National Retail Properties
Annual Report 2008

Plain-text annual report

STRENGTH AND STABILITY Throughout Uncertain Times, the Dividends Keep Coming 2 0 0 8 A N N U A L R E P O R T 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 National Retail Properties (NYSE: NNN), a real estate investment trust, invests in single tenant net-leased retail properties nationwide. In 2008, NNN acquired more than $355 million worth of properties. NNN has generated consistent returns for more than a decade supported by its strong dividend yield and 19 consecutive years of increased annual dividends. Its average annual total return for the past 15 years has been 10.1%. NNN maintains a conservatively managed, diversified real estate portfolio with properties subject to long-term, net leases with established tenants. Its 1,005 properties are located in 44 states with a total gross leasable area of approximately 11.3 million square feet. Current occupancy is 96.7% and these properties are leased to more than 200 tenants in 34 industry classifications. A net lease shifts property operating expenses (i.e., maintenance, taxes, insurance and utilities) to the tenant, so the rental revenue NNN receives has significantly fewer expenses and more stable net cash flow. NNN is one of 170 publicly traded companies in America to have increased annual dividends for 19 or more consecutive years. NATTIONWIDE PORTFOLIO DIVERSIFICATION REDUCES RISK As of December 31, 2008, NNN owned 1,005 properties in 44 states leased to more than 200 tenants. States in blue contain properties owned by NNN. DEAR FELLOW NNN SHAREHOLDER: Our strategy to build long-term value for our shareholders remains simple: pay a safe and growing dividend; generate steady and consistent Funds From Operations (FFO) per share growth; and, accomplish these dual objectives while assuming below average portfolio risk. 2008 was a difficult year for equity investors including investors in real estate investment trusts. On average, the REIT industry’s total return for the year was -38% which mirrored the broad equity markets. Although our total return of -21% was better than the average REIT, we recognize that our shareholders are looking for absolute returns, not relative outperformance. We are pleased that even with 2008’s disappointing results, NNN’s average annual total return has been over 10% per year for the past 10- and 15-year periods. In 2008, we delivered record operating results helped considerably by three quarters of strong performance prior to the onset of the recession. Although it is early in our new calendar year, it is already apparent that our 2009 financial performance will not be as strong. Firstly, we anticipate higher vacancy as several of our tenants are challenged by weak consumer spending and depressed levels of confidence. Secondly, we are cautiously allocating our capital such that our acquisition activity will be considerably less than in recent years. 2 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT  STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 3 OUR LONG-TERM STRATEGY The key elements of our long-term strategy remain unchanged: (cid:116) Acquire carefully underwritten net-leased retail properties to further diversify our portfolio and minimize risk; (cid:116) Sell select locations and reinvest the proceeds into newer, higher yielding properties to improve the quality and growth prospects of our core portfolio; (cid:116) Maintain a strong balance sheet with prudent leverage; and, (cid:116) Continue developing our talented team of associates. With the benefit of hindsight, it is fortunate that we have adhered to a conservative leverage strategy as our carefully structured balance sheet is a key strength of NNN. After an active year of acquisitions, we ended 2008 with less debt than at the beginning of the year. More importantly, our debt-to-total-assets ratio at year-end was 39.5% and we have no material debt maturities in 2009 or 2010 with staggered unsecured debt maturities thereafter. Due to the ongoing market turmoil, we are unable to predict what our cost of debt and equity will be this year. As a result, we are managing NNN cautiously in this uncertain economic environment. 4 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT HISTORICALLY HIGH OCCUPANCY NNN has steadily maintained a high occupancy rate in large part because of its well-located retail sites. The characteristics of freestanding stores – high visibility, easy access and no co-tenancy issues – have kept that format popular with both consumers and retail operators. POPORTFOLIO OCCUPANCY 100% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 In 2009 our priorities are: 1. Maximize the value of our existing assets. As evidenced by our high occupancy rate of 96.7%, this is a core competency of NNN and our strong tenant roster helped us with this task. Today, fewer retailers are expanding and more space is coming available, creating a challenging environment for our leasing team. 2. Carefully manage our expenses. Earlier this year, we undertook a series of steps toward reducing our overhead, including a reduction in staff. We continue to aggressively seek opportunities to reduce non-payroll expenses and anticipate that our 2009 overhead expenses will be approximately 10% less than 2008. 3. Selectively and opportunistically acquire properties. Our growth activity in 2009 will be modest. In the interim, we are more inclined to repurchase our own debt at a discount to par value. Your board of directors and management remain focused on our long-term goals and we believe that the actions we are taking now will make NNN a stronger company for 2009 and beyond. STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 5 WELLL-COVERED DIVIDENDS Dividends Per Share Payout Ratio SAFE AND GROWING DIVIDEND NNN has successfully increased its dividend while simultaneously lowering its payout ratio. A lower payout ratio enhances both the safety of the existing dividend and the opportunity for higher future dividend growth. $1.50 $1.45 $1.40 $1.35 $1.30 $1.25 $1.20 $1.15 $1.10 $1.05 $1.00 Dividend Yield = 8.6%* 120% 115% 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 2008 Dividends Payout Ratio *Based on the closing price of $17.19 on December 31, 2008. OUR 2008 PERFORMANCE Once again our entire team executed well in 2008. Our successful year was highlighted by a number of record achievements: (cid:116) Dividends per share were increased by a record 5.7% from $1.40 to $1.48. In an environment where dividend cuts abound in the REIT industry, NNN is proud to have paid increased annual dividends for 19 consecutive years. (cid:116) Our dividend payout ratio of 74.4%, which is a key measure of the safety of the dividend, continues to be one of the lowest in our industry. (cid:116) FFO per share increased 6.4% to a record $1.99 per share. (cid:116) Total assets increased to $2.6 billion as we acquired 109 properties for $355 million in our core portfolio. (cid:116) We sold a total of 44 properties for $214 million from both our core portfolio and our taxable subsidiary, as we continued to qualitatively cull the portfolio and divest properties where we could harvest value. We recognized a gain of $19.4 million from the sale of these properties. The average cap rate on properties sold was 6.9% which is a testament to our outstanding in-house disposition team. (cid:116) We acquired $25 million of our convertible bonds that come due in 2011 at a discounted price generating $5.5 million of gains. (cid:116) We raised $123 million of common equity at an average price of $22 per share, thereby strengthening our balance sheet. 6 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT LELEASE EXPIRATIONS (as a percentage ofof b base e rerent – December 31, 20088)) (( 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Weighted average remaining lease term of 13 years LONG-TERM LEASES 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. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Thereafter OUR CORE PORTFOLIO As of December 31, 2008, we owned 1,005 properties which were 96.7% leased. The average remaining lease term on our net lease retail assets is 13 years. Also, we have modest re-leasing risk with only 20 leases expiring in 2009. As of year-end, our properties were leased to over 200 different national and regional tenants operating in 34 different retail industry classifications. Our properties are located in 44 states with a concentration in the Sunbelt states where population growth rates are the highest and retailers have historically focused their new store development. About one fourth of our base rent comes from a diversified portfolio of convenience stores. While the convenience store industry is not immune to current economic events, it had a strong year of profitability in 2008 and remains one of the best performing retail categories. STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 7 8 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT AANNUAL TOTATT L RETURN COMPARISON ((For periods ending Decemembeb r r 3131, , 2008) (( 1 Year 3 Years 5 Years 10 Years 15 Years National Retail Properties (NNN) -21.0% 0.7% 5.9% 11.2% 10.1% S&P 500 Index (SPX) -36.9% -8.3% -2.2% -1.4% 6.5% Nasdaq (CCMP) -39.9% -9.8% -4.0% -2.7% 4.8% STRONG TRACK RECORD NNN shareholders have enjoyed a 15-year average annual total return of 10.1 percent. S&P 600 Index (SML) -31.0% -7.5% 0.9% 5.2% 7.8% Total Return is comprised of share price appreciation plus dividends paid. OUR NET-LEASED RETAIL REAL ESTATE We know that 2009 will be a challenging year for commercial landlords. A number of well known retailers have already filed for bankruptcy and we anticipate more. However, we feel that our niche of net-leased retail real estate remains a compelling long-term investment opportunity for the following reasons: (cid:116) The ratio of land value to the total cost of each property remains high when compared to other real estate categories such as offices, apartments and large regional malls. The land value for our well-located, corner locations at busy intersections is in the range of 45-50% of the total value for most of our properties at the time we purchase them. With economic growth, inflation and the difficulty of replacing these well-located sites, the land value at the end of the lease can reasonably equate to the price that we paid for both the land and the building upon acquisition. (cid:116) The quality of the rental revenue that we receive from our triple net leases is unusually high. Our tenants are responsible for property taxes, insurance and maintenance. As a result, 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. (cid:116) Our leases are long-term. In the current cautious retail environment, it is comforting to us that our average tenant is contractually obligated to pay rent for the next 13 years or more. STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 9 BALALANCE SHEET (Gross Book Basis – Decembeberr 331, , 20200808) (( Preferred Equity 3.3% PRUDENT LEVERAGE Maintaining a strong balance sheet with prudent leverage enhances our access to capital. Common Equity 57.2% Unsecured Debt 38.6% Secured Debt 0.9% OUR STRONG BALANCE SHEET We have consistently raised equity in the past to ensure that we have a strong balance sheet, and in 2008 we issued just over 5.5 million shares at an average price of $22 per share, raising $123 million. As of year-end, on a gross-book basis, our total debt was 39.5%. The vast majority of our debt (98%) is unsecured. Having no mortgage debt on nearly all of our properties provides us significant flexibility. Finally, our fixed charge coverage ratio is currently better than 3X which is measurably better than the average REIT which has a ratio of 2X. OUR SAFE AND GROWING DIVIDEND Historically, REIT stocks have been characterized by their high income from cash dividends. Late last year that began to change with at least 36 REITs cutting or suspending their dividend. Conversely, the October 2008 dividend declaration by our board of directors marked the 19th consecutive year of increased annual dividend payments to NNN shareholders. We hope to continue our multi-year record of consecutive annual dividend increases paid in cash. 10 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT OUR OUTLOOK FOR THE FUTURE While a complete breakdown of the country’s financial system may be averted, it appears that we are experiencing the end of an era and not simply the end of a business cycle. Business will likely be different in the financial markets and in our economy. We will probably face weaker economic growth, more government intervention and less leverage – all of which will cause lower returns on equity. Despite the cloudy financial outlook, we are optimistic that the high cash dividend that we currently pay will sustain better than average total returns for our shareholders. Our goal for 2009 is to position NNN to ensure that when the capital and retail markets improve, we are a stronger company. Our balance sheet is solid, we have one of the finest teams in the net lease retail sector, and in the future it is unlikely that we will have to compete for acquisitions with the highly leveraged competition that was abundant in the days of plentiful and inexpensive capital. We believe that our conservative approach will enable us to take advantage of future opportunities when they materialize. On behalf of all the associates and 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 2009 and beyond. Sincerely, Craig Macnab Chairman & Chief Executive Officer STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 11 12 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT CONVENIENCE STORES The U.S. convenience store industry had a strong year in 2008 with increasing store sales and profitability, despite fluctuations in gas prices. The majority of major convenience store operators in the U.S. have adopted a newer, consumer-friendly store format featuring: (cid:116) Ample parking; (cid:116) Cleaner, well-lit stores; (cid:116) An upscale feel with increased product offerings; and, (cid:116) Larger merchandise selection with competitive prices. The fundamental attributes of convenience store locations are in line with the fundamental real estate characteristics of freestanding retail stores. They are well-located sites, often at signalized intersections. The land value typically represents up to 50% of the total property value. And, the potential alternative uses for these locations ranges from drug stores to bank branches to restaurants, which all favor similar sites. Convenience stores produce a good risk-adjusted return on investment. STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 13 With a 2008 dividend of $1.48 per share, and FFO per share of $1.99, NNN’s dividend is well protected. 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: (cid:116) You can become a shareholder with a minimum initial investment of only $100. This investment can be made by check or money order. (cid:116) Dividends can be reinvested to purchase additional shares on some or all of your common stock. (cid:116) Reinvested dividends are currently offered at a 1% discount (subject to change). (cid:116) 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. (cid:116) Additionally, shares in the amount of $100 to $10,000 may be purchased on a one-time basis. (cid:116) 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. (cid:116) Fees for the sale of shares: $15 transaction fee plus a $0.10 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. 14 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT HISTORICAL FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data) 2008 2007 2006 2005 2004 Gross revenues(1) $ 247,352 $ 208,629 $ 180,877 $ 151,831 $ 133,875 Earnings from continuing operations Net earnings Total assets Total debt Total equity 103,730 123,082 2,649,362 1,052,804 1,542,209 80,906 157,110 2,539,605 1,060,070 1,407,285 60,021 182,505 47,160 89,400 27,571 64,934 1,917,495 1,736,588 1,300,517 776,737 1,096,505 861,045 828,087 524,241 756,998 Cash dividends declared to: Common stockholders Series A Preferred Stock stockholders Series B Convertible Preferred Stock stockholders 110,107 92,989 - - - - Series C Preferred Stock stockholders 6,785 6,785 Weighted average common shares: 76,035 4,376 419 923 69,018 4,008 1,675 - 66,272 4,008 1,675 - Basic Diluted 74,249,137 66,152,437 57,428,063 52,984,821 51,312,434 74,521,909 66,407,530 58,079,875 54,640,143 51,742,518 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 $ $ 1.31 1.30 1.57 1.56 1.48 - - 1.12 1.11 2.27 2.26 1.40 - - $ $ 0.94 0.94 3.08 3.05 1.32 2.45625 $ 0.78 0.80 1.58 1.56 1.30 2.25 0.43 0.46 1.15 1.18 1.29 2.25 41.875 167.50 167.50 Stock depositary stockholders 1.84375 1.84375 0.250955 - - Other data: Cash flows provided by (used in): Operating activities Investing activities Financing activities Funds from operations – diluted(2) $ 236,748 $ 129,634 $ 1,676 $ 19,226 $ 85,800 (256,304) (536,717) (90,099) (230,783) (5,317) 148,284 432,907 124,113 81,864 97,121 217,844 81,803 (69,963) (19,225) 73,065 (1) Gross revenues include revenues from NNN’s continuing and discontinued operations. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN has classified the revenues related to (i) all Investment Properties that were sold and leasehold interest which expired, (ii) all Inventory Properties which generated revenues prior to disposition, and (iii) all Investment and Inventory Properties which generated revenue and were held for sale at December 31, 2008, as discontinued operations. (2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“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 Investment Assets and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures. STRENGTH AND STABILITY THROUGHOUT UNCERTAIN TIMES 15 DIRECTORS & OFFICERS DIRECTORS Craig Macnab Chairman Ted B. Lanier† Lead Director Don DeFosset Retired Chairman, President & Chief Executive Officer Walter Industries, Inc. 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 Robert C. Legler Retired Chairman First Marketing Corporation Robert Martinez† Fortieth Governor of Florida & Senior Policy Advisor Holland & Knight 16 NATIONAL RETAIL PROPERTIES 2008 ANNUAL REPORT Left to right: (seated) Craig Macnab, Julian E. Whitehurst, (standing) Paul E. Bayer, Kevin B. Habicht, Christopher P. Tessitore 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 of Portfolio Management Christopher P. Tessitore Executive Vice President & General Counsel † Member audit committee (Committees as of February 10, 2009) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2008 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% 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. È 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 “large accelerated filer,” “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, 2008 was $72,845,557. The number of shares of common stock outstanding as of February 24, 2009 was 79,007,637. 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 2009 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. TABLE OF CONTENTS PAGE REFERENCE Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part IV Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures 1 8 18 18 18 18 19 21 23 45 46 87 87 89 90 90 90 90 90 91 96 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 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 all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust (“REIT”) subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as 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 investments) (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Inventory Assets are operated 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, 2008, NNN owned 1,005 Investment Properties, with an aggregate leasable area of 11,251,000 square feet, located in 44 states. Approximately 97 percent of NNN’s Investment Portfolio was leased at December 31, 2008. 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, 2008, the TRS owned 32 Inventory Properties. 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”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns real estate assets leased to convenience store operators from unrelated third parties. 1 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, 2009, NNN employed 59 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 (the “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, 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. 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. 2 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 (including but not limited to tenant, geographic and line of trade diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios, profitability measures, industry trends and performance of competitors compared to that of NNN. The operating strategies employed by NNN have allowed it to increase the annual dividends (paid quarterly) per common share for 19 consecutive years. Investment in Real Estate or Interests in Real Estate NNN’s management believes that single tenant, freestanding net lease retail properties will continue to be attractive investment opportunities and that NNN is well suited to take advantage of these opportunities because of its experience in accessing 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, market rents, 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, 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. 3 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 types and tenant types, (ii) leases, mortgages, commercial mortgage residual interests and other types of real estate interests, (iii) loans secured by personal property, (iv) loans secured by membership interests, or (v) 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, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000. For the year ended December 31, 2008, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 40 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 43 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 Operations – 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. 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. 4 Investment Properties As of December 31, 2008, NNN owned 1,005 Investment Properties with an aggregate gross leasable area of 11,251,000 square feet, located in 44 states. Approximately 97 percent of the gross leasable area was leased at December 31, 2008. 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, 2008 (in thousands): Land Building Size(1) Low 7 1 High 2,223 135 Average High 111 12 $ 8,882 17,049 Cost(2) Low $ 25 44 Average $ 1,097 1,721 (1) Approximate square feet. (2) Costs vary depending upon size and local demographic factors. In connection with the development of 21 Investment Properties, NNN has agreed to fund construction commitments (including construction and land costs) of $97,690,000. As of December 31, 2008, NNN has funded $70,451,000 of this commitment, with $27,239,000 remaining to be funded. As of December 31, 2008, NNN does not have any 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, 2008, 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 $8,000 to $2,160,000 (average of $222,000). Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. Generally, the Investment Property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Some of the leases also provide that in the event 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 the current market value at the time of exercise. 5 The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Investment Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2008: % of Annual Base Rent(1) 1.0% 2.8% 2.0% 3.5% 4.5% 4.2% # of Properties 20 40 20 34 38 36 Gross Leasable Area(2) 386,000 405,000 333,000 525,000 842,000 523,000 % of Annual Base Rent(1) 2.5% 1.9% 4.4% 2.9% 70.3% # of Properties 19 15 26 24 700 Gross Leasable Area(2) 463,000 287,000 751,000 418,000 5,795,000 2015 2016 2017 2018 Thereafter 2009 2010 2011 2012 2013 2014 (1) Based on annualized base rent for all leases in place as of December 31, 2008. (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: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Top 10 Lines of Trade Convenience Stores Automotive Service Restaurant – Full Service Theaters Automotive Parts Drug Stores Books Restaurants – Limited Service Sporting Goods Consumer Electronics Other % of Annual Base Rent(1) 2007 2006 2008 25.7% 8.9% 8.7% 6.1% 5.1% 4.0% 4.0% 3.3% 3.3% 3.2% 27.7% 23.9% 5.2% 10.3% 4.2% 4.9% 5.0% 4.4% 3.7% 3.9% 4.3% 30.2% 16.3% 0.2% 12.1% - 1.6% 8.3% 5.7% 4.7% 7.3% 5.6% 38.2% 100.0% 100.0% 100.0% (1) Based on annualized base rent for all leases in place as of December 31 of the respective year. The following table shows the top 10 states in which NNN’s Investment Properties are located as of December 31, 2008: State 1. Texas 2. Florida 3. Illinois 4. North Carolina 5. California 6. Georgia 7. Pennsylvania 8. Indiana 9. Ohio 10. Tennessee Other # of Properties % of Annual Base Rent(1) 211 84 39 62 26 57 80 37 31 30 348 19.9% 9.8% 6.6% 6.1% 5.2% 5.1% 4.2% 4.2% 3.1% 3.1% 32.7% 1,005 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2008. 6 Mortgages and Notes Receivable As of December 31, 2008 and 2007, mortgages and notes receivable, excluding structured finance investments, had an aggregate outstanding principal balance of $55,495,000 and $58,556,000, respectively. As of December 31, 2008, the mortgages and notes receivable bear interest rates ranging from 7.00% to 11.50% with maturity dates ranging from January 2009 through October 2028. Mortgages receivable are secured by real estate, real estate securities or other assets. As of December 31, 2008, and 2007, the outstanding principal balance of the structured finance investments was $4,514,000 and $14,359,000, respectively. As of December 31, 2008, the structured finance investments bear a weighted average interest rate of 11.36% per annum, of which 10.00% is payable monthly and the remaining 1.36% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity in April 2009. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. 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 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 $22,000,000 at December 31, 2008. Inventory Assets The NNN Inventory Portfolio, which is owned by the TRS, is comprised of two components: land for development (“Development Properties” or “Development Portfolio”) and improved 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, 2008, the TRS owned 19 Development Properties (11 completed, one under construction and seven land parcels) and 13 Exchange Properties. See the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Inventory Properties and their respective carrying costs. The following table summarizes the 11 completed Development Properties and 13 Exchange Properties as of December 31, 2008 (in thousands): Completed Development Properties: Land Building Exchange Properties: Land Building Size(1) High Low Average High Cost(2) Low Average 527 218 110 23 $ $ 15 1 11 2 128 27 29 7 $ $ 8,959 28,803 1,729 3,367 $ $ $ $ 247 369 121 184 1,787 4,244 465 970 (1) Approximate square feet. (2) Costs vary depending upon size and local demographic factors. 7 Under Construction. In connection with the development of one Inventory Property, NNN has agreed to fund total construction commitments (including construction and land costs) of $4,814,000. As of December 31, 2008, NNN has funded $2,212,000 of this commitment, with $2,602,000 remaining to be funded. Governmental Regulations Affecting Properties Property Environmental Considerations. Subject to a determination of the level of risk and potential cost of remediation, NNN may acquire a property where some level of contamination may exist. 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 or the improper disposal of hazardous substances emanating from 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 some level of contamination may exist, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, and/or (iii) agree to other arrangements deemed appropriate by NNN, including, under certain circumstances, the purchase of environmental insurance 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. 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, 2009, 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 position 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. 8 The global financial crisis and economic slowdown may have an adverse impact on NNN’s industry, business, its tenants’ business and NNN’s results of operations. The continuation or worsening of the current credit crisis and global economic crisis could have an adverse effect on the fundamentals of NNN’s business and results of operations, including overall market occupancy and rental rates. These current economic conditions could have a negative effect on the financial condition of NNN’s tenants, developers, borrowers, lenders or on the institutions that hold NNN’s cash balances and short-term investments, which may expose NNN to increased risks of default by these parties. With this disruption in the economy and capital markets, there can be no assurance NNN will not experience material adverse effects on its business, financial condition, results of operations or real estate values. There can be no assurance that actions of the United States Government, Federal Reserve or other government and regulatory bodies for the reported purpose of stabilizing the economy or financial markets will achieve their intended effect. Additionally, some of these actions may adversely affect financial institutions, capital providers, retailers, consumers or NNN’s financial condition, results of operations or the trading price of NNN’s shares. Potential consequences of the current credit crisis and global economic slowdown include: • • • • the financial condition of NNN’s tenants, which operate in the retail industry and some of which have recently filed for bankruptcy protection, may be adversely affected, which may result in tenant defaults under the leases due to bankruptcy, lack of liquidity, operational failures or for other reasons; the ability to borrow on terms and conditions that NNN finds acceptable, or at all, may be limited, which could reduce NNN’s ability to pursue acquisition and development opportunities and refinance existing debt, reduce NNN’s returns from acquisition and development activities and increase NNN’s future interest expense; reduced values of NNN’s properties may limit NNN’s ability to dispose of assets at attractive prices and may reduce the availability of unsecured loans; the value and liquidity of NNN’s short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold NNN’s cash deposits or the institutions or assets in which NNN has made short-term investments, the dislocation of the markets for NNN’s short-term investments, increased volatility in market rates for such investments or other factors; and • one or more lenders under the Credit Facility could fail and NNN may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. NNN may be unable to obtain debt or equity capital on favorable terms, if at all. NNN may be unable to obtain capital on favorable terms, if at all, to further its business objectives or meet its existing obligations. Debt and equity capital availability in the real estate market is severely strained. Nearly all of NNN’s debt, including the Credit Facility, is subject to balloon principal payments due at maturity. These maturities begin as soon as May 2010 and extend to October 2017. The ability of NNN to make these scheduled principal payments may be adversely impacted by NNN’s inability to extend or refinance the Credit Facility, the inability to dispose of assets at an attractive 9 price or the inability to obtain additional debt or equity capital. Capital that may be available may be materially more expensive or available under terms that are materially more restrictive than NNN’s existing capital which would have an adverse impact on NNN’s business, financial condition or results of operations. Loss of revenues from tenants would reduce NNN’s cash flow. NNN’s five largest tenants accounted for an aggregate of approximately 28 percent of NNN’s annual base rent as of December 31, 2008. The default, financial distress, bankruptcy or liquidation of one or more of NNN’s tenants could cause substantial vacancies among NNN’s Investment Portfolio. Vacancies reduce NNN’s revenues, increase property expenses and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, the tenant may not be able to renew the lease or, NNN may not be able to re-lease the vacant property at a comparable lease rate or without incurring additional expenditures in connection with such renewal or re-leasing. A significant portion of the source of NNN’s annual base rent is heavily concentrated in specific industry classifications and in specific geographic locations. As of December 31, 2008, an aggregate of approximately 38 percent of NNN’s annual base rent is generated from two retail lines of trade, convenience stores (26 percent) and restaurants (12 percent). In addition, as of December 31, 2008, an aggregate of approximately 30 percent of NNN’s annual base rent is generated from properties in Texas (20 percent) and Florida (10 percent). Any financial hardship and/or changes in these industries or states could have an adverse effect on NNN’s results of operations. Owning real estate and indirect interests in real estate carries inherent risks. 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, • 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. 10 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 earnings and could have an adverse effect on NNN’s financial condition. NNN may be subject to known or unknown environmental liabilities. Subject to a determination of the level of risk and potential cost of remediation, NNN may acquire a property where some level of contamination may exist. 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 or the improper disposal of hazardous substances emanating from 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 some level of contamination may exist, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, and/or (iii) agree to other arrangements deemed appropriate by NNN, including, under certain circumstances, the purchase of environmental insurance 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 and may have liability to third parties. 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 including liability to third parties. 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, (iii) NNN will not be subject to litigation by and liability to third parties, or (iv) the costs of such removal, remediation fines, third party liability, 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 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 11 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 or repay 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, 2008, the Residuals had a carrying value of $22,000,000. 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 or any 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, 2008, mortgages and notes receivables (including structured finance investments) had an outstanding principal balance of $60,009,000. 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, if any, 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. 12 Certain provisions of NNN’s 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 such 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 or lessee. 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 or partnership investments include impasses on decisions because in some instances no single co-venturer or partner has full control over the joint venture or partnership, respectively. Additionally, the co-venturer or partner may become insolvent, bankrupt or otherwise unable to contribute to the joint venture or partnership, respectively. 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 or realize its investment strategy, 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 insurance 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, thereby 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 or other acts of violence may negatively affect NNN’s operations. There can be no assurance that there will not be terrorist attacks against businesses within the United States. These attacks may directly impact NNN’s physical facilities or the businesses or the financial condition of its tenants, developers, borrowers, lenders or financial institutions with which NNN has a relationship. The United States is engaged in armed conflict, which could have an impact on these parties. 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. 13 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 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 an adverse impact on NNN’s financial condition or results of operations. Vacant properties or bankrupt tenants could adversely affect NNN’s business or financial condition. As of December 31, 2008, NNN owned 31 vacant, unleased Investment Properties and two vacant land parcels, which accounted for approximately three percent of total Investment Properties. 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. As of December 31, 2008, approximately two percent of the total gross leasable area of NNN’s Investment Portfolio is leased to two 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. NNN anticipates the number of vacancies and bankrupt tenants will increase. 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, 2008, NNN had total mortgage debt and secured notes payable outstanding of approximately $26,290,000, total unsecured notes payable of $1,000,014,000 and $26,500,000 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 cash 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 in cash on its outstanding common and preferred stock, 14 • • 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. NNN’s ability to make scheduled payments of principal or interest on its debt, or to retire or refinance such debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, competition, and 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 stockholders that any such refinancing, sale of assets or additional financing would be possible or, if possible, on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable or would not result in a material decline in earnings. 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 such 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, • consolidate, merge or sell NNN’s assets, and • pre-pay debt. 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 its debt covenants, 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. 15 In addition, certain covenants in NNN’s debt, including its Credit Facility, require NNN, among other things, to: • limit certain 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. The market value of NNN’s equity and debt securities is subject to various factors that may cause significant fluctuations or volatility. 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/or may be unrelated to NNN’s financial condition, operating performance or prospects that may cause significant fluctuations or volatility in such prices. These factors include among many: • general economic and financial market conditions including the current global economic downturn, • level and trend of interest rates, • NNN’s ability to access the capital markets to raise additional capital, • the issuance of additional equity or debt securities, • changes in NNN’s FFO or earnings estimates, • changes in NNN’s debt ratings or analyst ratings, • 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 16 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. Adverse legislative or regulatory tax changes could reduce NNN’s earnings, cash flow and market price of NNN’s 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 NNN’s common stock. 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, 2008, 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. Changes in accounting pronouncements could adversely impact NNN’s 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 or their interpretation and application of these 17 standards that govern the preparation of NNN’s 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. NNN’s failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results and share price. Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of the Company’s internal control over financial reporting. If NNN fails to maintain the adequacy of its internal control over financial reporting, as such standards may be modified, supplemented or amended from time to time, the Company may not be able to ensure that it can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal control over financial reporting, particularly those related to revenue recognition, are necessary for the Company to produce reliable financial reports and to maintain its qualification as a REIT and are important in helping to prevent financial fraud. If NNN cannot provide reliable financial reports or prevent fraud, its business and operating results could be harmed, REIT qualification could be jeopardized, investors could lose confidence in the Company’s reported financial information, and the trading price of NNN’s shares could drop significantly. NNN’s ability to pay dividends in the future is subject to many factors. NNN’s ability to pay dividends may be impaired if any of the risks described in this section were to occur. In addition, payment of NNN’s dividends depends upon NNN’s earnings, financial condition, maintenance of NNN’s REIT status and other factors as NNN’s Board of Directors may deem relevant from time to time. Item 1B. Unresolved Staff Comments None. 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. 18 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, 2003 and ending December 31, 2008. The graph assumes an investment of $100 on December 31, 2003. Indexed Total Annual Return (As of December 31, 2008) e u l a V x e d n I 225 200 175 150 125 100 75 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 NNN NAREIT S&P 500 19 For each calendar quarter indicated, the following table reflects respective high, low and closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such period. 2008 High Low Close Dividends paid per share 2007 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter $ $ 23.66 19.63 22.05 0.355 25.950 22.390 24.190 0.335 $ $ 24.00 20.75 20.90 0.375 25.450 21.760 21.860 0.355 $ $ 24.57 19.60 23.95 0.375 24.580 20.200 24.380 0.355 $ $ 23.66 10.53 17.19 0.375 26.150 22.480 23.380 0.355 $ $ Year 24.57 10.53 17.19 1.480 26.150 20.200 23.380 1.400 The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: 2008 2007 Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain $1.480000 - - - 100.0000% $1.397402 0.000414 0.002184 - - - - 99.8144% 0.0296% 0.1560% - $1.480000 100.0000% $1.400000 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 2009, NNN paid dividends to its stockholders of $29,313,000 or $0.375 per share of common stock. On January 31, 2009, there were 1,593 stockholders of record of common stock. 20 Item 6. Selected Financial Data Historical Financial Highlights (dollars in thousands, except per share data) Gross revenues(1) Earnings from continuing operations Net earnings Total assets Total debt Total equity Cash dividends declared to: Common stockholders Series A preferred stock stockholders Series B convertible preferred stock stockholders Series C preferred stock stockholders Weighted average common shares: Basic Diluted 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): 2008 2007 2006 2005 2004 $ 247,352 $ 103,730 123,082 2,649,362 1,052,804 1,542,209 208,629 $ 80,906 157,110 2,539,605 1,060,070 1,407,285 180,877 $ 60,021 182,505 1,917,495 776,737 1,096,505 151,831 $ 47,160 89,400 1,736,588 861,045 828,087 133,875 27,571 64,934 1,300,517 524,241 756,998 110,107 - - 6,785 92,989 - - 6,785 76,035 4,376 419 923 69,018 4,008 1,675 - 66,272 4,008 1,675 - 74,249,137 74,521,909 66,152,437 66,407,530 57,428,063 58,079,875 52,984,821 54,640,143 51,312,434 51,742,518 $ 1.31 $ 1.30 1.12 $ 1.11 0.94 $ 0.94 0.78 $ 0.80 2.27 2.26 1.40 - 3.08 3.05 1.32 2.45625 1.58 1.56 1.30 2.25 1.57 1.56 1.48 - - - 41.875 167.50 167.50 1.84375 1.84375 0.250955 - - 0.43 0.46 1.15 1.18 1.29 2.25 Operating activities Investing activities Financing activities Funds from operations – diluted(2) $ 236,748 $ (256,304) (5,317) 148,284 129,634 $ (536,717) 432,907 124,113 1,676 $ 19,226 $ (90,099) 81,864 97,121 (230,783) 217,844 81,803 85,800 (69,963) (19,225) 73,065 (1) Gross revenues include revenues from NNN’s continuing and discontinued operations. In accordance with (2) Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long- Lived Assets,” NNN has classified the revenues related to (i) all Investment Properties that were sold and leasehold interest which expired, (ii) all Inventory Properties which generated revenues prior to disposition, and (iii) all Investment and Inventory Properties which generated revenue and were held for sale at December 31, 2008, as discontinued operations. The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“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 Investment Assets and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures. 21 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 2008 2007 2006 2005 2004 $123,082 $157,110 $182,505 $ 89,400 $ 64,934 41,357 433 177 - - (9,980) - 155,069 - - (6,785) 29,317 1,065 31 - - (56,625) - 130,898 - - (6,785) 19,624 2,795 463 (262) (11,373) (91,332) - 102,420 (4,376) (419) (923) 13,712 6,695 606 - - (9,816) (14,786) 85,811 (4,008) (1,675) - 10,572 5,143 622 - - (2,523) - 78,748 (4,008) (1,675) - 148,284 124,113 96,702 80,128 73,065 - - 419 1,675 - FFO available to common stockholders – diluted $148,284 $124,113 $ 97,121 $ 81,803 $ 73,065 (1) The Series A and Series B 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 Operations.” 22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.” The term “NNN” or the “Company” refers to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust (“REIT”) subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.” 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) (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory 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”). The Inventory Assets are operated through the TRS. The TRS, directly and indirectly, through investment interests, primarily owns real estate generally for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). The TRS typically owns two types of properties, property for development (“Development Properties” or “Development Portfolio”) and improved properties (“Exchange Properties” or “Exchange Portfolio”). As of December 31, 2008, NNN owned 1,005 Investment Properties, with an aggregate leasable area of 11,251,000 square feet, located in 44 states. Approximately 97 percent of total properties in NNN’s Investment Portfolio were leased at December 31, 2008. In addition, as of December 31, 2008, NNN’s Investment Assets included $60,472,000 in mortgages and notes receivable (including accrued interest receivable and structured finance investments) and $22,000,000 of commercial mortgage residual interests. As of December 31, 2008, the TRS owned 19 Development Properties (11 completed, one under construction and seven land parcels) and 13 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 line of trade diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios and profitability measures, and industry trends and performance compared to that of NNN. NNN continues to maintain its diversification by tenant, geography and line of trade. NNN’s largest lines of trade concentration are the convenience store and restaurant sectors. These sectors represent a large part of the freestanding retail property marketplace which NNN believes represents an area of attractive investment opportunity. However, any financial hardship within these sectors could have a growing adverse effect on the financial condition and operating performance of NNN. NNN has some geographic concentration in the south and southeast which NNN believes are generally areas of above average population growth. NNN formed a joint venture with an institutional investor in September 2007, in which NNN owns a 15 percent equity interest. The joint venture owns real estate assets leased to convenience store operators. 23 During the years ended December 31, 2008, 2007 and 2006, occupancy of the Investment Portfolio has averaged approximately 97 to 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. The poor current economic environment has made it more difficult and more expensive to obtain debt and equity capital, which will likely reduce the pace of investments in new acquisitions or developments as well as the volume of dispositions. Additionally, the poor economic and retail environment will result in more retailers filing for bankruptcy, which may have an adverse impact on NNN’s occupancy. 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. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), the fair value of the real estate acquired with in-place leases 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 operating expenses relating to the property, generally 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 rental revenue varies 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. 24 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. Real Estate – Inventory Portfolio. The TRS acquires and/or develops and owns properties for the purpose of resale. 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 also 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. Impairment – Real Estate. Management periodically assesses its real estate for possible impairment whenever events or changes in certain 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. 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 Orange Avenue Mortgage Investments, Inc. (“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 were pledged as security for a note payable which was repaid in February 2008. 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. Recent Accounting Pronouncements. Financial Accounting Standards Board (“FASB”) Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) will become effective January 1, 2009, and is required to be applied retrospectively to all presented periods, as applicable. NNN estimates that the adoption of FSP APB 14-1 will result in the recognition of additional non-cash interest expense of approximately $5.5 and $2.6 million for the years ended December 31, 2008 and 2007, respectively, and $6.0 million for the year ending December 31, 2009. 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 25 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. 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: 2008 2007 2006 1,005 11,251,000 908 10,610,000 710 9,341,000 Number Total gross leasable area (square feet) Percent of total gross leasable area – leased Weighted average remaining lease term (years) 972 10,728,000 97% 13 892 10,355,000 98% 13 697 9,173,000 98% 12 The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Investment Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2008: % of Annual Base Rent(1) # of Properties 2009 2010 2011 2012 2013 2014 1.0% 2.8% 2.0% 3.5% 4.5% 4.2% 20 40 20 34 38 36 Gross Leasable Area(2) 386,000 405,000 333,000 525,000 842,000 523,000 % of Annual Base Rent(1) 2.5% 1.9% 4.4% 2.9% 70.3% # of Properties 19 15 26 24 700 Gross Leasable Area(2) 463,000 287,000 751,000 418,000 5,795,000 2015 2016 2017 2018 Thereafter (1) Based on the annualized base rent for all leases in place as of December 31, 2008. (2) Approximate square feet. 26 The following table summarizes the diversification of NNN’s Investment Portfolio based on the top 10 lines of trade: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Top 10 Lines of Trade Convenience Stores Automotive Service Restaurant – Full Service Theaters Automotive Parts Drug Stores Books Restaurants – Limited Service Sporting Goods Consumer Electronics Other % of Annual Base Rent(1) 2007 2008 2006 25.7% 8.9% 8.7% 6.1% 5.1% 4.0% 4.0% 3.3% 3.3% 3.2% 27.7% 23.9% 5.2% 10.3% 4.2% 4.9% 5.0% 4.4% 3.7% 3.9% 4.3% 30.2% 16.3% 0.2% 12.1% - 1.6% 8.3% 5.7% 4.7% 7.3% 5.6% 38.2% 100.0% 100.0% 100.0% (1) Based on annualized base rent for all leases in place as of December 31 of the respective year. The following table shows the top 10 states in which NNN’s Investment Properties are located in as of December 31, 2008: State 1. Texas 2. Florida Illinois 3. 4. North Carolina 5. California 6. Georgia 7. Pennsylvania 8. Indiana 9. Ohio 10. Tennessee Other % of Annual Base Rent(1) 19.9% 9.8% 6.6% 6.1% 5.2% 5.1% 4.2% 4.2% 3.1% 3.1% 32.7% # of Properties 211 84 39 62 26 57 80 37 31 30 348 1,005 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2008. 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) 2008 2007 2006 109 868,000 355,107 $ 235 2,205,000 696,682 213 1,130,000 371,898 $ $ (1) Includes dollars invested on projects under construction for each respective year. 27 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 Property Analysis – Inventory Portfolio 2008 19 290,000 59,796 9,980 $ $ 2007 37 997,000 146,041 56,625 $ $ 2006 30 1,015,000 319,361 91,332 $ $ 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 2008 2007 2006 11 1 7 19 13 32 8 9 6 23 33 56 11 5 13 29 68 97 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 2008 2007 2006 3 9,545 4 19,994 29,539 $ $ $ 3 64,694 23 105,152 169,846 $ $ $ 16 82,524 77 118,553 201,077 $ $ $ (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 (1) Net of minority interest. 2007 2006 # of Properties 13 58 71 Gain $ 5,125 5,888 $11,013 # of Properties Gain 9 55 64 $ $ 5,774 3,892 9,666 2008 # of Properties 6 19 25 Gain $4,751 4,607 $9,358 28 Revenue from Continuing Operations Analysis General. During the year ended December 31, 2008, 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): 2008 2007 2006 Percent of Total 2007 2008 2006 2008 Versus 2007 Percent Increase (Decrease) 2007 Versus 2006 Percent Increase (Decrease) Rental Income(1) Real estate expense reimbursement from tenants Interest and other income from $ 210,402 $ 165,471 $ 119,327 92.9% 91.5% 88.0% 27.2% 38.7% 7,126 5,688 4,569 3.2% 3.1% 3.4% 25.3% 24.5% real estate transactions 4,352 4,834 4,436 1.9% 2.7% 3.3% (10.0)% 9.0% Interest income on commercial mortgage residual interests Total revenues from continuing 4,636 4,882 7,268 2.0% 2.7% 5.3% (5.0)% (32.8)% operations $ 226,516 $ 180,875 $ 135,600 100.0% 100.0% 100.0% 25.2% 33.4% (1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations (“Rental Income”). 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): 2008 2007 2006 Percent of Total 2007 2008 2006 Investment Assets Inventory Assets Total revenues $ 213,059 13,457 $ 164,698 16,177 $ 119,146 16,454 94.1% 91.1% 87.9% 8.9% 12.1% 5.9% $ 226,516 $ 180,875 $ 135,600 100.0% 100.0% 100.0% 2008 Versus 2007 Percent Increase (Decrease) 29.4% (16.8)% 25.2% 2007 Versus 2006 Percent Increase (Decrease) 38.2% (1.7)% 33.4% Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007. Rental Income. Rental Income increased for the year ended December 31, 2008, as compared to the same period in 2007, primarily from the addition of 109 Investment Properties with an aggregate gross leasable area of 868,000 square feet. In addition, the increase in Rental Income is also attributable to a full year of Rental Income from the 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet which were acquired during the year ended December 31, 2007. The Investment Portfolio occupancy rate remained relatively stable during each of the years ended December 31, 2008 and 2007 with an average of approximately 97 percent and 98 percent, respectively. 29 Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants remained fairly consistent as a percentage of total revenues from continuing operations. The increase for the year ended December 31, 2008, as compared to 2007, was attributable to a full year of reimbursements from certain tenants acquired in 2007 and the reimbursements from newly acquired properties in 2008. Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the year ended December 31, 2008, as compared to 2007, primarily due to a decrease in interest income earned on the structured finance investments. For the years ended December 31, 2008 and 2007, the weighted average outstanding principal balance on NNN’s structured finance investments was $8,614,000 and $16,795,000, respectively. Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests (“Residuals”) for the year ended December 31, 2008, as compared to December 31, 2007, decreased slightly as a result of lower outstanding loan balances. The decrease was partially offset by an increase in interest income due to the increase in the discount rate from 17% to 25% during the third quarter of 2007. 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 slight decrease in the gain from the disposition of real estate is solely dependent on respective sales price and cost basis of the Inventory Properties sold. 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 an average of 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 consistent as a percentage of revenues from continuing operations. The increase 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 receivable. The aggregate principal balance of NNN’s mortgages and notes receivable 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 on mortgages receivable and structured finance investments of $4,240,000 and $3,966,000 for the years ended December 31, 2007 and 2006, respectively. 30 Interest Income on Commercial Mortgage Residual Interests. The decrease in interest income on the Residuals 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. 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 2007 2006 # of Properties Gain 2 - 2 $ $ 332 - 332 # of Properties Gain 6 - 6 $ $ 8,000 (3,609) 4,391 Analysis of Expenses from Continuing Operations General. During 2008, operating expenses from continuing operations increased primarily as a result of the acquisition of additional properties. Operating expenses from continuing operations decreased as a percentage from NNN’s total revenues from continuing operations due to increased operating 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 Loss on interest rate hedge Total other expenses (revenues) 2008 2007 2006 $ 24,868 10,532 44,743 - $ 23,542 8,102 31,843 416 758 - 638 - 24,007 6,508 21,711 - 8,779 1,580 80,901 $ 64,541 $ 62,585 (3,748) $ 58,483 804 (4,753) $ 49,286 - (3,816) 45,872 - 55,539 $ 44,533 $ 42,056 $ $ $ $ 31 Percentage of Total Operating Expenses 2007 2006 2008 Percentage of Revenues from Continuing Operations 2007 2008 2006 General and administrative Real estate Depreciation and amortization Impairment – real estate Impairment – commercial mortgage residual interests valuation Restructuring costs 30.8% 13.0% 55.3% - 0.9% - 36.5% 38.4% 11.0% 13.0% 17.7% 12.6% 10.4% 4.8% 4.6% 49.3% 34.7% 19.8% 17.6% 16.0% - 4.5% 0.2% 0.6% - - 1.0% 14.0% 2.5% - 0.3% - 0.4% - 6.5% 1.2% Total operating expenses 100.0% 100.0% 100.0% 35.7% 35.7% 46.2% Interest and other income Interest expense Loss of interest rate hedge (6.7)% (10.7)% (9.1)% (1.7)% (2.6)% (2.8)% 105.3% 110.7% 109.1% 25.8% 27.2% 33.8% - - 0.4% 1.4% - - Total other expenses (revenues) 100.0% 100.0% 100.0% 24.5% 24.6% 31.0% 2008 Versus 2007 Percent Increase (Decrease) 5.6% 30.0% 40.5% (100.0)% 18.8% - 25.3% (21.1)% 18.7% 100.0% 24.7% 2007 Versus 2006 Percent Increase (Decrease) (1.9)% 24.5% 46.7% 100.0% (92.7)% - 3.1% 24.6% 7.4% - 5.9% Comparison of Year End December 31, 2008 to Year Ended December 31, 2007. General and Administrative Expenses. General and administrative expenses increased for the year ended December 31, 2008, as compared to the same period in 2007, but decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase in general and administrative expenses for the year ended December 31, 2008, is primarily related to an increase in lost pursuit costs. Real Estate. Real estate expenses remained fairly stable as a percentage of revenues from continuing operations, but increased slightly as a percentage of total operating expenses for the year ended December 31, 2008, as compared to the same period in 2007. The increase in real estate expenses for the year ended December 31, 2008, is primarily attributable to an increase in tenant reimbursable real estate expenses related to newly acquired Investment Properties as well as an increase in expenses related to vacant properties. Depreciation and Amortization. Depreciation and amortization expenses increased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations for the year ended December 31, 2008, as compared to the year ended December 31, 2007. The increase is primarily a result of the depreciation recognized on (i) the 109 Investment Properties with an aggregate gross leasable area of 868,000 square feet, acquired in 2008, and (ii) a full year of depreciation and amortization on the 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet which were acquired 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 estimated 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. No real estate impairments were recorded during the year ended December 31, 2008. During the year ended December 31, 2007, NNN recorded real estate impairments totaling $416,000. 32 Impairment – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2008 and 2007, NNN recorded an other than temporary valuation adjustment of $758,000 and $638,000, respectively, as a reduction of earnings from operations. Interest Expense. Interest expense increased for the year ended December 31, 2008, as compared to the same period in 2007, but decreased as a percentage of total operating expense and as a percentage of revenues from continuing operations. The increase in interest expenses is primarily attributable to an increase of $233,201,000 in weighted average long-term debt outstanding. The increase in interest expense was partially offset by an overall decrease in weighted average interest rate for 2008 as compared to 2007. The following represents the primary changes in debt that have impacted interest expense: (i) (ii) repurchase of $25,000,000 of convertible notes payable with an effective interest rate of 3.95% in November 2008, issuance of $234,035,000 of convertible notes payable in March 2008, with an effective interest rate of 5.125%, due June 2028, (iii) payoff of the $100,000,000 7.125% notes payable in March 2008, (iv) payoff of the $12,000,000 secured note payable with stated interest rate of 10.00% in (v) February 2008, payoff of $26,041,000 10-year financing lease obligation with interest rate of 5.00% in November 2007, (vi) payoff of the $10,500,000 10.00% secured note in December 2007, (vii) payoff of the $20,800,000 variable rate term note in October 2007, (viii) repayment of mortgage in September 2007, with balance of $7,305,000 at December 31, (ix) (x) 2006, and an interest rate of 7.37%, issuance of $250,000,000 of notes payable in September 2007, with an effective interest rate of 6.92% due in October 2017, decrease of $5,403,000 in the weighted average debt outstanding on the revolving credit facility for the year ended December 31, 2008, as compared to the same period in 2007, and (xi) decrease in weighted average interest rate on the revolving credit facility from 6.24% for the period ended December 31, 2007, to 3.83% for the period ended December 31, 2008. 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. 33 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 real estate impairments totaling $416,000. No real estate 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 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) issuance of $250,000,000 of notes payable in September 2007 with an effective interest rate of 6.92% due in October 2017, payoff of $26,041,000 10-year financing lease obligation with interest rate of 5.00% in November 2007, 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 convertible notes payable in September 2006 with an effective interest rate of 3.95% due in September 2026, 34 (vi) payoff of the $20,800,000 variable rate term note in October 2007, which was assumed in connection with the acquisition of National Properties Corporation (“NAPE”) in June 2005, (vii) 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 (viii) payoff of the $10,500,000 OAMI secured note payable in December 2007, with a stated interest rate of 10.00%. Investment in Unconsolidated Affiliates In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV”) with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns real estate assets leased to convenience store operators from unrelated third parties. NNN owns 15 percent 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. For the years ended December 31, 2008 and 2007, NNN recognized equity in earnings of $364,000 and $49,000, respectively, from NNN Crow JV. NNN manages the joint venture pursuant to a management agreement and earned certain fees of $531,000 and $21,000 for the years ended December 31, 2008 and 2007, respectively. 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 year ended December 31, 2006, NNN recognized equity in earnings of $122,000 from Plaza. NNN did not recognize earnings from Plaza during the years ended December 31, 2008 and 2007. 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, its leasehold interests that expired and any Investment Properties that were held for sale at December 31, 2008. 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 2008 2007 2006 # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings 19 $ 9,980 $ 12,476 37 $ 56,625 $ 67,583 30 $91,332 $ 114,298 24 9,337 6,876 69 10,681 8,621 58 5,275 8,186 43 $ 19,317 $ 19,352 106 $ 67,306 $ 76,204 88 $96,607 $ 122,484 NNN occasionally sells Investment Properties and may reinvest the proceeds of the sales to purchase new properties or pay down outstanding indebtedness. 35 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 cash dividends; (ii) property acquisitions and development; (iii) origination of mortgages and notes receivable (including structured finance investments) and capital expenditures; (iv) payment of principal and interest on its outstanding indebtedness; and (v) other investments. NNN expects to meet these requirements (other than amounts required for additional property investments, mortgages and notes receivables, including structured finance investments) through cash provided from operations and NNN’s $400,000,000 unsecured revolving credit facility (the “Credit Facility”). NNN utilizes the Credit Facility to meet its short-term working capital requirements. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000. NNN anticipates that any additional investments in properties, mortgages and notes receivables and structured finance investments during the next 12 months will be funded by the Credit Facility, cash provided from operations, the issuance of long-term debt or the issuance of common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. 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 (used in) financing activities Increase (decrease) January 1 December 31 2008 2007 2006 $ 236,748 (256,304) (5,317) $ 129,634 (536,717) 432,907 $ 1,676 (90,099) 81,864 (24,873) 27,499 25,824 1,675 (6,559) 8,234 $ 2,626 $ 27,499 $ 1,675 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 36 provided by operations for the years ended December 31, 2008, 2007 and 2006, 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, 2008 included the following significant transactions: • $12,000,000 repayment of secured note payable with stated interest rate of 10.0% in February 2008, • $100,000,000 repayment of 7.125% notes payable in March 2008, • $228,576,000 in net proceeds from issuance of 2028 convertible notes payable, • $75,958,000 in net proceeds from the issuance of 3,450,000 shares of common stock in October 2008, • $110,107,000 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, • $103,300,000 in net payments from NNN’s Credit Facility, • $47,372,000 in net proceeds from the issuance of 2,146,640 common shares in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), • $19,188,000 in net payments on repurchase of $25,000,000 of 3.95% convertible notes payable due September 2026, and • $5,483,000 in minority interests distributions. 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 Credit Facility. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000. For the year ended December 31, 2008, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 40 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 43 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. 37 Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN’s contractual obligations and commercial commitments outstanding as of December 31, 2008. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2008. Total 2009 Expected Maturity Date (dollars in thousands) 2011 2012 2010 2013 Thereafter Long-term debt(1) Credit Facility Operating lease Total contractual cash obligations(2) $ 1,027,825 26,500 5,422 $ 1,001 - 865 $ 21,022 26,500 891 $ 148,598 - 917 $ 69,291 - 945 $ 234,898 - 973 $ 553,015 - 831 $ 1,059,747 $ 1,866 $ 48,413 $ 149,515 $ 70,236 $ 235,871 $ 553,846 (1) (2) Includes amounts outstanding under the mortgages payable, secured notes payable, convertible notes payable and notes payable and excludes unamortized note discounts. Excludes $7,608 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) as of December 31, 2008: Investment Portfolio Inventory Portfolio (1) Including construction and land costs. # Properties Total Commitment(1) Amount Funded Remaining Commitment 21 1 22 $ $ 97,690 4,814 102,504 $ $ 70,451 2,212 72,663 $ $ 27,239 2,602 29,841 As of December 31, 2008, NNN had outstanding letters of credit totaling $1,265,000 under its Credit Facility. As of December 31, 2008, NNN does not have any other material 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 Credit Facility, debt or equity financings and asset dispositions. 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 its Credit Facility or use other sources of capital in the event of unforeseen significant capital expenditures. The lost revenues and increased property expenses from vacant properties or uncollectibility of lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is 38 unable to release the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2009, NNN owns 34 vacant, unleased Investment Properties and two vacant land parcels which account for approximately four percent of total Investment Properties held in NNN’s Investment Portfolio. Additionally, two 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. In May 2008, one of NNN’s tenants, Uni-Mart, Inc. (“Uni-Mart”), which leased 69 Investment Properties and eight Inventory Properties, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In July 2008, Uni-Mart elected to reject the leases of 13 properties owned by NNN with total annual base rent of approximately $786,000. Additionally, in December 2008, Uni-Mart elected to reject an additional three properties. NNN has re-leased nine of the 16 properties as of December 31, 2008, and continues to market for re-lease or sale the remaining properties. In February 2009, Uni-Mart filed a motion to reject the leases of 38 additional properties. However, at NNN’s option, it may assume the in-place subleases to the existing convenience store operators, which approximate current existing rent. During the year ended December 31, 2008, NNN recorded $2,421,000 of income in connection with the Uni-Mart bankruptcy damage claim. NNN does not believe Uni-Mart’s Chapter 11 filing will have a material adverse effect on its operations and financial position. 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, 2008, 2007 and 2006, NNN declared and paid dividends to its common stockholders of $110,107,000, $92,989,000, and $76,035,000, respectively, or $1.48, $1.40 and $1.32 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: 2008 2007 2006 Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions $ 1.480000 100.000% $ 1.397402 0.000414 0.002184 - - - - - - - - - - 99.8144% $ 1.150780 0.0296% - 0.150261 0.1560% 0.018959 - - - 87.1803% - 11.3834% 1.4363% - $ 1.480000 100.000% $ 1.400000 100.0000% $ 1.320000 100.0000% 39 In February 2009, NNN paid dividends to its common stockholders of $29,313,000, or $0.375 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): Shares Outstanding At December 31, 2008 Liquidation Preference (per share) Fixed Annual Cash Distribution (per share) 2008 Per Share Total Dividends Declared and Paid For the Year Ended December 31, 2007 2006 Total Per Share Total Per Share - $ 25.00 $ 25.00000 $ - $ - $ - $ - $ 4,376 $ 2.456250 Non Voting Preferred Stock Issuance 9% Series A(1) 6.7% Series B Convertible(2) 7.375% Series C(3) 3,680,000 25.00 1.84375 6,785 1.84375 6,785 1.84375 - 2,500.00 167.50000 - - - - 419 923 41.875000 0.250955 (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 Cumulative Redeemable Preferred Stock. See “Capital Resources – Debt and Equity Securities.” (3) 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. If available, 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 $ 2008 26,500 26,290 — 381,535 618,479 Percentage of Total $ 2.5% 2.5% — 36.2% 58.8% 2007 129,800 27,480 12,000 172,500 718,290 Percentage of Total 12.2% 2.6% 1.1% 16.3% 67.8% Total outstanding debt $ 1,052,804 100.0% $ 1,060,070 100.0% 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. Additionally, in October 2008, NNN exercised the option to extend the maturity date by twelve months from May 2009 to May 2010. The current terms of the Credit Facility provide for (i) a tiered interest rate structure of a maximum of 112.5 basis points above LIBOR (as a result of an upgrade in NNN’s debt rating in June 2008, NNN’s current interest rate is 65 basis points above 40 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, 2010. The principal balance is due in full upon expiration. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000. 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) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment limitations. At December 31, 2008, 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 December 2008, upon maturity, NNN repaid the outstanding principal balance on a self-amortizing mortgage which had an original principal balance of $1,916,000 and was secured by a first mortgage on one Investment Property. Upon repayment of the loan, the encumbered Investment Property was released from the mortgage. As of December 31, 2007, the outstanding principal balance was $263,000 with an interest rate of 8.25%. Notes Payable – Secured. In February 2008, NNN repaid the outstanding principal amount on its secured note payable. NNN repaid the outstanding balance of the note payable with restricted cash that was released in December 2007. The note had an outstanding principal balance of $12,000,000 at December 31, 2007, a stated interest rate of 10.0% and an original maturity date of June 2008. 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. Each of NNN’s outstanding series of convertible notes are summarized in the table below (dollars in thousands): Convertible Senior Notes Issue Date Original Principal Net Proceeds Effective Interest Rate Debt Issuance Costs Earliest Conversion Date Earliest Put Option Date Maturity Date 2026(1)(2)(4) 2028(2)(5) September 2006 $ March 2008 172,500 $ 234,035 168,650 228,576 3.950% $ 5.125% 3,850(3) September 2025 September 2011 September 2026 June 2013 5,459 June 2028 June 2027 (1) NNN repurchased $25,000 in November 2008 for a purchase price of $19,188. (2) Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method. Includes $356 of note costs which were written off in connection with the repurchase of $25,000 of the 2026 Notes. The conversion rate per $1,000 principal amount was 41.2951 shares of NNN’s common stock, which is equivalent to a conversion price of $24.2159 per share of common stock. The conversion rate per $1,000 principal amount was 39.3459 shares of NNN’s common stock, which is equivalent to a conversion price of approximately $25.42 per share of common stock. (3) (4) (5) 41 Each series of convertible notes represents senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of the Company. Each note is 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 and unpaid interest thereon through but not including the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes. Notes Payable. Each of NNN’s outstanding series of 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) Maturity Date 2010(1) 2012(1) 2014(1)(2)(5) 2015(1) 2017(1)(6) $ September 2000 June 2002 June 2004 November 2005 September 2007 $ 20,000 50,000 150,000 150,000 250,000 126 287 440 390 877 $ 19,874 49,713 149,560 149,610 249,123 8.500% 7.750% 6.250% 6.150% 6.875% 8.595% September 2010 7.833% June 2012 5.910% June 2014 6.185% December 2015 6.924% 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 and interest rate hedge (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 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. 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 and unpaid interest thereon through the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes. In connection with the note offerings, NNN incurred debt issuance costs totaling $5,459,000 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, 2008, 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. In March 2008, NNN repaid the 7.125% $100,000,000 notes that were due in March 2008. 42 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 June 2008, NNN’s debt rating was upgraded by Moody’s Investor Service. Immediately following the filing of this Annual Report on Form 10-K, NNN expects to file a shelf registration statement with the Commission which will be automatically effective and 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 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 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. 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 used 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 underwriters’ 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 October 2008, NNN issued 3,450,000 shares of common stock in a registered, underwritten public offering at a price of $23.05 per share and received net proceeds of $75,958,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $3,565,000 consisting 43 primarily of underwriters’ fees and commissions, legal and accounting fees. NNN used the net proceeds to repay borrowings under the Credit Facility and to acquire Investment Properties. Dividend Reinvestment and Stock Purchase Plan. In February 2006, NNN filed a shelf registration statement with the 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): Shares of common stock Net proceeds 2008 2,146,640 47,372 $ 2007 2,645,257 62,980 $ 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”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns 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 (see Note 4). Mortgages and Notes Receivable. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands): Mortgages and notes receivable Structured finance investments Accrued interest receivables Unamortized premium Less loan origination fees, net Less allowance 2008 55,495 4,514 387 84 60,480 (8) - 60,472 $ $ 2007 58,556 14,359 578 165 73,658 (100) (396) 73,162 $ $ Mortgages are secured by real estate, real estate securities or other assets. Structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. Commercial Mortgage Residual Interests. In connection with the independent valuations of the Residuals’ fair value, NNN adjusted carrying value of the Residuals to reflect such fair value at December 31, 2008. The adjustments in the Residuals’ were recorded as an aggregate other than temporary valuation impairment of $758,000 and $638,000, for the years ended December 31, 2008 and 2007, respectively. NNN recorded $2,009,000 of unrealized gains and $326,000 of unrealized losses as other comprehensive income for the years ended December 31, 2008 and 2007, respectively. 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk NNN is exposed to interest changes primarily as a result of its 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, 2008, 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, 2008 and 2007. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of December 31, 2008. The variable interest rates shown represent the weighted average rates for the Credit Facility at the end of the periods. The table incorporates only those debt obligations that exist as of December 31, 2008, and 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 one percent for the year ended December 31, 2008. Debt Obligations (dollars in thousands) Variable Rate Debt Credit Facility Fixed Rate Debt Mortgages Unsecured Debt(2) Debt Obligation - 26,500 - - - - Weighted Average Interest Rate(1) - 3.83% - - - - $ Debt Obligation 1,001 1,022 1,098 19,291 863 3,015 Weighted Average Interest Rate 7.02% $ 7.02% 7.00% 6.99% 7.34% 7.33% Debt Obligation - 19,970 147,500 49,876 - 782,668 Effective Interest Rate - 8.60% 3.95% 7.83% - 6.05% 26,500 3.83% $ 26,290 7.02% $ 1,000,014 5.88% 26,500 129,800 $ $ 26,290 27,480 $ $ 728,757 921,507 $ $ $ $ 2009 2010 2011 2012 2013 Thereafter Total Fair Value: December 31, 2008 December 31, 2007(3) (1) (2) (3) The Credit Facility interest rate varies based upon a tiered rate structure ranging from 55 to 112.5 basis points above LIBOR based upon NNN’s debt rating. Includes NNN’s notes payable, net of unamortized note discounts, and convertible notes payable. NNN uses Bloomberg to determine the fair value. In February 2008, NNN repaid the outstanding principal balance on its notes payable – secured debt. As of December 31, 2007, the outstanding notes payable – secured debt obligations and the fair value of such was $12,000 with a 10.0% interest rate. 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 $22,000,000 and $24,340,000 as of December 31, 2008 and December 31, 2007, respectively. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity. Losses are considered other than temporary and are 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. 45 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders National Retail Properties, Inc. and Subsidiaries We have audited National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2008, 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 operating 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, 2008, 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, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008, and our report dated February 26, 2009, expressed an unqualified opinion thereon. Miami, Florida February 26, 2009 46 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders National Retail Properties, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of National Retail Properties Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 2008 and 2007, and the consolidated results of their operations and their cash flows for the each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2008, 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 26, 2009, expressed an unqualified opinion thereon. Miami, Florida February 26, 2009 47 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS December 31, 2008 December 31, 2007 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 affiliate Mortgages, notes and accrued interest receivable, net of allowance Commercial mortgage residual interests Cash and cash equivalents Receivables, net of allowance of $4,003 and $1,582, respectively Accrued rental income, net of allowance of $4,144 and $3,077, respectively Debt costs, net of accumulated amortization of $12,975 and $13,424, 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 $1,521 and $1,710, respectively Accrued interest payable Other liabilities Total liabilities Commitments and contingencies (Note 27) Minority interest Stockholders’ equity: $ $ $ $ 2,357,894 31,240 101,106 4,927 60,472 22,000 2,626 3,612 23,972 11,233 30,280 2,055,846 37,497 248,611 4,139 73,162 24,340 27,499 3,818 24,652 8,548 31,493 2,649,362 $ 2,539,605 $ 26,500 26,290 - 381,535 618,479 7,608 45,526 129,800 27,480 12,000 172,500 718,290 11,243 58,673 1,105,938 1,129,986 1,215 2,334 Preferred stock, $0.01 par value. Authorized 15,000,000 shares Series C, 3,680,000 depositary shares issued and outstanding, at stated liquidation value of $25 per share 92,000 92,000 Common stock, $0.01 par value. Authorized 190,000,000 shares; 78,415,051 and 72,527,729 shares issued and outstanding at December 31, 2008 and 2007, 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 784 725 - 1,302,351 143,789 3,285 1,542,209 - 1,175,364 137,599 1,597 1,407,285 $ 2,649,362 $ 2,539,605 See accompanying notes to consolidated financial statements. 48 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Year Ended December 31, 2007 2008 2006 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, Inventory Portfolio Impairment – commercial mortgage residual interests valuation Restructuring costs Earnings from operations Other expenses (revenues): Interest and other income Interest expense Loss on interest rate hedge Earnings from continuing operations before income tax benefit, minority interest, equity in earnings of unconsolidated affiliates, gain on disposition of equity investment and gain on extinguishment of debt Income tax benefit Minority interest Equity in earnings of unconsolidated affiliates Gain on disposition of equity investment Gain on extinguishment of debt Earnings from continuing operations Earnings from discontinued operations: Real estate, Investment Portfolio (Note 18) Real estate, Inventory Portfolio, net of income tax expense and minority interest (Note 18) Net earnings Other comprehensive income Total comprehensive income $206,195 3,103 1,104 7,126 4,352 4,636 226,516 $160,826 3,221 1,424 5,688 4,834 4,882 180,875 $115,574 3,201 552 4,569 4,436 7,268 135,600 4,900 (4,879) 1,750 (1,418) 36,705 (28,705) 21 332 8,000 24,868 10,532 44,743 - 758 - 80,901 145,636 23,542 8,102 31,843 416 638 - 64,541 116,666 (3,748) 58,483 804 55,539 (4,753) 49,286 - 44,533 90,097 7,501 304 364 - 5,464 103,730 72,133 8,536 188 49 - - 80,906 24,007 6,508 21,711 - 8,779 1,580 62,585 81,015 (3,816) 45,872 - 42,056 38,959 11,231 (1,664) 122 11,373 - 60,021 12,476 67,583 114,298 6,876 19,352 123,082 1,688 $124,770 8,621 76,204 157,110 (3,622) $153,488 8,186 122,484 182,505 5,219 $187,724 See accompanying notes to consolidated financial statements. 49 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED (dollars in thousands, except per share data) Year Ended December 31, 2007 2008 2006 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 $ $ 123,082 - - (6,785) 116,297 - $ 157,110 - - (6,785) 150,325 - 182,505 (4,376) (419) (923) 176,787 419 Net earnings available to common stockholders – diluted $ 116,297 $ 150,325 $ 177,206 Net earnings per share of common stock: Basic: Continuing operations Discontinued operations Net earnings Diluted: Continuing operations Discontinued operations Net earnings Weighted average number of common shares outstanding: Basic Diluted $ $ $ $ 1.31 0.26 1.57 1.30 0.26 1.56 $ $ $ $ 1.12 1.15 2.27 1.11 1.15 2.26 $ $ $ $ 0.94 2.14 3.08 0.94 2.11 3.05 74,249,137 66,152,437 57,428,063 74,521,909 66,407,530 58,079,875 See accompanying notes to consolidated financial statements. 50 . 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 6 0 0 2 d n a 7 0 0 2 , 8 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 ( ) 5 4 3 ( 6 6 1 , 3 3 5 6 , 3 ) 1 8 ( 2 9 9 , 1 l a t o T 5 0 5 , 2 8 1 7 8 0 , 8 2 8 $ - - - - - - - - - - - - - ) 5 4 3 ( 3 5 6 , 3 ) 1 8 ( 2 9 9 , 1 $ ) 9 8 4 , 0 2 ( 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 ) 1 ( ) 1 1 1 , 3 ( 6 6 1 , 3 2 3 6 , 8 5 - - - - - - - - 3 3 1 - 3 1 7 2 - - - - - - $ 5 8 4 , 8 7 7 $ 1 5 5 $ - - - - - - - - - - - - - - - - 0 0 0 , 2 9 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 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 s g n i n r a E d e n i a t e R n i f o l a t i p a C 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 ( - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 0 0 , 5 2 $ 0 4 5 , 4 4 $ 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 51 5 0 0 2 , 1 3 r e b m e c e D t a s e c n a l a B : d i a p d n a d e r a l c e d s d n e d i v i D s g n i n r a e t e N 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 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 ) 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 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 m a r g o r p t n e m t s u j d a e u l a v k c o t S s t s e r e t n i : 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 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 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 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 f o n o i t a n i m r e 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 6 0 0 2 d n a 7 0 0 2 , 8 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 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 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 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 $ 2 8 0 , 3 2 1 ) 5 8 7 , 6 ( ) 1 3 6 , 1 0 1 ( - 8 6 6 , 0 8 6 9 8 , 8 3 ) 2 8 5 , 3 ( 8 8 5 , 2 ) 2 6 1 ( ) 9 0 1 ( 9 0 0 , 2 ) 0 5 ( - - - - - - - - ) 2 6 1 ( ) 9 0 1 ( 9 0 0 , 2 ) 0 5 ( - - - - - - - - - 2 8 0 , 3 2 1 ) 5 8 7 , 6 ( ) 7 0 1 , 0 1 1 ( - - 2 7 4 , 8 3 3 6 , 0 8 8 7 8 , 8 3 ) 2 ( ) 2 8 5 , 3 ( 8 8 5 , 2 - - - - - - 4 5 3 8 1 2 - - - - - - - - - - - - - - - - - - 9 0 2 , 2 4 5 , 1 $ 5 8 2 , 3 $ 9 8 7 , 3 4 1 $ 1 5 3 , 2 0 3 , 1 $ 4 8 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 $ $ - - - - - - - - - - - - - - - - - - - - - - - $ $ 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 $ 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 s e r a h s 5 8 2 , 3 2 5 , 3 1 0 2 , 3 5 7 , 1 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 7 9 3 , 7 1 2 f o e c n a u s s I k c o t s n o m m o c f o e r a h s r e p 8 4 . 1 $ : k c o t s n o m m o c f o e c n a u s s I 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 8 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 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 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 : 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 s e r a h s 3 2 3 , 1 6 8 , 9 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 : k c o t s n o m m o c f o e c n a u s s I n o i t a s n e p m o c d e r r e f e d f o n o i t a z i t r o m A s 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 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 52 . 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, 2007 2008 2006 Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: $ 123,082 $ 157,110 $ 182,505 Stock compensation expense Depreciation and amortization Impairment – real estate Impairment – commercial mortgage residual interests valuation 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 extinguishment of debt Gain on disposition of real estate, Inventory Portfolio 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 Decrease (increase) in work in process Decrease (increase) in mortgages, notes and accrued interest receivable Decrease in receivables Increase in accrued rental income Decrease (increase) in other assets Increase (decrease) in accrued interest payable Increase (decrease) in other liabilities Increase (decrease) in current tax liability Net cash provided by operating activities 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 Principal payments on mortgages and notes Cash received from commercial mortgage residual interests Restricted cash Payment of lease costs Other Net cash used in investing activities 2,588 45,402 5,660 758 189 (162) (364) 439 2,818 (9,980) - (5,464) (12,665) (5,593) (33,745) 128,785 1,195 47 (217) 243 (978) 951 (3,635) (1,463) (1,143) 236,748 2,091 32,976 1,970 638 164 (309) (49) 30 1,143 (56,625) - - (12,133) (4,590) (165,160) 160,173 2,130 (4,217) (301) 3,924 (2,631) 3,615 5,254 4,510 (79) 129,634 3,170 24,524 693 8,779 137 (345) (122) 864 2,622 (91,165) (11,373) - (13,781) (8,366) (195,956) 101,324 2,982 (3,315) 795 642 (5,777) (520) 450 1,951 958 1,676 60,027 - 136,295 - 222,778 10,239 (352,618) - (901) (29,934) 64,589 3,591 - (922) (136) (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 (256,304) (536,717) (90,099) See accompanying notes to consolidated financial statements 53 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (dollars in thousands) Year Ended December 31, 2007 2008 2006 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 Repayment of notes payable – convertible 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 (used in) 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 225,517, 211,118 and 79,500 shares of restricted and unrestricted common stock in 2008, 2007 and 2006, 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 12,766, 7,750 and 14,062 shares of common stock in 2008, 2007 and 2006, respectively to directors pursuant to NNN’s performance incentive plan Issued 26,879, 16,346 and 33,379 shares of common stock in 2008, 2007 and 2006, respectively pursuant to NNN’s Deferred Director Fee Plan Surrender of 2,520 and 8,600 shares of restricted common stock in 2008 and 2007, 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 Interest rate hedge Real estate acquired in connection with foreclosure $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 516,000 (619,300) (1,190) 234,035 (12,000) - (100,000) (19,188) - (5,813) - 128,039 - - - - (6,785) (110,107) (5,483) 41 (3,566) $ 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) (5,317) 432,907 (24,873) 27,499 25,824 1,675 $ 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 2,626 $ 27,499 $ 1,675 69,395 3,441 3,796 - 262 449 58 - 1,688 300 29,948 24,245 - - 2,497 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 51,824 1,375 4,323 - 182 331 182 - $ $ $ $ $ $ $ $ 50,774 1,137 1,763 25,000 307 655 - 4 (3,622) $ 5,219 - 14,845 9,747 - 109 - $ $ $ $ $ $ 885 12,933 1,582 95,000 - - See accompanying notes to consolidated financial statements 54 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2008, 2007 and 2006 Note 1 – Organization and Summary of Significant Accounting Policies: Organization and Nature of Business – National Retail Properties, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term “NNN” or the “Company” refers to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable REIT subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as 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”). 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, 2008, NNN owned 1,005 Investment Properties, with an aggregate gross leasable area of 11,251,000 square feet, located in 44 states. In addition, as of December 31, 2008, NNN’s Investment Assets included $60,472,000 in mortgages, notes and interest receivable (including structured finance investments) and $22,000,000 in commercial mortgage residual interests. The Inventory Assets are operated through the TRS. The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2008, the TRS owned 32 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. 55 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, 2008: Date of Agreement Entity Name TRS’ Ownership % November 2002 February 2003 February 2004 September 2004 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 BEP, L.P. CNLRS Rockwall, L.P. NNN Harrison Crossing, L.P. CNLRS RGI Bonita Springs, LLC 60% 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 JV”) with an affiliate of Crow Holdings Realty Partners IV, LP (see Note 4). 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 – In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), the fair value of the real estate acquired with in-place leases 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. 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 56 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. Real Estate – Inventory Portfolio – The TRS acquires and/or develops and owns properties for the purpose of selling the real estate. 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. 57 Impairment – Real Estate – Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Real Estate 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 Orange Avenue Mortgage Investments, Inc. (“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 were 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. 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. 58 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. 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 2008 2007 2006 74,732,844 (483,707) 66,519,519 (367,082) 57,698,533 (270,470) used in basic earnings per share 74,249,137 66,152,437 57,428,063 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 74,249,137 66,152,437 57,428,063 177,678 35,900 143,550 69,040 - - 59,194 42,503 114,367 107,909 400,607 28,929 Weighted average number of common shares outstanding used in diluted earnings per share 74,521,909 66,407,530 58,079,875 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 59 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 estimates the fair value of restricted stock and stock option grants at the date of grant and amortizes 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 years following the adoption of SFAS 123R provisions. 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, 2008, 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 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 December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) the objective of which is to improve and simplify the accounting for business combinations. This statement requires the new acquiring entity to recognize all assets acquired and liabilities assumed in business combination transactions; establishes an acquisition-date fair value for said assets and liabilities; and requires full disclosure of the financial effect of the 60 acquisition. SFAS 141(R) 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. The adoption of SFAS 141(R) will not have a significant impact on NNN’s financial position or results of operations. In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment to Accounting Research Board No. 51. The objective of SFAS 160 is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and should be applied prospectively. The adoption of SFAS 160 will not have a significant impact on NNN’s financial position or results of operations. In February 2008, the FASB issued FASB Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”), to provide guidance for determining whether or not these transactions should be considered a linked transaction for the purposes of assessing whether sale accounting is appropriate under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”). For transactions within its scope, FSP 140-3 presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement, as a linked transaction. However, if certain criteria are met, the initial transfer and repurchase financing should not be evaluated as a linked transaction and should be evaluated separately under SFAS 140. This FSP is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted. The adoption of FSP 140-3 will not have a significant impact on NNN’s financial position or results of operations. In March 2008, FASB issued SFAS No. 161, (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 provides for enhanced disclosures about how and why an entity uses derivatives and how and where those derivatives and related hedged items are reported in the entity’s financial statements. The statement requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format and the cross referencing in footnotes to enable financial statement users to locate important information about derivative instruments. SFAS 161 applies to all entities and all derivative instruments and related hedged items accounted for under SFAS 133. SFAS 161 is effective prospectively for the financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. The adoption of SFAS 161 will not have a significant impact on NNN’s financial position or results of operations. In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 requires the debt component to be recorded based upon the estimated fair value of similar non-convertible debt. The resulting debt discount would be 61 amortized over the period during which the debt is expected to be outstanding as additional non-cash interest expense. FSP APB 14-1 will become effective beginning in NNN’s first quarter of 2009 and is required to be applied retrospectively to all presented periods, as applicable. The adoption of FSP APB 14-1 is expected to result in the recognition of additional non-cash interest expense of approximately $5.5 and $2.6 million for the years ended December 31, 2008 and 2007, respectively, and $6.0 million for the year ending December 31, 2009. In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), the objective of which is to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for non-governmental entities. SFAS 162 became effective 60 days following the Commission’s approval on September 16, 2008 of the Public Company Accounting Oversight Board Auditing (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS 162 did not have an impact on NNN’s financial position or results of operations. In June 2008, FASB issued FSP No. EITF 03-6-1, “Determining whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method as discussed in SFAS No. 128, “Earnings Per Share.” This FSP is effective for financial statements issued for the fiscal years beginning after December 15, 2008 and interim periods within those years. All prior period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provision of this FSP. The adoption of this FSP will not have a significant impact on NNN’s financial position or results of operations. In September 2008, FASB issued FSP No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP 133-1”). FSP 133-1 amends SFAS 133 and FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees.” The objective of this FSP is to require additional disclosures in order to adequately address the potential adverse effects of changes in credit risk on financial position, financial performance, and cash flows of the sellers of credit derivatives and certain guarantees. The provisions of FSP 133-1 is effective for reporting periods (annual or interim) ending after November 15, 2008, and earlier application is encouraged to facilitate comparisons at initial adoption. This FSP requires comparative disclosures only for periods ending subsequent to initial adoption. The adoption of FSP 133-1 will not have a significant impact on NNN’s financial position or results of operations. In October 2008, FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (“FSP 157-3”) in order to provide clarity and give examples on how fair market value should be determined in an illiquid or non-active 62 market. The FSP is effective upon issuance and for prior periods for which financial statements have not been issued. FSP 157-3 requires that revisions resulting from a change in valuation technique or application shall be accounted for as a change in accounting estimate under SFAS No. 154, “Accounting Changes and Error Corrections.” The adoption of FSP 157-3 did not have a significant impact on NNN’s financial position or results of operations. In December 2008, FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP 140-4”). Among other requirements, this FSP calls for public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets. This FSP is effective for the first reporting period (interim or annual) ending after December 15, 2008, and earlier application is encouraged. The adoption of FSP 140-4 will not have a significant impact on NNN’s financial position or results of operations. In November 2008, FASB ratified EITF No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”), which clarifies accounting and impairment considerations involving equity method investments after the effective date of both SFAS 141(R) and SFAS 160. EITF 08-6 addresses questions relating to how revised business combinations and non-controlling interests in accounting will impact equity method investments. EITF 08-6 is effective on a prospective basis for fiscal years beginning on or after December 15, 2008, and for interim periods within those fiscal years. The adoption of EITF 08-6 will not have a significant impact on NNN’s financial position or results of operations. In November 2008, FASB ratified EITF No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary” (“EITF 08-8”). EITF 08-8 clarifies whether a financial instrument, within the scope of this Issue, is not precluded from being indexed to an entity’s stock in the parent’s consolidated financial statements. EITF 08-8 is effective for fiscal years beginning on or after December 15, 2008, and for interim periods in those fiscal years. The adoption of EITF 08-8 will not have a significant impact on NNN’s financial position or results of operations. 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. Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2008 presentation. These reclassifications had no effect on stockholders’ equity or net earnings. Note 2 – Real Estate – Investment Portfolio: Leases – NNN generally leases its Investment Properties to established tenants. As of December 31, 2008, 990 of the Investment Property leases have been classified as operating leases and 20 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 six of these leases are 63 accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2009 and 2029) and provide for minimum rentals. In addition, the 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, 2008, 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 $ 2008 2007 $ 1,057,757 1,406,121 2,532 2,466,410 (146,296) 2,320,114 40,785 2,360,899 (3,005) 938,804 1,201,999 2,532 2,143,335 (111,087) 2,032,248 25,556 2,057,804 (1,958) $ 2,357,894 $ 2,055,846 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, 2008, 2007 and 2006, NNN recognized collectively in continuing and discontinued operations, $1,020,000, $2,672,000, and $3,160,000, respectively, of such income. At December 31, 2008 and 2007, the balance of accrued rental income, net of allowances of $4,144,000 and $3,077,000, respectively, was $23,972,000 and $24,652,000, respectively. In connection with the development of 21 Investment Properties, NNN has agreed to fund construction commitments (including construction and land costs) of $97,690,000. As of December 31, 2008, NNN has funded $70,451,000 of this commitment, with $27,239,000 remaining to be funded. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2008 (dollars in thousands): 2009 2010 2011 2012 2013 Thereafter $ 214,251 210,574 206,562 201,508 193,143 1,880,833 $ 2,906,871 64 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 2008 2007 $ 43,275 11,755 (23,790) $ 54,967 13,622 (31,092) $ 31,240 $ 37,497 The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2008 (dollars in thousands): 2009 2010 2011 2012 2013 Thereafter $ 4,339 4,358 4,343 4,370 4,319 21,546 $ 43,275 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 – Real Estate – As a result of NNN’s review of long-lived assets 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 (1) Included in Other Assets on the Consolidated Balance Sheets. 2008 2007 2006 $ - - - $ 128 288 $ 416 - - - 1,730 710 693 $1,730 $1,126 $693 65 Note 3 – Real Estate – Inventory Portfolio: As of December 31, 2008, the TRS owned 32 Inventory Properties: 24 completed inventory, one under construction and seven land parcels. As of December 31, 2007, the TRS owned 56 Inventory Properties: 41 completed inventory, nine under construction and six 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 2008 2007 $ 25,901 59,480 85,381 $ 65,983 140,970 206,953 19,031 1,469 20,500 (4,775) 30,477 12,025 42,502 (844) $ 101,106 $ 248,611 In connection with the development of one Inventory Property by the TRS, NNN has agreed to fund construction commitments (including construction and land costs) of $4,814,000. As of December 31, 2008, NNN has funded $2,212,000 of this commitment, with $2,602,000 remaining to be funded. 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): 2008 2007 2006 # of Properties Gain # of Properties Gain # of Properties Continuing operations Minority interest Total continuing operations Discontinued operations Intersegment eliminations Minority interest Total discontinued operations 1 $ 24 21 (10) 11 12,315 329 (3,297) 9,347 2 $ 69 332 - 332 10,957 844 (1,120) 10,681 6 58 Gain $ 8,000 (3,609) 4,391 5,590 190 (505) 5,275 25 $ 9,358 71 $ 11,013 64 $ 9,666 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”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns 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, 2008 and 2007, NNN recognized equity in earnings of $364,000 and $49,000, respectively, for NNN Crow JV. NNN manages the joint venture pursuant to a management 66 agreement and earned certain fees of $531,000 and $21,000 for the years ended December 31, 2008 and 2007, respectively. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to NNN Crow JV 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 year ended December 31, 2006, NNN received $1,042,000 in distributions from Plaza and recognized earnings from Plaza of $122,000. NNN did not receive any distributions or recognize earnings from Plaza during the years ended December 31, 2008 and 2007. 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, 2008, 2007 and 2006, NNN incurred rental expenses in connection with the lease of $981,000, $938,000 and $1,024,000, 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 year ended December 31, 2006, NNN earned $337,000 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, 2008 (dollars in thousands): 2009 2010 2011 2012 2013 Thereafter $ 865 891 917 945 973 831 $ 5,422 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. 67 Note 5 – Mortgages, Notes and Accrued Interest Receivable: Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands): Mortgages and notes receivable Structured finance investments Accrued interest receivables Unamortized premium Less loan origination fees, net Less allowance $ 2008 2007 $ 55,495 4,514 387 84 60,480 (8) - 58,556 14,359 578 165 73,658 (100) (396) $ 60,472 $ 73,162 Mortgages are secured by real estate, real estate securities or other assets. Structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. 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 the third quarter in 2007. In 2006, as a result of the increase in historical prepayments the independent valuation changed the assumption in future prepayments. 68 The following table summarizes the recognition of unrealized gains and/or losses recorded as other comprehensive income as well as other than temporary valuation impairment as of December 31 (dollars in thousands): Unrealized gains Unrealized losses Other than temporary valuation impairment 2008 2007 2006 $ $ 2,009 - 758 - 326 638 $ - - 8,779 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 2008 2007 25% 31.7% to 39.4% CPR 25% 33.0% to 45.7% 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, 2008 (dollars in thousands). 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 $ 22,000 $ $ $ $ $ $ $ $ 21,585 20,987 21,979 21,959 21,994 21,992 22,253 22,523 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. 69 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. Additionally, in October 2008, NNN exercised the option to extend the maturity date by twelve months from May 2009 to May 2010. The current terms of the Credit Facility provide for (i) a tiered interest rate structure of a maximum of 112.5 basis points above LIBOR (as a result of an upgrade in NNN’s debt rating in June 2008, NNN’s current interest rate is 65 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, 2010. The principal balance is due in full upon expiration. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000. The Credit Facility had a weighted average interest rate of 3.83% and 6.24% for the years ended December 31, 2008 and 2007, 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, 2008, NNN was in compliance with those covenants. The following table outlines interest expense as of December 31 (dollars in thousands): Interest expense: Capitalized as a cost of building construction Charged to operations 2008 2007 2006 $ $ 2,014 1,420 3,434 $ $ 3,718 2,219 5,937 $ $ 2,278 5,032 7,310 Note 8 – Mortgages Payable: The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in thousands): Entered Balance June 1996(2)(4) December 1999 December 2001(2) December 2001(2) December 2001(2) June 2002 February 2004(2) March 2005(2) $ 1,916 350 623 698 485 21,000 6,952 1,015 Interest Rate 8.25% 8.50% 9.00% 9.00% 9.00% 6.90% 6.90% 8.14% Maturity(3) December 2008 December 2009 April 2014 April 2019 April 2019 July 2012 January 2017 September 2016 Carrying Value of Encumbered Asset(s)(1) Outstanding Principal Balance at December 31, 2008 2007 $ - 3,227 900 1,304 1,274 25,097 12,006 1,360 $ - 49 315 418 214 19,477 5,036 781 $ 263 95 358 441 226 19,759 5,487 851 $ 45,168 $ 26,290 $ 27,480 70 (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, 2008. (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) Monthly payments include interest and principal, if any; the balance is due at maturity. (4) In December 2008, upon maturity, NNN repaid the outstanding principal balance and the property was released from the mortgage lien. This was a self-amortizing mortgage. The following is a schedule of the annual maturities of NNN’s mortgages payable at December 31, 2008 (dollars in thousands): 2009 2010 2011 2012 2013 Thereafter $ 1,001 1,022 1,098 19,291 863 3,015 $ 26,290 Note 9 – Note Payable – Secured: NNN’s consolidated financial statements include the following note payable, resulting from the acquisition of OAMI (dollars in thousands): Outstanding Principal Balance at December 31, 2008 2007 Stated Rate Maturity Date 03-1 Note(1)(2) $ - $ 12,000 10% June 2008 (1) NNN repaid the outstanding principal amount in February 2008. (2) Secured by certain equity investments in commercial mortgage residual interests of NNN with a carrying value of $5,445. Note 10 – Notes Payable – Convertible: Each of NNN’s outstanding series of convertible notes are summarized in the table below (dollars in thousands): Convertible Senior Notes 2026(1)(2)(4) 2028(2)(5) Issue Date Original Principal Net Proceeds Effective Interest Rate Debt Issuance Costs Earliest Conversion Date Earliest Put Option Date Maturity Date September 2006 $ 172,500 $ March 2008 234,035 168,650 3.950% $ 228,576 5.125% 3,850(3) September 2025 September 2011 September 2026 June 2013 5,459 June 2028 June 2027 (1) NNN repurchased $25,000 in November 2008 for a purchase price of $19,188. (2) Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method. Includes $356 of note costs which were written off in connection with the repurchase of $25,000 of the 2026 Notes. The conversion rate per $1,000 principal amount was 41.2951 shares of NNN’s common stock, which is equivalent to a conversion price of $24.2159 per share of common stock. The conversion rate per $1,000 principal amount was 39.3459 shares of NNN’s common stock, which is equivalent to a conversion price of approximately $25.42 per share of common stock. (3) (4) (5) Each series of convertible notes represents senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of the Company. Each note is redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount 71 of the notes being redeemed plus accrued and unpaid interest thereon through but not including the redemption date and (ii) the make whole amount, if any, as defined in the applicable supplemental indenture relating to the notes. Note 11 – Notes Payable: Each of NNN’s outstanding series of non-convertible notes are summarized in the table below (dollars in thousands). Notes Issue Date Principal Discount(3) 2010(1) 2012(1) 2014(1)(2)(5) 2015(1) 2017(6) September 2000 June 2002 June 2004 November 2005 September 2007 $ 20,000 50,000 150,000 150,000 250,000 $ 126 287 440 390 877 $ Net Price 19,874 49,713 149,560 149,610 249,123 Stated Rate 8.500% 7.750% 6.250% 6.150% 6.875% Effective Rate(4) Maturity Date 8.595% September 2010 7.833% June 2012 5.910% June 2014 6.185% December 2015 6.924% October 2017 (1) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility. (2) The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. (3) The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. (4) 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 and unpaid interest thereon through the redemption date and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes. In connection with the debt offerings, NNN incurred debt issuance costs totaling $5,459,000 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, 2008, NNN was in compliance with those covenants. 72 Note 12 – Preferred Stock: The following table outlines each issuance of NNN’s preferred stock (dollars in thousands): Non-Voting Preferred Stock Issuance Shares Outstanding At December 31, 2008 Liquidation Preference (per share) Fixed Annual Cash Distribution (per share) 9% Series A 7.375% Series C Redeemable Depositary Shares - 3,680,000 $ $ 25.00 25.00 2.25000 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 were 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. 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 13 – Common Stock: 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. 73 In June 2007, NNN filed a registration statement on Form S-8 with the Securities and Exchange Commission (the “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 prospectus 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. In October 2008, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 3,450,000 shares (including 450,000 shares in connection with the underwriters’ over allotment) of common stock at a price of $23.05 per share and received net proceeds of $75,958,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $3,565,000, consisting primarily of underwriters’ fees and commissions, and 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 (dollars in thousands): 2008 2007 Shares of common stock Net proceeds 2,146,640 47,372 $ 2,645,257 62,980 $ Note 14 – 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 60 percent of the participants’ contributions 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, 2008, 2007 and 2006 totaled $385,000, $428,000, and $248,000, respectively. Note 15 – 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 $ 2008 1.480000 - - - $ 2007 1.397402 0.000414 0.002184 - $ 2006 1.150780 - 0.150261 0.018959 $ 1.480000 $ 1.400000 $ 1.320000 74 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 $ 1.843750 $ 1.843750 $ - $ - $ 0.206250 1.843750 0.205867 1.840328 0.000061 0.000546 0.000322 0.002876 - - - 2008: Series C 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 - - - 0.256127 4.766800 0.028567 0.032316 0.601400 0.003604 (1) (2) Shares of Series A and Series B preferred are no longer outstanding. Issued in October 2006. Note 16 – 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 17 – 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 2005 through 2008. 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 75 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, 2008, 2007 and 2006, 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 Reserves Excess interest expense carryforward Net operating loss carryforward Net deferred income tax asset (liability) Current income tax asset (payable) Income tax asset (liability) 2008 2007 $(5,195) $(6,768) (632) (314) 393 5,676 134 (723) (332) 1,894 5,721 2,717 $ 4,082 982 $(1,511) (160) $ 5,064 $(1,671) 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, projections for future taxable income, and tax strategies available to NNN 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, 2008. 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): 2008 2007 2006 $ 119,788 $ 153,849 $ 176,283 Current: Federal State and local Deferred: Federal State and local Total benefit for income taxes (1,936) (364) (1,120) (209) (1,805) (339) 4,539 1,055 3,294 3,570 1,020 3,261 6,493 1,873 6,222 Total net earnings $ 123,082 $ 157,110 $ 182,505 76 Note 18 – 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, 2008, 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 2008 2007 2006 2,815 100 25 51 1,528 4,519 (77) (60) 433 1,730 2,026 (3) - (3) $ $ 9,086 2,695 147 351 866 13,145 (44) 459 1,065 710 2,190 (3) - (3) 23,913 5,991 215 1,127 334 31,580 98 3,035 2,805 693 6,631 - 1,816 1,816 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 2,496 9,980 - 10,958 56,625 - 23,133 91,332 (167) Earnings from discontinued operations $ 12,476 $ 67,583 $ 114,298 77 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, 2008, 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 2008 2007 2006 $ $ 10,626 139 877 916 12,558 8,616 - 1,008 224 9,848 $ 9,235 - 311 336 9,882 151,713 (139,069) 164,338 (152,537) 80,856 (75,076) 12,644 11,801 5,780 35 1,523 226 3,930 5,714 (8) 5,291 5,283 14,205 (4,207) (3,122) 78 1,509 68 844 2,499 (5) 3,928 3,923 15,227 (5,275) (1,331) 57 394 8 - 459 1 1,049 1,050 14,153 (5,009) (958) Earnings from discontinued operations $ 6,876 $ 8,621 $ 8,186 Note 19 – Derivatives: SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (“SFAS 133”), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 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 78 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 may discontinue 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. In February 2008, NNN terminated its interest rate hedge with a notional amount of $100,000,000 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 hedge when terminated was a liability of $804,000, which NNN recorded as a loss on interest rate hedge. 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. 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, 2008, $391,000 remains in other comprehensive income related to the fair value of the interest rate hedges. During the year ended December 31, 2008 and 2007, NNN reclassified $162,000 and $309,000, respectively, out of other comprehensive income as a reduction to interest expense. During 2009, NNN estimates that an additional $159,000 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. 79 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, 2008. Note 20 – 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: Number of Shares 2007 2006 2008 Outstanding, January 1 Options granted Options exercised Options surrendered 118,804 - (28,000) (13,800) 236,371 - (82,767) (34,800) 461,175 - (224,804) - Outstanding, December 31 77,004 118,804 236,371 Exercisable, December 31 77,004 118,804 236,371 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 2008 2007 2006 $ 13.64 - 11.17 14.00 14.00 $ 14.92 - 16.12 13.64 13.64 $ 15.66 - 16.43 14.92 14.92 The following summarizes the outstanding options and the exercisable options at December 31, 2008: Option Price Range $14.5700 to $15.3200 $10.1875 to $13.2000 Total 24,600 11.48 2.12 24,600 11.48 $ $ 52,404 15.18 3.57 52,404 15.18 $ $ 77,004 14.00 3.11 77,004 14.00 $ $ 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 80 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, 2008, the intrinsic value of options outstanding was $254,000. All options outstanding at December 31, 2008, were exercisable. During the years ended December 31, 2008, 2007 and 2006, NNN received proceeds totaling $313,000, $1,334,000 and $3,694,000, 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 years ended December 31, 2008, 2007 and 2006, was $327,000, $664,000 and $1,300,000, 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, 2008, of such grants. Non-vested restricted shares, January 1 Restricted shares granted Restricted shares vested Restricted shares forfeited Non-vested restricted shares, December 31 Number of Shares Weighted Average Share Price $ 386,761 225,117 (100,518) (2,520) 508,840 19.51 16.83 20.25 23.17 18.24 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, 2008 and 2007, NNN cancelled 2,520 and 8,600 forfeited shares, respectively, of restricted stock. No restricted stock was forfeited in 2006. Compensation expense for the restricted stock which is not tied to performance goals is determined based upon the fair value at the date of grant, assuming a 1.3% forfeiture rate, and is recognized as the greater of the amount amortized over a straight lined basis or the amount vested over the vesting periods. Vesting periods for officers and key associates of 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. 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 calculated by a third party using a 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, 2008, NNN granted 81,330 performance based shares with a weighted average grant price of $8.00 to certain executive officers of NNN. The compensation expense for the grant is based upon fair market value of the grant calculated by a 81 third party using a lattice model with the following assumptions: (i) risk free rate of 3.48%, (ii) a dividend rate of 6.5%, (iii) a term of five years, and (iv) a volatility of 19.89%. Volatility is based upon the historical volatility of NNN’s stock and other factors. The vesting of these shares is contingent upon the achievement of certain performance goals by January 1, 2013. The following summarizes other grants made during the year ended December 31, 2008, pursuant to the 2007 Plan. Other share grants under the 2007 Plan: Directors’ fees Deferred Directors’ fees Non-restricted grant Weighted Average Share Price Shares $ 12,766 26,846 400 40,012 20.53 19.71 21.63 19.99 Shares available under the 2007 Plan for grant, end of period 5,560,706 The total compensation cost for share-based payments for the years ended December 31, 2008, 2007 and 2006, totaled $3,341,000, $2,583,000 and $3,766,000, respectively, of such compensation expense. At December 31, 2008, NNN had $6,302,000 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 three years. Note 21 – 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, mortgages, notes and accrued interest receivable, receivables, mortgages payable, note payable – secured, accrued interest payable and other liabilities at December 31, 2008 and 2007, approximate fair value based upon current market prices of similar issues. At December 31, 2008 and 2007, the fair value of NNN’s notes payable and convertible notes, collectively, was $728,757,000 and $921,507,000, respectively, based upon the quoted market price. Note 22 – Related Party Transactions: See Note 4. 82 Note 23 – Quarterly Financial Data (unaudited): The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data): 2008 Revenues as originally reported Reclassified to discontinued operations Adjusted revenue Net earnings Net earnings per share(1): Basic Diluted 2007 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 $ $ $ $ $ $ $ $ 55,200 (946) 54,254 33,053 0.43 0.43 42,713 (3,974) 38,739 26,704 0.41 0.41 $ $ $ $ $ $ $ $ 57,026 (497) $ 58,573 (84) 56,529 $ 58,489 30,887 $ 30,274 0.40 0.40 46,421 (2,057) $ $ 0.39 0.39 47,783 (1,318) 44,364 $ 46,465 48,655 $ 47,386 $ 0.71 0.70 0.68 0.68 $ $ $ $ $ $ $ $ 57,244 - 57,244 28,868 0.35 0.35 52,565 (1,258) 51,307 34,365 0.46 0.46 (1) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount. 83 Note 24 – 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, 2008, 2007 and 2006 (dollars in thousands): 2008 Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals External revenues Intersegment revenues Interest revenue Interest revenue on Residuals Gain on the disposition of real estate, $ $ 218,696 12,727 6,728 4,636 Inventory Portfolio Interest expense Depreciation and amortization Operating expenses Impairments – real estate Equity in earnings of unconsolidated affiliate Loss on interest rate hedge Gain on extinguishment of debt 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 - (13,333) - - - (13,241) - - - 2,567 - - - - 2,475 328 2,803 (129,485) - $ $ $ $ 218,872 - 6,756 4,636 21 58,483 44,743 35,400 758 364 (804) 5,464 7,501 304 103,730 19,352 123,082 2,649,362 386,363 $ 176 606 28 - 21 7,443 42 9,573 - - - - 5,922 954 - 64,281 44,701 25,827 758 (2,203) (804) 5,464 1,579 (650) 110,606 (9,351) 12,476 123,082 2,649,931 352,618 $ $ $ 6,548 (2,803) $ 128,916 33,745 $ $ $ $ $ 84 2007 External revenues Intersegment revenues Interest revenue Interest revenue Residuals 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 Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) Assets Additions to long-lived assets: Real estate 2006 External revenues Intersegment revenues Interest revenue Interest revenue on Residuals 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 Investment Assets Inventory Assets Eliminations (Intercompany) Consolidated Totals $ $ 171,954 15,851 8,425 4,882 $ 327 - 40 - - 55,633 31,734 23,943 (927) (1,334) 2,675 (689) 332 8,502 109 7,702 (127) - 5,861 877 89,527 (9,003) 67,583 7,777 - (15,851) - - - (14,849) - (1) - 1,383 - - 382 844 $ $ $ $ $ 157,110 $ 2,519,360 $ $ 677,101 124,517 16,379 7,129 7,268 - 48,801 21,653 21,914 8,779 (1,226) $ 1,226 $ $ $ 263,369 165,160 441 - 61 - 8,000 12,352 58 10,183 - (243,124) - - (16,379) - - - (15,281) - (2) - (2,677) - 2,799 11,335 5,050 353 38 6,181 (2,017) 68,207 (9,889) 114,298 7,995 $ 182,505 $ 1,910,003 $ $ $ (1,894) $ 242,466 195,956 $ $ - - - 1,703 191 1,894 (234,971) - $ $ $ $ $ $ $ $ 172,281 - 8,465 4,882 332 49,286 31,843 31,644 (1,054) 49 8,536 188 80,906 76,204 157,110 2,539,605 842,261 124,958 - 7,190 7,268 8,000 45,872 21,711 32,095 8,779 122 11,373 11,231 (1,664) 60,021 122,484 182,505 1,917,498 548,505 Additions to long-lived assets: Real estate $ 352,549 85 Note 25 – Fair Value Measurements: On January 1, 2008, the Company adopted the provisions of FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) relating to financial assets and liabilities. SFAS 157 specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The standard describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels: • Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities. • Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques. NNN currently values its Residuals based upon an independent valuation which provides a discounted cash flow analysis based upon prepayment speeds, expected loan losses and yield curves. These valuation inputs are generally considered unobservable; therefore, the Residuals are considered Level 3 financial assets. The table below presents a reconciliation of the Residuals during the year ended December 31, 2008 (dollars in thousands): Balance at beginning of period Total gains (losses) – realized/unrealized: Included in earnings Included in other comprehensive income Interest income on Residuals Cash received from Residuals Purchases, sales, issuances and settlements, net Transfers in and/or out of Level 3 Balance at end of period Changes in gains (losses) included in earnings attributable to a change in unrealized gains (losses) relating to assets still held at the end of period $ 24,340 (758) 2,009 4,636 (8,227) - - 22,000 581 $ $ Note 26 – Major Tenants: As of December 31, 2008, NNN did not have any tenant that accounted for ten percent or more of its rental and earned income. Note 27 – Commitments and Contingencies: As of December 31, 2008, NNN had letters of credit totaling $1,265,000 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. 86 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, 2008 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 stockholders 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 87 • 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. 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, 2008, 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, 2008, NNN’s internal control over financial reporting was effective. Attestation Report of the Registered Public Accounting Firm. Ernst & Young LLP, NNN’s independent registered public accounting firm, audited the financial statements included in this Annual Report on Form 10-K and has issued an attestation report on NNN’s effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K. 88 Changes in Internal Control over Financial Reporting. During the three months ended December 31, 2008, 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. 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. 89 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 Relationships and Related 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 “Proposal II: Proposal to Ratify Independent Registered Public Accounting Firm,” and the information in such sections are incorporated herein by reference. 90 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, 2008 and 2007 Consolidated Statements of Earnings for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006 Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2008 Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2008 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 and filed with the Securities and Exchange Commission on May 1, 2006, and incorporated herein by reference). Articles Supplementary Establishing and Fixing the Rights and Preferences of 7.375% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share, dated October 11, 2006 (filed as Exhibit 3.2 to the Registrant’s Registration Statement on 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 and filed with the Securities and Exchange Commission on May 1, 2006, and incorporated herein by reference). 91 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 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 filed with the Securities and Exchange Commission 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 Registration Statement on 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. 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 and filed with the Securities and Exchange Commission on 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 and filed with the Securities and Exchange Commission on 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 and filed with the Securities and Exchange Commission on 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 and filed with the Securities and Exchange Commission on 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 filed with the Securities and Exchange Commission on June 18, 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 filed with the Securities and Exchange Commission on June 18, 2004, and incorporated herein by reference). 92 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 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 filed with the Securities and Exchange Commission on November 17, 2005, 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 filed with the Securities and Exchange Commission on November 17, 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 relating to 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006 and filed with the Securities and Exchange Commission on September 13, 2006, 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 filed with the Securities and Exchange Commission on September 13, 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 Registration Statement on 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 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference). Form of Supplemental Indenture No. 8 between National Retail Properties, Inc. and U.S. Bank National Association relating to 6.875% Notes due 2017 (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 4, 2007, 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 and filed with the Securities and Exchange Commission on September 4, 2007, and incorporated herein by reference). 93 4.17 4.18 Form of Ninth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.1 to Registrants’ Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference). Form of 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference). 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 10.6 10.7 2007 Performance Incentive Plan (filed as Annex A to the Registrant’s 2007 Annual Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 3, 2007, 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Craig Macnab (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Paul E. Bayer (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). 94 10.8 10.9 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 and filed with the Securities and Exchange Commission on 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 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2007, and incorporated herein by reference). 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 26, 2009 (filed herewith). Power of Attorney (included on signature page). Section 302 Certifications 12. 21. 23. 24. 31. 31.1 31.2 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32. Section 906 Certifications 32.1 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). 95 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 26th day of February, 2009. 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. POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Craig Macnab and Kevin B. Habicht as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof. Signature Title Date /s/ Craig Macnab Craig Macnab /s/ Ted B. Lanier Ted B. Lanier /s/ Don DeFosset Don DeFosset /s/ Dennis E. Gershenson Dennis E. Gershenson /s/ Richard B. Jennings Richard B. Jennings /s/ Robert C. Legler Robert C. Legler /s/ Robert Martinez Robert Martinez /s/ Kevin B. Habicht Kevin B. Habicht Chairman of the Board and Chief Executive Officer (Principal Executive Officer) February 26, 2009 Lead Director February 26, 2009 February 26, 2009 February 26, 2009 February 26, 2009 February 26, 2009 February 26, 2009 February 26, 2009 Director Director Director Director Director Director, Chief Financial Officer (Principal Financial and Accounting Officer), Executive Vice President, Assistant Secretary and Treasurer 96 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 and filed with the Securities and Exchange Commission on May 1, 2006, and incorporated herein by reference). Articles Supplementary Establishing and Fixing the Rights and Preferences of 7.375% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share, dated October 11, 2006 (filed as Exhibit 3.2 to the Registrant’s Registration Statement on 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 and filed with the Securities and Exchange Commission on 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 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 filed with the Securities and Exchange Commission 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 Registration Statement on 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. 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 and filed with the Securities and Exchange Commission on 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 and filed with the Securities and Exchange Commission on 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 and filed with the Securities and Exchange Commission on June 4, 2002, and incorporated herein by reference). 97 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on 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 filed with the Securities and Exchange Commission on June 18, 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 filed with the Securities and Exchange Commission on June 18, 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 filed with the Securities and Exchange Commission on November 17, 2005, 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 filed with the Securities and Exchange Commission on November 17, 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 relating to 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006 and filed with the Securities and Exchange Commission on September 13, 2006, 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 filed with the Securities and Exchange Commission on September 13, 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 Registration Statement on 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 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference). 98 4.15 4.16 4.17 4.18 Form of Supplemental Indenture No. 8 between National Retail Properties, Inc. and U.S. Bank National Association relating to 6.875% Notes due 2017 (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 4, 2007, 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 and filed with the Securities and Exchange Commission on September 4, 2007, and incorporated herein by reference). Form of Ninth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.1 to Registrants’ Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference). Form of 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference). 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 2007 Performance Incentive Plan (filed as Annex A to the Registrant’s 2007 Annual Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 3, 2007, 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Craig Macnab (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). 99 10.6 10.7 10.8 10.9 Employment Agreement dated as of December 1, 2008, between the Registrant and Paul E. Bayer (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Employment Agreement dated as of December 1, 2008, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, 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 and filed with the Securities and Exchange Commission on 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 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2007, and incorporated herein by reference). 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 26, 2009 (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). 100 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). 101 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2008 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 . . . . . . . . . . . . . . . Franklin, TN . . . . . . . . . . . . . . . . — — — — 1,423,701 2,310,845 899,768 1,807,096 2,449,261 1,627,872 2,180,574 2,108,278 — — — — — — — — 1,423,701 2,310,845 899,768 1,807,096 2,449,261 1,627,872 2,180,574 2,108,278 3,872,962 3,938,717 3,080,342 3,915,374 599,559 398,489 533,786 248,894 1992 1976 1994 1999 03/99 03/99 03/99 06/05 40 years 40 years 40 years 30 years Ace Hardware and Lighting: Bourbonnais, IL . . . . . . . . . . . . . — 298,192 1,329,492 — — 298,192 1,329,492 1,627,684 264,118 1997 11/98 37 years A.C. Moore Arts & Crafts Inc. Dover, NJ . . . . . . . . . . . . . . . . . . — 1,138,296 3,238,083 — — 1,138,296 3,238,083 4,376,379 819,640 1995 11/98 40 years Advanced Auto Parts: Miami, FL . . . . . . . . . . . . . . . . . . — 867,177 — 1,035,275 — 867,177 1,035,275 1,902,452 91,665 2005 12/04(g) 40 years All Star Sports: Wichita, KS . . . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Amazing Jakes: Aurora, CO . . . . . . . . . . . . . . . . . Plano, TX . . . . . . . . . . . . . . . . . . American Payday Loans: — — — — 3,275,372 1,550,654 1,630,685 965,402 5,075,945 13,873,887 5,705,067 17,049,425 — — — — — — — — 3,275,372 1,550,654 1,630,685 965,402 4,906,057 2,516,056 66,247 39,219 5,075,945 13,873,887 18,949,832 5,705,067 17,049,425 22,754,492 592,531 223,266 1988 1987 1986 1982 05/07 05/07 04/07 07/08 40 years 40 years 40 years 35 years Des Moines, IA . . . . . . . . . . . . . . — 108,421 379,067 — — 108,421 379,067 487,488 33,563 1979 06/05 40 years AmerUs Group Warehouse: Des Moines, IA . . . . . . . . . . . . . . — 28,465 85,396 — — 28,465 85,396 113,861 30,244 1949 06/05 10 years Amoco: Miami, FL . . . . . . . . . . . . . . . . . . Sunrise, FL . . . . . . . . . . . . . . . . . Amscot: Tampa, FL . . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . Clearwater, FL . . . . . . . . . . . . . . Applebee’s: — — — — — — — 969,156 949,185 — — — — — — 969,156 949,185 — — 969,156 949,185 — — (i) (i) 05/03 06/03 (i) (i) 1,159,733 764,473 664,213 358,354 546,475 455,524 352,305 1,010,821 — — — 865,674 — — — 922,218 — — 937,758 — — — — 331,614 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 28,258 56,810 55,806 56,678 55,679 18,999 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 Ballwin, MO . . . . . . . . . . . . . . . . — 1,496,173 1,403,581 — — 1,496,173 1,403,581 2,899,754 247,089 1995 12/01 40 years Arby’s: Colorado Springs, CO . . . . . . . . . Thomson, GA . . . . . . . . . . . . . . . Washington Courthouse, OH . . . . . . . . . . . . . Whitmore Lake, MI Arizona Oil: Casa Grande, AZ . . . . . . . . . . . . . Gilbert, AZ . . . . . . . . . . . . . . . . . Glendale, AZ . . . . . . . . . . . . . . . . Mesa, AZ . . . . . . . . . . . . . . . . . . Mesa, AZ . . . . . . . . . . . . . . . . . . Miami, AZ . . . . . . . . . . . . . . . . . Peoria, AZ . . . . . . . . . . . . . . . . . . Prescott, AZ . . . . . . . . . . . . . . . . — — — — — — — — — — — — 205,957 267,842 156,875 170,515 533,540 503,550 545,841 468,916 2,339,580 1,316,760 1,817,497 1,332,001 2,219,229 762,158 860,443 1,266,424 1,893,868 1,303,523 2,415,117 1,366,666 2,140,288 2,147,619 1,116,682 1,260,903 — — — — — — — — — — — — — — — — — — — — — — — — 205,957 267,842 156,875 170,515 533,540 503,550 545,841 468,916 739,497 771,392 702,716 639,431 2,339,580 1,316,760 1,817,497 1,332,001 2,219,229 762,158 860,443 1,266,424 1,893,868 1,303,523 2,415,117 1,366,666 2,140,288 2,147,619 1,116,682 1,260,903 4,233,448 2,620,283 4,232,614 2,698,666 4,359,517 2,909,778 1,977,125 2,527,328 93,925 88,646 96,091 82,549 33,819 23,277 37,736 28,472 33,442 38,350 23,264 22,516 1998 1997 1998 1993 1993 1996 2001 1986 2000 1998 1987 1997 12/01 12/01 12/01 12/01 05/08 05/08 05/08 05/08 05/08 05/08 05/08 05/08 40 years 40 years 40 years 40 years 35 years 35 years 40 years 30 years 40 years 35 years 30 years 35 years See accompanying report of independent registered public accounting firm. F-1 — — — — — — — — — — — — — — — — — — — — — Scottsdale, AZ . . . . . . . . . . . . . Sedona, AZ . . . . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . . Ashley Furniture: Altamonte Springs, FL . . . . . . Louisville, KY . . . . . . . . . . . . . Babies “R” Us: Arlington, TX . . . . . . . . . . . . . Independence, MO . . . . . . . . . Barnes & Noble: Brandon, FL . . . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . Plantation, FL . . . . . . . . . . . . . Freehold, NJ (r) . . . . . . . . . . . . Dayton, OH . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . Marlton, NJ . . . . . . . . . . . . . . . Bassett Furniture: Beautiful America Dry Cleaners: Orlando, FL . . . . . . . . . . . . . . . Bed, Bath & Beyond: Richmond, VA . . . . . . . . . . . . . Glendale, AZ . . . . . . . . . . . . . . Midland, MI . . . . . . . . . . . . . . . Beneficial: Eden Prairie, MN . . . . . . . . . . . Best Buy: Brandon, FL . . . . . . . . . . . . . . . Cuyahoga Falls, OH . . . . . . . . Rockville, MD . . . . . . . . . . . . . Fairfax, VA . . . . . . . . . . . . . . . St. Petersburg, FL . . . . . . . . . . Pittsburgh, PA . . . . . . . . . . . . . Denver, CO . . . . . . . . . . . . . . . Best Smoke & Gas: Abbottstown, PA . . . . . . . . . . . Billy Bob’s: Gresham, OR . . . . . . . . . . . . . . BJ’s Wholesale Club: 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 1,529,446 1,372,600 1,281,305 1,324,080 1,104,811 1,335,836 1,082,884 1,598,982 1,457,039 1,618,943 1,223,258 1,911,165 — — — — — — — — — — — — 1,529,446 1,372,600 1,281,305 1,324,080 1,104,811 1,335,836 1,082,884 1,598,982 1,457,039 1,618,943 1,223,258 1,911,165 Total 2,902,046 2,605,385 2,440,647 2,681,866 3,075,982 3,134,423 24,511 20,689 23,854 28,553 28,910 34,128 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 2,906,409 4,877,225 1,666,700 4,989,452 315,000 — — — 2,906,409 5,192,225 1,666,700 4,989,452 8,098,634 6,656,152 1,433,055 472,958 830,689 2,611,867 1,678,794 2,301,909 — — 114,769 — 830,689 2,611,867 1,678,794 2,416,678 3,442,556 4,095,472 816,753 410,763 4,751,211(p) 3,616,357 1,476,407 1,527,150 3,244,785 2,722,087 3,307,562 2,396,024 — 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 3,244,785 2,722,087 3,307,562 2,396,024 3,616,457 (c) 2,917,219 2,260,663 1,412,614 3,324,525 497,179 1,625,702 1,573,875 2,241,639 2,709,055 4,318,554 3,003,557 5,966,872 5,703,586 3,616,457 5,177,882 4,737,139 2,122,881 3,815,514 7,027,609 533,665 969,855 793,691 (c) 730,320 941,632 469,083 275,535 1,093,134 1999 2000 1992 1992 1995 1996 1997 2005 1996 1996 1995 1994 1995 1996 1995 1996 1997 1997 1995 05/08 05/08 05/08 05/08 05/08 05/08 09/97 03/05 06/96 12/01 08/94(f) 09/94 10/94(f) 05/95(f) 01/96 05/97 06/97 09/97 11/98 35 years 40 years 35 years 35 years 35 years 35 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years (c) 40 years 40 years 40 years 40 years 40 years Fairview Heights, IL . . . . . . . . — 1,257,729 2,622,952 — — 1,257,729 2,622,952 3,880,681 210,383 1980 10/05 40 years Beall’s: Sarasota, FL . . . . . . . . . . . . . . . — 1,077,802 1,795,174 — — 1,077,802 1,795,174 2,872,976 230,990 1996 09/97 40 years 58,124(o) 40,200 110,531 — — 40,200 110,531 150,731 13,471 2001 02/04 40 years 2,723,255(p) 1,184,144 2,842,759 1,082,092 231,356 — — — 2,758,452 — — 2,702,271 — 1,184,144 2,842,759 1,082,092 2,758,452 231,356 2,702,271 4,026,903 3,840,544 2,933,627 467,871 652,259 143,986 1997 1999 2006 06/98 12/98(g) 07/03 40 years 40 years 40 years 75,736 210,628 94,277 — 75,736 304,905 380,641 50,298 1997 12/01 40 years — — — — 2,985,156 2,772,137 3,708,980 2,359,377 6,233,342 3,418,783 3,052,477 3,218,018 4,345,620(p) 4,031,744 2,610,980 2,330,847 2,292,932 8,881,890 4,372,684 — — — — — — — — — — — — — — — — 5,757,293 2,985,156 2,772,137 6,068,357 3,708,980 2,359,377 9,652,125 6,233,342 3,418,783 6,270,495 3,052,477 3,218,018 6,642,724 4,031,744 2,610,980 2,330,847 2,292,932 4,623,779 8,881,890 4,372,684 13,254,574 822,978 680,779 979,339 915,124 491,113 604,283 824,433 1996 1970 1995 1995 1997 1997 1991 02/97 06/97 07/97 08/97 09/97 06/98 06/01 40 years 40 years 40 years 40 years 35 years 40 years 40 years — — 55,181 200,050 — — 55,181 200,050 255,231 14,795 2000 01/06 40 years 817,311 108,294 — — 817,311 108,294 925,605 19,064 1993 12/01 40 years Orlando, FL . . . . . . . . . . . . . . . 4,692,576(o) 3,270,851 8,626,657 366,650 — 3,270,851 8,993,307 12,264,158 1,069,953 2001 02/04 40 years Blockbuster Video: Conyers, GA . . . . . . . . . . . . . . Alice, TX . . . . . . . . . . . . . . . . . Gainesville, GA . . . . . . . . . . . . Glasgow, KY . . . . . . . . . . . . . . Kingsville, TX . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . — — — — — — — 320,029 318,285 294,882 302,859 498,849 491,453 843,121 556,282 578,268 611,570 560,904 457,695 498,488 562,498 — — — — — — — — 29,555 — — — — — 320,029 318,285 294,882 302,859 498,849 491,453 843,121 556,282 578,268 611,570 560,904 487,250 498,488 562,498 876,311 896,553 906,452 863,763 986,099 989,941 1,405,619 160,511 101,799 107,662 98,742 81,688 87,755 99,023 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 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 BMW: Duluth, GA . . . . . . . . . . . . . . . — 4,433,613 4,080,186 6,355,663 — 4,504,324 10,435,849 14,940,173 905,663 1984 12/01 40 years Borders Books & Music: Wilmington, DE . . . . . . . . . . . Richmond, VA . . . . . . . . . . . . Ft. Lauderdale, FL . . . . . . . . . . Bangor, ME . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . Borough of Abbotstown: Abbottstown, PA . . . . . . . . . . . Boston Market: Burton, MI . . . . . . . . . . . . . . . . Geneva, IL . . . . . . . . . . . . . . . . North Olmsted, OH . . . . . . . . . Novi, MI . . . . . . . . . . . . . . . . . Orland Park, IL . . . . . . . . . . . . Warren, OH . . . . . . . . . . . . . . . Buck’s: St. Louis, MO . . . . . . . . . . . . . Buffalo Wild Wings: Michigan City, IN . . . . . . . . . . Bugaboo Creek: Lithonia, GA . . . . . . . . . . . . . . Rochester, NY . . . . . . . . . . . . . Burger King: Colonial Heights, VA . . . . . . . Carino’s: Beaumont, TX . . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . . Carl’s Jr: Chandler, AZ . . . . . . . . . . . . . . Tucson, AZ . . . . . . . . . . . . . . . Spokane, WA . . . . . . . . . . . . . Carver’s: Centerville, OH . . . . . . . . . . . . Cash Advance: Mesa, AZ . . . . . . . . . . . . . . . . . Certified Auto Sales: — — 3,030,764 6,061,538 2,177,310 2,599,587 4,577,387(p) 3,164,984 3,319,234 1,546,915 2,486,761 — 1,947,198 — — — — — — — — — — — — 2,994,395 2,177,310 3,164,984 1,546,915 1,947,198 6,061,538 2,599,587 3,319,234 2,486,761 9,055,933 4,776,897 6,484,218 4,033,676 (c) 1,947,198 2,125,612 881,332 662,170 778,840 (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) — — — — — — — — — — — — — — — — — — — — 55,181 200,050 — — 55,181 200,050 255,231 14,795 2000 01/06 40 years 619,778 707,242 1,125,347 1,036,952 460,521 651,108 556,201 467,592 601,800 835,669 562,384 562,446 — — — — — — — — — — — — 619,778 1,125,347 601,800 835,669 562,384 562,446 707,242 893,485 389,065 297,567 377,244 467,592 1,327,020 2,018,832 990,865 1,133,236 939,628 1,030,038 124,504 159,397 69,541 57,575 69,038 82,316 1997 1996 1996 1995 1995 1997 12/01 12/01 12/01 12/01 12/01 12/01 40 years 40 years 40 years 40 years 40 years 40 years 775,246 — — — 775,246 — 775,246 (e) (e) 12/07(q) (e) 162,538 492,007 — — 162,538 492,007 654,545 86,614 1996 12/01 40 years 922,578 1,276,222 792,275 1,535,158 — — — — 922,578 792,275 1,276,222 1,535,158 2,198,800 2,327,433 49,188 59,168 2002 1995 06/07 06/07 40 years 40 years 662,345 609,787 — — 662,345 609,787 1,272,132 107,348 1997 12/01 40 years 439,076 1,363,447 1,369,836 1,018,659 1,007,432 1,205,512 — — — — — — 439,076 1,369,836 1,007,432 1,363,447 1,018,659 1,205,512 1,802,523 2,388,495 2,212,944 729,291 681,386 470,840 644,148 536,023 530,289 — — 103,000 — — — 729,291 681,386 470,840 644,148 639,023 530,289 1,373,439 1,320,409 1,001,129 240,023 179,326 212,220 114,068 211,079 93,353 2000 1994 1995 1984 1988 1996 12/01 12/01 12/01 06/05 06/05 12/01 40 years 40 years 40 years 20 years 10 years 40 years 850,625 1,059,430 — — 850,625 1,059,430 1,910,055 186,504 1986 12/01 40 years 43,043 112,764 250,696 — 43,043 363,460 406,503 33,088 1997 12/01 40 years Albuquerque, NM . . . . . . . . . . — 1,112,876 — 1,418,552 — 1,112,876 1,418,552 2,531,428 122,646 2005 04/04(f) 40 years Champps: Alpharetta, GA . . . . . . . . . . . . Irving, TX . . . . . . . . . . . . . . . . Charhut: Sunrise, FL . . . . . . . . . . . . . . . Checkers: Oralndo, FL . . . . . . . . . . . . . . . Chili’s: Camden, SC . . . . . . . . . . . . . . . Milledgeville, GA . . . . . . . . . . Sumter, SC . . . . . . . . . . . . . . . Hinesville, GA . . . . . . . . . . . . . Albany, GA . . . . . . . . . . . . . . . Statesboro, GA . . . . . . . . . . . . Florence, SC . . . . . . . . . . . . . . — — — — — — — — — — — 3,032,965 1,641,820 1,760,020 1,724,220 — — — — 3,032,965 1,760,020 1,641,820 1,724,220 4,674,785 3,484,240 289,029 303,534 1999 2000 12/01 12/01 40 years 40 years 286,834 423,837 — — 286,834 423,837 710,671 48,876 1979 05/04 40 years 256,568 — — — 256,568 (c) 256,568 (c) 1979 05/04 (c) — — — — 626,897 1,887,732 516,118 1,996,627 800,329 1,717,221 920,971 1,898,416 615,086 703,199 888,837 1,715,454 — — — — — 1,983,955 — — 1,887,811 — — — 626,897 516,118 800,329 920,971 615,086 703,199 888,837 1,887,732 1,996,627 1,717,221 1,898,416 1,983,955 1,887,811 1,715,454 2,514,629 2,512,745 2,517,550 2,819,387 2,599,041 2,591,010 2,604,291 155,345 164,306 130,580 88,988 59,932 53,095 66,116 2005 2005 2004 2006 2007 2007 2007 09/05 09/05 12/05 02/07 06/07(q) 06/07(q) 06/07 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) Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total — 1,870,720 — — — — — — — 716,196 1,870,720 2,586,916 453,624 453,624 700,000 700,000 — — 48,717 (e) (e) 2007 (e) (e) 07/07(q) 06/08(q) 10/08(q) 40 years (e) (e) Life on Which Depreciation and Amortization in Latest Income Statement is Computed 90,443 106,987 — — 90,443 106,987 197,430 7,351 2007 07/07 40 years Encum- brances (k) Valdosta, GA . . . . . . . . . . . . . . . . . Tifton, GA . . . . . . . . . . . . . . . . . . . Evans, GA . . . . . . . . . . . . . . . . . . . China Wok: Carlisle, PA . . . . . . . . . . . . . . . . . . — — — — Circuit City: Land 716,196 453,624 700,000 Gastonia, NC . . . . . . . . . . . . . . . . . St. Peters, MO . . . . . . . . . . . . . . . . — 2,548,040 3,879,911 — 1,740,807 5,406,298 Claim Jumper: Roseville, CA . . . . . . . . . . . . . . . . Tempe, AZ . . . . . . . . . . . . . . . . . . . — 1,556,732 2,013,650 — 2,530,892 2,920,575 — — — — — — — — 2,548,040 3,879,911 6,427,951 1,740,807 5,406,298 7,147,105 392,033 467,419 1,556,732 2,013,650 3,570,382 2,530,892 2,920,575 5,451,467 354,486 514,143 2004 2005 2000 2000 12/04 06/05(g) 40 years 40 years 12/01 12/01 40 years 40 years Cool Crest: Independence, MO . . . . . . . . . . . . — 1,837,672 1,533,729 — — 1,837,672 1,533,729 3,371,401 62,308 1988 05/07 40 years CORA Rehabilitation Clinics: Orlando, FL . . . . . . . . . . . . . . . . . . 116,248(o) 80,400 221,063 — — 80,400 221,063 301,463 26,942 2001 02/04 40 years Corpus Christi Flea Market: Corpus Christi, TX . . . . . . . . . . . . — 223,998 2,158,955 — — 223,998 2,158,955 2,382,953 528,494 1983 03/99 40 years CVS: San Antonio, TX . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . Midwest City, OK . . . . . . . . . . . . . Pantego, TX . . . . . . . . . . . . . . . . . . Flower Mound, TX . . . . . . . . . . . . Arlington, TX . . . . . . . . . . . . . . . . Leavenworth, KS . . . . . . . . . . . . . . Lewisville, TX . . . . . . . . . . . . . . . . Forest Hill, TX . . . . . . . . . . . . . . . . Garland, TX . . . . . . . . . . . . . . . . . . Oklahoma City, OK . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Gladstone, MO . . . . . . . . . . . . . . . Dave & Buster’s: — — — — — 440,985 — — — 967,528 — — 673,369 1,103,351 — 1,016,062 1,448,911 — 881,448 932,233 — 2,078,542 726,438 — 789,237 — — 692,165 — 1,476,838 — 1,581,480 — 2,617,656 1,851,374 — — — — — — 1,396,508 — — 1,330,830 — — 1,335,426 — — 1,174,549 — — 1,400,278 — — 1,471,105 — — 2,570,569 — — 1,739,568 — 49,403 (c) (c) 932,233 440,985 440,985 967,528 967,528 673,369 1,103,351 1,776,720 1,016,062 1,448,911 2,464,973 881,448 1,813,681 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 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) 353,769 418,071 108,345 362,219 350,729 343,594 304,649 354,446 366,244 334,709 364,222 1993 1995 1996 1997 1996 1998 1998 1998 1998 1998 1999 2003 2000 12/93 01/96 03/96 06/97 09/97 11/97(g) 11/97(g) 04/98(g) 04/98(g) 06/98(g) 08/98(g) 06/99 12/99(g) Hilliard, OH . . . . . . . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . . . . . Wawatosa, WI . . . . . . . . . . . . . . . . — — 1,861,630 — 5,693,911 934,210 4,689,004 — — 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 . . . . . . . . . . . . . . . . 428,429 — 603,730 — 589,996 — — 469,593 466,124 — 497,083 — — 459,751 — 1,245,768 414,994 — 350,461 — 468,281 — 675,704 — 321,006 — 585,425 — 344,821 — 497,170 — 684,235 — 768,438 — 542,951 — 442,700 — 392,306 — 320,918 — 816,644 195,658 632,121 227,673 397,387 257,518 238,205 157,375 287,174 394,243 407,268 282,912 376,744 390,275 775,618 149,862 228,981 682,921 192,650 237,959 314,262 419,980 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 934,210 4,689,004 5,623,214 — 1,861,630 — 5,693,911 1,861,630 5,693,911 249,103 (e) (e) 1998 (e) (e) 428,429 603,730 589,996 469,593 466,124 497,083 459,751 1,245,768 414,994 350,461 468,281 675,704 321,006 585,425 344,821 497,170 684,235 768,438 542,951 442,700 392,306 320,918 816,644 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 1,120,439 647,032 149,862 913,216 228,981 682,921 1,451,359 735,601 192,650 680,659 237,959 706,568 314,262 740,898 419,980 143,763 22,419 72,431 26,088 45,534 29,507 27,294 18,033 32,905 45,174 46,666 32,417 43,169 44,719 88,873 17,172 26,237 78,251 22,075 27,266 36,009 48,123 1997 1981 1982 1977 1980 1977 1976 1975 1977 1983 1993 1979 1984 1978 1980 1979 1976 1979 1977 1977 1974 1980 11/06 04/08 12/08 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 See accompanying report of independent registered public accounting firm. F-4 (c) (c) 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years (e) (e) 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 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 Hialeah, FL . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Kernersville, NC . . . . . . . . . . . . . . Lafayette, IN . . . . . . . . . . . . . . . . . Laurel, MD . . . . . . . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . . . . . . Little Rock, AR . . . . . . . . . . . . . . . Maplewood, MN . . . . . . . . . . . . . . Merrivile, IN . . . . . . . . . . . . . . . . . Middleburg Heights, OH . . . . . . . . N. Miami, FL . . . . . . . . . . . . . . . . . Nampa, ID . . . . . . . . . . . . . . . . . . . North Richland Hills, TX . . . . . . . Novi, MI . . . . . . . . . . . . . . . . . . . . Omaha, NE . . . . . . . . . . . . . . . . . . Pompano Beach, FL . . . . . . . . . . . Portland, OR . . . . . . . . . . . . . . . . . Provo, UT . . . . . . . . . . . . . . . . . . . Pueblo, CO . . . . . . . . . . . . . . . . . . Raleigh, NC . . . . . . . . . . . . . . . . . . Southfield, MI . . . . . . . . . . . . . . . . St. Louis, MO . . . . . . . . . . . . . . . . Sugarland, TX . . . . . . . . . . . . . . . . Tacoma, WA . . . . . . . . . . . . . . . . . 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: — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 432,479 503,797 325,937 310,383 358,295 222,629 231,236 406,544 423,516 527,596 671,665 702,789 630,007 368,152 496,963 855,381 356,591 500,352 545,175 496,452 436,153 764,431 519,038 475,420 1,094,361 401,401 519,641 315,186 580,288 922,401 619,003 883,538 383,194 514,340 634,924 793,432 175,245 347,749 511,345 589,689 766,627 482,909 511,175 557,465 773,096 379,327 76,507 179,699 271,268 813,167 259,581 151,216 729,175 129,840 305,344 314,303 393,590 161,462 216,015 301,725 482,297 330,496 265,824 334,027 200,559 290,221 160,924 176,136 492,602 476,967 302,979 132,605 1,920,032 3,526,868 2,680,532 3,916,889 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 432,479 503,797 325,937 310,383 358,295 222,629 231,236 406,544 416,445 527,596 671,665 702,789 630,007 368,152 496,963 855,381 356,591 500,352 545,175 496,452 436,153 764,431 519,038 475,420 1,094,361 401,401 519,641 315,186 580,288 922,401 619,003 883,538 383,194 514,340 634,924 793,432 607,724 175,245 851,546 347,749 837,282 511,345 589,689 900,072 766,627 1,124,922 705,538 482,909 742,411 511,175 557,465 964,009 773,096 1,189,541 906,923 379,327 748,172 76,507 882,488 179,699 271,268 901,275 813,167 1,181,319 259,581 756,544 151,216 1,006,597 729,175 1,085,766 630,192 129,840 850,519 305,344 810,755 314,303 829,743 393,590 925,893 161,462 735,053 216,015 301,725 777,145 482,297 1,576,658 731,897 330,496 785,465 265,824 334,027 649,213 780,847 200,559 290,221 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 20,080 39,846 58,592 67,569 87,843 55,333 58,572 63,876 88,584 43,465 8,766 20,591 31,083 93,175 29,744 17,327 83,551 14,878 34,987 36,014 45,099 18,501 24,752 34,573 55,263 37,869 30,459 38,274 22,981 33,255 18,439 20,182 56,444 48,690 29,667 12,984 1,920,032 3,526,868 5,446,900 2,680,532 3,916,889 6,597,421 1,084,133 1,204,022 239,014 241,650 626,170 511,624 — — 194,167 — 239,014 241,650 626,170 705,791 865,183 947,441 117,407 163,282 1978 1976 1978 1981 1978 1979 1974 2000 1978 1976 1979 1979 1983 1976 1976 1977 1979 1970 1979 1994 1976 1977 1978 1980 1984 1980 1973 1997 1984 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 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 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 81,610 1996 12/01 40 years Dr. Clean Dry Cleaners: Monticello, NY . . . . . . . . . . . . . . . — 19,625 71,570 — — 19,625 71,570 91,195 6,784 1996 03/05 40 years Easyhome: Cohoes, NY . . . . . . . . . . . . . . . . . . — 59,110 318,610 222,454 — 59,110 541,064 600,174 37,285 1994 09/04 40 years El Paso Barbeque: Tuscon, AZ . . . . . . . . . . . . . . . . . . Farmington, NM . . . . . . . . . . . . . . — — 996,435 2,756,524 — 2,741,660 — 729,748 — — 996,435 2,741,660 3,738,095 729,748 3,486,272 2,756,524 88,533 11,402 2007 2003 12/06(q) 12/07(q) 40 years 40 years El Tapatio Grill: Hammond, LA . . . . . . . . . . . . . . . . — 247,600 813,514 61,688 — 247,600 627,002 874,602 125,187 1997 12/01 40 years Enterprise Rent-A-Car: Wilmington, NC . . . . . . . . . . . . . . — 218,126 327,329 33,169 — 218,126 360,498 578,624 58,280 1981 12/01 40 years Express Oil Change: Muscle Shoals, AL . . . . . . . . . . . . Florence, AL . . . . . . . . . . . . . . . . . — — 167,949 110,188 624,273 381,082 — — — — 167,949 110,188 624,273 381,082 792,222 491,270 18,208 11,115 1985 1987 02/08 02/08 40 years 40 years See accompanying report of independent registered public accounting firm. F-5 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) Encum- brances (k) Helena, AL . . . . . . . . . . . . . . . . . . Opelika, AL . . . . . . . . . . . . . . . . . . Birmingham, AL . . . . . . . . . . . . . . Cordova, TN . . . . . . . . . . . . . . . . . Horn Lake, MS . . . . . . . . . . . . . . . Lakeland, TN . . . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . . — — — — — — — Fallas Paredes: Building, Improve- ments and Leasehold Interests 628,027 679,735 695,487 785,040 611,004 488,569 721,361 Land 363,087 547,215 469,534 638,628 326,116 185,823 402,438 Improve- ments Carrying Costs — — — — — — — — — — — — — — Land 363,087 547,215 469,534 638,628 326,116 185,823 402,438 Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total 628,027 991,114 679,735 1,226,950 695,487 1,165,021 785,040 1,423,668 937,120 611,004 674,392 488,569 721,361 1,123,799 13,738 14,869 13,765 818 727 509 751 1998 2006 2008 2000 1998 2000 1998 02/08 02/08 02/08(f) 12/08 12/08 12/08 12/08 40 years 40 years 40 years 40 years 40 years 40 years 40 years Arlington, TX . . . . . . . . . . . . . . . . — 317,838 1,680,428 242,483 — 317,838 1,922,911 2,240,749 516,949 1996 06/96 38 years Family Dollar: Cohoes, NY . . . . . . . . . . . . . . . . . . Hudson Falls, NY . . . . . . . . . . . . . Monticello, NY . . . . . . . . . . . . . . . — — — 94,038 51,055 96,445 506,879 379,789 351,721 4,923 — — Famous Footwear: Lapeer, MI . . . . . . . . . . . . . . . . . . . — 163,152 834,548 — — — — — Fantastic Sams: 94,038 51,055 96,445 511,802 379,789 351,721 605,840 430,844 448,166 54,413 40,748 33,340 1994 1993 1996 09/04 09/04 03/05 40 years 40 years 40 years 163,152 834,548 997,700 26,949 2007 09/07 40 years Eden Prairie, MN . . . . . . . . . . . . . . — 64,916 180,538 80,809 — 64,916 261,347 326,263 43,113 1997 12/01 40 years Fazoli’s Restaurant: Bay City, MI . . . . . . . . . . . . . . . . . — 647,055 633,899 — — 647,055 633,899 1,280,953 111,593 1997 12/01 40 years Ferguson: Destin, FL . . . . . . . . . . . . . . . . . . . — 553,552 1,011,898 253,411 — 553,552 1,265,309 1,818,861 48,228 2006 03/07 40 years 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 . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 Food 4 Less: Chula Vista, CA . . . . . . . . . . . . . . . — 3,568,862 — Fresh Market: — — — — — — — — — — — — — — — — — — — — — — — — — — — - — — — — — — — — — — — — — — — — — — — — — — — — — — - 882,882 327,611 272,007 545,133 473,290 241,890 269,871 660,275 580,596 252,373 271,236 425,860 359,539 403,420 178,176 229,097 292,251 360,801 323,146 487,716 742,070 256,415 188,162 480,697 257,981 316,208 301,853 657,929 1,540,811 712,699 385,088 682,810 410,803 707,160 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 1,288,037 798,901 542,486 516,784 328,622 884,191 403,494 676,797 418,816 860,998 544,790 757,034 455,181 67,620 19,789 25,333 36,340 33,583 28,815 23,830 64,973 31,148 18,742 22,124 23,531 33,010 35,271 18,190 30,437 41,073 25,686 21,826 64,081 33,668 41,817 20,265 24,882 32,284 27,996 35,087 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) Gainesville, FL . . . . . . . . . . . . . . . — 317,386 1,248,404 655,827 — 317,386 1,904,231 2,221,617 191,928 1982 03/99 40 years Fuel On: Bloomsburg, PA . . . . . . . . . . . . . . Carlisle, PA . . . . . . . . . . . . . . . . . . Emporium, PA . . . . . . . . . . . . . . . . Luzerne, PA . . . . . . . . . . . . . . . . . . — — — — — — — — See accompanying report of independent registered public accounting firm. 540,561 170,450 380,032 170,866 540,561 170,450 380,032 170,866 146,127 201,630 568,625 415,294 686,688 372,080 948,657 586,160 146,127 201,630 568,625 415,294 24,659 15,687 95,955 70,081 — — — — 1988 1988 1996 1989 01/06 01/06 08/05 08/05 40 years 40 years 40 years 40 years F-6 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 St. Mary’s, PA . . . . . . . . . . . . . . . . Zelienople, PA . . . . . . . . . . . . . . . . — — 274,323 160,219 260,942 437,167 — — — — 274,323 160,219 260,942 437,167 535,265 597,386 44,034 32,332 1979 1988 08/05 01/06 40 years 40 years Furniture Xpress: Buford, GA . . . . . . . . . . . . . . . . . . — 1,925,129 5,034,846 — — 1,925,129 5,034,846 6,959,975 561,175 2004 07/04 40 years Furr’s Family Dining: Las Cruces, NM . . . . . . . . . . . . . . . Tuscon, AZ . . . . . . . . . . . . . . . . . . Moore, OK . . . . . . . . . . . . . . . . . . . — — — 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 3,368,102 125,008 (e) 73,388 2006 (e) 2007 01/06(q) 07/06(q) 03/07(q) 40 years (e) 40 years Gander Mountain: Amarillo, TX . . . . . . . . . . . . . . . . . — 1,513,714 5,781,294 — — 1,513,714 5,781,294 7,295,008 596,196 2004 11/04 40 years Gate Petroleum: Concord, NC . . . . . . . . . . . . . . . . . Rocky Mountain, NC . . . . . . . . . . . — — 852,225 1,200,862 258,764 1,164,438 — — — — 852,225 1,200,862 2,053,087 258,764 1,164,438 1,423,202 106,326 103,101 2001 2000 06/05 06/05 40 years 40 years Gen-X Clothing: Federal Way, WA . . . . . . . . . . . . . — 2,037,392 1,661,577 257,414 — 2,037,392 1,918,991 3,956,383 471,412 1998 06/98 40 years Golden Corral: Abbeville, LA . . . . . . . . . . . . . . . . Lake Placid, FL . . . . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . Dallas, TX . . . . . . . . . . . . . . . . . . . Temple Terrace, FL . . . . . . . . . . . . Goodyear Truck & Tire: Wichita, KS . . . . . . . . . . . . . . . . . . Anthony, TX . . . . . . . . . . . . . . . . . Great Clips: — — — — — — — 98,577 115,113 362,416 305,074 1,329,793 1,390,502 1,138,129 1,024,747 1,187,614 1,339,000 — — 43,797 — — — — — — — 98,577 115,113 460,993 362,416 348,871 463,984 1,329,793 1,390,502 2,720,296 1,138,129 1,024,747 2,162,875 1,187,614 1,339,000 2,526,614 213,640 686,700 (l) 1,241,517 — — — — 213,640 686,700 900,340 (l) 1,241,517 1,241,517 251,103 222,973 244,786 180,398 235,720 121,603 45,264 1985 1985 1998 1994 1997 1989 2007 04/85 05/85 12/01 12/01 12/01 06/05 02/07 35 years 35 years 40 years 40 years 40 years 20 years 40 years Lapeer, MI . . . . . . . . . . . . . . . . . . . — 27,379 197,785 — — 27,379 197,785 225,164 6,798 2007 10/07 40 years Guitar Center: Roseville, MN . . . . . . . . . . . . . . . . — 1,599,311 1,419,396 — — 1,599,311 1,419,396 3,018,707 107,933 1994 08/06 40 years GymKix: Copperas Cove, TX . . . . . . . . . . . . — 203,908 431,715 171,477 — 203,908 603,192 807,100 139,136 1972 11/98 40 years H&R Block: Swansea, IL . . . . . . . . . . . . . . . . . . — 45,842 132,440 69,029 — 45,842 201,469 247,311 34,378 1997 12/01 40 years Hastings: Nacogdoches, TX . . . . . . . . . . . . . — 397,074 1,257,402 — — 397,074 1,257,402 1,654,477 318,280 1997 11/98 40 years Haverty’s: Clearwater, FL . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . . Pensacola, FL . . . . . . . . . . . . . . . . Bowie, MD . . . . . . . . . . . . . . . . . . Healthy Pet: Suwannee, GA . . . . . . . . . . . . . . . . Colonial Heights, VA . . . . . . . . . . Heilig-Meyers: Baltimore, MD . . . . . . . . . . . . . . . . Glen Burnie, MD . . . . . . . . . . . . . . Hollywood Video: Cincinnati, OH . . . . . . . . . . . . . . . . Clifton, CO . . . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . Home Décor: — — — — — — — — — — — 1,184,938 2,526,207 820,397 2,184,721 633,125 1,595,405 1,965,508 4,221,074 44,005 — 176,425 — — — — — 1,230,572 2,570,212 3,800,784 820,397 2,361,146 3,181,543 603,111 1,595,405 2,198,516 1,965,508 4,221,074 6,186,582 995,449 872,409 499,007 1,036,995 175,183 1,038,492 746,261 159,879 469,781 631,712 813,073 931,931 — — — — — — — — 175,183 1,038,492 1,213,675 906,140 746,261 159,879 53,006 36,536 469,781 631,712 813,073 1,282,854 931,931 1,563,643 205,809 235,848 520,623 282,200 732,477 245,462 603,190 1,149,251 279,308 — — — — — 538,693 1,082,132 543,438 977,939 732,477 245,462 603,190 1,149,251 1,752,441 92,254 128,946 87,391 1992 1992 1994 1997 1997 1996 1968 1968 1998 1998 1999 05/93 05/93 06/96 12/97 12/06 01/07 11/98 11/98 12/01 12/01 12/05 40 years 40 years 40 years 38 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Memphis, TN . . . . . . . . . . . . . . . . . — 549,309 539,643 364,460 — 549,309 904,103 1,453,412 200,016 1998 11/98 40 years Home Depot: Sunrise, FL . . . . . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. — 5,148,657 5,148,657 5,148,657 — — — (i) 05/03 (i) 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 HomeGoods: Fairfax, VA . . . . . . . . . . . . . . . . . . — 977,839 1,414,261 937,301 — 977,839 2,351,562 3,329,401 296,112 1995 12/95 40 years Hooters: Tampa, FL . . . . . . . . . . . . . . . . . . . — 783,923 504,768 Humana: Sunrise, FL . . . . . . . . . . . . . . . . . . — 800,271 252,717 Hy-Vee: St. Joseph, MO . . . . . . . . . . . . . . . — 1,579,583 2,849,246 International House of Pancakes: Midwest City, OK . . . . . . . . . . . . . Ankeny, IA . . . . . . . . . . . . . . . . . . — — 407,268 692,956 — 515,035 Jack-in-the-Box: 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 Jo-Ann Etc: — — — — — — — — — — — — — 783,923 504,768 1,288,692 88,860 1993 12/01 40 years 800,271 252,717 1,052,988 29,168 1984 05/04 40 years — 1,579,583 2,849,246 4,428,829 448,170 1991 09/02 40 years — — 407,268 692,956 — 407,268 515,035 1,207,991 60,803 (i) 2002 11/00 06/05 (i) 30 years — 1,055,433 1,236,590 2,292,023 109,490 2001 06/05 40 years — — — — — 60,517 112,390 172,907 19,902 1973 06/05 20 years 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 3,115,336 235,218 195,995 201,576 217,439 1998 2001 2001 1999 12/01 05/02 05/02 12/02 40 years 40 years 40 years 40 years Corpus Christi, TX . . . . . . . . . . . . — 818,448 896,395 12,222 — 818,448 908,617 1,727,065 343,049 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 . . . . . . . . . . . . . . . . . . . . Dothan, AL . . . . . . . . . . . . . . . . . . Midland City, AL . . . . . . . . . . . . . 586,174 426,114 471,029 1,451,277 — 485,461 353,643 — 807,477 1,239,085 — 684,639 1,361,897 — — 660,594 666,330 — 1,638,444 1,370,558 645,290 — — 516,010 — 1,365,569 1,192,192 — 1,433,652 1,124,109 518,814 1,500,000 — 552,393 679,169 — 741,222 490,309 — 709,784 521,023 — 954,910 275,897 — — 756,510 474,297 — 3,194,938 1,403,297 440,413 1,096,748 — — 988,907 770,793 — 3,161,883 1,596,602 891,185 — — 757,865 — 2,412,119 1,589,011 666,002 1,185,069 — — 1,314,197 2,124,513 773,671 1,886,333 — 728,990 2,538,232 — 985,372 745,488 Kash N’ Karry: Brandon, FL . . . . . . . . . . . . . . . . . . 3,079,596(p) 322,476 1,221,661 Keg Steakhouse: Bellingham, WA (r) . . . . . . . . . . . . Lynnwood, WA . . . . . . . . . . . . . . . Tacoma, WA . . . . . . . . . . . . . . . . . — 397,443 — 1,255,513 526,792 — 455,605 649,236 794,722 - — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — - — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 586,174 426,114 471,029 1,451,277 1,922,306 485,461 839,104 353,643 807,477 1,239,085 2,046,562 682,510 1,361,897 2,044,407 660,594 1,326,924 666,330 1,638,444 1,370,558 3,009,002 645,290 1,231,464 516,010 942,124 1,365,569 1,192,192 2,557,761 1,433,652 1,124,109 2,557,761 518,814 1,500,000 2,018,814 552,393 1,231,562 679,169 741,222 1,231,531 490,309 709,784 1,230,807 521,023 954,910 1,230,807 275,897 756,510 1,230,807 474,297 3,194,938 1,403,297 4,598,235 440,413 1,096,748 1,537,161 988,907 1,759,700 770,793 3,161,883 1,596,602 4,758,485 891,185 1,876,557 757,865 1,503,353 2,412,119 1,589,011 4,001,130 666,002 1,185,069 1,851,071 1,314,197 2,124,513 3,438,711 773,671 1,886,333 2,660,004 728,990 2,538,232 3,267,222 985,372 745,488 86,170 20,998 73,571 80,863 39,223 81,377 38,314 30,638 68,303 64,402 29,688 30,501 40,927 36,229 48,740 38,320 71,627 55,980 48,415 74,841 39,918 33,946 64,554 45,675 73,030 84,492 129,556 2006 1989 1975 1969 2000 2003 1998 1999 2000 2000 2007 1990 1995 1999 1999 1999 2001 1998 1982 1995 2001 2001 2000 1998 2007 2007 2006 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 03/07 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 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 322,476 1,221,661 1,544,137 159,070 1983 03/99 40 years 397,443 1,255,513 526,792 455,605 853,048 649,236 1,904,748 794,722 1,321,515 80,206 114,292 139,904 1981 1992 1981 12/01 12/01 12/01 40 years 40 years 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 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 . . . . . . . . . . . . . . Quincy, IL . . . . . . . . . . . . . . . . . . Schereville, IN . . . . . . . . . . . . . . Johnson Creek, WI . . . . . . . . . . . Lake Delton, WI . . . . . . . . . . . . . Chicago, IL . . . . . . . . . . . . . . . . . KFC: Erie, PA . . . . . . . . . . . . . . . . . . . . Marysville, WA . . . . . . . . . . . . . Evansville, IN . . . . . . . . . . . . . . . Fenton, MO . . . . . . . . . . . . . . . . . Kohl’s: Florence, AL . . . . . . . . . . . . . . . . Kum & Go: Omaha, NE . . . . . . . . . . . . . . . . . LA Fitness: Centerville, OH . . . . . . . . . . . . . . Warren, MI . . . . . . . . . . . . . . . . . Cincinnati, OH . . . . . . . . . . . . . . Light Restaurant: — — — — — — — — — — — — — — — — — — — — — — — — — 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 1,296,872 2,849,999 6,619,133 14,225,121 3,931,692 1,433,427 2,063,267 8,365,867 7,256,735 10,955,050 516,508 646,779 369,740 307,068 496,092 545,592 766,635 496,410 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 1,296,872 4,146,871 2,849,999 6,619,133 14,225,121 20,844,254 3,931,692 1,433,427 5,365,119 2,063,267 8,365,867 10,429,134 7,256,735 10,955,050 18,211,785 516,508 646,779 369,740 307,068 496,092 545,592 766,635 496,410 1,012,601 1,192,371 1,136,375 803,478 206,676 130,548 177,303 161,516 157,540 78,826 283,183 271,950 177,978 375,364 354,561 78,036 454,414 107,653 229,065 262,465 87,333 96,047 50,310 248,747 1987 1994 2005 2005 1999 2003 2005 2005 2005 2006 2004 1982 1996 1997 1999 2007 1996 1996 2004 1985 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 09/07 01/08 01/08 01/08 01/08 01/08 12/01 12/01 05/06 07/92 25 years 30 years 40 years 40 years 35 years 40 years 40 years 40 years 40 years 40 years 40 years 35 years 30 years 35 years 35 years 40 years 40 years 40 years 40 years 33 years 817,661 — 1,046,515 — 817,661 1,046,515 1,864,176 58,866 (i) 06/04 40 years 392,847 214,280 — — 392,847 214,280 607,127 37,945 1979 06/05 20 years 2,700,000 2,360,449 5,145,103 — — — — — — — — — 2,700,000 2,360,449 5,145,103 — 2,700,000 — 2,360,449 — 5,145,103 (e) (e) (e) (e) (e) (e) 06/08 07/08 08/08 (e) (e) (e) Columbus, OH . . . . . . . . . . . . . . — 1,032,008 1,107,250 — — 1,032,008 1,107,250 2,139,258 194,922 1998 12/01 40 years Lil’ Champ: Gainesville, FL . . . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . Ocala, FL . . . . . . . . . . . . . . . . . . Logan’s Roadhouse: Alexandria, LA . . . . . . . . . . . . . . Beckley, WV . . . . . . . . . . . . . . . . Cookeville, TN . . . . . . . . . . . . . . Fort Wayne, IN . . . . . . . . . . . . . . Greenwood, IN . . . . . . . . . . . . . . Hurst, TX . . . . . . . . . . . . . . . . . . Jackson, TN . . . . . . . . . . . . . . . . Lake Charles, LA . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . Opelika, AL . . . . . . . . . . . . . . . . Roanoke, VA . . . . . . . . . . . . . . . San Marcos, TX . . . . . . . . . . . . . Sanford, FL . . . . . . . . . . . . . . . . . Smyrna, TN . . . . . . . . . . . . . . . . . Warner Robins, GA . . . . . . . . . . Franklin, TN . . . . . . . . . . . . . . . . Southaven, MS . . . . . . . . . . . . . . Lowe’s: — — — — — — — — — — — — — — — — — — — — 900,141 2,225,177 845,827 1,217,567 1,396,024 1,262,430 1,274,315 1,341,188 1,857,628 1,199,765 1,284,898 1,607,806 1,028,484 2,302,414 836,979 1,677,782 1,334,998 905,301 2,519,485 1,297,767 3,265,315 — 1,800,281 — — — 1,563,500 — — 3,048,693 2,404,817 2,270,596 2,109,860 2,105,213 1,915,877 2,246,330 2,202,447 2,177,715 1,753,045 1,947,141 1,453,300 1,730,390 2,047,465 1,533,748 1,704,790 1,338,118 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 900,141 2,225,177 845,827 1,800,281 3,265,315 1,563,500 2,700,422 5,490,492 2,409,327 1,217,567 1,396,024 1,262,430 1,172,201 1,341,188 1,857,628 1,199,765 1,284,898 1,607,806 1,028,484 2,302,414 836,979 1,677,782 1,334,998 905,301 2,519,485 1,297,767 3,048,693 2,404,817 2,270,596 2,109,860 2,105,213 1,915,877 2,246,330 2,202,447 2,177,715 1,753,045 1,947,141 1,453,300 1,730,390 2,047,465 1,533,748 1,704,790 1,338,118 4,266,260 3,800,841 3,533,026 3,282,061 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 80,638 48,115 60,260 161,962 127,756 120,625 112,086 111,839 101,781 119,336 117,005 115,691 93,130 103,442 77,207 91,927 108,772 81,480 87,015 68,300 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 1,501,197 2001 06/02 40 years Magic China Café: Orlando, FL . . . . . . . . . . . . . . . . . 58,124(o) 40,200 110,531 — — 40,200 110,531 150,731 13,471 2001 02/04 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 Magic Mountain: Columbus, OH . . . . . . . . . . . . . . . . Columbus, OH . . . . . . . . . . . . . . . . Majestic Liquors: Coffee City, 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 . . . . . . . . . . . . . . . . . Mattress Firm: — — — — — — — — — — — — — — — 2,075,527 1,906,370 5,379,851 2,693,295 — — — — 2,075,527 1,906,370 3,981,897 5,379,851 2,693,295 8,073,146 73,475 103,804 1,330,427 3,858,445 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 — — — — — — — — — 1,330,427 3,858,445 5,188,872 1,651,570 2,017,770 3,669,340 2,505,249 2,138,400 4,643,649 977,290 2,368,447 3,345,737 611,366 1,608,555 2,219,921 361,371 1,029,053 1,390,424 786,159 1,233,984 2,020,143 1,554,411 1,228,778 2,783,189 2,407,203 2,298,580 4,705,783 859,435 1,507,709 933,091 1,507,709 1,293,214 1,210,826 2,504,040 2,606,118 2,897,922 5,504,040 648,274 574,618 373,787 195,472 207,158 229,443 155,829 99,689 86,122 108,798 196,995 33,124 35,963 44,145 105,653 1990 1990 1996 2000 1988 1997 1974 1993 2006 1982 1971 1970 1982 1983 1983 06/07 06/07 40 years 40 years 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 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 Baton Rouge, LA . . . . . . . . . . . . . . — 609,069 913,603 — — 609,069 913,603 1,522,672 296,982 1995 12/95 40 years MC Sports: Lapeer, MI . . . . . . . . . . . . . . . . . . . — 407,880 2,086,371 — — 407,880 2,086,371 2,494,251 67,372 2007 09/07 40 years Merchant’s Tires: Hampton, VA . . . . . . . . . . . . . . . . Newport News, VA . . . . . . . . . . . . Norfolk, VA . . . . . . . . . . . . . . . . . . Rockville, MD . . . . . . . . . . . . . . . . Washington, DC . . . . . . . . . . . . . . — — — — — 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 1,030,156 623,607 606,730 426,895 492,858 259,046 507,743 905,875 306,147 1,336,303 577,948 1,201,555 40,466 24,555 48,130 29,020 54,785 1986 1986 1986 1974 1983 03/05 03/05 03/05 03/05 03/05 40 years 40 years 40 years 40 years 40 years Mi Pueblo Foods: Watsonville, CA . . . . . . . . . . . . . . — 805,056 1,648,934 — — 805,056 1,648,934 2,453,990 214,705 1984 03/99 40 years Michaels: Fairfax, VA . . . . . . . . . . . . . . . . . . Grapevine, TX (r) . . . . . . . . . . . . . Plymouth Meeting, PA . . . . . . . . . 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 . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — 986,131 1,426,254 1,017,934 2,066,715 706,501 — — — 986,131 2,132,755 3,118,886 1,017,934 2,066,715 3,084,649 2,911,111 — 2,594,720 — 2,911,111 2,594,720 5,505,831 552,719 544,665 561,638 24,425 53,178 55,787 79,850 33,112 40,641 33,919 64,160 58,657 53,038 212,378 438,259 390,848 214,461 426,839 778,217 1,216,476 816,402 1,207,250 1,141,010 934,829 2,075,839 274,404 212,694 248,517 865,400 894,483 287,729 484,572 758,976 475,795 688,489 595,659 844,176 751,139 1,616,539 686,718 1,581,201 465,697 753,426 2,260,395 1,806,419 4,066,814 123,439 3,193,137 1,305,127 4,498,264 63,703 1,846,219 1,592,457 3,438,676 108,818 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 2,720,875 827,427 861,100 181,549 1,008,976 563,575 1,424,675 78,209 96,901 46,344 63,102 61,848 74,027 31,015 48,139 1995 1998 1999 1968 1985 1989 1983 1992 1964 1990 1984 1985 1970 1975 1995 1983 1983 1984 1986 1988 1995 1993 1955 1963 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 1,516,641 827,427 861,100 181,549 563,575 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Spokane, WA . . . . . . . . . . . . . . . . . Spokane, WA . . . . . . . . . . . . . . . . . St. Cloud, MN . . . . . . . . . . . . . . . . 214,246 — — — — — — See accompanying report of independent registered public accounting firm. 580,318 794,564 1,252,856 1,146,358 2,399,214 633,976 391,259 580,318 1,252,856 1,146,358 391,259 33,046 55,953 33,420 — — — 242,717 214,246 242,717 1990 1997 1986 F-10 12/95 06/98 40 years 40 years 10/98(g) 40 years 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 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 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 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 . . . . . . . . . . . . . . . . . . Mr. E’s Music Supercenter: — — — — — — — — — — — — — — — — 288,745 214,419 3,789,092 1,972,484 835,651 318,975 235,825 451,053 1,054,930 2,327,307 2,377,589 2,144,987 825,012 765,491 1,595,876 2,201,161 2,165,896 1,495,994 2,992,859 1,669,069 1,008,794 955,811 988,006 1,046,430 1,399,045 1,467,945 664,183 823,521 1,423,681 1,305,604 1,807,249 2,287,451 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 288,745 214,419 503,164 3,789,092 1,972,484 5,761,576 835,651 318,975 235,825 1,071,476 451,053 770,028 1,054,930 2,327,307 3,382,237 2,377,589 2,144,987 4,522,576 825,012 765,491 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 1,008,794 955,811 1,964,605 988,006 1,046,430 2,034,436 1,399,045 1,467,945 2,866,990 664,183 823,521 1,487,704 1,423,681 1,305,604 2,729,285 1,807,249 2,287,451 4,094,700 24,420 96,276 20,143 13,626 70,304 80,437 34,447 99,052 56,100 75,108 43,011 27,407 38,446 21,568 45,333 60,363 1971 1995 1972 1994 2003 1985 1969 1987 1985 1969 1967 1998 1991 1991 1986 1983 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 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 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 Arlington, TX . . . . . . . . . . . . . . . . — 435,002 2,299,881 334,059 — 435,002 2,633,940 3,068,942 707,511 1996 06/96 40 years M&T Bank: Carlisle, PA . . . . . . . . . . . . . . . . . . — 86,964 102,873 — — 86,964 102,873 189,837 7,396 1988 01/06 40 years Muchas Gracias Mexican Restaurant: Salem, OR . . . . . . . . . . . . . . . . . . . — 555,951 735,651 — — 555,951 735,651 1,291,602 129,505 1996 12/06 40 years New Covenant Church: Augusta, GA . . . . . . . . . . . . . . . . . — 176,656 674,253 — — 176,656 674,253 850,909 118,697 1998 12/01 40 years Office Depot: Arlington, TX . . . . . . . . . . . . . . . . Richmond, VA . . . . . . . . . . . . . . . . Hartsdale, NY . . . . . . . . . . . . . . . . OfficeMax: Cincinnati, OH . . . . . . . . . . . . . . . . Evanston, IL . . . . . . . . . . . . . . . . . Altamonte Springs, FL . . . . . . . . . Cutler Ridge, FL . . . . . . . . . . . . . . Sacramento, CA . . . . . . . . . . . . . . . Salinas, CA . . . . . . . . . . . . . . . . . . Redding, CA . . . . . . . . . . . . . . . . . Kelso, WA . . . . . . . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . . Leesburg, FL . . . . . . . . . . . . . . . . . Griffin, GA . . . . . . . . . . . . . . . . . . Tigard, OR . . . . . . . . . . . . . . . . . . . Orlando Metro Gymnastics: — — — — — — — — — — — — — — — 596,024 1,411,432 888,772 1,948,036 4,508,753 2,327,448 543,489 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 — — — — — — — — — — — — — — — — — — — — — 1,805,539 — — 1,851,326 — 868,003 561,509 640,019 685,470 596,024 1,411,432 2,007,456 888,772 1,948,036 2,836,808 4,508,753 2,327,448 6,836,201 543,489 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 2,848,737 868,003 1,805,539 2,673,542 561,509 1,851,326 2,412,835 — 1,929,028 — 640,019 1,929,028 2,569,047 — 1,801,905 — 685,470 1,801,905 2,487,375 1,539,873 2,247,321 — — 1,539,873 2,247,321 3,787,194 526,266 613,081 286,082 570,101 595,881 982,030 462,533 888,558 543,081 629,472 494,642 476,331 484,266 437,337 568,853 1991 1996 1996 1994 1995 1995 1995 1996 1995 1997 1998 1998 1998 1999 1995 01/94 05/96 09/97 07/94 06/95 01/96 06/96 12/96 02/97 06/97 09/97(g) 02/98 08/98 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 11/98(g) 40 years 11/98 40 years Orlando, FL . . . . . . . . . . . . . . . . . . — 427,661 1,344,660 — — 427,661 1,344,660 1,772,321 133,065 2003 01/05 40 years Palais Royale: Sealy, TX . . . . . . . . . . . . . . . . . . . . — 470,485 519,177 1,629,759 — 475,185 2,148,936 2,624,121 155,950 1982 03/99 40 years Party City: Memphis, TN . . . . . . . . . . . . . . . . . — 266,383 — 1,136,334 — 266,383 1,136,334 1,402,717 271,063 1999 06/99 40 years Pep Boys: Chicago, IL . . . . . . . . . . . . . . . . . . Cicero, IL . . . . . . . . . . . . . . . . . . . . Cornwell Heights, PA . . . . . . . . . . East Brunswick, NJ . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . . . Joliet, IL . . . . . . . . . . . . . . . . . . . . . Lansing, IL . . . . . . . . . . . . . . . . . . Las Vegas, NV . . . . . . . . . . . . . . . — — — — — — — — 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 — — — — — — — — — — — — — — — — 1,077,006 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 4,447,574 120,732 120,866 139,586 188,467 74,924 119,793 110,562 81,333 1993 1993 1972 1987 1989 1993 1993 1989 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 See accompanying report of independent registered public accounting firm. F-11 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Marietta, GA . . . . . . . . . . . . . . . . . Marlton, NJ . . . . . . . . . . . . . . . . . . Philadelphia, PA . . . . . . . . . . . . . . Quakertown, PA . . . . . . . . . . . . . . Roswell, GA . . . . . . . . . . . . . . . . . Turnersville, NJ . . . . . . . . . . . . . . . — — — — — — 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 — — — — — — Perfect Teeth: Rio Rancho, NM . . . . . . . . . . . . . . — 61,517 122,142 — Perkins Restaurant: Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . Newton, IA . . . . . . . . . . . . . . . . . . Urbandale, IA . . . . . . . . . . . . . . . . — — — — — 255,874 225,922 269,938 353,816 376,690 136,103 203,330 218,248 401,630 581,414 — — — — — Petco: Grand Forks, ND . . . . . . . . . . . . . . — 306,629 909,671 — Petro Express: 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 . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 1,322,626 506,975 629,337 429,432 869,805 697,953 875,591 425,496 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 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 1,227,521 335,424 544,504 1,070,390 1,184,517 744,571 760,356 1,975,267 1,529,667 1,210,397 982,031 1,972,180 1,282,737 1,380,939 2,061,482 722,773 532,154 2,358,754 1,771,201 1,196,544 1,745,883 677,575 577,353 834,302 420,625 709,082 795,846 857,369 1,022,565 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 4,483,726 133,350 155,318 123,119 104,520 102,462 131,018 1987 1983 1995 1995 2007 1986 11/07 11/07 11/07 11/07 11/07 11/07 30 years 30 years 35 years 35 years 30 years 30 years 61,517 122,142 183,659 21,522 1997 12/01 40 years 255,874 225,922 269,938 353,816 376,690 136,103 391,977 203,330 429,252 218,248 488,186 401,630 755,446 581,414 958,104 48,203 72,013 77,296 142,244 102,959 1976 1976 1977 1979 1979 06/05 06/05 06/05 06/05 06/05 10 years 10 years 10 years 10 years 20 years 306,629 909,671 1,216,301 251,131 1996 12/97 40 years 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 1,322,626 869,805 2,192,431 506,975 629,337 429,432 697,953 1,204,928 875,591 1,504,928 425,496 854,928 79,177 91,379 104,604 116,578 104,717 112,591 49,531 59,617 49,860 24,230 2,315,876 2,064,051 4,379,927 100,745 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 71,628 95,893 87,376 2,784,480 3,720,448 6,504,928 181,593 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 1,828,292 1,676,647 3,504,939 917,090 1,275,337 2,192,427 96,292 98,208 109,757 66,613 103,303 96,932 81,836 62,249 1,653,202 2,664,228 4,317,430 130,040 2,317,321 1,750,110 4,067,431 85,422 3,825,461 2,554,459 6,379,920 124,682 1,883,231 1,559,190 3,442,421 964,906 1,227,521 2,192,427 335,424 544,504 879,928 1,070,390 1,184,517 2,254,907 744,571 760,356 1,504,927 1,975,267 1,529,667 3,504,934 1,210,397 982,031 2,192,428 1,972,180 1,282,737 3,254,917 88,787 59,915 23,255 57,816 32,474 74,662 47,932 62,610 1,380,939 2,061,482 3,442,421 100,620 722,773 532,154 1,254,927 2,358,754 1,771,201 4,129,955 1,196,544 1,745,883 2,942,427 677,575 577,353 1,254,928 834,302 1,254,927 420,625 709,082 795,846 1,504,928 857,369 1,022,565 1,879,934 30,303 86,451 99,418 24,658 40,722 38,845 43,672 2001 1986 1987 1987 1988 1992 1982 1967 1986 1983 1996 1997 1997 1998 1998 1998 1983 2004 2004 2005 2000 2002 1999 2000 1999 1998 1988 2001 2000 1990 2003 2002 1988 2003 1998 1989 2000 1987 2002 1997 1999 2004 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 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 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 See accompanying report of independent registered public accounting firm. F-12 Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Building, Improve- ments and Leasehold Interests Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total Life on Which Depreciation and Amortization in Latest Income Statement is Computed Rock Hill, SC . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . Statesville, NC . . . . . . . . . . . . . . . . Thomasville, NC . . . . . . . . . . . . . . Waxhaw, NC . . . . . . . . . . . . . . . . . York, SC . . . . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Rock Hill, SC . . . . . . . . . . . . . . . . . — — — — — — — — — — 2,118,790 1,886,128 3,095,160 1,909,758 777,836 727,082 1,885,746 2,181,682 993,898 1,761,032 508,235 746,698 2,306,150 1,448,777 1,231,265 1,214,175 1,849,143 2,279,590 3,107,907 2,145,815 — — — — — — — — — — — — — — — — — — — — 2,118,790 1,886,128 4,004,918 3,095,160 1,909,758 5,004,918 777,836 727,082 1,504,918 92,061 93,214 41,403 1,885,746 2,181,682 4,067,428 106,487 993,898 1,761,032 2,754,930 508,235 746,698 1,254,933 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 85,955 31,890 70,714 49,326 92,608 87,174 1998 1999 1990 1999 2000 2002 1999 1997 2005 1999 04/07 04/07 04/07 04/07 04/07 04/07 04/07 05/07 05/07 05/07 35 years 35 years 30 years 35 years 35 years 40 years 35 years 40 years 40 years 40 years Pet Smart: Chicago, IL . . . . . . . . . . . . . . . . . . — 2,724,138 3,565,721 — — 2,724,138 3,565,721 6,289,859 917,422 1998 09/98 40 years Pet Paradise: Houston, TX . . . . . . . . . . . . . . . . . Bunnell, FL . . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Charlotte, NC . . . . . . . . . . . . . . . . . Davie, FL . . . . . . . . . . . . . . . . . . . . Pier 1 Imports: Anchorage, AK . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . . Sanford, FL . . . . . . . . . . . . . . . . . . Knoxville, TN . . . . . . . . . . . . . . . . Mason, OH . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . Valdosta, GA . . . . . . . . . . . . . . . . . Pizza Hut: — — — — — — — — — — — — 417,054 2,306,239 316,255 535,101 825,000 881,311 — — 1,137,752 1,068,673 928,321 1,662,584 713,319 738,051 467,169 593,571 316,640 390,838 821,770 803,082 734,833 885,047 756,406 805,912 — — — — — — — — — — — — — — — — — — — — — — — — 417,054 2,306,239 2,723,293 316,255 535,101 825,000 881,311 1,197,566 — — 535,101 825,000 45,644 15,738 (e) (e) 2008 1997 (e) (e) 03/08 04/08 09/08(q) 11/08(q) 40 years 40 years (e) (e) 1,137,752 1,068,673 2,206,425 1,272 2003 11/08 35 years 928,321 1,662,584 2,590,905 713,319 738,051 467,169 593,571 316,640 390,838 821,770 1,535,089 803,082 1,541,133 734,833 1,202,002 885,047 1,478,617 756,406 1,073,046 805,912 1,196,750 533,651 237,115 216,665 182,943 211,120 174,131 183,849 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 Monroeville, AL . . . . . . . . . . . . . . — 547,300 44,237 — — 547,300 44,237 591,537 7,788 1976 12/01 40 years Popeye’s: Snellville, GA . . . . . . . . . . . . . . . . — 642,169 436,512 — — 642,169 436,512 1,078,681 76,844 1995 12/01 40 years Pueblo Viejo Restaurant: Chandler, AZ . . . . . . . . . . . . . . . . . — 654,765 765,164 33,821 — 654,765 798,985 1,453,750 142,599 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 . . . . . . . . . . . . . . . . Lafayette, LA . . . . . . . . . . . . . . . . . Cleveland, OH . . . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . . . Jackson, MS . . . . . . . . . . . . . . . . . . Baton Rouge, LA . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . . Mobile, AL . . . . . . . . . . . . . . . . . . Winston-Salem, NC . . . . . . . . . . . . Lithonia, GA . . . . . . . . . . . . . . . . . Columbia, SC . . . . . . . . . . . . . . . . Akron, OH . . . . . . . . . . . . . . . . . . . QuikTrip: Alpharetta, GA . . . . . . . . . . . . . . . Clive, IA . . . . . . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — 1,164,780 2,090,094 — — 1,164,780 2,090,094 3,254,874 124,099 1,414,381 — 1,450,906 — 1,414,381 1,450,906 2,865,287 1,685,604 1,387,170 1,831,129 1,040,317 — — — — 1,685,604 1,387,170 3,072,774 1,831,129 1,040,317 2,871,446 3,205,591 1,531,842 1,886,627 — — 4,325,561 — — 3,205,591 1,531,842 4,737,433 1,886,627 4,325,561 6,212,188 55,920 82,363 61,769 90,953 49,564 2,912,842 1,724,045 — — 2,912,842 1,724,045 4,636,887 102,365 961,067 — 2,384,443 — 961,067 2,384,443 3,345,510 2,164,234 1,414,129 — — 2,164,234 1,414,129 3,578,363 — 2,225,578 — 1,035,679 2,225,578 3,261,257 — 2,096,448 — 4,555,684 2,096,448 6,652,132 — 2,012,612 — 934,023 2,012,612 2,946,635 — — — — — — 1,314,846 890,122 — 1,314,846 — 890,122 1964 2007 1999 1998 2006 2008 2006 2007 2006 2007 2007 2007 08/06 40 years 08/06(q) 40 years 08/06 08/06 08/06 08/06(q) 08/06 40 years 40 years 40 years 40 years 40 years 08/06(q) 40 years 08/06 40 years 08/06(q) 40 years 08/06(q) 40 years 11/06(q) 40 years (e) (e) 12/06(q) 01/07(q) (e) (e) 86,933 83,964 57,958 58,963 56,605 (e) (e) — 2,964,143 — 1,779,169 2,964,143 4,743,312 46,315 2008 05/07(q) 40 years — — — — — — — — — — — — — — — — — — — — — 549,485 845,948 2,409,908 934,755 1,064,150 — — 549,485 845,948 — 2,409,908 — 934,755 — 1,064,150 (e) (e) (e) (e) (e) (e) (e) (e) (e) (e) 06/07(q) 08/07(q) 08/07(q) 09/07(q) 10/08(q) (e) (e) (e) (e) (e) 1,048,309 606,916 1,655,225 623,473 258,759 556,970 1,180,443 792,448 1,051,207 53,737 65,753 93,553 1996 1994 1990 06/05 06/05 06/05 40 years 30 years 30 years 1,048,309 623,473 258,759 606,916 556,970 792,448 1,035,679 4,555,684 934,023 1,314,846 890,122 1,779,169 549,485 845,948 2,409,908 934,755 1,064,150 See accompanying report of independent registered public accounting firm. F-13 Urbandale, IA . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Wichita, KS . . . . . . . . . . . . . . . . . Woodstock, GA . . . . . . . . . . . . . Quizno’s: Rio Rancho, NM . . . . . . . . . . . . . Lapeer, MI . . . . . . . . . . . . . . . . . Qwest Corporation Service Center: Cedar Rapids, IA . . . . . . . . . . . . . Decorah, IA . . . . . . . . . . . . . . . . . Rally’s: Toledo, OH . . . . . . . . . . . . . . . . . REB Oil: Deerfield Beach, FL . . . . . . . . . . — — — — — — — — — — Rent-A-Center: Rio Rancho, NM . . . . . . . . . . . . . Rite Aid: Douglasville, GA . . . . . . . . . . . . Conyers, GA . . . . . . . . . . . . . . . . Augusta, GA . . . . . . . . . . . . . . . . — — — — 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 Des Moines, IA . . . . . . . . . . . . . . Gainesville, GA . . . . . . . . . . . . . Herculaneum, MO . . . . . . . . . . . Johnston, IA . . . . . . . . . . . . . . . . Lee’s Summit, MO . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . Olathe, KS . . . . . . . . . . . . . . . . . . — — — — — — — — — 379,435 592,192 455,322 912,962 856,001 1,612,887 394,289 385,119 373,770 1,224,099 948,051 844,216 966,145 293,896 296,867 202,430 792,656 1,391,981 Tulsa, OK . . . . . . . . . . . . . . . . . . — 1,224,843 339,566 127,250 118,012 649,917 764,025 542,934 453,891 488,383 1,041,883 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 379,435 592,192 455,322 834,757 912,962 1,505,154 856,001 1,612,887 2,468,888 394,289 385,119 779,408 373,770 1,224,099 1,597,869 948,051 838,826 966,145 293,896 1,241,947 296,867 1,135,693 202,430 1,168,575 53,753 107,780 190,410 45,465 108,384 34,696 35,047 23,898 792,656 1,391,981 2,184,637 123,248 1,224,843 649,917 1,874,760 339,566 127,250 113,236 764,025 1,103,591 542,934 453,891 670,184 567,127 488,383 1,041,883 1,530,266 76,726 67,648 64,096 53,584 92,250 48,566 28,820 96,428 13,398 — 208,194 — — 48,566 28,820 109,826 208,194 158,392 237,014 18,941 7,157 184,490 71,899 628,943 271,620 — — — — 184,490 71,899 628,943 271,620 813,433 343,519 111,375 96,199 1976 1974 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 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 40 years 40 years 20 years 10 years 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 12/01 10/07 06/05 06/05 1996 1989 1991 1991 1999 1993 1989 1994 1999 1990 1993 1990 1989 1997 1997 125,882 319,770 — — 125,882 319,770 445,652 136,120 1989 07/92 39 years Lake Placid, FL . . . . . . . . . . . . . . — 2,531,533 1,157,265 Red Lion Chinese: 769,522 273,756 — — — — 769,522 273,756 1,043,278 2,531,533 1,157,265 3,688,798 20,817 93,719 1980 1990 12/05 12/05 40 years 40 years Cohoes, NY . . . . . . . . . . . . . . . . . — 16,121 86,894 841 — 16,121 87,735 103,856 9,369 1994 09/04 40 years Reliable: St. Louis, MO . . . . . . . . . . . . . . . — 2,077,893 13,762,491 — — 2,077,893 13,762,491 15,840,384 1,536,666 1975 05/04 40 years 145,698 289,284 40,193 — 145,698 329,477 475,175 57,150 1997 12/01 40 years 413,438 574,666 995,209 998,900 568,606 1,326,748 — — — — — — — — 413,438 574,666 995,209 1,408,647 998,900 1,573,566 568,606 1,326,748 1,895,354 1,088,896 1,707,448 2,796,344 Riverdale, GA . . . . . . . . . . . . . . . — 1,088,896 1,707,448 Warner Robins, GA . . . . . . . . . . — 707,488 — 1,227,330 — 707,488 1,227,330 1,934,818 Mobile, AL . . . . . . . . . . . . . . . . . — 1,136,618 1,694,187 Orange Beach, AL . . . . . . . . . . . Thorndale, PA . . . . . . . . . . . . . . . — 1,409,980 — 2,260,618 1,996,043 2,472,039 West Mifflin, PA . . . . . . . . . . . . . — 1,401,632 2,043,862 Norfolk, VA . . . . . . . . . . . . . . . . — 2,742,194 1,796,508 Albany, NY . . . . . . . . . . . . . . . . . Albany, NY (r) . . . . . . . . . . . . . . Hudson Falls, NY . . . . . . . . . . . . Saratoga Springs, NY . . . . . . . . . — — — — Monticello, NY . . . . . . . . . . . . . . 781,014 24,707 33,794 56,737 762,303 664,400 867,257 823,923 780,091 590,978 768,795 — — — — — — — — — — — — — — 38,787 — — — — — 1,136,618 1,694,187 2,830,805 1,409,980 2,260,618 1,996,043 2,472,039 3,406,023 4,732,657 1,401,632 2,043,862 3,445,494 2,742,194 1,796,508 4,538,702 24,707 33,794 56,737 762,303 664,400 867,257 823,923 818,878 891,964 857,717 875,615 590,978 1,353,281 768,795 1,433,195 321,508 288,224 366,238 471,327 305,554 298,248 351,387 424,882 351,289 308,775 93,049 88,462 85,346 63,407 72,875 1996 1997 1997 1997 1999 2000 2000 2001 1999 2001 1994 1992 1990 1980 1996 01/96 06/97 12/97 12/97 40 years 40 years 40 years 40 years 03/98(g) 40 years 12/01 12/01 02/02 02/02 02/02 09/04 09/04 09/04 09/04 03/05 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years Rite Rug: Columbus, OH . . . . . . . . . . . . . . — 1,596,197 934,236 13,345 — 1,604,615 939,163 2,543,778 96,819 1970 11/04 40 years Road Ranger: Belvidere, IL . . . . . . . . . . . . . . . . — 748,237 1,256,106 Brazil, IN . . . . . . . . . . . . . . . . . . — 2,199,280 907,034 Cherry Valley, IL . . . . . . . . . . . . — 1,409,312 1,897,360 Cottage Grove, WI . . . . . . . . . . . — 2,174,548 1,733,398 Decatur, IL . . . . . . . . . . . . . . . . . Dekalb, IL . . . . . . . . . . . . . . . . . . — — 815,213 747,109 1,314,354 1,657,951 — — — — — — — — — — — — 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 3,907,946 815,213 747,109 1,314,354 1,657,951 2,129,568 2,405,060 79,815 57,634 120,561 110,143 83,516 105,349 1997 1990 1991 1990 2002 2000 06/06 06/06 06/06 06/06 06/06 06/06 40 years 40 years 40 years 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. 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 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 . . . . . . . . . . . . . . . Dry Ridge, KY . . . . . . . . . . . . . . . Florence, KY . . . . . . . . . . . . . . . . . Alexandria, KY . . . . . . . . . . . . . . . Florence, KY . . . . . . . . . . . . . . . . . Wilder, KY . . . . . . . . . . . . . . . . . . Florence, KY . . . . . . . . . . . . . . . . . Covington, KY . . . . . . . . . . . . . . . Hebron, KY . . . . . . . . . . . . . . . . . . Robb & Stucky: — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 — — — — — — — — — — — — — — — — — — — — — — 1,537,734 2,470,191 4,007,925 156,960 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 70,636 82,336 105,679 105,586 84,579 95,330 1,794,961 1,862,562 3,657,523 118,350 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 1,500,812 1,629,412 — 1,307,002 3,130,224 4,437,226 1,141,447 3,066,368 3,823,872 2,308,942 1,024,606 983,509 736,574 1,071,226 929,718 1,147,323 560,523 1,941,477 520,800 1,053,470 1,182,152 1,324,429 892,290 1,945,598 615,432 1,241,916 624,348 1,305,776 740,762 1,271,707 953,755 1,902,402 884,098 1,557,307 486,211 1,419,618 1,522,347 2,983,691 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,141,447 3,066,368 4,207,815 3,823,872 2,308,942 6,132,814 1,024,606 983,509 2,008,115 736,574 1,071,226 1,807,800 929,718 1,147,323 2,077,041 560,523 1,941,477 2,502,000 520,800 1,053,470 1,574,270 1,182,152 1,324,429 2,506,581 892,290 1,945,598 2,837,889 615,432 1,241,916 1,857,348 624,348 1,305,776 1,930,124 740,762 1,271,707 2,012,469 953,755 1,902,402 2,856,157 884,098 1,557,307 2,441,405 486,211 1,419,618 1,905,829 1,522,347 2,983,691 4,506,038 1989 1987 1996 1998 1996 2000 1997 1978 2006 2004 2007 1988 2003 2002 1990 1974 1997 2000 2007 2007 1973 1990 1993 1994 1994 1995 1996 1996 06/06 06/06 06/06 06/06 06/06 06/06 06/06 06/06 02/07 02/07 02/07 02/07(f) 02/07 02/07 03/07 03/07 08/07 09/07 09/07(f) 09/07(f) 04/08 04/08 04/08 04/08 04/08 04/08 04/08 04/08 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 94,109 70,457 122,893 113,594 143,736 108,232 44,053 47,982 39,439 62,694 29,629 37,250 45,938 25,134 26,426 25,737 38,501 31,517 28,730 60,384 Ft. Myers, FL . . . . . . . . . . . . . . . . . — 2,188,440 6,225,401 — — 2,188,440 6,225,401 8,413,841 1,737,491 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 1,013,997 1992 02/97 40 years Ross Dress For Less: Coral Gables, FL . . . . . . . . . . . . . . Lodi, CA . . . . . . . . . . . . . . . . . . . . — — 1,782,346 1,661,174 613,710 1,414,592 — — — — 1,782,346 1,661,174 3,443,520 613,710 1,414,592 2,028,302 470,246 184,192 1994 1984 06/96 03/99 40 years 40 years Rue 21: Lapeer, MI . . . . . . . . . . . . . . . . . . . — 126,170 645,384 — — 126,170 645,384 771,554 20,841 2007 09/07 40 years Sally Beauty Supply: Lapeer, MI . . . . . . . . . . . . . . . . . . . — 32,630 166,910 — — 32,630 166,910 199,540 5,390 2007 09/07 40 years Schlotzsky’s Deli: Phoenix, AZ . . . . . . . . . . . . . . . . . . Scottsdale, AZ . . . . . . . . . . . . . . . . 7-Eleven: Land O’ Lakes, FL . . . . . . . . . . . . Tampa, FL . . . . . . . . . . . . . . . . . . . — — — — Shek’s Chinese Express: 706,306 717,138 315,469 310,610 — — — — 706,306 717,138 315,469 1,021,775 310,610 1,027,748 55,536 54,680 1,076,572 1,080,670 — — 816,944 — 1,076,572 816,944 1,893,516 917,432 — 1,080,670 917,432 1,998,102 203,385 224,580 1995 1995 1999 1999 12/01 12/01 40 years 40 years 10/98(g) 40 years 12/98(g) 40 years Eden Prairie, MN . . . . . . . . . . . . . . — 64,916 261,347 — — 64,916 261,347 326,263 43,113 1997 12/01 40 years Shoes on a Shoestring: Albuquerque, NM . . . . . . . . . . . . . — 1,441,777 2,335,475 — — 1,441,777 2,335,475 3,777,251 673,882 1997 06/97 40 years Shop-a-Snak: Jasper, AL . . . . . . . . . . . . . . . . . . . Bessemer, AL . . . . . . . . . . . . . . . . Birmingham, AL . . . . . . . . . . . . . . Birmingham, AL . . . . . . . . . . . . . . — — — — 551,417 563,863 489,664 438,536 747,418 742,457 769,343 704,005 — — — — — — — — 551,417 563,863 489,664 438,536 747,418 1,298,835 742,457 1,306,320 769,343 1,259,007 704,005 1,142,541 49,049 48,724 50,488 46,200 1998 2002 1992 1989 Birmingham, AL . . . . . . . . . . . . . . Chelsea, AL . . . . . . . . . . . . . . . . . . Homewood, AL . . . . . . . . . . . . . . . — — — — — — See accompanying report of independent registered public accounting firm. 744,195 1,105,377 627,502 1,018,777 656,964 1,124,914 361,182 391,275 467,950 744,195 627,502 656,964 361,182 391,275 467,950 48,838 41,180 43,113 — — — 1989 1981 1990 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 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 Hoover, AL . . . . . . . . . . . . . . . . . . Hoover, AL . . . . . . . . . . . . . . . . . . Hoover, AL . . . . . . . . . . . . . . . . . . Trussville, AL . . . . . . . . . . . . . . . . Tuscaloosa, AL . . . . . . . . . . . . . . . Tuscaloosa, AL . . . . . . . . . . . . . . . Tuscaloosa, AL . . . . . . . . . . . . . . . — — — — — — — 712,752 864,527 764,461 1,156,598 445,980 271,728 385,947 525,165 431,917 671,989 541,741 732,669 462,868 559,403 — — — — — — — — — — — — — — 712,752 864,527 1,577,279 764,461 1,156,598 1,921,059 445,980 271,728 385,947 525,165 431,917 671,989 1,117,969 541,741 813,469 732,669 1,118,616 462,868 559,403 988,033 991,320 56,735 75,902 44,099 35,552 48,081 30,376 36,711 1998 2005 1989 1992 1991 1991 1991 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 Shop & Save: Homestead, PA . . . . . . . . . . . . . . . — 1,139,419 — 2,158,167(j) — 1,139,419 2,158,167 3,297,586 235,899 1994 02/97 40 years Soaks Express Car Wash: Ankeny, IA . . . . . . . . . . . . . . . . . . — 661,958 — — — 661,958 — 661,958 (e) 06/05 (e) Sonic Automotive: Charlotte, NC . . . . . . . . . . . . . . . . . — 3,618,837 4,853,587 — — 3,618,837 4,853,587 8,472,424 197,177 1996 05/07 40 years Spa and Nails Club: Orlando, FL . . . . . . . . . . . . . . . . . . 58,124(o) 40,200 110,531 — — 40,200 110,531 150,731 13,471 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 . . . . . . . . . . . . . . . Sportsman’s Warehouse: — — — — — — 341,713 982,429 — — 341,713 982,429 1,324,143 231,862 1999 12/98(g) 40 years 2,127,503 1,521,730 1,427,840 1,702,852 — — — — 2,127,503 1,521,730 3,649,233 1,427,840 1,702,852 3,130,692 820,340 — 2,573,264 — 820,340 2,573,264 3,393,604 3,113,375 2,660,206 3,749,990 5,982,660 — — — — 3,113,375 2,660,206 5,773,581 3,749,990 5,982,660 9,732,650 475,858 209,309 656,718 684,449 891,167 1994 1996 1998 1997 1994 06/96 09/97 40 years 40 years 12/97(g) 40 years 09/98 01/03 40 years 40 years Sioux Falls, SD . . . . . . . . . . . . . . . — 2,619,810 1,929,895 — — 2,619,810 1,929,895 4,549,705 227,835 1998 06/05 30 years Stock Building Supply: Hillman, MI . . . . . . . . . . . . . . . . . . — 166,866 822,950 — — 166,866 822,950 989,816 45,434 1952 10/06 40 years Stone Mountain Chevrolet: Lilburn, GA . . . . . . . . . . . . . . . . . . — 3,027,056 4,685,189 — — 3,027,056 4,685,189 7,712,245 512,443 2004 08/04 40 years Stop & Go: Grand Prairie, TX . . . . . . . . . . . . . Kennedale, TX . . . . . . . . . . . . . . . . Stripes: Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Donna, TX . . . . . . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . . Falfurias, TX . . . . . . . . . . . . . . . . . Freer, TX . . . . . . . . . . . . . . . . . . . . George West, TX . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — 421,254 399,988 684,568 692,190 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 1,287,564 933,149 699,086 1,384,743 1,418,948 1,308,418 2,151,142 852,629 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 1,243,224 695,074 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 421,254 391,208 684,568 1,105,822 692,190 1,083,398 120,512 121,854 1,842,992 1,418,941 3,261,933 107,899 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 84,051 136,906 139,027 99,445 87,061 1,392,201 1,443,817 2,836,018 109,790 1,279,447 1,014,702 2,294,149 2,529,864 1,124,953 3,654,817 2,033,467 1,287,564 3,321,031 933,149 699,086 1,632,235 1,384,743 1,418,948 2,803,691 1,308,418 2,151,142 3,459,560 852,629 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 77,160 85,543 97,908 53,160 107,899 163,576 107,691 116,413 78,818 85,668 1,317,408 1,623,891 2,941,299 123,483 970,145 1,286,006 2,256,151 4,243,940 4,458,007 8,701,947 1,150,862 1,158,251 2,309,113 1,243,224 695,074 1,938,298 97,790 338,994 88,075 52,855 1986 1985 2000 2000 2000 2000 2003 2004 2005 1990 1990 1995 1999 1982 1995 2005 1984 1986 1995 1999 2003 2002 1984 1996 Harlingen, TX . . . . . . . . . . . . . . . . — — See accompanying report of independent registered public accounting firm. 952,530 1,858,957 906,427 906,427 952,530 72,432 — 1991 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 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-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 Harlingen, TX . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . La Feria, TX . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Lawton, OK . . . . . . . . . . . . . . . . . . Los Indios, TX . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . . Mission, TX . . . . . . . . . . . . . . . . . . Olmito, TX . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . Pharr, TX . . . . . . . . . . . . . . . . . . . . Port Isabel, TX . . . . . . . . . . . . . . . . Portland, TX . . . . . . . . . . . . . . . . . Progresso, TX . . . . . . . . . . . . . . . . Riviera, TX . . . . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . San Benito, TX . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . South Padre Island, TX . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . . Palm View, TX . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . Rio Grande City . . . . . . . . . . . . . . . San Juan, TX . . . . . . . . . . . . . . . . . Zapata, TX . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . Harlingen, TX . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . Port Isabel, TX . . . . . . . . . . . . . . . . McAllen, TX . . . . . . . . . . . . . . . . . Brownsville, TX . . . . . . . . . . . . . . Edinburg, TX . . . . . . . . . . . . . . . . . La Villa, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . Laredo, TX . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 753,595 1,152,311 755,002 600,721 900,096 1,346,774 1,552,558 1,774,827 840,629 736,451 459,027 738,907 670,332 459,946 1,494,871 1,400,482 675,128 696,670 533,047 964,441 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 1,177,948 784,402 804,743 2,426,134 1,880,867 2,062,009 1,298,501 655,735 914,512 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 1,350,908 484,202 439,646 827,999 751,484 835,383 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 1,838,068 407,920 467,915 584,244 447,733 825,732 727,548 958,472 734,498 698,261 1,168,532 348,351 1,168,124 419,729 1,135,228 1,565,013 758,296 640,368 1,616,290 2,627,558 2,973,453 2,632,935 3,198,762 194,277 471,407 573,354 1,228,572 329,308 277,243 325,343 935,114 808,006 815,749 643,013 1,775,761 298,913 855,463 1,269,505 2,382,820 842,659 1,429,227 834,442 1,786,773 709,657 2,165,800 1,182,620 1,934,163 878,610 1,593,457 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 3,327,385 840,629 736,451 459,027 738,907 1,579,536 670,332 1,406,784 459,946 918,973 87,624 45,680 102,411 134,961 56,188 50,973 34,975 1,494,871 1,400,482 2,895,353 106,495 675,128 696,670 533,047 1,208,175 964,441 1,661,111 40,534 73,338 1,386,972 1,456,932 2,843,903 110,787 975,217 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 78,304 67,934 83,745 92,269 3,687,971 2,880,099 6,568,070 219,007 981,840 1,177,948 2,159,788 784,402 804,743 1,589,144 89,573 61,194 2,426,134 1,880,867 4,307,001 143,024 2,062,009 1,298,501 3,360,510 655,735 914,512 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 2,256,025 484,202 439,646 827,999 1,312,201 751,484 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 3,604,813 407,920 467,915 584,244 447,733 825,732 1,233,652 727,548 1,195,463 958,472 1,542,716 734,498 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 1,565,013 758,296 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 5,831,697 194,277 471,407 665,684 573,354 1,228,572 1,801,926 329,308 277,243 325,343 935,114 1,264,422 808,006 1,085,248 815,749 1,141,092 643,013 1,775,761 2,418,774 298,913 855,463 1,154,375 1,269,505 2,382,820 3,652,325 842,659 1,429,227 2,271,887 834,442 1,786,773 2,621,216 709,657 2,165,800 2,875,457 1,182,620 1,934,163 3,116,783 878,610 1,593,457 2,472,067 98,740 69,541 137,728 164,103 120,620 141,221 89,089 117,527 105,604 102,725 62,962 57,144 75,749 92,210 82,294 73,188 90,475 78,501 30,965 27,283 35,943 27,544 43,820 43,805 42,571 21,327 45,458 83,628 89,965 13,258 31,994 29,872 25,811 26,059 56,726 27,327 49,642 22,332 27,918 33,841 30,221 24,898 1999 1987 1988 2000 2001 1984 1983 1993 1993 1984 2005 2003 1999 1999 2003 2002 1988 2000 2003 1994 1983 1999 2005 2005 1994 1996 2004 1988 2000 1983 1984 2005 2006 2006 2006 2006 2007 1982 1973 1981 1981 1981 1983 1985 1996 1996 1996 2006 1998 2000 1980 1983 1983 1980 1983 1986 2007 2007 2007 2007 2007 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 12/05 10/06 12/06 12/06 12/06 12/06 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 01/08 01/08 01/08 01/08 01/08 05/08 05/08 05/08 05/08 05/08 05/08 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 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 30 years 30 years 30 years 30 years 30 years 30 years 40 years 40 years 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. 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 Lubbock, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Subway: Eden Prairie, MN . . . . . . . . . . . . . . Albany, NY . . . . . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . SuperValu: Huntington, WV . . . . . . . . . . . . . . Maple Heights, OH . . . . . . . . . . . . Susser: — — — — — — — 671,357 1,612,297 696,311 1,457,604 — — 54,097 150,449 67,341 2,734 66,667 — 21,494 115,858 1,125 1,254,238 760,602 1,034,758 2,874,414 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 . . . . . . . . . . . . . . . . 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: — — — — — — — — — — — — — — — — — — — — 275,023 632,337 593,718 796,772 754,990 525,616 282,777 936,942 1,256,948 2,054,570 690,142 1,212,681 221,196 828,023 308,068 1,300,511 524,368 1,815,101 989,998 486,260 648,296 1,079,007 1,031,743 1,649,975 547,218 703,287 682,108 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 2,249,313 501,783 879,791 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 671,357 1,612,297 2,283,654 696,311 1,457,604 2,153,915 1,679 1,518 54,097 217,790 271,887 2,734 66,667 69,401 21,494 116,983 138,477 35,928 7,091 12,441 1,254,238 760,602 2,014,840 1,034,758 2,874,414 3,909,172 225,804 853,342 2007 2007 1997 1992 1994 1971 1985 05/08 05/08 12/01 09/04 09/04 02/97 02/97 40 years 40 years 40 years 40 years 40 years 40 years 40 years 630,043 3,131,407 3,761,450 766,542 1983 03/99 40 years 45,815 132,365 178,180 23,304 1997 12/01 40 years 275,023 632,337 593,718 796,772 754,990 1,030,013 132,910 525,616 1,157,953 282,777 876,495 936,942 1,733,714 92,530 49,781 61,487 1,256,948 2,054,570 3,311,518 134,831 690,142 1,212,681 1,902,823 221,196 828,023 1,049,219 308,068 1,300,511 1,608,579 79,582 54,339 85,346 524,368 1,815,101 2,339,469 119,116 989,998 486,260 1,476,258 648,296 1,079,007 1,727,303 31,911 70,810 1,031,743 1,649,975 2,681,718 108,280 547,218 703,287 1,250,505 682,108 1,192,867 1,874,975 638,693 1,326,161 1,964,854 46,153 78,282 87,029 670,216 1,755,847 2,426,063 115,227 407,707 1,426,319 1,834,026 1,037,327 1,655,660 2,692,987 1,313,692 2,249,313 3,563,005 501,783 879,791 1,381,574 93,602 108,653 147,611 57,736 2001 2001 1995 1989 1990 2005 2003 2000 2005 1998 1998 2004 2004 1999 2005 1998 2003 2003 2003 2004 12/01 12/01 12/01 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 05/06 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years — — — — — — — — — — — — — — — — — — — — — — — — Tucson, AZ . . . . . . . . . . . . . . . . . . — 827,002 305,209 17,814 — 844,816 305,209 1,150,025 61,550 1974 12/01 40 years Texas Roadhouse: Grand Junction, CO . . . . . . . . . . . . Thornton, CO . . . . . . . . . . . . . . . . . TGI Friday’s: Corpus Christi, TX . . . . . . . . . . . . Third Federal Savings: Parma, OH . . . . . . . . . . . . . . . . . . . Thomasville: Buford, GA . . . . . . . . . . . . . . . . . . Title Max: — — — — — 584,237 920,143 598,556 1,019,164 1,209,702 1,532,125 370,119 238,145 1,266,527 2,405,629 — — — — — — — 584,237 920,143 1,504,380 598,556 1,019,164 1,617,720 161,983 179,415 1997 1998 12/01 12/01 40 years 40 years — 1,209,702 1,532,125 2,741,827 269,718 1995 12/01 40 years — 370,119 238,145 608,264 27,287 1977 09/06 40 years — 1,266,527 2,405,629 3,672,156 268,127 2004 07/04 40 years Aiken, SC . . . . . . . . . . . . . . . . . . . Anniston, AL . . . . . . . . . . . . . . . . . Berkeley, MO . . . . . . . . . . . . . . . . Cheraw, SC . . . . . . . . . . . . . . . . . . Columbia, SC . . . . . . . . . . . . . . . . Dalton, GA . . . . . . . . . . . . . . . . . . Darlington, SC . . . . . . . . . . . . . . . . Fairfield, AL . . . . . . . . . . . . . . . . . Gadsden, AL . . . . . . . . . . . . . . . . . Hueytown, AL . . . . . . . . . . . . . . . . Jonesboro, GA . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 645,823 1,087,417 613,583 453,482 518,996 282,086 418,144 329,695 531,728 319,270 525,162 347,425 313,933 267,271 310,525 177,599 639,046 388,736 228,420 93,054 967,267 292,499 441,594 160,101 236,910 88,449 212,458 177,737 46,662 132,926 250,310 135,366 674,768 645,823 453,482 282,086 329,695 319,270 347,425 267,271 177,599 388,736 93,054 292,499 441,594 160,101 236,910 88,449 212,458 177,737 46,662 132,926 250,310 135,366 674,768 8,073 4,251 5,289 4,945 3,991 5,211 4,009 2,664 3,644 3,490 4,388 1989 2008 1961 1976 1987 1972 1973 1974 2007 1948 1970 — — — — — — — — — — — 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 30 years 40 years 20 years 25 years 30 years 25 years 25 years 25 years 40 years 10 years 25 years 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 Improve- ments Carrying Costs 331,825 297,759 289,909 277,692 237,019 444,277 233,293 276,187 301,169 349,824 360,732 400,179 396,384 400,153 230,243 287,688 397,711 191,028 372,024 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Land 370,179 69,609 102,621 285,365 111,401 226,248 96,180 268,122 255,572 598,796 108,538 876,862 564,567 219,996 124,643 244,040 134,018 94,234 298,652 Building, Improve- ments and Leasehold Interests Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Total 702,004 331,825 367,367 297,759 392,530 289,909 563,057 277,692 348,420 237,019 670,525 444,277 329,472 233,293 544,309 276,187 556,741 301,169 948,620 349,824 360,732 469,270 400,179 1,277,041 960,951 396,384 620,149 400,153 354,886 230,243 531,728 287,688 531,728 397,711 285,262 191,028 670,675 372,024 4,148 3,190 5,436 5,207 2,963 5,553 3,499 4,143 3,765 5,247 4,509 6,003 5,946 6,002 3,454 4,315 4,261 2,388 3,986 1986 1998 1967 1967 1981 1986 1970 1978 1982 1975 1986 1978 1977 1979 1979 1971 1993 1986 1999 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 08/08 Land 370,179 69,609 102,621 285,365 111,401 226,248 96,180 268,122 255,572 598,796 108,538 876,862 564,567 219,996 124,643 244,040 134,018 94,234 298,652 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 30 years 35 years 20 years 20 years 30 years 30 years 25 years 25 years 30 years 25 years 30 years 25 years 25 years 25 years 25 years 25 years 35 years 30 years 35 years Encum- brances (k) Lawrenceville, GA . . . . . . . . . . . . Lewisburg, TN . . . . . . . . . . . . . . . . Macon, GA . . . . . . . . . . . . . . . . . . Marietta GA . . . . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . . Memphis, TN . . . . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . . . Nashville, TN . . . . . . . . . . . . . . . . Nashville, TN . . . . . . . . . . . . . . . . Norcross, GA . . . . . . . . . . . . . . . . . Pulaski, TN . . . . . . . . . . . . . . . . . . Riverdale, GA . . . . . . . . . . . . . . . . Snellville, GA . . . . . . . . . . . . . . . . Springfield, MO . . . . . . . . . . . . . . . Springfield, MO . . . . . . . . . . . . . . . St. Louis, MO . . . . . . . . . . . . . . . . St. Louis, MO . . . . . . . . . . . . . . . . Sylacauga, AL . . . . . . . . . . . . . . . . Taylors, SC . . . . . . . . . . . . . . . . . . Top’s: — — — — — — — — — — — — — — — — — — — Lacey, WA . . . . . . . . . . . . . . . . . . . — 2,777,449 7,082,150 — — 2,777,449 7,082,150 9,859,599 2,102,513 1992 02/97 40 years Tractor Supply Co.: Aransas Pass, TX . . . . . . . . . . . . . . — 100,967 1,599,293 — Ultra Car Wash: Mobile, AL . . . . . . . . . . . . . . . . . . Liburn, GA . . . . . . . . . . . . . . . . . . — — 1,070,724 1,086,104 1,395,676 1,119,141 — — — — — Uni-Mart: 100,967 1,599,293 1,700,260 345,394 1983 03/99 40 years 1,070,724 1,086,104 2,156,828 1,395,676 1,119,141 2,514,817 37,335 17,487 2005 2004 Avis, PA . . . . . . . . . . . . . . . . . . . . Bear Creek, PA (r) . . . . . . . . . . . . . Bloomsburg, PA (r) . . . . . . . . . . . . Bloomsburg, PA (r) . . . . . . . . . . . . Chambersburg, PA (r) . . . . . . . . . . Coraopolis, PA . . . . . . . . . . . . . . . Dallas, PA (r) . . . . . . . . . . . . . . . . . East Brady, PA (r) . . . . . . . . . . . . . Hazleton, PA (r) . . . . . . . . . . . . . . . Hazleton, PA (r) . . . . . . . . . . . . . . . Johnsonburg, PA (r) . . . . . . . . . . . Larksville, PA (r) . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . Taylor, PA (r) . . . . . . . . . . . . . . . . White Haven, PA (r) . . . . . . . . . . . Wilkes-Barre, PA (r) . . . . . . . . . . . Wilkes-Barre, PA (r) . . . . . . . . . . . Wilkes-Barre, PA (r) . . . . . . . . . . . Williamsport, PA (r) . . . . . . . . . . . Ashland, PA (r) . . . . . . . . . . . . . . . Bear Creek, PA (r) . . . . . . . . . . . . . Mountaintop, PA (r) . . . . . . . . . . . Beech Creek, PA . . . . . . . . . . . . . . Canisteo, NY . . . . . . . . . . . . . . . . . Curwensville, PA (r) . . . . . . . . . . . Dansville, PA (r) . . . . . . . . . . . . . . Effort, PA (r) . . . . . . . . . . . . . . . . . Ellwood City, PA . . . . . . . . . . . . . . Export, PA (r) . . . . . . . . . . . . . . . . Hastings, PA . . . . . . . . . . . . . . . . . Howard, PA . . . . . . . . . . . . . . . . . . Hughesville, PA (r) . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — See accompanying report of independent registered public accounting firm. 717,847 326,046 391,801 420,752 230,193 190,558 501,424 707,826 206,402 888,074 1,403,182 515,108 272,713 197,035 75,678 475,572 822,932 347,360 890,855 1,435,745 2,326,601 583,204 269,433 852,637 377,355 1,047,625 670,271 727,550 3,256,716 2,529,165 503,662 1,284,198 780,536 579,745 333,875 245,870 631,970 308,844 323,126 924,730 592,844 331,885 941,787 117,629 824,158 794,490 541,842 252,648 641,081 258,740 382,341 830,329 506,335 323,994 533,708 330,098 203,610 687,236 475,086 212,150 526,884 180,533 707,417 866,602 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 1,030,922 908,758 900,462 545,140 355,322 274,920 689,374 964,294 616,488 1,039,259 422,770 612,664 1,089,180 476,516 627,095 485,183 141,912 834,004 607,989 226,015 359,203 538,939 179,736 1,297,431 1,201,954 2,499,385 722,244 526,155 436,692 214,852 654,468 455,379 511,111 374,695 856,365 566,229 326,046 391,801 230,193 190,558 501,424 206,402 888,074 515,108 197,035 75,678 475,572 347,360 890,855 1,435,745 583,204 269,433 377,355 670,271 727,550 2,529,165 503,662 780,536 333,875 245,870 308,844 323,126 592,844 331,885 117,629 824,158 541,842 252,648 258,740 382,341 506,335 323,994 330,098 203,610 475,086 212,150 526,884 180,533 866,602 485,984 471,437 178,104 171,040 422,438 875,774 1,956,613 122,164 908,758 545,140 355,322 274,920 689,374 616,488 422,770 612,664 476,516 485,183 141,912 607,989 226,015 359,203 179,736 1,297,431 1,201,954 526,155 214,852 455,379 374,695 566,229 55,020 38,845 84,615 149,862 33,250 58,617 242,282 98,416 63,679 122,774 84,993 56,341 52,117 100,042 19,850 91,436 43,662 85,444 55,704 80,171 88,912 146,239 79,555 71,286 330,178 20,615 89,721 45,247 101,464 45,312 35,883 44,966 26,566 88,895 38,914 15,890 33,679 27,712 41,877 1976 1980 1981 1998 1990 1983 1995 1987 1974 2001 1978 1990 1980 1996 1953 1983 1975 1956 1989 1984 1973 1990 1989 1999 1998 1950 1977 1980 1987 1988 1983 1983 1988 2000 1987 1988 1989 1987 1977 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 196,089 221,840 199,089 136,416 290,136 196,089 221,840 199,089 136,416 290,136 F-19 08/07 05/08 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 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 40 years 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 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) 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 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 (r) . . . . . . . . . . . . . Plainfield, PA (r) . . . . . . . . . . . . . . Plains, PA (r) . . . . . . . . . . . . . . . . . Punxsutawney, PA (r) . . . . . . . . . . Reynoldsville, PA . . . . . . . . . . . . . Warriors Mark, PA (r) . . . . . . . . . . Williamsport, 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: Bridgeview, IL . . . . . . . . . . . . . . . . Vacant Land: Longwood, FL . . . . . . . . . . . . . . . . Florence, AL . . . . . . . . . . . . . . . . . Vacant Property: Altamonte Springs, FL . . . . . . . . . Aransas Pass, TX . . . . . . . . . . . . . . Bellingham, WA . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . Cohoes, NY . . . . . . . . . . . . . . . . . . Corpus Christi, TX . . . . . . . . . . . . Depew, NY . . . . . . . . . . . . . . . . . . East Palo Alto, CA . . . . . . . . . . . . Everett, PA . . . . . . . . . . . . . . . . . . Florissant, MO . . . . . . . . . . . . . . . . Foothill Ranch, CA . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Indianapolis, IN . . . . . . . . . . . . . . . Jacksonville, FL . . . . . . . . . . . . . . . Lapeer, MI . . . . . . . . . . . . . . . . . . . Lebanon, TN . . . . . . . . . . . . . . . . . Mesa, AZ . . . . . . . . . . . . . . . . . . . . Milford, CT . . . . . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . . . Montgomery, AL . . . . . . . . . . . . . . Olean, NY . . . . . . . . . . . . . . . . . . . Orlando, FL . . . . . . . . . . . . . . . . . . Ridgeland, MS . . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 53,280(o) — 514,708 285,510 412,356 134,501 672,259 133,831 679,595 158,346 174,583 298,364 254,635 381,372 643,886 533,848 364,946 746,309 372,913 581,718 415,372 482,239 812,449 835,411 1,062,388 1,202,832 268,962 428,193 905,332 1,346,177 382,518 243,945 401,264 204,417 649,800 293,717 327,933 113,312 404,981 148,499 378,715 295,036 477,893 535,091 534,807 829,241 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 1,427,764 746,558 673,238 744,154 585,152 1,031,559 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,088,282 51,049 26,868 893,270 689,040 924,425 89,537 1,240,882 1,236,837 1,259,807 275,163 144,823 978,344 386,251 2,271,634 3,404,843 226,366 1,159,833 2,490,210 2,937,449 1,456,113 2,505,022 421,897 1,915,483 509,179 112,150 639,584 1,106,911 986,565 855,523 187,335 1,353,264 581,612 399,801 152,609 697,298 921,200 592,730 1,186,705 1,418,158 1,140,080 259,286 101,320 933,313 — — — 2,672 — 1,407 — 76,664 — — — 7,830 — — — — — — — — — 2,062,738 — 112,765 — — — — — — — 40,453 36,850 778,874 — — — — — — — — — — — — — 514,708 285,510 412,356 134,501 672,259 133,831 679,595 158,346 174,583 298,364 254,635 896,080 381,372 929,396 643,886 946,204 533,848 364,946 499,447 746,309 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 2,251,509 626,463 382,518 243,945 605,681 401,264 204,417 943,517 649,800 293,717 441,245 327,933 113,312 553,480 404,981 148,499 673,751 378,715 295,036 477,893 535,091 534,807 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 28,206 47,621 39,482 26,991 55,196 27,580 43,023 30,720 35,666 60,087 61,786 88,959 19,892 99,561 28,290 29,677 48,058 24,253 29,952 28,009 54,038 83,788 182,953 98,816 92,027 214,757 196,390 127,806 113,074 116,002 137,455 111,605 (i) 55,021 1960 1987 1988 1988 1988 1987 1974 1988 1988 1989 1990 2000 1978 1967 1988 1994 1983 1983 1995 1988 1981 1990 2001 1975 1984 2000 2002 1997 1979 1996 1998 1997 (i) 1970 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 Life on Which Depreciation and Amortization in Latest Income Statement is Computed 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 1,417,392 131,002 1997 12/01 40 years 585,152 1,031,559 — 585,152 — 1,031,559 (e) (e) (e) (e) 03/06 06/04 (e) (e) 226,366 1,088,282 924,425 2,012,707 89,537 1,240,882 1,330,419 1,236,837 1,259,807 2,496,644 328,884 277,835 51,049 26,868 173,098 146,230 893,270 1,055,008 1,948,278 386,251 1,075,291 689,040 2,271,634 3,404,843 5,676,477 817,667 1,044,033 2,490,210 2,937,449 5,427,659 1,456,113 2,505,022 3,961,135 421,897 1,915,483 2,337,380 621,329 509,179 112,150 639,584 1,106,911 1,746,495 986,565 855,523 1,842,088 187,335 1,353,264 1,540,599 581,612 2,062,738 2,644,350 512,566 152,609 665,175 697,298 1,618,498 921,200 592,730 1,186,705 1,779,435 1,418,158 1,044,076 2,462,234 299,739 259,286 101,320 138,170 933,313 1,712,187 40,453 36,850 778,874 162,737 306,524 22,746 29,548 15,551 398,536 67,996 833,477 170,333 419,198 751,843 145,340 39,034 182,923 150,608 46,518 45,122 70,774 122,753 90,239 191,894 43,755 12,348 70,971 1979 1983 1994 1994 1994 1967 1994 1998 1998 1996 1995 1995 1995 1996 1994 2007 2007 1997 1994 1998 1999 1990 2001 1997 12/01 03/99 06/08 09/04 09/04 11/93 09/04 12/98(f) 11/98 04/03 12/96 12/05 12/05 12/01 09/04 10/07 03/07(q) 12/01 09/04 12/05 12/01 08/05 02/04 08/06 40 years 40 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 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years See accompanying report of independent registered public accounting firm. F-20 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 Sarasota, FL . . . . . . . . . . . . . . . . . Sarasota, FL . . . . . . . . . . . . . . . . . Schaumburg, IL . . . . . . . . . . . . . . Sealy, TX . . . . . . . . . . . . . . . . . . . Sherman, TX . . . . . . . . . . . . . . . . Southfield, MI . . . . . . . . . . . . . . . Summerville, PA . . . . . . . . . . . . . Swansea, IL . . . . . . . . . . . . . . . . . Ticonderoga, NY . . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . . . . Wichita Falls, TX . . . . . . . . . . . . Woodstock, GA . . . . . . . . . . . . . . Yeagertown, PA . . . . . . . . . . . . . — — — — — — — — — — — — — Value City Furniture: 1,167,618 1,903,810 470,600 1,343,746 2,064,964 1,311,190 964,185 873,758 126,149 232,670 643,759 405,107 271,832 92,798 264,956 91,709 688,622 88,867 324,751 313,897 818,611 1,107,418 1,937,017 1,284,901 180,073 142,061 218,564 — — — — — — — — — — — — — — — — — — — — — — — — — 1,167,618 2,122,374 470,600 1,343,746 2,064,964 1,311,190 964,185 873,758 126,149 232,670 643,759 405,107 271,832 92,798 264,956 91,709 688,622 88,867 324,751 313,897 818,611 1,107,418 1,890,769 1,284,901 180,073 142,061 Total 3,289,992 1,814,346 3,376,154 1,837,944 358,819 1,048,866 364,630 356,665 777,489 638,648 1,926,029 3,175,670 322,134 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 262,103 174,967 230,824 236,025 14,455 130,301 20,104 46,686 73,883 35,967 194,952 180,689 30,387 1996 1983 1998 1982 1969 1976 1988 1997 1993 1978 1982 1997 1977 09/97 03/99 12/01 03/99 09/06 12/01 01/06 12/01 09/04 09/06 12/01 05/03 08/05 40 years 40 years 40 years 40 years 20 years 40 years 40 years 40 years 40 years 20 years 40 years 40 years 20 years White Marsh, MD . . . . . . . . . . . . — 3,762,030 — 3,006,391 — 3,762,030 3,006,391 6,768,421 811,099 1998 03/98(g) 40 years Walgreens: Sunrise, FL . . . . . . . . . . . . . . . . . Tulsa, OK . . . . . . . . . . . . . . . . . . Wal-Mart: Beeville, TX . . . . . . . . . . . . . . . . Winfield, AL . . . . . . . . . . . . . . . . — — — — Washington Bike Center: 1,957,974 1,400,970 1,193,187 3,055,724 507,231 2,315,424 419,811 1,684,505 — — — — — — — — 1,957,974 1,400,970 1,193,187 3,055,724 3,358,944 4,248,911 197,011 270,559 507,231 752,566 419,811 1,684,505 1,259,797 2,104,316 564,644 412,353 1994 2003 1983 1983 05/03 06/05 03/99 03/99 40 years 40 years 40 years 40 years Fairfax, VA . . . . . . . . . . . . . . . . . — 192,830 278,892 83,773 — 192,830 362,665 555,495 42,273 1995 12/95 40 years 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 . . . . . . . . . . . Whitewater: Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . Bakersfield, CA . . . . . . . . . . . . . . San Fernando . . . . . . . . . . . . . . . . Ventura, CA . . . . . . . . . . . . . . . . . Ventura, CA . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 585,872 501,136 — 333,445 — — — — 585,872 501,136 — 333,445 585,872 834,581 (i) 58,700 (i) 1980 02/98 12/01 (i) 40 years 418,975 624,318 — 290,860 934,191 823,643 981,779 476,055 893,834 1,013,995 1,031,974 696,950 502,623 1,209,307 3,303,206 3,845,238 2,564,277 4,464,522 2,043,496 3,519,882 2,099,042 2,011,371 3,345,544 6,015,876 3,363,490 3,288,348 3,663,779 3,709,494 2,797,633 5,260,066 1,643,206 1,958,737 6,630,160 2,706,309 6,252,505 4,560,481 5,590,461 4,431,373 (l) 1,521,190 308,519 (l) (l) 969,274 (l) 1,450,274 (l) 1,540,648 (l) 1,030,351 562,698 (l) (l) 1,486,297 678,799 (l) 561,025 (l) 566,582 (l) (l) 551,919 (l) 1,476,879 (l) 1,471,230 — — 910,051 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 418,975 624,318 910,051 290,860 934,191 823,643 981,779 476,055 893,834 1,013,995 1,043,293 1,200,911 1,757,834 1,457,834 1,907,829 73,757 38,867 45,736 48,066 49,644 1,031,974 696,950 502,623 1,209,307 1,728,924 1,711,930 122,692 91,958 7,148,444 3,303,206 3,845,238 7,028,799 2,564,277 4,464,522 5,563,378 2,043,496 3,519,882 4,110,413 2,099,042 2,011,371 9,361,420 3,345,544 6,015,876 6,651,838 3,363,490 3,288,348 7,373,273 3,663,779 3,709,494 8,057,699 2,797,633 5,260,066 3,601,943 1,643,206 1,958,737 6,630,160 2,706,309 9,336,469 6,252,505 4,560,481 10,812,986 5,590,461 4,431,373 10,021,834 (l) 1,521,190 308,519 (l) (l) 969,274 (l) 1,450,274 (l) 1,540,648 (l) 1,030,351 562,698 (l) (l) 1,486,297 678,799 (l) 561,025 (l) 566,582 (l) (l) 551,919 (l) 1,476,879 (l) 1,471,230 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 1,471,230 120,862 115,175 90,835 45,600 132,894 83,905 65,160 118,978 62,027 76,866 105,168 88,912 61,798 11,248 45,002 58,917 62,534 47,838 26,125 60,381 36,768 26,048 26,306 25,625 59,998 53,639 1995 2007 2006 2006 2006 1997 1994 1975 1988 1988 1990 1998 2002 1994 1997 1975 1988 1994 2001 2004 2001 1998 2003 2004 1989 1998 2004 1997 1998 1999 1998 2004 2004 12/01 12/06(q) 01/07 01/07 01/07 12/01 12/05 03/08 03/08 03/08 03/08 03/08 03/08 03/08 03/08 03/08 03/08 03/08 03/08 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 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 35 years 40 years 40 years 40 years 35 years 35 years 35 years 40 years 40 years See accompanying report of independent registered public accounting firm. F-21 Des Moines, IA . . . . . . . . . Evansville, IN . . . . . . . . . . Kearney, MO . . . . . . . . . . Temple, GA . . . . . . . . . . . Robinson, TX . . . . . . . . . . Oklahoma City, OK . . . . . Amarillo, TX . . . . . . . . . . Jackson, MS . . . . . . . . . . . Glendale, KY . . . . . . . . . . Winn-Dixie: . . . . . . . . . . . Columbus, GA . . . . . . . . . Ziebart: Maplewood, MN . . . . . . . Middleburg Heights, OH . . . . . . . . . . . . . . . . Zio’s Restaurant: Aurora, CO . . . . . . . . . . . . Leasehold Interests: . . . . . . . Real Estate Held for Investment the Company has Invested in Under Direct Financing Leases: Bames and Noble: Plantation, FL . . . . . . . . . . Borders Books & Music: Altamonte Springs, FL . . . Checkers: Orlando, FL . . . . . . . . . . . CVS: San Antonio, TX . . . . . . . . Amarillo, TX . . . . . . . . . . Lafayette, LA . . . . . . . . . . Oklahoma City, OK . . . . . Oklahoma City, OK . . . . . Denny’s: Stockton, CA . . . . . . . . . . Food 4 Less: Chula Vista, CA . . . . . . . . Heilig-Meyers: Marlow Heights, MD . . . . York, PA . . . . . . . . . . . . . . Jared Jewelers: — — — — — — — — — — — — — — — — — — — — — — — — — — Glendale, AZ . . . . . . . . . . Lewisville, TX . . . . . . . . . Oviedo, FL . . . . . . . . . . . . Phoenix, AZ . . . . . . . . . . . Toledo, OH . . . . . . . . . . . . — 213,849 417,822 314,862 — Kash N’ Karry: Valrico, FL . . . . . . . . . . . . Rite Aid: Kennett Square, PA . . . . . Arlington, VA . . . . . . . . . . — — — Initial Cost to Company Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period (b) Encum- brances (k) Land Improve- ments Carrying Costs Land Building, Improve- ments and Leasehold Interests 816,275 575,761 1,268,709 1,065,007 1,182,537 1,246,773 1,158,416 1,287,640 1,066,052 (l) (l) (l) (l) (l) (l) (l) (l) (l) 1,023,371 1,874,875 307,846 311,313 199,234 148,106 1,168,457 1,104,345 2,532,133 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Building, Improve- ments and Leasehold Interests 816,275 575,761 1,268,709 1,065,007 1,182,537 1,246,773 1,158,416 1,287,640 1,066,052 (l) (l) (l) (l) (l) (l) (l) (l) (l) Total 816,275 575,761 1,268,709 1,065,007 1,182,537 1,246,773 1,158,416 1,287,640 1,066,052 Accumulated Depreciation and Amortization Date of Con- struction Date Acquired Life on Which Depreciation and Amortization in Latest Income Statement is Computed 29,760 20,991 46,255 29,953 33,259 27,273 15,687 14,754 5,552 1987 2002 2003 2007 2007 2008 2008 2008 2008 07/07 07/07 07/07 01/08 07/07 08/07 02/08 03/08 07/08 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 1,023,371 1,874,875 2,898,246 255,842 1984 07/03 40 years 307,846 311,313 619,159 30,158 1990 02/05 40 years 199,234 148,106 347,340 14,502 1961 02/05 40 years 1,168,457 1,104,345 2,272,802 131,445 2000 06/05 30 years 2,532,133 — 2,532,133 1,758,765 — (n) (m) $25,343,962 $1,060,307,095 $1,305,849,831 $100,557,487 $— $1,060,289,057 $1,403,115,369 $2,463,404,426 $146,295,914 — — — 3,498,405 3,267,400 — — — — 286,910 — — — 158,851 — (l) (l) 783,974 855,348 949,128 1,365,125 1,419,093 — — — — — — — — — — 939,974 508,573 — — — 4,266,421 — — 415,926 279,312 1,397,178 1,109,609 (l) (l) (l) (l) (l) 1,599,288 1,502,903 1,500,145 1,241,827 1,457,625 — — — — — — — — — — — — — — 1,234,519 3,255,257 — — (l) — — 3,201,489 1,984,435 — — — — — — — (d) — (l) (l) (d) — (d) (d) (l) (l) (l) (l) (l) (d) (l) — (c) (c) (c) (c) (d) (c) (c) (c) (d) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (c) (c) (c) (c) (d) (c) (c) (c) (d) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) (c) 1996 05/95 (c) 1997 09/97 (c) 1988 07/92 (c) (d) (c) (c) (c) 1993 1994 1995 1997 1997 12/93 12/94 01/96 06/97 06/97 (d) 1982 09/06 (c) 1995 11/98 (d) (d) 1968 1997 11/98 11/98 (c) (c) (c) (c) (c) 1998 1998 1998 1998 1998 12/01 12/01 12/01 12/01 12/01 (d) 1997 06/02 (c) (c) 2000 2002 12/00 02/02 (c) (c) (c) (c) (d) (c) (c) (c) (d) (c) (d) (d) (c) (c) (c) (c) (c) (d) (c) (c) $ 946,533 $ 3,028,583 $ 33,465,698 $ 1,984,435 $— $ — $ — $ — $ — See accompanying report of independent registered public accounting firm. F-22 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 Sale the Company has Invested in: AJ Petroleum: Hollywood, FL . . . . . . . . Express Mart: Mechanicsburg, PA . . . . . Fuel-On: Kane, PA . . . . . . . . . . . . . Houtzdale, PA . . . . . . . . . Mik Cleaners: Woodstock, GA . . . . . . . Nitlantika: Hollywood, FL . . . . . . . . Pep Boys: Guayama, PR . . . . . . . . . Reading, PA . . . . . . . . . . Power Center: Big Flats, NY . . . . . . . . . Midland, MI . . . . . . . . . . Topsham, ME . . . . . . . . . Irving, TX . . . . . . . . . . . . Waxahachie, TX . . . . . . . Harlingen, TX . . . . . . . . . Harlingen, TX . . . . . . . . . Rockwall, TX . . . . . . . . . Salon 140: Woodstock, GA . . . . . . . Sal’s Pizza: Mechanicsburg, PA . . . . . Starbuck’s: Harlingen, TX . . . . . . . . . Tutor Time: Elk Grove, CA . . . . . . . . Uni-Mart: Bradford, PA . . . . . . . . . . Midway, PA . . . . . . . . . . Clairton, PA . . . . . . . . . . Burnham, PA (r) . . . . . . . Port Royal, PA . . . . . . . . Vacant Land: Grand Prairie, TX . . . . . . Fairfield Township, OH . . . . . . . . . . . . . . . . Bonita Springs, FL . . . . . Topsham, ME . . . . . . . . . Rockwall, TX . . . . . . . . . Lancaster, OH . . . . . . . . . Hadley, MA . . . . . . . . . . Vacant Property: North Richland Hills, TX . . . . . . . . . . . . . . . . Woodstock, GA . . . . . . . Walgreens: Beavercreek, OH . . . . . . . Yen Ching Restaurant: Woodstock, GA . . . . . . . — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 417,487 184,170 — 72,383 214,738 — 156,967 311,707 913,017 729,052 — — 20,857 56,050 — 645,533 313,657 — 1,729,000 1,188,532 2,731,785 3,366,975 2,248,422 1,085,180 1,884,772 950,616 1,249,351 247,376 748,886 8,958,882 7,159,309 1,634,602 1,734,694 1,089,869 1,096,646 807,079 1,237,507 28,803,250 — — — — — — — — — — 15,642 42,037 — 48,256 143,158 — 285,930 369,305 — 1,157,709 — 184,231 310,893 215,405 264,741 238,052 386,807 3,201,128 112,000 1,034,215 9,359,707 1,730,636 2,048,514 761,512 708,427 700,821 510,262 635,213 — — — — — — — 583,650 190,321 179,509 511,452 — — — — — — — — — — — — — — — 1,614,113 2,755,284 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 417,487 184,170 601,657 72,383 214,738 287,121 156,967 311,707 329,187 79,062 486,154 390,769 20,857 56,050 76,907 645,533 313,657 959,190 1,729,000 1,188,532 2,731,785 3,366,975 4,460,785 4,555,507 2,248,422 1,085,180 1,884,772 950,616 1,249,351 247,376 748,886 8,958,882 5,291,498 1,634,602 61,548 1,089,869 1,096,646 807,079 1,237,507 28,803,250 7,539,920 2,719,782 1,946,320 2,040,485 2,345,997 1,054,455 1,986,393 37,762,132 15,642 42,037 57,679 48,256 143,158 191,414 285,930 369,305 655,235 — — — — — — — — — — — — — — — — — — — 1961 12/05 1972 07/06 1984 1977 08/05 01/06 1997 07/08 1960 12/05 1998 1989 2006 2005 2007 2008 2008 2008 2008 2007 11/07 11/07 08/05 05/05 02/06 02/06 02/06 04/08 04/08 02/06 1997 07/08 1972 07/06 1987 02/08 — — — — — — — — — — — — — — — — — — — 1,157,709 — 1,157,709 (e) (e) 09/08 (e) 184,231 310,893 215,405 264,741 238,052 386,807 3,201,128 112,000 1,034,215 9,359,707 1,730,636 2,048,514 761,512 708,427 700,821 510,262 635,213 — — — — — — — 945,743 1,019,320 916,226 775,003 873,265 386,807 3,201,128 112,000 1,034,215 9,359,707 1,730,636 2,048,514 583,650 190,321 179,509 511,452 763,159 701,773 1,614,113 2,755,284 4,369,397 1983 1990 1986 1978 1989 (e) (e) (e) (e) (e) (e) (e) 08/05 01/06 01/06 07/06 07/06 12/02 08/06 09/06 02/06 09/06 01/08 02/08 1989 1997 02/06 07/08 2008 10/07 1997 07/08 — — — — — (e) (e) (e) (e) (e) (e) (e) — — — — — — — — — (e) (e) (e) (e) (e) (e) (e) — — — — $— — $— 33,893 91,080 — $44,931,794 $59,480,460 $— — $— 33,893 91,080 124,973 $44,931,794 $54,705,683 $99,637,477 See accompanying report of independent registered public accounting firm. F-23 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 2008 (dollars in thousands) (a) Transactions in real estate and accumulated depreciation during 2008, 2007, and 2006 are summarized as follows: 2008 2007 2006 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 . . . . . . . . . . . . . . . . . . . . $2,415,544 410,787 (215,542) (5,493) $1,756,514 864,116 (203,403) (1,683) $1,508,664 558,766 (310,223) (693) Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,605,296 $2,415,544 $1,756,514 Accumulated depreciation and amortization: Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposition of land, buildings, and leasehold interests . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,087 (2,591) 37,800 $ 87,359 (3,667) 27,395 $ 79,197 (12,413) 20,575 Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 146,296 $ 111,087 $ 87,359 (b) As of December 31, 2008, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2008, the aggregate cost of the properties owned by the Company that under operating leases were $2,432,304 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-24 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE December 31, 2008 (dollars in thousands) Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount of Mortgages Carrying Amount of Mortgages (e) Principal Amount of Loans Subject to Delinquent Principal or Interest Description First mortgages on properties: National City, CA . . . . . . . . . . . . San Jose, CA . . . . . . . . . . . . . . . . Lake Jackson, TX . . . . . . . . . . . . Paramus, NJ . . . . . . . . . . . . . . . . . Des Moines, IA . . . . . . . . . . . . . . Terre Haute, IN . . . . . . . . . . . . . . Houston, TX . . . . . . . . . . . . . . . . . Lubbock, TX . . . . . . . . . . . . . . . . Cleveland, OH . . . . . . . . . . . . . . . Keystone Heights, FL . . . . . . . . . Chattanooga, TN . . . . . . . . . . . . . Lynchburg, VA . . . . . . . . . . . . . . Martinsburg, WV . . . . . . . . . . . . . 11.500% 2009 11.500% 2009 9.000% 2009 9.000% 2022 8.000% 2010 7.000% 2011 9.000% 2009 8.750% 2009 10.000% 2028 8.000% 2009 8.000% 2009 8.000% 2009 8.000% 2009 (b) — $ 2,765 2,565 (b) — 1,875 (d) — 6,000 (b) — 400 (d) — 1,582 (c) — (c) — 3,998 14,000 (c) — 6,644 (c) — 1,650 (c) — 1,600 (c) — 1,600 (c) — 1,650 (c) — $ 189 271 1,707 5,445 343 1,582 3,998 10,023 5,935 1,650 1,600 1,600 1,650 $46,329 $35,993(a) $— — — — — — — — — — — — — $— (a) The following shows the changes in the carrying amounts of mortgage loans during the years: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions during the year: 2008 2007 2006 $ 49,336 $13,627 $19,418 17,028(f) 39,088(f) 1,582(f) Collections of principal . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,874) (2,497) (3,379) — (7,373) — Balance at the close of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,993 $49,336 $13,627 (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, 2008, 2007 and 2006 were $35,993, $49,336, and $13,627, respectively. (f) Mortgages totaling $17,028, $39,088, and $1,582 were accepted in connection with real estate transactions for the year ended December 31, 2008, 2007 and 2006, respectively. See accompanying report of independent registered public accounting firm. F-25 NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES Exhibit 12 The following table sets forth the Company’s consolidated ratios of earnings to fixed charges for the periods as shown (dollars in thousands). Net Earnings, before Extraordinary Item . . . . . . . . . . . . Fixed Charges: Interest on Indebtedness . . . . . . . . . . . . . . . . . . . . . Amortization of Discount Relating to Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of Interest Rate Hedges . . . . . . . . . . Amortization of Deferred Charges . . . . . . . . . . . . . 2008 2007 2006 2005 2004 $123,082 $157,110 $182,505 $ 74,614 $64,934 63,746 53,359 48,947 37,035 33,454 189 (162) 3,070 163 (309) 2,085 136 (345) 1,613 104 (326) 1,508 123 (457) 1,260 66,843 55,298 50,351 38,321 34,380 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . $189,925 $212,408 $232,856 $112,935 $99,314 Divided by Fixed Charges Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized and Deferred Interest . . . . . . . . . . . . . . $ 66,843 2,014 $ 55,298 3,718 $ 50,351 2,278 $ 38,321 2,563 $34,380 271 $ 68,857 $ 59,016 $ 52,629 $ 40,884 $34,651 Ratio of Net Earnings to Fixed Charges . . . . . . . . . . . . . 2.76 3.60 4.42 2.76 2.87 Net Earnings Before Fixed Charges . . . . . . . . . . . . . . . . Gain of Disposition of DC Office Buildings (May $189,925 $212,408 $232,856 $112,935 $99,314 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (59,496) — — $189,925 $212,408 $173,360 $112,935 $99,314 Ratio of Net Earnings to Fixed Charges adjusted for DC Office Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 2.76 3.60 3.29 2.76 2.87 Preferred Stock Dividends: Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . Series B Convertible Preferred Stock . . . . . . . . . . Series C Redeemable Preferred Stock . . . . . . . . . . $ — $ — $ — 6,785 — 6,785 4,376 419 923 $ 4,008 1,675 — $ 4,008 1,675 — Total Preferred Stock Dividends . . . . . . . . . . $ 6,785 $ 6,785 $ 5,718 $ 5,683 $ 5,683 Combined Fixed Charges and Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,642 $ 65,801 $ 58,347 $ 46,567 $40,334 Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . Ratio of Net Earnings to Combined Fixed Charges and Preferred Stock Dividends adjusted for DC Office Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.51 3.23 3.99 2.43 2.46 2.51 3.23 2.97 2.43 2.46 NATIONAL RETAIL PROPERTIES INC. SUBSIDIARIES OF THE REGISTRANT December 31, 2008 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. 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 RGI Bonita Springs, LLC CNLRS Rockwall, L.P. CNLRS Yosemite Park CO, LLC Gator Pearson, LLC Mill Creek Day Centre, 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 GP Corp. NNN Harrison Crossing, L.P. NNN LP Corp. NNN PBY LLC 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 Maryland Texas Delaware Maryland Maryland Maryland Maryland Delaware Texas Delaware Delaware Delaware Maryland Maryland Delaware Maryland Maryland Delaware Maryland Florida Maryland Maryland Maryland Maryland Delaware Texas Delaware Delaware Delaware Delaware Florida Arizona Texas Delaware Maryland Delaware Delaware Consent of Independent Registered Public Accounting Firm Exhibit 23.1 We consent to incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-3 No. 333-132103) of National Retail Properties, Inc., (2) Registration Statement (Form S-3 No. 333-132095) of National Retail Properties, Inc., (3) Registration Statement (Form S-3 No. 333-126071) of National Retail Properties, Inc., (4) Registration Statement (Form S-8 No. 333-64794) pertaining to the 2000 Performance Incentive Plan of National Retail Properties, Inc., (5) Registration Statement (Form S-8 No. 333-15625) pertaining to the 1992 Stock Option Plan of National Retail Properties, Inc., (6) Registration Statement (Form S-8 No. 333-144100) pertaining to the 2007 Performance Incentive Plan of National Retail Properties, Inc., of our reports dated February 26, 2009, 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. and subsidiaries, included in this Annual Report (Form10-K) of National Retail Properties, Inc. and subsidiaries for the year ended December 31, 2008. February 26, 2009 Miami, Florida Certified Public Accountants Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 26, 2009 Date /s/ Craig Macnab Name: Craig Macnab Title: Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 26, 2009 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, 2008, 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, 2008 and 2007 and its results of operations for the years ended December 31, 2008, 2007 and 2006. February 26, 2009 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, 2008, 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, 2008 and 2007 and its results of operations for the years ended December 31, 2008, 2007 and 2006. February 26, 2009 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. Form Last Updated by the NYSE on April 28, 2006 NYSE Regulation 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 /s/ Craig Macnab By: Print Name: Craig Macnab Title: Date: Chief Executive Officer June 3, 2008 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 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 Independent Registered Public Accounting Firm: Ernst & Young LLP Orlando, FL Counsel: Pillsbury Winthrop Shaw Pittman LLP 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 FORM 10-K A copy of the Company’s Form 10-K, as filed with the Securities and Exchange Commission (SEC) for fiscal 2008, 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 2008, 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. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT www.nnnreit.com 

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