National Retail Properties
Annual Report 2011

Plain-text annual report

We are well-positioned for the opportunity ahead ... To help position you for life. 2011 Annual Report OUR STRONG FINANCIAL PERFORMANCE IN 2011 ALLOWED US TO RAISE OUR ANNUAL DIVIDEND FOR THE 22ND CONSECUTIVE YEAR. TABLE OF CONTENTS Shareholder’s Letter Historical Financial Highlights Our Outlook Officers & Directors 2 9 15 16 Inside Back Cover Shareholder Information DEAR FELLOW NNN SHAREHOLDERS: Craig Macnab Chairman and Chief Executive Officer “It is one thing to see the forward path and another to be able to take it” Sir Winston Churchill I am pleased to report that National Retail Properties (NNN) delivered strong performance this past year and we are well positioned as we head into 2012 to continue to build value for our shareholders. Our strong financial performance in 2011 allowed us to raise our annual dividend for the 22nd consecutive year. Our long-term dividend growth track record places us in an elite group of 104 public companies that have increased their annual dividend for 22 or more years. Our ability to accomplish this objective confirms the excellent fundamentals of investing in net lease real estate while maintaining a conservative balance sheet. 2011 was an excellent year for NNN as we increased our Funds from Operations (FFO) 8.3% to $1.57 per share before impairment charges. Our conservative balance sheet strategy ensured that we had the capital available to make $772 million of carefully underwritten new investments this past year. The majority of these acquisitions were completed in the second half of the year. In 2012 we will realize a full year of rent from these acquisitions which will help us to further grow our FFO. Our strategy to build long-term value for our shareholders remains essentially unchanged, as we diligently endeavor: (cid:116) to generate steady and consistent annual FFO per share growth; (cid:116) to pay a safe and growing dividend; and, (cid:116) to achieve these dual objectives while assuming below average balance sheet and portfolio risk. Over the long term our shareholder returns have outperformed many of the major indices, generating an average annual total return to NNN shareholders of 11.8% over the past 15 years and 14.9% over the past 10 years. All of us at NNN are fully aware that our generous annual dividend contributes meaningfully to our total shareholder return. 2 3 4 ANNUAL TOTAL RETURN COMPARISON National Retail Properties (NNN) Indices *NAREIT Equity REIT Index (FNERTR) *Morgan Stanley REIT Index (RMS G) S&P 500 Index (SPX) Nasdaq (CCMP) *S&P 400 (MID) S&P 600 (SML) *Russell 2000 Index (RTY) *Russell 2000 Value Index (RUJ) 1 YEAR 5.6% 3 YEARS 23.4% 5 YEARS 10 YEARS 15 YEARS 9.9% 14.9% 11.8% 8.3% 8.7% 2.1% -0.8% -1.7% 1.0% -4.2% -5.5% 21.1% 21.6% 14.1% 19.4% 19.6% 17.0% 15.6% 12.4% -1.4% -1.5% -0.3% 2.5% 3.3% 1.9% 0.1% -1.9% 10.2% 10.2% 2.9% 3.7% 7.0% 7.1% 5.6% 4.3% 8.9% 8.8% 5.4% 5.4% 10.0% 8.3% 6.3% 7.3% *NNN is a member of this index (deleted from S&P 600 and added to S&P 400 in December 2011). Over the long term, our shareholder returns have outperformed the major indices. OUR LONG TERM FOCU OUR LONG-TERM FOCUS AND STRATEGY OUR LONG-TERM FOCUS Our shareholder value creation strategy is built around the following primary objectives: (cid:116) Maintain a diversified and well-occupied net-leased retail portfolio. (cid:116) Acquire carefully underwritten, net-leased retail properties to further diversify our portfolio. (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 conservative leverage. (cid:116) Continue developing our talented team of associates. 5 NNN OCCUPANCY VS. REIT INDUSTRY AVERAGE 100% 95% 90% 85% 97.0% 97.4% 98.3% 98.2% 98.3% 96.7% 96.4% 96.9% 97.4% 93.0% 93.5% 93.5% 92.1% 92.8% 92.0% 90.5% 90.1% 90.8% ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11* NNN REIT INDUSTRY (Excluding Hotels & Health Care) Source: SNL Financial *2011 REIT Industry Data is as of Q3 2011 Our 97.4% portfolio occupancy rate is well above the occupancy rate of the average REIT. OUR 2011 PERFORMANCE This past year, National Retail Properties accomplished the following: (cid:116) Acquired 218 new properties investing $772 million. Through these acquisitions we also added 14 new tenants, further diversifying our portfolio. (cid:116) Issued $521 million of common equity which ensured that we maintained a very strong balance sheet. At the end of the year, our total debt to total gross book assets was less than 40%, which is well below the leverage of the average REIT*. (cid:116) Increased our annual dividend to $1.53 per share, which represents the 22nd consecutive year of dividend increases. (cid:116) Leased 18 properties and ended the year with 97.4% portfolio occupancy which is well above the average REIT’s occupancy. This is the eighth consecutive year that our portfolio has been at least 96% occupied. *Based on 2011 REIT Industry Data. Source: SNL Financial 6 7 SOUTH 26.1 % ROCKY MOUNTAIN 6.6 % W E S T 4.9 % A DIVERSE NATIONAL PORTFOLIO (as a percentage of base rent as of December 31, 2011) 1,422 PROPERTIES | 300+ TENANTS | 47 STATES S O U T H E A ST 2 5.5 % 3 . 1 % T 1 S A E H T R O N I M D W E S T 2 3 . 8 % OUR DIVERSE CORE PORTFOLIO National Retail Properties owns a fully diversified portfolio of retail properties that on average cost $2.6 million. Our properties are located in 47 states and are leased to more than 300 national and regional tenants operating in over 30 different retail industry classifications. As of December 31, 2011, we owned 1,422 properties with only 38 vacancies. Also, we have modest re-leasing risk with only 28 leases, representing 1.5% of our base rent, expiring in 2012. These statistics are the hallmark of a stable portfolio. 8 HISTORICAL FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data) Gross revenues(1) $ 271,696 $ 237,062 $ 243,933 $ 247,352 $ 208,629 2011 2010 2009 2008 2007 Earnings from continuing operations Earnings including noncontrolling interests Net earnings attributable to NNN Total assets Total debt Total stockholders’ equity Cash dividends declared to: Common stockholders Series C preferred stockholders Weighted average common shares: Basic Diluted Per share information: Earnings from continuing operations: Basic Diluted Net earnings: Basic Diluted Cash dividends declared to: Common stockholders 91,085 92,416 92,325 3,434,429 1,339,109 2,002,498 133,720 6,785 70,629 73,353 72,997 2,713,575 1,133,685 1,527,483 125,391 6,785 54,567 56,399 54,810 2,590,962 987,346 1,564,240 120,256 6,785 96,372 119,971 117,153 2,649,471 1,027,391 1,566,860 110,107 6,785 75,541 155,743 154,599 2,539,673 1,049,154 1,417,647 92,989 6,785 88,100,076 82,715,645 79,846,258 74,249,137 66,152,437 88,837,057 82,849,362 79,953,499 74,344,231 66,263,980 $ $ 0.95 0.95 0.96 0.96 1.53 $ 0.77 0.77 0.80 0.80 $ 0.58 0.58 0.60 0.60 $ 1.20 1.20 1.48 1.48 1.03 1.03 2.23 2.22 1.51 1.84375 1.50 1.84375 1.48 1.84375 1.40 1.84375 Series C preferred depositary stockholders 1.84375 Other data: Cash flows provided by (used in): Operating activities Investing activities Financing activities Funds from operations – diluted(2) $ 182,946 $ 187,914 $ 149,502 $ 237,459 $ 130,147 (752,068) (220,260) 569,156 139,665 19,169 108,328 (28,063) (108,840) 89,506 (256,304) (536,717) (6,028) 132,996 432,394 110,589 (1) Gross revenues include revenues from NNN’s continuing and discontinued operations. In accordance with FASB guidance on Accounting for the Impairment or Disposal of Long-Lived Assets, NNN has classified the revenues related to (i) all Properties which generated revenue that were sold and a leasehold interest which expired and (ii) all Properties which generated revenue and were held for sale at December 31, 2011, 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 operating performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under generally accepted accounting principles (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 certain assets, any impairment charges on a depreciable real estate asset and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures. 9 10 LEASE EXPIRATIONS (as a percentage of base rent as of December 31, 2011) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 THEREAFTER OUR NET-LEASED RETAIL REAL ESTATE We believe that our niche of net-leased retail real estate remains a compelling long-term investment opportunity for the following reasons: (cid:116) Our niche of smaller, freestanding retail properties is substantial. However in general, institutional investors prefer to focus on larger, higher profile trophy properties. The amount of work involved in sourcing our smaller investment properties plus completing the careful due diligence of each acquisition creates a barrier to entry in our niche. This has helped us to earn higher initial risk-adjusted returns than those that are achieved in many other real estate sectors, where the large investors tend to focus. (cid:116) The ratio of land value to the total cost of each property is high when compared to other real estate categories such as offices, apartments and large regional malls. The land value of our well-located, corners at busy intersections is in the range of 40-45% of the total value at the time of purchase. With economic growth, inflation and the difficulty of replacing these well-located sites factored in, the land value alone at the end of the lease can reasonably approximate 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 remarkably 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 negatively impacted by increases in these costs. (cid:116) Our leases are long-term, with typical initial lease durations of at least 15 years and, on average, our tenants are currently contractually obligated to pay rent for the next 12 years. (cid:116) Many of our properties are acquired from what we describe as relationship tenants. These are tenants with whom we have recently acquired real estate. For the last five years our team has done a terrific job of earning the respect and trust of a number of growing retailers that come to us to provide repeat sale-leaseback transactions. 11 OUR CAPITAL STRUCTURE (based on total gross book assets as of December 31, 2011) SECURED DEBT - $23.2 MILLION UNSECURED DEBT - $1,407.4 MILLION PREFERRED EQUITY - $92.0 MILLION COMMON EQUITY - $2,192.9 MILLION S E C U R E D D E B T 0 . 6 % CO M M ON EQUITY 59.0 % U NSECURED DEBT 37.9 % PREFERRED EQUITY 2.5 % Our conservative balance sheet strategy ensured that we had the capital available to make $772 million of carefully underwritten new investments this past year. OUR STRONG BALANCE SHEET In 2011 we issued $521 million of common equity allowing us to maintain a fortress-like balance sheet. Our leverage ratios are more conservative than the average REIT* and importantly the strength of our balance sheet gives us the capacity to respond very quickly when we identify attractive opportunities to acquire additional real estate which has attractive risk adjusted returns. At the moment we are in an environment of historically low interest rates. When the economy strengthens or the policies of the Federal Reserve normalize, interest rates are expected to increase. We choose to operate with very little floating rate debt which we expect will insulate us from any rise in interest rates. Also, with interest rates at these historically low levels, we plan to continue our policy of fixing the cost of our debt for long periods of time. *Based on 2011 REIT Industry Data. Source: SNL Financial 12 13 14 CONSECUTIVE ANNUAL DIVIDEND INCREASES 22 CONSECUTIVE YEARS OF DIVIDEND INCREASES – LONGER THAN 97% OF ALL PUBLIC REITS AND 98% OF ALL PUBLIC COMPANIES $ 1.60 $ 1.50 $ 1.40 $ 1.30 $ 1.20 $ 1.10 $ 1.00 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 OUR OUTLOOK While we pay close attention to the external environment in which we operate, our team focuses energy on the things that we can control. If we maintain a strong balance sheet and a fully diversified portfolio, as well as maintain the premier team in the industry, we are optimistic that we can continue to build value for our shareholders. In what may prospectively be a low return environment, we believe that the virtues of our strong dividend yield are magnified and will continue to be a meaningful contributor to our total return. General George S. Patton said, “Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.” At National Retail Properties, we will continue to anticipate and plan for a variety of outcomes. On behalf of the associates and directors of NNN, we thank you, our loyal shareholders, for your continued support. We appreciate your investment in NNN and are committed to working hard to maintain your respect and confidence in the years ahead. Sincerely, Craig Macnab Chairman and Chief Executive Officer 15 Left to right: (seated) Craig Macnab, Julian E. Whitehurst, (standing) Paul E. Bayer, Kevin B. Habicht, Christopher P. Tessitore Paul E. Bayer Executive Vice President & Chief Investment Officer Christopher P. Tessitore Executive Vice President & General Counsel Kevin B. Habicht Executive Vice President & Chief Financial Officer National Retail Properties, Inc. Richard B. Jennings† President Realty Capital International LLC Robert C. Legler Retired Chairman First Marketing Corporation Robert Martinez† Fortieth Governor of Florida and Senior Policy Advisor Holland & Knight OFFICERS & DIRECTORS EXECUTIVE OFFICERS Craig Macnab Chairman & Chief Executive Officer Julian E. Whitehurst President & Chief Operating Officer Kevin B. Habicht Executive Vice President & Chief Financial Officer DIRECTORS Craig Macnab Chairman & Chief Executive Officer Ted B. Lanier† Lead Director Don DeFosset Retired Chairman, President & Chief Executive Officer Walter Industries, Inc. David M. Fick† Professional Faculty Member, Johns Hopkins University Carey Business School and President of Nandua Oyster Company Ed Fritsch President & Chief Executive Officer Highwoods Properties † Member audit committee (Committees as of February 26, 2012) 16 16 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2011 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 6.625% Series D Preferred Stock, $0.01 par value Name of exchange on which registered: New York Stock Exchange 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 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer 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 The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2011 was $2,074,965,000. The number of shares of common stock outstanding as of February 15, 2012 was 105,775,779. 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 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the “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 Legal Proceedings Item 3. Item 4. Mine Safety Disclosures Part II Item 5. Item 6. Item 7. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules Signatures 1 6 14 14 14 14 15 17 19 36 37 72 72 73 74 74 74 74 74 75 79 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 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 (the “Exchange Act”). 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 real estate investment trust (“REIT”) formed in 1984. NNN's assets include: real estate assets, mortgages and notes receivable, and commercial mortgage residual interests. Real Estate Assets NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Properties” or “Property Portfolio”). As of December 31, 2011, NNN owned 1,422 Properties (including 11 properties with retail operations that NNN operates), with an aggregate gross leasable area of 16,428,000 square feet, located in 47 states. Approximately 97 percent of the total properties in NNN’s Property Portfolio were leased or operated as of December 31, 2011. Prior to December 31, 2011, NNN reported its operations in two primary business segments, investment assets and inventory assets. As a result of a continued reduction of investments in real estate acquired for the purpose of resale, the previously reported segment of inventory assets no longer meets the criteria for significance for separate segment reporting. Currently, NNN's operations are reported within one business segment in the financial statements and all properties are considered part of the Properties or Property Portfolio. As such, property counts and calculations involving property counts reflect all NNN properties. 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, 2012, NNN employed 59 full-time associates including executive and administrative personnel. Other Information 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. 1 The common shares of National Retail Properties, Inc. are traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “NNN.” The depositary shares, each representing 1/100th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series C Preferred Stock”), of NNN are traded on the NYSE under the ticker symbol “NNNPRC.” The depositary shares, each representing a 1/100th interest in a share of 6.625% Series D Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series D Preferred Stock”), of NNN are expected to trade on the NYSE under the ticker symbol “NNNPRD.” 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 well located for its tenants’ lines of trade within each local market. 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 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, repairs and maintenance and capital expenditures. 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, which represent less than once percent of NNN's total assets, may be subordinated to senior 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 real estate assets until it determines that the sale of such an asset is advantageous in view of NNN’s investment objectives. In deciding whether to sell a real estate 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’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 Property Portfolio (including but not limited to tenant, geographic and line of trade diversification), the occupancy rate of NNN’s Property 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 dividend (paid quarterly) per common share for 22 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 provide 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 property level operating history, the financial and other characteristics of the existing tenant, 2 • • • • the tenant’s business plan, operating history and management team, the tenant’s industry, the terms of any existing leases, and the rent to be paid by the tenant. NNN intends to engage in future investment activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make NNN an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments. Investments in Real Estate Mortgages, Commercial Mortgage Residual Interests, and Securities of or Interests in Persons Engaged in Real Estate Activities While NNN’s primary business objectives emphasize retail properties, NNN may invest in (i) a wide variety of property and tenant types, (ii) leases, mortgages, commercial mortgage residual interests and other types of real estate interests, (iii) loans secured by personal property, (iv) loans secured by partnerships or membership interests in partnerships or limited liability companies, respectively, or (v) securities of other REITs, or 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, has 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 $450,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2011, $65,600,000 was outstanding and $384,400,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000. For the year ended December 31, 2011, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 39 percent and the ratio of secured indebtedness to total gross assets was approximately one percent. The ratio of total debt to total market capitalization was approximately 33 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 issuers 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. Property Portfolio As of December 31, 2011, NNN owned 1,422 Properties with an aggregate gross leasable area of 16,428,000 square feet, located in 47 states. Approximately 97 percent of total properties in the Property Portfolio were leased or operated by NNN as of December 31, 2011. 3 The following table summarizes NNN’s Property Portfolio as of December 31, 2011 (in thousands): Land Building Size(1) Low High 2,223 135 Acquisition Cost(2) Average High Low Average 5 1 104 $ 8,882 $ 12 29,373 5 $ 19 971 1,635 Approximate square feet. (1) (2) Costs vary depending upon size and local demographic factors. In connection with the development of 54 Properties, NNN has agreed to fund construction commitments (including construction, land costs and tenant improvements) of $158,725,000. As of December 31, 2011, NNN had funded $103,614,000 of these commitments, with $55,111,000 remaining to be funded. As of December 31, 2011, NNN did not have any tenant that accounted 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 Properties provide for initial terms of 15 to 20 years. As of December 31, 2011, the weighted average remaining lease term was approximately 12 years. The 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. NNN's leases provide for annual base rental payments (payable in monthly installments) ranging from $1,000 to $2,521,000 (average of $211,000). NNN's leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index (“CPI”), and/or, to a lesser extent, increases in the tenant’s sales volume. Generally, the Property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions provided under the initial lease term. Some of the leases also provide that in the event NNN wishes to sell the Property subject to that lease, NNN first must offer the lessee the right to purchase the Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Property. The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Property Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2011: % of Annual Base Rent(1) # of Properties Gross Leasable Area(2) 2012 2013 2014 2015 2016 2017 1.5% 3.5% 3.3% 3.1% 2.1% 3.8% 28 42 43 68 38 32 434,000 883,000 587,000 926,000 569,000 812,000 % of Annual Base Rent(1) # of Properties 2018 2019 2020 2021 3.5% 3.1% 3.5% 5.1% 39 40 87 86 Gross Leasable Area(2) 829,000 670,000 746,000 723,000 Thereafter 67.5% 861 8,406,000 Based on annualized base rent for all leases in place as of December 31, 2011. (1) (2) Approximate square feet. 4 The following table summarizes the diversification of NNN’s Property Portfolio based on the top 10 lines of trade: Top 10 Lines of Trade Convenience stores Restaurants - full service Automotive parts General merchandise Theaters Automotive service Sporting goods Restaurants - limited service Consumer electronics 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Drug stores Other % of Annual Base Rent(1) 2011 2010 2009 24.6% 9.4% 6.5% 5.2% 5.0% 4.9% 4.8% 3.6% 3.5% 3.2% 29.3% 100.0% 23.5% 10.1% 7.8% 1.4% 5.7% 5.3% 4.5% 4.3% 2.6% 3.9% 30.9% 100.0% 26.1% 9.1% 6.6% 1.6% 6.2% 5.5% 3.5% 3.6% 3.0% 4.0% 30.8% 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 Properties are located as of December 31, 2011: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. State Texas Florida Illinois North Carolina Georgia Indiana California Ohio Pennsylvania Virginia Other # of Properties % of Annual Base Rent(1) 329 102 53 77 64 42 33 43 85 28 566 1,422 23.0% 9.2% 5.6% 5.2% 4.1% 3.5% 3.4% 3.3% 3.1% 3.1% 36.5% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2011. Mortgages and Notes Receivable Mortgages are secured by real estate, real estate securities or other assets and include structured finance investments which are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands): Mortgages and notes receivable Accrued interest receivables, net of reserves Unamortized discount 5 2011 2010 32,751 $ 29,750 730 (53) 644 (63) 33,428 $ 30,331 $ $ Commercial Mortgage Residual Interests Orange Avenue Mortgage Investments, Inc. (“OAMI”), a wholly 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 $15,299,000 and $15,915,000 at December 31, 2011 and 2010, respectively. 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 for the owner of such property from the presence or discharge of hazardous materials on the property or the improper disposal of hazardous materials 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. As of February 15, 2012, NNN has 66 Properties currently under some level of environmental remediation. In general, the seller, a previous owner, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Properties. Americans with Disabilities Act of 1990. The Properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 and similar state and local laws and regulations (collectively, 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, 2012, 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 Properties. NNN’s leases generally require each tenant to undertake 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. Current financial and economic conditions may have an adverse impact on NNN, its tenants, and commercial real estate in general. Current financial and economic conditions continue to be challenging and volatile and any worsening of such conditions, including any disruption in the capital markets, could adversely affect NNN’s business and results of operations and the financial condition of NNN’s tenants, developers, borrowers, lenders or the institutions that hold NNN’s cash balances and short-term investments, which may expose NNN to increased risks of default by these parties. There can be no assurance that actions of the United States Government, Federal Reserve or other government and regulatory bodies intended to stabilize 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. 6 Potential consequences of the current financial and economic conditions include: • • • • • the financial condition of NNN’s tenants 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 may be limited or unavailable, 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, reduce NNN’s ability to make cash distributions to its shareholders and increase NNN’s future interest expense; the recognition of impairment charges on or reduced values of NNN’s properties, which may adversely affect NNN's results of operations or limit NNN’s ability to dispose of assets at attractive prices and may reduce the availability of buyer financing; 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. Nearly all of NNN’s debt, including the Credit Facility, is subject to balloon principal payments due at maturity. These maturities range between 2012 and 2021. NNN's ability 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 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 tenants encounter significant macroeconomic, governmental and competitive forces. Adverse changes in consumer spending or consumer preferences for particular goods, services or store based retailing could severely impact their ability to pay rent. The default, financial distress, bankruptcy or liquidation of one or more of NNN’s tenants could cause substantial vacancies among NNN’s Property 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 a lease, the tenant may choose not to renew the lease and/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 Property Portfolio annual base rent is concentrated in specific industry classifications, tenants and in specific geographic locations. As of December 31, 2011, approximately, • • • 51 percent of NNN’s Property Portfolio annual base rent is generated from five retail lines of trade, including convenience stores (25 percent) and full-service restaurants (nine percent), 27 percent of NNN’s Property Portfolio annual base rent is generated from five tenants, including The Pantry, Inc. (seven percent) and Susser Holdings Corp. (six percent), and 47 percent of NNN’s Property Portfolio annual base rent is generated from five states, including Texas (23 percent) and Florida (nine percent). Any financial hardship and/or economic changes in these lines of trade, tenants or states could have an adverse effect on NNN’s results of operations. 7 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 or adverse changes in consumer preferences for particular goods, services or store based retailing, economic downturns in the areas where NNN’s properties are located, adverse changes in local real estate market conditions, such as an oversupply of space, reduction in demand for space, intense competition for tenants, or a geographic shift in the market away from NNN’s properties, changes in tenant or consumer preferences that reduce the attractiveness of NNN’s properties to tenants, changes in zoning, regulatory restrictions, or tax laws, and changes in interest rates or availability of financing. All of these factors could result in decreases in market rental rates and increases in vacancy rates, which could adversely affect NNN’s results of operations. NNN’s real estate investments are illiquid. Because real estate investments are relatively illiquid, NNN’s ability to adjust the portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including: (i) debt service (if any), (ii) real estate taxes, and (iii) operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings and could have an adverse effect on NNN’s financial condition. Costs of complying with changes in governmental laws and regulations may adversely affect NNN’s results of operations. NNN cannot predict what other laws or regulations will be enacted in the future, how future laws or regulations will be administered or interpreted, or how future laws or regulations will affect NNN’s properties, including, but not limited to environmental laws and regulations. Compliance with new laws or regulations, or stricter interpretation of existing laws, may require NNN, its retail tenants, or consumers to incur significant expenditures, impose significant liability, restrict or prohibit business activities and could cause a material adverse effect on NNN’s results of operation. NNN may be subject to known or unknown environmental liabilities and hazardous materials on properties owned by NNN. There may be known or unknown environmental liabilities associated with properties owned or acquired in the future by NNN. Certain particular uses of some properties may also have a heightened risk of environmental liability because of the hazardous materials used in performing services on those properties, such as convenience stores with underground petroleum storage tanks or auto parts and auto service businesses using petroleum products, paint and machine solvents. Some of NNN’s properties may contain asbestos or asbestos-containing materials, or may contain or may develop mold or other bio- contaminants. Asbestos-containing materials must be handled, managed and removed in accordance with applicable governmental laws, rules and regulations. Mold and other bio-contaminants can produce airborne toxins, may cause a variety of health issues in individuals and must be remediated in accordance with applicable governmental laws, rules and regulations. As part of its due diligence process, NNN generally obtains an environmental site assessment for each property it acquires. In 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 contamination in accordance with applicable laws, rules and regulations, (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. Although sellers or tenants may be contractually responsible for remediating hazardous materials on a property and may be responsible for indemnifying NNN for any liability resulting from the use of a property and for any failure to comply with any applicable environmental laws, rules or regulations, NNN has no assurance that sellers or tenants shall be able to meet their remediation and indemnity obligations to NNN. A tenant or seller may not have the financial ability to meet its remediation and indemnity obligations to NNN when required. Furthermore, NNN may have strict liability to governmental agencies or third parties as a result of the existence of hazardous materials on properties, whether or not NNN knew about or caused such hazardous materials to exist. 8 As of February 15, 2012 NNN has 66 Properties currently under some level of environmental remediation. In general, the seller, a previous owner, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Properties. If NNN is responsible for hazardous materials located on its properties, NNN’s liability may include investigation and remediation costs, property damage to third parties, personal injury to third parties, and governmental fines and penalties. Furthermore, the presence of hazardous materials on a property may adversely impact the property value or NNN’s ability to sell the property. Significant environmental liability could impact NNN’s results of operations, ability to make distributions to shareholders, and its ability to meet its debt obligations. In order to mitigate exposure to environmental liability, NNN has an environmental insurance policy on certain of its convenience store and travel plaza properties which expires in August 2013. However, the policy is subject to exclusions and limitations and does not cover all of the properties owned by NNN, and for those properties covered under the policy, insurance may not fully compensate NNN for any environmental liability. NNN has no assurance that the insurer on its environmental insurance policy will be able to meet its obligations under the policy. NNN may not desire to renew the environmental insurance policy in place upon expiration or a replacement policy may not be available at a reasonable cost, if at all. NNN may not be able to successfully execute its acquisition or development strategies. NNN may not 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 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 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, 2011, the Residuals had a carrying value of $15,299,000. The value of these Residuals is based on assumptions made by NNN to determine their value. These assumptions include, but are not limited to, 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, 2011, mortgages and notes receivables had an outstanding principal balance of $33,428,000. 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, 9 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. 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, or the co-venturer or partner may become insolvent, bankrupt or otherwise unable to contribute to the joint venture or partnership, respectively. Further, disputes may develop with a co-venturer or partner over decisions affecting the property, joint venture or partnership that may result in litigation, arbitration or some other form of dispute resolution. 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. NNN's loss of key management could adversely affect performance and the value of its common stock. NNN is dependent on the efforts of its key management. Competition for senior management personnel can be intense and NNN may not be able to retain its key management. Although NNN believes qualified replacements could be found for any departures of key management, the loss of their services could adversely affect NNN's performance and the value of its common stock. Operating losses from retail operations on certain Properties may adversely impact NNN’s results of operations. In June 2009, NNN acquired the operations of an auto service business that was operated on certain Properties. A third party manages and staffs these operations on behalf of NNN. The results of business operations from these properties are subject to the typical execution risks inherent with many retail operations including: merchandising, pricing, customer service, competition, consumer preferences and behavior, safety, compliance with various federal, state and local laws, ordinances and regulations, environmental contamination, weather conditions, or other trends in the markets they serve. These factors could negatively impact NNN’s results of operations from these certain Properties. Uninsured losses may adversely affect NNN’s ability to pay outstanding indebtedness. NNN’s properties are generally covered by comprehensive liability, fire, and extended insurance coverage. NNN believes that the insurance carried on its properties is adequate and in accordance with industry standards. There are, however, types of losses (such as from hurricanes, earthquakes or other types of natural disasters or wars or other acts of violence) 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 and asset value. 10 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. 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, 2011, NNN owned 38 vacant, un-leased Properties, which accounted for approximately three percent of total Properties held in NNN’s Property Portfolio. 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 Properties at comparable rental rates and in a timely manner. As of January 31, 2012, less than one percent of the total gross leasable area of NNN’s Property Portfolio was leased to four tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code and have the right to reject or affirm their leases with NNN. The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN’s business and financial condition. As of December 31, 2011, NNN had total mortgage debt outstanding of approximately $23,171,000, total unsecured notes payable of $1,250,338,000 and $65,600,000 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 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 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, 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. 11 NNN is obligated to comply with financial and other covenants in its debt instruments that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment of such debt. As of December 31, 2011, NNN had approximately $1,339,109,000 of outstanding indebtedness, of which approximately $23,171,000 was secured indebtedness. NNN’s unsecured debt instruments 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, enter into transactions with certain affiliates, create certain liens, consolidate, merge or sell NNN’s assets, and pre-pay debt. NNN’s secured debt instruments 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. In addition, certain covenants in NNN’s debt instruments, including its Credit Facility, require NNN, among other things, to: • • • limit certain leverage ratios, maintain certain minimum interest and debt service coverage ratios, and limit investments in certain types of assets. NNN’s failure to comply with certain of its debt covenants could result in defaults that accelerate the payment under such debt and limit the dividends paid to NNN’s common and preferred stockholders which would likely have a material adverse impact on NNN’s financial condition and results of operations. In addition, these defaults could impair its access to the debt and equity markets. 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, among others, include: • • • • • • • • • general economic and financial market conditions including the weak economic environment, 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 funds from operations 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. 12 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 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 provisions of the Internal Revenue Code of 1986, as amended (the “Code”) 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 or avoid significant tax liability. If NNN fails to qualify as a REIT, it would not be allowed a deduction for dividends paid to stockholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, NNN could be subject to potentially significant tax liabilities and penalties. Unless entitled to relief under certain statutory provisions, NNN would also be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost. Even if NNN 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 2012). 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 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, 2011, 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 or NNN’s tenants’ 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 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. Similarly, these changes could have a material impact on NNN’s tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate. 13 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, NNN 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 NNN 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. Cybersecurity risks and cyber incidents could adversely affect NNN's business and disrupt operations. Cyber incidents can result form deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cybersecurity protection costs, litigation and reputational damage adversely affecting customer or investor confidence. Item1B. 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 are 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. Mine Safety Disclosures None. 14 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”) for the five year period commencing December 31, 2006 and ending December 31, 2011. The graph assumes an investment of $100 on December 31, 2006. Comparison to Five-Year Cumulative Total Return 15 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. 2011 High Low Close Dividends paid per share 2010 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter Year $ 26.93 $ 26.69 $ 27.61 $ 27.54 $ 24.32 25.95 0.380 23.48 24.85 0.380 22.69 26.87 0.385 24.60 26.38 0.385 $ 23.73 $ 24.59 $ 25.94 $ 28.11 $ 19.19 22.83 0.375 20.50 21.44 0.375 20.82 25.11 0.380 24.85 26.50 0.380 27.61 22.69 26.38 1.530 28.11 19.19 26.50 1.510 The following table presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions 2011 2010 $ 1.088228 71.1260% $ 1.072446 71.0229% — — — —% —% —% 0.441772 28.8740% 0.081661 0.000861 0.000498 0.354534 5.4080% 0.0570% 0.0330% 23.4791% $ 1.530000 100.0000% $ 1.510000 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 Code and such other factors as the Board of Directors deems relevant. In February 2012, NNN paid dividends to its stockholders of $40,432,000, or $0.385 per share, of common stock. On January 31, 2012, there were 1,842 stockholders of record of common stock. In February 2012, NNN declared a dividend on its Series C Preferred Stock of 46.09375 cents per depositary share payable March 15, 2012. 16 Item 6. Selected Financial Data Historical Financial Highlights (dollars in thousands, except per share data) Gross revenues(1) Earnings from continuing operations Earnings including noncontrolling interests Net earnings attributable to NNN Total assets Total debt Total stockholders’ equity Cash dividends declared to: Common stockholders Series C preferred stockholders Weighted average common shares: Basic Diluted Per share information: Earnings from continuing operations: Basic Diluted Net earnings: Basic Diluted Cash dividends declared to: Common stockholders Series C preferred depositary stockholders Other data: Cash flows provided by (used in): 2011 2010 2009 2008 2007 $ 271,696 $ 237,062 $ 243,933 $ 247,352 $ 208,629 91,085 92,416 92,325 3,434,429 1,339,109 2,002,498 70,629 73,353 72,997 2,713,575 1,133,685 1,527,483 54,567 56,399 54,810 2,590,962 987,346 1,564,240 96,372 119,971 117,153 2,649,471 1,027,391 1,566,860 75,541 155,743 154,599 2,539,673 1,049,154 1,417,647 133,720 6,785 125,391 6,785 120,256 6,785 110,107 6,785 92,989 6,785 88,100,076 82,715,645 79,846,258 74,249,137 66,152,437 88,837,057 82,849,362 79,953,499 74,344,231 66,263,980 $ 0.95 $ 0.95 0.77 $ 0.77 0.58 $ 0.58 1.20 $ 1.20 0.96 0.96 0.80 0.80 0.60 0.60 1.48 1.48 1.03 1.03 2.23 2.22 1.53 1.84375 1.51 1.84375 1.50 1.84375 1.48 1.84375 1.40 1.84375 Operating activities Investing activities Financing activities Funds from operations – diluted(2) $ 182,946 $ 187,914 $ 149,502 $ 237,459 $ 130,147 (752,068) (220,260) 569,156 139,665 19,169 108,328 (28,063) (108,840) 89,506 (256,304) (536,717) (6,028) 132,996 432,394 110,589 (1) (2) Gross revenues include revenues from NNN’s continuing and discontinued operations. In accordance with FASB guidance on Accounting for the Impairment or Disposal of Long-Lived Assets, NNN has classified the revenues related to (i) all Properties which generated revenue that were sold and a leasehold interest which expired and (ii) all Properties which generated revenue and were held for sale at December 31, 2011, 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 generally accepted accounting principles (“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 real estate assets, excluding gains (or including losses) on the disposition of certain assets, any impairment charges on a depreciable real estate asset and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures. FFO is generally considered by industry analysts to be an 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 17 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. All revenue generating property dispositions and revenue generating properties held for sale at December 31, 2011 from NNN’s Property Portfolio are classified as discontinued operations. These 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 attributable to NNN’s stockholders Real estate depreciation and amortization: Continuing operations Discontinued operations Partnership/joint venture real estate depreciation Gain on disposition of real estate Impairment losses - real estate FFO Series C preferred stock dividends FFO available to common stockholders – basic and diluted 2011 2010 2009 2008 2007 $ 92,325 $ 72,997 $ 54,810 $ 117,153 $ 154,599 53,827 43,182 216 178 (527) 431 468 178 — 146,450 115,113 (6,785) (6,785) 42,556 1,720 178 40,024 1,766 177 28,364 2,018 31 — 96,291 (6,785) — — 139,781 117,374 (6,785) (6,785) (1,712) (2,973) (19,339) (67,638) $ 139,665 $ 108,328 $ 89,506 $ 132,996 $ 110,589 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.” 18 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 subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.” Overview NNN, a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. NNN assets include: real estate assets, mortgages and notes receivable, and commercial mortgage residual interests. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Properties” or “Property Portfolio”). Prior to December 31, 2011, NNN reported its operations in two primary business segments, investment assets and inventory assets. As a result of a continued reduction of investments in real estate acquired for the purpose of resale, the previously reported segment of inventory assets no longer meets the criteria for significance for separate segment reporting. Currently, NNN's operations are reported within one business segment in the financial statements and all properties are considered part of the Properties or Property Portfolio. As such, property counts and calculations involving property counts reflect all NNN properties. As of December 31, 2011, NNN owned 1,422 Properties (including 11 properties with retail operations that NNN operates), with an aggregate gross leasable area of approximately 16,428,000 square feet, located in 47 states. Approximately 97 percent of total properties in the Property Portfolio was leased or operated as of December 31, 2011. 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 the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property 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 tenant’s line of trade. NNN’s highest lines of trade concentrations are the convenience store and restaurant (including full and limited service) sectors. These sectors represent a large part of the freestanding retail property marketplace and NNN’s management believes these sectors present attractive investment opportunities. NNN’s Property Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic locations, respectively, could have a material adverse effect on the financial condition and operating performance of NNN. As of years end December 31, 2011, 2010 and 2009, Properties have remained at least 96 percent leased. NNN's Property Portfolio’s average remaining lease term of 12 years has remained fairly constant over the past three years which, coupled with its net lease structure, provides enhanced probability of maintaining occupancy and operating earnings. 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 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 the FASB guidance on business 19 combinations, 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. NNN's 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, 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 – Properties with 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. Direct financing method – Properties with 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. Impairment – Real Estate. Based upon the events or changes in certain circumstances, management periodically assesses its Properties for possible impairment indicating that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market condition or the ability of NNN to re-lease or sell properties that are vacant or become vacant. 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 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. 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. In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, Orange Avenue Mortgage Investments, Inc. ("OAMI"), for $1,603,000 pursuant to which OAMI became a wholly owned subsidiary of NNN. NNN accounted for the transaction as an equity transaction in accordance with the FASB guidance on consolidation. Revenue Recognition. Rental revenues for non-development real estate assets are recognized when earned in accordance with the FASB guidance on 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. New Accounting Pronouncements. Refer to Note 1 of the December 31, 2011, Consolidated Financial Statements. Use of Estimates. Additional critical accounting policies of NNN include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Additional critical accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to real estate assets, the recoverability of the carrying value of long-lived assets, including the commercial mortgage residual interests, the recoverability of the income tax benefit, and the collectibility of receivables from tenants, including accrued rental income. Actual results could differ from those estimates. 20 Results of Operations Property Analysis General. The following table summarizes NNN’s Property Portfolio as of December 31: Properties Owned: Number Total gross leasable area (square feet) Properties: Leased Operated Percent of Properties – leased and operated Weighted average remaining lease term (years) 2011 2010 2009 1,422 1,195 1,015 16,428,000 12,972,000 11,373,000 1,364 1,147 11 97% 12 11 97% 12 966 12 96% 12 Total gross leasable area (square feet) – leased and operated 15,681,000 12,215,000 10,508,000 The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Property Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2011: % of Annual Base Rent(1) # of Properties Gross Leasable Area(2) % of Annual Base Rent(1) # of Properties Gross Leasable Area(2) 2012 2013 2014 2015 2016 2017 1.5% 3.5% 3.3% 3.1% 2.1% 3.8% 28 42 43 68 38 32 434,000 883,000 587,000 926,000 2018 2019 2020 2021 3.5% 3.1% 3.5% 5.1% 39 40 87 86 829,000 670,000 746,000 723,000 569,000 Thereafter 67.5% 861 8,406,000 812,000 (1) (2) Based on the annualized base rent for all leases in place as of December 31, 2011. Approximate square feet. The following table summarizes the diversification of NNN’s Property Portfolio based on the top 10 lines of trade: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Lines of Trade Convenience stores Restaurants - full service Automotive parts General merchandise Theaters Automotive service Sporting goods Restaurants - limited service Consumer electronics Drug stores Other 2011 2010 2009 24.6% 9.4% 6.5% 5.2% 5.0% 4.9% 4.8% 3.6% 3.5% 3.2% 29.3% 100.0% 23.5% 10.1% 7.8% 1.4% 5.7% 5.3% 4.5% 4.3% 2.6% 3.9% 30.9% 100.0% 26.1% 9.1% 6.6% 1.6% 6.2% 5.5% 3.5% 3.6% 3.0% 4.0% 30.8% 100.0% (1) Based on annualized base rent for all leases in place as of December 31 of the respective year. 21 The following table shows the top 10 states in which NNN’s Properties are located in as of December 31, 2011: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. State Texas Florida Illinois North Carolina Georgia Indiana California Ohio Pennsylvania Virginia Other # of Properties % of Annual Base Rent(1) 329 102 53 77 64 42 33 43 85 28 566 1,422 23.0% 9.2% 5.6% 5.2% 4.1% 3.5% 3.4% 3.3% 3.1% 3.1% 36.5% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2011. Property Acquisitions. The following table summarizes the Property acquisitions for each of the years ended December 31 (dollars in thousands): Acquisitions: Number of Properties Gross leasable area (square feet) Total dollars invested(1) 2011 2010 2009 218 194 3,448,000 1,700,000 $ 772,463 $ 256,570 $ 10 309,000 38,968 (1) Includes dollars invested in projects under construction or tenant improvements for each respective year. NNN typically funds property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the "Credit Facility") or by issuing its debt or equity securities in the capital markets. Property Dispositions. The following table summarizes the 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 2011 2010 2009 8 122,000 12,632 527 $ $ 18 326,000 58,797 1,712 $ $ 13 253,000 21,890 2,973 $ $ NNN typically uses the proceeds from property sales either to pay down the Credit Facility or reinvest in real estate. Revenue from Continuing Operations Analysis General. During the year ended December 31, 2011, NNN’s rental income increased primarily due to the increase in rental income from property acquisitions (See “Results of Operations – Property Analysis – Property Acquisitions”). NNN anticipates increases in rental income will continue to come from additional property acquisitions and increases in rents pursuant to lease terms. 22 The following summarizes NNN’s revenues from continuing operations (dollars in thousands): 2011 2010 2009 Percent of Total 2010 2009 2011 2011 Versus 2010 Percent Increase (Decrease) 2010 Versus 2009 Percent Increase (Decrease) Rental Income(1) Real estate expense reimbursement from tenants Interest and other income from real estate transactions Interest income on commercial mortgage residual interests Total revenues from continuing operations $ 250,449 $ 214,249 $ 212,114 94.2% 94.0% 92.7% 16.9 % 1.0 % 9,927 7,197 8,138 2,312 2,982 4,323 3,105 3,460 4,252 3.7% 0.9% 1.2% 3.2% 1.3% 1.5% 3.5% 37.9 % (11.6)% 1.9% (22.5)% (31.0)% 1.9% (10.3)% (18.6)% $ 265,793 $ 227,888 $ 228,827 100.0% 100.0% 100.0% 16.6 % (0.4)% (1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations (“Rental Income”). Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010 Rental Income. Rental Income increased in amount, but remained consistent as a percent of the total revenues from continuing operations for the year ended December 31, 2011 as compared to 2010. The increase for the year ended December 31, 2011, is primarily due to a full year of rental income from the acquisition of 194 properties with a gross leasable area of approximately 1,700,000 square feet in 2010 and a partial year of rental income from the acquisition of 218 properties with aggregate gross leasable area of approximately 3,448,000 during 2011. In addition, NNN recorded $2,649,000 as compared to $728,000 in lease termination and rent settlement fees during the years ended December 31, 2011 and 2010, respectively. Real Estate Expense Reimbursement from Tenants. Real estate expense reimbursements from tenants increased for the year ended December 31, 2011, as compared to 2010 and increased as a percentage of total revenues from continuing operations. The increase is primarily attributable to a full year of reimbursements from properties acquired in 2010 and a partial year of reimbursements from certain newly acquired properties in 2011. Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the year ended December 31, 2011, as compared to 2010. The decrease is primarily due to the decrease in the average outstanding balance of NNN's mortgages receivable to $23,798,000 for the year ended December 31, 2011 as compared to $31,925,000 for the same period in 2010. Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests (“Residuals”) decreased for the year ended December 31, 2011, as compared to December 31, 2010. The decrease in interest income on Residuals is primarily the result of scheduled loan amortization. Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009 Rental Income. Rental Income remained relatively stable in amount and as a percent of the total revenues from continuing operations for the year ended December 31, 2010 as compared to 2009. Real Estate Expense Reimbursement from Tenants. Real estate expense reimbursements from tenants decreased for the year ended December 31, 2010, as compared to 2009 but remained fairly consistent as a percentage of total revenues from continuing operations. The decrease is primarily attributable to the increase in reimbursed tax assessments in 2009 as compared to 2010. Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the year ended December 31, 2010, as compared to 2009, primarily due to a lower weighted average principal balance and a lower weighted average interest rate on NNN’s mortgages receivable and structured finance investments during the year ended December 31, 2010. For the years ended December 31, 2010 and 2009, the weighted average outstanding principal balance and interest rates on NNN’s mortgages receivable and structured finance investments was $31,925,000 at 9.04% and $38,968,000 at 9.50%, respectively. The decrease was also due to two defaulted loans at December 31, 2010. 23 Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests decreased for the year ended December 31, 2010, as compared to December 31, 2009, but remained fairly stable as a percent of total revenue from continuing operations. The decrease in interest income on Residuals is primarily the result of declining loan balances from prepayments and scheduled loan amortization. Analysis of Expenses from Continuing Operations General. During 2011, operating expenses from continuing operations increased primarily due to an increase in depreciation expense, an increase in reimbursable real estate expenses from acquired properties and an increase in incentive compensation during the year ended December 31, 2011, as compared to the same period in 2010. The increase was partially offset by the recovery of previous impairment losses and other charges. The following summarizes NNN’s expenses from continuing operations (dollars in thousands): General and administrative Real estate Depreciation and amortization Impairment losses and other charges, net of recoveries Impairment – commercial mortgage residual interests valuation Restructuring costs Total operating expenses Interest and other income Interest expense Total other expenses (revenues) 2011 2010 2009 $ 28,814 $ 22,763 $ 16,887 58,115 (1,431) 1,024 — 13,235 48,047 7,458 3,995 — 21,774 13,497 46,258 36,080 498 731 $ $ $ 103,409 $ 95,498 $ 118,838 (1,511) $ (1,513) $ 74,845 65,179 73,334 $ 63,666 $ (1,371) 62,151 60,780 Percentage of Total Operating Expenses Percentage of Revenues from Continuing Operations 2011 2010 2009 2011 2010 2009 2011 Versus 2010 Percent Increase (Decrease) 2010 Versus 2009 Percent Increase (Decrease) 27.9 % 16.3 % 56.2 % 23.8 % 13.9 % 50.3 % 18.3 % 10.8 % 10.0 % 11.4 % 6.4 % 5.8 % 9.5 % 5.9 % 38.9 % 21.9 % 21.1 % 20.2 % 26.6 % 27.6 % 21.0 % 4.5 % (1.9)% 3.9 % (1.4)% 7.8 % 30.4 % (0.5)% 3.3 % 15.8 % (119.2)% (79.3)% 1.0 % 4.2 % — — 0.4 % 0.6 % 0.4 % 1.8 % — — 0.2 % 0.3 % 100.0 % 100.0 % 100.0 % 39.0 % 42.0 % 51.9 % General and administrative Real estate Depreciation and amortization Impairment losses and other charges, net of recoveries Impairment – commercial mortgage residual interests valuation Restructuring costs Total operating expenses Interest and other income Interest expense (2.1)% (2.4)% (2.3)% (0.6)% (0.7)% (0.6)% 102.1 % 102.4 % 102.3 % 28.2 % 28.6 % 27.2 % Total other expenses (revenues) 100.0 % 100.0 % 100.0 % 27.6 % 27.9 % 26.6 % (74.4)% — 8.3 % (0.1)% 14.8 % 15.2 % 702.2 % (100.0)% (19.6)% 10.4 % 4.9 % 4.7 % Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010 General and Administrative Expenses. General and administrative expenses increased for the year ended December 31, 2011, as compared to the same period in 2010 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, 2011, is primarily attributable to an increase in incentive compensation. 24 Real Estate. Real estate 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, 2011, as compared to the same period in 2010. The increase is primarily due to the increase in tenant reimbursable expenses related to a partial year of reimbursable expenses from certain properties acquired in 2011 and a full year of reimbursable expenses from certain properties acquired in 2010. Depreciation and Amortization. Depreciation and amortization expenses increased as a percentage of total operating expenses and as a percentage of revenues from continuing operations for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The increase is primarily due to the acquisition of 194 properties with an aggregate gross leasable area of approximately 1,700,000 square feet in 2010 and 218 properties with an aggregate gross leasable area of approximately 3,448,000 square feet during 2011. Impairment Losses and Other Charges, Net of Recoveries. The decrease in impairment losses and other charges is primarily due to a $5,625,000 mortgage receivable charge recorded in 2010, of which $3,115,000 was recovered in 2011. Impairment – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2011 and 2010, NNN recorded an other than temporary valuation adjustment of $1,024,000 and $3,995,000, respectively, as a reduction of earnings from operations. Interest Expense. Interest expense increased for the year ended December 31, 2011, as compared to the same period in 2010, and increased as a percentage of revenues from continuing operations but remained relatively stable as a percentage of total operating expenses. The following represents the primary changes in debt that have impacted interest expense: (i) (ii) (iii) the payoff of the $20,000,000 8.5% notes payable in September 2010, the issuance of $300,000,000 in July 2011 of notes payable with a maturity of July 2021, and stated interest rate of 5.500%, and the increase of $86,782,000 in the weighted average debt outstanding on the Credit Facility for the year ended December 31, 2011, as compared to the same period in 2010. Comparison of Year End December 31, 2010 to Year Ended December 31, 2009 General and Administrative Expenses. General and administrative expenses increased for the year ended December 31, 2010, as compared to the same period in 2009 and increased 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, 2010, is primarily attributable to an increase in noncash long-term incentive compensation. This increase is partially offset by a decrease in lost pursuit costs and an increase in capitalized overhead. Real Estate. Real estate expenses increased as a percentage of total operating expenses, but remained stable as a percentage of revenues from continuing operations for the year ended December 31, 2010, as compared to the same period in 2009. Depreciation and Amortization. Depreciation and amortization expenses increased as a percentage of total operating expenses but remained fairly stable as a percentage of revenues from continuing operations for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The dollar increase is primarily a result of an increase in the amortization of loan costs associated with a credit agreement NNN entered into in November 2009. Impairment Losses and Other Charges, Net of Recoveries. Based upon the events or changes in certain circumstances, management periodically assesses its Investment Properties for possible impairment indicating that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. 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 determines 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. The decrease in impairment losses and other charges is primarily due to real estate impairments of $28,884,000 recorded in 2009, as compared to zero in 2010. Impairment – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2010 and 2009, NNN recorded an other than temporary valuation adjustment of $3,995,000 and $498,000, respectively, as a reduction of earnings from operations. Restructuring Costs. During the year ended December 31, 2009, NNN recorded restructuring costs of $731,000 in connection with a workforce reduction. No such costs were incurred during 2010. 25 Interest Expense. Interest expense increased for the year ended December 31, 2010, as compared to the same period in 2009, and increased as a percentage of revenues from continuing operations but remained relatively stable as a percentage of total operating expenses. The following represents the primary changes in debt that have impacted interest expense: (i) (ii) (iii) (iv) (v) (vi) the repurchase of $11,000,000 of convertible notes payable due June 2028 with an effective interest rate of 7.192% in 2009, the repurchase of $8,800,000 of convertible notes payable due September 2026 with an effective interest rate of 5.840% in 2009, the payoff of the $20,000,000 8.5% notes payable in September 2010, the increase of $7,037,000 in the weighted average debt outstanding on the Credit Facility for year ended December 31, 2010, as compared to the same period in 2009, the increase in the weighted average interest rate on the Credit Facility from 1.19% during the year ended December 31, 2009, to 3.80% during the year ended December 31, 2010, the decrease of $626,000 in capitalized interest expense for the year ended December 31, 2010, as compared to the same period in 2009, and (vii) the increase of $850,000 in amortization of loan commitment fees related to the Credit Facility entered into November 2009. Discontinued Operations Earnings (Loss) NNN classified as discontinued operations the revenues and expenses related to its revenue generating Properties that were sold, its leasehold interests that expired or were terminated and any revenue generating Properties that were held for sale at December 31, 2011. The following table summarizes the earnings from discontinued operations for the years ended December 31 (dollars in thousands): 2011 2010 2009 # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings # of Sold Properties Gain Earnings Properties Noncontrolling interests 8 — 8 $ $ 424 — 424 $ $ 1,331 (80) 1,251 16 — 16 $ 1,434 — $ 1,434 $ $ 2,724 11 2,735 11 — 11 $ 2,950 — $ 2,950 $ $ 1,832 (166) 1,666 NNN periodically sells Properties and may reinvest the sales proceeds to purchase additional properties. NNN evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations. Impairment Losses and Other Charges. NNN periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant. 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. During the years ended December 31, 2011 and 2009, NNN recognized real estate impairments on discontinued operations of $431,000 and $5,630,000, respectively. During the year ended December 31, 2010, NNN did not recognize real estate impairments on discontinued operations. 26 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, to a lesser extent, 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. Properties are leased to tenants under long-term, net leases which typically require the tenant to pay certain operating expenses for 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; (iv) capital expenditures; (v) payment of principal and interest on its outstanding indebtedness; and (vi) other investments. NNN expects to meet these requirements (other than amounts required for additional property investments, mortgages and notes receivable) through cash provided from operations and NNN’s Credit Facility. NNN utilizes the Credit Facility to meet its short-term working capital requirements. As of December 31, 2011, $65,600,000 was outstanding and $384,400,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000. NNN anticipates that any additional investments in properties, mortgages and notes receivables 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. Cash and Cash Equivalents. The table below summarizes 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) Net cash at beginning of period Net cash at end of period 2011 2010 2009 $ 182,946 $ 187,914 $ 149,502 (752,068) 569,156 34 2,048 (220,260) 19,169 (13,177) 15,225 $ 2,082 $ 2,048 $ (28,063) (108,840) 12,599 2,626 15,225 Cash provided by operating activities represents cash received primarily from rental income from tenants, proceeds from the disposition of certain properties and interest income less cash used for general and administrative expenses, interest expense and acquisition of certain properties. NNN’s cash flow from operating activities, net of cash used in and provided by the acquisition and disposition of certain 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 properties. The change in cash provided by operations for the years ended December 31, 2011, 2010 and 2009, 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 Properties. NNN’s financing activities for the year ended December 31, 2011, included the following significant transactions: • • • • • • • $95,400,000 in net payments on NNN's Credit Facility, $229,451,000 in net proceeds from the issuance of 9,200,000 shares of common stock in September, $198,228,000 in net proceeds from the issuance of 8,050,000 shares of common stock in December, $133,720,000 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, $93,451,000 in net proceeds from the issuance of 3,745,896 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), and $292,956,000 in net proceeds from the issuance of 5.50% notes payable. 27 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 Properties, with cash from its Credit Facility. As of December 31, 2011, $65,600,000 was outstanding and $384,400,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000. For the year ended December 31, 2011, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 39 percent and the ratio of secured indebtedness to total gross assets was approximately one percent. The ratio of total debt to total market capitalization was approximately 33 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN’s ability to incur debt under certain circumstances. The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy. Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN’s contractual obligations and commercial commitments outstanding as of December 31, 2011. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2011. Long-term debt(1) Credit Facility Operating leases Total contractual cash obligations(2) Expected Maturity Date (dollars in thousands) Total 2012 2013 2014 2015 $ 1,284,906 $ 69,290 $ 223,898 (3) $ 150,881 $ 150,917 2016 Thereafter $ 139,652 (3) $ 550,268 65,600 2,749 — 945 — 973 — 831 65,600 — — — — — $ 1,353,255 $ 70,235 $ 224,871 $ 151,712 $ 216,517 $ 139,652 $ 550,268 (1) (2) (3) Includes amounts outstanding under mortgages payable, convertible notes payable and notes payable and excludes unamortized note discounts. Excludes $15,108 of accrued interest payable. Maturity dates are based on put option dates under NNN’s convertible notes. In addition to the contractual obligations outlined above, in connection with the development of 54 Properties, NNN has agreed to fund construction commitments (including construction, land costs and tenant improvements) of $158,725,000. As of December 31, 2011, NNN had funded $103,614,000 of this commitment, with $55,111,000 remaining to be funded. As of December 31, 2011, NNN had outstanding letters of credit totaling $57,000 under its Credit Facility. As of December 31, 2011, NNN did 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 issued preferred stock with cumulative preferential cash distributions, as described below under “Dividends.” Management anticipates satisfying these obligations with a combination of NNN’s cash provided from operations, current capital resources on hand, its Credit Facility, debt or equity financings and asset dispositions. Generally the Properties are leased under long-term net leases. Therefore, management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain of NNN’s Properties are subject to leases under which NNN retains responsibility for specific costs and expenses associated with the Property. Management anticipates the costs associated with NNN’s vacant Properties or those 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 resulting from vacant properties or uncollectibility of lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is unable to release the Properties at comparable rental rates and in a timely manner. As of December 31, 2011, NNN owned 38 vacant, un-leased Properties which accounted for approximately three percent of total Properties held in NNN’s Property Portfolio. Additionally, as of January 31, 2012, less 28 than one percent of the total gross leasable area of NNN’s Property Portfolio was leased to four tenants that 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 February 2011, one of NNN’s tenants, Borders Group, Inc. (“Borders”), which leased five Properties from NNN, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In February 2011, Borders moved to reject three leases with NNN and retains the right to reject the remaining two leases with NNN. In June 2010, one of NNN’s tenants, Majestic Liquor Stores, Inc. (“Majestic”), which leased 13 Properties from NNN, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In addition, in June 2010, the principals of Majestic, (the “Majestic Principals”), which are the borrowers on a loan from NNN secured by one Majestic property, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In June 2010, Majestic elected to reject the leases of four properties owned by NNN and the one property securing the loan to the Majestic Principals. In November 2010 NNN foreclosed on the property securing the loan to the Majestic Principals. In addition, during the year ended December 31, 2010, NNN recorded a $5,625,000 charge in connection with the loan to the Majestic Principals. In December 2010, Majestic assumed all 9 of the remaining leases with NNN. Also in December 2010 Majestic and Majestic Principals plan of reorganization was approved by the U.S. Bankruptcy court and Majestic and the Majestic Principals exited bankruptcy. In 2011, NNN received a $6,544,000 related to the Majestic Principals note receivable, property foreclosure and rejected leases. Dividends. NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Code, as amended, and related regulations and intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. 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 adversely affect NNN’s income and ability to pay dividends. 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, 2011, 2010 and 2009, NNN declared and paid dividends to its common stockholders of $133,720,000, $125,391,000 and $120,256,000, respectively, or $1.53, $1.51 and $1.50 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: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions 2011 2010 2009 $ 1.088228 71.1260% $ 1.072446 71.0229% $ 1.495182 99.6788% — — — — — — 0.441772 28.8740% 0.081661 0.000861 0.000498 0.354534 5.4080% 0.0570% 0.0330% 23.4791% — 0.003051 0.001767 — — 0.2034% 0.1178% — $ 1.530000 100.0000% $ 1.510000 100.0000% $ 1.500000 100.0000% In February 2012, NNN paid dividends to its common stockholders of $40,432,000, or $0.385 per share of common stock. Holders of NNN’s preferred stock issuance 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. NNN declared and paid dividends to its Series C Preferred stockholders of $6,785,000 or $1.843750 per depository share during each of the years ended December 31, 2011, 2010 and 2009. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed. In February 2012, NNN declared a dividend on its Series C Preferred Stock of 46.09375 cents per depositary share payable March 15, 2012. 29 The following presents the characterizations for tax purposes of such preferred stock dividends for the years ended December 31: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Capital Resources 2011 2010 2009 $ 1.843750 100.0000% $ 1.703170 92.3753% $ 1.837828 99.6788% — — — — — — 0.140580 7.6247% — — — — — 0.003750 0.002172 — 0.2034% 0.1178% $ 1.843750 100.0000% $ 1.843750 100.0000% $ 1.843750 100.0000% Generally, cash needs for property acquisitions, mortgages and notes receivable investments, debt payments, 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, by internally generated funds. Cash needs for operating expenses and dividends have generally been funded by internally generated funds. 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 – convertible Notes payable Total outstanding debt 2011 Percentage of Total 2010 Percentage of Total $ 65,600 23,171 355,371 894,967 4.9% $ 1.8% 26.5% 66.8% 161,000 24,269 349,534 598,882 14.2% 2.2% 30.8% 52.8% $ 1,339,109 100.0% $ 1,133,685 100.0% Indebtedness. NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests, and mortgages and notes receivable. Line of Credit Payable. In May 2011, NNN amended and restated its credit agreement increasing the borrowing capacity under its unsecured revolving credit facility from $400,000,000 to $450,000,000 and amending certain other terms under the former revolving credit facility (as the context requires, the previous and new revolving credit facility, the “Credit Facility”). The Credit Facility had a weighted average outstanding balance of $104,644,000 and a weighted average interest rate of 3.2% during the year ended December 31, 2011. The Credit Facility matures May 2015, with an option to extend maturity to May 2016. The Credit Facility bears interest at LIBOR plus 150 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature for NNN to increase, at its option, the facility size up to $650,000,000. As of December 31, 2011, $65,600,000 was outstanding, and $384,400,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000. 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, 2011, NNN was in compliance with those covenants. In the event that NNN violates any of these restrictive financial covenants, it could cause the indebtedness under the Credit Facility to be accelerated and may impair NNN’s access to the debt and equity markets and limit NNN’s ability to pay dividends to its common and preferred stockholders, each of which would likely have a material adverse impact on NNN’s financial condition and results of operations. 30 Mortgages Payable. The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in thousands): Entered December 2001(2) December 2001(2) December 2001(2) June 2002 (4) February 2004(2) March 2005(2) Original Balance Interest Rate $ 623 698 485 21,000 6,952 1,015 9.00% 9.00% 9.00% 6.90% 6.90% 8.14% Maturity(3) April 2014 April 2019 April 2019 July 2012 January 2017 September 2016 Carrying Value of Encumbered Asset(s)(1) 642 $ 1,119 1,085 23,369 11,280 1,303 Outstanding Principal Balance at December 31, 2011 2010 $ $ 158 333 172 18,488 3,485 535 215 364 187 18,841 4,038 624 $ 38,798 $ 23,171 $ 24,269 (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, 2011. (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) NNN plans to use proceeds from the Credit Facility to repay outstanding indebtedness. Notes Payable – Convertible. Each of NNN’s outstanding series of convertible notes is summarized in the table below (dollars in thousands, except conversion price): Terms Issue Date Net Proceeds Stated Interest Rate (8) Debt Issuance Costs Earliest Conversion Date (9) Earliest Put Option Date Maturity Date Original Principal Repurchases Outstanding principal balance at December 31, 2011 2026 Notes(1)(2)(4) 2028 Notes(2)(5)(6) September 2006 March 2008 $ $ $ $ 168,650 3.950% (3) 3,850 September 2025 September 2016 September 2026 172,500 (33,800) 138,700 $ $ $ $ 228,576 5.125% (7) 5,459 June 2027 June 2013 June 2028 234,035 (11,000) 223,035 (1) (2) (3) (4) (5) (6) (7) (8) (9) NNN repurchased $8,800 and $25,000 in 2009 and 2008, respectively, for a purchase price of $6,994 and $19,188, respectively, resulting in a gain of $1,565 and $4,961, respectively. 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 $463 of note costs which were written off in connection with the repurchase of $33,800 of the 2026 Notes. The conversion rate per $1 principal amount was 42.2959 shares of NNN's common stock, which is equivalent to a conversion price of $23.6430 per share of common stock. The conversion rate per $1 principal amount was 39.4084 shares of NNN’s common stock, which is equivalent to a conversion price of $25.3753 per share of common stock. NNN repurchased $11,000 in 2009 for a purchase price of $8,588 resulting in a gain of $1,867. Includes $219 of note costs which were written off in connection with the repurchase of $11,000 of the 2028 Notes, respectively. With the adoption of the accounting guidance on convertible debt securities in 2009, the effective interest rates for the 2026 Notes and the 2028 Notes are 5.840% and 7.192%, respectively. Prior to the earliest respective conversion date, the notes are only convertible in limited circumstances pursuant to the terms of the notes. 31 Each series of convertible notes represents senior, unsecured obligations of NNN and is 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. The carrying amounts of the Company’s convertible debt and equity balances are summarized in the table below as of December 31, (dollars in thousands): Carrying value of equity component Principal amount of convertible debt Remaining unamortized debt discount Net carrying value of convertible debt 2011 2010 $ $ (33,873) $ 361,735 (6,363) (33,873) 361,735 (12,201) 321,499 $ 315,661 As of December 31, 2011, the remaining amortization period for the 2028 Notes debt discount was approximately 18 months. The 2026 Notes debt discount has been fully amortized. The adjusted effective interest rates for the liability components of the 2026 Notes and the 2028 Notes were 5.840% and 7.192%, respectively. The Company recorded noncash interest charges of $5,837,000, $6,154,000 and $5,809,000 for the years ended December 31, 2011, 2010 and 2009, respectively, relating to the 2026 Notes and 2028 Notes. The Company recorded contractual interest expense of $16,909,000, $16,909,000 and $17,046,000 for the years ended December 31, 2011, 2010 and 2009, respectively, relating to the 2026 Notes and 2028 Notes. The if-converted values which exceed the principal amount as of December 31, 2011, are $16,057,000 and $8,831,000 for the 2026 Notes and the 2028 Notes, respectively. As of December 31, 2010, the if-converted values which exceed the principal amount are $15,601,000 and $9,611,000 for the 2026 Notes and the 2028 Notes, respectively. Notes Payable. Each of NNN’s outstanding series of non-convertible notes is summarized in the table below (dollars in thousands): Notes Issue Date Principal Discount(3) Net Price Stated Rate Effective Rate(4) Maturity Date 2012(1) (8) 2014(1)(2)(5) 2015(1) 2017(1)(6) 2021(1)(7) June 2002 June 2004 November 2005 September 2007 July 2011 $ 50,000 150,000 150,000 250,000 300,000 287 440 390 877 4,269 $ 49,713 149,560 149,610 249,123 295,731 7.750% 6.250% 6.150% 6.875% 5.500% 7.833% June 2012 5.910% June 2014 6.185% December 2015 6.924% October 2017 5.690% July 2021 (1) (2) (3) (4) (5) (6) (7) (8) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility. The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. Includes the effects of the discount, treasury lock gain / loss and swap gain / loss (as applicable). 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. 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. NNN entered into two interest rate hedges with a total notional amount of $150,000. Upon issuance of the 2021 Notes, NNN terminated the interest rate hedge agreements resulting in a liability of $5,300, of which $5,218 was deferred in other comprehensive income. The deferred liability is being amortized over the term of the 2021Notes using the effective interest method. NNN plans to use proceeds from the Credit Facility to repay outstanding indebtedness. 32 Each series of notes represents senior, unsecured obligations of NNN and is 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 $8,001,000 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 indentures, pursuant to which NNN’s notes and convertible 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, 2011, NNN was in compliance with those covenants. NNN’s failure to comply with certain of its debt covenants could result in defaults that accelerate the payment under such debt and limit the dividends paid to NNN’s common and preferred stockholders which would likely have a material adverse impact on NNN’s financial condition and results of operations. In addition, these defaults could impair its access to the debt and equity markets. In September 2010, NNN repaid the 8.500% $20,000,000 notes that were due in September 2010. 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. In February 2009, NNN filed a shelf registration statement with the Securities and Exchange Commission (the “Commission”) which was automatically effective and 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 3,680,000 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 $92,000,000. 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. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed. 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. NNN intends to redeem the Series C Preferred Stock on March 15, 2012 at $25.00 per depositary share, plus all accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. 6.625% Series D Cumulative Redeemable Preferred Stock. On February 23, 2012, NNN consummated an underwritten public offering of 11,500,000 depositary shares (including 1,500,000 shares in connection with the underwriters over-allotment), each representing a 1/100th interest in a share of 6.625% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”), and received gross proceeds of $287,000,000. In connection with this offering, the Company incurred stock issuance costs of approximately $9,600,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses. Holders of the Series D depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 6.625% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.65625 per depositary share). The Series D 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. The Series D Preferred Stock has no maturity date and will remain outstanding unless redeemed. NNN may redeem the Series D Preferred Stock underlying the depositary shares on or after September 23, 2017, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated and unpaid dividends. In addition, upon a 33 change of control, as defined in the articles supplementary fixing the rights and preferences of the Series D Preferred Stock, NNN may redeem the Series D Preferred Stock underlying the depositary shares at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated and unpaid dividends, and the holders of depositary shares may convert some or all of their Series D Preferred Stock into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of February 24, 2012, the Series D Preferred Stock was not redeemable or convertible. NNN intends to use the net proceeds (including net proceeds from the underwriters' over-allotment exercise) of approximately $277,900,000 from this offering to redeem the Series C Preferred Stock, which became redeemable on October 12, 2011. The Series C Preferred Stock will be redeemed on March 15, 2012 at $25.00 per depositary share, plus all accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. NNN intends to use the remainder of the net proceeds for general corporate purposes, which may include repaying the outstanding indebtedness under its Credit Facility. Common Stock Issuances. In September 2011, NNN filed a prospectus supplement to the prospectus contained in its February 2009 shelf registration statement and issued 9,200,000 shares (including 1,200,000 shares in connection with the underwriters' over allotment) of common stock at a price of $26.07 per share and received net proceeds of $229,451,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $10,393,000, consisting primarily of underwriters' fees and commissions, legal and accounting fees and printing expenses. The Company used a portion of the net proceeds from the offering to repay borrowings under its Credit Facility and used the remainder for general corporate purposes, including property acquisitions. In December 2011, NNN filed a prospectus supplement to the prospectus contained in its February 2009 shelf registration statement and issued 8,050,000 shares (including 1,050,000 shares in connection with the underwriters' over allotment) of common stock at a price of $25.75 per share and received net proceeds of $198,228,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $9,060,000, consisting primarily of underwriters' fees and commissions, legal and accounting fees and printing expenses. The Company used a portion of the net proceeds from the offering to repay borrowings under its Credit Facility and used the remainder for general corporate purposes, including property acquisitions. Dividend Reinvestment and Stock Purchase Plan. In June 2009, NNN filed a shelf registration statement which was automatically effective, with the Commission for its DRIP, which permits the issuance by NNN of 16,000,000 shares of common stock. NNN’s 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: Shares of common stock Net proceeds 2011 2010 2009 3,745,896 793,759 3,766,452 $ 93,451,000 $ 17,623,000 $ 67,354,000 The proceeds from the issuances were used to pay down outstanding indebtedness under NNN’s Credit Facility. Mortgages and Notes Receivable. Mortgages are secured by real estate, real estate securities or other assets. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands): Mortgages and notes receivable Accrued interest receivable, net of reserves Unamortized discount 2011 2010 32,751 $ 29,750 730 (53) 644 (63) 33,428 $ 30,331 $ $ 34 Commercial Mortgage Residual Interests In connection with the independent valuations of the Residuals’ fair value, NNN adjusted the carrying value of the Residuals to reflect such fair value as of December 31, 2011. Due to changes in market conditions relating to residual assets, the independent valuation changed several valuation assumptions. The following table summarizes the changes to the key assumptions used in determining the value of the Residuals 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 2011 2010 25% 25% 2.18% to 18.57% CPR 4.35% to 20.37% CPR 0.2% - 4.7% range 0.1% - 15.0% range 20% 20% Forward 3-month curve Forward 3-month curve Forward curve Forward curve 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 Business Combination 2011 2010 2009 $ — $ 1,272 $ 246 1,024 — 3,995 — 1,744 498 In connection with the default of a note receivable and certain lease agreements between NNN and one of its tenants, in June 2009, NNN acquired the operations of an auto service business that operated certain Properties. The note foreclosure resulted in a loss of $7,816,000. NNN recorded the value of the assets received at fair value. No liabilities were assumed. The fair value of the assets resulted in goodwill of $3,400,000. In connection with the review of goodwill for impairment, NNN recognized a total noncash impairment charge of $1,500,000 and $1,900,000 in 2011 and 2010, respectively. 35 Item7A. Quantitative and Qualitative Disclosures About Market Risk NNN is exposed to interest rate risk primarily as a result of its variable rate Credit Facility and its fixed rate debt which is used to finance NNN’s development and acquisition activities, as well as 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, 2011, 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, 2011 and 2010. The table presents principal payments and related interest rates by year for debt obligations outstanding as of December 31, 2011. The variable interest rates shown represent weighted average rate for the Credit Facility for the year ended December 31, 2011. The table incorporates only those debt obligations that existed as of December 31, 2011, 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 by less than two percent for the year ended December 31, 2011. Debt Obligations (dollars in thousands) Variable Rate Debt Credit Facility Fixed Rate Debt Mortgages Unsecured Debt(1) Debt Obligation Weighted Average Interest Rate Debt Obligation Weighted Average Interest Rate Debt Obligation Effective Interest Rate — — — 65,600 3.22% — — $ 19,290 6.92% $ 863 881 917 952 268 7.35% 7.27% 7.22% 7.19% 8.47% 49,983 216,671 149,867 149,817 138,700 545,300 65,600 3.22% $ 23,171 6.99% $ 1,250,338 7.83% 7.19% 5.91% 6.19% 5.84% 6.25% 6.38% 65,600 161,000 $ $ 23,171 24,269 $ $ 1,362,922 1,044,621 2012 2013 2014 2015 2016 Thereafter Total Fair Value: December 31, 2011 December 31, 2010 $ $ $ $ (1) Includes NNN’s notes payable and convertible notes payable, each net of unamortized discounts. NNN uses Bloomberg to determine the fair value. 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 based upon an independent valuation, had a carrying value of $15,299,000 and $15,915,000 as of December 31, 2011 and 2010, respectively. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity. Losses are considered other than temporary and reported as a valuation impairment in earnings from operations if and when there has been a change in the timing or amount of estimated cash flows that leads to a loss in value. 36 Item 8. Financial Statements and Supplementary Data The Board of Directors and Stockholders of National Retail Properties, Inc. and Subsidiaries Report of Independent Registered Public Accounting Firm We have audited National Retail Properties, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2011, 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. and Subsidiaries’ 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 Management’s 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. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, 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. and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of earnings, equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated February 24, 2012 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Certified Public Accountants Orlando, Florida February 24, 2012 37 The Board of Directors and Stockholders of National Retail Properties, Inc. and Subsidiaries Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated balance sheets of National Retail Properties, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of earnings, equity, and cash flows for each of the three years in the period ended December 31, 2011. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Retail Properties, Inc. and Subsidiaries at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statements 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 Property Inc.’s internal control over financial reporting as of December 31, 2011, 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 24, 2012 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Certified Public Accountants Orlando, Florida February 24, 2012 38 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) Real estate portfolio: ASSETS December 31, 2011 December 31, 2010 Accounted for using the operating method, net of accumulated depreciation and amortization $ 3,224,023 $ 2,514,302 Accounted for using the direct financing method Real estate 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 $1,403 and $1,750, respectively Accrued rental income, net of allowance of $4,870 and $3,609, respectively Debt costs, net of accumulated amortization of $15,332 and $11,198, respectively Other assets Total assets Liabilities: Line of credit payable Mortgages payable LIABILITIES AND EQUITY Notes payable – convertible, net of unamortized discount of $6,363 and $12,201, respectively Notes payable, net of unamortized discount of $5,033 and $1,118, respectively Accrued interest payable Other liabilities Total liabilities Commitments and contingencies (Note 26) Equity: Stockholders’ equity: 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 Common stock, $0.01 par value. Authorized 190,000,000 shares; 104,754,859 and 83,613,289 shares issued and outstanding, 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 other comprehensive income Total stockholders’ equity of NNN Noncontrolling interests Total equity Total liabilities and equity 26,518 37,201 4,358 33,428 15,299 2,082 2,149 25,187 10,802 53,382 29,773 37,724 4,515 30,331 15,915 2,048 3,403 25,535 9,366 40,663 $ 3,434,429 $ 2,713,575 $ 65,600 $ 23,171 355,371 894,967 15,108 76,336 161,000 24,269 349,534 598,882 7,342 43,774 1,430,553 1,184,801 92,000 92,000 1,049 — 838 — 1,958,225 1,429,750 (44,946) (3,830) 3,234 1,661 2,002,498 1,527,483 1,378 1,291 2,003,876 1,528,774 $ 3,434,429 $ 2,713,575 See accompanying notes to consolidated financial statements. 39 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) 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 Retail operations: Revenues Operating expenses Net Operating expenses: General and administrative Real estate Depreciation and amortization Impairment losses and other charges, net of recoveries Impairment – commercial mortgage residual interests valuation Restructuring costs Earnings from operations Other expenses (revenues): Interest and other income Interest expense Earnings from continuing operations before gain on disposition of real estate, income tax benefit (expense), equity in earnings of unconsolidated affiliate and gain on extinguishment of debt Gain on disposition of real estate Income tax benefit (expense) Equity in earnings of unconsolidated affiliate Gain on extinguishment of debt Earnings from continuing operations Earnings from discontinued operations, net of income tax expense (Note 18) Earnings including noncontrolling interests Year Ended December 31, 2011 2010 2009 $ 246,569 $ 210,329 $ 207,734 2,787 1,093 9,927 2,312 3,105 3,001 919 7,197 2,982 3,460 3,070 1,310 8,138 4,323 4,252 265,793 227,888 228,827 45,139 (43,096) 2,043 28,814 16,887 58,115 (1,431) 1,024 — 103,409 164,427 (1,511) 74,845 73,334 32,958 (31,647) 1,311 22,763 13,235 48,047 7,458 3,995 — 95,498 133,701 (1,513) 65,179 63,666 91,093 70,035 297 (779) 474 — 91,085 1,331 92,416 641 (475) 428 — 70,629 2,724 73,353 15,595 (15,176) 419 21,774 13,497 46,258 36,080 498 731 118,838 110,408 (1,371) 62,151 60,780 49,628 37 1,049 421 3,432 54,567 1,832 56,399 See accompanying notes to consolidated financial statements. 40 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except per share data) Loss (earnings) attributable to noncontrolling interests: Continuing operations Discontinued operations Net earnings attributable to NNN Other comprehensive income (loss) Total comprehensive income Net earnings attributable to NNN Series C preferred stock dividends Net earnings attributable to common stockholders Net earnings per share of common stock: Basic: Continuing operations Discontinued operations Net earnings Diluted: Continuing operations Discontinued operations Net earnings Year Ended December 31, 2011 2010 2009 $ $ $ $ $ $ $ $ (11) $ (367) $ (80) (91) 92,325 (5,491) 11 (356) 72,997 1,150 86,834 $ 74,147 $ 92,325 $ 72,997 $ (6,785) (6,785) 85,540 $ 66,212 $ 0.95 $ 0.01 0.96 $ 0.95 $ 0.01 0.96 $ 0.77 $ 0.03 0.80 $ 0.77 $ 0.03 0.80 $ (1,423) (166) (1,589) 54,810 (1,903) 52,907 54,810 (6,785) 48,025 0.58 0.02 0.60 0.58 0.02 0.60 Weighted average number of common shares outstanding: Basic Diluted 88,100,076 88,837,057 82,715,645 82,849,362 79,846,258 79,953,499 See accompanying notes to consolidated financial statements. 41 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2011, 2010 and 2009 (dollars in thousands, except per share data) Series C Preferred Stock Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Noncontrolling Interests Total Equity Balances at December 31, 2008 $ 92,000 $ 784 $ 1,337,018 $ 134,644 $ 2,414 $ 1,566,860 $ 2,086 $ 1,568,946 54,810 1,589 56,399 Net earnings Dividends declared and paid: $1.84375 per depositary share of Series C preferred stock $1.50 per share of common stock Issuance of common stock: 99,738 shares 3,664,182 shares – discounted stock purchase program Issuance of 262,546 shares of restricted common stock Stock issuance costs Equity component of convertible debt Amortization of deferred compensation Amortization of interest rate hedges Unrealized gain – commercial mortgage residual interests Contributions from noncontrolling interests Distributions to noncontrolling interests Other — — — — — — — — — — — — — — — — 1 1 36 3 — — — — — — — — — 54,810 — 1,797 1,435 65,519 (3) (113) (795) 3,443 — — — — 190 (6,785) (120,256) — — — — — — — — — — — — — — — — — — — — (159) (6,785) (118,458) 1,436 65,555 — (113) (795) 3,443 (159) (1,744) (1,744) — — — — 190 — — — — — — — — — 104 152 (552) (757) (6,785) (118,458) 1,436 65,555 — (113) (795) 3,443 (159) (1,640) 152 (552) (567) Balances at December 31, 2009 $ 92,000 $ 825 $ 1,408,491 $ 62,413 $ 511 $ 1,564,240 $ 2,622 $ 1,566,862 See accompanying notes to consolidated financial statements. 42 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2011, 2010 and 2009 (dollars in thousands, except per share data) Series C Preferred Stock Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Noncontrolling Interests Total Equity Balances at December 31, 2009 $ 92,000 $ 825 $ 1,408,491 $ 62,413 $ 511 $ 1,564,240 $ 2,622 $ 1,566,862 Net earnings Dividends declared and paid: $1.84375 per depositary share of Series C preferred stock $1.51 per share of common stock Issuance of common stock: 39,872 shares 491,705 shares – discounted stock purchase program Issuance of 377,164 shares of restricted common stock Stock issuance costs Performance incentive plan Amortization of deferred compensation Amortization of interest rate hedges Unrealized gain/loss – commercial mortgage residual interests Contributions from noncontrolling interests Distributions to noncontrolling interests Purchase of noncontrolling interest Other — — — — — — — — — — — — — — — — — 3 1 5 4 — — — — — — — — — — 72,997 — 7,350 697 10,272 (4) (1) (1,634) 5,119 — — — — (404) (136) (6,785) (125,391) — — — — — — — — — — — — — — — — — — — — — (165) 1,272 — — — 43 72,997 356 73,353 (6,785) (118,038) 698 10,277 — (1) (1,634) 5,119 (165) 1,272 — — (404) (93) — — — — — — — — — (26) 43 (861) (1,199) 356 (6,785) (118,038) 698 10,277 — (1) (1,634) 5,119 (165) 1,246 43 (861) (1,603) 263 Balances at December 31, 2010 $ 92,000 $ 838 $ 1,429,750 $ 3,234 $ 1,661 $ 1,527,483 $ 1,291 $ 1,528,774 See accompanying notes to consolidated financial statements. 43 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2011, 2010 and 2009 (dollars in thousands, except per share data) Series C Preferred Stock Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Noncontrolling Interests Total Equity Balances at December 31, 2010 $ 92,000 $ 838 $ 1,429,750 $ 3,234 $ 1,661 $ 1,527,483 $ 1,291 $ 1,528,774 Net earnings Dividends declared and paid: $1.84375 per depositary share of Series C preferred stock $1.53 per share of common stock Issuance of common stock: 17,288,265 shares 3,197,127 shares – discounted stock purchase program Issuance of 133,432 shares of restricted common stock Stock issuance costs Performance incentive plan Amortization of deferred compensation Amortization of interest rate hedges Fair value treasury locks Unrealized gain – commercial mortgage residual interests Stock value adjustment Contributions from noncontrolling interests Distributions to noncontrolling interests Balances at December 31, 2011 — — — — — — — — — — — — — — — — — 5 — — 13,652 92,325 (6,785) (133,720) 173 447,690 32 1 — — — — — — — — — 79,762 (57) (19,453) (513) 7,394 — — — — — — — — — — — — — — — — — — — — — — — — — — — 9 (5,218) (246) (36) — — 92,325 (6,785) (120,063) 447,863 79,794 (56) (19,453) (513) 7,394 9 (5,218) (246) (36) — — 91 — — — — — — — — — — — — 41 (45) 92,416 (6,785) (120,063) 447,863 79,794 (56) (19,453) (513) 7,394 9 (5,218) (246) (36) 41 (45) $ 92,000 $ 1,049 $ 1,958,225 $ (44,946) $ (3,830) $ 2,002,498 $ 1,378 $ 2,003,876 See accompanying notes to consolidated financial statements. 44 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Cash flows from operating activities: Earnings including noncontrolling interests Adjustments to reconcile net earnings to net cash provided by operating activities: Performance incentive plan expense Stock options expense – tax effect Depreciation and amortization Impairment losses and other charges Impairment – commercial mortgage residual interests valuation Amortization of notes payable discount Amortization of deferred interest rate hedges Equity in earnings of unconsolidated affiliate Distributions received from unconsolidated affiliate Gain on disposition of real estate portfolio Gain on extinguishment of debt Deferred income taxes Income tax valuation allowance Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: Additions to held for sale real estate Proceeds from disposition of held for sale real estate Decrease in real estate leased to others using the direct financing method Increase in work in process Increase in mortgages, notes and accrued interest receivable Decrease (increase) in receivables Decrease (increase) in commercial mortgage residual interests Decrease (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 Year Ended December 31, 2011 2010 2009 $ 92,416 $ 73,353 $ 56,399 8,283 — 58,817 2,115 1,024 6,191 9 (474) 593 (721) — 884 — (1,025) 1,993 1,595 (1,213) (96) 1,108 (654) 253 746 7,766 2,682 654 5,756 122 49,084 7,458 3,995 6,360 (166) (428) 578 (2,075) — (2,544) 3,121 (478) 42,817 1,544 (755) (467) (219) 1,516 124 (53) (129) (431) (169) 4,172 190 48,485 41,710 498 6,006 (159) (421) 607 (2,987) (3,432) (16,649) 14,900 (2,457) 6,276 1,378 (786) (10) 941 (291) (2,061) (172) (137) (2,930) 432 Net cash provided by operating activities 182,946 187,914 149,502 Cash flows from investing activities: Proceeds from the disposition of real estate, Investment Portfolio 10,696 10,312 14,588 Additions to real estate: Accounted for using the operating method Accounted for using the direct financing method Increase in mortgages and notes receivable Principal payments on mortgages and notes receivable Payment of lease costs Other (756,633) (230,928) (44,433) (1,747) (9,838) 6,837 (1,589) 206 — (8,564) 13,818 (1,324) (3,574) — (959) 4,009 (451) (817) Net cash used in investing activities (752,068) (220,260) (28,063) See accompanying notes to consolidated financial statements. 45 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Cash flows from financing activities: Proceeds from line of credit payable Repayment of line of credit payable Payment of interest rate hedge Repayment of mortgages payable Proceeds from notes payable Repurchase of notes payable – convertible – debt component Repurchase of notes payable – convertible – equity component Repayment of notes payable Payment of debt costs Proceeds from issuance of common stock Payment of Series C preferred stock dividends Payment of common stock dividends Noncontrolling interest distributions Noncontrolling interest contributions Stock issuance costs Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Interest paid, net of amount capitalized Taxes paid (received) Supplemental disclosure of noncash investing and financing activities: Issued 141,351, 392,474 and 262,546 shares of restricted and unrestricted common stock in 2011, 2010 and 2009, respectively, pursuant to NNN’s performance incentive plan Issued 9,632, 10,092 and 6,594 shares of common stock in 2011, 2010 and 2009, respectively, to directors pursuant to NNN’s performance incentive plan Issued 26,023, 25,066 and 41,604 shares of common stock in 2011, 2010 and 2009, respectively, pursuant to NNN’s Deferred Director Fee Plan Surrender of 5,215 shares of restricted common stock in 2011 Change in other comprehensive income Change in lease classification (direct financing lease to operating lease) $ $ $ $ $ $ $ $ $ Transfer of real estate from Portfolio to held for sale $ Note and mortgage receivable accepted in connection with real estate transactions $ Mortgages payable assumed in connection with real estate transactions $ Real estate acquired in connection with mortgage receivable foreclosure Assets received in note receivable foreclosure Note receivable foreclosures $ $ $ Year Ended December 31, 2011 2010 2009 $ 805,300 $ 278,900 $ 132,400 (900,700) (117,900) (158,900) (5,218) (1,098) 295,731 — — — (5,582) 540,560 (6,785) (133,720) (45) 41 (19,328) 569,156 34 2,048 2,082 63,474 $ $ (561) $ 3,456 250 449 109 $ $ $ $ (5,491) $ 3,407 $ — $ — $ — $ — $ — $ — $ — (6,453) — — — (20,000) (75) 17,692 (6,785) — (1,000) — (14,785) (795) — (6,275) 68,060 (6,785) (125,391) (120,256) (861) 43 (1) 19,169 (13,177) 15,225 2,048 62,386 472 6,889 236 401 $ $ $ $ $ $ — $ (552) 152 (104) (108,840) 12,599 2,626 15,225 61,475 (63) 4,290 118 611 — 1,150 $ (1,903) — $ — $ 5,950 5,432 6,250 $ $ $ — $ — $ — 16,058 1,550 — 4,240 5,527 (17,013) See accompanying notes to consolidated financial statements. 46 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2011, 2010 and 2009 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 taxable subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.” NNN assets include: real estate assets, mortgages and notes receivable, and commercial mortgage residual interests. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Properties” or “Property Portfolio”). Property Portfolio: Total properties (including retail operations) Gross leasable area (square feet) States December 31, 2011 1,422 16,428,000 47 Prior to December 31, 2011, NNN reported its operations in two primary business segments, investment assets and inventory assets. As a result of a continued reduction of investments in real estate acquired for the purpose of resale, the previously reported segment of inventory assets no longer meets the criteria for significance for separate segment reporting. Currently, NNN's operations are reported within one business segment in the financial statements and all properties are considered part of the Properties or Property Portfolio. As such, property counts and calculations involving property counts reflect all NNN properties. Principles of Consolidation – NNN’s consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates, including transactions whereby NNN has been determined to be the primary beneficiary in accordance with the Financial Accounting Standards Board (“FASB”) guidance included in Consolidation. 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. The TRS develops real estate through various joint venture development affiliate agreements. NNN consolidates certain joint venture development entities 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 noncontrolling interest for its other partners’ ownership percentage. Real Estate 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 the FASB guidance on business combinations, 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 fair values of these assets. The as-if-vacant fair value of a property is provided to management by a qualified appraiser. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below- market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease, including the probability of renewal periods. The capitalized above- 47 market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant would renew the option whereby the Company would amortize the value attributable to the renewal over the renewal period. 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. NNN's 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 – Properties with 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 – Properties with 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 – Held For Sale – The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been or are under contract for sale. The properties are recorded at acquisition cost, including the acquisition and closing costs. The cost of the real estate developed 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 and is recorded at the lower of cost or fair value. In accordance with the FASB guidance included in Real Estate, NNN classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated. Impairment – Real Estate – Based upon events or changes in certain circumstances, management periodically assesses its Property Portfolio for possible impairment indicating that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market condition and the ability of NNN to re-lease or sell properties that are currently vacant or become vacant. 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 FASB guidance included in 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 reserve allowance related to the mortgages, notes and accrued interest is NNN’s best estimate of the amount of probable credit losses. The reserve 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 reserve allowance when all possible means of collection have been exhausted. 48 Investment in an Unconsolidated Affiliate – NNN accounts for its investment in an unconsolidated affiliate under the equity method of accounting. 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., accounted for under the equity method of accounting. 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. 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. In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, Orange Avenue Mortgage Investments, Inc. (“OAMI”), for $1,603,000, pursuant to which OAMI became a wholly owned subsidiary of NNN. NNN accounted for the transaction as an equity transaction in accordance with the FASB guidance on consolidation. 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. Valuation of Receivables – NNN estimates 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. Goodwill – Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the assets acquired and the liabilities assumed. In accordance with the FASB guidance included in Goodwill, NNN performs impairment testing on goodwill by comparing fair value of its reporting units to carrying amount annually. Debt Costs – Debt costs incurred in connection with NNN’s $450,000,000 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 the FASB guidance included in 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 – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. Effective January 1, 2009, the guidance requires classification of the Company’s unvested restricted share units which contain rights to receive nonforfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method for the years ended December 31 (dollars in thousands): 49 Basic and Diluted Earnings: Net earnings attributable to NNN Less: Series C preferred stock dividends Net earnings available to NNN’s common stockholders Less: Earnings attributable to unvested restricted shares Net earnings used in basic earnings per share Reallocated undistributed income (loss) Net earnings used in diluted earnings per share Basic and Diluted Weighted Average Shares Outstanding: Weighted average number of shares outstanding Less: Unvested restricted stock Less: Contingent shares Weighted average number of shares outstanding used in basic earnings per share Effects of dilutive securities: Contingent shares Convertible debt Common stock options Directors’ deferred fee plan Weighted average number of shares outstanding used in diluted earnings per share 2011 2010 2009 $ 92,325 $ 72,997 $ (6,785) 85,540 (622) 84,918 (2) (6,785) 66,212 (299) 65,913 — 54,810 (6,785) 48,025 (290) 47,735 (1) $ 84,916 $ 65,913 $ 47,734 88,972,723 83,320,921 80,486,215 (630,102) (242,545) (605,276) (639,957) — — 88,100,076 82,715,645 79,846,258 66,001 512,024 2,881 156,075 — — 3,814 129,903 — — 9,037 98,204 88,837,057 82,849,362 79,953,499 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 – In accordance with the FASB guidance in Equity - Based Payments to Non-Employees, 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. 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 (the “Code”), 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 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, 2011, 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 taxable REIT subsidiary 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 17). 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 the FASB guidance included in 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. Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which 50 was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance 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. New Accounting Pronouncements – In May 2011, the FASB amended its guidance on Fair Value Measurements, providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. The new guidance changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements, particularly for Level 3 fair value measurements. The new guidance will be effective for fiscal years beginning after December 1, 2011. NNN is currently evaluating the provisions to determine the potential impact, if any, the adoption will have on its financial position and results of operations. In June 2011, the FASB issued Accounting Standards Update 2011-05 which amended its guidance on the presentation of comprehensive income in financial statements. The new guidance requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements, but may require certain additional disclosures. In December 2011, the FASB issued update 2011-12, which indefinitely defers certain provisions of Accounting Standards Update 2011-05, including a requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net earnings is presented and the statement in which other comprehensive income is presented. In September 2011, the FASB amended its guidance on testing goodwill for impairment. The objective of the amendment is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements, but may require certain additional disclosures. In December 2011, the FASB issued Accounting Standards Update entitled Derecognition of in Substance Real Estate - a Scope Clarification. The amendments in this update clarify the scope of current U.S. GAAP. The amendments will resolve the diversity in practice about whether the guidance in subtopic 360-20 applies to the derecognition of in substance real estate when the parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate because of a default by the subsidiary on its nonrecourse debt. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. NNN is currently evaluating the provisions to determine the potential impact, if any, the adoption will have on its financial position and results of operations. In December 2011, the FASB amended its guidance on offsetting assets and liabilities in financial statements. The objective of this update would be to require disclosure to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amendments in this update are effective for annual reporting periods beginning on or after January 1, 2013. NNN is currently evaluating the provisions to determine the potential impact, if any, the adoption will have on its financial position and 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 purchase price allocation. Actual results could differ from those estimates. 51 Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2011 presentation. Prior to December 31, 2011, NNN reported its operations in two primary business segments, investment assets and inventory assets. As a result of reduction of investments in real estate acquired for the purpose of resale, the previously reported segment of inventory assets is no longer a significant segment of NNN's business and therefore is no longer reported as a separate segment. Currently, NNN's operations are reported within one primary business segment and all properties are considered part of the Properties or Property Portfolio. As such, property counts and calculations involving property counts reflect all NNN properties. Note 2 – Real Estate – Portfolio: Leases – The following outlines key information for NNN’s leases at December 31, 2011: Lease classification: Operating Direct financing Building portion – direct financing / land portion – operating Weighted average remaining lease term 1,377 15 5 12 Years 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 Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the property. Generally, the leases of the Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term. Real Estate 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 2011 2010 $ 1,314,157 $ 1,117,915 2,118,656 1,591,113 1,290 3,434,103 (270,094) 3,164,009 60,014 1,290 2,710,318 (222,406) 2,487,912 26,390 $ 3,224,023 $ 2,514,302 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, 2011, 2010 and 2009, NNN recognized collectively in continuing and discontinued operations, ($222,000), ($93,000) and $2,102,000, respectively, of such income, net of reserves. At December 31, 2011 and 2010, the balance of accrued rental income, net of allowances of $4,870,000 and $3,609,000, respectively, was $25,187,000 and $25,535,000, respectively. As of December 31, 2011, in connection with the development of Properties, NNN has the following funding commitments (dollars in thousands): Real Estate Portfolio (1) Includes land and construction costs. # of Properties Total Commitment(1) Amount Funded Remaining Commitment 54 $ 158,725 $ 103,614 $ 55,111 52 The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2011 (dollars in thousands): 2012 2013 2014 2015 2016 Thereafter $ 280,328 273,762 264,869 257,821 251,055 2,151,781 $ 3,479,616 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 CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales. Real Estate 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 2011 2010 $ $ 32,587 $ 11,464 (17,533) 26,518 $ 37,699 12,297 (20,223) 29,773 The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2011 (dollars in thousands): 2012 2013 2014 2015 2016 Thereafter $ $ 4,263 4,213 3,454 3,160 3,077 14,420 32,587 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 Portfolio – Accounted for Using the Operating Method). 53 Note 3 – Real Estate – Held For Sale: As of December 31, 2011, NNN owned 22 held for sale Properties: 16 improved properties and six land parcels. As of December 31, 2010, NNN owned 23 held for sale Properties: 14 improved properties and nine land parcels. Held for sale real estate consisted of the following at December 31 (dollars in thousands): Held For Sale: Land Building Less accumulated depreciation and amortization Less impairment 2011 2010 $ 23,807 $ 22,130 45,937 (527) (8,209) $ 37,201 $ 24,737 21,710 46,447 (514) (8,209) 37,724 The following table summarizes the number of held for sale Properties sold and the corresponding gain recognized on the disposition of held for sale Properties included in continuing and discontinued operations for the years ended December 31 (dollars in thousands): Continuing operations Discontinued operations Noncontrolling interest 2011 2010 2009 # of Properties Gain # of Properties Gain # of Properties Gain — $ 8 — 8 $ 297 424 (194) 527 2 $ 16 — 18 $ 641 1,434 (363) 1,712 2 $ 11 — 13 $ 37 2,950 (14) 2,973 Note 4 – Impairments – Real Estate: Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company’s review of long lived assets, including identifiable intangible assets, NNN recognized the following real estate impairments for the years ended December 31 (dollars in thousands): Continuing operations Discontinued operations 2011 2010 2009 $ $ — $ 431 431 $ — $ — — $ 28,884 5,630 34,514 The valuation of impaired assets is determined using widely accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties. NNN may consider a single valuation technique or multiple valuation techniques, as appropriate, when measuring the fair value of its real estate. 54 Note 5 – Business Combinations: In connection with the default of a note receivable and certain lease agreements between NNN and one of its tenants, in June 2009, NNN acquired the operations of an auto service business that operated certain Properties. The note foreclosure resulted in a loss of $7,816,000. NNN recorded the value of the assets received at fair value. No liabilities were assumed. The fair value of the assets resulted in goodwill of $3,400,000. In connection with the annual review of goodwill for impairment, NNN recognized a noncash impairment charge of $1,500,000 and $1,900,000 included in Impairment losses and other charges, net of recoveries in the Consolidated Statements of Earnings during the years ended December 31, 2011 and 2010, respectively. Note 6 – Mortgages, Notes and Accrued Interest Receivable: 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. Mortgages and notes receivable consisted of the following at December 31, (dollars in thousands): Mortgages and notes receivable Accrued interest receivables, net of reserves Unamortized discount 2011 2010 32,751 $ 29,750 730 (53) 644 (63) 33,428 $ 30,331 $ $ In connection with the evaluation of the collectibility of its mortgages and notes receivable, during the year ended December 31, 2010, NNN recorded a valuation reserve of $5,625,000 included in Impairment losses and other charges, net of recoveries in the Consolidated Statements of Earnings. During the year ended December 31, 2011, $3,115,000 of this valuation reserve was recovered and included in Impairment losses and other charges, net of recoveries in the Consolidated Statements of Earnings. Note 7 – Commercial Mortgage Residual Interests: NNN holds the commercial mortgage residual interests (“Residuals”) from seven securitizations. 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 adjusted several valuation assumptions related to prepayment speeds and default curves during 2011. 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 2011 2010 2009 $ — $ 1,272 $ 246 1,024 — 3,995 — 1,744 498 55 The following table summarizes the changes to the key assumptions used in determining the value of the Residuals as of December 31: Discount rate 2011 2010 25% 25% Average life equivalent CPR speeds range 2.18% to 18.57% CPR 4.35% to 20.37% CPR Foreclosures: Frequency curve default model Loss severity of loans in foreclosure Yield: LIBOR Prime 0.2% - 4.7% range 0.1% - 15.0% range 20% 20% Forward 3-month curve Forward 3-month curve Forward curve Forward curve The following table shows the effects on the key assumptions affecting the fair value of the Residuals at December 31, 2011 (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 15,299 14,735 13,942 15,293 15,291 15,068 14,928 15,447 15,633 $ $ $ $ $ $ $ $ $ These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation of a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Note 8 – Line of Credit Payable: In May 2011, NNN amended and restated its credit agreement increasing the borrowing capacity under its unsecured revolving credit facility from $400,000,000 to $450,000,000 and amending certain other terms under the former revolving credit facility (as the context requires, the previous and new revolving credit facility, the “Credit Facility”). The Credit Facility had a weighted average outstanding balance of $104,644,000 and a weighted average interest rate of 3.2% during the year ended December 31, 2011. The Credit Facility matures May 2015, with an option to extend maturity to May 2016. The Credit Facility bears interest at LIBOR plus 150 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature to increase the facility size up to $650,000,000. As of December 31, 2011, $65,600,000 was outstanding and $384,400,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000. 56 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 and dividend limitations. At December 31, 2011, NNN was in compliance with those covenants. Note 9 – Mortgages Payable: The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in thousands): Entered December 2001 (2) December 2001 (2) December 2001 (2) June 2002 (4) February 2004 (2) March 2005 (2) Initial Balance Interest Rate Maturity (3) Carrying Value of Encumbered Asset(s)(1) Outstanding Principal Balance at December 31, 2011 2010 $ 623 698 485 21,000 6,952 1,015 9.00% April 2014 $ 642 $ 9.00% April 2019 9.00% April 2019 6.90% July 2012 6.90% January 2017 8.14% September 2016 1,119 1,085 23,369 11,280 1,303 $ 158 333 172 18,488 3,485 535 $ 38,798 $ 23,171 $ 215 364 187 18,841 4,038 624 24,269 (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, 2011. (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) NNN plans to use proceeds from the Credit Facility to repay outstanding indebtedness. The following is a schedule of the annual maturities of NNN’s mortgages payable at December 31, 2011 (dollars in thousands): 2012 2013 2014 2015 2016 Thereafter $ 19,290 863 881 917 952 268 $ 23,171 57 Note 10 – Notes Payable – Convertible: Each of NNN’s outstanding series of convertible notes are summarized in the table below (dollars in thousands, except conversion price): Terms Issue Date Net Proceeds Stated Interest Rate (8) Debt Issuance Costs Earliest Conversion Date (9) Earliest Put Option Date Maturity Date Original Principal Repurchases Outstanding principal balance at December 31, 2011 2026 Notes(1)(2)(4) September 2006 168,650 3.950% 3,850 (3) September 2025 September 2016 September 2026 172,500 (33,800) 138,700 $ $ $ $ $ $ $ $ 2028 Notes(2)(5)(6) March 2008 228,576 5.125% 5,459 (7) June 2027 June 2013 June 2028 234,035 (11,000) 223,035 (1) (2) (3) (4) (5) (6) (7) (8) (9) NNN repurchased $8,800 and $25,000 in 2009 and 2008, respectively, for a purchase price of $6,994 and $19,188, respectively, resulting in a gain of $1,565 and $4,961, respectively. 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 $463 of note costs which were written off in connection with the repurchase of $33,800 of the 2026 Notes. The conversion rate per $1 principal amount was 42.2959 shares of NNN’s common stock, which is equivalent to a conversion price of $23.6430 per share of common stock. The conversion rate per $1 principal amount was 39.4084 shares of NNN’s common stock, which is equivalent to a conversion price of $25.3753 per share of common stock. NNN repurchased $11,000 in 2009 for a purchase price of $8,588 resulting in a gain of $1,867. Includes $219 of note costs which were written off in connection with the repurchase of $11,000 of the 2028 Notes, respectively. With the adoption of the accounting guidance on convertible debt securities in 2009, the effective interest rates for the 2026 Notes and the 2028 Notes are 5.840% and 7.192%, respectively. Prior to the earliest respective conversion date, the notes are only convertible in limited circumstances pursuant to the terms of the notes. 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. The carrying amounts of the Company’s convertible debt and equity balances are summarized in the table below as of December 31 (dollars in thousands): Carrying value of equity component Principal amount of convertible debt Remaining unamortized debt discount Net carrying value of convertible debt 2011 2010 $ $ (33,873) $ 361,735 (6,363) (33,873) 361,735 (12,201) 321,499 $ 315,661 As of December 31, 2011, the remaining amortization period for the 2028 Notes debt discount was approximately 18 months. The 2026 Notes debt discount has been fully amortized. 58 The adjusted effective interest rates for the liability components of the 2026 Notes and the 2028 Notes were 5.840% and 7.192%, respectively. The Company recorded noncash interest charges of $5,837,000, $6,154,000 and $5,809,000 for the years ended December 31, 2011, 2010 and 2009, respectively, relating to the 2026 Notes and 2028 Notes. The Company recorded contractual interest expense of $16,909,000, $16,909,000 and $17,046,000 for the years ended December 31, 2011, 2010 and 2009, respectively, relating to the 2026 Notes and 2028 Notes. The if-converted values which exceed the principal amount as of December 31, 2011, are $16,057,000 and $8,831,000 for the 2026 Notes and the 2028 Notes, respectively. As of December 31, 2010, the if-converted values which exceed the principal amount are $15,601,000 and $9,611,000 for the 2026 Notes and the 2028 Notes, respectively. Note 11 – Notes Payable: Each of NNN’s outstanding series of non-convertible notes is summarized in the table below (dollars in thousands): Notes 2012(1) (8) 2014(1)(2)(5) 2015(1) 2017(1)(6) 2021(1)(7) Issue Date Principal Discount(3) Net Price Stated Rate Effective Rate(4) Maturity Date June 2002 June 2004 November 2005 September 2007 July 2011 $ 50,000 $ 150,000 150,000 250,000 300,000 287 440 390 877 4,269 $ 49,713 149,560 149,610 249,123 295,731 7.750% 6.250% 6.150% 6.875% 5.500% 7.833% June 2012 5.910% June 2014 6.185% December 2015 6.924% October 2017 5.690% July 2021 (1) (2) (3) (4) (5) (6) (7) (8) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility. The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. Includes the effects of the discount, treasury lock gain and swap gain (as applicable). 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. 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. NNN entered into two interest rate hedges with a total notional amount of $150,000. Upon issuance of the 2021 Notes, NNN terminated the interest rate hedge agreements resulting in a liability of $5,300, of which $5,218 was deferred in other comprehensive income. The deferred liability is being amortized over the term of the note using the effective interest method. NNN plans to use proceeds from the Credit Facility to repay outstanding indebtedness. Each series of the notes represents senior, unsecured obligations of NNN and is subordinated to all secured indebtedness of NNN. Each of the notes 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 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 $8,001,000 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 September 2010, NNN repaid the $20,000,000 8.5% notes payable that were due in September 2010. 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, 2011, NNN was in compliance with those covenants. 59 Note 12 – Preferred Stock: 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 3,680,000 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 $92,000,000. 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. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed. 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. As of January 31, 2012, none of the Series C Preferred Stock had been redeemed. Note 13 – Common Stock: In February 2009, NNN filed a shelf registration statement with the Commission which permits the issuance by NNN of an indeterminate amount of debt and equity securities. In September 2011, NNN filed a prospectus supplement to the prospectus contained in its February 2009 shelf registration statement and issued 9,200,000 shares (including 1,200,000 shares in connection with the underwriters' over allotment) of common stock at a price of $26.07 per share and received net proceeds of $229,451,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $10,393,000, consisting primarily of underwriters' fees and commissions, legal and accounting fees and printing expenses. In December 2011, NNN filed a prospectus supplement to the prospectus contained in its February 2009 shelf registration statement and issued 8,050,000 shares (including 1,050,000 shares in connection with the underwriters' over allotment) of common stock at a price of $25.75 per share and received net proceeds of $198,228,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $9,060,000, consisting primarily of underwriters' fees and commissions, legal and accounting fees and printing expenses. Dividend Reinvestment and Stock Purchase Plan. In June 2009, 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 16,000,000 shares of common stock. The following outlines the common stock issuances pursuant to the DRIP for the years ended December 31: Shares of common stock Net proceeds Note 14 – Employee Benefit Plan: 2011 2010 2009 3,745,896 793,759 3,766,452 $ 93,451,000 $ 17,623,000 $ 67,354,000 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 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, 2011, 2010 and 2009 totaled $321,000, $297,000 and $302,000, respectively. 60 Note 15 – Dividends: The following presents the characterization for tax purposes of common stock dividends per share paid to stockholders for the years ended December 31: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions 2011 2010 2009 $ 1.088228 $ 1.072446 $ 1.495182 — — — 0.441772 0.081661 0.000861 0.000498 0.354534 — 0.003051 0.001767 — $ 1.530000 $ 1.510000 $ 1.500000 During the years ended years ended December 31, 2011, 2010 and 2009, NNN declared and paid dividends to its common shareholders of $133,720,000, $125,391,000 and $120,256,000, respectively, or $1.53, $1.51 and $1.50 per share, respectively, of common stock. On January 13, 2012, NNN declared a dividend of $0.385 per share, which is payable February 15, 2012 to its common stockholders of record as of January 31, 2012. The following presents the characterization for tax purposes of preferred stock dividends per share paid to stockholders for the year ended December 31: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain 2011 2010 2009 $ 1.843750 $ 1.703170 $ 1.837828 — — — 0.140580 — — — 0.003750 0.002172 $ 1.843750 $ 1.843750 $ 1.843750 NNN declared and paid dividends to its Series C Preferred stockholders of $6,785,000, or $1.84375 per depository share, during each of the years ended December 31, 2011, 2010 and 2009. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed. In February 2012, NNN declared a dividend on its Series C Preferred Stock of 46.09375 cents per depositary share payable March 15, 2012. Note 16 – Restructuring Costs: During the year ended December 31, 2009, NNN recorded restructuring costs of $731,000, related to the reduction of its workforce in January 2009. Note 17 – Income Taxes: 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, 2011, 2010 and 2009, and the statutory rates relate to state taxes and nondeductible expenses. For income tax purposes, NNN has taxable REIT subsidiaries in which certain real estate activities are conducted. In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, OAMI, pursuant to which OAMI became a wholly owned subsidiary of NNN. OAMI has remaining tax liabilities relating to the built-in gain of its assets. In June 2009, NNN incurred a new deferred income tax item as a result of NNN acquiring the operations of 12 auto service 61 businesses. See Note 5 – Business Combinations. The new deferred tax item is goodwill. The amount of the tax deductible goodwill is approximately $11,216,000. It is amortized for tax purposes using a straight-line method, over 15 years, beginning with the month incurred. The components of the net income tax asset consist of the following at December 31 (dollars in thousands): Temporary differences: Built-in gain Depreciation Cost basis Deferred income Other Reserves Goodwill Excess interest expense carryforward Net operating loss carryforward Net deferred income tax asset Valuation allowance Total deferred income tax asset 2011 2010 $ (3,537) $ (1,103) 386 151 (267) 11,035 3,524 5,299 6,805 22,293 (18,021) $ $ 4,272 $ (4,068) (772) 256 230 56 13,160 3,239 5,678 5,398 23,177 (18,021) 5,156 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 begin to expire in 2028. 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, with the exception of certain impairments and losses, it is more likely than not that NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2011. NNN believes it is more likely than not that the benefit from certain impairment charges and losses will not be realized. In recognition of this risk, NNN has provided a valuation allowance of $18,021,000 on the deferred tax assets relating to the impairments and losses. The income tax benefit consists of the following components for the years ended December 31, (as adjusted) (dollars in thousands): Net earnings before income taxes Provision for income tax benefit (expense): Current: Federal State and local Deferred: Federal State and local Total benefit (expense) for income taxes Net earnings attributable to NNN’s stockholders 2011 2010 2009 $ 93,302 $ 74,097 $ 53,930 (79) (15) (801) (82) (977) (254) (48) (744) (54) (1,100) (419) (79) 1,110 268 880 $ 92,325 $ 72,997 $ 54,810 In June 2006, the FASB issued additional guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements included in 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. 62 NNN, in accordance with FASB guidance included in Income Taxes, 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 the FASB guidance. In addition, NNN did not record a cumulative effect adjustment related to the adoption of the FASB guidance. 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 2008 through 2011. NNN also files in many states with varying open years under statute. Note 18 – Earnings from Discontinued Operations: NNN classified the revenues and expenses related to leasehold interests which expired and properties which generated revenue and were sold or generated revenue and were held for sale as of December 31, 2011, as discontinued operations. The following is a summary of the earnings from discontinued operations 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 income from real estate transactions Operating expenses: General and administrative Real estate Depreciation and amortization Impairment losses and other charges Other expenses (revenues): Interest and other income Interest expense Earnings (loss) before gain on disposition of real estate and income tax expense Gain on disposition of real estate Income tax expense Earnings from discontinued operations attributable to NNN Loss (earnings) attributable to noncontrolling interests Earnings from discontinued operations attributable to NNN Note 19 – Derivatives: 2011 2010 2009 $ 3,709 $ 5,394 $ 11,284 27 619 37 4,392 22 1,146 306 431 1,905 — 1,382 1,382 1,105 424 (198) 1,331 (80) 40 1,647 578 7,659 101 2,363 627 — 3,091 (2) 2,655 2,653 1,915 1,434 (625) 2,724 11 $ 1,251 $ 2,735 $ 30 1,944 471 13,729 123 3,098 2,043 5,630 10,894 (6) 3,790 3,784 (949) 2,950 (169) 1,832 (166) 1,666 In accordance with the guidance on derivatives and hedging, 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. 63 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, forward swaps (“forward hedges”) and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges hedging the variable cash flows associated with floating rate debt 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. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer 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 June 2011, NNN terminated its two treasury locks with a total notional amount of $150,000,000 that were hedging the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The fair value of the treasury locks, designated as cash flow hedges, when terminated was a liability of $5,300,000, of which $5,218,000 was deferred in other comprehensive income. 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, 2011, $5,924,000 remains in other comprehensive income related to the effective portion of NNN’s previous interest rate hedges. During the year ended December 31, 2011, NNN reclassed $9,000 out of other comprehensive income as an increase to interest expense. During the years ended December 31, 2010 and 2009, NNN reclassed $165,000 and $159,000, respectively, out of other comprehensive income as a reduction to interest expense. Over the next 12 months, NNN estimates that an additional $231,000 will be reclassified as an increase in 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. 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, 2011. Note 20 – Performance Incentive Plan: In June 2007, NNN filed a registration statement on Form S-8 with the 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 replaced 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. 64 The following summarizes NNN’s stock-option compensation activity for each of the years ended December 31: Outstanding, January 1 Options granted Options exercised Options surrendered Outstanding, December 31 Exercisable, December 31 Number of Shares 2011 2010 2009 7,500 — (2,500) — 5,000 5,000 12,154 — (4,654) — 7,500 7,500 77,004 — (51,500) (13,350) 12,154 12,154 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 2011 2010 2009 $ 14.11 $ 13.72 $ 14.00 — 13.20 14.57 14.57 — 13.08 14.11 14.11 — 13.72 13.72 13.72 The following summarizes the outstanding options and the exercisable options at December 31, 2011: 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 Total 5,000 14.57 1.1 5,000 14.57 $ $ 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, 2011, the intrinsic value of options outstanding was $59,000. All options outstanding at December 31, 2011, were exercisable. During the years ended December 31, 2011, 2010 and 2009, NNN received proceeds totaling $33,000, $61,000, and $707,000, 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, 2011, 2010 and 2009, was $24,000, $43,000, and $240,000, 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 restricted stock activity for the year ended December 31, 2011: Non-vested restricted shares, January 1 Restricted shares granted Restricted shares vested Restricted shares forfeited Restricted shares repurchased Non-vested restricted shares, December 31 65 Number of Shares Weighted Average Share Price 902,537 $ 141,351 (135,396) (5,215) (2,704) 900,573 $ 18.52 24.45 20.24 20.96 26.50 19.18 During the year ended December 31, 2011 and 2010, a total of 5,215 and 15,310, respectively, of restricted shares were forfeited. No shares were forfeited in 2009. Compensation expense for the restricted stock which is not contingent upon NNN’s performance goals is determined based upon the fair value at the date of grant 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 three to seven years and generally vest yearly on a straight line basis. During the year ended December 31, 2010, NNN granted 91,000 performance based shares subject to its earnings based growth after a three year period relative to its peers. The shares were granted to certain executive officers and had weighted average grant price of $23.12 per share. Once the performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. NNN considers the likelihood of meeting the performance criteria based upon management’s estimates and analysis of future earnings based growth relative to its peers from which it determines the amounts to be recognized. Compensation expense is recognized over the requisite service period. The following summarizes other grants made during the year ended December 31, 2011, pursuant to the 2007 Plan. Other share grants under the 2007 Plan: Directors’ fees Deferred Directors’ fees Shares available under the 2007 Plan for grant, end of period Shares Weighted Average Share Price 9,632 $ 26,312 35,944 $ 4,690,814 25.91 25.86 25.87 The total compensation cost for share-based payments for the years ended December 31, 2011, 2010 and 2009, totaled $6,390,000, $5,310,000, and $4,172,000, respectively, of such compensation expense. At December 31, 2011, NNN had $8,071,000 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 2.2 years. In addition, NNN recognized performance based long term incentive cash compensation of $1,702,000 and $446,000 for the years ended December 31, 2011 and 2010, respectively. 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 other receivables, mortgages payable and other liabilities at December 31,2011 and 2010, approximate fair value based upon current market prices of similar issues. At December 31, 2011 and 2010, the carrying value and fair value of NNN’s notes payable and convertible notes payable, collectively, was $1,362,922,000 and $1,044,621,000, respectively, based upon the quoted market price. 66 Note 22 – Quarterly Financial Data (unaudited): The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data): 2011 Revenues as originally reported Reclassified to discontinued operations Adjusted revenue Net earnings attributable to NNN’s stockholders Net earnings per share (1): Basic Diluted 2010 Revenues as originally reported Reclassified to discontinued operations Adjusted revenue Net earnings attributable to NNN’s stockholders Net earnings per share (1): Basic Diluted First Quarter Second Quarter Third Quarter Fourth Quarter 61,952 $ 62,516 $ 67,460 $ 74,400 (261) 61,691 20,820 $ $ (457) 62,059 21,303 $ $ 183 67,643 22,632 $ $ 0.23 $ 0.23 0.23 $ 0.23 0.24 $ 0.24 — 74,400 27,570 0.26 0.26 56,626 $ 56,496 $ 56,656 $ 59,440 (577) 56,049 16,365 $ $ (475) 56,021 21,207 $ $ (353) 56,303 21,210 $ $ 0.18 $ 0.18 0.23 $ 0.23 0.23 $ 0.23 76 59,516 14,215 0.15 0.15 $ $ $ $ $ $ $ $ (1) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount. 67 Note 23 – Segment Information: For the years ended December 31, 2009 and 2010, NNN has identified two primary financial segments: (i) Investment assets and (ii) Inventory Assets. For the year ended December 31, 2011, as a result of a continued reduction in investments in real estate acquired for the purpose of resale, the previously reported segment of inventory assets no longer meets the criteria for significance for separate segment reporting. Therefore, for 2011, NNN's operations are reported within one business segment in the financial statements. For comparability, the following tables represent the segment data and reconciliation to NNN's consolidated totals for the years ended December 31, 2011, 2010 and 2009 (as adjusted) (dollars in thousands): 2011 External revenues Intersegment revenues Interest revenue Interest revenue on Residuals Gain on the disposition of real estate, Inventory Portfolio Retail operations, net Interest expense Depreciation and amortization Operating expenses Impairment losses and other charges, net of recoveries Impairment – commercial mortgage residual interests valuation Equity in earnings of unconsolidated affiliate Income tax benefit (expense) Earnings (loss) from continuing operations Earnings from discontinued operations, net of income tax expense Earnings (loss) including noncontrolling interests Earnings attributable to noncontrolling interests from continuing operations Earnings attributable to noncontrolling interests from discontinued operations Net earnings (loss) attributable to NNN Assets Additions to long-lived assets: Real estate Investment Assets Inventory Assets 261,099 50 2,992 3,105 — 2,043 76,223 58,110 40,973 1,500 1,024 722 (790) 91,391 934 92,325 — — $ $ $ 92,325 3,560,485 758,380 $ $ $ 29 — 79 — 297 — (1,328) 5 4,728 (2,931) — — 11 (58) 397 339 (11) (80) 248 35,375 1,025 Eliminations (Intercompany) — (50) — — — — (50) — — — — (248) — (248) — (248) — — Consolidated Totals 261,128 — 3,071 3,105 297 2,043 74,845 58,115 45,701 (1,431) 1,024 474 (779) 91,085 1,331 92,416 (11) (80) $ $ $ (248) $ 92,325 (161,431) $ 3,434,429 — $ 759,405 68 2010 External revenues Intersegment revenues Interest revenue Interest revenue on Residuals Gain on the disposition of real estate, Inventory Portfolio Retail operations, net Interest expense Depreciation and amortization Operating expenses Impairment losses and other charges, net of recoveries Impairment – commercial mortgage residual interests valuation Equity in earnings of unconsolidated affiliate Income tax benefit (expense) Earnings (loss) from continuing operations Earnings from discontinued operations, net of income tax expense Earnings (loss) including noncontrolling interests Earnings attributable to noncontrolling interests from continuing operations Loss attributable to noncontrolling interests from discontinued operations Net earnings (loss) attributable to NNN Assets Additions to long-lived assets: Real estate Eliminations (Intercompany) — (1,205) — — 215 — (1,205) — — (260) — 800 — 1,275 — 1,275 — — (40) 534 48 — 426 — (1,450) 8 4,329 260 — — 959 (1,220) 292 (928) (358) 11 Consolidated Totals 222,663 — 3,278 3,460 641 1,311 65,179 48,047 35,998 7,458 3,995 428 (475) 70,629 2,724 73,353 (367) 11 72,997 (1,275) $ 1,275 $ 38,997 478 $ $ (171,458) $ 2,713,575 — $ 231,406 Investment Assets Inventory Assets 222,703 671 3,230 3,460 — 1,311 67,834 48,039 31,669 7,458 3,995 (372) (1,434) 70,574 2,432 73,006 (9) — $ $ $ 72,997 2,846,036 230,928 $ $ $ 69 2009 External revenues Intersegment revenues Interest revenue Interest revenue on Residuals Gain on the disposition of real estate, Inventory Portfolio Retail operations, net Interest expense Depreciation and amortization Operating expenses Impairment losses and other charges, net of recoveries Impairment – commercial mortgage residual interests valuation Restructuring costs Equity in earnings of unconsolidated affiliate Gain on extinguishment of debt Income tax benefit Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of income tax expense Earnings (loss) including noncontrolling interests Earnings attributable to noncontrolling interests from continuing operations Earnings attributable to noncontrolling interests from discontinued operations Net earnings (loss) attributable to NNN Assets Additions to long-lived assets: Real estate Eliminations (Intercompany) — (4,077) — — 32 — (4,055) — — — — — 12,701 — — 12,711 — 12,711 — — 194 1,042 30 — 5 — 188 10 5,080 6,713 — — — — 587 (10,133) (1,506) (11,639) (906) (166) Consolidated Totals 221,470 — 4,476 4,252 37 419 62,151 46,258 35,271 36,080 498 731 421 3,432 1,049 54,567 1,832 56,399 (1,423) (166) 54,810 (12,711) $ 12,711 $ 237,715 2,457 $ $ (235,161) $ 2,590,962 — $ 46,890 Investment Assets Inventory Assets 221,276 3,035 4,446 4,252 — 419 66,018 46,248 30,191 29,367 498 731 (12,280) 3,432 462 51,989 3,338 55,327 (517) — 54,810 2,588,408 44,433 $ $ $ $ $ $ 70 Note 24 – Fair Value Measurements: 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, 2011 (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 $ 15,915 (1,024) (246) 3,105 (2,451) — — 15,299 (1,092) $ $ Note 25 – Major Tenants: As of December 31, 2011, NNN had no tenants that accounted for ten percent or more of its rental and earned income. Note 26 – Commitments and Contingencies: As of December 31, 2011, NNN had letters of credit totaling $57,000 outstanding under its Credit Facility. In the ordinary course of its business, NNN is a party to various other legal actions which management believes are 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. Note 27 – Subsequent Events: NNN reviewed all subsequent events and transactions that have occurred after December 31, 2011 the date of the consolidated balance sheet. On February 23, 2012, NNN consummated an underwritten public offering of 11,500,000 depositary shares (including net proceeds from the underwriters over-allotment exercise), each representing a 1/100th interest in a share of 6.625% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”), and received gross proceeds of $287,500,000. In connection with this offering, the Company incurred stock issuance costs of approximately $9,600,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses. NNN intends to use the net proceeds (including net proceeds from the underwriters' over-allotment exercise) of approximately $277,900,000 from this offering to redeem the Series C Preferred Stock, which became redeemable on October 12, 2011. The Series C Preferred Shares will be redeemed on March 15, 2012 at $25.00 per depositary share, plus all accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. NNN intends to use the remainder of the net proceeds for general corporate purposes, which may include repaying the outstanding indebtedness under its Credit Facility. There were no other subsequent events or transactions. 71 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, 2011, 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 Securities and Exchange Commission (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 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 72 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, 2011, 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, 2011, 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. Changes in Internal Control over Financial Reporting. During the three months ended December 31, 2011, there were no changes in NNN’s internal control over financial reporting that 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. 73 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 included in the Registrant's proxy statement including the information, without limitation, 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 such 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 included in the Registrant's proxy statement including the information, without limitation, contained in the sections thereof captioned “Proposal I: Election of Directors – Compensation of Directors,” “Executive Compensation” and “Compensation Committee Report”, and such information is 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 included in the Registrant's proxy statement including the information, without limitation, contained in the section thereof captioned “Executive Compensation – Equity Compensation Plan Information,” and “Security Ownership”, and such information is 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 included in the Registrant's proxy statement including the information, without limitation, contained in the section thereof captioned “Certain Relationships and Related Transactions” and such information 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 included in the Registrant's proxy statement including the information, without limitation, contained in the section thereof captioned “Audit Committee Report” and “Proposal II: Proposal to Ratify Independent Registered Public Accounting Firm”, and such information is incorporated herein by reference. 74 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, 2011 and 2010 Consolidated Statements of Earnings for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009 Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2011 Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2011 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 Bylaws 37 39 40 42 45 47 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 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; second amendment filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2007, and incorporated herein by reference). 4. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 4.2 4.3 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. 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). 75 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 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). 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). Form of Tenth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 5.500% Notes due 2021 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated July 6, 2011 and filed with the Securities and Exchange Commission on July 6, 2011, and incorporated herein by reference). Form of 5.500% Notes due 2021 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated July 6, 2011 and filed with the Securities and Exchange Commission on July 6, 2011, and incorporated herein by reference). 76 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 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). Form of Indemnification Agreement (as entered into between the Registrant and each of its directors and executive officers) (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 June 12, 2009, and incorporated herein by reference). Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Craig Macnab (filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.10 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Paul E. Bayer (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.14 Amended and Restated Credit Agreement, dated as of May 25, 2011, by and among the Registrant, certain lenders and Wells Fargo Bank, National Association, as the Administrative Agent (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2011, and incorporated herein by reference). 12. Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith). 21. Subsidiaries of the Registrant (filed herewith). 23. Consent of Independent Accountants 77 23.1 Ernst & Young LLP dated February 24, 2012 (filed herewith). 24. Power of Attorney (included on signature page). 31. Section 302 Certifications 31.1 31.2 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32. Section 906 Certifications 32.1 32.2 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 99. Additional Exhibits 99.1 Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith). 101 Interactive Data File 101.1 The following materials from National Retail Properties, Inc. Annual Report on Form 10-K for the period ended December 31, 2011, formatted in Extensible Business Reporting Language: (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed consolidated statements of cash flows, and (iv) notes to condensed consolidated financial statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 (filed herewith). 78 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 24th day of February, 2012. SIGNATURES 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. 79 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 /s/ Craig Macnab Craig Macnab /s/ Ted B. Lanier Ted B. Lanier /s/ Don DeFosset Don DeFosset /s/ David M. Fick David M. Fick /s/ Edward J. Fritsch Edward J. Fritsch /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) Lead Director Director Director Director Director Director Director Director, Chief Financial Officer (Principal Financial and Accounting Officer), Executive Vice President, Assistant Secretary and Treasurer Date February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 80 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: (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 Miami, FL 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 2011, 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 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 2011, 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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