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