National Retail Properties
Annual Report 2007

Plain-text annual report

Stability in turbulent times. 2007 Annual Report By any measure, 2007 was a turbulent year in the stock market and for many REIT investors. Despite market conditions, NNN shareholders enjoyed a total return of 8.1%. This was due in large part to our high quality portfolio characteristics: • Full diversification with 908 properties in 44 states; • Long-term net leases with a remaining average lease term of 13 years; • Property-level expenses of maintenance, taxes, insurance and utilities passed directly to the tenant under our net lease structure. These results validate our long-held philosophy: focus on retail real estate fundamentals in our underwriting process and manage the things that we can control. 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 double-digit total returns for more than a decade supported by its strong dividend yield and 18 consecutive years of increased annual dividends. In 2007, NNN acquired nearly $700 million of properties, generated record FFO per share growth, preserved solid portfolio occupancy and maintained its strong balance sheet. NNN maintains a conservatively managed, fully diversified retail real estate portfolio with properties subject to long-term, net leases. As of December 31, 2007, its 908 properties are located in 44 states with a total gross leasable area of approximately 10.6 million square feet. Occupancy is 98.3 percent and these properties are leased to 198 tenants in 35 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 18 or more consecutive years. TABLE OF CONTENTS 1. Company Profile 2. Letter to Shareholders 14. Dividend Reinvestment & Direct Stock Purchase 15. Historical Financial Highlights 16. Directors & Officers Inside Back Cover: Shareholder Information DEAR FELLOW SHAREHOLDERS At National Retail Properties (“NNN”) our objective is to build long-term value for our shareholders by paying a safe and growing dividend, generating steady and consistent annual FFO per share growth and accomplishing these dual objectives while assuming a below average level of risk. 2007 was a challenging year for equity investors in general and for many REIT investors. Despite the market turmoil, NNN achieved an 8.1 percent total return in 2007 with a large portion of total shareholder return coming from our quarterly cash dividend. It is important to note that, even in these challenging market conditions, we are focused on long-term opportunities as we consistently execute our multi-year strategy. NNN STRATEGY Our core strategies to create long-term shareholder value are: •• Acquire carefully underwritten, accretive, net-leased retail properties. This growth enhances results and further diversifies our portfolio, thereby minimizing risk; •• Sell select properties and reinvest the proceeds into newer, higher yielding properties to improve the quality and growth prospects of our core portfolio; •• Maintain a strong balance sheet with prudent leverage; •• Continue developing our talented team of associates. NNN is well positioned to provide a safe and growing dividend by growing FFO per share while assuming below-average risk. 2 STABILITY IN TURBULENT TIMES NATIONAL RETAIL PROPERTIES 3 Dividends Per Share Payout Ratio $1.40 $1.35 $1.30 SAFE AND GROWING DIVIDEND (One of 181 publicly traded companies ) $1.25 A lower payout ratio provides a margin of safety between dividends paid per share and FFO per share and allows for higher potential dividend growth. $1.20 $1.15 $1.10 $1.05 $1.00 Dividend Yield = 6.0%* 110% 105% 100% 95% 90% 85% 80% 75% 70% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Dividends Payout Ratio *Based on the closing price of $23.38 on December 31, 2007. 2007 RESULTS In 2007, our entire team executed this growth compares favorably with well and we had another productive the estimated 5 percent to 6 percent and successful year highlighted by a growth rate of the REIT industry. number of record achievements. ••• Dividends per share were increased by a record 6.1 percent from $1.32 to $1.40. This marks the 18th consecutive year of increased annual dividends. Only 181 companies in America have increased their dividends for 18 or more consecutive years and NNN is proud to be among that group of quality companies. ••• Total assets increased to $2.5 billion as we acquired 235 properties for a record $697 million in our core portfolio. Additionally, we acquired 19 properties in our joint venture. ••• We sold a total of 108 properties for $306.2 million from both our core portfolio and our taxable subsidiary as we continued to qualitatively cull ••• Dividend payout ratio was reduced to the portfolio and divest properties 74.9 percent which enhances the safety where we could harvest value. of the dividend. After several years of We recognized a gain of $67.6 million successfully improving this ratio, NNN is from the sale of these properties. now in a position where future dividend per share growth will be more in line with future FFO per share growth. ••• We maintained a strong balance sheet, raising $298 million of common equity and completing ••• FFO per share increased 12 percent to a record $1.87 per share. Driven by the our first institutional joint venture which is focused on the acquisition terrific execution of our talented associates, of convenience store properties. 4 STABILITY IN TURBULENT TIMES NATIONAL RETAIL PROPERTIES 5 Weighted average remaining lease term of 13 years LEASE EXPIRATIONS (As a percentage of annual base rent – December 31, 2007) Our typical initial lease terms of 15-20 years allow us to ride out most economic and real estate cycles. Our current average remaining lease term is more than 13 years, giving us a steady, contractually-obligated rental income stream. DIVERSIFIED CORE PORTFOLIO As of December 31, 2007, we owned 908 Each acquisition is individually evaluated properties with an occupancy rate of by our experienced underwriting team. 98.3 percent. The average lease maturity When underwriting a prospective of our net lease retail assets is 13 years. acquisition we pay particular attention Also, we have modest re-leasing risk with to the real estate fundamentals of each few of our leases expiring in 2008 or 2009. property. We never forget that we are in As of year-end, our properties were leased the real estate business and while credit to 198 different national and regional is important, the strength of our company tenants operating in 35 different retail is ultimately dependent on the key retail industry classifications. Our properties are real estate characteristics of our individual located in 44 states with a concentration properties. These key attributes include in the Sunbelt where the population factors such as the specific location of growth rates are the highest and retailers the property, the demographics of the are focusing their new store development. trade area, access, visibility, ingress and Since January 1, 2005, our core portfolio egress, traffic count, retail competition, has expanded considerably from 362 alternative retail uses for that location properties to the current 908 properties. and evaluating how the current rent We have more than accomplished our paid by the tenant compares with objective of owning a portfolio of net- the market rent for that location. leased retail properties fully diversified by tenant, line of trade and geographic region. Of course, we are also focused on the ability of the tenant to pay rent for the duration of the lease. Our team evaluates the financial strength of the tenant, the viability of that tenant in the specific location and, 6 STABILITY IN TURBULENT TIMES where possible, the unit-level economics Second, the quality of the rental revenue of that store. In general, we are looking that we receive from our triple net leases for the operating income contribution is unusually high. Our tenants are from that specific store to be double generally responsible for property taxes, the rent of that particular location. insurance and maintenance. As a result, We believe that freestanding, net-leased retail real estate is a superb long-term investment for a number of reasons. First, the ratio of land value to the total cost of each property is unusually high when compared to other real estate sectors such as offices, apartments and large regional malls. The land value for our high profile, corner locations at our operating cash flow is more secure and consistent than many other types of real estate because we are not impacted as much by increases in these costs. Third, our leases are long-term. In the current cautious retail environment, it is comforting to us that, on average, our tenants are contractually obligated to pay rent for the next 13 years. busy intersections is frequently more than One area where we believe that our 40 percent of the total value for most of shareholders can sleep comfortably is the these properties at the time we purchase quality of our real estate and our tenants. them. With economic growth, inflation We own the corner locations of America and the difficulty of replacing these well- where much of our nation’s retail activity located sites, the land value at the end of the lease can reasonably approximate the price that we paid for both the land and the building upon acquisition. takes place. Approximately two-thirds of our rent is paid by companies that are publicly traded and/or carry a public debt rating – which means that they are large, financially strong national or regional retailers. We believe that the net lease format of retail real estate is a superb long-term investment. NATIONAL RETAIL PROPERTIES 7 BALANCE SHEET (Gross Book Basis – December 31, 2007) Maintaining a strong balance sheet with prudent leverage enhances our access to capital. We continued to selectively sell properties where we could harvest value to improve the overall quality of the portfolio. 8 STABILITY IN TURBULENT TIMES BALANCE SHEET STRENGTH Maintaining a flexible and strong balance This past year we also accessed an sheet is a core attribute of NNN. additional capital source by completing In 2007, our team was extremely active, accessing a variety of capital sources. We raised $298 million of new common equity primarily through two underwritten public offerings, and secondarily through our dividend reinvestment and direct stock purchase plan. We also completed a successful $250 million 10-year unsecured notes offering and expanded our bank line of credit capacity by $100 million to $400 million at attractive pricing. our first joint venture with an institutional partner. This venture is focused exclusively on the convenience store industry where we have exceptional relationships and deal flow. By year-end, we had acquired 19 properties in the joint venture for $65.6 million. When the joint venture is fully invested we expect it to own approximately $220 million of properties. NNN owns a 15 percent equity interest in the joint venture and in addition to earning our share of the As of year-end, on a gross-book basis, our venture’s operating income, we earn total debt comprised 42.4 percent of our annual fees for managing the venture. assets. Substantially all of our assets (more than 97 percent) are unencumbered with debt. Having no mortgage debt on nearly all of our properties provides us significant flexibility. Our conservative balance sheet management was rewarded when one of the three major credit ratings agencies recently upgraded NNN’s debt rating. Strategically this venture is important as it allows us to access an additional capital source and to continue to control deal flow and relationships while maintaining our leading presence in the convenience store sector. Also, it lets us manage our direct exposure to this vibrant category of retailing. NATIONAL RETAIL PROPERTIES 9 ANNUAL TOTAL RETURN COMPARISON (For periods ending December 31, 2007) NNN shareholders have enjoyed a 15-year average annual total return of 13.4 percent. 1 Year 3 Years 5 Years 10 Years 15 Years National Retail Properties (NNN) 8.1% 10.9% 16.2% 11.4% 13.4% S&P 500 Index (SPX) 5.5% 8.6% 12.8% 5.9% 10.5% Nasdaq (CCMP) 10.6% 7.6% 15.5% 5.9% 9.5% S&P 600 Index (SML) -0.3% 7.3% 16.0% 9.0% 10.8% Total Return is comprised of share price appreciation plus dividends paid. PORTFOLIO PRUNING AND RECYCLING CAPITAL HUMAN CAPITAL Our asset management team constantly Our industry leading growth is due to the reviews our portfolio looking for assets hard work of all of our talented associates. that do not fit our long-term strategy. As the real estate industry continues to Typically, we sell assets that have fixed evolve and mature, our human capital rental payments and replace them with management is increasingly important for carefully underwritten properties that have sustained performance. As managers, higher yields and growing rental streams our challenge is to constantly measure as the rental payments escalate over the and evaluate our colleagues while duration of the lease. This continual process ensuring that we have the appropriate improves the overall quality of our portfolio. people in the correct positions. Our team In the last three years we have sold is among the most experienced and $505.8 million of properties from our core competent in the net-lease retail arena portfolio, including $146 million in 2007. and many of them have been with NNN for a long time. Philosophically, we like to nurture and promote from within while periodically adding people from the outside to execute upon new initiatives. The vast majority of these property dispositions were successfully divested by our internal team using our robust www.nnn1031.com website. In many instances, we have obtained exceptional pricing for these assets by selling properties directly to buyers thereby avoiding brokerage commissions and maximizing proceeds. 10 STABILITY IN TURBULENT TIMES NATIONAL RETAIL PROPERTIES 11 2008 AND BEYOND The external environment in which we operate is less friendly and more uncertain than it was 12 months ago. Capital is not as easily available and has become National Retail Properties is well- more expensive. Also, it appears that positioned to fulfill our commitment certain sectors of retailing are going to to provide our shareholders a safe and experience less growth than they have growing dividend by growing FFO per in the last several years. Finally, margin pressures will be felt by a number of our share while assuming below average risk. According to The Wall Street Journal, tenants, particularly restaurant operators, nearly 80 million Baby Boomers will at a time when they may have difficulty become eligible for Social Security passing these costs on to their customers. benefits over the next three decades. Despite the external environment, I am optimistic about NNN’s ability to deliver value for our shareholders in 2008 as we have a high quality, diversified portfolio, our balance sheet is very strong with adequate capital to execute our strategy and we have These individuals all need investments that can provide a reliable source of income. With our track record of 18 consecutive years of paying growing dividends, NNN is in an enviable position of being able to satisfy the needs of this large group of investors. perhaps the strongest team of real estate On behalf of all the associates and professionals in the net lease retail sector. directors of NNN, we thank you, our loyal shareholders, for your support. We are committed to working hard to earn your continued respect and confidence in 2008 and beyond. Sincerely, Craig Macnab Chairman & Chief Executive Officer 12 STABILITY IN TURBULENT TIMES WHAT DOES NNN STAND FOR? 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 our tenants 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. “We never forget that we are in the real estate business and while credit is important, the strength of our company is ultimately dependent on the key retail real estate characteristics of our individual properties.” NATIONAL RETAIL PROPERTIES 13 DIVIDEND REINVESTMENT & DIRECT STOCK PURCHASE We offer a dividend reinvestment and direct stock purchase plan designed to make purchasing our stock economical and convenient. The plan is open 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 can be made by check or money order. •• Dividends can be reinvested to purchase additional shares on some or all of your common stock. •• 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. •• Additionally, shares in the amount of $100 - $10,000 may be purchased on a one-time basis. •• 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. •• Fees for the sale of shares: $15 transaction fee plus a $.10 per share brokerage commission fee. To learn more about our Dividend Reinvestment and 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. “2007 was a challenging year challenging year for equity investors in general and for many REIT investors. Despite the market turmoil, NNN achieved NNN achieved an 8.1 percent total return.” 14 STABILITY IN TURBULENT TIMES HISTORICAL FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data) Gross revenues(1) $ 208,630 $ 180,878 $ 151,831 $ 133,875 $ 112,073 2006 2005 2004 2003 Earnings from continuing operations Net earnings Total assets Total debt Total equity 85,150 157,110 2,539,605 1,060,070 64,695 182,505 35,610 89,400 30,317 64,934 22,519 53,473 1,917,497 1,736,588 1,300,517 1,211,639 776,737 1,407,285 1,096,505 861,045 828,087 524,241 756,998 467,419 730,754 Cash dividends declared to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders 92,989 - - Series C Preferred Stock stockholders 6,785 Weighted average common shares: 76,035 4,376 419 923 69,018 4,008 1,675 - 66,272 4,008 1,675 - 55,473 4,008 502 - Basic Diluted 66,152,437 57,428,063 52,984,821 51,312,434 43,108,213 66,407,530 58,079,875 54,640,143 51,742,518 43,896,800 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 Preferred 1.18 1.18 2.27 2.26 1.40 - - 1.03 1.02 3.08 3.05 1.32 2.45625 0.56 0.58 1.58 1.56 1.30 2.25 0.48 0.48 1.15 1.15 1.29 2.25 0.42 0.42 1.14 1.13 1.28 2.25 41.875 167.50 167.50 50.25 Stock depositary stockholders 1.84375 0.250955 - - - Other data: Cash flows provided by (used in): Operating activities Investing activities Financing activities Funds from operations – diluted(2) 129,634 (536,717) 432,907 124,113 1,676 19,226 (90,099) (230,783) 81,864 97,121 217,844 81,803 85,800 (69,963) (19,225) 73,065 54,215 (256,870) 205,965 61,749 (1) Gross revenues include revenues from NNN’s continuing and discontinued operations. 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 NNN 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 NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures. NATIONAL RETAIL PROPERTIES 15 EXECUTIVE OFFICERS Craig Macnab Chairman & Chief Executive Officer Julian E. Whitehurst President & Chief Operating Officer Kevin B. Habicht Executive Vice President & Chief Financial Officer Paul E. Bayer Executive Vice President Christopher P. Tessitore Executive Vice President & General Counsel † Member audit committee (( (Committees as of Febr uary 18, 2008) DIRECTORS & OFFICERS DIRECTORS Craig Macnab Chairman Clifford R. Hinkle Lead Director Dennis E. Gershenson President, Chief Executive Officer & Chairman Ramco-Gershenson Properties Trust Kevin B. Habicht Executive Vice President & Chief Financial Officer National Retail Properties, Inc. Richard B. Jennings† President Realty Capital International, Inc. & 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 Robert Martinez† Fortieth Governor of Florida & Senior Policy Advisor Holland & Knight 16 STABILITY IN TURBULENT TIMES UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A (Amendment No. 1) (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, 2007 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, $0.01 par value 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, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ 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, 2007 was $66,159,208. The number of shares of common stock outstanding as of February 14, 2008 was 72,534,884. DOCUMENTS INCORPORATED BY REFERENCE: Registrant incorporates by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K portions of National Retail Properties, Inc.’s definitive Proxy Statement for the 2008 Annual Meeting of Stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A. The definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. EXPLANATORY NOTE: This Form 10-K/A is being filed in its entirety to correct certain typographical errors in the following portions of National Retail Properties Inc.’s Form 10-K for the year ended December 31, 2007 (the “Form 10-K”): (i) the Report of Independent Registered Public Accounting Firm of KPMG in Item 8 of the Form 10-K and (ii) the Consent of KPMG LLP filed as Exhibit 23.2 to the Form 10-K. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 16 17 17 17 18 20 22 46 47 94 94 96 97 97 97 97 97 Part IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 103 PART I Unless the context otherwise requires, references in this Annual Report on Form 10-K to the terms “registrant” or “NNN” or “the Company” refer to National Retail Properties, Inc. and its [consolidated] subsidiaries, including taxable real estate investment trust (“REIT”) subsidiaries and their majority owned and controlled subsidiaries (collectively the “TRS”). 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 NNN uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, NNN 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, NNN’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 NNN 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. NNN 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 NNN, a Maryland corporation, is a fully integrated REIT formed in 1984. NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets and mortgages and notes receivable (including structured finance) (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 subsidiaries. The Inventory Assets are held in the TRS. Real Estate Assets NNN 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, 2007, NNN owned 908 Investment Properties, with an aggregate leasable area of 10,610,000 square feet, located in 44 states. Approximately 98 percent of NNN’s Investment Portfolio was leased at December 31, 2007. The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily for the purpose of resale (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2007, the TRS owned 56 Inventory Properties. Mortgages and Notes Receivable Mortgages are loans secured by real estate, real estate securities or other assets. As of December 31, 2007, these receivables totaled $49,336,000. 1 Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns or leases the real estate and/or other acceptable collateral such as fixtures, equipment or cash. These agreements are sometimes 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, 2007, the structured finance agreements had an outstanding principal balance of $14,359,000. Investment in Unconsolidated Affiliate Crow Holdings. In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV I plans to acquire from unrelated third parties up to $220,000,000 of real estate assets leased to convenience store operators. Competition NNN 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 January 31, 2008, NNN employed 72 full-time associates including executive and administrative personnel. NNN’s executive offices are located at 450 S. Orange Avenue, Suite 900, Orlando, Florida 32801, and its telephone number is (407) 265-7348. NNN has an Internet website at www.nnnreit.com where NNN’s filings with the Securities and Exchange Commission can be downloaded free of charge. The common shares of National Retail Properties, Inc. are traded on the New York Stock Exchange (“NYSE”), under the ticker symbol “NNN.” Business Strategies and Policies The following is a discussion of NNN’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 NNN’s stockholders. Operating Strategies NNN’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 increased current returns and 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. Initial lease terms are generally 15 to 20 years. 2 In some cases, NNN’s investment in real estate is in the form of mortgages, structured finance investments or other loans which may be secured by real estate, a borrower’s pledge of ownership interests in the entity that owns the real estate or other assets. These investments may be subordinated to senior loans secured by other loans encumbering the underlying real estate or assets. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. NNN holds investment real estate assets until it determines that the sale of such a property is advantageous in view of NNN’s investment objectives. In deciding whether to sell a real estate investment asset, NNN may consider factors such as potential capital appreciation, net cash flow, tenant credit quality, market lease rates, potential use of sale proceeds and federal income tax considerations. NNN acquires and/or develops inventory real estate assets primarily for the purpose of resale. NNN’s management team considers certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN may include items such as: the composition of NNN’s Investment Portfolio (such as tenant, geographic and industry classification diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios, profitability measures and industry trends compared to that of NNN. The operating strategies employed by NNN have allowed it to increase dividends paid per common share for 18 consecutive years. Investment in Real Estate or Interests in Real Estate NNN’s management believes that attractive acquisition opportunities for retail properties will continue to be available and that NNN is well suited to take advantage of these opportunities because of its access to capital markets, ability to underwrite and acquire properties, 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, visibility 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 and existing or potential competing properties or retailers, 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 compatibility of the property with NNN’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, 3 • • • • • the financial and other characteristics of the existing tenant, the tenant’s business plan, operating history and management team, the tenant’s industry, the terms of any existing leases, and the rent to be paid by the tenant. NNN 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 NNN 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, Commercial Mortgage Residual Interests, and Securities of or Interests in Persons Engaged in Real Estate Activities While NNN’s primary business objectives and current portfolio ownership primarily emphasize retail properties, NNN may invest in (i) a wide variety of property and tenant types, (ii) leases, mortgages, commercial mortgage residual interests and other types of real estate interests, (iii) loans secured by collateral related to business operations of an owned or leased property, or (iv) 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, NNN from time to time has made investments in mortgage loans or held mortgages on properties that NNN has sold and has made structured finance investments and other loans related to properties acquired or sold. Financing Strategy NNN’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. NNN 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. NNN typically funds its short-term liquidity requirements including investments in additional retail properties with cash from its $400,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000. For the year ended December 31, 2007, NNN’s ratio of total indebtedness to total gross assets (before accumulated depreciation) was approximately 43 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 39 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN’s ability to incur debt under certain circumstances. NNN 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 NNN. 4 The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy at any time. NNN 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 NNN’s strategies or policies described above may be changed at any time by NNN without notice to or a vote of NNN’s stockholders. Investment Properties As of December 31, 2007, NNN owned 908 Investment Properties with an aggregate gross leasable area of 10,610,000 square feet, located in 44 states. Approximately 98 percent of the gross leasable area was leased at December 31, 2007. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of NNN’s Investment Properties and their respective carrying costs. The following table summarizes NNN’s Investment Properties as of December 31, 2007 (in thousands): Land Building Size(1) Low 7 1 High 2,223 135 Average High 115 12 $ 10,197 13,874 Cost(2) Low $ 25 44 Average $ 1,078 1,440 (1) Approximate square feet. (2) Costs vary depending upon size and local demographic factors. In connection with the development of 27 Investment Properties, NNN has agreed to fund construction commitments (including land costs) of $71,883,000, of which $44,561,000 has been funded as of December 31, 2007. During 2006, NNN disposed of the properties leased to the United States of America which had accounted for more than 10 percent of NNN's total rental income in 2005. As of December 31, 2007, NNN does not have any one tenant that accounts for ten percent or more of its rental income. Leases. Although there are variations in the specific terms of the leases, the following is a summary of the general structure of NNN's leases. Generally, the leases of the Investment Properties provide for initial terms of 15 to 20 years. As of December 31, 2007, the weighted average remaining lease term was approximately 13 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 NNN'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 $1,800,000 (average of $217,000). 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. 5 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 NNN wishes to sell the Investment Property subject to that lease, NNN first must offer the lessee the right to purchase the Investment Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Investment Property. Certain Investment Properties have leases that provide the tenant with a purchase option to acquire the Investment Property from NNN. The purchase price calculations are generally stated in the lease agreement or are based on current market value. The following table summarizes the lease expirations of NNN’s Investment Portfolio as of December 31, 2007: % of Annual Base Rent(1) 0.7% 1.8% 3.1% 2.3% 4.0% 4.3% # of Properties 14 24 38 21 35 32 Gross Leasable Area(2) 258,000 458,000 401,000 336,000 563,000 687,000 2014 2015 2016 2017 2018 Thereafter % of Annual Base Rent(1) 5.0% 2.9% 2.3% 4.9% 4.3% 64.4% # of Properties 31 20 16 27 33 601 Gross Leasable Area(2) 509,000 469,000 262,000 674,000 505,000 5,233,000 2008 2009 2010 2011 2012 2013 (1) Based on annualized base rent for all leases in place as of December 31, 2007. (2) Approximate square feet. The following table summarizes the diversification of trade of NNN’s Investment Portfolio based on the top 10 lines of trade: Top 10 Lines of Trade 1. Convenience Stores 2. Restaurants – Full Service 3. Drug Stores 4. Automotive Parts 5. Books 6. Consumer Electronics 7. Theaters 8. Car Washes 9. Sporting Goods 10. Restaurants – Limited Service Other % of Annual Base Rent(1) 2006 2005 2007 23.9% 10.3% 5.0% 4.9% 4.4% 4.3% 4.2% 4.0% 3.9% 3.7% 31.4% 16.3% 12.1% 8.3% 1.6% 5.7% 5.6% - - 7.3% 4.7% 38.4% 12.1% 6.6% 10.0% 0.1% 5.8% 5.9% - - 7.4% 3.0% 49.1% 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. 6 The following table summarizes the diversification by state of NNN’s Investment Portfolio as of December 31, 2007: State 1. Texas 2. Florida 3. North Carolina 4. Illinois 5. Georgia 6. Pennsylvania 7. Indiana 8. Colorado 9. Ohio 10. Missouri Other # of Properties % of Annual Base Rent(1) 201 84 62 38 48 80 36 15 28 19 297 908 20.2% 11.3% 6.8% 6.6% 5.3% 4.7% 3.7% 3.4% 3.4% 3.0% 31.6% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2007. Mortgages and Notes Receivable As of December 31, 2007 and 2006, NNN held mortgages and notes receivables with an aggregate principal balance of $51,556,000 and $17,227,000, respectively. The mortgages and notes receivables bear interest rates ranging from 7.00% to 12.00% with maturity dates ranging from May 2008 through October 2028. Structured finance agreements are typically loans secured by a borrower’s pledge of its ownership interest in the entity that owns or leases the real estate and/or other acceptable collateral such as fixtures, equipment or cash. These agreements are sometimes 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 2007 and 2006, NNN made structured finance investments of $12,376,000 and $16,477,000, respectively. As of December 31, 2007, the structured finance investments bear a weighted average interest rate of 11.26% per annum, of which 9.78% is payable monthly and the remaining 1.48% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between January 2009 and March 2010. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. As of December 31, 2007 and 2006, the outstanding principal balance of the structured finance investments was $14,359,000 and $13,917,000, respectively. Commercial Mortgage Residual Interests Orange Avenue Mortgage Investments, Inc. (“OAMI”), a majority owned and consolidated subsidiary of NNN, holds the residual interests (“Residuals”) from seven commercial real estate loan securitizations. Each of the Residuals is reported at fair value based upon an independent valuation; unrealized gains or losses are reported as other comprehensive income in stockholders’ equity, and 7 other than temporary losses as a result of a change in timing or amount of estimated cash flows are recorded as an other than temporary valuation impairment. The Residuals had an estimated fair value of $24,340,000 at December 31, 2007. Inventory Assets The TRS develops Inventory Properties (“Development Properties” or “Development Portfolio”) as well as acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). NNN'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, 2007, the TRS owned 23 Development Properties (eight completed, nine under construction and six land parcels) and 33 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 eight completed Development Properties and 33 Exchange Properties as of December 31, 2007 (in thousands): Completed Development Properties: Land Building Exchange Properties: Land Building High Size(1) Low Average High Cost(2) Low Average 1,255 125 294 47 47 8 11 2 $ $ 378 34 64 15 8,959 37,007 3,665 4,785 $ $ 244 1,635 121 184 $ $ 172 9,212 1,403 2,033 (1) Approximate square feet. (2) Costs vary depending upon size and local demographic factors. Under Construction. In connection with the development of nine Inventory Properties by the TRS, NNN has agreed to fund total construction commitments (including land costs) of $24,097,000, of which $17,125,000 has been funded as of December 31, 2007. Governmental Regulations Affecting Properties Property Environmental Considerations. NNN 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. As a part of its acquisition due diligence process, NNN generally obtains an environmental site assessment for each property. In such cases where NNN intends to acquire real estate where contamination or potential contamination exists, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, or (iii) agree to other arrangements deemed appropriate by NNN to address environmental conditions at the property. NNN has 70 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. 8 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 NNN may incur costs if the tenant does not comply. As of February 15, 2008, NNN has not been notified by any governmental authority of, nor is NNN’s management aware of, any non-compliance with the ADA that NNN’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 NNN’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 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, NNN’s business, financial condition or results of operations could be adversely affected. Loss of revenues from tenants would reduce NNN’s cash flow. NNN’s five largest tenants accounted for an aggregate of approximately 25 percent of NNN’s annual base rent as of December 31, 2007. The default, financial distress or bankruptcy of one or more of NNN’s tenants could cause substantial vacancies among NNN’s Investment Portfolio. Vacancies reduce NNN’s revenues until NNN 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, NNN 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 NNN’s annual base rent is heavily concentrated in a specific industry classification and in specific geographic locations. As of December 31, 2007, an aggregate of approximately 38 percent of NNN’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, 2007, an aggregate of approximately 32 percent of NNN’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 NNN’s financial results. There are a number of risks inherent in owning real estate and indirect interests in real estate. NNN’s economic performance and the value of its real estate assets are subject to the risk that if NNN’s properties do not generate revenues sufficient to meet its operating expenses, including debt service, NNN’s cash flow and ability to pay distributions to its shareholders will be adversely affected. As a real estate company, NNN is susceptible to the following real estate industry risks, which are beyond its control: • changes in national, regional and local economic conditions and outlook, • decreases in consumer spending and retail sales, 9 • economic downturns in the areas where NNN’s properties are located, • adverse changes in local real estate market conditions, such as an oversupply, reduction in demand or intense competition for tenants, • changes in tenant preferences that reduce the attractiveness of NNN’s properties to tenants, • zoning, regulatory restrictions, or change in taxes, and • changes in interest rates or availability of financing. All of these factors could result in decreases in market rental rates and increases in vacancy rates, which could adversely affect NNN’s results of operations. NNN’s real estate investments are illiquid. Because real estate investments are relatively illiquid, NNN’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 NNN’s financial condition. NNN may be subject to known or unknown environmental liabilities. NNN 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 NNN'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 NNN intends to acquire real estate where contamination or potential contamination exists, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, or (iii) agree to other arrangements deemed appropriate by NNN to address environmental conditions at the property. NNN has 70 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, NNN may have to cover the costs of remediation, fines or other environmental liabilities at these and other properties. NNN 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 NNN to liability. NNN 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 NNN, (ii) NNN 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. NNN may not be able to successfully execute its acquisition or development strategies. NNN cannot assure that it will be able to implement its investment strategies successfully. Additionally, NNN cannot assure that its property portfolio will expand at all, or if it will 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 NNN expects to invest in markets other than the ones in which its current properties are located or properties which may be leased to tenants other than those to which 10 NNN has historically leased properties, NNN will also be subject to the risks associated with investment in new markets or with new tenants that may be relatively unfamiliar to NNN’s management team. NNN’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 NNN’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 may delay or eliminate proceeds or cash flows NNN expects from these projects, which could have an adverse effect on NNN’s financial condition. NNN may not be able to dispose of properties consistent with its operating strategy. NNN may be unable to sell properties targeted for disposition (including its Inventory Properties) due to adverse market conditions. This may adversely affect, among other things, NNN’s ability to sell under favorable terms, execute its operating strategy, achieve target earnings or returns, retire debt or pay dividends. A change in the assumptions used to determine the value of commercial mortgage residual interests could adversely affect NNN’s financial position. As of December 31, 2007, the Residuals had a carrying value of $24,340,000. The value of these Residuals is based on discount rate, loan loss, prepayment speed and interest rate assumptions made by NNN 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 NNN’s earnings, could decline. NNN may suffer a loss in the event of a default or bankruptcy of a borrower. If a borrower defaults on a mortgage, structured finance loan or other loan made by NNN, and does not have sufficient assets to satisfy the loan, NNN may suffer a loss of principal and interest. In the event of the bankruptcy of a borrower, NNN 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 NNN’s loans may be subordinate to other debt of a borrower. These investments are typically loans secured by a borrower’s pledge of its ownership interests in the entity that owns the real estate or other assets. These agreements are typically subordinated to senior loans secured by other loans encumbering the underlying real estate or assets. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2007, mortgages and notes receivables had an outstanding principal balance of $51,556,000 and the structured finance investments had an outstanding principal balance of $14,359,000. If a borrower defaults on the debt senior to NNN’s loan, or in the event of the bankruptcy of a borrower, NNN’s loan will be satisfied only after the borrower’s senior creditors’ claims are satisfied. Where debt senior to NNN’s loans exists, the presence of intercreditor arrangements may limit NNN’s ability to amend loan documents, assign the loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy proceedings and litigation can significantly increase the time needed for NNN 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. 11 Certain provisions of the leases or loan agreements may be unenforceable. NNN’s rights and obligations with respect to its leases, structured finance loans, mortgage loans or other 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 NNN’s security interest in the underlying collateral of a borrower. NNN 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 NNN’s control of those investments. Joint ventures or partnerships involve risks not otherwise present for direct investments by NNN. It is possible that NNN’s co-venturers or partners may have different interests or goals than NNN at any time and they may take actions contrary to NNN’s requests, policies or objectives, including NNN’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. Additionally, the partner may become insolvent or bankrupt. Competition with numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN’s ability to grow. NNN may not be in a position or have the opportunity in the future to complete suitable property acquisitions or developments on advantageous terms due to competition for such properties with others engaged in real estate investment activities. NNN’s inability to successfully acquire or develop new properties may affect NNN’s ability to achieve anticipated return on investment, which could have an adverse effect on its results of operations. Uninsured losses may adversely affect NNN’s ability to pay outstanding indebtedness. NNN’s properties are generally covered by comprehensive liability, fire, flood, and extended coverage. NNN 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 or a loss exceeds policy limits, NNN could lose both its invested capital and anticipated revenues from the property, whereby reducing NNN’s cash flow. Acts of violence, terrorist attacks or war may affect the markets in which NNN operates and NNN’s results of operations. Terrorist attacks may negatively affect NNN'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 NNN’s physical facilities or the businesses of its tenants. The United States is engaged in armed conflict, which could have an impact on NNN’s tenants. The consequences of armed conflict are unpredictable, and NNN may not be able to foresee events that could have an adverse effect on its business. More generally, any of these events or threats of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial 12 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 NNN’s financial condition or results of operations. Vacant properties or bankrupt tenants could adversely affect NNN. As of December 31, 2007, NNN owned 12 vacant, unleased Investment Properties, which accounted for approximately two percent of the total gross leasable area of NNN’s Investment Portfolio, in addition to three vacant land parcels. NNN 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 NNN could have a material adverse effect on the liquidity and results of operations of NNN if NNN 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 NNN’s Investment Portfolio is leased to three tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their lease with NNN. The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN’s business and financial condition. As of December 31, 2007, NNN had total mortgage debt and secured notes payable outstanding of approximately $39,480,000, total unsecured notes payable of $890,790,000 and $129,800,000 outstanding on the Credit Facility. NNN’s organizational documents do not limit the level or amount of debt that it may incur. If NNN incurs additional indebtedness and permits a higher degree of leverage, debt service requirements would increase and could adversely affect NNN’s financial condition and results of operations, as well as NNN’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 NNN may default on its debt obligations. The Credit Facility contains financial covenants that could limit the amount of distributions to NNN’s common and preferred stockholders. The amount of debt outstanding at any time could have important consequences to NNN’s stockholders. For example, it could: • • • require NNN to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing funds available for operations, real estate investments and other appropriate business opportunities that may arise in the future, increase NNN’s vulnerability to general adverse economic and industry conditions, limit NNN’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 NNN’s debt service requirements, • • • limit NNN’s ability to pay dividends on its outstanding common and preferred stock, limit NNN’s flexibility in planning for, or reacting to, changes in its business and the factors that affect the profitability of its business, and limit NNN’s flexibility in conducting its business, which may place NNN at a disadvantage compared to competitors with less debt or debt with less restrictive terms. 13 NNN’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 NNN’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 NNN is unable to generate sufficient 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. NNN 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 NNN would find acceptable. NNN 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. NNN’s unsecured debt contains various restrictive covenants which include, among others, provisions restricting NNN’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 NNN, • enter into transactions with certain affiliates, • create certain liens, and • consolidate, merge or sell NNN’s assets. NNN’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. NNN’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 NNN’s tenants under their leases. In addition, certain covenants in NNN’s debt, including its Credit Facility, require NNN, among other things, to: • maintain certain maximum leverage ratios, • maintain certain minimum interest and debt service coverage ratios, • • limit dividends declared and paid to NNN’s common and preferred stockholders, and limit investments in certain types of assets. 14 The market value of NNN’s equity and debt securities could be substantially affected by various factors. As with other publicly traded securities, the market price of NNN’s equity and debt securities depends on various factors, which may change from time-to-time and may be unrelated to NNN’s operating performance or prospects. These factors include among many: • general economic and financial market conditions, • level and trend of interest rates, • NNN’s financial condition and performance, • market perception of NNN compared to other REITs, and • market perception of REITs compared to other investment sectors. NNN’s failure to qualify as a real estate investment trust for federal income tax purposes could result in significant tax liability. NNN intends to operate in a manner that will allow NNN to continue to qualify as a real estate investment trust (“REIT”). NNN believes it has been organized as, and its past and present operations qualify NNN as a REIT. However, the Internal Revenue Service, (“IRS”) could successfully assert that NNN is not qualified as such. In addition, NNN 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 NNN’s control. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for NNN to qualify as a REIT. If NNN 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, NNN could be subject to potentially significant tax liabilities and penalties. Unless entitled to relief under certain statutory provisions, NNN 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 NNN maintains its REIT status, NNN may be subject to certain federal, state and local taxes on its income and property. Even if NNN remains qualified as a REIT, NNN may face other tax liabilities that reduce operating results and cash flow. Even if NNN remains qualified for taxation as a REIT, NNN may be subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease earnings and cash available for distribution to stockholders. In addition, in order to meet the REIT qualification requirements, NNN holds some of its assets through the TRS. 15 Adverse legislative or regulatory tax changes could reduce the NNN’s earnings, cash flow and market price of our common stock. At any time, the federal and state income tax laws governing REITs or the administrative interpretations of those laws may change. Any such changes may have retroactive effect, and could adversely affect NNN or its stockholders. For example, legislation enacted in 2003 and extended in 2006 generally reduced the federal income tax rate on most dividends paid by corporations to individual investors to a maximum of 15 percent (through 2010). REIT dividends, with limited exceptions, will not benefit from the rate reduction, because a REIT’s income generally is not subject to corporate level tax. As such, this legislation could cause shares in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs, and could have an adverse effect on the value of our common stock. Changes in accounting pronouncements could adversely impact NNN reported financial performance. Accounting policies and methods are fundamental to how NNN records and reports its financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) and the Commission, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards that govern the preparation of its financial statements. These changes could have a material impact on NNN’s reported financial condition and results of operations. In some cases, NNN could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Compliance with REIT requirements, including distribution requirements, may limit NNN’s flexibility and negatively affect NNN’s operating decisions. To maintain its status as a REIT for U.S. federal income tax purposes, NNN 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 NNN distributes to its stockholders and the ownership of its shares. NNN may also be required to make distributions to its stockholders when it does not have funds readily available for distribution or at times when NNN’s funds are otherwise needed to fund capital expenditures or to fund debt service requirements. NNN 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, 2007, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state taxes on its income and real estate. Item 1B. Unresolved Staff Comments. None. 16 Item 2. Properties Please refer to Item 1. “Business.” Item 3. Legal Proceedings In the ordinary course of its business, NNN is a party to various legal actions that management believes is routine in nature and incidental to the operation of the business of NNN. 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. 17 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The common stock of NNN currently is traded on the NYSE under the symbol “NNN.” Set forth below is a line graph comparing the cumulative total stockholder return on NNN’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, 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, 2002 and ending December 31, 2007. The graph assumes an investment of $100 on December 31, 2002. Indexed Total Annual Return (As of December 31, 2007) e u l a V x e d n I 300 250 200 150 100 50 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 NNN S&P 500 NAREIT 18 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. 2007 High Low Close Dividends paid per share 2006 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter Year $ $ $ $ 25.950 22.390 24.190 0.335 23.540 20.220 23.300 0.325 $ $ 25.450 21.760 21.860 0.355 23.370 18.810 19.950 0.325 $ $ 24.580 20.200 24.380 0.355 22.460 19.820 21.600 0.335 $ $ 26.150 22.480 23.380 0.355 24.100 21.250 22.950 0.335 26.150 20.200 23.380 1.400 24.100 18.810 22.950 1.320 The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: 2007 2006 Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain $ 1.397402 0.000414 0.002184 - 99.8144% $ 1.150780 - 0.150261 0.018959 0.0296% 0.1560% - 87.1803% - 11.3834% 1.4363% $1.400000 100.0000% $1.320000 100.0000% NNN 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, NNN’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 2008, NNN paid dividends to its stockholders of $21,598,000 or $0.355 per share of common stock. On January 31, 2008, there were 1,556 stockholders of record of common stock. 19 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 Preferred Stock stockholders Weighted average common shares: $ 2007 208,630 85,150 157,110 2,539,605 1,060,070 1,407,285 2006 2005 2004 2003 $ 180,878 64,695 182,505 1,917,497 776,737 1,096,505 151,831 35,610 89,400 1,736,588 861,045 828,087 133,875 30,317 64,934 1,300,517 524,241 756,998 112,073 22,519 53,473 1,211,639 467,419 730,754 92,989 - - 6,785 76,035 4,376 419 923 69,018 4,008 1,675 - 66,272 4,008 1,675 - 55,473 4,008 502 - Basic Diluted 66,152,437 66,407,530 57,428,063 58,079,875 52,984,821 54,640,143 51,312,434 51,742,518 43,108,213 43,896,800 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 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 1.18 2.27 2.26 1.40 - - 1.03 1.02 3.08 3.05 1.32 2.45625 0.56 0.58 1.58 1.56 1.30 2.25 0.48 0.48 1.15 1.15 1.29 2.25 0.42 0.42 1.14 1.13 1.28 2.25 41.875 167.50 167.50 50.25 1.84375 0.250955 - - - 129,634 (536,717) 432,907 124,113 1,676 (90,099) 81,864 97,121 19,226 (230,738) 217,844 81,803 85,800 (69,963) (19,225) 73,065 54,215 (256,870) 205,965 61,749 (1) Gross revenues include revenues from NNN’s continuing and discontinued operations. 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. 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 NNN 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 NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures. (2) 20 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 NNN’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. NNN’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. NNN 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 NNN’s investment segment are classified as discontinued operations. In addition, certain properties in NNN’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 NNN’s reported total revenues and total and per share earnings from continuing operations and an increase in NNN’s earnings from discontinued operations. However, NNN’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: Reconciliation of funds from operations: Net earnings Real estate depreciation and amortization: Continuing operations Discontinued operations Partnership/joint venture 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(1) Series B Convertible Preferred Stock dividends(1) Series C Preferred Stock dividends FFO available to common stockholders – basic Series B Convertible Preferred Stock dividends, if dilutive 2007 2006 2005 2004 2003 $157,110 $182,505 $ 89,400 $64,934 $53,473 30,067 315 31 - - (56,625) - 130,898 - - (6,785) 20,358 2,061 463 (262) (11,373) (91,332) - 102,420 (4,376) (419) (923) 14,331 6,076 606 - - (9,816) (14,786) 85,811 (4,008) (1,675) - 10,871 4,844 622 - - (2,523) - 78,748 (4,008) (1,675) - 9,219 2,653 699 - - (287) - 65,757 (4,008) (502) - 124,113 96,702 80,128 73,065 61,247 - 419 1,675 - 502 FFO available to common stockholders – diluted $124,113 $ 97,121 $ 81,803 $73,065 $61,749 (1) The Series A and Series B Convertible Preferred stock issuances are no longer outstanding. 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.” 21 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.” Overview NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets and mortgages, and notes receivable (including structured finance investments) on the consolidated balance sheets (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 subsidiaries. NNN 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 TRS. The TRS, directly and indirectly, through investment interests, owns real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). Additionally, the 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, 2007, NNN owned 908 Investment Properties, with an aggregate leasable area of 10,610,000 square feet, located in 44 states. Approximately 98 percent of NNN’s Investment Portfolio was leased at December 31, 2007. In addition to the Investment Properties, as of December 31, 2007, NNN had $65,964,000 and $24,340,000 in mortgages and notes receivable (including accrued interest receivable) and commercial mortgage residual interests, respectively. As of December 31, 2007, the TRS owned 23 Development Properties (eight completed inventory, nine under construction and six land parcels) and 33 Exchange Properties. NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of NNN’s Investment Portfolio and structured finance investments (such as tenant, geographic and industry classification diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios and profitability measures, industry trends and performance compared to that of NNN, and returns NNN receives on its invested capital. The growth of the Investment Portfolio from 524 properties to 908 properties over the three years ending December 31, 2007 has increased property diversification. NNN has increased its investments in the convenience store sector. This sector represents a large part of the freestanding retail property marketplace which NNN believes represents an area of attractive investment opportunity. Similarly, NNN has some geographic concentration in the south and southeast which NNN believes are areas of above average population growth. NNN formed a joint venture with an institutional investor in 2007. This joint venture plans to acquire up to $220 million of real estate assets leased to convenience store operators. NNN owns a 15 percent equity ownership interest in the joint venture which mitigates NNN’s convenience store sector concentration compared to acquiring these assets in the Investment Portfolio. Additionally, the joint venture provides an additional source of capital to fund property acquisitions. 22 As of December 31, 2007, 2006 and 2005, occupancy of the Investment Portfolio has averaged 98 percent. The Investment Portfolio’s average remaining lease term of 13 years has remained fairly constant over the past three years which, coupled with its net lease structure, provide enhanced probability of maintaining occupancy and operating earnings in periods of soft economic conditions. Critical Accounting Policies and Estimates The preparation of NNN’s consolidated financial statements in conformance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments on assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as other disclosures in the 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 NNN’s financial statements. A summary of NNN’s accounting policies and procedures are included in Note 1 of NNN’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 NNN’s consolidated financial statements. Real Estate – Investment Portfolio. NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by NNN 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. 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. 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 NNN’s net investment in the leases. 23 Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset 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 TRS acquires and/or develops and owns properties for the purpose of re-sale. 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 TRS. The 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 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. Commercial Mortgage Residual Interest at Fair Value. Commercial 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 commercial mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. NNN recognizes the excess of all cash flows attributable to the commercial 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 commercial 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 NNN 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 real estate assets, the recoverability of the carrying value of long-lived assets, including the commercial 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. 24 Results of Operations Property Analysis – Investment Portfolio General. The following table summarizes NNN’s Investment Portfolio as of December 31: Investment Properties Owned: Number Total gross leasable area (square feet) Investment Properties Leased: 2007 2006 2005 908 10,610,000 710 9,341,000 524 9,227,000 Number Total gross leasable area (square feet) Percent of total gross leasable area – leased Weighted average remaining lease term (years) 892 10,355,000 98% 13 697 9,173,000 98% 12 512 9,066,000 98% 11 The following table summarizes the lease expirations of NNN’s Investment Portfolio as of December 31, 2007: % of Annual Base Rent(1) # of Properties Gross Leasable Area(2) 0.7% 1.8% 3.1% 2.3% 4.0% 4.3% 14 24 38 21 35 32 2014 258,000 2015 458,000 2016 401,000 2017 336,000 563,000 2018 687,000 Thereafter % of Annual Base Rent(1) 5.0% 2.9% 2.3% 4.9% 4.3% 64.4% # of Properties 31 20 16 27 33 601 Gross Leasable Area(2) 509,000 469,000 262,000 674,000 505,000 5,233,000 2008 2009 2010 2011 2012 2013 (1) Based on the annualized base rent for all leases in place as of December 31, 2007. (2) Approximate square feet. The following table summarizes the diversification of NNN’s Investment Portfolio based on the top 10 lines of trade: Top 10 Lines of Trade 2007 2006 2005 % of Annual Base Rent(1) 1. Convenience Stores 2. Restaurants – Full Service 3. Drug Stores 4. Automotive Parts 5. Books 6. Consumer Electronics 7. Theaters 8. Car Washes 9. Sporting Goods 10. Restaurants – Limited Service Other 23.9% 10.3% 5.0% 4.9% 4.4% 4.3% 4.2% 4.0% 3.9% 3.7% 31.4% 16.3% 12.1% 8.3% 1.6% 5.7% 5.6% - - 7.3% 4.7% 38.4% 12.1% 6.6% 10.0% 0.1% 5.8% 5.9% - - 7.4% 3.0% 49.1% 100.0% 100.0% 100.0% (1) Based on annualized base rent for all leases in place as December 31, of the respective year. 25 The following table shows the top 10 states in which NNN’s Investment Properties are located in as of December 31, 2007: State 1. Texas 2. Florida 3. North Carolina Illinois 4. 5. Georgia 6. Pennsylvania 7. Indiana 8. Colorado 9. Ohio 10. Missouri Other % of Annual Base Rent(1) 20.2% 11.3% 6.8% 6.6% 5.3% 4.7% 3.7% 3.4% 3.4% 3.0% 31.6% 100.0% # of Properties 201 84 62 38 48 80 36 15 28 19 297 908 (1) Based on annualized base rent for all leases in place as of December 31, 2007. Property Acquisitions. The following table summarizes the Investment Properties acquired for each of the years ended December 31 (dollars in thousands): Acquisitions: Number of Investment Properties Gross leasable area (square feet) Total dollars invested(1) 2007 2006 2005 235 2,205,000 696,682 213 1,130,000 371,898 170 1,150,000 332,461 $ $ $ (1) Includes dollars invested on projects under construction for each respective year. Property Dispositions. The following table summarizes the Investment Properties sold by NNN for each of the years ended December 31 (dollars in thousands): Number of properties Gross leasable area (square feet) Net sales proceeds Net gain 2007 37 997,000 146,041 56,625 $ $ 2006 30 1,015,000 319,361 91,332 $ $ 2005 12 476,000 40,377 9,816 $ $ Property Analysis – Inventory Portfolio General. The following summarizes the number of properties held for sale in the Inventory Portfolio as of December 31: Development Portfolio: Completed Inventory Properties Properties under construction Land parcels Exchange Portfolio: Inventory Properties Total Inventory Properties 26 2007 2006 2005 8 9 6 23 33 56 11 5 13 29 68 97 1 12 4 17 46 63 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 2007 2006 2005 3 64,694 23 105,152 169,846 $ $ $ 16 82,524 77 118,553 201,077 $ $ $ 15 67,846 58 66,527 134,373 $ $ $ (1) Includes dollars invested on projects under construction for each respective year. 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): Development(1) Exchange 2007 2006 2005 # of Properties 13 58 71 $ $ Gain 5,125 5,888 11,013 # of Properties Gain # of Properties 9 55 64 $ $ 5,774 3,892 9,666 12 16 28 $ $ Gain 12,987 2,641 15,628 (1) Net of any intercompany eliminations or minority interest. Business Combinations Orange Avenue Mortgage Investments, Inc. 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. On May 2, 2005, NNN exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. As a result of the option exercise, NNN has consolidated OAMI in its consolidated financial statements. In accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), NNN recorded the assets and liabilities of OAMI at fair value and 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 NNN, 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 NNN, is an officer, director and indirect stockholder of OAMI. Craig Macnab, an officer and director of NNN, and Julian E. Whitehurst, an officer of NNN, 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 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. 27 As a result of NNN’s acquisition of 78.9 percent equity interest in OAMI, NNN’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in NNN’s consolidated financial statements. In addition, certain officers and directors of NNN own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, NNN received $2,749,000 in distribution from the LLCs during the year ended December 31, 2005. For the year ended December 31, 2005, NNN recognized $1,467,000 of earnings from the LLCs. In connection with the independent valuations of the Residuals’ fair value, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007. 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. NNN recorded an other than temporary valuation impairment of $638,000 and $8,779,000 for the years ended December 31, 2007 and 2006, respectively. In addition, NNN recorded $326,000 of unrealized losses and $1,992,000 of unrealized gains as other comprehensive income for the years ended December 31, 2007 and 2006, respectively. NNN 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 election, $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 commercial mortgage residual interests. National Properties Corporation. On June 16, 2005, NNN 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 NNN’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, 2007, NNN’s rental income increased primarily due to the acquisition of Investment Properties (See “Results of Operations – Property Analysis – Investment Portfolio – Property Acquisitions”). NNN anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions. The following summarizes NNN’s revenues from continuing operations (dollars in thousands): 2007 2006 2005 Percent of Total 2006 2007 2005 $ 170,733 $ 125,004 $ 91,876 91.6% 88.6% 84.1% 2007 Versus 2006 Percent Increase (Decrease) 36.6% 2006 Versus 2005 Percent Increase (Decrease) 36.1% 5,720 4,619 3,902 3.1% 3.3% 3.6% 23.8% 18.4% Rental Income(1) Real estate expense reimbursement from tenants Interest and other income from real estate transactions 5,076 4,265 6,111 2.7% 3.0% 5.6% 19.0% (30.2)% Interest income on commercial mortgage residual interests Total revenues from 4,882 7,268 7,349 2.6% 5.1% 6.7% (32.8)% (1.1)% continuing operations $ 186,411 $ 141,156 $ 109,238 100.0% 100.0% 100.0% 32.1% 29.2% (1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations (“Rental Income”). 28 Revenue from Operations by Source of Income. NNN has identified two primary operating segments, and thus, sources of revenue: (i) earnings from NNN’s Investment Assets and (ii) earnings from NNN’s Inventory Assets. NNN revenues from continuing operations come primarily from Investment Assets The following table summarizes the revenues from continuing operations for each of the years ended December 31, (dollars in thousands): Investment Assets Inventory Assets Total revenues 2007 170,234 16,177 186,411 $ $ 2006 124,702 16,454 141,156 $ $ $ $ 2005 104,681 4,557 Percent of Total 2006 2007 2005 91.3% 88.3% 95.8% 4.2% 8.7% 11.7% 109,238 100.0% 100.0% 100.0% 2007 Versus 2006 Percent Increase (Decrease) 2006 Versus 2005 Percent Increase (Decrease) 36.5% (1.7)% 32.1% 19.1% 261.1% 29.2% Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006. Rental Income. Rental income increased for the year ended December 31, 2007 as compared to the same period in 2006 primarily from NNN’s acquisition of 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet during the year ended December 31, 2007. The Investment Portfolio occupancy rate remained relatively stable at approximately 98 percent for each of the years ended December 31, 2007 and 2006. Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants remained relatively constant as a percentage of revenues from continuing operations, but increased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 was attributable to a full year of reimbursement from certain properties acquired in 2006 and the reimbursements from the newly acquired Investment Properties acquired in 2007. Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions increased for the year ended December 31, 2007 as compared to the same period in 2006. This increase is primarily attributable to an increase in interest income on its mortgages and notes receivables. The aggregate principal balance of NNN’s mortgages and notes receivables at December 31, 2007 and 2006 was $51,556,000 and $17,227,000, respectively. The increase in interest income was partially offset by a lower weighted average outstanding principal balance on NNN’s structured finance investments during 2007. NNN recorded interest income of $4,240,000 and $3,966,000 for the years ended December 31, 2007 and 2006, respectively. Interest Income on Commercial Mortgage Residual Interests. The decrease in interest income on commercial mortgage residual interests for the year ended December 31, 2007 as compared to 2006 is primarily the result of the amortization and pre-payments of the underlying notes. 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 decrease in the gain from the disposition of real estate is primarily due to the timing of sales of these Inventory Properties. 29 The following table summarizes the Inventory Property dispositions included in continuing operations for the years ended December 31 (dollars in thousands): 2007 2006 # of Properties Gain # of Properties Gain Minority interest Gain, net of minority interest 2 - 2 $ $ 332 - 332 Gain 8,000 (3,609) 4,391 $ $ 6 - 6 Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005. Rental Income. NNN’s Rental Income increased primarily due to the addition of an aggregate gross leasable area of 1,130,000 square feet to NNN’s Investment Portfolio resulting from the acquisition of an additional 213 Investment Properties during the year ended December 31, 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 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, NNN received $886,000 of disposition and development fee income during the year ended December 31, 2006. There was no fee income recognized in 2006. Interest Income on Commercial Mortgage Residual Interests. NNN recognizes interest income on commercial 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, NNN 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 commercial 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. 30 The following table summarizes the Inventory Property dispositions included in continuing operations for the years ended December 31 (dollars in thousands): Gain Minority interest Gain, net of minority interest 2006 2005 # of Properties Gain 6 - 6 $ $ 8,000 (3,609) 4,391 # of Properties Gain 6 - 6 $ $ 2,010 - 2,010 Analysis of Expenses from Continuing Operations General. During 2007, operating expenses from continuing operations increased primarily as a result of the acquisition of additional properties and was offset by a decrease in impairments. Operating expenses from continuing operations decreased as a percentage from NNN’s total revenues from continuing operations due to increased efficiencies. The following summarizes NNN’s expenses from continuing operations (dollars in thousands): General and administrative Real estate Depreciation and amortization Impairment – real estate Impairment – commercial mortgage residual interests valuation Restructuring costs Total operating expenses Interest and other income Interest expense Total other expenses (revenues) 2007 2006 2005 $ 23,542 8,272 32,593 791 638 - $ 24,009 6,701 22,445 - 8,779 1,580 65,836 $ 63,514 $ 22,401 5,613 16,252 1,673 2,382 - 48,321 (4,753) $ 49,286 (3,816) $ 45,872 (2,039) 33,309 44,533 $ 42,056 $ 31,270 $ $ $ $ Percentage of Total Operating Expenses 2006 2007 2005 Percentage of Revenues from Continuing Operations 2006 2007 2005 35.8% 37.8% 46.4% 12.6% 17.0% 20.5% 5.1% 12.5% 10.6% 11.6% 49.5% 35.3% 33.6% 17.5% 15.9% 14.9% 1.5% 1.2% 0.4% 3.5% 4.5% 4.8% - - 2007 Versus 2006 Percent Increase (Decrease) (1.9)% 23.4% 45.2% 100.0% 2006 Versus 2005 Percent Increase (Decrease) 7.2% 19.4% 38.1% (100.0)% 1.0% 13.8% 2.5% - 4.9% - 0.3% - 6.2% 1.1% 2.2% - (92.7)% (100.0)% General and administrative Real estate Depreciation and amortization Impairment – real estate Impairment – commercial mortgage residual interests valuation Restructuring costs Total operating expenses 100.0% 100.0% 100.0% 35.3% 45.0% 44.2% Interest and other income Interest expense (10.7)% (9.1)% (6.5)% (2.5)% (2.7)% (1.9)% 110.7% 109.1% 106.5% 26.4% 32.5% 30.5% Total other expenses (revenues) 100.0% 100.0% 100.0% 23.9% 29.8% 28.6% 3.7% 24.6% 7.4% 5.9% 31 268.6% 100.0% 31.4% 87.2% 37.7% 34.5% Comparison of Year End December 31, 2007 to Year Ended December 31, 2006. General and Administrative. General and administrative expenses decreased slightly for the year ended December 31, 2007 as compared to the same period in 2006; however, such expenses remained fairly consistent as a percentage of total operating expense from continuing operations. The decrease in general and administrative expenses for 2007 was primarily attributable to a decrease in expenses related to personnel compensation, and a decrease in lost pursuit costs. Real Estate. Real estate expenses increased for the year ended December 31, 2007, as compared to the year ended December 31, 2006; however, such expenses remained fairly consistent as a percentage of total revenues from continuing operations. The increase in real estate expenses for 2007 as compared to the same period for 2006 is primarily attributable to (i) an increase in tenant reimbursable real estate expenses, and (ii) 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, 2007, as compared to the year ended December 31, 2006. The increase for the year ended December 31, 2007, as compared to the same period in 2006 is attributable to (i) the acquisition of 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet in 2007, and (ii) a full year of depreciation and amortization on the 213 Investment Properties with an aggregate gross leasable area of 1,130,000 square feet which were acquired during 2006. The increase in depreciation and amortization was partially offset by the disposition of 37 Investment Properties with an aggregate gross leasable area of 997,000 square feet during the year ended December 31, 2007. Impairment – Real Estate. NNN 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 NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN 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. During the year ended December 31, 2007, NNN recorded impairments totaling $791,000. No impairments were recorded during the year ended December 31, 2006. Impairment – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007 and 2006. In 2007, due to changes in market conditions relating to residual assets, the independent valuation increased the discount rate from 17% to 25%. Other than temporary valuation adjustments are recorded as a reduction of earnings from operations. For the years ended December 2007 and 2006, NNN recorded an other than temporary impairment of $638,000 and $8,779,000, respectively. Restructuring Costs. During the year ended December 31, 2006, NNN 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. No such costs were incurred during 2007. Interest Expense. The increase in interest expense for the year ended December 31, 2007, as compared to the year ended December 31, 2006, is primarily attributable to an increase of $126,164,000 in weighted average long-term debt outstanding. The increase in the weighted average long-term debt was due to the increase in dollars invested in Investment and Inventory Properties. The increase in interest expense was partially offset by an increase of $1,440,000 in the interest capitalized to construction 32 projects in 2007, as well as by a decrease in the overall weighted average interest rate for 2007 as compared to 2006. The following represents the primary changes in debt: (i) (ii) (iii) (iv) (v) (vi) (vii) issuance of $250,000,000 of notes payable in September 2007 with an effective interest rate of 6.92% due in October 2017, repayment of mortgage in September 2007 with balance of $7,305,000 at December 31, 2006 and an interest rate of 7.37%, the decrease in the weighted average debt outstanding on the revolving credit facility (decreased by $28,506,000), issuance of $172,500,000 of notes payable in September 2006 with an effective interest rate of 3.95% due in September 2026, payoff of the $20,800,000 variable rate term note in October 2007, which was assumed in connection with the acquisition of NAPE in June 2005, 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%, and payoff of the $10,500,000 OAMI secured note payable with a stated interest rate of 10.00%. Comparison of Year Ended 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 NNN, 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. NNN 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 33 circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN 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 – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, NNN recorded an other than temporary valuation impairment of $8,779,000 and $2,382,000 for the years ended December 31, 2006 and 2005, respectively. 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”). NNN 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, NNN 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 Investment in Unconsolidated Affiliates In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”) with an affiliate of Crow Holdings Realty Partners IV, L.P. and holds a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interests. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was paid in full in November 2007. In October 2006, NNN 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 owned a 346,000 square foot office building, one floor of which serves as NNN’s headquarters office, and an interest in an adjacent parking garage. In connection with the sale, NNN was released as a guarantor of Plaza’s $14,000,000 unsecured promissory note. During the years ended December 31, 2007, 2006 and 2005, NNN recognized equity in earnings of unconsolidated affiliates of $49,000, $122,000, and $1,209,000, respectively. The decrease in equity in earnings of unconsolidated affiliates prior to the years ended December 31, 2007 and 2006, was primarily attributable to the decrease in the income earned on investments in commercial mortgage residual interests as a result of the acquisition of 78.9 percent equity interest in OAMI in May 2005. Subsequent to the acquisition, NNN’s interest in the LLCs was no longer being accounted for as an equity investment and is now included as a part of OAMI in NNN’s consolidated financial statements. Earnings from Discontinued Operations In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN 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, 2007. NNN also classified as discontinued operations the revenues and expenses of its Inventory Properties which generated rental revenues. NNN records discontinued operations by NNN’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): Investment Assets Inventory Assets, net of minority interest 2007 2006 2005 # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings 37 $ 56,625 $ 63,338 30 $ 91,332 $ 109,664 12 $ 9,816 $ 29,453 69 106 10,681 8,622 $ 67,306 $ 71,960 58 88 5,275 8,146 $ 96,607 $ 117,810 22 34 13,618 9,551 $ 23,434 $ 39,004 NNN occasionally sells Investment Properties and may reinvest the proceeds of the sales to purchase new properties. NNN evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations. 35 Extraordinary Gain During the year ended December 31, 2005, NNN recognized an extraordinary gain of $14,786,000, which resulted from the difference between NNN’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”). Impact of Inflation NNN’s leases typically contain provisions to mitigate the adverse impact of inflation on NNN’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, NNN’s exposure to inflation is reduced. Inflation may have an adverse impact on NNN’s tenants. Liquidity General. NNN’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, mortgages and notes receivable, structured finance investments and capital expenditures; (iii) payment of principal and interest on its outstanding indebtedness, and (iv) other investments. NNN expects to meet these requirements (other than amounts required for additional property investments, mortgages and notes receivables and structured finance investments) through cash provided from operations and NNN’s revolving credit facility. NNN utilizes its credit facility to meet its short term working capital requirements. As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the credit facility, excluding undrawn letters of credit totaling $2,685,000. NNN anticipates that any additional investments in properties, mortgages and notes receivables and structured finance investments during the next 12 months will be funded with cash provided from operations, long-term debt and the issuance of common or preferred equity, which may be initially funded with proceeds from NNN’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 NNN. Below is a summary of NNN’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 financing activities Increase (decrease) January 1 December 31 36 2007 2006 2005 $ 129,634 (536,717) 432,907 $ 1,676 (90,099) 81,864 $ 19,226 (230,783) 217,844 25,824 1,675 (6,559) 8,234 6,287 1,947 $ 27,499 $ 1,675 $ 8,234 Cash provided by operating activities represents cash received primarily from rental income from tenants, proceeds from the disposition of Inventory Properties and interest income less general and administrative expenses, interest expense and acquisition of Inventory Properties. NNN’s cash flow from operating activities, net of cash used in and provided by the acquisition and disposition of its Inventory Properties, has been sufficient to pay the distributions for each period presented. NNN uses proceeds from its Credit Facility to fund the acquisition of its Inventory Properties. The change in cash provided by operations for the years ended December 31, 2007, 2006 and 2005, 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. NNN’s financing activities for the year ended December 31, 2007 included the following significant transactions: • $247,498,000 in net proceeds from issuance of notes due in October 2017, • $135,750,000 in net proceeds from the issuance of 5,750,000 shares of common stock, • $99,150,000 in net proceeds from the issuance of 4,000,000 shares of common stock, • $92,989,000 in dividends paid to common stockholders, • $6,785,000 in dividends paid to holders of the depositary shares of NNN’s Series C Preferred stock, • $44,540,000 paid to redeem all outstanding shares of Series A Preferred stock, • $101,800,000 in net proceeds from NNN’s credit facility, • $62,980,000 in net proceeds from the issuance of 2,645,257 common shares in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), • $10,500,000 repayment of secured note payable, • $20,800,000 repayment of term note, and • $26,007,000 repurchase of the properties under the financing lease obligation. Financing Strategy NNN’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 NNN’s stockholders. NNN 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. NNN typically funds its short-term liquidity requirements including investments in additional Investment Properties with cash from its $400,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000. 37 For the year ended December 31, 2007, NNN’s ratio of total indebtedness to total gross assets (before accumulated depreciation) was approximately 43 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 39 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN’s ability to incur debt under certain circumstances. The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy. Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN’s contractual obligations and commercial commitments outstanding as of December 31, 2007. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2007. Long-term debt(1) Credit Facility Operating lease Total contractual cash obligations(2) Expected Maturity Date (dollars in thousands) Total 2008 2009 2010 2011 2012 Thereafter $ 931,980 $ 129,800 6,261 113,190 $ 1,001 $ 21,022 $ 173,598 $ 69,291 $ - 839 129,800 865 - 891 - 917 - 945 553,878 - 1,804 $ 1,068,041 $ 114,029 $ 131,666 $ 21,913 $ 174,515 $ 70,236 $ 555,682 (1) (2) Includes amounts outstanding under the mortgages payable, secured notes payable, convertible notes payable and notes payable and excludes unamortized note discounts. Excludes $11,243 of accrued interest payable. In addition to the contractual obligations outlined above, NNN has agreed to fund construction commitments in connection with the development of additional properties as outlined below (dollars in thousands): Investment Portfolio Inventory Portfolio (1) Including land costs. # of Properties Total Construction Commitment(1) Amount Funded at December 31, 2007 27 9 36 $ $ 71,883 24,097 95,980 $ $ 44,561 17,125 61,686 As of December 31, 2007 NNN had outstanding letters of credit totaling $2,685,000 under its Credit Facility. As of December 31, 2007, NNN 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, NNN has preferred stock with cumulative preferential cash distributions, as described below under “Dividends.” Management anticipates satisfying these obligations with a combination of NNN’s current capital resources on hand, its revolving credit facility and debt or equity financings. 38 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 NNN's Investment Properties are subject to leases under which NNN retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with NNN’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under NNN’s 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 NNN could have a material adverse effect on the liquidity and results of operations if NNN is unable to release the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2008, NNN owns 13 vacant, unleased Investment Properties which account for approximately three percent of the total gross leasable area of NNN’s Investment Portfolio in addition to three vacant land parcels. Additionally, less than one percent of the total gross leasable area of NNN’s Investment Portfolio is leased to three tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN. Dividends. NNN 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. NNN generally 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 NNN 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 NNN’s income and its ability to pay dividends. NNN believes it has been organized as, and its past and present operations qualify NNN as, a REIT. Additionally, NNN intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. One of NNN’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, 2007, 2006 and 2005, NNN declared and paid dividends to its common stockholders of $92,989,000, $76,035,000, and $69,018,000, respectively, or $1.40, $1.32 and $1.30 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: 2007 2006 2005 Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions $ 1.397402 0.000414 0.002184 - - 99.8144% $ 1.150780 - 0.150261 0.018959 - 0.0296% 0.1560% - - 87.1803% $ 1.068470 0.224510 - 0.002210 0.004810 - 11.3834% 1.4363% - 82.1900% 17.2700% - 0.1700% 0.3700% $ 1.400000 100.0000% $ 1.320000 100.0000% $ 1.300000 100.0000% 39 In February 2008, NNN paid dividends to its common stockholders of $21,598,000, or $0.355 per share of common stock. Holders of each of NNN’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 NNN’s preferred stock (dollars in thousands, except per share data): Non-Voting Preferred Stock Issuance 9% Series A(1) 6.7% Series B Convertible(2) Shares Outstanding At December 31, 2007 - - Liquidation Preference (per share) Fixed Annual Cash Distribution (per share) $ 25.00 $ 25.00000 $ 2,500.00 167.50000 - $ - Dividends Declared and Paid For the Year Ended December 31, 2007 2006 2005 Total Per Share Total Per Share Total Per Share - $ 4,376 $ 2.456250 $ 4,008 $ 2.25 - 419 923 41.875000 1,675 167.50 0.250955 - - 7.375% Series C(3) 3,680,000 25.00 1.84375 6,785,000 1.84375 (2) (1) Effective January 2, 2007, NNN 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 $367 of dividends payable at December 31, 2006, which were paid in 2007. In April 2006, the holder of NNN’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock. In October 2006, NNN issued 3,680,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Preferred Stock. See “Capital Resources – Debt and Equity Securities.” (3) Restricted Cash. Restricted cash consisted of amounts held in restricted accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”). In December 2007, in accordance to agreements with the Buyer, all restrictions were released, therefore, as of December 31, 2007 NNN has no cash held in restricted accounts. The amount held in these accounts at December 31, 2006 was $36,728,000. NNN used a portion of the amounts released to repay the $10,500,000 OAMI secured note payable. Capital Resources Generally, cash needs for property acquisitions, mortgages and notes receivable, 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 NNN’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 NNN’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 $ 2007 129,800 27,480 12,000 172,500 718,290 - Percentage of Total 12.2% $ 2.6% 1.1% 16.3% 67.8% - 2006 28,000 35,892 24,500 172,500 489,804 26,041 Percentage of Total 3.6% 4.6% 3.2% 22.2% 63.1% 3.3% $ 1,060,070 100.0% $ 776,737 100.0% 40 Line of Credit Payable. In October 2007, NNN exercised the $100,000,000 accordion feature of its existing revolving Credit Facility increasing the borrowing capacity to $400,000,000 from $300,000,000. The terms of the Credit Facility provide for (i) a tiered interest rate structure of a maximum of 112.5 basis points above LIBOR (based upon the debt rating of NNN, the current interest rate is 80 basis points above LIBOR), (ii) requires NNN 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 NNN, the current commitment fee is 20 basis points), (iii) provides for a competitive bid option for up to 50 percent of the facility amount and (iv) expires on May 8, 2009. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which NNN may request to be extended for an additional 12 months. As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000. In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment limitations. At December 31, 2007, NNN was in compliance with those covenants. In the event that NNN violates any of these restrictive financial covenants, its access to the debt or equity markets may become impaired. Mortgages Payable. In September 2007, upon maturity, NNN repaid the outstanding principal balance on the long-term fixed rate loan which had an original principal balance of $12,000,000, and was secured by a first mortgage on nine Investment Properties. Upon repayment of the loan, the encumbered Investment Properties were released from the mortgage. As of December 31, 2006, the outstanding principal balance was $7,305,000 with an interest rate of 7.37%. In February 2006, upon maturity, NNN 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 NNN’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 with an interest rate of 7.44%. In May 2006, NNN disposed of three Investment Properties that were subject to a first mortgage with an original and outstanding principal balance of $95,000,000 with an interest rate of 5.40%. Upon disposition of these Investment Properties, the buyer assumed the mortgage. Notes Payable – Secured. In December 2007, NNN repaid the outstanding principal balance of $10,500,000 on one of its secured notes which had an interest rate of 10.00%. NNN repaid the outstanding balance of the note with the restricted cash that was released in December 2007. Notes Payable – Convertible. In September 2006, NNN 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, NNN 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 was 40.9015 shares of NNN’s 41 common stock, which was 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. As a result of the increase in NNN’s dividend, the conversion rate was adjusted to 41.0028, which is equivalent to a conversion price of $24.3886 per share. Upon conversion of each $1,000 principal amount of Convertible Notes, NNN 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 NNN’s option, in cash, common stock or a combination thereof. The Convertible Notes are redeemable at the option of NNN, 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 NNN 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, NNN 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. NNN used the proceeds of the Convertible Notes to pay down outstanding indebtedness under the Credit Facility. Notes Payable. Each of NNN’s outstanding series of publicly held non-convertible notes are summarized in the table below (dollars in thousands). Notes Issue Date Principal Discount(3) Net Price Stated Rate Effective Rate(4) Commencement of Semi- Annual Interest Payments 2008(1)(7) 2010(1) 2012(1) 2014(1)(2)(5) 2015(1) 2017(1)(6) $ March 1998 September 2000 June 2002 June 2004 November 2005 September 2007 100,000 $ 20,000 50,000 150,000 150,000 250,000 271 $ 126 287 440 390 877 99,729 7.125% 7.163% September 1998 19,874 8.500% 8.595% March 2001 49,713 7.750% 7.833% December 2002 149,560 6.250% 5.910% June 2004 149,610 6.150% 6.185% June 2006 249,123 6.875% 6.924% April 2008 Maturity Date March 2008 September 2010 June 2012 June 2014 December 2015 October 2017 (1) (2) (3) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN'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 and interest rate hedge (as applicable). (4) (5) NNN 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, NNN 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. (6) NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a loss of $3,228. The loss has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method. (7) NNN anticipates using proceeds from the Credit Facility to fund the maturity of the 2008 Note. Each series of notes represent senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of NNN. The notes are redeemable at the option of NNN, 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. 42 In connection with the note offerings, NNN incurred debt issuance costs totaling $6,667,000 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 NNN’s notes have been issued, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2007, NNN was in compliance with those covenants. In the event that NNN violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired. In addition, in connection with the acquisition of NAPE, NNN assumed a $20,800,000 term note payable (“Term Note”). In October 2007, NNN repaid the outstanding principal balance on its $20,800,000 term note. The term note had a weighted interest rate of 6.62% as of December 2006. Financing Lease Obligation. In July 2004, NNN sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. NNN 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,” NNN has recognized the sale as a financing transaction. 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 was exercised. In November 2007, NNN repurchased the properties under the agreements of the put option for approximately $26,007,000. Debt and Equity Securities. NNN 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. NNN 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, NNN filed a shelf registration statement with the Securities and Exchange Commission which permits the issuance by NNN of an indeterminate amount of debt and equity securities. A description of NNN’s outstanding series of publicly held notes is found under “Debt – Notes Payable – Convertible” and “Debt – Notes Payable” above. 7.375% Series C Cumulative Redeemable Preferred Stock. In October 2006, NNN 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, NNN 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, NNN 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% 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 NNN’s common stock with respect to dividend rights and rights upon liquidation, dissolution 43 or winding up of NNN. NNN 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. In January 2007, NNN used $44,540,000 of the net proceeds from the offering to redeem the Series A Preferred Stock; and the remainder of the net proceeds were to repay borrowings under the Credit Facility. Common Stock Issuances. In March 2007, NNN issued 5,000,000 shares of common stock at a price of $24.70 per share and received net proceeds of $118,020,000. Subsequently, in April 2007, NNN issued an additional 750,000 shares of common stock in connection with the underwriters’ over- allotment option and received net proceeds of $17,730,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $6,217,000 consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses. In October 2007, NNN issued 4,000,000 shares of common stock at a price of $25.94 per share and received net proceeds of $99,150,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $4,874,000 consisting primarily of underwriter’s fees and commissions, legal and accounting fees. In October 2007, NNN used a portion of the net proceeds to repay the outstanding principal balance on its term note. In June 2005, in connection with the acquisition of National Properties Corporation (see “Results of Operations – Business Combination”), NNN issued 1,636,532 newly issued shares of NNN’s common stock in exchange for 100 percent of the common stock of NAPE. Dividend Reinvestment and Stock Purchase Plan. In February 2006, NNN 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 NNN of up to 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 NNN’s common stock. The following outlines the common stock issuances pursuant to NNN’s DRIP for each of the years ended December 31 (dollars in thousands): 2007 2006 Shares of common stock Net proceeds 2,645,257 62,980 $ 3,046,408 65,722 $ The proceeds from the issuances were used to pay down outstanding indebtedness under NNN’s Credit Facility. Investment in Unconsolidated Affiliates – In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV I plans to acquire up to $220,000,000 of real estate assets leased to convenience store operators from unrelated third parties. NNN owns a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interest. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was paid in full in November 2007. Mortgages and Notes Receivable. Mortgages are loans secured by real estate, real estate securities or other assets. As of December 31, 2007, these receivables totaled $49,336,000. 44 Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns or leases the real estate and/or other acceptable collateral such as fixtures, equipment or cash. These agreements are sometimes 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, 2007, the structured finance agreements had an outstanding principal balance of $14,359,000. As of December 31, 2007, the structured finance investments bear a weighted average interest rate of 11.26% per annum, of which 9.78% is payable monthly and the remaining 1.48% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between January 2009 and March 2010. 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. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands): Mortgages and notes receivable Structured Finance Accrued interest receivables $ Less loan origination fees, net Less allowance 2007 2006 $ 51,556 14,359 545 66,460 (100) (396) 17,227 13,917 641 31,785 (206) (634) $ 65,964 $ 30,945 Commercial Mortgage Residual Interests. In connection with the independent valuations of the commercial mortgage residual interests’ (the “Residuals”) fair value, NNN adjusted carrying value of the Residuals to reflect such fair value at December 31, 2007. The adjustments in the Residuals’ were recorded as an aggregate other than temporary valuation impairment of $638,000 and $8,779,000, for the years ended December 31, 2007 and 2006, respectively. NNN recorded $326,000 of unrealized losses and $1,992,000 of unrealized gains as other comprehensive income for the years ended December 31, 2007 and 2006, respectively. 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk NNN 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 NNN’s development and acquisition activities, and for general corporate purposes. NNN’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, NNN borrows at both fixed and variable rates on its long-term debt. As of December 31, 2007, NNN has one interest rate hedge with a value of $109,000 which is included in other liabilities. As of December 31, 2006, NNN had no outstanding derivatives. The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding as of December 31, 2007 and 2006. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of December 31, 2007. The variable interest rates shown represent the weighted average rates for the Credit Facility and Term Note at the end of the periods. The table incorporates only those debt obligations that exist as of December 31, 2007 it does not consider those debt obligations 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, NNN’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, NNN’s hedging strategies at that time and interest rates. If interest rates on NNN’s variable rate debt increased by one percent, NNN’s interest expense would have increased approximately three percent for the year ended December 31, 2007. Variable Rate Debt Credit Facility and Term Note(1) Weighted Average Interest Rate(2) Debt Obligation - 129,800 - - - - 129,800 129,800 48,800 $ $ $ - 6.24% - - - - 6.24% 6.24% 5.98% 2008 2009 2010 2011 2012 Thereafter Total Fair Value: December 31, 2007 December 31, 2006 Debt Obligations (dollars in thousands) Fixed Rate Debt Mortgages Unsecured Debt(3)(4) Secured Debt Debt Obligation Debt Obligation Weighted Average Interest Rate 7.04% 7.02% 7.01% 7.00% 6.73% 7.60% 7.04% $ Effective Interest Rate 7.16% - 8.60% 3.95% 7.83% 6.45% 6.17% 99,992 - 19,955 172,500 49,846 548,497 890,790 Weighted Average Interest Rate 10.00% - - - - - 10.00% 12,000 - - - - - 12,000 7.04% $ 921,507 7.12% $ 690,198 6.17% 5.84% 12,000 10.00% 24,500 10.00% $ $ $ Debt Obligation 1,190 1,000 1,022 1,098 19,291 3,879 27,480 27,480 35,892 $ $ $ (1) (2) (3) (4) In October 2007, NNN repaid the outstanding principal balance on the Term Note. 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 NNN. Includes NNN’s notes payable, net of unamortized note discounts and convertible notes payable. In July 2004, NNN sold Investment Properties for $26,041 and subsequently leased back the properties under a 10 year financing lease obligation which was subsequently repurchased in November 2007. NNN is also exposed to market risks related to NNN’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 $24,340,000 and $31,512,000 as of December 31, 2007 and December 31, 2006, 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 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders National Retail Properties, Inc. We have audited National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2007, 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 included in the accompanying Managements’ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operative effectiveness of internal control based on the assessed risk, 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, National Retail Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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 sheets of National Retail Properties, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended of National Retail Properties, Inc. and our report dated February 22, 2008, expressed an unqualified opinion thereon. February 22, 2008 Miami, Florida Certified Public Accountants 47 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders National Retail Properties, Inc. We have audited the accompanying consolidated balance sheets of National Retail Properties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Retail Properties, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2007, 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 22, 2008, expressed an unqualified opinion thereon. February 22, 2008 Miami, Florida 48 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders National Retail Properties, Inc.: We have audited the accompanying consolidated statements of earnings, stockholders’ equity, and cash flows of National Retail Properties, Inc. and subsidiaries for the year ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements for 2005 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 consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of National Retail Properties, Inc. and subsidiaries for the year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Orlando, Florida February 17, 2006, except as to notes 2, 19, 26 which are as of February 22, 2008 Certified Public Accountants 49 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS December 31, 2007 December 31, 2006 Real estate, Investment Portfolio: Accounted for using the operating method, net of accumulated depreciation and amortization Accounted for using the direct financing method Real estate, Inventory Portfolio, held for sale Investment in unconsolidated affiliates Mortgages, notes and accrued interest receivable, net of allowance Commercial mortgage residual interests Cash and cash equivalents Restricted cash Receivables, net of allowance of $1,582 and $722, respectively Accrued rental income, net of allowance Debt costs, net of accumulated amortization of $13,424 and $11,339, 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 $1,710 and $996, respectively 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 C, 3,680,000 depositary shares issued and outstanding, at stated liquidation value of $25 per share Common stock, $0.01 par value. Authorized 190,000,000 shares; 72,527,729 and 59,823,031 shares issued and outstanding at December 31, 2007 and 2006, 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 $ $ $ $ $ $ $ 2,055,846 37,497 248,611 4,139 65,964 24,340 27,499 - 3,818 24,652 8,548 38,691 2,539,605 129,800 27,480 12,000 172,500 718,290 - 11,243 57,002 1,671 1,129,986 1,440,996 71,334 228,159 - 30,945 31,512 1,675 36,587 7,915 26,510 8,180 33,684 1,917,497 28,000 35,892 24,500 172,500 489,804 26,041 5,989 30,828 6,340 819,894 2,334 1,098 - 92,000 44,540 92,000 725 598 - 1,175,364 137,599 1,597 1,407,285 2,539,605 $ - 873,885 80,263 5,219 1,096,505 1,917,497 See accompanying notes to consolidated financial statements. 50 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, 2007, 2006 and 2005 (dollars in thousands, except per share data) Year Ended December 31, 2006 2007 2005 Revenues: Rental income from operating leases Earned income from direct financing leases Percentage rent Real estate expense reimbursement from tenants Interest and other income from real estate transactions Interest income on commercial 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 Impairment – commercial mortgage residual interests valuation Restructuring 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 $165,511 3,650 1,572 5,720 5,076 4,882 186,411 $120,632 3,640 732 4,619 4,265 7,268 141,156 $ 87,559 3,874 443 3,902 6,111 7,349 109,238 1,750 (1,418) 36,705 (28,705) 13,569 (11,559) 332 8,000 2,010 23,542 8,272 32,593 791 638 - 65,836 120,907 (4,753) 49,286 44,533 76,374 8,537 190 49 - 85,150 24,009 6,701 22,445 - 8,779 1,580 63,514 85,642 (3,816) 45,872 42,056 43,586 11,206 (1,592) 122 11,373 64,695 22,401 5,613 16,252 1,673 2,382 - 48,321 62,927 (2,039) 33,309 31,270 31,657 2,882 (138) 1,209 - 35,610 63,338 8,622 71,960 157,110 - 157,110 (3,622) $153,488 109,664 8,146 117,810 182,505 - 182,505 5,219 $187,724 29,453 9,551 39,004 74,614 14,786 89,400 - $ 89,400 See accompanying notes to consolidated financial statements. 51 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED Years Ended December 31, 2007, 2006 and 2005 (dollars in thousands, except per share data) Year Ended December 31, 2006 2007 2005 Net earnings Series A preferred stock dividends Series B Convertible preferred stock dividends Series C preferred stock dividends Net earnings available to common stockholders – basic Series B Convertible preferred stock dividends, if dilutive $ $ 157,110 - - (6,785) 150,325 - $ 182,505 (4,376) (419) (923) 176,787 419 89,400 (4,008) (1,675) - 83,717 1,675 Net earnings available to common stockholders – diluted $ 150,325 $ 177,206 $ 85,392 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 1.09 - 2.27 1.18 1.08 - $ $ $ 1.03 2.05 - 3.08 1.02 2.03 - 2.26 $ 3.05 $ 0.56 0.74 0.28 1.58 0.58 0.71 0.27 1.56 66,152,437 57,428,063 52,984,821 66,407,530 58,079,875 54,640,143 See accompanying notes to consolidated financial statements. 52 . 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 5 0 0 2 d n a 6 0 0 2 , 7 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 ( 0 0 4 , 9 8 8 9 9 , 6 5 7 l a t o T ) 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 $ - - - - - - - - - - - - ) 8 8 1 , 5 3 ( 0 0 4 , 9 8 ) 8 0 0 , 4 ( ) 5 7 6 , 1 ( ) 8 1 0 , 9 6 ( - - - - - - - - - 4 8 6 , 2 9 4 6 , 2 3 4 1 , 1 3 3 6 0 , 8 1 ) 2 ( ) 8 ( 1 3 8 , 1 - - - 1 2 6 1 9 2 - - 5 2 1 , 2 2 7 1 2 5 $ ) 9 8 4 , 0 2 ( $ 5 8 4 , 8 7 7 $ 1 5 5 $ - - - - - - - - - - - - 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 d e r r e f e r P k c o t S - - - - - - - - - - - - - - - - - - - - 0 0 0 , 5 2 0 4 5 , 4 4 B s e i r e S 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 A s e i r e S d e r r e f e r P 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 $ 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 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 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 n i b m o c m a r g o r p 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 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 k c o t s k c o t S 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 53 $ 0 0 0 , 5 2 $ 0 4 5 , 4 4 $ 5 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B . 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 d e r r e f e r P k c o t S B s e i r e S 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 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 5 0 0 2 d n a 6 0 0 2 , 7 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 ( ) 6 7 3 , 4 ( ) 3 2 9 ( ) 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 ( 5 0 5 , 2 8 1 l a t o T 7 8 0 , 8 2 8 $ - - - - - - - - - - - - - ) 5 4 3 ( 3 5 6 , 3 2 9 9 , 1 ) 1 8 ( 5 0 5 , 2 8 1 ) 9 1 4 ( ) 6 7 3 , 4 ( ) 3 2 9 ( ) 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 7 2 1 - - - - - - $ ) 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 $ 5 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B - - - - - ) 0 0 0 , 5 2 ( - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 $ ) 1 ( k c o t S d e r r e f e r P 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 $ k c o t s n o m m o c f o e r a h s r e p 2 3 . 1 $ 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 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 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 54 : 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 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 ( e g d e h 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 e g d e h 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 o c e c n a u s s i k c o t S 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 l a i c r e m m o C – n i a g d e z i l a e r n U 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 k c o t S d e r r e f e r P s e r a h s 4 8 1 , 2 7 2 $ 0 4 5 , 4 4 $ 6 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B f o n o i t a n i m r e t 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 ’ N N N 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 e g d e h e t a r t s e r e t n i f o e u l a v r i a F . 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 7 6 3 $ s e d u l c n I ) 1 ( ) 2 ( . 4 0 0 2 e n u J n i p a w s 0 0 0 , 4 9 $ e h t . 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 . 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 5 0 0 2 d n a 6 0 0 2 , 7 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 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 d e r r e f e r P k c o t S B s e i r e S 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 A s e i r e S d e r r e f e r P k c o t S 0 1 1 , 7 5 1 ) 5 8 7 , 6 ( ) 6 3 0 , 9 7 ( ) 0 4 5 , 4 4 ( - 7 2 0 , 9 4 1 4 7 , 7 4 2 1 9 0 , 2 ) 9 1 1 , 3 ( ) 6 0 2 , 1 1 ( ) 9 0 3 ( ) 6 2 3 ( 2 3 1 - - - - - - - - - ) 9 0 3 ( ) 6 2 3 ( 2 3 1 ) 9 1 1 , 3 ( - - - - - - - - - - 0 1 1 , 7 5 1 ) 5 8 7 , 6 ( ) 9 8 9 , 2 9 ( - - - 7 4 9 , 3 1 6 0 0 , 9 4 3 4 6 , 7 4 2 ) 2 ( 1 9 0 , 2 ) 6 0 2 , 1 1 ( - - - - - - 6 - 8 9 1 2 2 - - - - - - - - - - - - - - - - - - - 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 $ 5 8 2 , 7 0 4 , 1 $ 7 9 5 , 1 $ 9 9 5 , 7 3 1 $ 4 6 3 , 5 7 1 , 1 $ 5 2 7 $ 0 0 0 , 2 9 $ - - - - - - - - - - - - - - - - - - $ 0 4 5 , 4 4 $ k c o t S d e r r e f e r P 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 7 3 4 8 . 1 $ k c o t s n o m m o c f o e r a h s r e p 0 4 . 1 $ 6 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 ) 0 4 5 , 4 4 ( k c o t S d e r r e f e r P A s e i r e S f o s e r a h s 9 8 5 , 1 8 7 , 1 f o n o i t p m e d e R - - - - - - - - - - $ $ 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 l a i c r e m m o C – s s o l d e z i l a e r n U 7 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 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 0 8 , 4 5 0 , 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 9 1 1 , 8 9 1 f o e c n a u s s I 55 : 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 3 2 3 , 1 6 8 , 9 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 e g d e h 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 n o i t a n i m r e t e g d e h e t a r t s e r e t n I 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 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 2006 2007 2005 Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: $ 157,110 $ 182,505 $ 89,400 Stock compensation expense Depreciation and amortization Impairment – real estate Impairment – commercial mortgage residual interests valuation adjustment Amortization of notes payable discount Amortization of deferred interest rate hedges 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 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 Decrease (increase) in mortgages, notes and accrued interest receivable Decrease in receivables Decrease (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 2,091 32,976 1,970 638 164 (309) (49) 30 1,143 (56,625) - (12,133) - (4,590) 3,170 24,524 693 8,779 137 (345) (122) 864 2,622 (91,165) (11,373) (13,781) - (8,366) 1,971 22,350 3,729 2,382 105 (326) (1,209) 3,293 (5,854) (9,816) - (21,627) (14,786) (1,709) (165,160) 160,173 2,130 (4,217) (301) 3,924 (2,631) 3,615 5,254 4,510 (79) (195,956) 101,324 2,982 (3,315) 795 642 (5,777) (520) 450 1,951 958 (137,286) 79,065 2,915 (4,355) 6,465 7,730 593 877 913 (4,365) (1,229) Net cash provided by operating activities 129,634 1,676 19,226 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 Cash received from commercial mortgage residual interests Business combination, net of cash acquired Restricted cash Acquisition of 1.3 percent interest in Services Payment of lease costs Other Net cash used in investing activities 136,295 - 222,778 10,239 38,982 - (677,101) - (4,156) (44,888) 19,862 6,208 - 36,587 - (2,912) (6,612) (351,100) (1,449) - (18,371) 39,075 16,885 - (6,396) - (2,790) 1,030 (267,488) (309) - (17,738) 16,846 11,704 2,183 (12,764) (829) (1,253) (117) (536,717) (90,099) (230,783) See accompanying notes to consolidated financial statements. 56 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (dollars in thousands) Year Ended December 31, 2006 2007 2005 Cash flows from financing activities: Proceeds from line of credit payable Repayment of line of credit payable Repayment of mortgages payable Proceeds from notes payable – convertible Repayment of notes payable – secured Proceeds from notes payable Repayment of notes payable Payment of interest rate hedge Payment of debt costs Repayment of financing lease obligation Proceeds from issuance of common stock Proceeds from issuance of preferred stock Redemption of 1,781,589 shares of Series A Preferred Stock Payment of Series A Preferred Stock dividends Payment of Series B Convertible Preferred Stock dividends Payment of Series C Preferred Stock dividends Payment of common stock dividends Minority interest distributions Minority interest contributions Stock issuance costs Net cash provided by 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 206,718, 79,500 and 223,468 shares of restricted and unrestricted common stock in 2007, 2006 and 2005, respectively, pursuant to NNN’s performance incentive plan Converted 10,000 shares of Series B Convertible Preferred Stock to 1,293,996 shares of common stock in 2006 Issued 7,750 and 14,062 shares of common stock in 2007 and 2006, respectively to directors pursuant to NNN’s performance incentive plan Issued 16,346 and 33,379 shares of common stock in 2007 and 2006, respectively pursuant to NNN’s Deferred Director Fee Plan Surrender of 8,600 and 30,135 shares of restricted common stock in 2007 and 2005, respectively Dividends on 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 Assignment of mortgage payable in connection with the disposition of real estate Issued 1,636,532 shares of common stock in connection with the acquisition of National Properties Corporation (“NAPE”) in 2005 Interest rate hedge $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 662,300 (560,500) (8,412) - (33,300) 249,122 - (3,228) (2,453) (26,007) 310,721 - (44,540) - - (6,785) (92,989) (62) 155 (11,115) 432,907 25,824 1,675 27,499 51,824 1,375 4,214 - 182 331 182 - $ $ $ $ $ $ $ $ $ $ (3,622) $ - 14,845 9,747 - - 109 $ $ $ $ $ $ 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 1,675 50,774 1,137 1,763 25,000 307 655 - 4 5,219 885 12,933 1,582 95,000 - - $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 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 8,234 38,684 4,494 4,003 - - - 461 - 1,254 2,158 4,752 2,415 406 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, 2007, 2006 and 2005 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 “NNN” refers to National Retail Properties, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned subsidiaries of National Retail Properties, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (collectively, the “TRS”). NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, mortgages and notes receivable (including structured finance investments) on the consolidated balance sheets and commercial 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 subsidiaries. NNN 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, 2007, NNN owned 908 Investment Properties, with an aggregate gross leasable area of 10,610,000 square feet, located in 44 states. In addition to the Investment Properties, as of December 31, 2007, NNN had $65,964,000 and $24,340,000 in mortgages and notes receivables (including structured finance investments) and commercial mortgage residual interests, respectively. The Inventory Assets are operated through the TRS. The 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, 2007, the TRS owned 56 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. NNN’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. NNN applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by NNN due to the significance of rights held by other parties. 58 The TRS develops real estate through various joint venture development affiliate agreements. NNN consolidates the joint venture development entities listed in the table below based upon either NNN being the primary beneficiary of the respective variable interest entity or NNN having a controlling interest over the respective entity. NNN 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, 2007: Date of Agreement Entity Name November 2002 February 2003 February 2004 September 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 P&P, L.P. CNLRS BEP, L.P. CNLRS Rockwall, L.P. NNN Harrison Crossing, L.P. CNLRS RGI Bonita Springs, LLC TRS’ Ownership % 60% 50% 50% 50% 50% 50% 50% 50% 50% NNN no longer holds an interest in the collective partnership interest of CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”). In October 2006, NNN sold its equity investment for $10,239,000 (see Note 4). In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JVI”) with an affiliate of Crow Holdings Realty Partners IV, LP (see Note 4). In May 2005, NNN (through a wholly owned subsidiary of the TRS) exercised its option to purchase 78.9 percent of the common shares of Orange Avenue Mortgage Investments, Inc. (“OAMI”). As a result, NNN has consolidated OAMI in its consolidated financial statements (see Note 22). Real Estate – Investment Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by NNN 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. 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. 59 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. 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 NNN’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. 60 Real Estate – Inventory Portfolio – The 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 TRS. The 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 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 TRS classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated (see Note 19). 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 NNN with the real estate sold are met. Lease termination fees are recognized when the related leases are cancelled and NNN 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 NNN’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 – NNN accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 4). Commercial Mortgage Residual Interests, at Fair Value – Commercial 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 commercial mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. NNN recognizes the excess of all cash flows attributable to the commercial 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 commercial mortgage residual interests have been pledged as security for notes payable. Cash and Cash Equivalents – NNN 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. 61 Cash accounts maintained on behalf of NNN in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, NNN has not experienced any losses in such accounts. NNN 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 consisted of amounts held in restricted accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”). As of December 31, 2007, NNN has no cash held in restricted accounts. The amount held in these accounts at December 31, 2006 was $36,728,000. In December 2007, in accordance to agreements with the Buyer, the restrictions expired. NNN used a portion of the amounts released to repay the $10,500,000 OAMI secured note payable. Valuation of Receivables – NNN estimates of the collectibility of its accounts receivable related to rents, expense reimbursements and other revenues. NNN 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 NNN’s $400,000,000 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 NNN’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: Weighted average number of common shares outstanding Unvested restricted stock Weighted average number of common shares outstanding 2007 2006 2005 66,519,519 (367,082) 57,698,533 (270,470) 53,272,997 (288,176) used in basic earnings per share 66,152,437 57,428,063 52,984,821 Weighted average number of common shares outstanding used in basic earnings per share Effect of dilutive securities: Restricted stock Common stock options Assumed conversion of Series B Convertible Preferred Stock to common stock Directors’ deferred fee plan 66,152,437 57,428,063 52,984,821 143,550 69,040 114,367 107,909 221,337 128,944 - 42,503 400,607 28,929 1,293,996 11,045 Weighted average number of common shares outstanding used in diluted earnings per share 66,407,530 58,079,875 54,640,143 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, NNN 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, NNN 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 NNN’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, 2007. Income Taxes – NNN 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. NNN 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, 2007, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state taxes on its income and real estate. NNN 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 income that previously would have been disqualified from being eligible REIT income under 63 the federal income tax regulations. As a result, certain activities of NNN 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 NNN’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 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. NNN has evaluated the provisions of SFAS 157 and determined that the adoption of SFAS 157 will not have a significant impact on NNN’s financial position or results of operations. In February 2007, FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which expands the scope of what companies may carry at fair value. This statement also includes an amendment to SFAS Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). SFAS 159 offers an irrevocable option to carry the vast majority of recognized financial assets and liabilities at fair value with changes in fair value recorded in earnings. This statement can be applied instrument by instrument but must be applied to the entire financial instrument and not portions thereof. This statement does not apply to: (a) financial assets and financial liabilities recognized under leases as defined in SFAS Statement No. 13 “Accounting for Leases” with the exception of a guarantee of a third party lease obligation or a contingent obligation arising from a cancelled lease; (b) financial instruments that are in whole or part, 64 classified by the issuer as a component of stockholder’s equity (such as convertible debt security with a non-contingent beneficial conversion feature); (c) non-financial insurance contracts and warranties; and (d) financial instruments resulting from the separation of an embedded non-financial derivative instrument from a non-financial hybrid instrument and various employers’ and plan obligations for pension benefits, post retirement benefits and other forms of deferred compensation arrangements including stock purchase plans and stock option plans. The amendment to SFAS 115 affects entities with available-for-sale and trading securities. This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 will not have a significant impact on NNN’s financial position or results of operation. In May 2007, a FASB Staff Position (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation 48,” was issued to amend Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FSP FIN 48-1 clarifies that a tax position could be effectively settled upon examination by a taxing authority. An enterprise should make the assessment on a position-by-position basis, but an enterprise could conclude that all positions in a particular tax year are effectively settled. In determining effective settlement an enterprise shall evaluate all the following conditions (a) the taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required and expected to perform for the tax position; (b) the enterprise does not intend to appeal or litigate any aspect of the tax position included in the completed examination, and (c) it is remote that the taxing authority would examine or reexamine any aspect of the tax position. In making this assessment management shall consider the taxing authority’s policy on reopening closed examinations and the specific facts and circumstances of the tax position. Management shall presume the taxing authority has full knowledge of all relevant information in making the assessment on whether the taxing authority would reopen a previously closed examination. This FSP was applied upon initial adoption of FIN 48. If an enterprise did not apply FIN 48 in a manner consistent to this FSP then adoption of the provisions of FSP FIN 48-1 should be retrospectively applied to the date of the initial adoption of FIN 48. The adoption of this FSP did not have a significant impact on the NNN’s financial position or results of operations. In June 2007, FASB issued and ratified Emerging Issues Task Force No. 06-11, (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends On Share-Based Payment Award.” EITF 06-11 concludes that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified non-vested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 should be applied prospectively and is effective for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. Retroactive application to previously issued financial statements is prohibited. The adoption of EITF 06-11 will not have a significant impact on NNN’s financial position or results of operation. In December 2007, FASB issued Statements No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) the objective of which is to improve and simplify the accounting for business combinations. SFAS 141(R) will improve reporting by creating greater consistency in the accounting and financial reporting of business combinations. This statement requires the new acquiring entity to recognize all assets acquired and liabilities assumed in business combination 65 transactions; establishes an acquisition-date fair value for said assets and liabilities; and fully disclose to investors the financial effect the acquisition will have. SFAS 141(R) applies to business combinations between mutual entities, including those combinations achieved in the absence of a transaction involving the acquirer such as through the lapse of minority veto rights and combinations achieved without the transfer of consideration, for example, by contract alone. FAS 141(R) specifically excludes joint ventures and common control transactions. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. NNN is currently evaluating the provisions for SFAS 141(R) to determine the potential impact, if any, the adoption will have on NNN’s financial position or results of operations. In December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment to Accounting Research Board No. 51 SFAS 160 objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. NNN is currently evaluating the provisions for SFAS 160 to determine the potential impact, if any, the adoption will have on NNN’s financial position or results of operations. The FASB is currently reviewing comments on a proposed FASB Staff Position (the “proposed FSP”) which, if issued, would require separate accounting for the debt and equity components of convertible instruments. The proposed FSP would require the value assigned to the debt component to be the estimated fair value of a similar bond without the conversion feature, which would result in the debt being recorded at a discount. The debt discount would be amortized over the expected life of the debt as additional interest expense. The proposed FSP would be effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The guidance in the proposed FSP would be applied retrospectively to all periods presented and could result in additional annual interest expense recognized by NNN if adopted, as proposed. Use of Estimates – Management of NNN 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. 66 Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2007 presentation. These reclassifications had no effect on stockholders’ equity or net earnings. The statements of cash flow for the years ended December 31, 2006 and 2005 reflect a reclassification of $16,855,000 and $11,704,000, respectively, to reclassify the cash received from commercial mortgage residual assets from “cash flows from operating activities” to “cash flows from investing activities.” For the year ended December 31, 2006, the reclassification resulted in a change in the “net cash provided by operating activities” from $18,561,000 to $1,676,000 and a change in the “net cash used in investing activities” from $106,984,000 to $90,099,000. For the year ended December 31, 2005, the reclassification resulted in a change in the “net cash provided by operating activities” from $30,930,000 to $19,226,000 and a change in the “net cash used in investing activities” from $242,487,000 to $230,783,000. The reclassification does not effect the net change in cash for either of the years ended December 31, 2006 and 2005 and has no impact on the consolidated balance sheets, consolidated statements of earnings and the related earnings per share amounts or the consolidated statements of stockholders’ equity. Note 2 – Real Estate – Investment Portfolio: Leases – NNN generally leases its Investment Properties to established tenants. As of December 31, 2007, 892 of the Investment Property leases have been classified as operating leases and 26 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 10 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2008 and 2027) 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 NNN’s Investment Properties are subject to leases under which NNN retains responsibility for certain costs and expenses of the property. As of December 31, 2007, the weighted average remaining lease term was approximately 13 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. Investment Portfolio – 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 67 $ $ 2007 938,804 1,201,999 2,532 2,143,335 (111,087) 2,032,248 25,556 2,057,804 (1,958) 2006 693,187 830,450 2,532 1,526,169 (87,359) 1,438,810 3,769 1,442,579 (1,583) $ 2,055,846 $ 1,440,996 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, 2007, 2006 and 2005, NNN recognized collectively in continuing and discontinued operations, $2,672,000, $3,160,000, and $2,053,000, respectively, of such income. At December 31, 2007 and 2006, the balance of accrued rental income, net of allowances of $3,077,000 and $2,536,000, respectively, was $24,652,000 and $26,510,000, respectively. In connection with the development of 27 Investment Properties, NNN has agreed to fund construction commitments (including land costs) of $71,883,000, of which $44,561,000 has been funded as of December 31, 2007. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2007 (dollars in thousands): 2008 2009 2010 2011 2012 Thereafter $ $ 189,858 188,275 185,705 181,700 176,464 1,652,500 2,574,502 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. Investment Portfolio – 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 $ 2007 54,967 13,622 (31,092) $ 2006 104,756 25,015 (58,437) $ 37,497 $ 71,334 The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2007 (dollars in thousands): $ 5,024 5,104 5,123 5,108 5,139 29,469 $ 54,967 2008 2009 2010 2011 2012 Thereafter 68 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 NNN’s review of long lived assets for impairment, including identifiable intangible assets, NNN recognized the following impairments for each of the years ended December 31 (dollars in thousands): Continuing operations: Real estate Intangibles(1) Discontinued operations: Real estate 2007 2006 2005 $ $ 503 288 791 335 1,126 $ $ - - - 693 693 $ $ 345 1,328 1,673 2,056 3,729 (1) Included in Other Assets on the Consolidated Balance Sheets. Note 3 – Real Estate – Inventory Portfolio: As of December 31, 2007, the TRS owned 56 Inventory Properties: 41 completed inventory, nine under construction and six land parcels. As of December 31, 2006, the TRS owned 97 Inventory Properties: 79 complete inventory, five under construction and 13 land parcels. The real estate Inventory Portfolio consisted of the following (dollars in thousands): Inventory: Land Building Construction projects: Land Work in process Less impairment 2007 2006 $ 65,983 140,970 $ 62,554 101,168 206,953 163,722 30,477 12,025 42,502 (844) 42,303 22,134 64,437 - $ 248,611 $ 228,159 In connection with the development of nine Inventory Properties by the TRS, NNN has agreed to fund construction commitments of $24,097,000, of which $17,125,000 has been funded as of December 31, 2007. 69 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): 2005 2006 2007 # 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 2 $ 69 332 - 332 10,957 844 (1,120) 10,681 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 71 $ 11,013 64 $ 9,666 28 $ 15,628 Note 4 – Investments in Unconsolidated Affiliates: Crow Holdings. In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV I plans to acquire up to $220,000,000 of real estate assets leased to convenience store operators from unrelated third parties. NNN owns a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interest. For the year ended December 31, 2007, NNN recognized earnings of $49,000 for NNN Crow JV I. NNN manages the joint venture pursuant to a management agreement and earned management fees of $21,000 for the year ended December 31, 2007. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was repaid in full in November 2007. CNL Plaza. In May 2002, NNN purchased a 25 percent partnership interest in CNL Plaza Ltd. and CNL Plaza Venture Ltd. (collectively “Plaza”) for $750,000. The remaining partnership interests in Plaza were owned by affiliates of James M. Seneff, Jr. and Robert A. Bourne, each a former member of NNN’s Board of Directors. Plaza owned a 346,000 square foot office building and an interest in an adjacent parking garage. NNN had severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. In October 2006, NNN sold its equity investment in Plaza for $10,239,000 and recognized a gain of $11,373,000. In connection with the sale, NNN was released as guarantor of Plaza’s $14,000,000 unsecured promissory note. During the years ended December 31, 2006 and 2005, NNN received $1,042,000, and $471,000, respectively, in distributions from Plaza. For the year ended December 31, 2006, NNN recognized earnings from Plaza of $122,000, and a loss of $218,000 for the year ended December 31, 2005. Since November 1999, NNN has leased its headquarters office space from Plaza. NNN’s lease expires in October 2014. In October 2006, NNN amended its lease with Plaza to reduce the square footage leased by NNN. During the years ended December 31, 2007, 2006 and 2005, NNN incurred rental expenses in connection with the lease of $938,000, $1,024,000 and 70 $1,035,000, respectively. In May 2000, NNN subleased a portion of its office space to affiliates of James M. Seneff, Jr. In October 2006, NNN terminated these subleases in connection with NNN’s amendment. During the years ended December 31, 2006 and 2005, NNN earned $337,000 and $397,000, respectively, in rental and accrued rental income from these affiliates. The following is a schedule of NNN’s future minimum lease payments related to the office space leased from Plaza at December 31, 2007 (dollars in thousands): 2008 2009 2010 2011 2012 Thereafter $ 839 865 891 917 945 1,804 $ 6,261 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. NNN 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: Mortgage receivables and structured finance are loans secured by real estate, real estate securities or other assets. As of December 31, 2007 and 2006, NNN held mortgages and notes receivable with an aggregate principal balance of $51,556,000 and $17,227,000, respectively. The mortgage receivables bear interest rates ranging from 7.00% to 12.00% with maturity dates ranging from May 2008 through October 2028. As of December 31, 2007, the structured finance investments bear a weighted average interest rate of 11.26% per annum, of which 9.78% is payable monthly and the remaining 1.48% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between January 2009 and March 2010. 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. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands): Mortgages and notes receivable Structured Finance Accrued interest receivables Less loan origination fees, net Less allowance 2007 2006 $ 51,556 14,359 $ 17,227 13,917 545 641 66,460 31,785 (100) (396) (206) (634) $ 65,964 $ 30,945 71 Note 6 – Commercial Mortgage Residual Interests: OAMI holds the commercial 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) NNN owned these investment interests prior to its acquisition of the equity interest in OAMI. (2) NNN owns 78.9 percent of OAMI’s investment interest. Each of the Residuals is recorded at fair value based upon an independent 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. Due to changes in market conditions relating to residual assets, the independent valuation increased the discount rate from 17% to 25% during 2007. As a result of the increase in discount rate and an increase in prepayments of underlying loans of the Residuals, NNN recognized an other than temporary valuation impairment of $638,000 for the year ended 2007. In 2006, as a result of the increase in historical prepayments, the independent valuation changed the assumption in future pay prepayments. As a result, NNN recognized an other than temporary valuation impairment of $8,779,000 for the year ended December 31, 2006. NNN recorded $326,000 of unrealized losses and $1,992,000 of unrealized gains as other comprehensive income for the years ended December 31, 2007 and 2006, respectively. 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 2007 2006 25% 33.0% to 45.7% CPR 17% 38.7% to 47.6% CPR 1.1% maximum rate 10% 1.1% maximum rate 10% Forward 3-month curve Forward curve Forward 3-month curve Forward curve The following table shows the effects on the key assumptions affecting the fair value of the Residuals at December 31, 2007 (dollars in thousands). 72 Carrying amount of retained interests Discount rate assumption Fair value at 27% discount rate Fair value at 30% 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 $ 24,340 $ $ $ $ $ $ $ $ 23,807 23,041 24,317 25,727 25,745 25,742 26,172 26,608 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 October 2007, NNN exercised the $100,000,000 accordion feature of its existing revolving credit facility (the “Credit Facility”) increasing the borrowing capacity to $400,000,000 from $300,000,000. NNN’s Credit Facility’s current loan agreement terms as amended and restated in December 2005, (i) lowers 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 NNN, the current interest rate is 80 basis points above LIBOR), (ii) requires NNN 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 NNN, the current commitment fee is 20 basis points), (iii) provides for a competitive bid option for up to 50 percent of the facility amount, (iv) extends the expiration date to May 8, 2009 and (v) amends certain of the financial covenants of NNN. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which NNN may request to be extended for an additional 12 months. As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000. The Credit Facility had a weighted average interest rate of 6.24% and 5.91% for the years ended December 31, 2007 and 2006, respectively. In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage and (iv) investment and dividend limitations. At December 31, 2007, NNN was in compliance with those covenants. 73 For the years ended December 31, 2007, 2006 and 2005, interest cost incurred was $5,937,000, $7,310,000, and $2,948,000 respectively, of which $3,718,000, $2,278,000 and $2,563,000, respectively, was capitalized by NNN as a cost of buildings constructed. For the years ended December 31, 2007, 2006 and 2005, $2,219,000, $5,032,000 and $385,000, respectively, were charged to operations. Note 8 – Mortgages Payable: The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in thousands): Entered June 1996(2) December 1999 December 2001 December 2001 December 2001 June 2002 February 2004(2) February 2004(3) March 2005(2) Balance Interest Rate Maturity(4) $ 1,916 350 623 698 485 21,000 6,952 12,000 1,015 8.250% December 2008 8.500% December 2009 9.000% April 2014 9.000% April 2019 9.000% April 2019 6.900% July 2012 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, 2007 2006 $ $ 1,739(5) $ 3,270 962 1,344 1,317 25,654 12,248 - 1,380 263 95 358 441 226 19,759 5,487 - 851 506 136 398 463 236 20,027 5,907 7,304 915 $ 47,914 $ 27,480 $ 35,892 (1) Each loan is secured by a first mortgage lien on certain of NNN’s properties. The carrying values of the assets are as of December 31, 2007. (2) Date entered represents the date that NNN 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) NNN assumed this long term fixed rate loan when NNN increased its ownership in Net Lease Institutional Realty, L.P. In September 2007, upon maturity, NNN repaid the outstanding principal balance on this long-term fixed rate loan. (4) Monthly payments include interest and principal, if any; the balance is due at maturity. (5) NNN has a $354,000 letter of credit that also secures the loan. The following is a schedule of the annual maturities of NNN’s mortgages payable at December 31, 2007 (dollars in thousands): 2008 2009 2010 2011 2012 Thereafter $ 1,190 1,000 1,022 1,098 19,291 3,879 $ 27,480 Note 9 – Notes Payable – Secured: NNN’s consolidated financial statements include the following notes payable, resulting from the acquisition of OAMI (see Note 22) (dollars in thousands): 74 02-1 Notes(1) 03-1 Notes(2)(3) Outstanding Principal Balance at December 31, 2007 - 12,000 12,000 $ $ 2006 $ $ 10,500 14,000 24,500 Stated Rate Maturity Date 10% December 2007 10% June 2008 (1) NNN repaid the outstanding principal amount in December 2007. (2) Secured by certain equity investments in commercial mortgage residual interests of NNN with a carrying value of $5,445. (3) Interest is payable quarterly with annual principal payments of $2,000 payable June 30. The 03-1 Note 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: NNN 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) Net Price Stated Rate Effective Rate(4) Commencement of Semi- Annual Interest Payments Maturity Date $ 2008(1) 2010(1) 2012(1) 2014(1)(2)(5) 2015(1) 2017(6) March 1998 September 2000 June 2002 June 2004 November 2005 September 2007 100,000 $ 20,000 50,000 150,000 150,000 250,000 271 $ 99,729 19,874 126 49,713 287 149,560 440 149,610 390 249,123 877 7.125% 8.500% 7.750% 6.250% 6.150% 6.875% 7.163% September 1998 March 2008 8.595% March 2001 7.833% December 2002 5.910% June 2004 6.185% June 2006 6.924% April 2008 September 2010 June 2012 June 2014 December 2015 October 2017 (1) (2) (3) (4) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN'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). (5) NNN 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, NNN 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. (6) NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a liability of $3,260, of which $3,228 was recorded to other comprehensive income. The liability has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method. Each series of the notes represent senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of NNN. Each of the notes are redeemable at the option of NNN, 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, NNN incurred debt issuance costs totaling $6,667,000 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 75 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 NNN’s notes have been issued, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2007, NNN was in compliance with those covenants. Term Note – In connection with the acquisition of NAPE (see Note 22), NNN assumed a $20,800,000 term note payable (“Term Note”). The principal balance on the Term Note was due in full upon June 2009. The Term Note bore interest based on a tiered rate structure to a maximum rate of 165 basis points above LIBOR. In accordance with the terms of Term Note, NNN was required to meet certain restrictive financial covenants, which among other things, required NNN to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage. In October 2007, NNN repaid the outstanding principal balance on the Term Note. For the year ended December 31, 2006, the Term Note had a weighted average interest rate of 6.62%. Note 11 – Notes Payable – Convertible: In September 2006, NNN 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 2027 (with a 2011 put option). Subsequently, NNN 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 was 40.9015 shares of NNN’s common stock, which was 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. As a result of the increase in NNN’s dividend, the conversion rate was adjusted to 41.0028, which is equivalent to a conversion price of $24.3886. Upon conversion of each $1,000 principal amount of Convertible Notes, NNN 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 NNN’s option, in cash, common stock or a combination thereof. The Convertible Notes are redeemable at the option of NNN, in whole or in part, on or after September 20, 2011 for cash equal to 100 percent 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 NNN 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, NNN 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 76 deferred and are being amortized over the period to the earliest put option of the holders, September 20, 2011 using the effective interest method. Note 12 – Financing Lease Obligation: In July 2004, NNN sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. NNN 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,” NNN has recognized the sale as a financing transaction. 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 was exercised. In November 2007, NNN repurchased the properties under the agreements of the put option for approximately $26,007,000. Note 13 – Preferred Stock: The following table outlines each issuance of NNN’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, 2007 Liquidation Preference (per share) Fixed Annual Cash Distribution (per share) - - 3,680,000 $ 25.00 2,500.00 25.00 $ 2.25000 167.50000 1.84375 9% Non-Voting Series A Preferred Stock. In December 2001, NNN issued 1,999,974 shares of 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”). 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 NNN’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of NNN. In January 2007, NNN redeemed all outstanding 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, NNN 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, NNN 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 NNN’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock. 77 7.375% Series C Cumulative Redeemable Preferred Stock. In October 2006, NNN 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 Preferred Stock”), and received gross proceeds of $80,000,000. In addition, NNN 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 NNN 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% 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 NNN’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of NNN. NNN 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 June 2005, NNN issued 1,636,532 shares of common stock pursuant to the acquisition of National Properties Corporation (“NAPE”) (see Note 22). In March 2007, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 5,000,000 shares of common stock at a price of $24.70 per share and received net proceeds of $118,020,000. Subsequently, in April 2007, NNN issued an additional 750,000 shares of common stock in connection with the underwriters’ over- allotment option and received net proceeds of $17,730,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $6,217,000, consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses. In June 2007, NNN filed a registration statement on Form S-8 with the Securities and Exchange Commission which permits the issuance by NNN of up to 5,900,000 shares of common stock pursuant to NNN’s 2007 Performance Incentive Plan. In October 2007, NNN filed a prospective supplement to the prospectus contained in its February 2006 Shelf Registration Statement and issued 4,000,000 shares of common stock at a price of $25.94 per share and received net proceeds of $99,150,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $4,874,000, consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses. Dividend Reinvestment and Stock Purchase Plan. In February 2006, NNN 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 NNN of 12,191,394 shares of common stock. The following outlines the common stock issuances pursuant to the DRIP for the years ended December 31: 78 Shares of common stock Net proceeds 2,645,257 62,980 $ 3,046,408 65,722 $ 2007 2006 Note 15 – Employee Benefit Plan: Effective January 1, 1998, NNN adopted a defined contribution retirement plan (the “Retirement Plan”) covering substantially all of the employees of NNN. The 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. NNN 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. NNN’s contributions to the Retirement Plan for the years ended December 31, 2007, 2006 and 2005 totaled $428,000, $248,000, and $194,000, 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: $ Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions $ 2007 1.397402 0.000414 0.002184 - - 2006 1.150780 - 0.150261 0.018959 - $ 2005 1.068470 0.224510 - 0.002210 0.004810 $ 1.400000 $ 1.320000 $ 1.300000 The following presents the characterization for tax purposes of preferred stock dividends per share paid to stockholders for the year ended December 31: Total Ordinary Dividends Qualified Dividend Capital Gain Unrecaptured Section 1250 Gain $ 0.206250 $ 1.843750 0.205867 $ 1.840328 0.000061 $ 0.000546 0.000322 0.002876 $ - - 2007: Series A(1) Series C 2006: Series A Series B Convertible(1) Series C(2) 2.250000 41.875000 0.250955 1.961557 36.506800 0.218784 2005: Series A Series B Convertible 2.250000 167.500000 2.250000 167.500000 - - - - - 0.256127 4.766800 0.028567 0.032316 0.601400 0.003604 - - - - (1) (2) Shares of Series A and Series B convertible are no longer outstanding. Issued in October 2006. 79 Note 17 – Restructuring Costs: During the year ended December 31, 2006, NNN 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 – Income Taxes: In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The 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. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. NNN is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed its various federal and state filing positions. NNN believes that its income tax filing positions and deductions are well documented and supported. Additionally, NNN believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, NNN did not record a cumulative effect adjustment related to the adoption of FIN 48. NNN has had no increases or decreases in unrecognized tax benefits for current or prior years since the date of adoption. Further, no interest or penalties have been included since no reserves were recorded and no significant increases or decreases are expected to occur within the next 12 months. When applicable, such interest and penalties will be recorded in non-operating expenses. The periods that remain open under federal statute are 2004 through 2007. NNN also files in many states with varying open years under statute. For income tax purposes, NNN has taxable REIT subsidiaries in which certain real estate activities are conducted. Additionally, in May 2005, NNN acquired a 78.9 percent equity interest in OAMI, and has consolidated OAMI in its financial statements. OAMI, upon making its REIT election, has remaining tax liabilities relating to the built-in-gain of its assets. NNN treats some depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between NNN’s effective tax rates for the years ended December 31, 2007, 2006 and 2005, 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): Temporary differences: Built-in-gain Depreciation Other Excess interest expense carryforward Net operating loss carryforward Net deferred income tax asset (liability) Current income tax asset (payable) Income tax asset (liability) 80 2007 2006 $ (6,768) (632) 79 5,676 134 $(1,511) (160) $ (9,480) (600) 8 2,010 1,961 $(6,101) (239) $(1,671) $(6,340) 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 NNN’s taxable REIT subsidiaries. The net operating loss carryforwards expire in 2027. 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 NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2007. 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): 2007 2006 2005 $ 153,849 $ 176,283 $ 92,362 Current: Federal State and local Deferred: Federal State and local Total provision for income taxes (1,120) (209) 3,570 1,020 3,261 (1,805) (339) 6,493 1,873 6,222 (2,402) (451) (44) (65) (2,962) Total net earnings $ 157,110 $ 182,505 $ 89,400 81 Note 19 – Earnings from Discontinued Operations: Real Estate – Investment Portfolio – In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN 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, 2007, 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 Percentage rent 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 2007 2006 2005 $ $ 4,400 2,267 - 318 624 7,609 (45) 294 315 335 899 (3) 0 (3) 6,713 56,625 - 18,855 5,552 34 1,077 505 26,023 97 2,848 2,071 693 5,709 (1) 1,816 1,815 18,499 91,332 (167) $ 28,059 6,645 37 2,448 390 37,579 (66) 6,736 6,076 2,056 14,802 (14) 3,154 3,140 19,637 9,816 - Earnings from discontinued operations $ 63,338 $ 109,664 $ 29,453 82 Real Estate – Inventory Portfolio – NNN has classified the revenues and expenses related to (i) its Inventory Properties, which generated rental revenues prior to disposition, and (ii) the Inventory Properties which had generated rental revenues and were held for sale as of December 31, 2007, 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 Percentage rent 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 Impairments – real estate Other expenses (revenues): Interest and other income Interest expense Earnings before income tax expense and minority interest Income tax expense Minority interest 2007 2006 2005 $ $ 8,616 - 1,008 224 9,848 $ 9,235 - 311 336 9,882 1,986 6 69 899 2,960 164,338 (152,537) 11,801 80,856 (75,076) 5,780 70,967 (51,350) 19,617 78 1,504 68 844 2,494 (5) 3,928 15,232 (5,276) (1,334) 57 389 8 - 454 - 1,049 14,159 (4,984) (1,029) 8 318 21 - 347 (1) 815 21,416 (5,844) (6,021) Earnings from discontinued operations $ 8,622 $ 8,146 $ 9,551 Real Estate – Impairment – NNN 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 NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN 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, NNN recognized a $335,000, $693,000 and $2,056,000 impairment in discontinued operations in the Investment Portfolio during the years ended December 31, 2007, 2006 and 2005, respectively. Additionally, NNN recognized an $844,000 impairment in discontinued operations in the Inventory Portfolio during the year ended December 31, 2007. NNN had no impairments in the Inventory Portfolio for the years ended December 31, 2006 and 2005. 83 Note 20 – 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, NNN 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. NNN’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, NNN primarily uses treasury locks and interest rate swaps as part of its cash flow hedging strategy. Treasury locks designated as cash flow hedges lock in the yield or price of a treasury security. Treasury locks are cash settled either as a cash inflow or outflow, depending on movements in interest rates. 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. 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. NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer highly 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, NNN 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. NNN is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 6 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments). In September 2007, NNN terminated two interest rate hedges with a combined notional amount of $100,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate hedges when terminated was a liability of $3,260,000, of which $3,228,000 was deferred in other comprehensive income. 84 In June 2004, NNN 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. As of December 31, 2007, $229,000 remains in other comprehensive income related to the fair value of the interest rate hedges. During the year ended December 31, 2007 and 2006, NNN reclassified $309,000 and $345,000, respectively, out of other comprehensive income as a reduction to interest expense. During 2008, NNN estimates that an additional $162,000 will be reclassified to interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on NNN’s long-term debt. As of December 31, 2007 NNN has one interest rate hedge with a positive fair value of $109,000 included in other liabilities. NNN recorded an immaterial amount of hedge ineffectiveness on cash flow hedges as interest expense during the year ended December 31, 2007. Additionally, NNN does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. NNN had no derivative financial instruments outstanding at December 31, 2006. Note 21 – Performance Incentive Plan: In June 2007, NNN filed a registration statement on Form S-8 with the Securities and Exchange Commission which permits the issuance of up to 5,900,000 shares of common stock pursuant to NNN’s 2007 Performance Incentive Plan (the “2007 Plan”). The 2007 Plan replaces NNN’s previous Performance Incentive Plan. The 2007 Plan allows NNN to award or grant to key employees, directors and persons performing consulting or advisory services for NNN 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 2007 Plan. The following summarizes NNN’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 2006 2005 2007 236,371 - (82,767) (34,800) 461,175 - (224,804) - 639,765 - (173,280) (5,310) Outstanding, December 31 118,804 236,371 461,175 Exercisable, December 31 118,804 236,371 457,000 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 2007 2006 2005 14.92 - 16.12 13.64 13.64 $ 15.66 - 16.43 14.92 14.92 $ 15.33 - 14.48 15.66 15.67 $ 85 The following summarizes the outstanding options and the exercisable options at December 31, 2007: 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 $17.3750 $10.1875 to $13.6875 Total 52,600 11.32 2.64 52,600 11.32 $ $ 66,204 15.49 3.96 66,204 15.49 118,804 13.64 3.38 118,804 13.64 $ $ $ $ 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, 2007, the intrinsic value of options outstanding was $1,038,000. All options outstanding at December 31, 2007, were exercisable. During the years ended December 31, 2007, 2006 and 2005, NNN received proceeds totaling $1,334,000, $3,694,000 and $2,509,000, respectively, in connection with the exercise of options. NNN issued new common stock to satisfy share option exercises. The total intrinsic value of options exercised during the year ended December 31, 2007, 2006 and 2005, was $664,000, $1,300,000 and $1,026,000, respectively. Pursuant to the 2007 Plan, NNN has granted and issued shares of restricted stock to certain officers, directors and key associates of NNN. The following summarizes the activity for the year ended December 31, 2007 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 284,689 206,719 (96,047) (8,600) 386,761 Weighted Average Share Price $ 18.44 20.16 17.59 21.18 19.51 In May 2006, NNN 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. During the years ended December 31, 2007 and 2005, NNN cancelled 8,600 and 30,135 shares, respectively, of restricted stock. No restricted stock was cancelled in 2005. 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 NNN 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. 86 During the year ended December 31, 2007, NNN granted 79,000 performance based shares with a weighted average grant price of $12.94 to certain executive officers of NNN. The compensation expense for the grant is based upon the fair value of the grant lattice model with the following assumptions: (i) risk free interest rate of 4.8%, (ii) a dividend rate of 5.3%, (iii) a term of five years, and (iv) volatility of 17.5%. Volatility is based upon the historical volatility of NNN’s stock and other factors. The term is assumed to be the vesting date for each tranche. The vesting of these shares is contingent upon achievement of certain performance goals by January 1, 2012. During the year ended December 31, 2005, NNN granted 38,273 performance based shares with a weighted average grant price of $11.23 to certain executive officers of NNN. Compensation expense for the grant 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 NNN’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. As of December 31, 2007, 15,309 of these shares have vested as a result of the achievement of certain of these performance goals. The following summarizes other grants made during the year ended December 31, 2007, pursuant to the 2000 Plan. Other share grants under the 2007 Plan: Directors’ fees Deferred Directors’ fees Non-restricted grant Weighted Average Share Price 23.54 23.59 24.70 23.75 Shares 7,750 16,346 4,400 28,496 Shares available under the 2007 Plan for grant, end of period 2,964,191 The total compensation cost for share-based payments for the years ended December 31, 2007, 2006 and 2005, totaled $2,583,000, $3,766,000 and $2,156,000, respectively, of such compensation expense. At December 31, 2007, NNN had $5,321,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements under the 2007 Plan. This cost is expected to be recognized over a weighted average period of 3.1 years. Note 22 – Business Combinations: Orange Avenue Mortgage Investments, Inc. – On May 2, 2005, NNN 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, NNN has consolidated OAMI in its consolidated financial statements. 87 In accordance with SFAS 141, NNN recorded the assets and liabilities of OAMI at fair value. NNN 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. The following table summarizes the extraordinary gain recognized by NNN (dollars in thousands) during the year ended December 31, 2005: NNN’s share of net assets acquired Less option price Basis of option Extraordinary gain $ $ 24,434 (9,379) (269) 14,786 NNN’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 NNN, 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 NNN, is an officer, director and indirect stockholder of OAMI. Craig Macnab, an officer and director of NNN and Julian E. Whitehurst, an officer of NNN, 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, NNN 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 NNN’s acquisition of 78.9 percent equity interest in OAMI, NNN’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in NNN’s consolidated financial statements. In addition, certain officers and directors of NNN own preferred shares of OAMI. Prior to the acquisition of 78.9 percent equity interest in OAMI, NNN 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, NNN recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs. In 2003, in connection with a loan to OAMI, NNN 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, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007, 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. NNN 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 commercial mortgage residual interests. 88 National Properties Corporation – On June 16, 2005, NNN 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 NNN’s common stock. NNN’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 23 – Fair Value of Financial Instruments: NNN believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. NNN 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, financing lease obligation and other liabilities at December 31, 2007 and 2006, approximate fair value based upon current market prices of similar issues. At December 31, 2007 and 2006, the fair value of NNN’s notes and convertible notes, collectively, was $921,507, 000 and $690,198,000, respectively, based upon the quoted market price. Note 24 – Related Party Transactions: For additional related party disclosures see Note 4 and Note 22. In June 2005, James M. Seneff, Jr. and Robert A. Bourne each retired from the Board of Directors (“Retired Directors”). NNN has revolving lines of credit with the TRS that allow for an aggregate borrowing capacity of $280,000,000, as of December 31, 2007. The lines of credit each bear interest at 75 percent of the Prime rate 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, 2007 and 2006 was $220,515,000 and $208,395,000, and bore interest at a rate of 9.54% and 10.29%, respectively. In connection with the lines of credit from the TRS, NNN earned $15,851,000, $16,287,000 and $3,511,000 in interest and fees during the years ended December 31, 2007, 2006 and 2005, respectively, each of which was eliminated in consolidation. In 2005, NNN provided disposition and development services to an affiliate of the Retired Directors. In connection therewith, NNN received an aggregate of $886,000 in fees during the years ended December 31, 2005. There were no fees recognized during the years ended December 31, 2007 and 2006. In 2002, NNN extended the maturity dates to dates between June and December 2007 of four mortgages securing an original aggregate principal indebtedness totaling $8,514,000 from affiliates of the Retired Directors. In June 2005, NNN received the outstanding principal balance for three of the mortgage loans. In July 2005, NNN received the entire outstanding principal balance for the remaining mortgage loan. In connection therewith, NNN recorded $96,000, as interest and other income from real estate transactions during the year ended December 31, 2005. 89 Note 25 – Quarterly Financial Data (unaudited): The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data): 2007 Revenues as originally reported Reclassified to discontinued operations Adjusted revenue Net earnings Net earnings per share(1): Basic Diluted 2006 Revenues as originally reported Reclassified to discontinued operations Adjusted revenue Net earnings Net earnings per share(1): Basic Diluted First Quarter Second Quarter Third Quarter Fourth Quarter $ $ $ $ $ $ $ $ 42,713 (2,269) 40,444 26,704 0.41 0.41 37,026 (3,760) 33,266 23,448 0.40 0.39 $ $ $ $ $ $ $ 46,421 (679) 45,742 48,655 0.71 0.70 37,570 (3,725) 33,845 80,201 1.38 1.37 $ $ $ $ $ $ $ 47,783 (123) 47,660 47,386 0.68 0.68 37,966 (3,009) 34,957 21,455 0.35 0.35 $ $ $ $ $ $ $ 52,565 - 52,565 34,365 0.46 0.46 41,578 (2,490) 39,088 57,401 0.93 0.93 (1) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount. 90 Note 26 – Segment Information: NNN has identified two primary financial segments: (i) Investment Assets and (ii) Inventory Assets. The following tables represent the segment data and reconciliation to NNN’s consolidated totals for the years ended December 31, 2007, 2006 and 2005 (dollars in thousands): Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals 2007 External revenues Intersegment revenues Interest revenue Interest revenue on commercial mortgage residuals interests Gain on the disposition of real estate, Inventory Portfolio Interest expense Depreciation and amortization Operating expenses Impairments – real estate Equity in earnings of unconsolidated affiliates Income tax benefit Minority interest $ $ 177,596 15,851 8,319 4,882 - 55,633 32,484 24,109 1,302 (1,334) 2,675 (689) 327 - 40 - 332 8,502 109 7,705 128 - 5,862 879 Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) Assets Additions to long-lived assets: Real estate 93,772 63,338 157,110 2,519,360 677,101 $ $ $ (9,004) 7,778 (1,226) 263,369 165,160 $ $ $ $ $ $ $ $ - (15,851) - 177,923 - 8,359 - - (14,849) - - (1) 1,383 - - 382 844 1,226 (243,124) - 4,882 332 49,286 32,593 31,814 1,429 49 8,537 190 85,150 71,960 157,110 2,539,605 842,261 $ $ $ 91 2006 External revenues Intersegment revenues Interest revenue Interest revenue on commercial mortgage residuals interests Gain on the disposition of real estate, Inventory Portfolio Interest expense Depreciation and amortization Operating expenses Impairments – real estate 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 (loss) Assets Additions to long-lived assets: Real estate 2005 External revenues Intersegment revenues Interest revenue Interest revenue on commercial 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 – real estate Income tax benefit Minority interest Earnings (loss) from continuing operations Earnings from discontinued operations Extraordinary gain Net earnings Assets Additions to long-lived assets: Real estate Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals $ $ - (16,379) - 130,671 - 7,033 $ $ 130,230 16,379 6,972 7,268 - 48,801 22,386 22,103 8,779 441 - 61 - 8,000 12,352 59 10,189 - - - (15,281) - (2) - (2,677) - 2,799 11,335 5,050 353 72,841 109,664 182,505 1,910,003 $ $ 38 6,156 (1,945) (9,849) 7,955 (1,894) 242,466 352,549 $ 195,956 $ 96,550 3,511 5,702 7,349 - 32,554 16,031 18,629 2,859 4,055 835 (378) 1,240 - 436 - 2,010 3,335 221 9,395 (40) - 2,047 240 45,161 29,453 14,786 89,400 1,729,778 (7,018) 8,629 - 1,611 137,291 $ $ 267,797 $ 137,286 92 $ $ $ $ $ $ $ - - - 1,703 191 1,894 (234,971) - - (3,511) - - - (2,580) - (9) (1,610) - - - (2,532) 921 - (1,611) (130,481) - $ $ $ $ $ $ $ 7,268 8,000 45,872 22,445 32,290 8,779 122 11,373 11,206 (1,592) 64,695 117,810 182,505 1,917,498 548,505 97,790 - 6,138 7,349 2,010 33,309 16,252 28,015 1,209 4,055 2,882 (138) 35,611 39,003 14,786 89,400 1,736,588 405,083 $ $ $ $ $ $ $ Note 27 – Major Tenants: In the year ended December 31, 2005, NNN recorded rental and earned income from one of its tenants, the United States of America, of $18,827,000. The rental and earned income from the United States of America represented more than 10 percent of NNN’s rental and earned income for the year ended December 2005. As of December 31, 2007 and 2006, NNN did not have any one tenant that accounts for ten percent or more of its rental and earned income. Note 28 – Commitments and Contingencies: As of December 31, 2007, NNN had letters of credit totaling $2,685,000 outstanding under its Credit Facility. In the ordinary course of its business, NNN is a party to various other legal actions which management believes is routine in nature and incidental to the operation of the business of NNN. Management believes that the outcome of the proceedings will not have a material adverse effect upon its operations, financial condition or liquidity. 93 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. NNN carried out an assessment as of December 31, 2007 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 NNN’s Chief Executive Officer and Chief Financial Officer. Rules adopted by the Commission require NNN to present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of NNN’s disclosure controls and procedures and the conclusions of NNN’s management about the effectiveness of NNN’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 NNN’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 providing reasonable assurance that information required to be disclosed in NNN’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 providing reasonable assurance that such information is accumulated and communicated to NNN’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, NNN’s Chief Executive Officer and Chief Financial Officer, and affected by NNN’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 NNN’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 NNN’s receipts and expenditures are being made in accordance with authorizations of management or the Board of Directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of NNN’s assets that could have a material adverse effect on NNN’s financial statements. 94 Scope of the Assessments. The assessment by NNN’s Chief Executive Officer and Chief Financial Officer of NNN’s disclosure controls and procedures and the assessment by NNN’s management, including NNN’s Chief Executive Officer and Chief Financial Officer, of NNN’s internal control over financial reporting included a review of procedures and discussions with NNN’s management and others at NNN. In the course of the assessments, NNN sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. NNN’s internal control over financial reporting is also assessed on an ongoing basis by personnel in NNN’s Accounting department and by NNN’s internal auditors in connection with their internal audit activities. The overall goals of these various assessment activities are to monitor NNN’s disclosure controls and procedures and NNN’s internal control over financial reporting and to make modifications as necessary. NNN’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. 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 NNN’s on-going procedures. The assessments of NNN’s disclosure controls and procedures and NNN’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 NNN’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, NNN’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, NNN’s disclosure controls and procedures were effective. Management’s Report on Internal Control over Financial Reporting. Management, including NNN’s Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting for NNN. 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 NNN’s internal control over financial reporting. Based upon the assessments, NNN’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, NNN’s internal control over financial reporting was effective. NNN’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 NNN’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, 2007, there were no changes in NNN’s internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, NNN’s internal control for financial reporting. 95 Limitations on the Effectiveness of Controls. Management, including NNN’s Chief Executive Officer and Chief Financial Officer, do not expect that NNN’s disclosure controls and procedures or NNN’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 NNN 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. 96 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. 97 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, 2007 and 2006 Consolidated Statements of Earnings for the years ended December 31, 2007, 2006 and 2005 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005 Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2007 Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2007 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. 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). 98 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 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). 4.10 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). 99 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 Form of Supplemental Indenture No. 6 dated as of November 17, 2005, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $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). Form of 6.875% Notes due 2017 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 4, 2007 and incorporated herein by reference). Form of Eighth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 4, 2007, and incorporated hereby by reference). 10. Material Contracts 10.1 10.2 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 NNN and the Participant of NNN (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). 100 10.3 10.4 10.5 10.6 10.7 10.8 10.9 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). 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). 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 as Exhibit 10.8 with the Securities and Exchange Commission on February 21, 2007, and incorporated herein by reference). Employment Agreement dated January 2, 2007, between the Registrant and Paul Bayer (filed herewith). Employment Agreement dated January 2, 2007, between Christopher P. Tessitore (filed herewith). 12. 21. 23. 24. 31. 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 22, 2008 (filed herewith). 23.2 KPMG LLP dated February 22, 2008 (filed herewith). Power of Attorney (included on signature page). Section 302 Certifications 31.1 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). 101 31.2 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 32.2 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). 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). 102 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 25th day of February, 2008. NATIONAL RETAIL PROPERTIES, INC. By: /s/ Craig Macnab Craig Macnab Chairman of the Board 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. /s/ Craig Macnab Craig Macnab /s/ Clifford R. Hinkle* Clifford R. Hinkle Dennis Gershenson /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/ Kevin B. Habicht Kevin B. Habicht Title Date Chairman of the Board and Chief Executive Officer February 25, 2008 Lead Director February 25, 2008 February 25, 2008 February 25, 2008 February 25, 2008 February 25, 2008 February 25, 2008 February 25, 2008 Director Director Director Director Director Director, Chief Financial Officer (Principal Financial and Accounting Officer), Executive Vice President, Assistant Secretary and Treasurer *By: /s/ Craig Macnab Craig Macnab Attorney-in-fact 103 3. Articles of Incorporation and By-laws Exhibit Index 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). 4. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 4.2 4.3 4.4 4.5 4.6 4.7 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 104 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 $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 $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). Form of 6.875% Notes due 2017 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 4, 2007 and incorporated herein by reference). 105 4.18 Form of Eighth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 4, 2007, and incorporated hereby by reference). 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 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 NNN and the Participant of NNN (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). 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). 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 as Exhibit 10.8 with the Securities and Exchange Commission on February 21, 2007, and incorporated herein by reference). Employment Agreement dated January 2, 2007, between the Registrant and Paul Bayer (filed herewith). Employment Agreement dated January 2, 2007, between Christopher P. Tessitore (filed herewith). 106 12. 21. 23. 24. 31. 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 22, 2008 (filed herewith). 23.2 KPMG LLP dated February 22, 2008 (filed herewith). Power of Attorney (included on signature page). Section 302 Certifications 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 32.2 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). 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). 107 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2007 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: Beaumont, TX . . . . . . . . . Houston, TX . . . . . . . . . . Pasadena, TX . . . . . . . . . College Station, TX . . . . Franklin, TN . . . . . . . . . . $— — — — — $1,423,701 $ 2,449,261 $ 2,310,845 899,768 1,407,855 1,807,096 1,627,872 2,180,574 2,230,756 2,108,278 — 298,192 1,329,492 — — — — — — $— — — — — $1,423,701 $ 2,449,261 $ 3,872,962 3,938,717 1,627,872 2,310,845 3,080,342 2,180,574 899,768 3,638,611 2,230,756 1,407,855 3,915,374 2,108,278 1,807,096 $ 538,327 357,793 479,272 141,746 178,618 1992 1976 1994 2002 1999 03/99 03/99 03/99 06/05 06/05 40 years 40 years 40 years 40 years 30 years — 298,192 1,329,492 1,627,684 228,506 1997 11/98 37 years Ace Hardware and Lighting: Bourbonnais, IL . . . . . . . A.C. Moore Arts & Crafts Inc. Dover, NJ . . . . . . . . . . . . Advanced Auto Parts: Miami, FL . . . . . . . . . . . . AJ Petroleum: Lake Placid, FL . . . . . . . . All Star Sports: Wichita, KS . . . . . . . . . . . Wichita, KS . . . . . . . . . . . Amazing Jakes: Aurora, CO . . . . . . . . . . . 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: Colorado Springs, CO . . . Thomson, GA . . . . . . . . . Washington Courthouse, OH . . . . . . . . . . . . . . . . . . . . Whitmore Lake, MI Ashley Furniture: Altamonte Springs, FL . . Louisville, KY . . . . . . . . Babies “R” Us: Arlington, TX . . . . . . . . . Independence, MO . . . . . — — — — — — — — — — — — — — — — — — — — — — — — 1,138,296 3,238,083 — — 1,138,296 3,238,083 4,376,379 738,687 1995 11/98 40 years 867,177 — 1,035,275 — 867,177 1,035,275 1,902,452 65,783 2005 12/04(g) 40 years 2,531,533 1,157,265 3,275,372 1,550,654 1,630,685 965,402 5,075,945 13,873,887 108,421 379,067 28,465 85,396 969,156 949,185 — — — — — — — — — 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 — 1,496,173 1,403,581 205,957 267,842 533,540 503,550 156,875 170,515 545,841 468,916 — — — — — 2,906,409 1,666,700 4,877,225 4,989,452 315,000 — 830,689 1,678,794 2,611,867 2,301,909 — 114,769 — — — — — — — — — — — — — — — — — — — — — — — 2,531,533 1,157,265 3,688,798 64,942 1990 12/05 40 years 3,275,372 1,550,654 1,630,685 965,402 4,906,057 2,516,056 25,479 15,084 1988 1987 05/07 05/07 40 years 40 years 5,075,945 13,873,887 18,949,832 245,683 1986 04/07 40 years 108,421 379,067 487,488 24,087 1979 06/05 40 years 28,465 85,396 113,861 21,705 1949 06/05 10 years 969,156 949,185 — — 969,156 949,185 — — (i) (i) 05/03 06/03 (i) (i) 1,159,733 764,473 664,213 358,354 546,475 455,524 352,305 865,674 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 19,450 35,168 30,535 33,623 32,235 10,708 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 2,899,754 211,999 1995 12/01 40 years 205,957 267,842 533,540 503,550 739,497 771,392 156,875 170,515 545,841 468,916 702,716 639,431 80,587 76,057 82,445 70,826 2,906,409 1,666,700 5,192,225 4,989,452 8,098,634 6,656,152 1,302,103 348,222 830,689 1,678,794 2,611,867 2,416,678 3,442,556 4,095,472 751,456 349,896 1998 1997 1998 1993 1997 2005 1996 1996 12/01 12/01 12/01 12/01 09/97 03/05 06/96 12/01 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-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 Barnes & Noble: Brandon, FL . . . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . — — — 1,476,407 1,527,150 3,244,785 2,722,087 3,307,562 2,396,024 Plantation, FL . . . . . . . . . . . . . . 4,820,120(p) 3,616,357 — Freehold, NJ (r) . . . . . . . . . . . . . Dayton, OH . . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . Marlton, NJ . . . . . . . . . . . . . . . . — — — — — 2,917,219 2,260,663 1,412,614 3,324,525 497,179 1,625,702 1,573,875 2,241,639 2,831,370 4,318,554 — — — — — — — — — — — — — — — — — — 1,476,407 1,527,150 3,003,557 3,244,785 2,722,087 5,966,872 3,307,562 2,396,024 5,703,586 495,486 901,803 733,790 3,616,457 (c) 3,616,457 (c) 2,917,219 2,260,663 5,177,882 1,412,614 3,324,525 4,737,139 497,179 1,625,702 2,122,881 1,573,875 2,241,639 3,815,514 2,831,370 4,318,554 7,149,924 673,803 857,649 428,440 219,494 985,170 1995 1994 1995 1996 1995 1996 1997 1997 1995 08/94(f) 09/94 10/94(f) 05/95(f) 01/96 05/97 06/97 09/97 11/98 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years 40 years Bassett Furniture: Fairview Heights, IL . . . . . . . . . — 1,257,729 2,622,952 — — 1,257,729 2,622,952 3,880,681 144,809 1980 10/05 40 years Beall’s: Sarasota, FL . . . . . . . . . . . . . . . — 1,077,802 1,795,174 — — 1,077,802 1,795,174 2,872,976 184,009 1996 09/97 40 years Beautiful America Dry Cleaners: Orlando, FL . . . . . . . . . . . . . . . . 65,839(o) 40,200 110,531 — — 40,200 110,531 150,731 10,708 2001 02/04 40 years Bed, Bath & Beyond: Richmond, VA . . . . . . . . . . . . . 2,762,751(p) 1,184,144 2,842,759 — — 1,184,144 2,842,759 4,026,903 1,082,092 231,356 — 2,758,452 — 1,082,092 2,758,452 3,840,544 — 2,702,271 — 231,356 2,702,271 2,933,627 396,802 583,297 76,430 1997 1999 2006 06/98 40 years 12/98(g) 40 years 07/03 40 years Glendale, AZ . . . . . . . . . . . . . . . Midland, MI . . . . . . . . . . . . . . . Beneficial: Eden Prairie, MN . . . . . . . . . . . Bennigan’s: Milford, CT (r) . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . Schaumburg, IL . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . Best Buy: Brandon, FL . . . . . . . . . . . . . . . Cuyahoga Falls, OH . . . . . . . . . Rockville, MD . . . . . . . . . . . . . Fairfax, VA . . . . . . . . . . . . . . . . — — — — — — — — — — — Pittsburgh, PA . . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . . Billy Bob’s: Gresham, OR . . . . . . . . . . . . . . BJ’s Wholesale Club: — — — St. Petersburg, FL . . . . . . . . . . . 4,408,646(p) 4,031,744 2,610,980 75,736 210,628 94,277 — 75,736 304,905 380,641 42,574 1997 12/01 40 years 921,200 1,088,282 697,298 924,425 2,064,964 1,311,190 818,611 1,107,418 2,985,156 2,772,137 3,708,980 2,359,377 6,233,342 3,418,783 3,052,477 3,218,018 2,330,847 2,292,932 8,881,890 4,372,684 — — — — — — — — — — — — — — — — — — — — — — 921,200 697,298 1,618,498 1,088,282 924,425 2,012,707 2,064,964 1,311,190 3,376,154 818,611 1,107,418 1,926,029 2,985,156 2,772,137 5,757,293 3,708,980 2,359,377 6,068,357 6,233,342 3,418,783 9,652,125 3,052,477 3,218,018 6,270,495 4,031,744 2,610,980 6,642,724 2,330,847 2,292,932 4,623,779 8,881,890 4,372,684 13,254,574 105,321 139,627 198,044 167,266 753,675 621,794 893,869 834,673 416,513 546,960 715,116 1985 1979 1998 1982 1996 1970 1995 1995 1997 1997 1991 12/01 12/01 12/01 12/01 02/97 06/97 07/97 08/97 09/97 06/98 06/01 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 35 years 40 years 40 years 817,311 108,294 — — 817,311 108,294 925,605 16,357 1993 12/01 40 years Orlando, FL . . . . . . . . . . . . . . . . 5,097,052(o) 3,270,851 8,626,657 366,650 — 3,270,851 8,993,307 12,264,158 844,379 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 — — — — — — — — 29,555 — — — — — 320,029 556,282 318,285 294,882 302,859 498,849 491,453 843,121 578,268 611,570 560,904 487,250 498,488 876,311 896,553 906,452 863,763 986,099 989,941 562,498 1,405,619 146,604 87,342 92,372 84,719 69,382 75,292 84,961 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 . . . . . . . . . . . . . . . . — 4,433,613 4,080,186 4,225,787 — 4,504,324 8,305,973 12,810,297 660,297 1984 12/01 40 years Borders Books & Music: Wilmington, DE . . . . . . . . . . . . Richmond, VA . . . . . . . . . . . . . — — 3,030,764 6,061,538 2,177,310 2,599,587 Ft. Lauderdale, FL . . . . . . . . . . 4,643,774(p) 3,164,984 3,319,234 Bangor, ME . . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . Boston Market: Burton, MI . . . . . . . . . . . . . . . . — — — 1,546,915 2,486,761 1,947,198 — — — — — — — — — — — 2,994,395 6,061,538 9,055,933 1,974,073 2,177,310 2,599,587 4,776,897 3,164,984 3,319,234 6,484,218 1,546,915 2,486,761 4,033,676 816,343 561,588 716,671 1,947,198 (c) 1,947,198 (c) 1994 1995 1995 1996 1997 12/94 06/95 02/96 06/96 09/97 40 years 40 years 33 years 40 years (c) 619,778 707,242 — — 619,778 707,242 1,327,020 106,823 1997 12/01 40 years See accompanying report of independent registered public accounting firm. 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 Geneva, IL . . . . . . . . . . . . . . . . North Olmsted, OH . . . . . . . . . Novi, MI . . . . . . . . . . . . . . . . . Orland Park, IL . . . . . . . . . . . . Warren, OH . . . . . . . . . . . . . . . Wheaton, IL . . . . . . . . . . . . . . . — — — — — — 1,125,347 1,036,952 601,800 460,521 835,669 562,384 562,446 651,108 556,201 467,592 1,115,457 1,014,184 — — — — — — — — — — — — 1,125,347 893,485 2,018,833 137,129 601,800 835,669 562,384 562,446 1,115,457 389,065 297,567 377,244 467,592 872,736 990,865 1,133,236 939,628 1,030,038 1,988,193 59,849 50,304 59,692 70,625 133,964 1996 1996 1995 1995 1997 1995 12/01 12/01 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 40 years 40 years Buck’s: St. Louis, MO . . . . . . . . . . . . . — 775,246 — — — 775,246 — 775,246 — (e) 12/07(q) (e) Buffalo Wild Wings: Michigan City, IN . . . . . . . . . . — 162,538 492,007 — — 162,538 492,007 654,545 74,313 1996 12/01 40 years Bugaboo Creek: Lithonia, GA . . . . . . . . . . . . . . Rochester, NY . . . . . . . . . . . . . — — 922,578 1,276,222 792,275 1,535,158 — — — — 922,578 1,276,222 792,275 1,535,158 2,198,800 2,327,433 17,282 20,789 2002 1995 06/07 06/07 40 years 40 years Burger King: Colonial Heights, VA . . . . . . . — 662,345 609,787 — — 662,345 609,787 1,272,132 92,103 1997 12/01 40 years Carino’s: Beaumont, TX . . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . . Carl’s Jr: Chandler, AZ . . . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . . CarMax: — — — — — 439,076 1,363,447 1,369,836 1,018,659 1,007,432 1,205,512 — — — — — — 439,076 1,363,447 1,369,836 1,018,659 1,007,432 1,205,512 1,802,523 2,388,495 2,212,944 205,937 153,860 182,082 729,291 681,386 644,148 536,023 — — 103,000 — 729,291 681,386 644,148 639,023 1,373,439 1,320,409 81,860 144,734 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 Albuquerque, NM . . . . . . . . . . — 10,197,135 — 8,128,062 — 10,197,135 8,128,062 18,325,197 635,005 2004 04/04(f) 40 years Cash Advance: Mesa, AZ . . . . . . . . . . . . . . . . . — 43,043 112,764 250,696 — 43,043 363,460 406,503 4,543 1997 12/01 40 years Certified Auto Sales: Albuquerque, NM . . . . . . . . . . — 1,112,876 — 1,418,552 — 1,112,876 1,418,552 2,531,428 87,182 2005 04/04(f) 40 years Champps: Alpharetta, GA . . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . . — — 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 3,484,240 247,983 260,429 1999 2000 12/01 12/01 40 years 40 years Charhut: Sunrise, FL . . . . . . . . . . . . . . . — 286,834 423,837 — — 286,834 423,837 710,671 38,277 1979 05/04 40 years Checkers: Orlando, FL . . . . . . . . . . . . . . . — 256,568 — — — 256,568 (c) 256,568 (c) 1988 07/92 (c) Chili’s: Camden, SC . . . . . . . . . . . . . . . Milledgeville, GA . . . . . . . . . . Sumter, SC . . . . . . . . . . . . . . . . Hinesville, GA . . . . . . . . . . . . . Albany, GA . . . . . . . . . . . . . . . Statesboro, GA . . . . . . . . . . . . Florence, SC . . . . . . . . . . . . . . Valdosta, GA . . . . . . . . . . . . . . — — — — — — — — Chili Verde Restaurant: 626,897 1,887,732 516,118 1,996,627 800,329 1,717,221 920,971 1,898,416 — 610,385 — 687,947 888,837 1,715,454 — 716,196 — — — — — — — — — — — — — — — — 626,897 1,887,732 516,118 1,996,627 800,329 1,717,221 920,971 1,898,416 — 610,385 — 687,947 888,837 1,715,454 — 716,196 2,514,629 2,512,745 2,517,550 2,819,387 610,385 687,947 2,604,291 716,196 108,151 114,390 87,650 41,528 (e) (e) 23,230 (e) 2005 2005 2004 2006 (e) (e) 2007 (e) 09/05 09/05 12/05 02/07 06/07(q) 06/07(q) 06/07 07/07(q) 40 years 40 years 40 years 40 years (e) (e) 40 years (e) Indianapolis, IN . . . . . . . . . . . . — 639,584 1,015,173 91,738 — 639,584 1,106,911 1,746,495 154,884 1996 12/01 40 years Circuit City: Gastonia, NC . . . . . . . . . . . . . . St. Peters, MO . . . . . . . . . . . . . East Palo Alto, CA . . . . . . . . . Foothill Ranch, CA . . . . . . . . . Claim Jumper: Roseville, CA . . . . . . . . . . . . . Tempe, AZ . . . . . . . . . . . . . . . . CompUSA: Baton Rouge, LA (r) . . . . . . . . Roseville, MN (r) . . . . . . . . . . . — — — — — — — — 2,548,040 3,879,911 1,740,807 5,406,298 2,271,634 3,404,843 1,456,113 2,505,022 1,556,732 2,013,650 2,530,892 2,920,575 609,069 913,603 1,599,311 1,419,396 — — — — — — — — — — — — — — — — 2,548,040 3,879,911 1,740,807 5,406,298 2,271,634 3,404,843 1,456,113 2,505,022 6,427,951 7,147,105 5,676,477 3,961,135 295,035 332,262 748,356 689,218 1,556,732 2,013,650 2,530,892 2,920,575 3,570,382 5,451,467 304,145 441,128 609,069 913,603 1,599,311 1,419,396 1,522,672 3,018,707 274,142 72,448 2004 2005 1998 1995 2000 2000 1995 1994 12/04 06/05(g) 12/98(f) 12/96 12/01 12/01 12/95 12/05 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-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 Cool Crest: Independence, MO . . . . . . . . . . . . — 1,837,672 1,533,729 — — 1,837,672 1,533,729 3,371,401 23,965 1988 05/07 40 years CORA Rehabilitation Clinics: Orlando, FL . . . . . . . . . . . . . . . . . . 131,678(o) 80,400 221,063 — — 80,400 221,063 301,463 21,415 2001 02/04 40 years Corpus Christi Flea Market: Corpus Christi, TX . . . . . . . . . . . . — 223,998 2,158,955 — — 223,998 2,158,955 2,382,953 474,520 1983 03/99 40 years CVS: San Antonio, TX . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . Midwest City, OK . . . . . . . . . . . . . Irving, TX (r) . . . . . . . . . . . . . . . . . Pantego, TX . . . . . . . . . . . . . . . . . . Ellenwood, GA . . . . . . . . . . . . . . . Flower Mound, TX . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . Leavenworth, KS . . . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . . . . . . Forest Hill, TX . . . . . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Gladstone, MO . . . . . . . . . . . . . . . Dave & Buster’s: — — — — — — — — — — 440,985 — — 967,528 — — — 673,369 1,103,351 — — — 1,000,222 — — — 1,016,062 1,448,911 — 616,289 921,173 — — 881,448 932,233 — — — — 558,657 — 1,396,508 — — 2,078,542 — 1,330,830 — 726,438 — — 1,335,426 — 789,237 — — 1,174,549 — — 692,165 — 1,400,278 — — 1,476,838 — 1,418,531 — 522,461 — — 1,471,105 — — 1,581,480 — 2,570,569 — — 2,617,656 — 1,739,568 — 1,851,374 94,795 (c) (c) (c) 616,289 932,233 558,657 440,985 440,985 967,528 967,528 673,369 1,103,351 1,776,720 1,000,222 (c) 1,000,222 1,016,062 1,448,911 2,464,973 921,173 1,537,462 881,448 1,813,681 558,657 2,078,542 1,396,508 3,475,050 726,438 1,330,830 2,057,268 789,237 1,335,426 2,124,663 692,165 1,174,549 1,866,714 1,476,838 1,400,278 2,877,116 522,461 1,418,531 1,940,992 1,581,480 1,471,105 3,052,585 2,617,656 2,570,569 5,188,225 1,851,374 1,739,568 3,590,942 (c) (c) 326,185 (c) 381,848 90,198 86,308 (c) 327,306 317,458 310,208 275,285 319,439 320,647 329,466 270,445 320,733 1993 1995 1996 1996 1997 1996 1996 1996 1998 1998 1998 1998 1998 1998 1999 2003 2000 12/93 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) 06/98(g) 06/98(g) 08/98(g) 06/99 12/99(g) (c) (c) 40 years (c) 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Hilliard, OH . . . . . . . . . . . . . . . . . . — 934,210 4,689,004 — — 934,210 4,689,004 5,623,214 131,878 1998 11/06 40 years 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 . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Kernersville, NC . . . . . . . . . . . . . . Lafayette, IN . . . . . . . . . . . . . . . . . Laurel, MD . . . . . . . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . . . . . . 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 — 432,479 — 503,797 — 325,937 — 310,383 — 358,295 — 222,629 — 231,236 — 406,544 — 423,516 — 527,596 — 671,665 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 816,644 1,245,073 195,658 799,388 632,121 1,222,117 697,266 227,673 863,511 397,387 754,601 257,518 238,205 697,956 157,375 1,403,143 702,168 287,174 744,704 394,243 875,549 407,268 958,616 282,912 697,750 376,744 390,275 975,700 775,618 1,120,439 647,032 149,862 228,981 913,216 682,921 1,451,359 735,601 192,650 680,659 237,959 706,568 314,262 740,898 419,980 607,724 175,245 851,546 347,749 837,282 511,345 589,689 900,072 766,627 1,124,922 705,538 482,909 742,411 511,175 557,465 964,009 773,096 1,196,612 906,923 379,327 748,172 76,507 428,429 603,730 589,996 469,593 466,124 497,083 459,751 1,245,768 414,994 350,461 468,281 675,704 321,006 585,425 344,821 497,170 684,235 768,438 542,951 442,700 392,306 320,918 432,479 503,797 325,937 310,383 358,295 222,629 231,236 406,544 423,516 527,596 671,665 816,644 195,658 632,121 227,673 397,387 257,518 238,205 157,375 287,174 394,243 407,268 282,912 376,744 390,275 775,618 149,862 228,981 682,921 192,650 237,959 314,262 419,980 175,245 347,749 511,345 589,689 766,627 482,909 511,175 557,465 773,096 379,327 76,507 123,347 12,636 40,824 14,703 25,665 16,631 15,384 10,164 18,546 25,461 26,303 18,271 24,331 25,202 50,092 9,679 14,788 44,105 12,441 15,368 20,296 27,123 11,318 22,459 33,024 38,084 49,511 31,188 33,013 36,002 49,929 24,498 4,941 1997 1981 1982 1977 1980 1977 1976 1975 1977 1983 1993 1979 1984 1978 1980 1979 1976 1979 1977 1977 1974 1980 1978 1976 1978 1981 1978 1979 1974 2000 1978 1976 1979 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 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 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years F-4 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 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 . . . . . . . . . . . . . . . . . . . . St. Louis, MO . . . . . . . . . . . . . . . . Virginia Gardens, FL . . . . . . . . . . . Dick’s Sporting Goods: Taylor, MI . . . . . . . . . . . . . . . . . . . White Marsh, MD . . . . . . . . . . . . . Dollar Tree: Garland, TX . . . . . . . . . . . . . . . . . . Copperas Cove, TX . . . . . . . . . . . . Donato’s: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 1,094,361 515,866 232,670 401,401 519,641 315,186 580,288 324,751 922,401 619,003 883,538 383,194 514,340 634,924 793,432 179,699 271,268 813,167 259,581 151,216 729,175 161,978 129,840 305,344 314,303 238,145 393,590 161,462 216,015 301,725 482,297 279,400 126,149 330,496 265,824 334,027 200,559 313,897 290,221 160,924 176,136 492,602 476,967 302,979 132,605 1,920,032 3,526,868 2,680,532 3,916,889 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 1,094,361 515,866 232,670 401,401 519,641 315,186 580,288 324,751 922,401 619,003 883,538 383,194 514,340 634,924 793,432 882,488 179,699 271,268 901,275 813,167 1,181,319 259,581 756,544 151,216 1,006,597 729,175 1,085,766 612,235 161,978 630,192 129,840 850,519 305,344 810,755 314,303 608,265 238,145 829,743 393,590 925,893 161,462 735,053 216,015 301,725 777,145 482,297 1,576,658 795,266 279,400 358,819 126,149 731,897 330,496 785,465 265,824 649,213 334,027 780,847 200,559 313,897 638,648 290,221 1,212,622 160,924 779,927 176,136 1,059,674 875,796 492,602 991,307 476,967 937,903 302,979 926,037 132,605 11,606 17,519 52,517 16,764 9,766 47,093 10,461 8,386 19,720 20,298 15,380 25,419 10,428 13,951 19,486 31,148 18,045 8,147 21,344 17,168 21,573 12,953 20,273 18,743 10,393 11,375 31,814 24,842 14,518 6,354 1,920,032 3,526,868 5,446,900 2,680,532 3,916,889 6,597,421 995,961 1,106,100 239,014 241,650 626,170 511,624 — — 194,167 — 239,014 241,650 626,170 705,791 865,183 947,441 101,753 145,122 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 1980 1977 1996 1996 1994 1972 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 01/07 01/07 08/96 08/96 02/94 11/98 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 Medina, OH . . . . . . . . . . . . . . . . . . — 405,113 463,582 — — 405,113 463,582 868,696 70,020 1996 12/01 40 years Dr. Clean Dry Cleaners: Monticello, NY . . . . . . . . . . . . . . . — 19,625 71,570 — — 19,625 71,570 91,195 4,995 1996 03/05 40 years Easyhome: Cohoes, NY . . . . . . . . . . . . . . . . . . — 58,969 317,885 — — 58,969 317,885 376,854 26,815 1994 09/04 40 years Eckerd: Douglasville, GA . . . . . . . . . . . . . . Conyers, GA . . . . . . . . . . . . . . . . . Augusta, GA . . . . . . . . . . . . . . . . . Riverdale, GA . . . . . . . . . . . . . . . . Warner Robins, GA . . . . . . . . . . . . West Mifflin, PA . . . . . . . . . . . . . . Norfolk, VA . . . . . . . . . . . . . . . . . . Thorndale, PA . . . . . . . . . . . . . . . . — — — — — — — — El Mariachi Grill: 995,209 413,438 574,666 998,900 568,606 1,326,748 1,088,896 1,707,448 707,488 1,401,632 2,043,862 2,742,194 1,796,508 2,260,618 2,472,039 — — — — — — — — — 1,227,330 — — — — — — — 995,209 1,408,647 413,438 574,666 998,900 1,573,566 568,606 1,326,748 1,895,354 1,088,896 1,707,448 2,796,344 707,488 1,227,330 1,934,818 1,401,632 2,043,862 3,445,494 2,742,194 1,796,508 4,538,702 2,260,618 2,472,039 4,732,657 296,627 263,252 333,069 428,640 274,871 300,192 263,862 363,081 1996 1997 1997 1997 1999 1999 2001 2001 01/96 06/97 12/97 12/97 03/98(g) 02/02 02/02 02/02 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Montgomery, AL . . . . . . . . . . . . . . — 1,418,158 1,140,080 — — 1,418,158 1,044,075 2,462,233 166,034 1999 12/01 40 years El Meskal: Hammond, LA . . . . . . . . . . . . . . . . — 247,600 813,514 62,287 — 247,600 627,601 875,201 109,955 1997 12/01 40 years El Paso Barbeque: Tuscon, AZ . . . . . . . . . . . . . . . . . . Farmington, NM . . . . . . . . . . . . . . — — 996,435 2,756,524 — 2,741,660 — — — — 996,435 2,741,660 3,738,095 — 2,756,524 2,756,524 19,991 (e) 2007 (e) 12/06(q) 12/07(q) 40 years (e) Enterprise Rent-A-Car: Wilmington, NC . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. 327,329 218,126 218,126 327,329 545,455 49,440 — 1981 12/01 40 years 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 Fallas Paredes: Arlington, TX . . . . . . . . . . . . . . . . Family Dollar: Cohoes, NY . . . . . . . . . . . . . . . . . . Hudson Falls, NY . . . . . . . . . . . . . Monticello, NY . . . . . . . . . . . . . . . Fantastic Sams: Eden Prairie, MN . . . . . . . . . . . . . . Fazoli’s Restaurant: Bay City, MI . . . . . . . . . . . . . . . . . Ferguson; Destin, FL . . . . . . . . . . . . . . . . . . . Food Fast: Bossier City, LA . . . . . . . . . . . . . . Brownsboro, TX . . . . . . . . . . . . . . Flint, TX . . . . . . . . . . . . . . . . . . . . Forney, TX . . . . . . . . . . . . . . . . . . Forney, TX . . . . . . . . . . . . . . . . . . Gun Barrel City, TX . . . . . . . . . . . Gun Barrel City, TX . . . . . . . . . . . Jacksonville, TX . . . . . . . . . . . . . . Kemp, TX . . . . . . . . . . . . . . . . . . . Longview, TX . . . . . . . . . . . . . . . . Longview, TX . . . . . . . . . . . . . . . . Longview, TX . . . . . . . . . . . . . . . . Longview, TX . . . . . . . . . . . . . . . . Longview, TX . . . . . . . . . . . . . . . . Longview, TX . . . . . . . . . . . . . . . . Mabank,TX . . . . . . . . . . . . . . . . . . Mt. Vernon, TX . . . . . . . . . . . . . . . Shreveport, LA . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Tyler, TX . . . . . . . . . . . . . . . . . . . . Food 4 Less: Chula Vista, CA . . . . . . . . . . . . . . . Fresh Market: Gainesville, FL . . . . . . . . . . . . . . . Furr’s Family Dining: Las Cruces, NM . . . . . . . . . . . . . . . Tuscon, AZ . . . . . . . . . . . . . . . . . . Moore, OK . . . . . . . . . . . . . . . . . . . Gander Mountain: Amarillo, TX . . . . . . . . . . . . . . . . . Gate Petroleum: Concord, NC . . . . . . . . . . . . . . . . . Rocky Mountain, NC . . . . . . . . . . . Gen-X Clothing: Federal Way, WA . . . . . . . . . . . . . Golden Corral: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 317,838 1,680,428 242,483 — 317,838 1,922,911 2,240,749 465,560 1996 06/96 38 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 41,712 31,253 24,547 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 36,492 1997 12/01 40 years 647,055 633,899 553,552 1,011,898 882,882 327,611 272,007 545,133 473,290 241,890 269,871 660,275 580,596 252,373 271,236 425,860 359,539 403,420 178,176 229,097 292,251 360,801 323,146 487,716 742,070 256,415 188,162 542,144 257,981 316,208 301,853 657,929 385,088 410,803 707,160 653,516 467,271 386,429 632,166 505,102 303,925 430,518 381,585 535,304 571,962 235,972 493,568 666,046 249,918 283,153 831,325 545,967 542,486 328,622 403,494 418,816 544,790 455,181 3,568,862 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 647,055 633,899 1,280,953 95,745 1997 12/01 40 years 553,552 1,011,898 1,565,450 20,027 2006 03/07 40 years 882,882 327,611 272,007 545,133 473,290 241,890 269,871 660,275 580,596 252,373 271,236 425,860 359,539 403,420 178,176 229,097 292,251 360,801 323,146 487,716 742,070 256,415 188,162 542,144 257,981 316,208 301,853 657,929 1,540,811 712,699 385,088 410,803 682,810 707,160 1,252,293 653,516 1,126,806 709,161 467,271 386,429 656,300 632,166 1,292,441 505,102 1,085,698 556,298 303,925 701,754 430,518 807,445 381,585 894,843 535,304 975,382 571,962 414,148 235,972 722,665 493,568 958,297 666,046 610,719 249,918 283,153 606,299 831,325 1,319,041 545,967 1,288,037 798,901 542,486 516,784 328,622 945,638 403,494 676,797 418,816 860,998 544,790 757,034 455,181 23,759 6,952 8,900 12,768 11,800 10,124 8,372 22,828 10,944 6,585 7,773 8,268 11,598 12,393 6,391 10,694 14,430 9,025 7,669 22,515 11,829 14,692 7,120 8,742 11,343 9,836 12,328 1975 1990 1985 1989 1990 1988 1986 1976 1986 1983 1990 1984 1983 1985 1977 1986 1990 1969 1978 1980 1985 1980 1984 1984 1978 1989 1981 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 06/07 06/07 06/07 06/07 06/07 06/07 06/07 06/07 06/07 06/07 06/07 06/07 15 years 30 years 25 years 30 years 30 years 25 years 25 years 15 years 25 years 25 years 30 years 25 years 25 years 25 years 20 years 25 years 25 years 15 years 20 years 20 years 25 years 20 years 25 years 25 years 20 years 30 years 20 years 3,568,862 (c) 3,568,862 (c) 1995 11/98 (c) 317,386 1,248,404 655,827 — 317,386 1,904,231 2,221,617 144,321 1982 03/99 40 years 947,476 1,170,722 938,701 — 2,181,954 — — — — 2,429,401 — 1,170,722 947,476 2,181,954 3,129,430 — 1,170,722 938,701 2,429,401 3,368,102 70,459 — 12,653 2006 (e) 2007 01/06(q) 07/06(q) 03/07(q) 40 years (e) 40 years 1,513,714 5,781,294 852,225 1,200,862 258,764 1,164,438 — — — — — — 1,513,714 5,781,294 7,295,008 451,664 2004 11/04 40 years 852,225 1,200,862 2,053,087 258,764 1,164,438 1,423,202 76,305 73,990 2001 2000 06/05 06/05 40 years 40 years 2,037,392 1,661,577 257,414 — 2,037,392 1,918,991 3,956,383 423,437 1998 06/98 40 years Abbeville, LA . . . . . . . . . . . . . . . . Lake Placid, FL . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Temple Terrace, FL . . . . . . . . . . . . — — — — — — 98,577 115,113 — 43,797 — — — — See accompanying report of independent registered public accounting firm. 460,993 362,416 463,984 348,871 1,329,793 1,390,502 2,720,296 1,138,129 1,024,747 2,162,875 1,187,614 1,339,000 2,526,614 362,416 305,074 1,329,793 1,390,502 1,138,129 1,024,747 1,187,614 1,339,000 240,748 211,416 210,024 154,779 202,245 98,577 115,113 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 F-6 Goodyear Truck & Tire: Wichita, KS . . . . . . . . . . . . . . . . . . Anthony, TX . . . . . . . . . . . . . . . . . GymKix: Copperas Cove, TX . . . . . . . . . . . . H&R Block: Swansea, IL . . . . . . . . . . . . . . . . . . Hastings: Nacogdoches, TX . . . . . . . . . . . . . Haverty’s: — — — — — Healthy Pet: Suwannee, GA . . . . . . . . . . . . . . . . Colonial Heights, VA . . . . . . . . . . Heilig-Meyers: Baltimore, MD . . . . . . . . . . . . . . . . Glen Burnie, MD . . . . . . . . . . . . . . Hollywood Video: Cincinnati, OH . . . . . . . . . . . . . . . . Clifton, CO . . . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . Ridgeland, MS . . . . . . . . . . . . . . . . Home Décor: Memphis, TN . . . . . . . . . . . . . . . . . Home Depot: — — — — — — — — — HomeGoods: Fairfax, VA . . . . . . . . . . . . . . . . . . Hooters: Tampa, FL . . . . . . . . . . . . . . . . . . . Hope Rehab: Houston, TX . . . . . . . . . . . . . . . . . Horizon Travel Plaza: Midland City, AL . . . . . . . . . . . . . Dothan, AL . . . . . . . . . . . . . . . . . . Lebanon, TN . . . . . . . . . . . . . . . . . Humana: Sunrise, FL . . . . . . . . . . . . . . . . . . Hy-Vee: — — — — — — — 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 213,640 686,700 (l) 1,241,517 — — — — 213,640 686,700 900,340 (l) 1,241,517 1,241,517 87,268 14,226 1989 2007 06/05 02/07 20 years 40 years 203,908 431,715 171,477 — 203,908 603,192 807,100 123,601 1972 11/98 40 years 45,842 132,440 69,029 — 45,842 201,469 247,311 29,307 1997 12/01 40 years — — — — — — — — — — — — — 397,074 1,257,402 1,654,477 286,845 1997 11/98 40 years 1,189,188 2,570,212 3,759,400 820,397 2,361,146 3,181,543 603,111 1,595,405 2,198,516 1,965,508 4,221,074 6,186,582 930,917 811,364 459,122 927,357 175,183 1,038,492 1,213,675 906,140 746,261 159,879 27,044 17,879 469,781 631,712 813,073 1,282,854 931,931 1,563,643 185,482 212,550 538,693 1,082,132 543,438 245,462 977,939 732,477 603,190 1,149,251 1,752,441 933,314 1,712,188 778,874 78,787 110,634 58,660 47,638 1992 1992 1994 1997 1997 1996 1968 1968 1998 1998 1999 1997 05/93 05/93 06/96 12/97 12/06 01/07 11/98 11/98 12/01 12/01 12/05 12/05 40 years 40 years 40 years 38 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 175,183 1,038,492 746,261 159,879 469,781 631,712 813,073 931,931 — — — — 520,623 282,200 245,462 732,477 603,190 1,149,251 933,314 778,874 279,308 — — — 397,074 1,257,402 — Clearwater, FL . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . . Pensacola, FL . . . . . . . . . . . . . . . . Bowie, MD . . . . . . . . . . . . . . . . . . — 1,184,938 2,526,207 820,397 2,184,721 — 633,125 1,595,405 263,188 — 1,965,508 4,221,074 44,005 176,425 — — Sunrise, FL . . . . . . . . . . . . . . . . . . — 5,148,657 — — — 5,148,657 — 5,148,657 — (i) 05/03 (i) 549,309 539,643 364,460 — 549,309 904,103 1,453,412 176,448 1998 11/98 40 years 977,839 1,414,261 937,301 — 977,839 2,351,562 3,329,401 249,166 1995 12/95 40 years 783,923 504,768 112,150 509,179 728,990 2,538,232 773,671 1,886,333 — 581,612 800,271 252,717 — — — — — — — — — — — — — — — — — — — — — — — — — — 783,923 504,768 1,288,692 76,241 1993 12/01 40 years 112,150 509,179 621,329 26,202 1995 12/05 40 years 728,990 2,538,232 3,267,222 773,671 1,886,333 2,660,004 581,612 581,612 — 66,100 37,334 (e) 2006 2007 (e) 12/06 03/07 03/07(q) 40 years 40 years (e) 800,271 252,717 1,052,988 22,849 1984 05/04 40 years 1,579,583 2,849,246 4,428,829 376,938 1991 09/02 40 years 271,853 380,043 407,268 692,956 (c) (c) 271,853 380,043 407,268 515,035 1,207,991 — (c) (c) (i) 43,635 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 78,575 2001 06/05 40 years 60,517 112,390 172,907 14,283 1973 06/05 20 years 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 Jacobson Industrial: Des Moines, IA . . . . . . . . . . . . . . . — 60,517 112,390 Jared Jewelers: Richmond, VA . . . . . . . . . . . . . . . . Brandon, FL . . . . . . . . . . . . . . . . . . Lithonia, GA . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . — 955,134 1,336,152 — 1,196,900 1,182,150 — 1,270,517 1,215,818 — 1,675,739 1,439,597 — — — — See accompanying report of independent registered public accounting firm. 955,134 1,336,152 2,291,286 1,196,900 1,182,150 2,379,050 1,270,517 1,215,818 2,486,335 1,675,739 1,439,597 3,115,336 201,815 166,409 171,149 181,449 — — — — 1998 2001 2001 1999 12/01 05/02 05/02 12/02 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 Life on Which Depreciation and Amortization in Latest Income Statement is Computed Jo-Ann Etc: Corpus Christi, TX . . . . . . . . . . . — 818,448 896,395 12,222 — 818,448 908,617 1,727,065 320,316 1967 11/93 40 years Kangaroo Express: Belleview, FL . . . . . . . . . . . . . . . Carthage, NC . . . . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . Sanford, NC . . . . . . . . . . . . . . . . Sanford, NC . . . . . . . . . . . . . . . . Siler City, NC . . . . . . . . . . . . . . . West End, NC . . . . . . . . . . . . . . . Destin, FL . . . . . . . . . . . . . . . . . . Niceville, FL . . . . . . . . . . . . . . . . Interlachen, FL . . . . . . . . . . . . . . Kill Devil Hills, NC . . . . . . . . . . Kill Devil Hills, NC . . . . . . . . . . Clarksville, TN . . . . . . . . . . . . . . Clarksville, TN . . . . . . . . . . . . . . Gallatin, TN . . . . . . . . . . . . . . . . Naples, FL . . . . . . . . . . . . . . . . . . Oxford, MS . . . . . . . . . . . . . . . . . Columbiana, AL . . . . . . . . . . . . . Naples, FL . . . . . . . . . . . . . . . . . . Kentwood, LA . . . . . . . . . . . . . . Longs, SC . . . . . . . . . . . . . . . . . . Naples, FL . . . . . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . Cary, NC . . . . . . . . . . . . . . . . . . . 471,029 — 485,461 — 807,477 — 684,639 — — 666,330 — 1,638,444 586,174 — 426,114 — — 1,365,569 — 1,433,652 518,814 — 679,169 — 490,309 — 521,023 — 275,897 — — 474,297 — 3,194,938 440,413 — 770,793 — — 3,161,883 985,372 — — 745,488 — 2,412,119 — 666,002 — 1,314,197 1,451,277 353,643 1,239,085 1,361,897 660,594 1,370,558 645,290 516,010 1,192,192 1,124,109 — 552,393 741,222 709,784 954,910 756,510 1,403,297 1,096,748 988,907 1,596,602 891,185 757,865 1,589,011 1,185,069 2,124,513 Kash N’ Karry: Brandon, FL . . . . . . . . . . . . . . . . Sarasota, FL . . . . . . . . . . . . . . . . 3,124,261(p) 322,476 470,600 — 1,221,661 1,343,746 Keg Steakhouse: . . . . . . . . . . Bellingham, WA (r) Lynnwood, WA . . . . . . . . . . . . . Tacoma, WA . . . . . . . . . . . . . . . . 397,443 — — 1,255,513 526,792 — 455,605 649,236 794,722 Kerasotes: Bloomington, IN . . . . . . . . . . . . . Bolingbrook, IL . . . . . . . . . . . . . Brighton, CO . . . . . . . . . . . . . . . . Castle Rock, CO . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . Galesburg, IL . . . . . . . . . . . . . . . Machesney Park, IL . . . . . . . . . . Michigan City, IN . . . . . . . . . . . . Muncie, IN . . . . . . . . . . . . . . . . . Naperville, IL . . . . . . . . . . . . . . . New Lenox, IL . . . . . . . . . . . . . . KFC: 4,000,182 — 2,337,910 3,032,087 — 2,937,193 5,490,668 — 1,069,710 5,001,791 — 2,904,550 4,268,824 — 1,300,359 2,441,058 — 1,204,699 8,769,548 — 3,017,551 8,421,666 — 1,995,639 — 1,243,157 5,511,584 — 6,141,054 11,624,187 — 6,777,804 10,979,958 Erie, PA . . . . . . . . . . . . . . . . . . . . Marysville, WA . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . Fenton, MO . . . . . . . . . . . . . . . . . — — — — 516,508 646,779 369,740 307,068 496,092 545,592 766,635 496,410 Kohl’s: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 471,029 485,461 807,477 682,510 666,330 1,638,444 586,174 426,114 1,365,569 1,433,652 518,814 679,169 490,309 521,023 275,897 474,297 3,194,938 440,413 770,793 3,161,883 985,372 745,488 2,412,119 666,002 1,314,197 1,451,277 353,643 1,239,085 1,361,897 660,594 1,370,558 645,290 516,010 1,192,192 1,124,109 — 552,393 741,222 709,784 954,910 756,510 1,403,297 1,096,748 988,907 1,596,602 891,185 757,865 1,589,011 1,185,069 2,124,513 1,922,306 839,104 2,046,562 2,044,407 1,326,924 3,009,002 1,231,464 942,124 2,557,761 2,557,761 518,814 1,231,562 1,231,531 1,230,807 1,230,807 1,230,807 4,598,235 1,537,161 1,759,700 4,758,485 1,876,557 1,503,353 4,001,130 1,851,071 3,438,711 49,888 12,156 42,594 46,815 22,708 47,112 22,182 17,738 38,498 36,299 (e) 16,691 22,397 18,484 24,867 19,406 36,544 28,561 23,693 34,926 17,638 14,999 24,828 16,048 19,917 322,476 470,600 1,221,661 1,343,746 1,544,137 1,814,346 128,529 141,373 397,443 1,255,513 526,792 455,605 649,236 794,722 853,048 1,904,748 1,321,515 68,815 98,062 120,036 6,338,092 4,000,182 2,337,910 5,969,280 3,032,087 2,937,193 6,560,379 5,490,668 1,069,710 7,906,342 5,001,791 2,904,550 5,569,183 4,268,824 1,300,359 2,441,058 3,645,758 1,204,699 8,769,548 11,787,099 3,017,551 8,421,666 10,417,305 1,995,639 1,243,157 6,754,741 5,511,584 6,141,054 11,624,187 17,765,241 6,777,804 10,979,958 17,757,762 46,669 29,479 40,036 36,471 35,574 17,799 63,945 61,407 40,189 84,760 80,062 516,508 646,779 369,740 307,068 496,092 545,592 766,635 496,410 1,012,601 1,192,371 1,136,375 803,478 74,931 82,407 31,145 233,667 2006 1989 1975 1969 2000 2003 1998 1999 2000 2000 (e) 1990 1995 1999 1999 1999 2001 1998 1982 1995 2001 2001 2000 1998 2007 1983 1983 1981 1992 1981 1987 1994 2005 2005 1999 2003 2005 2005 2005 2006 2004 1996 1996 2004 1985 08/06 08/06 08/06 08/06 08/06 08/06 08/06 08/06 09/06 09/06 10/06 10/06 10/06 12/06 12/06 12/06 12/06 12/06 01/07 02/07 03/07 03/07 05/07 06/07 08/07 03/99 03/99 12/01 12/01 12/01 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 12/01 12/01 05/06 07/92 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 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 40 years 40 years 40 years 25 years 30 years 40 years 40 years 35 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 33 years Florence, AL . . . . . . . . . . . . . . . . — 817,661 — 1,046,515 — 817,661 1,046,515 1,864,176 32,704 (i) 06/04 40 years Kum & Go: Omaha, NE . . . . . . . . . . . . . . . . . — 392,847 214,280 — — 392,847 214,280 607,127 27,231 1979 06/05 20 years Light Restaurant: Columbus, OH . . . . . . . . . . . . . . — 1,032,008 1,107,250 — — 1,032,008 1,107,250 2,139,258 167,240 1998 12/01 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 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 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: — — — — — — — — — — — — — — — — — — — — 900,141 2,225,177 845,827 315,315 — 1,800,281 — — — 1,563,500 — — 1,217,567 3,048,693 1,396,024 2,404,817 1,262,430 2,270,596 1,274,315 2,109,860 1,341,188 2,105,213 1,857,628 1,915,877 1,199,765 2,246,330 1,284,898 2,202,447 1,607,806 2,177,715 1,028,484 1,753,045 2,302,414 1,947,141 836,979 1,453,300 1,677,782 1,730,390 1,334,998 2,047,465 905,301 1,533,748 2,519,485 1,704,790 1,297,767 1,338,118 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,225,177 900,141 1,800,281 315,315 845,827 1,563,500 2,700,422 2,540,492 2,409,327 1,217,567 3,048,693 1,396,024 2,404,817 1,262,430 2,270,596 1,274,315 2,109,860 1,341,188 2,105,213 1,857,628 1,915,877 1,199,765 2,246,330 1,284,898 2,202,447 1,607,806 2,177,715 1,028,484 1,753,045 2,302,414 1,947,141 836,979 1,453,300 1,677,782 1,730,390 1,334,998 2,047,465 905,301 1,533,748 2,519,485 1,704,790 1,297,767 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 35,631 18,722 21,172 85,744 67,635 63,860 59,340 59,209 53,884 63,178 61,944 61,248 49,304 54,763 40,874 48,667 57,585 43,136 44,396 34,847 2007 2006 2007 1998 2006 1997 2003 2000 1999 1994 1998 2005 2005 1998 2000 1999 2002 2004 1995 2005 07/05(q) 08/05 02/06(q) 40 years 40 years 40 years 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 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 1,271,710 2001 06/02 40 years Magic China Café: Orlando, FL . . . . . . . . . . . . . . . . . 65,839(o) 40,200 110,531 — — 40,200 110,531 150,731 10,708 2001 02/04 40 years Magic Mountain: Columbus, OH . . . . . . . . . . . . . . . Columbus, OH . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . Azle, TX . . . . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . . . . Merchant’s Tires: Hampton, VA . . . . . . . . . . . . . . . Newport News, VA . . . . . . . . . . . Norfolk, VA . . . . . . . . . . . . . . . . . Rockville, MD . . . . . . . . . . . . . . . Washington, DC . . . . . . . . . . . . . Mi Pueblo Foods: Watsonville, CA . . . . . . . . . . . . . Michaels: Fairfax, VA . . . . . . . . . . . . . . . . . Grapevine, TX (r) . . . . . . . . . . . . Plymouth Meeting, PA . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — 2,075,527 1,906,370 5,379,851 2,693,295 — — — — 2,075,527 1,906,370 5,379,851 2,693,295 3,981,897 8,073,146 25,815 36,471 1,235,214 1,222,434 1,330,427 3,858,445 1,461,333 1,673,229 1,651,570 2,017,770 2,505,249 2,138,400 977,290 2,368,447 611,366 1,608,555 361,371 1,029,053 786,159 1,233,984 1,554,411 1,228,778 2,407,203 2,050,580 859,435 933,091 1,293,214 1,210,826 2,606,118 2,897,922 648,274 574,618 — — — — — — — — — — — — — — — — — — — — 248,000 — — — — — — — — — 1,235,214 1,222,434 1,330,427 3,858,445 1,461,333 1,673,229 1,651,570 2,017,770 2,505,249 2,138,400 977,290 2,368,447 611,366 1,608,555 361,371 1,029,053 786,159 1,233,984 1,554,411 1,228,778 2,407,203 2,298,580 859,435 933,091 1,293,214 1,210,826 2,606,118 2,897,922 648,274 574,618 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 1,507,709 1,507,709 2,504,040 5,504,040 179,835 233,812 398,132 1,030,156 623,607 426,895 259,046 507,743 306,147 577,948 — — — — — — — — — — 179,835 233,812 398,132 1,030,156 623,607 426,895 259,046 507,743 306,147 577,948 606,730 492,858 905,875 1,336,303 1,201,555 87,862 277,326 120,263 145,027 153,698 170,232 115,615 73,963 55,272 78,079 139,344 11,638 12,636 13,874 33,205 29,794 18,079 35,436 21,367 40,336 1990 1990 1990 1996 1999 2000 1988 1997 1974 1993 2006 1982 1971 1970 1982 1983 1983 1986 1986 1986 1974 1983 06/07 06/07 40 years 40 years 02/05 02/05 02/05 02/05 02/05 02/05 02/05 02/05 05/05(g) 06/05 06/05 06/07 06/07 07/07 07/07 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 40 years 40 years 40 years 40 years 805,056 1,648,934 — — 805,056 1,648,934 2,453,990 173,482 1984 03/99 40 years 986,131 1,426,254 1,017,934 2,066,715 2,911,111 706,501 — — — 2,594,720 — — 986,131 2,132,755 1,017,934 2,066,715 2,911,111 2,594,720 3,118,886 3,084,649 5,505,831 476,206 492,997 494,507 1995 1998 1999 12/95 06/98 10/98(g) 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. 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 Mister Car Wash: Anoka, MN . . . . . . . . . . . . . . . . . . Brooklyn Park, MN . . . . . . . . . . . . Cedar Rapids, IA . . . . . . . . . . . . . . Clive, IA . . . . . . . . . . . . . . . . . . . . Cottage Grove, MN . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Eden Prairie, MN . . . . . . . . . . . . . . Edina, MN . . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Humble, TX . . . . . . . . . . . . . . . . . . Plymouth, MN . . . . . . . . . . . . . . . . Roseville, MN . . . . . . . . . . . . . . . . Spokane, WA . . . . . . . . . . . . . . . . . Spokane, WA . . . . . . . . . . . . . . . . . St. Cloud, MN . . . . . . . . . . . . . . . . Stillwater, MN . . . . . . . . . . . . . . . . Sugarland, TX . . . . . . . . . . . . . . . . West St Paul, MN . . . . . . . . . . . . . Rochester, MN . . . . . . . . . . . . . . . . Rochester, MN . . . . . . . . . . . . . . . . Birmingham, AL . . . . . . . . . . . . . . Clearwater, FL . . . . . . . . . . . . . . . . Mesquite, TX . . . . . . . . . . . . . . . . . Seminole, FL . . . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . Vestavia Hills, AL . . . . . . . . . . . . . El Paso, TX . . . . . . . . . . . . . . . . . . El Paso, TX . . . . . . . . . . . . . . . . . . El Paso, TX . . . . . . . . . . . . . . . . . . El Paso, TX . . . . . . . . . . . . . . . . . . El Paso, TX . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 212,378 438,259 390,848 1,141,010 274,404 212,694 248,517 865,400 894,483 287,729 214,461 778,217 816,402 934,829 484,572 475,795 595,659 751,139 686,718 465,697 2,260,395 1,806,419 3,193,137 1,305,127 1,846,219 1,592,457 1,960,385 1,144,516 1,347,305 1,701,671 795,775 678,201 623,760 1,108,129 5,125,771 1,267,125 1,204,234 1,516,641 181,549 563,575 580,318 1,252,856 1,146,358 391,259 214,419 3,789,092 1,972,484 235,825 451,053 1,054,930 2,327,307 2,377,589 2,144,987 765,491 1,595,876 2,201,161 2,165,896 1,495,994 2,992,859 1,669,069 955,811 1,008,794 988,006 1,046,430 1,399,045 1,467,945 823,521 1,423,681 1,305,604 1,807,249 2,287,451 827,427 861,100 214,246 835,651 318,975 242,717 288,745 664,183 825,012 Mountain Jack’s: Centerville, OH . . . . . . . . . . . . . . . — 850,625 1,059,430 Mr. E’s Music Supercenter: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 212,378 438,259 390,848 1,141,010 274,404 212,694 248,517 865,400 894,483 287,729 214,461 426,839 778,217 1,216,476 816,402 1,207,250 934,829 2,075,839 758,976 484,572 688,489 475,795 595,659 844,176 751,139 1,616,539 686,718 1,581,201 753,426 465,697 2,260,395 1,806,419 4,066,814 3,193,137 1,305,127 4,498,264 1,846,219 1,592,457 3,438,676 1,960,385 1,144,516 3,104,901 1,347,305 1,701,671 3,048,976 795,775 678,201 1,473,976 623,760 1,108,129 1,731,889 5,125,771 1,267,125 6,392,896 1,204,234 1,516,641 2,720,875 181,549 1,008,976 563,575 1,424,675 794,564 580,318 1,252,856 1,146,358 2,399,214 633,976 391,259 503,164 214,419 3,789,092 1,972,484 5,761,576 235,825 1,071,476 770,028 451,053 1,054,930 2,327,307 3,382,237 2,377,589 2,144,987 4,522,576 765,491 1,590,503 1,595,876 2,201,161 3,797,037 2,165,896 1,495,994 3,661,890 2,992,859 1,669,069 4,661,928 955,811 1,964,605 1,008,794 988,006 1,046,430 2,034,436 1,399,045 1,467,945 2,866,990 823,521 1,487,704 1,423,681 1,305,604 2,729,285 1,807,249 2,287,451 4,094,700 827,427 861,100 214,246 835,651 318,975 242,717 288,745 825,012 664,183 10,127 22,050 23,131 33,109 13,730 16,851 14,064 26,603 24,321 21,991 51,182 26,413 45,120 32,427 40,178 19,216 26,164 25,644 30,694 12,860 19,959 13,702 23,200 13,857 10,125 39,919 8,352 2,349 12,121 8,937 3,827 11,005 6,233 8,345 4,779 1,246 1,748 980 1,813 3,177 1968 1985 1989 1983 1992 1964 1990 1984 1985 1970 1975 1995 1983 1983 1984 1986 1988 1995 1993 1955 1963 1990 1997 1986 1971 1995 1972 1994 2003 1985 1969 1987 1985 1969 1967 1998 1991 1991 1986 1983 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 10/07 10/07 11/07 11/07 11/07 11/07 11/07 11/07 12/07 12/07 12/07 12/07 12/07 15 years 25 years 25 years 20 years 25 years 20 years 30 years 20 years 20 years 15 years 25 years 35 years 25 years 25 years 30 years 25 years 30 years 35 years 35 years 10 years 20 years 30 years 35 years 20 years 15 years 35 years 20 years 40 years 40 years 30 years 25 years 25 years 30 years 25 years 25 years 40 years 40 years 40 years 30 years 40 years 850,625 1,059,430 1,910,055 160,018 1986 12/01 40 years Arlington, TX . . . . . . . . . . . . . . . . — 435,002 2,299,881 334,059 — 435,002 2,633,940 3,068,942 637,178 1996 06/96 40 years Muchas Gracias Mexican Restaurant: Salem, OR . . . . . . . . . . . . . . . . . . . New Covenant Church: — 555,951 735,651 Augusta, GA . . . . . . . . . . . . . . . . . — 176,656 674,253 Office Depot: Arlington, TX . . . . . . . . . . . . . . . . Richmond, VA . . . . . . . . . . . . . . . . Hartsdale, NY . . . . . . . . . . . . . . . . — — — 596,024 1,411,432 888,772 1,948,036 4,508,753 2,327,448 — — — — — — — — — — OfficeMax: 555,951 735,651 1,291,602 111,114 1996 12/06 40 years 176,656 674,253 850,909 101,840 1998 12/01 40 years 596,024 1,411,432 2,007,456 888,772 1,948,036 2,836,808 4,508,753 2,327,448 6,836,201 490,980 564,380 227,831 1991 1996 1996 Cincinnati, OH . . . . . . . . . . . . . . . . Evanston, IL . . . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . . . Cutler Ridge, FL . . . . . . . . . . . . . . Sacramento, CA . . . . . . . . . . . . . . . Salinas, CA . . . . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 543,489 1,574,551 2,118,040 1,867,831 1,757,618 3,625,449 1,689,793 3,050,160 4,739,953 989,370 1,479,119 2,468,489 1,144,167 2,961,206 4,105,373 1,353,217 1,829,325 3,182,542 667,174 2,181,563 2,848,737 543,489 1,574,551 1,867,831 1,757,618 1,689,793 3,050,160 989,370 1,479,119 1,144,167 2,961,206 1,353,217 1,829,325 667,174 2,181,563 530,737 551,941 905,775 425,555 814,528 497,348 574,933 — — — — — — — 1994 1995 1995 1995 1996 1995 1997 F-10 01/94 05/96 09/97 07/94 06/95 01/96 06/96 12/96 02/97 06/97 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 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 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 — 1,805,539 — — 1,851,326 — — 1,929,028 — — 1,801,905 — — — 868,003 1,805,539 2,673,542 561,509 1,851,326 2,412,835 640,019 1,929,028 2,569,047 685,470 1,801,905 2,487,375 1,539,873 2,247,321 3,787,194 449,504 430,047 436,040 392,290 512,670 1998 1998 1998 1999 1995 09/97(g) 02/98 08/98 11/98(g) 11/98 40 years 40 years 40 years 40 years 40 years 1,539,873 2,247,321 427,661 1,344,660 — — 427,661 1,344,660 1,772,321 99,448 2003 01/05 40 years Encum- brances (k) Kelso, WA . . . . . . . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . . Leesburg, FL . . . . . . . . . . . . . . . . . Griffin, GA . . . . . . . . . . . . . . . . . . Tigard, OR . . . . . . . . . . . . . . . . . . . Orlando Metro Gymnastics: Orlando, FL . . . . . . . . . . . . . . . . . . Palais Royale: — — — — — — Land 868,003 561,509 640,019 685,470 Sealy, TX . . . . . . . . . . . . . . . . . . . . 475,185 519,176 — — 475,185 519,176 994,361 115,508 1982 03/99 40 years Palm Tree Computer Systems: Orlando, FL . . . . . . . . . . . . . . . . . . 60,351(o) 36,850 101,320 — — 36,850 101,320 138,170 9,815 2001 02/04 40 years Party City: Memphis, TN . . . . . . . . . . . . . . . . . Pep Boys: Chicago, IL . . . . . . . . . . . . . . . . . . Cicero, IL . . . . . . . . . . . . . . . . . . . . Cornwell Heights, PA . . . . . . . . . . East Brunswick, NJ . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . . . Joliet, IL . . . . . . . . . . . . . . . . . . . . . Lansing, IL . . . . . . . . . . . . . . . . . . Las Vegas, NV . . . . . . . . . . . . . . . Marietta, GA . . . . . . . . . . . . . . . . . Marlton, NJ . . . . . . . . . . . . . . . . . . Philadelphia, PA . . . . . . . . . . . . . . Quakertown, PA . . . . . . . . . . . . . . Roswell, GA . . . . . . . . . . . . . . . . . Turnersville, NJ . . . . . . . . . . . . . . . Perfect Teeth: Rio Rancho, NM . . . . . . . . . . . . . . Perkins Restaurant: Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Newton, IA . . . . . . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . . . . . . . Petco: Grand Forks, ND . . . . . . . . . . . . . . Petro Express: — — — — — — — — — — — — — — — — — — — — — — 266,383 — 1,136,334 — 266,383 1,136,334 1,402,717 242,655 1999 06/99 40 years 1,077,006 3,756,102 1,341,244 3,760,263 2,058,189 3,101,900 2,449,212 5,025,778 809,881 2,330,983 1,505,821 3,726,894 868,936 3,439,711 1,917,220 2,530,354 1,311,037 3,555,989 1,608,391 4,141,816 1,300,283 3,830,376 1,128,592 3,251,721 930,986 2,732,320 989,911 3,493,815 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,077,006 3,756,102 4,833,108 1,341,244 3,760,263 5,101,507 2,058,189 3,101,900 5,160,089 2,449,212 5,025,778 7,474,990 809,881 2,330,983 3,140,864 1,505,821 3,726,894 5,232,715 868,936 3,439,711 4,308,647 1,917,220 2,530,354 4,447,574 1,311,037 3,555,989 4,867,026 1,608,391 4,141,816 5,750,207 1,300,283 3,830,376 5,130,659 1,128,592 3,251,721 4,380,313 930,986 2,732,320 3,663,306 989,911 3,493,815 4,483,726 13,414 13,429 15,510 20,940 8,325 13,310 12,284 9,037 14,817 17,258 13,680 11,613 11,385 14,558 1993 1993 1972 1987 1989 1993 1993 1989 1987 1983 1995 1995 2007 1986 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 35 years 35 years 25 years 30 years 35 years 35 years 35 years 35 years 30 years 30 years 35 years 35 years 30 years 30 years 61,517 122,142 — — 61,517 122,142 183,659 18,465 1997 12/01 40 years 255,874 225,922 269,938 353,816 376,690 136,103 203,330 218,248 401,630 581,414 — — — — — — — — — — 255,874 225,922 269,938 353,816 376,690 136,103 203,330 218,248 401,630 581,414 391,977 429,252 488,186 755,446 958,104 34,593 51,679 55,471 102,081 73,888 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 — — 306,629 909,671 1,216,301 228,389 1996 12/97 40 years Belmont, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Concord, NC . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 1,507,766 1,622,165 3,129,931 1,025,233 1,604,698 2,629,931 1,292,976 1,836,951 3,129,927 1,457,711 2,047,217 3,504,928 1,290,989 1,838,939 3,129,928 1,777,717 1,977,210 3,754,927 869,805 2,192,431 1,322,626 697,953 1,204,928 506,975 875,591 1,504,928 629,337 854,928 425,496 429,432 2,315,876 2,064,051 4,379,927 1,037,423 1,467,505 2,504,928 2,165,285 1,964,643 4,129,928 1,339,787 1,790,140 3,129,927 2,784,480 3,720,448 6,504,928 1,532,107 1,972,821 3,504,928 1,030,292 1,724,636 2,754,928 1,810,009 2,569,919 4,379,928 1,257,718 1,559,712 2,817,430 1,696,967 2,418,814 4,115,781 2,144,009 1,985,919 4,129,928 1,507,766 1,622,165 1,025,233 1,604,698 1,292,976 1,836,951 1,457,711 2,047,217 1,290,989 1,838,939 1,777,717 1,977,210 869,805 1,322,626 697,953 506,975 875,591 629,337 425,496 429,432 2,315,876 2,064,051 1,037,423 1,467,505 2,165,285 1,964,643 1,339,787 1,790,140 2,784,480 3,720,448 1,532,107 1,972,821 1,030,292 1,724,636 1,810,009 2,569,919 1,257,718 1,559,712 1,696,967 2,418,814 2,144,009 1,985,919 32,829 37,888 43,372 48,337 43,419 46,684 20,537 24,719 20,674 10,046 41,772 29,700 39,761 36,229 75,295 39,926 40,721 45,509 27,619 42,833 40,191 2001 1986 1987 1987 1988 1992 1982 1967 1986 1983 1996 1997 1997 1998 1998 1998 1983 2004 2004 2005 2000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 35 years 30 years 30 years 30 years 30 years 30 years 30 years 20 years 30 years 30 years 35 years 35 years 35 years 35 years 35 years 35 years 30 years 40 years 40 years 40 years 35 years 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 Concord, NC . . . . . . . . . . . . . . . . . Conover, NC . . . . . . . . . . . . . . . . . Cornelius, NC . . . . . . . . . . . . . . . . Denver, NC . . . . . . . . . . . . . . . . . . Fort Mill, SC . . . . . . . . . . . . . . . . . Fort Mill, SC . . . . . . . . . . . . . . . . . Gastonia, NC . . . . . . . . . . . . . . . . . Gastonia, NC . . . . . . . . . . . . . . . . . Gastonia, NC . . . . . . . . . . . . . . . . . Gastonia, NC . . . . . . . . . . . . . . . . . Hickory, NC . . . . . . . . . . . . . . . . . Kings Mountain, NC . . . . . . . . . . . Lake Wylie, SC . . . . . . . . . . . . . . . Lake Wylie, SC . . . . . . . . . . . . . . . Lincolnton, NC . . . . . . . . . . . . . . . Lincolnton, NC . . . . . . . . . . . . . . . Matthews, NC . . . . . . . . . . . . . . . . Mineral Springs, NC . . . . . . . . . . . Monroe, NC . . . . . . . . . . . . . . . . . . Monroe, NC . . . . . . . . . . . . . . . . . . Monroe, NC . . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . Statesville, NC . . . . . . . . . . . . . . . . Thomasville, NC . . . . . . . . . . . . . . Waxhaw, NC . . . . . . . . . . . . . . . . . York, SC . . . . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 722,773 744,571 1,828,292 1,676,647 917,090 1,275,337 1,653,202 2,664,228 2,317,321 1,750,110 3,825,461 2,554,459 1,883,231 1,559,190 964,906 1,227,521 544,504 335,424 1,070,390 1,184,517 760,356 1,975,267 1,529,667 982,031 1,210,397 1,972,180 1,282,737 1,380,939 2,061,482 532,154 2,358,754 1,771,201 1,196,544 1,745,883 577,353 677,575 834,302 420,625 709,082 795,846 857,369 1,022,565 2,118,790 1,886,128 3,095,160 1,909,758 727,082 1,885,746 2,181,682 993,898 1,761,032 746,698 508,235 2,306,150 1,448,777 1,231,265 1,214,175 1,849,143 2,279,590 3,107,907 2,145,815 777,836 PETsMART: Chicago, IL . . . . . . . . . . . . . . . . . . — 2,724,138 3,565,721 Picture Factory: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 722,773 744,571 1,828,292 1,676,647 3,504,939 917,090 1,275,337 2,192,427 1,653,202 2,664,228 4,317,430 2,317,321 1,750,110 4,067,431 3,825,461 2,554,459 6,379,920 1,883,231 1,559,190 3,442,421 964,906 1,227,521 2,192,427 879,928 544,504 335,424 1,070,390 1,184,517 2,254,907 760,356 1,504,927 1,975,267 1,529,667 3,504,934 982,031 2,192,428 1,210,397 1,972,180 1,282,737 3,254,917 1,380,939 2,061,482 3,442,421 532,154 1,254,927 2,358,754 1,771,201 4,129,955 1,196,544 1,745,883 2,942,427 577,353 1,254,928 677,575 834,302 1,254,927 420,625 709,082 795,846 1,504,928 857,369 1,022,565 1,879,934 2,118,790 1,886,128 4,004,918 3,095,160 1,909,758 5,004,918 727,082 1,504,918 1,885,746 2,181,682 4,067,428 993,898 1,761,032 2,754,930 746,698 1,254,933 508,235 2,306,150 1,448,777 3,754,927 1,231,265 1,214,175 2,445,440 1,849,143 2,279,590 4,128,733 3,107,907 2,145,815 5,253,722 777,836 33,932 25,810 53,919 35,418 51,697 36,814 24,843 9,642 23,972 13,465 30,957 19,874 25,960 41,720 12,565 35,846 41,222 10,224 16,885 16,106 18,108 38,172 38,650 17,167 44,153 35,640 13,223 29,320 18,971 35,618 33,528 2002 1999 2000 1999 1998 1988 2001 2000 1990 2003 2002 1988 2003 1998 1989 2000 1987 2002 1997 1999 2004 1998 1999 1990 1999 2000 2002 1999 1997 2005 1999 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 04/07 05/07 05/07 05/07 35 years 35 years 35 years 35 years 35 years 30 years 35 years 40 years 35 years 40 years 35 years 35 years 35 years 35 years 30 years 35 years 30 years 40 years 35 years 35 years 40 years 35 years 35 years 30 years 35 years 35 years 40 years 35 years 40 years 40 years 40 years 2,724,138 3,565,721 6,289,859 828,279 1998 09/98 40 years Sarasota, FL . . . . . . . . . . . . . . . . . . — 1,167,618 1,903,810 218,564 — 1,167,618 2,122,374 3,289,992 205,716 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 Popeye’s: Snellville, GA . . . . . . . . . . . . . . . . — 642,169 436,512 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 1,478,617 593,571 756,406 1,073,046 316,640 805,912 1,196,750 390,838 492,087 216,571 196,588 164,571 188,994 155,221 163,701 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 6,682 1976 12/01 40 years 16,396 88,372 104,768 7,151 1994 09/04 40 years 642,169 436,512 1,078,681 65,931 1995 12/01 40 years Chandler, AZ . . . . . . . . . . . . . . . . . — 654,765 765,164 7,500 — 654,765 772,664 1,427,429 122,640 1997 12/01 40 years Pull-A-Part: — Birmingham, AL . . . . . . . . . . . . . . Augusta, GA . . . . . . . . . . . . . . . . . Conley, GA . . . . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . . . Louisville, KY . . . . . . . . . . . . . . . . Harvey, LA . . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Knoxville, TN . . . . . . . . . . . . . . . . Nashville, TN . . . . . . . . . . . . . . . . — — — — — — — — — 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 — — 1,450,906 — — — — — — — 2,384,443 — — See accompanying report of independent registered public accounting firm. 1,164,780 2,090,094 3,254,874 1,414,381 1,450,906 2,865,287 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 2,384,443 3,345,510 2,164,234 1,414,129 3,578,363 71,847 19,648 47,684 35,761 52,657 (e) 59,264 27,322 48,611 1964 2007 1999 1998 2006 (e) 2006 2007 2006 2,164,234 1,414,129 — — — — — 961,067 — 08/06 08/06(q) 08/06 08/06 08/06 08/06(q) 08/06 08/06(q) 08/06 40 years 40 years 40 years 40 years 40 years (e) 40 years 40 years 40 years 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 Lafayette, LA . . . . . . . . . . . . . . . Cleveland, OH . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . Jackson, MS . . . . . . . . . . . . . . . . Baton Rouge, LA . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . . . Winston-Salem, NC . . . . . . . . . . Lithonia, GA . . . . . . . . . . . . . . . . Columbia, SC . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . Olathe, KS . . . . . . . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Woodstock, GA . . . . . . . . . . . . . — 1,034,830 — 4,555,684 — 934,023 — 1,314,846 — 890,122 — 1,779,169 549,485 — — 845,948 — 2,409,908 934,755 — — 1,048,309 623,473 — 258,759 — 379,435 — 592,192 — 856,001 — 394,289 — 373,770 — 948,051 — 844,216 — 966,145 — 792,656 — — 1,224,843 339,566 — 127,250 — 118,012 — 488,383 — — — — — 2,096,448 — — — — — — — — — — — — — — — — — — — — — — — — — 606,916 556,970 792,448 455,322 912,962 1,612,887 385,119 1,224,099 293,896 296,867 202,430 1,391,981 649,917 764,025 542,934 453,891 1,041,883 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,034,830 4,555,684 934,023 1,314,846 890,122 1,779,169 549,485 845,948 2,409,908 934,755 1,048,309 623,473 258,759 379,435 592,192 856,001 394,289 373,770 948,051 838,826 966,145 792,656 1,224,843 339,566 127,250 118,012 488,383 — 1,034,830 6,652,132 2,096,448 — 934,023 — 1,314,846 — 890,122 — 1,779,169 549,485 — — 845,948 — 2,409,908 934,755 — 606,916 556,970 792,448 455,322 912,962 1,612,887 385,119 1,224,099 293,896 296,867 202,430 1,391,981 649,917 764,025 542,934 453,891 1,041,883 1,655,225 1,180,443 1,051,207 834,757 1,505,154 2,468,888 779,408 1,597,869 1,241,947 1,135,693 1,168,575 2,184,637 1,874,760 1,103,591 670,184 571,903 1,530,266 (e) 6,551 (e) (e) (e) (e) (e) (e) (e) (e) 38,564 47,188 67,138 38,576 77,348 136,647 32,628 77,781 24,900 25,151 17,150 88,449 55,062 48,547 45,999 38,455 66,203 (e) 2007 (e) (e) (e) (e) (e) (e) (e) (e) 1996 1994 1990 1996 1989 1991 1991 1999 1993 1989 1994 1999 1990 1993 1990 1989 1997 08/06(q) 08/06 11/06(q) 12/06(q) 01/07(q) 05/07(q) 06/07(q) 08/07(q) 08/07(q) 09/07(q) 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 06/05 (e) 40 years (e) (e) (e) (e) (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 30 years 40 years 30 years 30 years 40 years Quizno’s: Rio Rancho, NM . . . . . . . . . . . . . Qwest Corporation Service Center: Cedar Rapids, IA . . . . . . . . . . . . . Decorah, IA . . . . . . . . . . . . . . . . . — — — Rally’s: 48,566 96,428 13,398 — 48,566 109,826 158,392 16,186 1997 12/01 40 years 184,490 71,899 628,943 271,620 — — — — 184,490 71,899 628,943 271,620 813,433 343,519 79,928 69,037 1976 1974 06/05 06/05 20 years 10 years Toledo, OH . . . . . . . . . . . . . . . . . — 125,882 319,770 — — 125,882 319,770 445,652 127,868 1989 07/92 39 years REB Oil: Deerfield Beach, FL . . . . . . . . . . — 769,522 273,756 — — 769,522 273,756 1,043,278 13,973 1980 12/05 40 years Red Lion Chinese Restaurant: Cohoes, NY . . . . . . . . . . . . . . . . . — 27,327 147,286 — — 27,327 147,286 174,613 11,918 1994 09/04 40 years Reliable: St. Louis, MO . . . . . . . . . . . . . . . — 2,077,893 13,762,491 — — 2,077,893 13,762,491 15,840,384 1,192,793 1975 05/04 40 years Rent-A-Center: Rio Rancho, NM . . . . . . . . . . . . . — 145,698 289,284 40,193 — 145,698 329,477 475,175 48,883 1997 12/01 40 years Rite Aid: Mobile, AL . . . . . . . . . . . . . . . . . Orange Beach, AL . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . Albany, NY (r) . . . . . . . . . . . . . . Hudson Falls, NY . . . . . . . . . . . . Saratoga Springs, NY . . . . . . . . . Ticonderoga, NY . . . . . . . . . . . . Monticello, NY . . . . . . . . . . . . . . — 1,136,618 — 1,409,980 24,707 — 33,794 — 56,737 — 762,303 — 88,867 — 664,400 850,549 1,694,187 1,996,043 867,257 823,923 780,091 590,978 688,622 768,795 Rite Rug: — — — — — — — — 38,787 — — — — — — — 1,136,618 1,409,980 24,707 33,794 56,737 762,303 88,867 664,400 1,694,187 1,996,043 867,257 823,923 818,878 590,978 688,622 768,795 2,830,805 3,406,023 891,964 857,717 875,615 1,353,281 777,489 1,433,195 255,893 301,486 71,367 67,802 64,802 48,633 56,668 53,656 2000 2000 1994 1992 1990 1980 1993 1996 12/01 12/01 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 Columbus, OH . . . . . . . . . . . . . . — 1,596,197 934,236 13,345 — 1,604,615 939,163 2,543,778 73,339 1970 11/04 40 years Roadhouse Grill: Cheektowaga, NY . . . . . . . . . . . . — 689,040 386,251 — — 689,040 386,251 1,075,290 58,340 1994 12/01 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 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 . . . . . . . . . . . . . . . . Champaign, IL . . . . . . . . . . . . . . . . Dekalb, IL . . . . . . . . . . . . . . . . . . . Fenton, MO . . . . . . . . . . . . . . . . . . Hampshire, IL . . . . . . . . . . . . . . . . Princeton, IL . . . . . . . . . . . . . . . . . South Beloit, IL . . . . . . . . . . . . . . . Cedar Rapids, IA . . . . . . . . . . . . . . Marion, IA . . . . . . . . . . . . . . . . . . . Okawville, IL . . . . . . . . . . . . . . . . . Dubuque, IA . . . . . . . . . . . . . . . . . Belvidere, IL . . . . . . . . . . . . . . . . . South Beloit, IL . . . . . . . . . . . . . . . Robb & Stucky: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 748,237 1,256,106 — 2,199,280 907,034 — 1,409,312 1,897,360 — 2,174,548 1,733,398 — 815,213 1,314,354 — 747,109 1,657,951 — 1,537,734 2,470,191 — 3,171,775 1,111,643 — 959,012 1,295,780 — 1,844,068 1,663,137 — 1,094,045 1,661,684 — 623,214 1,331,082 — 704,648 1,500,279 — 1,794,961 1,862,562 — 3,241,075 2,007,662 — 504,730 1,503,084 2,583,565 2,621,722 — 1,307,002 1,500,812 1,629,412 — — 1,141,447 3,066,368 — 3,823,872 2,308,942 — 983,509 1,024,606 — 736,574 1,071,226 — 929,718 1,147,323 — 560,523 1,941,477 — — 520,800 — — 1,182,152 — — — — — — — — 748,237 1,256,106 2,004,344 2,199,280 907,034 3,106,314 1,409,312 1,897,360 3,306,672 2,174,548 1,733,398 3,907,946 815,213 1,314,354 2,129,568 747,109 1,657,951 2,405,060 1,537,734 2,470,191 4,007,925 3,171,775 1,111,643 4,283,418 959,012 1,295,780 2,254,792 1,844,068 1,663,137 3,507,205 1,094,045 1,661,684 2,755,729 623,214 1,331,082 1,954,296 704,648 1,500,279 2,204,927 1,794,961 1,862,562 3,657,523 3,241,075 2,007,662 5,248,737 504,730 1,503,084 2,007,814 2,583,565 2,621,722 5,205,287 1,307,002 3,130,224 4,437,226 1,141,447 3,066,368 4,207,815 3,823,872 2,308,942 6,132,814 983,509 2,008,115 1,024,606 736,574 1,071,226 1,807,800 929,718 1,147,323 2,077,041 560,523 1,941,477 2,502,000 — 520,800 520,800 — 1,182,152 1,182,152 48,412 34,958 73,127 66,808 50,657 63,900 95,205 42,845 49,941 64,100 64,044 51,302 57,823 71,786 43,918 32,880 57,350 34,560 67,077 50,508 19,465 21,201 10,756 14,157 (e) (e) 1997 1990 1991 1990 2002 2000 1989 1987 1996 1998 1996 2000 1997 1978 2006 2004 2007 1988 2003 2002 1990 1974 1997 2000 (e) (e) 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 02/07 02/07 02/07 02/07 02/07 02/07 03/07 03/07 08/07 09/07 09/07 09/07 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 Ft. Myers, FL . . . . . . . . . . . . . . . . . — 2,188,440 6,225,401 — — 2,188,440 6,225,401 8,413,841 1,580,217 1997 12/97 40 years Roger & Mary’s: Kenosha, WI . . . . . . . . . . . . . . . . . — 1,917,606 3,431,364 — — 1,917,606 3,431,364 5,348,970 928,213 1992 02/97 40 years Ross Dress For Less: Coral Gables, FL . . . . . . . . . . . . . . Lodi, CA . . . . . . . . . . . . . . . . . . . . Schlotzsky’s Deli: Phoenix, AZ . . . . . . . . . . . . . . . . . . Scottsdale, AZ . . . . . . . . . . . . . . . . 7-Eleven: Land O’ Lakes, FL . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . Shek’s Chinese Express: — — — — — — 1,782,346 1,661,174 613,710 1,414,592 706,306 717,138 315,469 310,610 — — — — — — — — 1,782,346 1,661,174 3,443,520 613,710 1,414,592 2,028,302 427,005 148,827 706,306 717,138 315,469 1,021,775 310,610 1,027,748 47,649 46,915 1,076,572 1,080,670 — — 816,944 — 917,432 — 1,076,572 1,080,670 816,944 1,893,516 917,432 1,998,102 182,961 201,644 1994 1984 1995 1995 1999 1999 06/96 03/99 12/01 12/01 40 years 40 years 40 years 40 years 10/98(g) 12/98(g) 40 years 40 years Eden Prairie, MN . . . . . . . . . . . . . . — 64,916 261,347 — — 64,916 261,347 326,263 36,492 1997 12/01 40 years Shoes on a Shoestring: Albuquerque, NM . . . . . . . . . . . . . — 1,441,777 2,335,475 — — 1,441,777 2,335,475 3,777,251 615,495 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 . . . . . . . . . . . . . . . — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 747,418 1,298,835 551,417 742,457 1,306,320 563,863 769,343 1,259,007 489,664 704,005 1,142,541 438,536 744,195 1,105,377 361,182 627,502 1,018,777 391,275 656,964 1,124,914 467,950 712,752 864,527 1,577,279 764,461 1,156,598 1,921,059 671,989 1,117,969 445,980 541,741 271,728 813,469 732,669 1,118,616 385,947 988,033 462,868 525,165 991,320 559,403 431,917 747,418 551,417 742,457 563,863 769,343 489,664 704,005 438,536 744,195 361,182 627,502 391,275 656,964 467,950 712,752 864,527 764,461 1,156,598 671,989 445,980 541,741 271,728 732,669 385,947 462,868 525,165 559,403 431,917 30,364 30,162 31,254 28,600 30,233 25,492 26,689 35,121 46,987 27,300 22,008 29,765 18,804 22,726 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 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 Shop & Save: Homestead, PA . . . . . . . . . . . . . . . — 1,139,419 — 2,158,167(j) — 1,139,419 2,158,167 3,297,586 166,837 1994 02/97 40 years Soaks Express Car Wash: Ankeny, IA . . . . . . . . . . . . . . . . . . — 661,958 — — — 661,958 — 661,958 — (e) 06/05 (e) Sofa Express: Buford, GA . . . . . . . . . . . . . . . . . . — 1,925,129 5,034,846 — — 1,925,129 5,034,846 6,959,975 435,304 2004 07/04 40 years Sonic Automotive: Charlotte, NC . . . . . . . . . . . . . . . . . — 3,618,837 4,853,587 — — 3,618,837 4,853,587 8,472,424 75,837 1996 05/07 40 years Spa and Nails Club: Orlando, FL . . . . . . . . . . . . . . . . . . 65,839(o) 40,200 110,531 — — 40,200 110,531 150,731 10,708 2001 02/04 40 years Spencer’s A/C & Appliances: Glendale, AZ . . . . . . . . . . . . . . . . . Sports Authority: Tampa, FL . . . . . . . . . . . . . . . . . . . Sarasota, FL . . . . . . . . . . . . . . . . . . Memphis, TN (r) . . . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . . . . . . Woodbridge, NJ . . . . . . . . . . . . . . . Bradenton, FL . . . . . . . . . . . . . . . . Sportsman’s Warehouse: — — — — — — — 341,713 982,429 — — 341,713 982,429 1,324,143 207,301 1999 12/98(g) 40 years 2,127,503 1,521,730 1,427,840 1,702,852 820,340 3,113,375 2,660,206 3,749,990 5,982,660 1,526,340 4,139,363 — — — — — 2,573,264 — — — — — — — 2,127,503 1,521,730 3,649,233 1,427,840 1,702,852 3,130,692 820,340 2,573,264 3,393,604 3,113,375 2,660,206 5,773,581 3,749,990 5,982,660 9,732,650 1,526,340 4,139,363 5,665,703 437,814 166,738 592,387 617,944 741,600 409,624 1994 1996 1998 1997 1994 1997 06/96 09/97 12/97(g) 09/98 01/03 01/04 40 years 40 years 40 years 40 years 40 years 40 years Sioux Falls, SD . . . . . . . . . . . . . . . — 2,619,810 1,929,895 — — 2,619,810 1,929,895 4,549,705 163,505 1998 06/05 30 years Steak & Ale: Jacksonville, FL . . . . . . . . . . . . . . . — 986,565 855,523 — — 986,565 855,523 1,842,088 129,220 1996 12/01 40 years Stone Mountain Chevrolet: Lilburn, GA . . . . . . . . . . . . . . . . . . — 3,027,056 4,685,189 — — 3,027,056 4,685,189 7,712,245 395,313 2004 08/04 40 years Stop & Go: Grand Prairie, TX . . . . . . . . . . . . . Kennedale, TX . . . . . . . . . . . . . . . . — — 421,254 399,988 684,568 692,190 — — — — 421,254 391,208 684,568 1,105,822 692,190 1,083,398 103,398 104,549 1986 1985 Stripes: 933,149 933,149 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 . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 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 1,406,784 918,973 459,946 1,494,871 1,400,482 2,895,353 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 72,425 56,418 91,896 93,320 66,751 58,438 73,695 51,792 57,419 65,719 35,683 72,425 72,286 78,140 52,905 57,503 82,886 65,640 227,544 59,119 35,478 48,619 58,816 30,662 68,742 90,590 37,715 34,215 23,476 71,482 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 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 840,629 736,451 459,027 840,629 736,451 459,027 12/01 12/01 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 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) 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 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 . . . . . . . . . . . . . . . . . . . Orange Grove, TX . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . Del Rio, TX . . . . . . . . . . . . . . . . . . Kerrville, TX . . . . . . . . . . . . . . . . . Monahans, TX . . . . . . . . . . . . . . . . Odessa, TX . . . . . . . . . . . . . . . . . . San Angelo, TX . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . Subway: Eden Prairie, MN . . . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . SuperValu: Huntington, WV . . . . . . . . . . . . . . Maple Heights, OH . . . . . . . . . . . . Susser: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 655,735 675,128 696,670 533,047 964,441 1,386,972 1,456,932 975,217 1,029,752 987,020 893,376 880,169 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 1,766,745 1,838,068 825,732 407,920 727,548 467,915 958,472 584,244 447,733 734,498 698,261 1,168,532 348,351 1,168,124 419,729 1,135,228 758,296 640,368 1,616,290 2,627,558 2,973,453 2,632,935 3,198,762 471,407 194,277 573,354 1,228,572 1,565,013 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 54,097 2,734 21,862 150,449 66,667 117,829 67,341 — — 1,254,238 760,602 1,034,758 2,874,414 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 655,735 675,128 696,670 533,047 1,208,175 964,441 1,661,111 1,386,972 1,456,932 2,843,903 975,217 1,029,752 2,004,968 987,020 893,376 1,880,396 880,169 1,101,301 1,981,471 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 1,589,144 784,402 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 4,509,128 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 1,766,745 1,838,068 3,604,813 825,732 1,233,652 407,920 727,548 1,195,463 467,915 958,472 1,542,716 584,244 447,733 734,498 1,182,231 698,261 1,168,532 1,866,793 348,351 1,168,124 1,516,475 419,729 1,135,228 1,554,957 758,296 2,323,309 640,368 1,616,290 2,256,658 2,627,558 2,973,453 5,601,011 2,632,935 3,198,762 5,831,697 665,684 471,407 194,277 573,354 1,228,572 1,801,926 1,565,013 27,208 49,227 74,364 52,560 45,599 56,212 61,934 147,005 60,124 41,075 96,003 66,278 46,678 92,448 110,151 80,964 94,792 59,800 78,888 70,885 68,953 42,262 38,356 41,447 47,046 41,987 37,341 46,161 32,549 3,440 3,031 3,994 3,060 4,869 4,867 4,730 2,369 5,051 9,293 9,996 1,473 1,280 54,097 2,734 21,862 217,790 66,667 117,829 271,887 69,401 139,691 30,410 5,486 9,534 1,254,238 760,602 2,014,840 1,034,758 2,874,414 3,909,172 206,788 781,481 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 2007 1982 1973 1981 1981 1981 1983 1985 1996 1996 1996 2006 1998 2000 1997 1992 1994 1971 1985 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 04/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 12/07 12/01 09/04 09/04 02/97 02/97 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 30 years 30 years 30 years 30 years 30 years 30 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 630,043 3,131,407 3,761,450 688,257 1983 03/99 40 years 45,815 132,365 178,180 19,995 1997 12/01 40 years Corpus Christi, TX . . . . . . . . . . . . — 630,043 3,131,407 Swansea Quick Cash: Swansea, IL . . . . . . . . . . . . . . . . . . — 45,815 132,365 Taco Bell: Ocala, FL . . . . . . . . . . . . . . . . . . . . Ormond Beach, FL . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . . . . . . . Bedford, IN . . . . . . . . . . . . . . . . . . Columbus, IN . . . . . . . . . . . . . . . . Columbus, IN . . . . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . . — — — — — — — 275,023 632,337 593,718 796,772 — — — — — — — See accompanying report of independent registered public accounting firm. 754,990 1,030,013 525,616 1,157,953 282,777 876,495 936,942 1,733,714 1,256,948 2,054,570 3,311,518 690,142 1,212,681 1,902,823 828,023 1,049,219 221,196 754,990 525,616 282,777 936,942 1,256,948 2,054,570 690,142 1,212,681 828,023 221,196 114,035 79,390 42,711 38,063 83,466 49,265 33,638 275,023 632,337 593,718 796,772 — — — — — — — 2001 2001 1995 1989 1990 2005 2003 12/01 12/01 12/01 05/06 05/06 05/06 05/06 40 years 40 years 40 years 40 years 40 years 40 years 40 years 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 Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed 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: 308,068 1,300,511 524,368 1,815,101 989,998 486,260 648,296 1,079,007 1,031,743 1,649,975 703,287 547,218 682,108 1,192,867 638,693 1,326,161 670,216 1,755,847 407,707 1,426,319 1,037,327 1,655,660 1,313,692 2,249,313 879,791 501,783 — — — — — — — — — — — — — — — — — — — — — — — — — — 308,068 1,300,511 1,608,579 524,368 1,815,101 2,339,469 989,998 486,260 1,476,258 648,296 1,079,007 1,727,303 1,031,743 1,649,975 2,681,718 703,287 1,250,505 547,218 682,108 1,192,867 1,874,975 638,693 1,326,161 1,964,854 670,216 1,755,847 2,426,063 407,707 1,426,319 1,834,026 1,037,327 1,655,660 2,692,987 1,313,692 2,249,313 3,563,005 879,791 1,381,574 501,783 52,833 73,738 19,754 43,834 67,030 28,571 48,460 53,875 71,331 57,944 67,261 91,378 35,742 2000 2005 1998 1998 2004 2004 1999 2005 1998 2003 2003 2003 2004 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 Tucson, AZ . . . . . . . . . . . . . . . . . . — 827,002 305,209 17,814 — 844,816 305,209 1,150,025 52,810 1974 12/01 40 years Texas Roadhouse: Grand Junction, CO . . . . . . . . . . . . Thornton, CO . . . . . . . . . . . . . . . . . — — 920,143 584,237 598,556 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 Tractor Supply Co.: Aransas Pass, TX . . . . . . . . . . . . . . — 100,967 1,599,293 Ultra Car Wash: Mobile, AL . . . . . . . . . . . . . . . . . . — 1,070,724 1,086,104 — — — — — — — Uni-Mart: — — 920,143 1,504,380 584,237 598,556 1,019,164 1,617,720 138,979 153,936 1997 1998 12/01 12/01 40 years 40 years — 1,209,702 1,532,125 2,741,827 231,414 1995 12/01 40 years — 1,266,527 2,405,629 3,672,156 207,987 2004 07/04 40 years — 2,777,449 7,082,150 9,859,599 1,925,460 1992 02/97 40 years — 100,967 1,599,293 1,700,260 305,694 1983 03/99 40 years — 1,070,724 1,086,104 2,156,828 10,182 2005 08/07 40 years Avis, PA . . . . . . . . . . . . . . . . . . . . Bear Creek, PA (r) . . . . . . . . . . . . . Bloomsburg, PA (r) . . . . . . . . . . . . Bloomsburg, PA (r) . . . . . . . . . . . . Bloomsburg, PA (r) . . . . . . . . . . . . Chambersburg, PA (r) . . . . . . . . . . Coraopolis, PA . . . . . . . . . . . . . . . Dallas, PA (r) . . . . . . . . . . . . . . . . . East Brady, PA (r) . . . . . . . . . . . . . Emporium, PA . . . . . . . . . . . . . . . . Hazleton, PA . . . . . . . . . . . . . . . . . Hazleton, PA (r) . . . . . . . . . . . . . . . . . . . . . . . . . . Johnsonburg, PA (r) Larksville, PA (r) . . . . . . . . . . . . . . Luzerne, PA . . . . . . . . . . . . . . . . . . Moosic, PA (r) . . . . . . . . . . . . . . . . Pleasant Gap, PA (r) . . . . . . . . . . . Port Vue, PA (r) . . . . . . . . . . . . . . . Punxsutawney, PA (r) . . . . . . . . . . Ridgway, PA . . . . . . . . . . . . . . . . . Shamokin, PA (r) . . . . . . . . . . . . . . Shippensburg, PA (r) . . . . . . . . . . . St. Clair, PA . . . . . . . . . . . . . . . . . . St. Mary’s, PA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taylor, PA (r) White Haven, PA (r) . . . . . . . . . . . Wilkes-Barre, PA (r) . . . . . . . . . . . Wilkes-Barre, PA (r) . . . . . . . . . . . Wilkes-Barre, PA (r) . . . . . . . . . . . Williamsport, PA (r) . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 717,847 326,046 391,801 420,752 230,193 190,558 707,826 501,424 206,402 146,127 686,689 540,561 888,074 1,403,182 515,108 272,713 197,035 75,678 822,932 347,360 475,572 890,855 1,435,745 2,326,601 852,637 583,204 269,433 568,625 380,032 948,657 377,355 1,047,625 670,271 727,550 3,256,716 2,529,165 503,662 1,284,198 780,536 579,745 333,875 245,870 586,161 415,295 170,866 631,970 308,844 323,126 924,730 592,844 331,885 941,787 117,629 824,158 794,490 541,842 252,648 641,081 258,740 382,341 830,329 506,335 323,994 533,708 330,098 203,610 687,236 475,086 212,150 260,942 274,323 535,265 707,417 526,884 180,533 866,602 1,352,587 485,984 649,541 471,437 178,104 171,040 593,478 422,438 875,774 1,956,613 2,832,386 122,164 1,030,922 908,758 326,046 391,801 230,193 190,558 501,424 206,402 146,127 540,561 888,074 515,108 197,035 75,678 347,360 475,572 890,855 1,435,745 583,204 269,433 568,625 380,032 377,355 670,271 727,550 2,529,165 503,662 780,536 333,875 245,870 415,295 170,866 308,844 323,126 592,844 331,885 117,629 824,158 541,842 252,648 258,740 382,341 506,335 323,994 330,098 203,610 475,086 212,150 260,942 274,323 526,884 180,533 866,602 485,984 471,437 178,104 171,040 422,438 875,774 1,956,613 122,164 908,758 38,718 27,335 59,544 17,352 105,459 23,397 41,248 170,494 69,255 67,524 44,811 86,396 59,809 39,648 49,316 36,675 70,400 13,968 64,344 30,725 60,127 39,199 56,416 30,986 62,567 102,909 55,983 50,164 232,348 14,507 1976 1980 1981 1967 1998 1990 1983 1995 1987 1996 1974 2001 1978 1990 1989 1980 1996 1953 1983 1975 1956 1989 1984 1979 1973 1990 1989 1999 1998 1950 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 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 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years 20 years F-17 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 Yeagertown, PA . . . . . . . . . . . . . . Ashland, PA (r) . . . . . . . . . . . . . . . Bear Creek, PA (r) . . . . . . . . . . . . . Mountaintop, PA (r) . . . . . . . . . . . Abbottstown, PA . . . . . . . . . . . . . . Beech Creek, PA . . . . . . . . . . . . . . Canisteo, NY . . . . . . . . . . . . . . . . . Carlisle, PA . . . . . . . . . . . . . . . . . . Curwensville, PA (r) . . . . . . . . . . . Dansville, PA (r) . . . . . . . . . . . . . . Effort, PA (r) . . . . . . . . . . . . . . . . . Ellwood City, PA . . . . . . . . . . . . . . Export, PA (r) . . . . . . . . . . . . . . . . Hastings, PA . . . . . . . . . . . . . . . . . Howard, PA . . . . . . . . . . . . . . . . . . Hughesville, PA (r) . . . . . . . . . . . . Jersey Shore, PA (r) . . . . . . . . . . . . Leeper, PA . . . . . . . . . . . . . . . . . . . Lewisberry, PA . . . . . . . . . . . . . . . McSherrytown, PA (r) . . . . . . . . . . Mercersburg, PA . . . . . . . . . . . . . . Milesburg, PA (r) . . . . . . . . . . . . . Minersville, PA (r) . . . . . . . . . . . . . . . . . . . . . . . Montoursville, PA (r) Nanticoke, PA (r) . . . . . . . . . . . . . . New Florence, PA . . . . . . . . . . . . . Newstead, NY . . . . . . . . . . . . . . . . Nuangola, PA (r) . . . . . . . . . . . . . . Phillipsburg, PA . . . . . . . . . . . . . . Pittsburgh, PA . . . . . . . . . . . . . . . . Plainfield, PA (r) . . . . . . . . . . . . . . Plains, PA (r) . . . . . . . . . . . . . . . . . Punxsutawney, PA (r) . . . . . . . . . . Reynoldsville, PA . . . . . . . . . . . . . Summerville, PA . . . . . . . . . . . . . . Warriors Mark, PA (r) . . . . . . . . . . Williamsport, PA (r) . . . . . . . . . . . Zelienople, PA (r) . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . Ft. Worth, TX . . . . . . . . . . . . . . . . Melbourne, FL . . . . . . . . . . . . . . . . United Trust Bank: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 142,061 355,322 689,374 422,770 110,362 476,516 141,912 347,858 226,015 179,736 180,073 545,140 274,920 616,488 400,101 612,664 485,183 411,491 607,989 359,203 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 92,798 404,981 148,499 378,715 295,036 437,168 160,219 196,089 221,840 199,089 136,416 290,136 514,708 285,510 412,356 134,501 672,259 133,831 679,595 158,346 174,583 298,364 254,635 477,893 535,091 534,807 829,241 1,173,292 1,810,665 977,971 2,057,322 910,786 708,389 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 1,360,379 510,490 1,127,796 — 607,128 1,427,764 746,558 Bridgeview, IL . . . . . . . . . . . . . . . . — 673,238 744,154 Vacant Land: Longwood, FL . . . . . . . . . . . . . . . . Florence, AL . . . . . . . . . . . . . . . . . Florence, AL . . . . . . . . . . . . . . . . . — — — 585,152 1,022,509 243,266 — — — Vacant Property: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 142,061 355,322 689,374 422,770 110,362 476,516 141,912 347,858 226,015 179,736 322,134 180,073 900,462 545,140 274,920 964,294 616,488 1,039,259 400,101 510,463 612,664 1,089,180 627,095 485,183 759,349 411,491 834,004 607,989 538,939 359,203 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 1,261,313 573,718 415,372 482,239 656,822 812,449 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 92,798 553,480 404,981 148,499 673,751 378,715 295,036 597,387 437,168 160,219 196,089 221,840 199,089 136,416 290,136 514,708 285,510 412,356 134,501 672,259 133,831 679,595 158,346 174,583 298,364 254,635 477,893 535,091 534,807 1,012,700 829,241 1,364,332 1,173,292 1,810,665 2,983,957 977,971 3,035,293 2,057,322 910,786 1,619,175 708,389 1,114,553 2,125,426 3,239,979 1,743,092 1,943,650 3,686,742 744,145 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 2,520,154 510,490 1,127,796 1,638,286 — 1,427,764 607,128 1,353,686 1,427,764 746,558 21,384 62,464 31,501 70,639 19,588 29,994 23,753 20,145 29,766 17,585 58,845 25,760 10,519 22,295 18,345 27,721 18,671 31,523 26,136 17,867 36,538 18,257 28,479 20,336 23,610 39,776 40,900 58,888 13,168 65,907 18,727 19,645 31,813 16,055 13,308 19,827 18,541 21,403 40,667 63,056 137,685 74,367 69,257 161,620 147,798 96,183 85,097 87,301 103,445 83,409 (i) 39,843 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 1997 (i) 1970 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 01/05 05/05 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 (i) 40 years 673,238 744,154 1,417,392 112,398 1997 12/01 40 years 585,152 1,022,509 243,266 585,152 — — 1,022,509 243,266 — (e) (e) (e) (e) (e) (e) 03/06 06/04 06/04 12/01 05/03 (e) (e) (e) 40 years 40 years Mesa, AZ . . . . . . . . . . . . . . . . . . . . Dallas, GA . . . . . . . . . . . . . . . . . . . — — 152,609 — — See accompanying report of independent registered public accounting firm. 665,175 512,566 1,287,630 1,952,791 3,240,421 399,801 1,287,630 1,952,791 112,765 — 77,418 225,793 152,609 1997 1997 F-18 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 1,284,901 202,085 520,950 978,344 530,289 264,956 1,159,833 1,240,882 1,915,483 964,185 643,759 1,186,705 261,352 Land 1,937,017 54,999 73,290 893,270 470,840 91,709 226,366 89,537 421,897 873,758 405,107 592,730 48,482 Improve- ments Carrying Costs — — — — — — — — 76,664 — — — 7,830 — — — — — — — — — — — — — Building, Improve- ments and Leasehold Interests 1,284,901 104,974 242,896 1,055,008 530,289 264,956 817,667 1,240,882 1,915,483 964,185 643,759 1,186,705 261,352 Land 1,890,769 54,999 73,290 893,270 470,840 91,709 226,366 89,537 421,897 873,758 405,107 592,730 48,482 Total 3,175,670 159,973 316,186 1,948,278 1,001,130 356,665 1,044,033 1,330,419 2,337,380 1,837,943 1,048,866 1,779,435 309,834 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 148,568 17,360 78,344 372,149 80,096 40,055 148,722 275,219 97,557 210,523 111,798 60,571 22,048 1997 1984 1986 1967 1996 1997 1998 1983 1995 1982 1976 1998 1994 05/03 07/04 12/01 11/93 12/01 12/01 11/98 03/99 12/05 03/99 12/01 12/05 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 2,490,210 2,937,449 — — 2,490,210 2,937,449 5,427,659 345,762 1996 04/03 40 years 3,762,030 — 3,006,391 — 3,762,030 3,006,391 6,768,421 735,939 1998 03/98(g) 40 years 1,957,974 1,193,187 1,400,970 3,055,724 507,231 419,811 2,315,424 1,684,505 — — — — — — — — 1,957,974 1,193,187 1,400,970 3,055,724 3,358,944 4,248,911 161,987 194,165 1994 2003 507,231 419,811 2,315,424 1,684,505 2,822,655 2,104,316 508,910 370,240 1983 1983 05/03 06/05 03/99 03/99 40 years 40 years 40 years 40 years 192,830 278,892 83,773 — 192,830 362,665 555,495 35,690 1995 12/95 40 years 585,872 501,136 624,318 290,860 823,643 476,055 893,834 — 333,445 — — — — 418,975 — 934,191 981,779 1,013,995 — — 910,051 — — — — — — — 585,872 501,136 624,318 290,860 823,643 476,055 893,834 — 333,445 585,872 834,581 (i) 50,364 (i) 1980 02/98 12/01 (i) 40 years 418,975 910,051 934,191 981,779 1,013,995 1,043,293 1,200,911 1,757,834 1,457,834 1,907,829 63,282 16,115 22,381 23,521 24,293 1995 2007 2006 2006 2006 12/01 12/06(q) 01/07 01/07 01/07 1,031,974 502,623 696,950 1,209,307 (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) 1,521,190 308,519 969,274 1,450,274 1,540,648 1,030,351 562,698 1,486,297 678,799 561,025 566,582 551,919 1,476,879 1,471,230 816,275 575,761 1,268,709 1,023,371 1,874,875 307,846 311,313 199,234 148,106 1,168,457 1,104,345 2,532,133 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,031,974 502,623 696,950 1,209,307 1,728,924 1,711,930 105,269 61,725 1997 1994 (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) (l) 1,521,190 308,519 969,274 1,450,274 1,540,648 1,030,351 562,698 1,486,297 678,799 561,025 566,582 551,919 1,476,879 1,471,230 816,275 575,761 1,268,709 1,521,190 308,519 969,274 1,450,274 1,540,648 1,030,351 562,698 1,486,297 678,799 561,025 566,582 551,919 1,476,879 1,471,230 816,275 575,761 1,268,709 23,768 3,535 17,308 22,661 24,017 18,399 10,048 23,223 14,141 10,018 10,117 9,856 23,076 16,857 9,353 6,597 14,537 2004 2001 1998 2003 2004 1989 1998 2004 1997 1998 1999 1998 2004 2004 1987 2002 2003 12/01 12/05 05/07 05/07 05/07 05/07 05/07 05/07 05/07 05/07 05/07 05/07 05/07 05/07 05/07 07/07 07/07 07/07 07/07 1,023,371 1,874,875 2,898,246 208,970 1984 07/03 40 years 307,846 311,313 619,159 22,376 1990 02/05 40 years 199,234 148,106 347,340 10,799 1961 02/05 40 years 1,168,457 1,104,345 2,272,802 93,706 2000 06/05 30 years 2,532,133 — 2,532,133 1,547,131 — (n) (m) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 35 years 40 years 40 years 40 years 35 years 35 years 35 years 40 years 40 years 40 years 40 years 40 years Woodstock, GA . . . . . . . Bonham, TX . . . . . . . . . Red Oak, TX . . . . . . . . . Corpus Christi, TX . . . . Spokane, WA . . . . . . . . Swansea, IL . . . . . . . . . . Everett, PA . . . . . . . . . . Aransas Pass, TX . . . . . Houston, TX . . . . . . . . . Sealy, TX . . . . . . . . . . . Southfield, MI . . . . . . . . Montgomery, AL . . . . . Cohoes, NY . . . . . . . . . . Value City: Florissant, MO . . . . . . . Value City Furniture: White Marsh, MD . . . . . Walgreens: Sunrise, FL . . . . . . . . . . Tulsa, OK . . . . . . . . . . . Wal-Mart: Beeville, TX . . . . . . . . . Winfield, AL . . . . . . . . . Washington Bike Center: Fairfax, VA . . . . . . . . . . Wendy’s Old Fashioned Hamburger: Sacramento, CA . . . . . . New Kensington, PA . . . Whataburger: Albuquerque, NM . . . . . Brunswick, GA . . . . . . . Jacksonville, FL . . . . . . Starke, FL . . . . . . . . . . . Yulee, FL . . . . . . . . . . . Wherehouse Music: Homewood, AL . . . . . . . Independence, MO . . . . Wingfoot: Beaverdam, OH . . . . . . . Benton, AR . . . . . . . . . . Bowman, SC . . . . . . . . . Brunswick, GA . . . . . . . Dalton, GA . . . . . . . . . . Dandrige, TN . . . . . . . . Franklin, OH . . . . . . . . . Gary, IN . . . . . . . . . . . . Georgetown, KY . . . . . . Mebane, NC . . . . . . . . . Piedmont, SC . . . . . . . . Port Wentworth, GA . . . Valdosta, GA . . . . . . . . . Whiteland, IN . . . . . . . . Des Moines, IA . . . . . . . Evansville, IN . . . . . . . . Kearney, MO . . . . . . . . . Winn-Dixie: Columbus, GA . . . . . . . Ziebart: Maplewood, MN . . . . . . Middleburg Heights, OH . . . . . . . . . . . . . . . Zio’s Restaurant: Aurora, CO . . . . . . . . . . Leasehold Interests: . . . . . . Encum- brances (k) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $26,454,684 $941,102,953 $1,116,459,120 $85,827,593 $— $941,336,554 $1,200,041,008 $2,141,377,563 $111,086,973 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) 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 — — — — (d) — — (l) (l) — (d) (d) (l) — Real Estate Held for Investment the Company has Invested in Under Direct Financing Leases: Barnes and Noble: Plantation, FL . . . . . . . . . . . Borders Books & Music: Altamonte Springs, FL . . . . Checkers: Orlando, FL . . . . . . . . . . . . . CVS: San Antonio, TX . . . . . . . . . Amarillo, TX . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . Oklahoma City, OK . . . . . . Ft. Worth, TX . . . . . . . . . . . Haltom City, TX . . . . . . . . . Denny’s: — — — — — — — — — — — — 3,498,559 — — — 3,267,579 — — — 286,910 — — — 158,851 — — (l) (l) — 413,918 783,974 855,348 949,128 1,228,436 1,365,125 1,419,093 1,135,110 1,660,859 — — — — — — — — — — — — — — — — Stockton, CA . . . . . . . . . . . . — 939,974 508,573 — — Eckerd: Kennett Square, PA . . . . . . . Arlington, VA . . . . . . . . . . . Food 4 Less: Chula Vista, CA . . . . . . . . . Heilig-Meyers: Marlow Heights, MD . . . . . York, PA . . . . . . . . . . . . . . . International House of Pancakes: Sunset Hills, MO . . . . . . . . . Matthews, NC . . . . . . . . . . . Jared Jewelers: — — — — — — — Glendale, AZ . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . Oviedo, FL . . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . . Toledo, OH . . . . . . . . . . . . . — 225,603 441,309 358,516 — (l) — — 1,984,435 — 3,201,489 — — — 4,266,181 — — — 415,926 279,312 1,397,178 1,109,609 — — 736,345 655,668 (l) (l) (l) (l) (l) 1,599,105 1,502,903 1,500,145 1,241,827 1,457,625 — — — — — — — — — — — — — — — — — — — — — — (d) (d) — — (l) (l) (l) (l) (l) (d) (d) Kash N’ Karry: Valrico, FL . . . . . . . . . . . . . Uni-Mart: . . . . . . . . . . . . . . Olean, NY (r) . . . . . . . . . . . — 1,234,519 3,255,257 — 41,774 267,755 (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) 1996 05/95 1997 09/97 1988 07/92 1993 1994 1995 1996 1997 1997 1996 1996 12/93 12/94 01/96 12/96 06/97 06/97 09/97 09/97 (d) 1982 09/06 (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (c) (c) (d) (d) 2000 2002 12/00 02/02 1995 11/98 1968 1997 11/98 11/98 1993 1993 1998 1998 1998 1998 1998 10/93 12/93 12/01 12/01 12/01 12/01 12/01 1997 06/02 1990 08/05 (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (d) (d) (c) (c) (c) (d) (d) (c) (c) (c) (c) (c) (c) (c) (d) (d) $1,025,428 $3,484,274 $39,149,782 $1,984,435 $— $ — $ — $ — $— Real Estate Held for Sale the Company has Invested in: AJ Petroleum: Hollywood, FL . . . . . . . . . . Hollywood, FL . . . . . . . . . . Keybank: Beavercreek, OH . . . . . . . . . Pep Boys: Anaheim, CA . . . . . . . . . . . Annandale, VA . . . . . . . . . . Artesia, CA . . . . . . . . . . . . . Escondido, CA . . . . . . . . . . Fullerton, CA . . . . . . . . . . . — — — 417,487 645,533 184,170 313,657 422,184 — — 2,671,814 — 2,718,604 — 3,140,404 — 3,664,675 — 3,555,665 2,586,628 3,048,482 2,630,276 4,785,117 1,885,292 — — — — — — — — — — — — — — — — 417,487 645,533 184,170 313,657 601,657 959,190 422,184 — 422,184 2,671,814 2,718,604 3,140,404 3,664,675 3,555,665 2,586,628 3,048,482 2,630,276 4,785,117 1,885,292 5,258,442 5,767,086 5,770,680 8,449,792 5,440,957 — — — — — — — — 1961 1960 12/05 12/05 — — (e) 02/07 (e) 1983 1970 1983 1983 1959 11/07 11/07 11/07 11/07 11/07 — — — — — See accompanying report of independent registered public accounting firm. F-20 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 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 2,885,232 2,731,785 4,502,444 3,486,484 2,305,923 2,262,137 4,466,453 1,978,950 1,674,741 Land 2,117,771 1,729,000 892,935 1,374,760 228,337 3,586,201 3,380,442 1,719,331 972,652 2,022,876 1,188,532 1,522,988 3,374,339 3,366,975 2,025,447 960,573 1,084,055 2,207,543 1,923,866 2,783,506 3,059,286 2,248,422 1,839,240 1,085,180 1,884,772 910,077 1,208,017 745,992 729,834 243,535 8,958,882 7,159,309 10,262,109 1,634,602 1,734,694 — — — 3,733,213 1,759,243 37,006,653 1,927,636 — 635,452 1,118,486 Improve- ments Carrying Costs — — — — — — — — — — — — — — — — 10,406,939 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Building, Improve- ments and Leasehold Interests 2,885,232 2,731,785 4,502,444 3,486,484 2,305,923 2,262,137 4,466,453 1,978,950 1,674,741 Land 2,117,771 1,729,000 892,935 1,374,760 228,337 3,586,201 3,380,442 1,719,331 972,652 Total 5,003,003 4,460,785 5,395,379 4,861,244 2,534,260 5,848,338 7,846,895 3,698,281 2,647,393 2,022,876 1,188,532 1,522,988 3,374,339 3,366,975 2,025,447 5,397,215 4,555,507 3,548,435 960,573 1,084,055 2,207,543 1,923,866 3,168,116 3,007,921 2,783,506 3,059,286 5,842,792 2,248,422 1,839,240 1,085,180 1,884,772 910,077 1,208,017 745,992 729,834 243,535 8,958,882 6,314,756 20,669,048 1,634,602 1,734,694 — — — 3,733,213 1,759,243 37,006,653 8,563,178 22,508,288 2,719,782 3,619,466 910,077 1,208,017 745,992 4,463,047 2,002,778 45,965,535 1,927,636 — 1,927,636 635,452 1,118,486 1,753,938 Encum- brances (k) Glendale, AZ . . . . Guayama, PR . . . Houston, TX . . . . Manassas, VA . . . Merced, CA . . . . . North Hollywood, CA . . . . . . . . . . Oceanside, CA . . Orlando, FL . . . . . Phoenix, AZ . . . . Rancho Cucamonga, CA . . . . . . . . . . Reading, PA . . . . Reseda, CA . . . . . San Bernardino, CA . . . . . . . . . . Tempe, AZ . . . . . West Covina, CA . . . . . . . . . . Power Center: Big Flats, NY . . . Bismarck, ND . . . Midland, MI . . . . Topsham, ME . . . Irving, TX . . . . . . Waxahachie, TX . . . . . . . . . . Harlingen, TX . . . . . . . . Lapeer, MI Lapeer, MI . . . . . Rockwall, TX . . . Rite Aid: Largo, MD . . . . . Road Ranger: Rockford, IL . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — Stock Building Supply: Hillman, MI Stripes: . . . . — 166,886 822,950 — — 166,886 822,950 989,836 Corpus Christi, TX . . . . . . . . . . Uni-Mart: Bradford, PA . . . . Kane, PA . . . . . . . Midway, PA . . . . Clairton, PA . . . . Houtzdale, PA . . . Burnham, PA (r) . . . . . . . . . . Mechanicsburg, PA . . . . . . . . . . Port Royal, PA . . Vacant Land: Grand Prairie, — — — — — — — — — 1,308,398 2,151,142 184,231 156,967 310,893 215,405 311,707 761,512 913,017 708,427 700,821 729,052 264,741 510,262 120,639 238,052 357,897 635,213 TX . . . . . . . . . . — 386,807 Fairfield Township, OH . . . . . . . . . . Bonita Springs, FL . . . . . . . . . . Topsham, ME . . . Plano, TX . . . . . . Harlingen, TX . . . Harlingen, TX . . . Rockwall, TX . . . Vacant Property: North Richland — — — — — — — 3,201,116 151,781 311,714 10,034,740 245,483 284,907 9,275,959 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,308,398 2,151,142 3,459,540 184,231 156,967 310,893 215,405 311,707 761,512 913,017 708,427 700,821 729,052 945,743 1,069,984 1,019,320 916,226 1,040,759 264,741 510,262 775,003 120,639 238,052 357,897 635,213 478,536 873,265 386,807 3,201,116 151,781 1,034,215 10,034,740 245,483 284,907 9,275,959 — — — — — — — — 386,807 3,201,116 151,781 1,034,215 10,034,740 245,483 284,907 9,275,959 Hills, TX . . . . . — 583,650 179,509 — — 583,650 179,509 763,159 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Walgreens: Beavercreek, OH . . . . . . . . . . Harlingen, TX . . . — — $— 1,445,473 1,321,108 — — — — — — 1,445,473 1,321,108 — — 1,445,473 1,321,108 $95,738,021 $130,563,338 $10,406,939 $— $96,460,522 $140,125,724 $236,586,246 — — $— See accompanying report of independent registered public accounting firm. F-21 1990 1998 1994 1992 1988 1996 1988 1991 1988 1985 1989 1986 1969 1974 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 11/07 1983 11/07 2006 2006 2005 2007 (e) (e) (e) 2007 2007 2007 08/05 10/04 05/05 02/06 02/06 02/06 10/06 09/06 09/06 02/06 — — — — — — — — — — — — — — — — — — — (e) (e) (e) — — — (e) 03/07 (e) 1988 06/06 1952 10/06 1995 12/05 1983 1984 1990 1986 1977 08/05 08/05 01/06 01/06 01/06 1978 07/06 1972 1989 07/06 07/06 (e) 12/02 (e) (e) (e) (e) (e) (e) (e) 08/06 09/06 02/06 12/05 09/06 09/06 09/06 — — — — — — — — — — — (e) (e) (e) (e) (e) (e) (e) (e) 1989 02/06 — (e) (e) 10/07 09/06 (e) (e) NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2007 (dollars in thousands) (a) Transactions in real estate and accumulated depreciation during 2007, 2006, and 2005 are summarized as follows: 2007 2006 2005 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 . . . . . . . . . . . . . . . . . . . . $1,756,514 864,116 (203,403) (1,683) $1,508,664 558,766 (310,223) (693) $1,129,126 469,384 (87,446) (2,400) Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,415,544 $1,756,514 $1,508,664 Accumulated depreciation and amortization: Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposition of land, buildings, and leasehold interests . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,359 (3,667) 27,395 $ 79,197 (12,413) 20,575 $ 61,802 (1,665) 19,060 Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,087 $ 87,359 $ 79,197 (b) As of December 31, 2007, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2007, the aggregate cost of the properties owned by the Company that under operating leases were $2,262,306, and financing leases were $9,048. (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, there was a lease amendment to this property, resulting in a reclassification from a direct financing lease to an operating lease. (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) Property is encumbered as a part of the Company’s $6,952 long-term, fixed rate mortgage and security agreement. (p) Property is encumbered as a part of the Company’s $21,000 long-term, fixed rate mortgage and security agreement. (q) Date acquired represents acquisition date of land. Pursuant to lease agreement, the Company funds the tenant’s construction draws, final funding occurs generally within 12 months from the acquisition of the land. (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. See accompanying report of independent registered public accounting firm. F-22 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE December 31, 2007 (dollars in thousands) Description First mortgages on properties: Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount of Mortgages Carrying Amount of Mortgages (e) National City, CA . . . . . . . . . . . . San Jose, CA . . . . . . . . . . . . . . . . Bellingham, WA . . . . . . . . . . . . . Lake Jackson, TX . . . . . . . . . . . . Paramus, NJ . . . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Terre Haute, IN . . . . . . . . . . . . . . Plano, TX . . . . . . . . . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . . . . Cleveland, OH . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Elsa, TX . . . . . . . . . . . . . . . . . . . . Keystone Heights, FL . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . Martinsburg, WV . . . . . . . . . . . . . 11.500% 2009 11.500% 2009 7.200% 2013 7.500% 2008 9.000% 2022 8.000% 2010 7.000% 2011 9.500% 2008 8.750% 2009 10.000% 2028 8.375% 2008 8.375% 2008 8.375% 2008 8.000% 2009 8.000% 2009 8.000% 2009 8.000% 2009 (b) — $ 2,765 2,565 (b) — 2,605 (b) — 1,875 (b) — 6,000 (b) — 400 (d) — (c) — 1,582 22,737 (c) — 14,000 (c) — 6,644 (c) — 985 (c) — 1,222 (c) — 869 (c) — 1,650 (c) — 1,600 (c) — 1,600 (c) — 1,650 (c) — $ 486 536 2,497 1,750 5,652 361 1,582 11,082 11,384 4,430 985 1,222 869 1,650 1,600 1,600 1,650 Principal Amount of Loans Subject to Delinquent Principal or Interest $ — — 2,497(g) — — — — — — — — — — — — — — $70,749 $49,336(a) $2,497 (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: Collections of principal . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 2006 2005 $13,627 39,088(f) $19,418 1,582(f) $11,528 13,150(f) (3,379) (7,373) (5,260) Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,336 $13,627 $19,418 (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 NNN and its subsidiaries for federal income tax purposes for the years ended December 31, 2007, 2006 and 2005 were $49,336, $13,627 and $19,418, respectively. (f) Mortgages totaling $39,088, $1,582 and $13,150 were accepted in connection with real estate transactions for the year ended December 31, 2007, 2006 and 2005, respectively. (g) National Retail Properties, Inc. initiated foreclosure process in February 2008. See accompanying report of independent registered public accounting firm. F-23 EMPLOYMENT AGREEMENT EXHIBIT 10.8 THIS EMPLOYMENT AGREEMENT (the “Agreement”) dated as of January 2, 2007, by and between National Retail Properties, Inc., with its principal place of business at 450 South Orange Avenue, Suite 900, Orlando, Florida 32801 (the “Company”), and Paul E. Bayer, residing at the address set forth on the signature page hereof (“Executive”). WHEREAS, the Company desires to continue to employ Executive, and Executive desires to continue to be employed by the Company; and WHEREAS, the Company and Executive desire to enter into an Employment Agreement which sets forth the terms and conditions of Executive’s continuing employment by the Company. Accordingly, the parties hereto agree as follows: 1. Term. The Company hereby employs Executive, and Executive hereby accepts such employment, for a term (as the same may be extended, the “Term”) commencing as of the date hereof and continuing for a two-year period, unless terminated earlier in accordance with the provisions of Section 4. On the second anniversary of the date hereof, the Term shall automatically be extended for successive two-year periods in accordance with the terms of this Agreement (subject to termination as aforesaid) unless either party notifies the other party of non-renewal in writing, in accordance with Section 8, 180 days prior to the expiration of the initial two-year period or any subsequent renewal period. 2. Duties. During the Term, Executive shall be employed by the Company as Executive Vice President, and, as such, Executive shall faithfully perform for the Company the duties of said office and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board of Directors of the Company (the “Board”) or the Chief Executive Officer of the Company, which duties shall not be materially inconsistent with the duties performed by executives holding similar offices with real estate investment trusts. Executive shall devote substantially all of his business time and effort to the performance of his duties hereunder, except that Executive may devote reasonable time and attention to civic, charitable, business or social activities so long as such activities do not interfere with Executive’s employment duties. Executive shall comply with the policies, standards, and regulations established from time to time by the Company. 3. Compensation. 3.1 Salary. For purposes of this Agreement, a “Contract Year” shall mean each calendar year during the Term. During the first Contract Year of the Term, the Company shall pay Executive a base salary at the rate of $170,000 per annum, in accordance with the customary payroll practices of the Company applicable to senior executives, but not less frequently than monthly. The Compensation Committee of the Board shall review Executive’s base salary each Contract Year during the Term and may increase such amount as it may deem advisable (such salary, as the same may be increased, the “Annual Salary”). 3.2 Bonus and Incentive Compensation. Executive will be entitled to participate in the Company’s Annual Bonus Program (the “Bonus Plan”) as follows: (a) Annual Bonus Compensation. Executive shall be eligible to receive a bonus each Contract Year (“Annual Bonus”) as the Compensation Committee of the Board of Directors shall determine. Executive’s Annual Bonus shall be determined in accordance with the Company’s executive compensation policies as in effect from time to time during the Term and shall be based, in part, on his achieving his individual performance goals for the year and, in part, on the Company’s achieving its performance goals for the year. (b) Equity Incentive Awards. Executive shall be eligible to participate each Contract Year in the Company’s equity incentive plans pursuant to the Company’s 2000 Performance Incentive Plan or such other plans or programs as the Compensation Committee shall determine. 3.3 Benefits - In General. Except with respect to benefits of a type otherwise provided for under Section 3.4, Executive shall be permitted during the Term to participate in any group life, hospitalization or disability insurance plans, health programs, retirement plans, fringe benefit programs and similar benefits that may be available to other senior executives of the Company generally, on the same terms as such other executives, in each case to the extent that Executive is eligible under the terms of such plans or programs. 3.4 Specific Benefits. Without limiting the generality of Section 3.3, the Company shall make available to Executive the fringe benefits set forth on Attachment “A” to this Agreement. Executive shall be entitled to 20 days of paid time off (“PTO”) per Contract Year. Unless otherwise required by law, no more than 10 days of unused PTO may be carried forward (on a “first-in, first- out” basis) to the immediately following year (but not thereafter). 3.5 Expenses. The Company shall pay or reimburse Executive for all ordinary and reasonable out-of-pocket expenses incurred by Executive during the Term in the performance of Executive’s services under this Agreement; provided that such expenses are incurred and accounted for by Executive in accordance with the policies and procedures established from time to time by the Company. 4. Termination of Employment. 4.1 Termination upon Death or Disability. If Executive dies during the Term, the obligations of the Company to or with respect to Executive shall terminate in their entirety except as otherwise provided under this Section 4.1. If Executive becomes eligible for disability benefits under the Company’s long-term disability plans and arrangements (or, if none, if Executive by virtue of ill health or other disability is unable to perform substantially and continuously the duties assigned to him for at least 120 consecutive or non-consecutive days out of any consecutive 12-month period), the Company shall have the right, to the extent permitted by law, to terminate the employment of Executive upon notice in writing to Executive; provided that the Company will have no right to terminate Executive’s employment if, in the reasonable opinion of a qualified physician acceptable to the Company, it is substantially certain that Executive will be able to resume Executive’s duties on a regular full-time basis within 30 days of the date Executive receives notice of such termination. Upon death or other termination of employment by virtue of disability in accordance with this Section 4.1, Executive (or Executive’s estate or beneficiaries in the case of the death of Executive) shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than (i) Annual Salary and other benefits earned and accrued under this Agreement prior to the date of termination (and reimbursement under this Agreement for expenses incurred prior to the date of termination); (ii) a cash payment equal to the prorated portion of the Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which 2 Executive’s employment hereunder terminates; (iii) elimination of any exclusively time-based vesting conditions on any restricted stock, stock option or other equity awards in the Company he had been granted which he then continues to hold, to the extent then unvested (it being expressly understood and agreed that any performance-based vesting conditions (whether or not in tandem with such time-based vesting conditions) will continue in effect in accordance with their terms, except as may otherwise be provided to the contrary in the applicable award agreements); (iv) in the event of Executive’s death, (A) a cash payment equal to two months of Executive’s Annual Salary payable no later than 10 days after such termination, and (B) continuation to Executive’s spouse and dependents of fully paid health insurance benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) during the one year following the date of termination; and (v) Executive (or, in the case of his death, his estate and beneficiaries) shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 4.2 Termination by the Company for Cause; Termination by Executive without Good Reason. (a) For purposes of this Agreement, “Cause” shall mean Executive’s: (i) conviction of (or pleading nolo contendere to), or an indictment or information is filed against Executive and is not discharged or otherwise resolved within 12 months thereafter, and said indictment or information charged Executive with a felony, any crime of moral turpitude, or any crime which is likely to result in material injury to the Company; (ii) the continued failure by Executive substantially to perform his duties or to carry out the lawful directives of the Board of Directors; (iii) material breach of a fiduciary duty relating to Executive’s employment with the Company, or otherwise engaging in gross misconduct or willful or gross neglect (in connection with the performance of his duties) which is materially injurious to the Company; or (iv) material breach of any of Section 6 or any other provisions of this Agreement provided, that the Company shall not be permitted to terminate Executive for Cause except on written notice given to Executive at any time following the occurrence of any of the events described in clause (i), (ii), (iii) or (iv) above. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause under clause (ii) or (iv) above unless the Company provided written notice to Executive setting forth in reasonable detail the reasons for the Company’s intention to terminate for Cause, Executive has been provided the opportunity, together with counsel, not later than 14 days following such notice to be heard before the Board and Executive failed within 30 days (or, if later, five business days after such hearing) to cure the event or deficiency set forth in the written notice. (b) The Company may terminate Executive’s employment hereunder for Cause, and Executive may terminate his employment at any time upon 60 days prior written notice to the Company. If the Company terminates Executive for Cause, or Executive terminates his employment 3 and the termination by Executive is not covered by Section 4.3, (i) Executive shall receive Annual Salary and other benefits (but, in all events, and without increasing Executive’s rights under any other provision hereof, excluding any Annual Bonus not yet paid) earned and accrued under this Agreement prior to the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the termination of employment), and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 4.3 Termination by the Company without Cause; Termination by Executive for Good Reason. (a) For purposes of this Agreement, “Good Reason” shall mean, unless otherwise consented to by Executive: (i) a material reduction in Executive’s position, authority, duties or responsibilities; (ii) a reduction in Annual Salary of Executive; (iii) the relocation of Executive’s office to more than 50 miles from the Company’s principal place of business in Orlando, Florida; (iv) the Company’s material breach of this Agreement; or (v) the Company’s failure to obtain an agreement from any successor to the business of the Company by which the successor assumes and agrees to perform this Agreement. Notwithstanding the foregoing, Good Reason under clause (i), (ii), (iii) or (iv) above shall not be deemed to exist unless notice of termination on account thereof (specifying a termination date no later than 15 days from the date of such notice) is given by Executive to the Company no later than 30 days after the time at which Executive first becomes or should have become aware of the event or condition purportedly giving rise to Good Reason; and, in such event, the Company shall have 30 days from the date notice of such a termination is given to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder. (b) The Company may terminate Executive’s employment at any time for any reason or no reason upon 30 days’ prior written notice to Executive and Executive may terminate Executive’s employment with the Company for Good Reason. If the Company terminates Executive’s employment and the termination is not covered by Sections 4.1, 4.2 or 4.4 or Executive terminates his employment for Good Reason: (i) Executive shall (subject, in the case of the following clauses (C), (D), (E) and (H), to Executive’s delivery of a general release reasonably acceptable to the Company which shall have become irrevocable) be entitled to: (A) any accrued but unpaid Annual Salary and PTO due to Executive as of the termination of employment; 4 (B) reimbursement under this Agreement for expenses incurred but unpaid prior to the termination of employment; (C) a cash payment equal to 200% of Executive’s Annual Salary, payable in equal installments over a 12– month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following Executive’s termination; provided, however, that, in the event of such a termination upon or after a Change of Control, such payment shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above and the release having become irrevocable; and provided, further, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination); (D) a cash payment equal to 200% of Executive’s average Annual Bonus for the three Contract Years immediately preceding the date of termination, payable in equal installments over a 12-month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following Executive’s termination; provided, however, that, in the event of such a termination upon or after a Change of Control, such payment shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above and the release’s having become irrevocable; and provided, further, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination); (E) any payment due under Section 5 hereof; (F) vesting of any restricted stock, stock options or other equity awards in the Company Executive had been granted which Executive then continues to hold, to the extent then unvested; (G) for a period of one year after termination, such health benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) as Executive would have received under this Agreement (and at such costs to Executive as would have applied in the absence of such termination); provided, however, that the Company shall in no event be required to provide any benefits otherwise required by this clause (G) after such time as Executive becomes entitled to receive benefits of the same type from another employer or recipient of Executive’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements); and (H) in the event of such a termination upon or after a Change of Control, a prorated Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates; provided that the amounts referred to in clauses (A), (B), (E) and (H) shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above, except to the extent that a six-month delay is necessary to avoid tax under Section 409A of the Code; and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 5 4.4 Natural Termination. In the event that Executive’s employment by the Company pursuant to this Agreement terminates at the scheduled expiration of the Term because of a non-renewal of the Term as a result of a decision by the Company not to renew as contemplated by and in accordance with the last sentence of Section 1 (and not theretofore under Section 4.1, 4.2 or 4.3), (i) Executive shall (subject, in the case of the following clauses (C), (D) and (F), to Executive’s delivery of a general release reasonably acceptable to the Company which shall have become irrevocable) be entitled to: (A) any accrued but unpaid Annual Salary and PTO due to Executive as of the termination of employment; (B) reimbursement under this Agreement for expenses incurred but unpaid prior to the termination of employment; (C) a cash payment equal to 200% of Executive’s Annual Salary in the case of expiration of the initial Term, or 100% of Executive’s Annual Salary in the case of expiration of a renewal of the Term, payable in equal installments over a 12–month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following termination of this Agreement; provided, however, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination); (D) any payment due under Section 5 hereof; (E) for a period of one year after termination, such health benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) as Executive would have received under this Agreement (and at such costs to Executive as would have applied in the absence of such termination upon expiration); provided, however, that the Company shall in no event be required to provide any benefits otherwise required by this clause (E) after such time as Executive becomes entitled to receive benefits of the same type from another employer or recipient of Executive’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements); (F) a prorated Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates; and (G) only in the case of expiration of the initial Term, elimination of any exclusively time-based vesting conditions on any restricted stock, stock option or other equity awards in the Company Executive had been granted which Executive then continues to hold, to the extent then unvested (it being expressly understood and agreed that any performance-based vesting conditions (whether or not in tandem with such time-based vesting conditions) will continue in effect in accordance with their terms, except as may otherwise be provided to the contrary in the applicable award agreements); provided that the amounts referred to in clauses (A), (B), (D) and (F) shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above, except to the extent that a six-month delay is necessary to avoid tax under Section 409A of the Code; and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 6 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, and taking into account any withholding obligation on the part of the Company, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determination, shall be made by the Company’s regular independent accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to Executive, net of any of the Company’s federal or state withholding obligations with respect to such Payment, within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (each, an “Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment (or an additional Gross-Up Payment). Such notification shall be given as soon as practicable but no later than 10 business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) (ii) give the Company any information reasonably requested by the Company relating to such claim, take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order to effectively contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall 7 indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest (to the extent applicable to the Excise Tax and the Gross-Up Payment) and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Section 5(c)) promptly pay (in no more than five business days) to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. Non-Competition, Non-Solicitation, and Confidentiality; Certain Other Covenants. 6.1 Disclosure of Confidential Information. Executive acknowledges that the Company will provide Executive with confidential and proprietary information regarding the business in which the Company or any of its current or future subsidiaries or affiliates (collectively, other than the Company, the “Company Affiliates”) are involved, and the Company and the Company Affiliates will provide Executive with trade secrets, as defined in Section 688.002(4) of the Florida Statutes, of the Company and the Company Affiliates (hereinafter all such confidential information and trade secrets referred to as the “Confidential Information”). For purposes of this Agreement, “Confidential Information” includes, but is not limited to: (a) Information related to the business of the Company and the Company Affiliates, including but not limited to marketing strategies and plans, sales procedures, operating policies and procedures, pricing and pricing strategies, business and strategic plans, financial statements and projections, accounting and tax positions and procedures, and other business and financial information of the Company and the Company Affiliates; 8 (b) Information regarding the customers of the Company and the Company Affiliates which Executive acquired as a result of his employment with the Company, including but not limited to, customer contracts, customer lists, work performed for customers, customer contacts, customer requirements and needs, data used by the Company and the Company Affiliates to formulate customer proposals, customer financial information and other information regarding the customer’s business; (c) Information regarding the vendors of the Company and the Company Affiliates which Executive acquired as a result of his employment with the Company, including but not limited to, product and service information and other information regarding the business activities of such vendors; (d) Training materials developed by and utilized by the Company and the Company Affiliates; (e) Any other information which Executive acquired as a result of his employment with the Company and which Executive has a reasonable basis to believe the Company or the Company Affiliates, as the case may be, would not want disclosed to a business competitor or to the general public; and (f) Information which: (i) is proprietary to, about or created by the Company or the Company Affiliates; (ii) gives the Company or any of the Company Affiliates some competitive advantage, the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company or the Company Affiliates; (iii) (iv) is not typically disclosed to non-executives by the Company or otherwise is treated as confidential by the Company or the Company Affiliates; or is designated as Confidential Information by the Company or from all the relevant circumstances should reasonably be assumed by Executive to be confidential to the Company or any Company Affiliates; provided, however, that Confidential Information shall not include information which (x) at the time of receipt or thereafter becomes publicly known through no wrongful act of Executive, (y) is obtainable in the public domain, or (z) if Executive gives prior notice to the Company of any 9 disclosure of information described in the following provisions of this clause (z), can be and is demonstrated by Executive as not having been developed by use of or reference to other Confidential Information and as not having been acquired or developed by Executive in connection with Executive’s employment or affiliation with the Company. 6.2 Covenant Not to Compete. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for compensation or otherwise, engage in or have any interest in any sole proprietorship, partnership, corporation, company, association, business or any other person or entity (whether as an employee, officer, corporation, business or any creditor, consultant or otherwise) that, directly or indirectly, competes with the Company’s “Business” (as defined below) in any and all states in which the Company or any Company Affiliate conducts such business while Executive is employed by the Company or any Company Affiliate; provided, however, Executive may continue to hold securities of the Company or any Company Affiliate or continue to hold or acquire, solely as an investment, shares of capital stock or other equity securities of any company if (x) he currently holds an interest in such stock or other securities, and before the date hereof has disclosed to the Board in detail (I) the applicable company (or companies) and (II) the specific stock or other equity securities of the entity he owns, or (y) the stock or other securities are traded on any national securities exchange or are regularly quoted in the over-the-counter market, so long as Executive does not control, acquire a controlling interest in, or become a member of a group which exercises direct or indirect control of more than 5% of any class of capital stock of such corporation. For purposes of this Agreement, the Company’s “Business” is defined so as to consist of the development, acquisition, ownership, management, and sale of a diversified portfolio of high-quality, freestanding net-lease properties leased to retail, restaurant, convenience-store and similar businesses, and such other businesses conducted by the Company after the date hereof, and from time to time during the Term, that shall become material and substantial with respect to the Company’s then-overall business. 6.3 Non-Solicitation of Clients. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association, business or other entity, solicit, attempt to contract with, or enter into a contractual or business relationship of any kind pertaining to any aspect of the Company’s Business, or any other business conducted by the Company or any Company Affiliate at the time of termination of employment or at any time in the prior 12-month period, with any person or entity with which the Company or any Company Affiliate has any contractual or business relationship, or engaged in negotiations toward such a contract, in the previous 12 months, if such solicitation, attempt to contract with, or entering into a contractual or business relationship would have a material adverse effect on the Company’s operations, financial condition, prospects or relationship with such person or entity. 10 6.4 Non-Solicitation of Employees. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association or other entity, either (i) hire, attempt to employ, contact with respect to hiring, solicit with respect to hiring or enter into any contractual arrangement with any employee or former employee of the Company or any Company Affiliate, or (ii) induce or otherwise advise or encourage any employee of the Company or any Company Affiliate to leave his or her employment; unless, in each such case, such employee or former employee has not been employed by the Company or a Company Affiliate for a period in excess of six months at the time of such solicitation, attempt to employ, contact, employment or inducement. 6.5 Confidentiality. While employed by the Company and after Executive’s employment terminates, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall keep secret and retain in strictest confidence, shall not disclose to any third-party, and shall not use for his benefit or the benefit of others, except in connection with the business affairs of the Company, any Company Affiliate, or any of their officers or directors (collectively, the “Benefited Persons”), all confidential and proprietary information and trade secrets relating to the business of the Company or any of the other Benefited Persons (but not if expressly excluded from being Confidential Information under the proviso of Section 6.1(f)), including, without limitation, the Confidential Information, unless such disclosure is required by a valid subpoena or other legal mandate or otherwise by rule of law or other valid order of a court or government body or agency. In the event disclosure so is required, Executive shall provide the Company with written notice of same at least five business days prior to the date on which Executive is required to make the disclosure. Notwithstanding the foregoing, the express terms of this Section 6.5 shall not apply in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal. 6.6 Tangible Items. All files, records, documents, manuals, books, forms, reports, memoranda, studies, data, calculations, recordings, or correspondence, whether visually perceptible, machine-readable or otherwise, in whatever form they may exist, and all copies, abstracts and summaries of the foregoing, and all physical items related to the business of the Company, whether of a public nature or not, and whether prepared by Executive or not, are and shall remain the exclusive property of the Company , and shall not be removed from its premises, except as required in the course of Executive’s employment by the Company, without the prior written consent of the Company. Such items, including any copies or other reproductions thereof, shall be promptly returned by Executive to the Company at any time upon the written request of the Company. Notwithstanding the foregoing, the express terms of this Section 6.6 shall not apply in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal. 11 6.7 Remedies. (a) The Company and Executive acknowledge and agree that a breach by Executive of any of the covenants contained in this Section 6 will cause immediate and irreparable harm and damage to the Company and any other Benefited Person, and that monetary damages will be inadequate to compensate the Company, and any other Benefited Person, as the case may be, for such breach. Accordingly, Executive acknowledges that the Company and any other Benefited Person affected shall, in addition to any other remedies available to it at law or in equity, be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of said covenants by Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, without the necessity of proving the inadequacy of legal remedies or irreparable harm. (b) Except with regard to Section 6.7(a), all disputes between the parties or any claims concerning the performance, breach, construction or interpretation of this Agreement, or in any manner arising out of this Agreement, shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules, as amended from time to time, of the American Arbitration Association (the “AAA”), which arbitration shall be carried out in the manner set forth below: (i) Within 15 days after written notice by one party to the other party of its demand for arbitration, which demand shall set forth the name and address of its designated arbitrator, the other party shall appoint its designated arbitrator and so notify the demanding party. Within 15 days thereafter, the two arbitrators so appointed shall appoint the third arbitrator. If the two appointed arbitrators cannot agree on the third arbitrator, then the AAA shall appoint an independent arbitrator as the third arbitrator. The dispute shall be heard by the arbitrators within 90 days after appointment of the third arbitrator. The decision of any two or all three of the arbitrators shall be binding upon the parties without any right of appeal. The decision of the arbitrators shall be final and binding upon the Company, its successors and assigns, and upon Executive, his heirs, personal representatives, and legal representatives. (ii) The arbitration proceedings shall take place in Orlando, Florida, and the judgment and determination of such proceedings shall be binding on all parties. Judgment upon any award rendered by the arbitrators may be entered into any court having competent jurisdiction without any right of appeal. (iii) Each party shall pay its or his own expenses of arbitration, and the expenses of the arbitrators and the arbitration proceeding shall be shared equally. However, if in the opinion of a majority of the arbitrators, any claim or defense was unreasonable, the arbitrators may assess, as part of their award, all or any part of the arbitration expenses of the other party (including reasonable attorneys’ fees) and of the arbitrators and the arbitration proceeding. 6.8 Change of Control. For the purposes of this Agreement, “Change of Control” shall be a change of control under the applicable definition contained in Section 2.4 of the Company’s 2000 Performance Incentive Plan, or successor thereto of comparable import; provided, however, that 12 in no event shall a Change of Control for purposes of this Agreement be deemed to have arisen merely by virtue of a “person” or “group” (which terms shall have the meaning they have when used in Section 13(d) of the Securities Exchange Act of 1934, as amended) having become a direct or indirect owner of Company securities (such that a Change of Control would, without regard to this proviso, otherwise have been deemed to have occurred), if Executive is or is a member of such person or group. 7. Severability. As the provisions of this Agreement are independent of and severable from each other, the Company and Executive agree that if, in any action before any court or agency legally empowered to enforce this Agreement, any term, restriction, covenant, or promise hereof is found to be unreasonable or otherwise unenforceable, then such decision shall not effect the validity of the other provisions of this Agreement, and such invalid term, restriction, covenant, or promise shall also be deemed modified to the extent necessary to make it enforceable. 8. Notice. For purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when received if delivered in person, the next business day if delivered by overnight commercial courier (e.g., Federal Express), or the third business day if mailed by United States certified mail, return receipt requested, postage prepaid, to the following addresses: (a) If to the Company, to: National Retail Properties, Inc. 450 South Orange Avenue, Suite 900 Orlando, Florida 32801 Attn: Chairman of the Compensation Committee of the Board of Directors with a copy to: National Retail Properties, Inc. 450 South Orange Avenue, Suite 900 Orlando, Florida 32801 Attention: General Counsel and Pillsbury Winthrop Shaw Pittman LLP 2300 N Street, N.W. Washington, DC 20037 Attn: Jeffrey B. Grill, Esq. (b) If to Executive, to: Paul E. Bayer at the address set forth on the signature page hereof Either party may change its address for notices in accordance with this Section 8 by providing written notice of such change to the other party. 13 9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 10. Benefits; Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, legal representatives, successors and permitted assigns. Executive shall not assign this Agreement. However, the Company is expressly authorized to assign this Agreement to a Company Affiliate upon written notice to Executive, provided that (i) the assignee assumes all of the obligations of the Company under this Agreement, (ii) Executive’s role when viewed from the perspective of Company Affiliates in the aggregate is comparable to such role immediately before the assignment, and (iii) the Company, for so long as an affiliate of the assignee, remains secondarily liable for the financial obligations hereunder. 11. Attorney’s Fees. The Company agrees to reimburse Executive for his reasonable legal fees incurred in reviewing this Agreement. In the event of any legal proceeding relating to this Agreement or any term or provision thereof, the losing party shall be responsible to pay or reimburse the prevailing party for all reasonable attorneys’ fees incurred by the prevailing party in connection with such proceeding, except that, in the event of an arbitration, the provisions of Section 6.7(b)(iii) shall apply. 12. Entire Agreement Amendment. This Agreement, including its incorporated Attachment “A,” constitutes the entire agreement between the parties, and all prior understandings, agreements or undertakings between the parties concerning Executive’s employment or the other subject matters of this Agreement (including without limitation the Existing Employment Agreement) are superseded in their entirety by this Agreement. 13. Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege. 14. No Duty to Mitigate. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments hereunder be subject to offset in the event Executive does mitigate (except as otherwise provided in clause (i)(G) of the second sentence of Section 4.3(b) or clause (i)(E) of Section 4.4). 15. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but which together shall be one and the same instrument. 16. Tax Advice. Executive confirms and represents to the Company that he has had the opportunity to obtain the advice of legal counsel, financial and tax advisers, and such other professionals as he deems necessary for entering into this Agreement, and he has not relied upon the advice of the Company or the Company’s officers, directors, or employees. 17. Interpretation. As both parties having had the opportunity to consult with legal counsel, no provision of this Agreement shall be construed against or interpreted to the disadvantage of any party by reason of such party having, or being deemed to have, drafted, devised, or imposed such provision. 14 IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written. NATIONAL RETAIL PROPERTIES, INC. /s/ Craig Macnab By: Name: Craig Macnab Title: Chief Executive Officer /s/ Paul E. Bayer Paul E. Bayer 15 ATTACHMENT “A” • • • $500/month car allowance Long-term disability coverage providing benefits equal to two-thirds of Annual Salary Additional Fringe Benefits Life insurance benefits with a face amount equal to Annual Salary (provided that, if at any time the Company cannot obtain such insurance at rates which are reasonable for the provision by the Company of such a benefit, the Company may then self-insure such benefits) 16 EMPLOYMENT AGREEMENT EXHIBIT 10.9 THIS EMPLOYMENT AGREEMENT (the “Agreement”) dated as of January 2, 2007, by and between National Retail Properties, Inc., with its principal place of business at 450 South Orange Avenue, Suite 900, Orlando, Florida 32801 (the “Company”), and Christopher P. Tessitore, residing at the address set forth on the signature page hereof (“Executive”). WHEREAS, the Company desires to continue to employ Executive, and Executive desires to continue to be employed by the Company; and WHEREAS, the Company and Executive desire to enter into an Employment Agreement, which sets forth the terms and conditions of Executive’s continuing employment by the Company. Accordingly, the parties hereto agree as follows: 1. Term. The Company hereby employs Executive, and Executive hereby accepts such employment, for a term (as the same may be extended, the “Term”) commencing as of the date hereof and continuing for a two-year period, unless terminated earlier in accordance with the provisions of Section 4. On the second anniversary of the date hereof, the Term shall automatically be extended for successive two-year periods in accordance with the terms of this Agreement (subject to termination as aforesaid) unless either party notifies the other party of non-renewal in writing, in accordance with Section 8, 180 days prior to the expiration of the initial two-year period or any subsequent renewal period. 2. Duties. During the Term, Executive shall be employed by the Company as Executive Vice President and General Counsel of the Company, and, as such, Executive shall faithfully perform for the Company the duties of said office and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board of Directors of the Company (the “Board”) or the Chief Executive Officer of the Company, which duties shall not be materially inconsistent with the duties performed by executives holding similar offices with real estate investment trusts. Executive shall devote substantially all of his business time and effort to the performance of his duties hereunder, except that Executive may devote reasonable time and attention to civic, charitable, business or social activities so long as such activities do not interfere with Executive’s employment duties. Executive shall comply with the policies, standards, and regulations established from time to time by the Company. 3. Compensation. 3.1 Salary. For purposes of this Agreement, a “Contract Year” shall mean each calendar year during the Term. During the first Contract Year of the Term, the Company shall pay Executive a base salary at the rate of $170,000 per annum, in accordance with the customary payroll practices of the Company applicable to senior executives, but not less frequently than monthly. The Compensation Committee of the Board shall review Executive’s base salary each Contract Year during the Term and may increase such amount as it may deem advisable (such salary, as the same may be increased, the “Annual Salary”). 3.2 Bonus and Incentive Compensation. Executive will be entitled to participate in the Company’s Annual Bonus Program (the “Bonus Plan”) as follows: (a) Annual Bonus Compensation. Executive shall be eligible to receive a bonus each Contract Year (“Annual Bonus”) as the Compensation Committee of the Board of Directors shall determine. Executive’s Annual Bonus shall be determined in accordance with the Company’s executive compensation policies as in effect from time to time during the Term and shall be based, in part, on his achieving his individual performance goals for the year and, in part, on the Company’s achieving its performance goals for the year. (b) Equity Incentive Awards. Executive shall be eligible to participate each Contract Year in the Company’s equity incentive plans pursuant to the Company’s 2000 Performance Incentive Plan or such other plans or programs as the Compensation Committee shall determine. 3.3 Benefits - In General. Except with respect to benefits of a type otherwise provided for under Section 3.4, Executive shall be permitted during the Term to participate in any group life, hospitalization or disability insurance plans, health programs, retirement plans, fringe benefit programs and similar benefits that may be available to other senior executives of the Company generally, on the same terms as such other executives, in each case to the extent that Executive is eligible under the terms of such plans or programs. 3.4 Specific Benefits. Without limiting the generality of Section 3.3, the Company shall make available to Executive the fringe benefits set forth on Attachment “A” to this Agreement. Executive shall be entitled to 20 days of paid time off (“PTO”) per Contract Year. Unless otherwise required by law, no more than 10 days of unused PTO may be carried forward (on a “first-in, first- out” basis) to the immediately following year (but not thereafter). 3.5 Expenses. The Company shall pay or reimburse Executive for all ordinary and reasonable out-of-pocket expenses incurred by Executive during the Term in the performance of Executive’s services under this Agreement; provided that such expenses are incurred and accounted for by Executive in accordance with the policies and procedures established from time to time by the Company. 4. Termination of Employment. 4.1 Termination upon Death or Disability. If Executive dies during the Term, the obligations of the Company to or with respect to Executive shall terminate in their entirety except as otherwise provided under this Section 4.1. If Executive becomes eligible for disability benefits under the Company’s long-term disability plans and arrangements (or, if none, if Executive by virtue of ill health or other disability is unable to perform substantially and continuously the duties assigned to him for at least 120 consecutive or non-consecutive days out of any consecutive 12-month period), the Company shall have the right, to the extent permitted by law, to terminate the employment of Executive upon notice in writing to Executive; provided that the Company will have no right to terminate Executive’s employment if, in the reasonable opinion of a qualified physician acceptable to the Company, it is substantially certain that Executive will be able to resume Executive’s duties on a regular full-time basis within 30 days of the date Executive receives notice of such termination. Upon death or other termination of employment by virtue of disability in accordance with this Section 4.1, Executive (or Executive’s estate or beneficiaries in the case of the death of Executive) shall have no right to receive any compensation or benefit hereunder on and after the effective date of the termination of employment other than (i) Annual Salary and other benefits earned and accrued under this Agreement prior to the date of termination (and reimbursement under this Agreement for expenses incurred prior to the date of termination); (ii) a cash payment equal to the prorated portion of the Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which 2 Executive’s employment hereunder terminates; (iii) elimination of any exclusively time-based vesting conditions on any restricted stock, stock option or other equity awards in the Company he had been granted which he then continues to hold, to the extent then unvested (it being expressly understood and agreed that any performance-based vesting conditions (whether or not in tandem with such time-based vesting conditions) will continue in effect in accordance with their terms, except as may otherwise be provided to the contrary in the applicable award agreements); (iv) in the event of Executive’s death, (A) a cash payment equal to two months of Executive’s Annual Salary payable no later than 10 days after such termination, and (B) continuation to Executive’s spouse and dependents of fully paid health insurance benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) during the one year following the date of termination; and (v) Executive (or, in the case of his death, his estate and beneficiaries) shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 4.2 Termination by the Company for Cause; Termination by Executive without Good Reason. (a) For purposes of this Agreement, “Cause” shall mean Executive’s: (i) conviction of (or pleading nolo contendere to), or an indictment or information is filed against Executive and is not discharged or otherwise resolved within 12 months thereafter, and said indictment or information charged Executive with a felony, any crime of moral turpitude, or any crime which is likely to result in material injury to the Company; (ii) the continued failure by Executive substantially to perform his duties or to carry out the lawful directives of the Board of Directors; (iii) material breach of a fiduciary duty relating to Executive’s employment with the Company, or otherwise engaging in gross misconduct or willful or gross neglect (in connection with the performance of his duties) which is materially injurious to the Company; or (iv) material breach of any of Section 6 or any other provisions of this Agreement provided, that the Company shall not be permitted to terminate Executive for Cause except on written notice given to Executive at any time following the occurrence of any of the events described in clause (i), (ii), (iii) or (iv) above. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause under clause (ii) or (iv) above unless the Company provided written notice to Executive setting forth in reasonable detail the reasons for the Company’s intention to terminate for Cause, Executive has been provided the opportunity, together with counsel, not later than 14 days following such notice to be heard before the Board and Executive failed within 30 days (or, if later, five business days after such hearing) to cure the event or deficiency set forth in the written notice. (b) The Company may terminate Executive’s employment hereunder for Cause, and Executive may terminate his employment at any time upon 60 days prior written notice to the Company. If the Company terminates Executive for Cause, or Executive terminates his employment and the termination by Executive is not covered by Section 4.3, (i) Executive shall receive Annual 3 Salary and other benefits (but, in all events, and without increasing Executive’s rights under any other provision hereof, excluding any Annual Bonus not yet paid) earned and accrued under this Agreement prior to the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the termination of employment), and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 4.3 Termination by the Company without Cause; Termination by Executive for Good Reason. (a) For purposes of this Agreement, “Good Reason” shall mean, unless otherwise consented to by Executive: (i) a material reduction in Executive’s position, authority, duties or responsibilities; (ii) a reduction in Annual Salary of Executive; (iii) the relocation of Executive’s office to more than 50 miles from the Company’s principal place of business in Orlando, Florida; (iv) the Company’s material breach of this Agreement; or (v) the Company’s failure to obtain an agreement from any successor to the business of the Company by which the successor assumes and agrees to perform this Agreement. Notwithstanding the foregoing, Good Reason under clause (i), (ii), (iii) or (iv) above shall not be deemed to exist unless notice of termination on account thereof (specifying a termination date no later than 15 days from the date of such notice) is given by Executive to the Company no later than 30 days after the time at which Executive first becomes or should have become aware of the event or condition purportedly giving rise to Good Reason; and, in such event, the Company shall have 30 days from the date notice of such a termination is given to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder. (b) The Company may terminate Executive’s employment at any time for any reason or no reason upon 30 days’ prior written notice to Executive and Executive may terminate Executive’s employment with the Company for Good Reason. If the Company terminates Executive’s employment and the termination is not covered by Sections 4.1, 4.2 or 4.4 or Executive terminates his employment for Good Reason: (i) Executive shall (subject, in the case of the following clauses (C), (D), (E) and (H), to Executive’s delivery of a general release reasonably acceptable to the Company which shall have become irrevocable) be entitled to: (A) any accrued but unpaid Annual Salary and PTO due to Executive as of the termination of employment; (B) reimbursement under this Agreement for expenses incurred but unpaid prior to the termination of employment; 4 (C) a cash payment equal to 200% of Executive’s Annual Salary, payable in equal installments over a 12– month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following Executive’s termination; provided, however, that, in the event of such a termination upon or after a Change of Control, such payment shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above and the release having become irrevocable; and provided, further, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination); (D) a cash payment equal to 200% of Executive’s average Annual Bonus for the three Contract Years immediately preceding the date of termination, payable in equal installments over a 12-month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following Executive’s termination; provided, however, that, in the event of such a termination upon or after a Change of Control, such payment shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above and the release’s having become irrevocable; and provided, further, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination); (E) any payment due under Section 5 hereof; (F) vesting of any restricted stock, stock options or other equity awards in the Company Executive had been granted which Executive then continues to hold, to the extent then unvested; (G) for a period of one year after termination, such health benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) as Executive would have received under this Agreement (and at such costs to Executive as would have applied in the absence of such termination); provided, however, that the Company shall in no event be required to provide any benefits otherwise required by this clause (G) after such time as Executive becomes entitled to receive benefits of the same type from another employer or recipient of Executive’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements); and 5 (H) in the event of such a termination upon or after a Change of Control, a prorated Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates; provided that the amounts referred to in clauses (A), (B), (E) and (H) shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above, except to the extent that a six-month delay is necessary to avoid tax under Section 409A of the Code; and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 4.4 Natural Termination. In the event that Executive’s employment by the Company pursuant to this Agreement terminates at the scheduled expiration of the Term because of a non-renewal of the Term as a result of a decision by the Company not to renew as contemplated by and in accordance with the last sentence of Section 1 (and not theretofore under Section 4.1, 4.2 or 4.3), (i) Executive shall (subject, in the case of the following clauses (C), (D) and (F), to Executive’s delivery of a general release reasonably acceptable to the Company which shall have become irrevocable) be entitled to: (A) any accrued but unpaid Annual Salary and PTO due to Executive as of the termination of employment; (B) reimbursement under this Agreement for expenses incurred but unpaid prior to the termination of employment; (C) a cash payment equal to 200% of Executive’s Annual Salary in the case of expiration of the initial Term, or 100% of Executive’s Annual Salary in the case of expiration of a renewal of the Term, payable in equal installments over a 12–month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following termination of this Agreement; provided, however, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination); (D) any payment due under Section 5 hereof; (E) for a period of one year after termination, such health benefits under the Company’s health plans and programs 6 applicable to senior executives of the Company generally (if and as in effect from time to time) as Executive would have received under this Agreement (and at such costs to Executive as would have applied in the absence of such termination upon expiration); provided, however, that the Company shall in no event be required to provide any benefits otherwise required by this clause (E) after such time as Executive becomes entitled to receive benefits of the same type from another employer or recipient of Executive’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements); a prorated Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates; and (F) (G) only in the case of expiration of the initial Term, elimination of any exclusively time-based vesting conditions on any restricted stock, stock option or other equity awards in the Company Executive had been granted which Executive then continues to hold, to the extent then unvested (it being expressly understood and agreed that any performance-based vesting conditions (whether or not in tandem with such time-based vesting conditions) will continue in effect in accordance with their terms, except as may otherwise be provided to the contrary in the applicable award agreements); provided that the amounts referred to in clauses (A), (B), (D) and (F) shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above, except to the extent that a six-month delay is necessary to avoid tax under Section 409A of the Code; and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder. 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, and taking into account any withholding obligation on the part of the Company, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 7 (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determination, shall be made by the Company’s regular independent accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to Executive, net of any of the Company’s federal or state withholding obligations with respect to such Payment, within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (each, an “Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment (or an additional Gross-Up Payment). Such notification shall be given as soon as practicable but no later than 10 business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) (ii) give the Company any information reasonably requested by the Company relating to such claim, take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order to effectively contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with 8 respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest (to the extent applicable to the Excise Tax and the Gross-Up Payment) and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after- tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Section 5(c)) promptly pay (in no more than five business days) to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. Non-Competition, Non-Solicitation, and Confidentiality; Certain Other Covenants. 6.1 Disclosure of Confidential Information. Executive acknowledges that the Company will provide Executive with confidential and proprietary information regarding the business in which the Company or any of its current or future subsidiaries or affiliates (collectively, other than the Company, the “Company Affiliates”) are involved, and the Company and the Company Affiliates will provide Executive with trade secrets, as defined in Section 688.002(4) of the Florida Statutes, of the Company and the Company Affiliates (hereinafter all such confidential information and trade secrets referred to as the “Confidential Information”). For purposes of this Agreement, “Confidential Information” includes, but is not limited to: (a) Information related to the business of the Company and the Company Affiliates, including but not limited to marketing strategies and plans, sales procedures, operating policies and procedures, pricing and pricing strategies, business and strategic plans, financial statements and projections, accounting and tax positions and procedures, and other business and financial information of the Company and the Company Affiliates; 9 (b) Information regarding the customers of the Company and the Company Affiliates which Executive acquired as a result of his employment with the Company, including but not limited to, customer contracts, customer lists, work performed for customers, customer contacts, customer requirements and needs, data used by the Company and the Company Affiliates to formulate customer proposals, customer financial information and other information regarding the customer’s business; (c) Information regarding the vendors of the Company and the Company Affiliates which Executive acquired as a result of his employment with the Company, including but not limited to, product and service information and other information regarding the business activities of such vendors; (d) Training materials developed by and utilized by the Company and the Company Affiliates; (e) Any other information which Executive acquired as a result of his employment with the Company and which Executive has a reasonable basis to believe the Company or the Company Affiliates, as the case may be, would not want disclosed to a business competitor or to the general public; and (f) Information which: (i) is proprietary to, about or created by the Company or the Company Affiliates; (ii) gives the Company or any of the Company Affiliates some competitive advantage, the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company or the Company Affiliates; (iii) (iv) is not typically disclosed to non-executives by the Company or otherwise is treated as confidential by the Company or the Company Affiliates; or is designated as Confidential Information by the Company or from all the relevant circumstances should reasonably be assumed by Executive to be confidential to the Company or any Company Affiliates; provided, however, that Confidential Information shall not include information which (x) at the time of receipt or thereafter becomes publicly known through no wrongful act of Executive, (y) is obtainable in the public domain, or (z) if Executive gives prior notice to the Company of any disclosure of information described in the following provisions of this clause (z), can be and is demonstrated by Executive as not having been developed by use of or reference to other Confidential Information and as not having been acquired or developed by Executive in connection with Executive’s employment or affiliation with the Company. 10 6.2 Covenant Not to Compete. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for compensation or otherwise, engage in or have any interest in any sole proprietorship, partnership, corporation, company, association, business or any other person or entity (whether as an employee, officer, corporation, business or any creditor, consultant or otherwise) that, directly or indirectly, competes with the Company’s “Business” (as defined below) in any and all states in which the Company or any Company Affiliate conducts such business while Executive is employed by the Company or any Company Affiliate; provided, however, Executive may continue to hold securities of the Company or any Company Affiliate or continue to hold or acquire, solely as an investment, shares of capital stock or other equity securities of any company if (x) he currently holds an interest in such stock or other securities, and before the date hereof has disclosed to the Board in detail (I) the applicable company (or companies) and (II) the specific stock or other equity securities of the entity he owns, or (y) the stock or other securities are traded on any national securities exchange or are regularly quoted in the over-the-counter market, so long as Executive does not control, acquire a controlling interest in, or become a member of a group which exercises direct or indirect control of more than 5% of any class of capital stock of such corporation. For purposes of this Agreement, the Company’s “Business” is defined so as to consist of the development, acquisition, ownership, management, and sale of a diversified portfolio of high-quality, freestanding net-lease properties leased to retail, restaurant, convenience-store and similar businesses, and such other businesses conducted by the Company after the date hereof, and from time to time during the Term, that shall become material and substantial with respect to the Company’s then-overall business. 6.3 Non-Solicitation of Clients. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association, business or other entity, solicit, attempt to contract with, or enter into a contractual or business relationship of any kind pertaining to any aspect of the Company’s Business, or any other business conducted by the Company or any Company Affiliate at the time of termination of employment or at any time in the prior 12-month period, with any person or entity with which the Company or any Company Affiliate has any contractual or business relationship, or engaged in negotiations toward such a contract, in the previous 12 months, if such solicitation, attempt to contract with, or entering into a contractual or business relationship would have a material adverse effect on the Company’s operations, financial condition, prospects or relationship with such person or entity. 6.4 Non-Solicitation of Employees. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a 11 termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association or other entity, either (i) hire, attempt to employ, contact with respect to hiring, solicit with respect to hiring or enter into any contractual arrangement with any employee or former employee of the Company or any Company Affiliate, or (ii) induce or otherwise advise or encourage any employee of the Company or any Company Affiliate to leave his or her employment; unless, in each such case, such employee or former employee has not been employed by the Company or a Company Affiliate for a period in excess of six months at the time of such solicitation, attempt to employ, contact, employment or inducement. 6.5 Confidentiality. While employed by the Company and after Executive’s employment terminates, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall keep secret and retain in strictest confidence, shall not disclose to any third-party, and shall not use for his benefit or the benefit of others, except in connection with the business affairs of the Company, any Company Affiliate, or any of their officers or directors (collectively, the “Benefited Persons”), all confidential and proprietary information and trade secrets relating to the business of the Company or any of the other Benefited Persons (but not if expressly excluded from being Confidential Information under the proviso of Section 6.1(f)), including, without limitation, the Confidential Information, unless such disclosure is required by a valid subpoena or other legal mandate or otherwise by rule of law or other valid order of a court or government body or agency. In the event disclosure so is required, Executive shall provide the Company with written notice of same at least five business days prior to the date on which Executive is required to make the disclosure. Notwithstanding the foregoing, the express terms of this Section 6.5 shall not apply in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal. 6.6 Tangible Items. All files, records, documents, manuals, books, forms, reports, memoranda, studies, data, calculations, recordings, or correspondence, whether visually perceptible, machine-readable or otherwise, in whatever form they may exist, and all copies, abstracts and summaries of the foregoing, and all physical items related to the business of the Company, whether of a public nature or not, and whether prepared by Executive or not, are and shall remain the exclusive property of the Company , and shall not be removed from its premises, except as required in the course of Executive’s employment by the Company, without the prior written consent of the Company. Such items, including any copies or other reproductions thereof, shall be promptly returned by Executive to the Company at any time upon the written request of the Company. Notwithstanding the foregoing, the express terms of this Section 6.6 shall not apply in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal. 6.7 Remedies. (a) The Company and Executive acknowledge and agree that a breach by Executive of any of the covenants contained in this Section 6 will cause immediate and irreparable harm and damage to the Company and any other Benefited Person, and that monetary damages will be inadequate to compensate the Company, and any other Benefited Person, as the case may be, for such 12 breach. Accordingly, Executive acknowledges that the Company and any other Benefited Person affected shall, in addition to any other remedies available to it at law or in equity, be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of said covenants by Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, without the necessity of proving the inadequacy of legal remedies or irreparable harm. (b) Except with regard to Section 6.7(a), all disputes between the parties or any claims concerning the performance, breach, construction or interpretation of this Agreement, or in any manner arising out of this Agreement, shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules, as amended from time to time, of the American Arbitration Association (the “AAA”), which arbitration shall be carried out in the manner set forth below: (i) Within 15 days after written notice by one party to the other party of its demand for arbitration, which demand shall set forth the name and address of its designated arbitrator, the other party shall appoint its designated arbitrator and so notify the demanding party. Within 15 days thereafter, the two arbitrators so appointed shall appoint the third arbitrator. If the two appointed arbitrators cannot agree on the third arbitrator, then the AAA shall appoint an independent arbitrator as the third arbitrator. The dispute shall be heard by the arbitrators within 90 days after appointment of the third arbitrator. The decision of any two or all three of the arbitrators shall be binding upon the parties without any right of appeal. The decision of the arbitrators shall be final and binding upon the Company, its successors and assigns, and upon Executive, his heirs, personal representatives, and legal representatives. (ii) The arbitration proceedings shall take place in Orlando, Florida, and the judgment and determination of such proceedings shall be binding on all parties. Judgment upon any award rendered by the arbitrators may be entered into any court having competent jurisdiction without any right of appeal. (iii) Each party shall pay its or his own expenses of arbitration, and the expenses of the arbitrators and the arbitration proceeding shall be shared equally. However, if in the opinion of a majority of the arbitrators, any claim or defense was unreasonable, the arbitrators may assess, as part of their award, all or any part of the arbitration expenses of the other party (including reasonable attorneys’ fees) and of the arbitrators and the arbitration proceeding. 6.8 Change of Control. For the purposes of this Agreement, “Change of Control” shall be a change of control under the applicable definition contained in Section 2.4 of the Company’s 2000 Performance Incentive Plan, or successor thereto of comparable import; provided, however, that in no event shall a Change of Control for purposes of this Agreement be deemed to have arisen merely by virtue of a “person” or “group” (which terms shall have the meaning they have when used in Section 13(d) of the Securities Exchange Act of 1934, as amended) having become a direct or indirect owner of Company securities (such that a Change of Control would, without regard to this proviso, otherwise have been deemed to have occurred), if Executive is or is a member of such person or group. 13 7. Severability. As the provisions of this Agreement are independent of and severable from each other, the Company and Executive agree that if, in any action before any court or agency legally empowered to enforce this Agreement, any term, restriction, covenant, or promise hereof is found to be unreasonable or otherwise unenforceable, then such decision shall not effect the validity of the other provisions of this Agreement, and such invalid term, restriction, covenant, or promise shall also be deemed modified to the extent necessary to make it enforceable. 8. Notice. For purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when received if delivered in person, the next business day if delivered by overnight commercial courier (e.g., Federal Express), or the third business day if mailed by United States certified mail, return receipt requested, postage prepaid, to the following addresses: (a) If to the Company, to: National Retail Properties, Inc. 450 South Orange Avenue, 9th Floor Orlando, Florida 32801 Attn: Chairman of the Compensation Committee of the Board of Directors with a copy to: National Retail Properties, Inc. 450 South Orange Avenue, 9th Floor Orlando, Florida 32801 Attention: President and Pillsbury Winthrop Shaw Pittman LLP 2300 N Street, N.W. Washington, DC 20037 Attn: Jeffrey B. Grill, Esq. (b) If to Executive, to: Christopher P. Tessitore at the address set forth on the signature page hereof Either party may change its address for notices in accordance with this Section 8 by providing written notice of such change to the other party. 9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 10. Benefits; Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, legal representatives, successors and permitted assigns. Executive shall not assign this Agreement. However, the Company is expressly authorized to assign this Agreement to a Company Affiliate upon written notice to 14 Executive, provided that (i) the assignee assumes all of the obligations of the Company under this Agreement, (ii) Executive’s role when viewed from the perspective of Company Affiliates in the aggregate is comparable to such role immediately before the assignment, and (iii) the Company, for so long as an affiliate of the assignee, remains secondarily liable for the financial obligations hereunder. 11. Attorney’s Fees. The Company agrees to reimburse Executive for his reasonable legal fees incurred in reviewing this Agreement. In the event of any legal proceeding relating to this Agreement or any term or provision thereof, the losing party shall be responsible to pay or reimburse the prevailing party for all reasonable attorneys’ fees incurred by the prevailing party in connection with such proceeding, except that, in the event of an arbitration, the provisions of Section 6.7(b)(iii) shall apply. 12. Entire Agreement Amendment. This Agreement, including its incorporated Attachment “A,” constitutes the entire agreement between the parties, and all prior understandings, agreements or undertakings between the parties concerning Executive’s employment or the other subject matters of this Agreement (including without limitation the Existing Employment Agreement) are superseded in their entirety by this Agreement. 13. Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege. 14. No Duty to Mitigate. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments hereunder be subject to offset in the event Executive does mitigate (except as otherwise provided in clause (i)(G) of the second sentence of Section 4.3(b) or clause (i)(E) of Section 4.4). 15. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but which together shall be one and the same instrument. 16. Tax Advice. Executive confirms and represents to the Company that he has had the opportunity to obtain the advice of legal counsel, financial and tax advisers, and such other professionals as he deems necessary for entering into this Agreement, and he has not relied upon the advice of the Company or the Company’s officers, directors, or employees. 17. Interpretation. As both parties having had the opportunity to consult with legal counsel, no provision of this Agreement shall be construed against or interpreted to the disadvantage of any party by reason of such party having, or being deemed to have, drafted, devised, or imposed such provision. 15 IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written. NATIONAL RETAIL PROPERTIES, INC. /s/ Craig Macnab By: Name: Craig Macnab Title: Chief Executive Officer /s/ Christopher P. Tessitore Christopher P. Tessitore 16 ATTACHMENT “A” • • • $500/month car allowance Long-term disability coverage providing benefits equal to two-thirds of Annual Salary Additional Fringe Benefits Life insurance benefits with a face amount equal to Annual Salary (provided that, if at any time the Company cannot obtain such insurance at rates which are reasonable for the provision by the Company of such a benefit, the Company may then self-insure such benefits) 17 Exhibit 12 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES The following table sets forth the Company’s consolidated ratios of earnings to fixed charges for the periods as shown (dollars in thousands). 2007 2006 2005 2004 2003 Net Earnings, before Extraordinary Item . . . . . . . . . . . . . . . . . $157,110 $182,505 $ 74,614 $64,934 $53,473 Fixed Charges: Interest on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of Discount Relating to Indebtedness . . . . Amortization of Treasury Lock Gain . . . . . . . . . . . . . . . . Amortization of Deferred Charges . . . . . . . . . . . . . . . . . . 53,359 163 (309) 2,085 48,947 136 (345) 1,613 37,035 104 (326) 1,508 33,454 123 (457) 1,260 28,356 146 (596) 1,334 55,298 50,351 38,321 34,380 29,240 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . . . . . . $212,408 $232,856 $112,935 $99,314 $82,713 Divided by Fixed Charges Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,298 $ 50,351 $ 38,321 $34,380 $29,240 102 Capitalized and Deferred Interest . . . . . . . . . . . . . . . . . . . 2,278 2,563 3,718 271 Ratio of Net Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . 3.60 4.42 2.76 2.87 2.82 $ 59,016 $ 52,629 $ 40,884 $34,651 $29,342 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . . . . . . $212,408 $232,856 $112,935 $99,314 $82,713 — Gain of Disposition of DC Office Buildings (May 2006) . . . . — (59,496) — — $212,408 $173,360 $112,935 $99,314 $82,713 Ratio of Net Earnings to Fixed Charges adjusted for DC Office Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.60 3.29 2.76 2.87 2.82 Preferred Stock Dividends Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ Series B Convertible Preferred Stock . . . . . . . . . . . . . . . Series C Redeemable Preferred Stock . . . . . . . . . . . . . . . — 6,785 4,376 $ 419 923 4,008 $ 4,008 $ 4,008 502 1,675 1,675 — — — Total Preferred Stock Dividends . . . . . . . . . . . . . . . $ 6,785 $ 5,718 $ 5,683 $ 5,683 $ 4,510 Combined Fixed Charges and Preferred Stock Dividends . . . . $ 65,801 $ 58,347 $ 46,567 $40,334 $33,852 Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . 3.23 3.99 2.43 2.46 2.44 Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends adjusted for DC Office Buildings . . . . . . . 3.23 2.97 2.43 2.46 2.44 NATIONAL RETAIL PROPERTIES INC. SUBSIDIARIES OF THE REGISTRANT December 31, 2007 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. CNLRS Acquisitions, Inc. CNLRS BEP, L.P. CNLRS Bismarck ND, LLC CNLRS Equity Ventures BEP, Inc. CNLRS Equity Ventures, Inc. CNLRS Equity Ventures Plano, Inc. CNLRS Equity Ventures Rockwall, 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 Realty I, Inc. Net Lease Realty VI, LLC NNN Acquisitions, Inc. NNN BJ’s Orlando FL, LLC NNN Brokerage Services, Inc. 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 RAD Monticello NY, LLC NNN Retail FF Mabank LLC NNN Ster Florida LLC NNN Ster Paradise Valley Arizona LLC NNN Ster Texas L.P. NNN Texas GP Corp. NNN TRS, Inc. Orange Avenue Mortgage Investments, Inc. WG Grand Prairie TX, LLC Jurisdiction of Formation 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 Maryland Delaware Maryland Florida Maryland Maryland Maryland Maryland Delaware Delaware Texas Delaware Delaware Delaware Florida Arizona Texas Delaware Maryland Delaware Delaware EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-132103, 333-132095, and No. 333-126071 and Form S-8 No. 333-64794, No. 333-15625 and No. 333-144100) of National Retail Properties, Inc. and subsidiaries of our reports dated February 22, 2008, with respect to the consolidated financial statements and schedules of National Retail Properties, Inc. and subsidiaries, and the effectiveness of internal control over financial reporting of National Retail Properties, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2007. February 22, 2008 Miami, Florida Certified Public Accountants Consent of Independent Registered Public Accounting Firm EXHIBIT 23.2 The Board of Directors National Retail Properties, Inc.: We consent to the incorporation by reference in the registration statement (no.333–144100) on Form S–8, registration statement (no.333–15625) on Form S–8, registration statement (no.333–64794) on Form S–8, registration statement (no.333–126071) on Form S–3, registration statement (no.333–132103) on Form S–3, and registration statement (no. 333-132095) on Form S-3 of National Retail Properties, Inc. of our report dated February 17, 2006 except as to notes 2, 19, and 26 which are as of February 22, 2008, with respect to National Retail Properties, Inc. and subsidiaries, consolidated statements of earnings, stockholders’ equity, and cash flows for year ended December 31, 2005, which report appears in the December 31, 2007 annual report on Form 10–K of National Retail Properties, Inc. Orlando, Florida February 22, 2008 Certified Public Accountants CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.1 I, Craig Macnab, certify that: 1. I have reviewed this report on Form 10-K of National Retail Properties, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. 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 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 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; c) 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 d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) 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 22, 2008 Date /s/ Craig Macnab Name: Craig Macnab Title: Chairman of the Board and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.2 I, Kevin B. Habicht, certify that: 1. I have reviewed this report on Form 10-K of National Retail Properties, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. 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 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 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; c) 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 d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) 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 22, 2008 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, Chairman of the Board and 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, 2007, 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, 2007 and 2006 and its results of operations for the years ended December 31, 2007, 2006 and 2005. February 22, 2008 Date /s/ Craig Macnab Name: Craig Macnab Title: Chairman of the Board and 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, 2007, 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, 2007 and 2006 and its results of operations for the years ended December 31, 2007, 2006 and 2005. February 22, 2008 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 on Exhibit H to the Company’s Domestic Company 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, 2007 Date Submitted: May 18, 2007 SHAREHOLDER INFORMATION 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: FORM 10-K (As amended) Pillsbury Winthrop Shaw Pittman LLP A copy of the Company’s Form 10-K, Washington, D.C. Corporate Office: National Retail Properties, Inc. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 www.nnnreit.com as amended and filed with the Securities and Exchange Commission (SEC) for fiscal 2007, 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 2007, 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. N A T I O N A L R E T A I L P R O P E R T I E S , I N C . 2 0 0 7 A n n u a l R e p o r t 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT www.nnnreit.com 

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