National Retail Properties Annual Report 2013

Plain-text annual report

2013 ANNUAL REPORT Dividends Rooted in Strength and Stability consecutive annual dividend increases while making the dividend more secure with a reduced payout ratio TABLE OF CONTENTS 2 | SHAREHOLDER’S LET TER 7 | HISTORICAL FINANCIAL HIGHLIGHTS 16 | OFFICERS AND DIREC TORS INSIDE BACK COVER | SHAREHOLDER INFORMATION NNN CONSISTENTLY OUTPERFORMS THE REIT INDUSTRY AND MAJOR EQUITY INDICES Annual Total Return Comparison For Periods Ending December 31, 2013 (quarterly) (NNN = $30.33 at 12/31/2013) NATIONAL RETAIL PROPERTIES (NNN) 2.0% 10.3% 19.0% 12.3% 13.8% 12.3% 1 YEAR 3 YEARS 5 YEARS 10 YEARS 15 YEARS 20 YEARS INDICES * NAREIT Equity REIT Index (FNERTR) * Morgan Stanley REIT Index (RMS G) S&P 500 Index (SPX) Nasdaq (CCMP) * S&P 400 Index (MID) * Russell 1000 Index (RIY) * Russell 1000 Value Index (RLV) * NNN is a member of this index (deleted from S&P 600 and added to S&P 400 in December 2011; deleted from Russell 2000 and added to Russell 1000 in June 2012) 2.9% 2.5% 32.3% 40.1% 33.4% 33.1% 32.5% 10.1% 9.5% 16.1% 17.8% 15.6% 16.3% 16.0% 16.9% 16.7% 17.9% 22.9% 21.8% 18.5% 16.6% 8.6% 8.4% 7.4% 8.8% 10.3% 7.8% 7.5% 10.5% 10.3% 4.7% 5.3% 9.9% 5.1% 6.2% 10.3% n/a 9.2% 8.8% 12.1% 7.3% 6.9% Source: Bloomberg DEAR FELLOW NNN SHAREHOLDERS I am delighted to report that National Retail Properties (NNN) completed another strong year of operational performance. With our fortress-like balance sheet and our well-occupied portfolio we are very well positioned for the future. Our excellent ﬁnancial results in 2013 allowed us to raise our dividend for the 24th consecutive year. This long-term dividend growth track record places us in an elite group of just over 100 U.S. public companies. Our strategy to build long-term shareholder value has not wavered over the last several years. Our team continues to focus on the following three primary goals: • to generate consistent recurring annual FFO per share growth; • to annually increase our dividend per share; • to achieve these dual objectives while taking on below average balance sheet and portfolio risk. We have generated an average annual total return to NNN shareholders of 12.3% over the past 20 years outperforming virtually all of the major equity indices. We are optimistic we will continue to generate shareholder returns that outperform the major indices. However, the headwinds that all companies are facing are likely to lead to lower multi-year total returns than achieved in the past 20 years. One of the challenges facing all companies like NNN is that interest rates will increase from the artiﬁcially low rates we are currently experiencing. We mitigate this risk by using long-term ﬁxed rate debt and by maintaining a modest amount of leverage. LEASE EXPIRATIONS (as a percentage of base rent as of December 31, 2013) 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 THEREAFTER FFO AT LEAST 8% GROWTH PER SHARE in each of 2011, 2012 and 2013 NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 3 OUR LONGTERM FOCUS AND STRATEGY Our shareholder value creation strategy continues to include the following primary tactics: • Maintain a diversiﬁed and well-occupied net-leased retail portfolio. After thoughtful consideration, we are not pursuing oﬃce and industrial properties as our experience shows that well-located retail locations generate better shareholder returns. • Acquire carefully underwritten, net-lease retail properties in strong locations. While we remain selective and disciplined in our acquisition activities, our annualized base rent has increased by 82% over the last four years. • We are continuing to focus our acquisition eﬀorts on well-managed non-investment grade tenants. Our initial yields on these properties are attractive and the rental stream from these acquisitions grows over time. By contrast, properties leased to investment-grade retail tenants command the highest prices and the rental stream generally has zero growth over time! • Sell select locations and reinvest the proceeds into newer, higher yielding properties to improve the quality and growth prospects of our core portfolio. • Maintain a strong balance sheet with conservative leverage and a staggered debt maturity schedule. This approach has enabled us to maintain an enviable cost of capital. • Employ the most talented professionals in our industry and continue to develop our outstanding team of associates. We are currently investing additional resources on this latter objective. Our strategy has been very consistent for the last several years while several of our more direct competitors have pursued the acquisition of a variety of disparate property types. We continue to believe that: a) retail properties oﬀer a more attractive risk return characteristic than oﬃce or industrial real estate; b) our size is more than suﬃcient to provide us the beneﬁts of a fully diversiﬁed portfolio as well as access to low cost capital; and, c) a focused portfolio of higher yielding, well underwritten, retail properties allows for more consistent FFO per share growth. NUMBER OF PROPERTIES 1,037 1,034 1,422 1,212 1,860 1,622 2,000 1,750 1,500 1,250 1,000 750 500 4 2008 2009 2010 2011 2012 2013 80% OF ACQUISITIONS Over the past three years were funded with permanent capital while growing per share results more than 25% NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 5 OUR 2013 PERFORMANCE In the ﬁrst half of 2013 capital markets were buoyant and capital was plentiful and freely available. Although our balance sheet was already strong, we consciously decided to aggressively tap this attractively priced long term capital. The demand for net-leased retail properties continued to be very strong and as a result initial yields continue to compress. However, our capable team successfully sourced acquisitions at yields that remain well in excess of our cost of capital. Speciﬁc highlights for 2013 included the following as we: • Acquired 275 new properties investing $630 million. Internally we continue to emphasize repeat acquisitions from our relationship tenants. Notably, the yield that we receive when we acquire properties remains higher than those of our peers. • Completed an acquisition of 139 properties leased to Sun Trust Bank. Among the attractive features of this transaction were the low investment per property as well as the above average deposit base at the branches we acquired. • Sold 35 properties for $61 million generating gains of $5.4 million. (These gains are not included in FFO.) • Leased 20 properties and ended the year with 98.2% portfolio occupancy which is well above the REIT industry average. This is the tenth consecutive year that our portfolio has been at least 96% occupied. • • Issued a 10-year unsecured note oﬀering raising $350 million at an all-in interest rate of 3.39%. We also took advantage of the enormous demand for yield by issuing $278 million of 5.7% preferred equity as well as $264 million of common equity. Increased our annual dividend to $1.60 per share, which represents the 24th consecutive annual dividend increase. 24 CONSECUTIVE ANNUAL DIVIDEND INCREASES Fourth longest of all public REITs and 98% of all U.S. public companies $1.70 $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 ‘12 ‘13 ‘14 6 NOTE: 2014 projected based on current dividend rate OUR HISTORICAL FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data) GROSS REVENUES(1) $ 397,006 $ 342,059 $ 271,696 $ 237,062 $ 243,933 2013 2012 2011 2010 2009 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 Series D preferred stockholders Series E 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 155,013 160,085 160,145 133,228 141,937 142,015 84,740 92,416 92,325 64,844 73,353 72,997 50,013 56,399 54,810 4,454,523 3,988,026 3,435,043 2,713,575 2,590,962 1,570,059 1,586,964 1,339,109 1,133,685 987,346 2,777,045 2,296,285 2,002,498 1,527,483 1,564,240 189,107 167,495 133,720 125,391 120,256 — 19,047 8,876 1,979 15,449 — 6,785 6,785 6,785 — — — — — — 118,204,148 106,965,156 88,100,076 82,715,645 79,846,258 119,864,824 109,117,515 88,837,057 82,849,362 79,953,499 $ 1.07 $ 1.05 $ 0.88 $ 0.70 $ 1.06 1.03 0.87 0.96 0.96 1.53 0.70 0.80 0.80 1.51 0.52 0.52 0.60 0.60 1.50 1.11 1.10 1.60 — 1.13 1.11 1.56 0.537760 1.843750 1.843750 1.843750 Series D preferred depositary stockholders 1.656250 1.343403 Series E preferred depositary stockholders 0.771875 — — — — — — — OTHER DATA: Cash flows provided by (used in): Operating activities Investing activities Financing activities FUNDS FROM OPERATIONS – AVAILABLE TO COMMON STOCKHOLDERS(2) $ 274,421 $ 228,130 $ 177,728 $ 187,914 $ 149,502 (568,040) (601,759) (752,068) (220,260) (28,063) 293,028 229,518 373,623 193,682 574,374 139,834 19,169 (108,840) 108,625 90,039 (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, 2013, as discontinued operations. (2)The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relative non-GAAP ﬁnancial measure of performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under U.S. 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. NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 7 OUR DIVERSIFIED PORTFOLIO LOCATION DISTRIBUTION BY REGION National Retail Properties owns a fully diversiﬁed portfolio of 1,860 retail properties that on average cost $2.6 million each. Our properties are located in 47 states and are leased to more than 350 national and regional tenants operating in 38 diﬀerent retail industry classiﬁcations. We have modest re-leasing risk over the next several years, with only 4.7% of our current base rent expiring over the next three years. Our average remaining lease term is 12 years. These two metrics support the low risk nature of our very stable retail real estate investments. In the last couple of years, our portfolio has beneﬁted from the strong performance of several of our tenants which has, in many cases, led to signiﬁcant credit enhancements. For example, through corporate M&A activity we now have 7-Eleven, Energy Transfer Partners, Lowe’s and Advance Auto Parts as meaningful tenants. We are also delighted that tenants such as AMC Theatres, Bloomin’ Brands, Natural Grocers and The Container Store completed successful initial public oﬀerings. A DIVERSE NATIONAL PORTFOLIO WEST | 5.3% ROCKY MOUNTAIN | 5.7% NORTHEAST | 15.4% MIDWEST | 22.9% SOUTH | 23.7% SOUTHEAST | 27.0% STATES WITH NNN PROPERTIES 8 Over the last four years we have GROWN OUR PORTFOLIO BY 80% to 1,860 properties leased to more than 350 tenants in 47 states NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 9 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: • The freestanding net lease retail property market is very large. However, large institutional investors, such as pension funds and insurance companies, generally prefer to focus on larger, higher proﬁle trophy properties. The amount of work involved in sourcing our smaller properties creates a barrier to entry for us. This enables us to earn higher initial risk-adjusted returns than those that can be achieved in many other real estate sectors, where these other investors tend to focus. • The initial yields on investment of approximately 8% that we have obtained the past two years are well in excess of our weighted average cost of capital. Further, in almost all of our leases the rent increases meaningfully, and as a result, the investment spread over our cost of capital should expand further over time. • We continue to focus on retail real estate as we are convinced that the residual value of well-located retail properties is higher than other net lease property types such as industrial or oﬃce. • The ratio of land value to the total cost of each property is high when compared to most other real estate categories including oﬃces, apartments and large regional malls. The land value of our well-located properties – usually at or near corners at busy intersections – is generally in the range of 30-50% 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 at the time of the original acquisition. • The quality of the rental revenue that we receive from our triple net leases is remarkably high. Our triple-net-lease structure means that the 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. • Our leases are long-term, with typical initial lease durations of 15 to 20 years. Our average tenant is currently contractually obligated to pay rent for the next 12 years. • Many of our properties are acquired from what we describe as relationship tenants. These are tenants with whom we have done business previously and with whom we establish a recurring programmatic pipeline. 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. By dealing directly with retailers, we are most likely to end up owning those properties that they expect to operate for a long time. 10 Our average remaining lease term is 12 YEARS with only 8.2% of leases expiring through the end of 2017 NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 11 OUR STRONG BALANCE SHEET We continue to adhere to our strategy of maintaining an investment grade balance sheet. As of the end of the year our total debt-to-total gross book assets remained just less than 33%. In the recent past, permanent capital has been both well-priced and plentiful and we consciously chose to take advantage of this. In the short term, this had the eﬀect of lowering per share earnings growth. However, we are in great shape in the event we choose to modestly increase leverage from our current position of strength. Importantly, over the last three years we have ﬁnanced about 80% of our approximately $2.1 billion of acquisitions with permanent capital – namely common and preferred equity – or proceeds from asset sales. OUR CAPITAL STRUCTURE (as of December 31, 2013 – based on Total Gross Book Assets) SECURED DEBT 0.2% | $9.5 Million PREFERRED EQUITY 12.0% | $575.0 Million UNSECURED DEBT 32.7% | $1,560.6 Million COMMON EQUITY 55.1% | $2,629.7 Million NNN OCCUPANCY VS. REIT INDUSTRY AVERAGE 100% 95% 90% 85% NNN REIT INDUSTRY (Excluding Hotels & Healthcare) 12 97.0% 97.4% 98.3% 98.2% 98.3% 96.7% 96.4% 96.9% 97.4% 97.9% 98.2% 93.0% 93.5% 93.5% 92.1% 92.8% 92.0% 90.5% 90.1% 90.8% 92.6% 92.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: SNL Financial Our portfolio has sustained at least 96% OCCUPANCY for 11 consecutive years NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 13 OUR OUTLOOK Our management team is convinced that we will continue to build value over the medium to long term for our shareholders by: • Carefully allocating capital into well underwritten retail properties. • Focusing our energy on increasing per share value as opposed to simply growing our asset base. • Evaluating all corporate or large portfolio acquisition opportunities, but only pursuing those which are consistent with our goal of building long-term shareholder value. • Maintaining a conservative and ﬂexible balance sheet. Finally, 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 WELLLADDERED DEBT MATURITIES NNN’s Low Leverage Balance Sheet Strategy is Enhanced by its Well-Laddered Debt Maturity 3.4% 4.0% 5.7% $ 350M $ 300M $ 250M $ 200M $ 150M $ 100M $ 50M $ 0M 6.9% 5.9% 6.2% 6.0% 9.0% 9.0% 0% 14 (As of December 31, 2013) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 The average investment per property across our portfolio is $2.6 MILLION The granularity of these well-located properties signiﬁcantly enhances our diversiﬁcation NATIONAL RETAIL PROPERTIES | 2013 ANNUAL REPORT | ROOTED IN STRENGTH & STABILITY | 15 OFFICERS AND DIRECTORS EXECUTIVE OFFICERS (Pictured Below) CRAIG MACNAB Chief Executive Oﬃcer JULIAN E. WHITEHURST President & Chief Operating Oﬃcer KEVIN B. HABICHT Executive Vice President & Chief Financial Oﬃcer PAUL E. BAYER Executive Vice President & Chief Investment Oﬃcer DIRECTORS CRAIG MACNAB Chairman 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 KEVIN B. HABICHT CHRISTOPHER P. TESSITORE Executive Vice President & General Counsel STEPHEN A. HORN, JR. Executive Vice President & Chief Acquisition Oﬃcer 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 †Member audit committee (Committees as of February 13, 2014) From left to right: Paul Bayer, Chris Tessitore, Craig Macnab, Kevin Habicht, Jay Whitehurst and Steve Horn 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, 2013 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 6.625% Series D Preferred Stock, $0.01 par value 5.700% Series E 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, 2013 was $4,057,865,000. The number of shares of common stock outstanding as of February 11, 2014 was 122,002,008. 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 2014 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. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Properties Legal Proceedings Mine Safety Disclosures 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 Quantitative and Qualitative Disclosures About Market Risk 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 18 20 39 40 75 75 76 77 77 77 77 77 78 83 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 are primarily held for investment (“Properties” or “Property Portfolio”). As of December 31, 2013, NNN owned 1,860 Properties with an aggregate gross leasable area of 20,402,000 square feet, located in 47 states. Approximately 98 percent of the Properties in NNN’s Property Portfolio were leased as of December 31, 2013. 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, 2014, NNN employed 62 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 a 1/100th of a share of 6.625% Series D Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series D Preferred Stock”), of NNN are traded on the NYSE under the ticker symbol “NNNPRD.” The depositary shares, each representing a 1/100th of a share of 5.700% Series E Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series E Preferred Stock”), of NNN are traded on the NYSE under the ticker symbol “NNNPRE.” 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 within each local market for its tenants’ lines of trade. Management believes that these types of properties, generally leased 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 insurance, utilities, repairs, maintenance, capital expenditures, real estate taxes, assessments and other governmental charges. Initial lease terms are generally 15 to 20 years. 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, local market conditions, potential use of sale proceeds and federal income tax considerations. NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. These key indicators include 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, industry trends and industry performance compared to that of NNN. In some cases, NNN’s investment in real estate is in the form of mortgages or other loans which may be secured by real estate or a borrower’s pledge of ownership interests in the entity that owns the real estate or other assets. These investments, which represent less than approximately one-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. The operating strategies employed by NNN have allowed NNN to increase the annual dividend (paid quarterly) per common share for 24 consecutive years, one of only four publicly traded REIT's to do so. 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, and its ability to identify, underwrite and acquire properties. 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 and age 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 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, the tenant’s business plan, operating history and management team, 2 • • • • the tenant’s industry, the terms of any existing leases, the rent to be paid by the tenant, and the potential for, and current extent of, any environmental problems. 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 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 $500,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2013, $46,400,000 was outstanding and $453,600,000 was available for future borrowings under the Credit Facility. As of December 31, 2013, NNN’s ratio of total debt to total gross assets (before accumulated depreciation) was approximately 32 percent and the ratio of secured indebtedness to total gross assets was less than one-percent. The ratio of total debt to total market capitalization was approximately 28 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, 2013, NNN owned 1,860 Properties with an aggregate gross leasable area of 20,402,000 square feet, located in 47 states. Approximately 98 percent of total Properties in the Property Portfolio were leased as of December 31, 2013. 3 The following table summarizes NNN’s Property Portfolio as of December 31, 2013 (in thousands): Land Building Size(1) Acquisition Cost(2) High Low Average High Low Average 2,223 142 5 1 100 $ 8,882 $ 5 $ 920 11 29,373 19 1,674 Approximate square feet. (1) (2) Costs vary depending upon size and local demographic factors. As of December 31, 2013, NNN has agreed to fund construction commitments on leased Properties, estimated to be completed within 12 months, as outlined in the table below (dollars in thousands): Number of properties Total commitment(1) Amount funded Remaining commitment 48 $ 145,818 99,024 46,794 (1) Includes land, construction costs and tenant improvements. As of December 31, 2013, NNN did not have any tenant that accounted for ten percent or more of its rental income. Leases The following is a summary of the general structure of NNN’s Property leases, although the specific terms of each lease can vary. Generally, the Property leases provide for initial terms of 15 to 20 years. As of December 31, 2013, the weighted average remaining lease term of the Property Portfolio was approximately 12 years. The Properties are generally leased under net leases, pursuant to which the tenant typically bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. NNN's Property leases provide for annual base rental payments (payable in monthly installments) ranging from $1,000 to $2,607,000 (average of $211,000), and 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, 2013: % of Annual Base Rent(1) 1.4% 1.6% 1.7% 3.5% 8.3% 3.5% 2014 2015 2016 2017 2018 2019 # of Properties 32 32 32 46 186 57 Gross Leasable Area(2) 434,000 482,000 567,000 1,009,000 1,957,000 1,005,000 % of Annual Base Rent(1) 3.1% 4.6% 6.9% 3.3% 2020 2021 2022 2023 # of Properties 97 99 92 54 Gross Leasable Area(2) 916,000 918,000 1,150,000 962,000 Thereafter 62.1% 1,092 10,472,000 Based on annualized base rent for all leases in place as of December 31, 2013. (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 service Restaurants - limited service Automotive parts Theaters Health and fitness Banks Sporting goods 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Recreational vehicle dealers, parts and accessories Other % of Annual Base Rent(1) 2013 19.7% 9.7% 7.6% 5.5% 5.1% 4.5% 4.3% 4.1% 3.7% 3.2% 2012 19.8% 10.7% 7.6% 5.2% 5.6% 4.7% 3.7% 0.2% 4.0% 2.7% 2011 24.6% 9.4% 4.9% 3.6% 6.5% 5.0% 2.6% 0.2% 4.8% 2.3% 32.6% 100.0% 35.8% 100.0% 36.1% 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, 2013: State Texas Florida Illinois Georgia North Carolina Virginia Indiana California Ohio 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Pennsylvania Other # of Properties % of Annual Base Rent(1) 369 164 63 102 98 85 75 38 55 95 716 1,860 20.4% 10.5% 5.3% 4.8% 4.7% 4.6% 3.9% 3.5% 3.4% 3.3% 35.6% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2013. Mortgages and Notes Receivable Mortgage notes 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 Unamortized discount 2013 2012 16,942 $ 26,952 177 — 858 (40) 17,119 $ 27,770 $ $ 5 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 $11,721,000 and $13,096,000 at December 31, 2013 and 2012, 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 environmental 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. In order to mitigate exposure to environmental liability, NNN maintains an environmental insurance policy that covers substantially all of the properties which expires in August 2018. 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 12, 2014, NNN has 70 Properties currently under some level of environmental remediation and/or monitoring. 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 12, 2014, 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 entities 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. Financial and economic conditions may have an adverse impact on NNN, its tenants, and commercial real estate in general. 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; reduced values of NNN's Properties may limit NNN's ability to dispose of assets at attractive prices and reduce the availability of buyer financing; and 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. 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 2014 and 2023. 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. Tenants loss of revenues could 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 or the expansion of e-commerce 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 in NNN’s Property Portfolio. Vacancies reduce NNN’s revenues, increase property expenses and could decrease the 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, 2013, approximately, • • • 47.7% of NNN’s Property Portfolio annual base rent is generated from five retail lines of trade, including convenience stores (19.7%) and full-service restaurants (9.7%), 22.7% of NNN’s Property Portfolio annual base rent is generated from five tenants, including Susser Holdings Corp. (5.0%), Mister Car Wash (4.9%), The Pantry, Inc. (4.4%), 7-Eleven, Inc. (4.2%) and LA Fitness (4.2%), and 45.6% of NNN’s Property Portfolio annual base rent is generated from five states, including Texas (20.4%) and Florida (10.5%). 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 demographic change, 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 12, 2014, NNN has 70 Properties currently under some level of environmental remediation and/or monitoring. 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 maintains an environmental insurance policy that covers substantially all of its Properties which expires in August 2018. 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, 2013, the Residuals had a carrying value of $11,721,000. The value of these Residuals is based on assumptions made by NNN to determine their fair 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 fair 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 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 collateral 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 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, 2013, mortgages and notes receivables had an outstanding principal balance of $16,942,000. If a borrower defaults on the debt senior to NNN’s loan, or in the event of the bankruptcy of a borrower, NNN’s loan will be satisfied only after the borrower’s senior creditors’ claims are satisfied. Where debt senior to NNN’s loans exists, the presence of intercreditor arrangements may limit 9 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, 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 from numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN’s ability to grow. NNN may not complete suitable property acquisitions or developments on advantageous terms, if at all, due to competition for such properties with others engaged in real estate investment activities or lack of properties for sale on terms deemed acceptable to NNN. 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 personnel 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. Uninsured losses may adversely affect NNN’s operating results and asset values. 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 or indirectly 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 or be insured for such. 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, 2013, NNN owned 33 vacant, un-leased Properties, which accounted for approximately two 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, 2014, less than one percent of the total gross leasable area of NNN’s Property Portfolio was leased to 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, 2013, NNN had total mortgage debt outstanding of approximately $9,475,000, total unsecured notes payable of $1,514,184,000 and $46,400,000 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, 2013, NNN had approximately $1,570,059,000 of outstanding indebtedness, of which approximately $9,475,000 was secured indebtedness. NNN’s unsecured debt instruments contain 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 contain customary covenants, including, among others, provisions: • • • • • requiring 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 establishing 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, 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 faces other tax liabilities that reduce operating results and cash flow. Even if NNN remains qualified for taxation as a REIT, NNN is 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. 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 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, 2013, 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 from 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. These cyber incidents could negatively impact NNN, NNN's tenants and/or the capital markets. Future investment in international markets could subject NNN to additional risks. If NNN expands its operating strategy to include investment in international markets, NNN could face additional risks, including foreign currency exchange rate fluctuations, operational risks due to local economic and political conditions and laws and policies of the U.S. affecting foreign investment. Item 1B. Unresolved Staff Comments None. Item 2. Properties Please refer to Item 1. “Business.” Item 3. Legal Proceedings In the ordinary course of its business, NNN is a party to various legal actions that management believes 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, 2008 and ending December 31, 2013. The graph assumes an investment of $100 on December 31, 2008. Comparison to Five-Year Cumulative Total Return 15 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 fifteen year period commencing December 31, 1998 and ending December 31, 2013. The graph assumes an investment of $100 on December 31, 1998. Comparison to Fifteen-Year Cumulative Total Return 16 For each calendar quarter and year 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. 2013 High Low Close Dividends paid per share 2012 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter Year $ 36.18 $ 41.98 $ 37.74 $ 35.51 $ 31.43 36.17 0.395 31.31 34.40 0.395 30.06 31.82 0.405 30.01 30.33 0.405 $ 27.81 $ 28.33 $ 31.82 $ 32.39 $ 26.30 27.19 0.385 26.04 28.29 0.385 28.21 30.50 0.395 29.98 31.20 0.395 41.98 30.01 30.33 1.600 32.39 26.04 31.20 1.560 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 2013 2012 $ 1.224568 76.5355% $ 1.199003 76.8592% 0.056784 3.5490% — 0.000650 0.317998 — 0.0406% 19.8749% 0.013346 0.021358 0.048890 0.277403 0.8555% 1.3691% 3.1340% 17.7822% $ 1.600000 100.0000% $ 1.560000 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 2014, NNN paid dividends to its stockholders of $49,274,000, or $0.405 per share, of common stock. On January 31, 2014, there were 1,852 stockholders of record of common stock. In February 2014, NNN declared a dividend on its Series D and E Preferred Stock of 41.40625 and 35.62500 cents per depositary share, respectively, payable March 14, 2014. 17 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 Series D preferred stockholders Series E 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 Series D preferred depositary stockholders Series E preferred depositary stockholders Other data: Cash flows provided by (used in): 2013 2012 2011 2010 2009 $ 397,006 $ 342,059 $ 271,696 $ 237,062 $ 243,933 155,013 160,085 160,145 4,454,523 1,570,059 2,777,045 189,107 — 19,047 8,876 133,228 141,937 142,015 3,988,026 1,586,964 2,296,285 167,495 1,979 15,449 — 84,740 92,416 92,325 3,435,043 1,339,109 2,002,498 133,720 6,785 — — 64,844 73,353 72,997 2,713,575 1,133,685 1,527,483 125,391 6,785 — — 50,013 56,399 54,810 2,590,962 987,346 1,564,240 120,256 6,785 — — 118,204,148 106,965,156 88,100,076 82,715,645 79,846,258 119,864,824 109,117,515 88,837,057 82,849,362 79,953,499 $ 1.07 $ 1.06 1.05 $ 1.03 0.88 $ 0.87 0.70 $ 0.70 1.11 1.10 1.60 — 1.656250 0.771875 1.13 1.11 1.56 0.537760 1.343403 — 0.96 0.96 1.53 0.80 0.80 1.51 1.843750 1.843750 1.843750 — — — — — — 0.52 0.52 0.60 0.60 1.50 Operating activities Investing activities Financing activities $ 274,421 $ 228,130 $ 177,728 $ 187,914 $ 149,502 (568,040) 293,028 (601,759) 373,623 (752,068) 574,374 (220,260) 19,169 (28,063) (108,840) Funds from operations – available to common stockholders(2) 229,518 193,682 139,834 108,625 90,039 (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, 2013, as discontinued operations. (2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relative non- GAAP financial measure of performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under U.S. 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. 18 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 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, 2013 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 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 the most directly comparable GAAP measure, net earnings for the years ended December 31: 2013 2012 2011 2010 2009 Reconciliation of funds from operations: Net earnings attributable to NNN’s stockholders $ 160,145 $ 142,015 $ 92,325 $ 72,997 $ 54,810 Series C preferred stock dividends Series D preferred stock dividends Series E preferred stock dividends Excess of redemption value over carrying value of Series C preferred shares redeemed — (19,047) (8,876) (1,979) (15,449) — — (3,098) (6,785) (6,785) (6,785) — — — — — — — — — Net earnings available to common stockholders 132,222 121,489 85,540 66,212 48,025 Real estate depreciation and amortization: Continuing operations Discontinued operations Joint venture real estate depreciation Joint venture gain on disposition of real estate Gain on disposition of real estate, net of tax and noncontrolling interest Impairment losses – real estate 99,020 371 — — (5,442) 3,347 73,586 1,480 112 (2,341) (10,956) 10,312 52,179 1,957 176 — (449) 431 41,595 2,214 178 — 40,901 3,699 178 — (1,574) (2,764) — — FFO available to common stockholders $ 229,518 $ 193,682 $ 139,834 $ 108,625 $ 90,039 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.” 19 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's 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”). As of December 31, 2013, NNN owned 1,860 Properties, with an aggregate gross leasable area of approximately 20,402,000 square feet, located in 47 states. Approximately 98 percent of total properties in the Property Portfolio were leased as of December 31, 2013. 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 the years ended December 31, 2013, 2012 and 2011, NNN's Property Portfolio has remained at least 97 percent leased. The average remaining lease term of NNN's Property Portfolio was 12 years, and 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 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 assumptions; 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 estimates and assumptions 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 or funded 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 Financial Accounting Standards Board ("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 based in each case on their fair values. 20 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 conditions 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. Real estate held for sale is not depreciated and is recorded at the lower of cost or fair value, less costs to sell. 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. 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 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. 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, repairs and capital expenditures. 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. New Accounting Pronouncements. Refer to Note 1 of the December 31, 2013, 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. Correction of Immaterial Errors. During the year ended December 31, 2012, NNN identified certain immaterial errors related to deferred tax assets and the related valuation allowance. In 2009, NNN incurred a loss on foreclosure and impairment charges associated with acquiring the operations of one of its lessees. The properties and operations were transferred to taxable REIT subsidiaries upon foreclosure. Certain charges associated with the acquisition and impaired properties should have been recorded in NNN’s qualified REIT subsidiaries prior to the properties’ transfer to the taxable REIT subsidiary group. Deferred tax assets associated with the book charges of $10,350,000 in that year were inappropriately recorded in the taxable REIT subsidiary group. A valuation allowance for the full amount of the deferred tax assets was also recorded in 2009. In the year ended December 31, 2012, NNN decreased deferred tax assets and the related valuation allowance by $10,350,000 each to correct the error. 21 NNN further reviewed its conclusions in previous periods, commencing in 2009, with respect to the realizability of the remaining deferred tax assets. Upon further review, NNN determined that its available sources of income supported realizability of all but $3,104,000 of its gross deferred tax assets as of December 31, 2009, 2010 and 2011. As a result, NNN determined that it had previously understated its deferred income tax benefit in the years ended December 31, 2010 and 2009 by $3,121,000 and $3,372,000, respectively, and understated its net deferred tax assets by $6,493,000 as of December 31, 2011 and 2010, in its financial statements. NNN corrected this in the year ended December 31, 2012 by reversing the valuation allowance and recording an income tax benefit of $6,493,000. NNN reviewed the impact of correcting the prior period errors in 2012 as well as its impact on prior periods in accordance with SAB Topics 1.M and 1.N and determined that the misstatements did not have a material effect on the Company’s financial position, results of operations, trends in earnings, or cash flows for any of the periods presented. Furthermore, NNN determined in the year ended December 31, 2012 that its available sources of income supported realizability of all of its gross deferred tax assets. In 2012, NNN reversed the remaining valuation allowance and recorded an income tax benefit of $1,178,000. During the year ended December 31, 2013, NNN identified an immaterial error related to its statement of cash flows for the year ended December 31, 2011. The Company previously classified its payment for the termination of interest rate hedges of $5,218,000 in financing activities. These instruments were hedging the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. This amount has been presented in operating activities in the 2013 consolidated financial statements. 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 or operated, and unimproved land Percent of Properties – leased or operated, and unimproved land Weighted average remaining lease term (years) 2013 2012 2011 1,860 1,622 1,422 20,402,000 19,168,000 16,428,000 1,827 1,588 1,384 98% 12 98% 12 97% 12 Total gross leasable area (square feet) – leased or operated 19,872,000 18,524,000 15,681,000 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, 2013: % of Annual Base Rent(1) 1.4% 1.6% 1.7% 3.5% 8.3% 3.5% # of Properties 32 32 32 46 186 57 2014 2015 2016 2017 2018 2019 Gross Leasable Area(2) 434,000 482,000 567,000 1,009,000 2020 2021 2022 2023 % of Annual Base Rent(1) 3.1% 4.6% 6.9% 3.3% # of Properties 97 99 92 54 Gross Leasable Area(2) 916,000 918,000 1,150,000 962,000 1,957,000 Thereafter 62.1% 1,092 10,472,000 1,005,000 (1) Based on the annualized base rent for all leases in place as of December 31, 2013. (2) Approximate square feet. 22 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 service Restaurants - limited service Automotive parts Theaters Health and fitness Banks Sporting goods 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Recreational vehicle dealers, parts and accessories Other % of Annual Base Rent(1) 2013 19.7% 9.7% 7.6% 5.5% 5.1% 4.5% 4.3% 4.1% 3.7% 3.2% 2012 19.8% 10.7% 7.6% 5.2% 5.6% 4.7% 3.7% 0.2% 4.0% 2.7% 2011 24.6% 9.4% 4.9% 3.6% 6.5% 5.0% 2.6% 0.2% 4.8% 2.3% 32.6% 100.0% 35.8% 100.0% 36.1% 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 in as of December 31, 2013: State Texas Florida Illinois Georgia North Carolina Virginia Indiana California Ohio 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Pennsylvania Other # of Properties % of Annual Base Rent(1) 369 164 63 102 98 85 75 38 55 95 716 1,860 20.4% 10.5% 5.3% 4.8% 4.7% 4.6% 3.9% 3.5% 3.4% 3.3% 35.6% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2013. Property Acquisitions. The following table summarizes the Property acquisitions for each of the years ended December 31 (dollars in thousands): Acquisitions: Number of Properties 2013 2012 2011 275 232 218 Gross leasable area (square feet) 1,652,000 2,955,000 3,448,000 Initial cash yield 7.8% 8.3% 8.4% Total dollars invested(1) (1) Includes dollars invested in projects under construction or tenant improvements for each respective year. $ 629,896 $ 707,233 $ 772,463 23 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 Gain, net of non-controlling interests Cap rate 2013 2012 2011 35 360,000 61,000 6,293 $ $ 34 211,000 81,120 10,956 $ $ 7.5% 8.2% 8 122,000 12,632 527 8.2% $ $ NNN typically uses the proceeds from property sales either to pay down the Credit Facility or reinvest in real estate. Analysis of Revenue from Continuing Operations General. During the year ended December 31, 2013, 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 existing lease terms. The following summarizes NNN’s revenues from continuing operations (dollars in thousands): 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 2013 2012 2011 Percent of Total 2012 2011 2013 2013 Versus 2012 Percent 2012 Versus 2011 Percent $ 375,460 $ 315,037 $ 243,218 95.7% 95.0% 94.0% 19.2 % 29.5 % 13,110 11,587 10,080 1,467 2,239 2,287 2,290 2,673 3,105 3.3% 0.4% 0.6% 3.5% 0.7% 0.8% 3.9% 13.1 % 15.0 % 0.9% (34.5)% (2.1)% 1.2% (14.3)% (13.9)% $ 392,327 $ 331,536 $ 258,690 100.0% 100.0% 100.0% 18.3 % 28.2 % (1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations (“Rental Income”). Comparison of Revenues from Continuing Operations – 2013 versus 2012 Rental Income. Rental Income increased in amount and as a percent of the total revenues from continuing operations for the year ended December 31, 2013 as compared to the same period in 2012. The increase for the year ended December 31, 2013, is primarily due to a partial year of rental income received as a result of the acquisition of 275 properties in continuing operations with aggregate gross leasable area of approximately 1,652,000 during 2013 and a full year of rental income received as a result of the acquisition of 232 properties in continuing operations with a gross leasable area of approximately 2,955,000 square feet in 2012. In addition, lease termination fees increased $597,000 for the year ended December 31, 2013, as compared to December 31, 2012. Real Estate Expense Reimbursement from Tenants. Real estate expense reimbursements from tenants increased for the year ended December 31, 2013, as compared to the same period in 2012, but decreased as a percentage of total revenues from continuing operations. The increase is primarily attributable to a full year of reimbursements from properties acquired in 2012 and a partial year of reimbursements from certain newly acquired properties in 2013. 24 Comparison of Revenues from Continuing Operations – 2012 versus 2011 Rental Income. Rental Income increased in amount and as a percent of the total revenues from continuing operations for the year ended December 31, 2012 as compared to the same period in 2011. The increase for the year ended December 31, 2012, is primarily due to a full year of rental income from the acquisition of 218 properties in continuing operations with a gross leasable area of approximately 3,448,000 square feet in 2011 and a partial year of rental income from the acquisition of 232 properties in continuing operations with aggregate gross leasable area of approximately 2,955,000 during 2012. In addition, the increase was partially offset by the decrease in lease termination fees. NNN recorded $661,000 as compared to $2,649,000 in lease termination and rent settlement fees during the years ended December 31, 2012 and 2011, respectively. Real Estate Expense Reimbursement from Tenants. Real estate expense reimbursements from tenants increased for the year ended December 31, 2012, as compared to the same period in 2011, but decreased as a percentage of total revenues from continuing operations. The increase is primarily attributable to a full year of reimbursements from properties acquired in 2011 and a partial year of reimbursements from certain newly acquired properties in 2012. Analysis of Expenses from Continuing Operations General. Operating expenses from continuing operations increased primarily due to an increase in depreciation expense and an increase in reimbursable real estate expenses, but was partially offset by a decrease in incentive compensation during the year ended December 31, 2013, as compared to the same period in 2012. The following summarizes NNN’s expenses from continuing operations (dollars in thousands): General and administrative Real estate Depreciation and amortization Impairment – commercial mortgage residual interests valuation Impairment losses and other charges, net of recoveries Total operating expenses Interest and other income Interest expense Total other expenses (revenues) 2013 2012 2011 $ 32,576 $ 32,187 $ 18,100 99,246 1,185 1,972 17,041 73,707 2,812 3,088 28,796 16,997 56,466 1,024 (1,349) $ $ $ 153,079 $ 128,835 $ 101,934 (1,493) $ (2,232) $ 85,283 83,192 83,790 $ 80,960 $ (1,593) 75,532 73,939 General and administrative Real estate Depreciation and amortization Impairment – commercial mortgage residual interests valuation Impairment losses and other charges, net of recoveries Total operating expenses Interest and other income Interest expense Percentage of Total Operating Expenses Percentage of Revenues from Continuing Operations 2013 2012 2011 2013 2012 2011 2013 Versus 2012 Percent 2012 Versus 2011 Percent 21.3 % 11.8 % 64.8 % 25.0 % 13.2 % 57.2 % 28.2 % 16.7 % 8.3 % 4.6 % 9.7 % 11.1 % 5.1 % 6.6 % 55.4 % 25.3 % 22.2 % 21.8 % 1.2 % 6.2 % 34.6 % 11.8% 0.3% 30.5% 0.8 % 2.2 % 1.0 % 0.3 % 0.8 % 0.4 % (57.9)% 174.6% 1.3 % 2.4 % (1.3)% 0.5 % 0.9 % (0.5)% 100.0 % 100.0 % 100.0 % 39.0 % 38.7 % 39.4 % (36.1)% 18.8 % (1.8)% (2.8)% (2.2)% (0.4)% (0.7)% (0.6)% (33.1)% 101.8 % 102.8 % 102.2 % 21.7 % 25.1 % 29.2 % 2.5 % 3.5 % 328.9% 26.4% 40.1% 10.1% 9.5% Total other expenses (revenues) 100.0 % 100.0 % 100.0 % 21.3 % 24.4 % 28.6 % 25 Comparison of Expenses from Continuing Operations – 2013 versus 2012 General and Administrative Expenses. General and administrative expenses increased for the year ended December 31, 2013, as compared to the same period in 2012, but decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase in general and administrative expenses for the year ended December 31, 2013, is primarily attributable to increases in real estate acquisition costs, but was partially offset by a decrease in incentive compensation. Real Estate. Real estate expenses increased for the year ended December 31, 2013, as compared to the same period in 2012, but decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. 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 2013 and a full year of reimbursable expenses from certain properties acquired in 2012. The increase was partially offset by a decrease in real estate expenses that are not reimbursable by the tenant and a decrease in real estate expenses incurred on vacant properties for the year ended December 31, 2013, as compared to the same period in 2012. Depreciation and Amortization. Depreciation and amortization expenses increased as a percentage of total operating expenses and increased as a percentage of revenues from continuing operations for the year ended December 31, 2013, as compared to the year ended December 31, 2012. The increase in expenses is primarily due to the acquisition of 275 properties in continuing operations with an aggregate gross leasable area of approximately 1,652,000 square feet in 2013 and 232 properties in continuing operations with an aggregate gross leasable area of approximately 2,955,000 square feet during 2012. Impairment – Commercial Mortgage Residual interests valuation. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2013 and 2012, NNN recorded an other than temporary valuation adjustment of $1,185,000 and $2,812,000, respectively, as a reduction of earnings from operations. Impairment Losses and Other Charges, Net of Recoveries. NNN reviews long-lived assets for impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive price. Management evaluates 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. During the years ended December 31, 2013 and 2012, NNN recorded $1,957,000 and $3,258,000, respectively, of real estate impairments. Interest Expense. Interest expense increased for the year ended December 31, 2013, as compared to the same period in 2012, but decreased as a percentage of revenues from continuing operations and 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) (vii) the issuance in August 2012 of $325,000,000 principal amount of notes payable with a maturity of October 2022, and stated interest rate of 3.800%; the repayment in June 2012 of $50,000,000 principal amount of notes payable with a stated interest rate of 7.750%; the repayment in July 2012 of a mortgage, with a balance of $18,488,000 at December 31, 2011 and an interest rate of 6.900%; the settlement of $138,700,000 principal amount of 3.950% convertible notes payable, of which $123,163,000 was settled in the fourth quarter 2012 and the remaining $15,537,000 was settled in the first quarter 2013; the issuance in April 2013 of $350,000,000 principal amount of notes payable with a maturity of April 2023, and stated interest rate of 3.300%; the settlement of $223,035,000 principal amount of 5.125% convertible notes payable in 2013; and the decrease of $12,017,000 in the weighted average debt outstanding on the credit facility for the year ended December 31, 2013, as compared to the same period in 2012. 26 Comparison of Expenses from Continuing Operations – 2012 versus 2011 General and Administrative Expenses. General and administrative expenses increased for the year ended December 31, 2012, as compared to the same period in 2011, but decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase in general and administrative expenses for the year ended December 31, 2012, is primarily attributable to an increase in stock based incentive compensation. Real Estate. Real estate expenses increased for the year ended December 31, 2012 compared to the same period in 2011, but decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. 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 2012 and a full year of reimbursable expenses from certain properties acquired in 2011. The increase for the year ended December 31, 2012, was partially offset by a reduction of real estate expenses due to the leasing of certain vacant properties. Depreciation and Amortization. Depreciation and amortization expenses increased as a percentage of total operating expenses and increased as a percentage of revenues from continuing operations for the year ended December 31, 2012, as compared to the year ended December 31, 2011. The increase in expenses is primarily due to the acquisition of 232 properties in continuing operations with an aggregate gross leasable area of approximately 2,955,000 square feet in 2012 and 218 properties in continuing operations with an aggregate gross leasable area of approximately 3,448,000 square feet during 2011. Impairment – Commercial Mortgage Residual interests valuation. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2012 and 2011, NNN recorded an other than temporary valuation adjustment of $2,812,000 and $1,024,000, respectively, as a reduction of earnings from operations. Impairment Losses and Other Charges, Net of Recoveries. NNN reviews long-lived assets for impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive price. Management evaluates 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. During the year ended December 31, 2012, NNN recorded $3,258,000 of real estate impairments. Although no real estate impairments were recorded, the recovery of $2,931,000 of a mortgage receivable charge, partially offset by the impairment of goodwill of $1,500,000, were recorded during the year ended December 31, 2011. Interest Expense. Interest expense increased for the year ended December 31, 2012, as compared to the same period in 2011, 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 issuance of $300,000,000 in July 2011 of notes payable with a maturity of July 2021, and stated interest rate of 5.500%; the issuance of $325,000,000 in August 2012 of notes payable with a maturity of October 2022, and stated interest rate of 3.800%; the repayment of the $50,000,000 7.750% notes payable in June 2012; the repayment of a mortgage in July 2012, with a balance of $18,488,000 at December 31, 2011 and an interest rate of 6.900%; the settlement of $123,163,000 of the $138,700,000 3.950% convertible notes payable in the fourth quarter 2012; and the decrease of $51,225,000 in the weighted average debt outstanding on the credit facility for the year ended December 31, 2012, as compared to the same period in 2011. 27 Discontinued Operations Earnings (Loss). NNN classified as discontinued operations the revenues and expenses related to its revenue generating Properties that were sold and any revenue generating Properties that were held for sale at December 31, 2013. The following table summarizes the earnings from discontinued operations for the years ended December 31 (dollars in thousands): Properties Noncontrolling interests 2013 2012 2011 # of Sold Properties 35 — 35 Gain Earnings $ 6,272 (152) $ 6,120 $ $ 5,072 (226) 4,846 # of Sold Properties 34 — 34 Gain Earnings $ 10,956 — $ 10,956 $ $ 8,709 (29) 8,680 # of Sold Properties 8 — 8 Gain Earnings $ $ 424 — 424 $ $ 7,676 (100) 7,576 NNN periodically sells Properties and may reinvest the sales proceeds to purchase additional properties or pay down debt. 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. Management evaluates 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. During the years ended December 31, 2013, 2012 and 2011, NNN recognized real estate impairments on discontinued operations of $2,149,000, $7,054,000 and $431,000, respectively. 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 will 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 with respect to these expenses. 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 short term liquidity requirements through cash provided from operations and NNN’s Credit Facility. As of December 31, 2013, $46,400,000 was outstanding and $453,600,000 was available for future borrowings under the Credit Facility. NNN anticipates its long term capital needs 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. 28 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 financing activities Increase (decrease) Net cash at beginning of period Net cash at end of period 2013 2012 2011 $ 274,421 $ 228,130 $ 177,728 (568,040) 293,028 (591) 2,076 (601,759) 373,623 (6) 2,082 $ 1,485 $ 2,076 $ (752,068) 574,374 34 2,048 2,082 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, 2013, 2012 and 2011, 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 acquisitions and dispositions of Properties. NNN’s financing activities for the year ended December 31, 2013, included the following significant transactions: • • • • • • • • • • $127,800,000 in net payments to NNN's Credit Facility, $277,644,000 in net proceeds from the issuance of 11,500,000 depositary shares representing interests in NNN's 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock") in May, $25,407,000 in net proceeds from the issuance of 764,891 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), $238,643,000 in net proceeds from the issuance of 6,956,992 shares of common stock in connection with the at-the-market ("ATM") equity program, $189,107,000 in dividends paid to common stockholders, $19,047,000 in dividends paid to holders of the depositary shares of NNN’s Series D Preferred Stock, $8,876,000 in dividends paid to holders of the depositary shares of NNN’s Series E Preferred Stock, $344,266,000 in net proceeds from the issuance of the 3.300% notes payable in April, $20,565,000 paid in the first quarter to settle the remaining $15,537,000 principal amount of the 3.950% convertible notes payable, and $226,231,000 paid to settle the $223,035,000 principal amount of the 5.125% convertible notes payable. 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, maintaining investment grade credit rating, staggering debt maturities 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, 2013, $46,400,000 was outstanding and $453,600,000 was available for future borrowings under the Credit Facility. As of December 31, 2013, NNN’s ratio of total debt to total gross assets (before accumulated depreciation) was approximately 32 percent and the ratio of secured indebtedness to total gross assets was less than one percent. The ratio of total debt to total market capitalization was approximately 28 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. 29 Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN’s contractual obligations and commercial commitments outstanding as of December 31, 2013. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2013. Expected Maturity Date (dollars in thousands) Long-term debt(1) Credit Facility Operating leases Total contractual cash obligations(2) Total 2014 2015 2016 2017 2018 Thereafter $1,534,345 $ 151,100 $ 151,150 $ 6,827 $ 250,147 $ 46,400 831 — 831 — — 46,400 — — — $1,581,576 $ 151,931 $ 151,150 $ 53,227 $ 250,147 $ 86 — — 86 $ 975,035 — — $ 975,035 (1) Includes amounts outstanding under mortgages payable and notes payable and excludes unamortized note discounts. (2) Excludes $17,142 of accrued interest payable. In addition to the contractual obligations outlined above, NNN has agreed to fund construction commitments on certain of its leased Properties. The improvements are estimated to be completed within 12 months. These construction commitments, as of December 31, 2013, are outlined in the table below (dollars in thousands): Number of properties Total commitment(1) Amount funded Remaining commitment 48 $ 145,818 99,024 46,794 (1) Includes land, construction costs and tenant improvements. As of December 31, 2013, 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, 2013, NNN owned 33 vacant, un-leased Properties which accounted for approximately two percent of total Properties held in NNN’s Property Portfolio. Additionally, as of January 31, 2014, less than one percent of the total gross leasable area of NNN’s Property Portfolio was leased to tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN. Dividends. NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the 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. 30 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. The following table outlines the dividends declared and paid for NNN's common stock for the years ended December 31 (in thousands, except per share data): Dividends Per share $ 2013 189,107 1.600 $ 2012 167,495 1.560 $ 2011 133,720 1.530 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 2013 2012 2011 $ 1.224568 76.5355% $ 1.199003 76.8592% $ 1.088228 71.1260% 0.056784 3.5490% — 0.000650 0.317998 — 0.0406% 19.8749% 0.013346 0.021358 0.048890 0.277403 0.8555% 1.3691% 3.1340% — — — — — — 17.7822% 0.441772 28.8740% $ 1.600000 100.0000% $ 1.560000 100.0000% $ 1.530000 100.0000% In February 2014, NNN paid dividends to its common stockholders of $49,274,000, or $0.405 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. The following table outlines the dividends declared and paid for NNN's preferred stock for the years ended December 31(in thousands, except per share data): Series C Preferred Stock (1): Dividends Per share Series D Preferred Stock (2): Dividends Per share Series E Preferred Stock (3): Dividends Per share 2013 2012 2011 $ — $ — 1,979 0.537760 $ 6,785 1.843750 19,047 1.656250 15,449 1.343403 8,876 0.771875 — — — — — — 1) The Series C Preferred Stock was redeemed in March 2012. The dividends paid during the quarter ended March 31, 2012 include accumulated and unpaid dividends through the redemption date. 2) The Series D Preferred Stock dividends paid during the quarter ended June 30, 2012 include accumulated and unpaid dividends from the issuance date through the declaration date. The Series D Preferred Stock has no maturity date and will remain outstanding unless redeemed. 3) The Series E Preferred Stock dividends paid during the quarter ended September 30, 2013 include accumulated and unpaid dividends from the issuance date through the declaration date. The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed. 31 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 2013 2012 2011 Series E (3) Series D Percentage of Total Series D (2) Series C(1) Percentage of Total Series C Percentage of Total $0.741150 $ 1.590323 96.0195% $ 1.255844 $ 0.502710 93.4823% $1.843750 100.0000% 0.030332 0.065084 3.9296% 0.013979 0.005596 1.0406% — — — 0.022371 0.008956 1.6652% 0.000393 0.000843 0.0509% 0.051209 0.020498 3.8119% — — — — — — $0.771875 $ 1.656250 100.0000% $ 1.343403 $ 0.537760 100.0000% $1.843750 100.0000% 1) The Series C preferred stock was redeemed in March 2012. 2) The Series D preferred stock was issued in February 2012. 3) The Series E preferred stock was issued in May 2013. In February 2014, NNN declared a dividend on its Series D and E Preferred Stock of 41.40625 and 35.62500 cents per depositary share, respectively, payable March 14, 2014. Capital Resources 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 $ 2013 46,400 9,475 — 1,514,184 Percentage of Total 3.0% $ 0.6% — 96.4% 2012 174,200 10,602 236,500 1,165,662 Percentage of Total 11.0% 0.7% 14.9% 73.4% $ 1,570,059 100.0% $ 1,586,964 100.0% 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 October 2012, NNN amended and restated its credit agreement increasing the borrowing capacity under its unsecured revolving credit facility from $450,000,000 to $500,000,000 and amended 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 $41,402,000 and a weighted average interest rate of 1.4% during the year ended December 31, 2013. The Credit Facility matures October 2016, with an option to extend maturity to October 2017. As of December 31, 2013, the Credit Facility bears interest at LIBOR plus 107.5 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 $1,000,000,000. As of December 31, 2013, $46,400,000 was outstanding and $453,600,000 was available for future borrowings under the Credit Facility. 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, 2013, NNN was in compliance with those covenants. In the event that NNN 32 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. 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) February 2004(2) March 2005(2) June 2012 (2)(4) Initial Balance $ 623 698 485 6,952 1,015 6,850 Interest Rate 9.00% 9.00% 9.00% 6.90% 8.14% 5.75% Maturity(3) April 2014 April 2019 April 2019 January 2017 September 2016 April 2016 Carrying Value of Encumbered Asset(s)(1) 438 $ 968 936 10,797 1,264 8,717 Outstanding Principal Balance at December 31, 2013 2012 $ 27 $ 263 136 2,257 335 6,457 95 299 155 2,892 439 6,722 $ 23,120 $ 9,475 $ 10,602 (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, 2013. (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) Initial balance and outstanding principal balance includes unamortized premium. 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 Effective Interest Rate Debt Issuance Costs Original Principal Repurchases Settled Outstanding principal balance at December 31, 2013 2026 Notes September 2006 $ $ $ $ 168,650 3.950% 5.840% 3,850 172,500 (33,800) (138,700) — $ $ $ $ 2028 Notes March 2008 228,576 5.125% 7.192% 5,459 234,035 (11,000) (223,035) — 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 2013 2012 $ $ — $ — — (22,193) 238,572 (2,072) — $ 214,307 As of December 31, 2013, the debt discount for both the 2028 Notes and the 2026 Notes had been fully amortized. 33 NNN recorded the following in interest expense relating to the 2028 Notes and the 2026 Notes as of December 31 (dollars in thousands): Noncash interest charges Contractual interest expense Amortization of debt costs 2013 2012 2011 $ $ 2,072 $ 4,291 $ 5,400 566 15,744 1,149 5,837 16,909 1,583 8,038 $ 21,184 $ 24,329 On September 28, 2012, NNN announced that the market price condition on its 2026 Notes has been satisfied, and that the 2026 Notes would be convertible during the calendar quarter beginning October 1, 2012. All note holders elected to exercise the conversion feature of the 2026 Notes prior to their redemption. Pursuant to the terms of the 2026 Notes, the Company elected to pay the full settlement value in cash. The settlement value of a note was based on an average of the daily closing price of the Company's common stock over an averaging period that commenced after the Company received a conversion notice from a note holder. The Company paid approximately $164,649,000 in aggregate settlement value for the $123,163,000 of settled 2026 Notes at the end of the applicable averaging periods. The difference between the amount paid and the principal amount of the settled 2026 Notes of $41,486,000 was recognized as a decrease to additional paid-in capital. As of December 31, 2012, $15,537,000 of the principal amount of 2026 Notes were outstanding. In January 2013, the Company paid approximately $20,702,000 in aggregate settlement value for the remaining $15,537,000 of outstanding 2026 Notes. The difference between the amount paid and the principal amount of the settled 2026 Notes of $5,028,000 was recognized as a decrease to additional paid-in capital and $137,000 was recorded as interest expense. As of December 31, 2012, $223,035,000 of the principal amount of 2028 Notes were outstanding. In June 2013, NNN called all of the outstanding 2028 Notes for redemption on July 11, 2013. On July 11, 2013, $130,000 principal amount of the 2028 Notes were settled at par plus accrued interest. The holders of the remaining $222,905,000 principal amount of 2028 Notes elected to convert into cash and shares of the Company's common stock in accordance with the conversion formula which was based on the average daily closing price of NNN's common stock price over a period of 20 days commencing after receipt of a note holder's conversion notice. In 2013, the Company issued 2,407,911 shares of common stock and paid approximately $226,427,000 in aggregate settlement value for the $223,035,000 principal amount of 2028 Notes. The difference between the amount paid and the principal amount of the settled 2028 Notes of $3,197,000 was recognized as a decrease to additional paid- in capital and $195,000 was recorded as interest expense. 34 Notes Payable. Each of NNN’s outstanding series of non-convertible notes is summarized in the table below (dollars in thousands): Notes 2014(1)(2)(5)(9) 2015(1) 2017(1)(6) 2021(1)(7) 2022 (1) 2023(1)(8) Issue Date Principal Discount(3) Net Price Stated Rate Effective Rate(4) Maturity Date June 2004 $ 150,000 $ November 2005 September 2007 July 2011 August 2012 April 2013 150,000 250,000 300,000 325,000 350,000 440 390 877 4,269 4,989 2,594 149,560 6.250% 149,610 6.150% 249,123 6.875% 295,731 5.500% 320,011 3.800% 347,406 3.300% 5.910% 6.185% 6.924% 5.690% 3.984% 3.388% June 2014 December 2015 October 2017 July 2021 October 2022 April 2023 (1) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility. (2) The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. (3) The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. (4) Includes the effects of the discount, treasury lock gain / loss and swap gain / loss, as applicable. (5) NNN entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, NNN terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method. (6) NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a liability of $3,260, of which $3,228 was recorded to other comprehensive income. The liability has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method. (7) 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 2021 Notes using the effective interest method. (8) NNN entered into four forward starting swaps with an aggregate notional amount of $240,000. Upon issuance of the 2023 Notes, NNN terminated the forward starting swaps resulting in a liability of $3,156, of which $3,141 was deferred in other comprehensive income. The deferred liability is being amortized over the term of the note using the effective interest method. (9) NNN plans to use proceeds from the Credit Facility and/or potential debt or equity offerings to repay the outstanding indebtedness. 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 $13,550,000 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, 2013, 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 June 2012, NNN repaid the $50,000,000 7.750% notes payable that were due in June 2012. 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 2012, 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. 35 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 Series C Preferred Stock. In March 2012, NNN redeemed all 3,680,000 outstanding depositary shares, representing interests in its Series C Preferred Stock. The Series C Preferred Stock was redeemed at $25.00 per depositary share, plus accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was $3,098,000 of Series C Preferred Stock issuance costs. 6.625% Series D Cumulative Redeemable Preferred Stock. In February 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 of a share of 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 $9,855,000, consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses. NNN used these net offering proceeds to redeem the Series C Preferred Stock for an aggregate redemption price of $92,000,000, excluding accumulated dividends of $283,000. NNN used the remainder of the net proceeds for general corporate purposes, including repaying outstanding indebtedness under its Credit Facility. 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 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 in limited circumstances 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 19, 2014, the Series D Preferred Stock was not redeemable or convertible. 5.700% Series E Cumulative Redeemable Preferred Stock. In May 2013, NNN closed an underwritten public offering of 11,500,000 depositary shares (including 1,500,000 shares issued in connection with the underwriters' over-allotment), each representing a 1/100th interest in a share of Series E Preferred Stock, and received gross proceeds of $287,500,000. In connection with this offering, the Company incurred stock issuance costs of approximately $9,856,000, consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses. The Company used the net proceeds from the offering for general corporate purposes and funding property acquisitions. Holders of the Series E depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 5.700% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.425 per depositary share). The Series E 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 E Preferred Stock has no maturity date and will remain outstanding unless redeemed. NNN may redeem the Series E Preferred Stock underlying the depositary shares on or after May 30, 2018, 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 change of control, as defined in the articles supplementary fixing the rights and preferences of the Series E Preferred Stock, NNN may redeem the Series E 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 in limited circumstances the holders of depositary shares may convert some or all of their Series E Preferred Stock into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of February 19, 2014, the Series E Preferred Stock was not redeemable or convertible. 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 36 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. In May 2012, NNN established an at-the-market equity program ("2012 ATM") which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through May 2015. NNN intends to use the net proceeds from this offering to repay outstanding indebtedness under the Credit Facility, to finance NNN's potential development and acquisition activities and for other general corporate purposes. The following table outlines the common stock issuances pursuant to the 2012 ATM (dollars in thousands, except per share data): Shares of common stock Average price per share (net) Net proceeds Stock issuance costs (1) 2013 2012 4,676,542 4,282,298 $ 32.60 $ 152,435 2,161 29.64 126,947 2,145 (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. In March 2013, NNN established a second ATM equity program ("2013 ATM") which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through March 2015. NNN intends to use the net proceeds from this offering to repay outstanding indebtedness under the Credit Facility, to finance NNN's potential development and acquisition activities and for other general corporate purposes. The following table outlines the common stock issuances pursuant to the 2013 ATM (dollars in thousands, except per share data): Shares of common stock Average price per share (net) Net proceeds Stock issuance costs (1) $ 2013 2,280,450 37.80 86,208 1,613 (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. Dividend Reinvestment and Stock Purchase Plan. In February 2012, 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 (dollars in thousands): Shares of common stock Net proceeds 2013 2012 2011 764,891 2,101,644 3,745,896 $ 25,407 $ 56,102 $ 93,451 The proceeds from the issuances were used to pay down outstanding indebtedness under NNN’s Credit Facility. 37 Mortgages and Notes Receivable Mortgage notes 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 Unamortized discount 2013 2012 16,942 $ 26,952 177 — 858 (40) 17,119 $ 27,770 $ $ Commercial Mortgage Residual Interests In connection with the independent specialist's valuations of the Residuals’ fair value, NNN adjusted the carrying value of the Residuals to reflect such fair value as of December 31, 2013. 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 at December 31: Discount rate Average life equivalent CPR(1) speeds range Foreclosures: Frequency curve default model Loss severity of loans in foreclosure Yield: LIBOR Prime (1) Conditional prepayment rate 2013 2012 20% 25% 0.80% to 20.76% CPR 0.80% to 24.31% CPR 0.07% - 2.43% range 0.09% - 4.49% 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 for the years ended December 31 (dollars in thousands): Unrealized gains Unrealized losses Other than temporary valuation impairment 2013 2012 2011 $ 511 $ 1,132 $ — 1,185 — 2,812 — 246 1,024 Business Combination 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 included in Impairment losses and other charges, net of recoveries in the Consolidated Statements of Earnings during the year ended December 31, 2011. 38 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, 2013, 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, 2013 and 2012. The table presents principal payments and related interest rates by year for debt obligations outstanding as of December 31, 2013. The variable interest rates shown represent weighted average rate for the Credit Facility for the year ended December 31, 2013. The table incorporates only those debt obligations that existed as of December 31, 2013, 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 one percent for the year ended December 31, 2013. Debt Obligations (dollars in thousands) Variable Rate Debt Credit Facility Fixed Rate Debt Mortgages(1) Unsecured Debt(2) Debt Obligation Weighted Average Interest Rate Debt Obligation Weighted Average Interest Rate Debt Obligation 2014 2015 2016 2017 2018 Thereafter Total Fair Value: December 31, 2013 December 31, 2012 $ $ $ $ — — — — 46,400 1.39% — — — — — — 46,400 1.39% 46,400 174,200 $ $ $ $ 1,158 1,207 6,842 147 86 35 9,475 9,475 10,602 6.90% 6.86% 5.95% 8.03% 9.00% 9.00% 6.32% $ $ $ $ Effective Interest Rate 5.91% 6.19% — 149,975 149,904 — 249,596 6.92% — 4.29% 5.08% — 964,709 1,514,184 1,555,672 1,585,756 (1) NNN's mortgages payable include unamortized premium. (2) Includes NNN’s notes payable and convertible notes payable, each net of unamortized discounts. NNN uses market prices quoted from Bloomberg, a third party, which is a level one input, 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 $11,721,000 and $13,096,000 as of December 31, 2013 and 2012, 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. 39 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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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, 2013, 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, 2013 and 2012, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 19, 2014 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Certified Public Accountants Orlando, Florida February 19, 2014 40 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, 2013 and 2012, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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 Properties, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 19, 2014 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Certified Public Accountants Orlando, Florida February 19, 2014 41 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) Real estate portfolio: ASSETS December 31, 2013 December 31, 2012 Accounted for using the operating method, net of accumulated depreciation and amortization $ 4,253,364 $ 3,794,044 Accounted for using the direct financing method Real estate held for sale Mortgages, notes and accrued interest receivable Commercial mortgage residual interests Cash and cash equivalents Receivables, net of allowance of $2,822 and $855, respectively Accrued rental income, net of allowance of $3,181 and $3,270, respectively Debt costs, net of accumulated amortization of $20,213 and $17,965, respectively Other assets Total assets Liabilities: Line of credit payable LIABILITIES AND EQUITY Mortgages payable, including unamortized premium of $130 and $187, respectively Notes payable – convertible, net of unamortized discount of $2,072 at December 31, 2012 Notes payable, net of unamortized discount of $10,816 and $9,338, respectively Accrued interest payable Other liabilities Total liabilities Commitments and contingencies Equity: Stockholders’ equity: Preferred stock, $0.01 par value. Authorized 15,000,000 shares Series E, 11,500,000 depositary shares issued and outstanding at December 31, 2013, at stated liquidation value of $25 per share Series D, 11,500,000 depositary shares issued and outstanding, at stated liquidation value of $25 per share Common stock, $0.01 par value. Authorized 375,000,000 shares; 121,991,677 and 111,554,997 shares issued and outstanding, respectively Excess stock, $0.01 par value. Authorized 390,000,000 shares; none issued or outstanding Capital in excess of par value Retained earnings (loss) Accumulated other comprehensive income (loss) Total stockholders’ equity of NNN Noncontrolling interests Total equity Total liabilities and equity 18,342 15,344 17,119 11,721 1,485 4,107 24,797 12,877 95,367 23,217 17,546 27,770 13,096 2,076 3,112 25,458 12,781 68,926 $ 4,454,523 $ 3,988,026 $ 46,400 $ 9,475 — 174,200 10,602 236,500 1,514,184 1,165,662 17,142 89,037 17,527 85,950 1,676,238 1,690,441 287,500 — 287,500 287,500 1,221 — 1,117 — 2,353,166 2,101,002 (147,837) (4,505) (90,952) (2,382) 2,777,045 2,296,285 1,240 1,300 2,778,285 2,297,585 $ 4,454,523 $ 3,988,026 See accompanying notes to consolidated financial statements. 42 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (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 – commercial mortgage residual interests valuation Impairment losses and other charges, net of recoveries Earnings from operations Other expenses (revenues): Interest and other income Interest expense Year Ended December 31, 2013 2012 2011 $ 371,948 $ 311,753 $ 239,758 1,955 1,557 13,110 1,467 2,290 2,119 1,165 11,587 2,239 2,673 2,367 1,093 10,080 2,287 3,105 392,327 331,536 258,690 — — — 32,576 18,100 99,246 1,185 1,972 153,079 239,248 (1,493) 85,283 83,790 19,008 (18,542) 466 32,187 17,041 73,707 2,812 3,088 128,835 203,167 (2,232) 83,192 80,960 45,139 (43,088) 2,051 28,796 16,997 56,466 1,024 (1,349) 101,934 158,807 (1,593) 75,532 73,939 Earnings from continuing operations before gain on disposition of real estate, income tax benefit (expense) and equity in earnings of unconsolidated affiliate 155,458 122,207 84,868 Gain on disposition of real estate Income tax benefit (expense) Equity in earnings of unconsolidated affiliate Earnings from continuing operations Earnings from discontinued operations, net of income tax expense Earnings including noncontrolling interests Loss (earnings) attributable to noncontrolling interests: Continuing operations Discontinued operations 173 (618) — 155,013 5,072 160,085 286 (226) 60 — 6,947 4,074 133,228 8,709 141,937 107 (29) 78 297 (899) 474 84,740 7,676 92,416 9 (100) (91) Net earnings attributable to NNN $ 160,145 $ 142,015 $ 92,325 See accompanying notes to consolidated financial statements. 43 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands, except per share data) Net earnings attributable to NNN Series C preferred stock dividends Series D preferred stock dividends Series E preferred stock dividends Excess of redemption value over carrying value of Series C preferred shares redeemed 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 Weighted average number of common shares outstanding: Basic Diluted Other comprehensive income: Net earnings attributable to NNN Amortization of interest rate hedges Fair value treasury locks Unrealized gains (losses) – commercial mortgage residual interests Stock value adjustments Noncontrolling interests Year Ended December 31, 2013 2012 2011 $ 160,145 $ 142,015 $ — (19,047) (8,876) (1,979) (15,449) — — (3,098) 92,325 (6,785) — — — $ $ $ $ $ 132,222 $ 121,489 $ 85,540 1.07 $ 0.04 1.11 $ 1.06 $ 0.04 1.10 $ 1.05 $ 0.08 1.13 $ 1.03 $ 0.08 1.11 $ 0.88 0.08 0.96 0.87 0.09 0.96 118,204,148 106,965,156 119,864,824 109,117,515 88,100,076 88,837,057 $ 160,145 $ 142,015 $ 92,325 438 (3,141) (438) 69 949 231 — 1,132 85 — 9 (5,218) (246) (36) — Comprehensive income attributable to NNN $ 158,022 $ 143,463 $ 86,834 See accompanying notes to consolidated financial statements. 44 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2013, 2012 and 2011 (dollars in thousands, except per share data) Series C Preferred Stock Series D Preferred Stock Series E 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 4 5 3,197,127 shares – stock purchase program Issuance of 133,432 shares of restricted common stock Stock issuance costs Performance incentive plan Amortization of deferred compensation Interest rate hedge termination Amortization of interest rate hedges Fair value treasury locks Unrealized loss – commercial mortgage residual interests Stock value adjustment Contributions from noncontrolling interests Distributions to noncontrolling interests Balances at December 31, 2011 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 5 — 92,325 — (6,785) 13,652 (133,720) 173 447,690 32 1 — — — — — — — — — 79,762 (57) (19,453) (513) 7,394 — — — — — — — — — — — — — — — — — — — — — — — — — — — 9 (5,218) (246) (36) — — 92,325 91 92,416 (6,785) (120,063) 447,863 79,794 (56) (19,453) (513) 7,394 9 (5,218) (246) (36) — — — — — — — — — — — — — — 41 (45) (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. NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2013, 2012 and 2011 (dollars in thousands, except per share data) Series C Preferred Stock Series D Preferred Stock Series E 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, 2011 $ 92,000 $ Net earnings Dividends declared and paid: $0.53776 per depositary share of Series C preferred stock $1.34340 per depositary share of Series D preferred stock $1.56 per share of common stock — — — — Redemption of 3,680,000 shares of Series C Preferred Stock (92,000) — — — — — — 4 6 Issuance of 11,500,000 depositary shares of Series D Preferred Stock — 287,500 Issuance of common stock: 40,460 shares 1,689,160 shares – stock purchase program 4,282,298 shares - ATM equity program Issuance of 373,913 shares of restricted common stock Equity component of convertible debt Stock issuance costs Performance incentive plan Amortization of deferred compensation Amortization of interest rate hedges Unrealized gain – commercial mortgage residual interests Stock value adjustment Balances at December 31, 2012 — — — — — — — — — — — — — — — — — — — — — — — $ 1,049 $1,958,225 $ (44,946) $ (3,830) $ 2,002,498 $ 1,378 $ 2,003,876 — — — — — — — — — — — — — — — — — — — — 4 — — — 17 43 4 — — — — — — — — 142,015 — — (1,979) (15,449) 11,758 (167,495) 3,098 (3,098) (9,855) 833 44,395 129,049 331 (41,486) (2,265) (451) 7,370 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 231 1,132 85 142,015 (78) 141,937 (1,979) (15,449) (155,733) (92,000) 277,645 833 44,412 129,092 335 (41,486) (2,265) (451) 7,370 231 1,132 85 — — — — — — — — — — — — — — — — (1,979) (15,449) (155,733) (92,000) 277,645 833 44,412 129,092 335 (41,486) (2,265) (451) 7,370 231 1,132 85 $ — $ 287,500 $ — $ 1,117 $2,101,002 $ (90,952) $ (2,382) $ 2,296,285 $ 1,300 $ 2,297,585 See accompanying notes to consolidated financial statements. NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2013, 2012 and 2011 (dollars in thousands, except per share data) Series C Preferred Stock Series D Preferred Stock Series E 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, 2012 $ — $ 287,500 $ — $ 1,117 $2,101,002 $ (90,952) $ (2,382) $ 2,296,285 $ 1,300 $ 2,297,585 Net earnings Dividends declared and paid: $1.65625 per depositary share of Series D preferred stock $0.77188 per depositary share of Series E preferred stock $1.60 per share of common stock Issuance of 11,500,000 depositary shares of Series E Preferred Stock Issuance of common stock: 29,013 shares 4 7 322,084 shares – stock purchase program 6,956,992 shares – ATM equity program 2,407,911 shares – conversion of 2028 Notes Issuance of 290,181 shares of restricted common stock Equity component of convertible debt Stock issuance costs Amortization of deferred compensation Amortization of interest rate hedges Fair value forward swaps Unrealized loss – commercial mortgage residual interests Stock value adjustment Noncontrolling interests — — — — — — — — — — — — — — — — — — — — — — — — — — — 287,500 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 4 — — 3 70 24 3 — — — — — — — — — 160,145 — — (19,047) (8,876) 14,941 (189,107) (9,856) 744 10,458 242,348 85,200 (213) (93,450) (3,774) 6,715 — — — — (949) — — — — — — — — — — — — — — — — — — — — — — — — — — — 438 (3,141) (438) 69 949 160,145 (60) 160,085 (19,047) (8,876) (174,162) 277,644 744 10,461 242,418 85,224 (210) (93,450) (3,774) 6,715 438 (3,141) (438) 69 — — — — — — — — — — — — — — — — — — (19,047) (8,876) (174,162) 277,644 744 10,461 242,418 85,224 (210) (93,450) (3,774) 6,715 438 (3,141) (438) 69 — Balances at December 31, 2013 $ — $ 287,500 $ 287,500 $ 1,221 $2,353,166 $(147,837) $ (4,505) $ 2,777,045 $ 1,240 $ 2,778,285 See accompanying notes to consolidated financial statements. 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: Depreciation and amortization Impairment losses and other charges Impairment – commercial mortgage residual interests valuation Amortization of notes payable discount Amortization of debt costs Amortization of mortgages payable premium Amortization of deferred interest rate hedges Interest rate hedge payment Equity in earnings of unconsolidated affiliate Distributions received from unconsolidated affiliate Gain on disposition of real estate Deferred income taxes Income tax valuation allowance Performance incentive plan expense Performance incentive plan payment 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 Decrease (increase) in mortgages, notes and accrued interest receivable Decrease (increase) in receivables Decrease (increase) in accrued rental income Decrease in other assets Increase (decrease) in accrued interest payable Increase (decrease) in other liabilities Other Year Ended December 31, 2013 2012 2011 $ 160,085 $ 141,937 $ 92,416 99,617 4,106 1,185 3,188 3,118 (57) 438 (3,141) — — (6,445) 800 — 8,518 (2,138) (1,029) — 1,573 641 62 368 400 (385) 3,841 (324) 75,334 10,114 2,812 4,976 2,584 (29) 231 — (4,074) 7,019 (10,956) 637 (7,671) 10,136 — (6,616) — 1,624 (187) (264) (456) 1,657 2,419 (2,002) (1,095) 58,817 2,115 1,024 6,191 — — 9 (5,218) (474) 593 (721) 796 — 8,283 — (1,025) 1,993 1,595 (96) 1,108 253 746 7,766 2,682 (1,125) 177,728 Net cash provided by operating activities 274,421 228,130 Cash flows from investing activities: Proceeds from the disposition of real estate 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 Cash received from commercial mortgage residual interests Payment of lease costs Return of investment from unconsolidated affiliate Other 60,626 81,402 10,696 (637,417) (684,925) (756,633) — (3,857) 14,617 — (1,186) — (823) — (8,768) 12,804 — (2,594) 1,220 (898) (1,747) (9,838) 6,837 — (1,589) — 206 Net cash used in investing activities (568,040) (601,759) (752,068) See accompanying notes to consolidated financial statements. 48 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 Repayment of mortgages payable Proceeds from notes payable Repayment of notes payable Repayment of notes payable – convertible Payment of debt costs Proceeds from issuance of common stock Proceeds from issuance of Series D preferred stock Proceeds from issuance of Series E preferred stock Redemption of Series C preferred stock Payment of Series C Preferred Stock dividends Payment of Series D Preferred Stock dividends Payment of Series E Preferred Stock dividends Stock issuance costs Payment of common stock dividends Noncontrolling interest distributions Noncontrolling interest contributions Year Ended December 31, 2013 2012 2011 $ 601,800 $ 1,184,900 $ 805,300 (729,600) (1,076,300) (1,070) 347,406 — (246,797) (3,265) 267,613 — 287,500 — — (19,047) (8,876) (13,529) (189,107) — — (19,390) 320,011 (50,000) (164,649) (4,512) 185,223 287,500 — (92,000) (1,979) (15,449) — (12,237) (167,495) — — (900,700) (1,098) 295,731 — — (5,582) 540,560 — — — (6,785) — — (19,328) (133,720) (45) 41 Net cash provided by financing activities 293,028 373,623 574,374 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 2,407,911 shares of common stock for conversion premium on 2028 Notes $ Issued 298,896, 398,578 and 141,351 shares of restricted and unrestricted common stock in 2013, 2012 and 2011, respectively, pursuant to NNN’s performance incentive plan Issued 16,605, 16,078 and 9,632 shares of common stock in 2013, 2012 and 2011, respectively, to directors pursuant to NNN’s performance incentive plan Issued 12,308, 19,212 and 26,023 shares of common stock in 2013, 2012 and 2011, respectively, pursuant to NNN’s Deferred Director Fee Plan Surrender of 241, 15,286 and 5,215 shares of restricted common stock in 2013, 2012 and 2011, respectively Change in other comprehensive income Change in lease classification (direct financing lease to operating lease) Mortgages payable assumed in connection with real estate transactions Real estate acquired in connection with mortgage receivable foreclosure Real estate received in note receivable foreclosure $ $ $ $ $ $ $ $ $ (591) 2,076 1,485 80,930 360 85,224 8,218 582 162 7 2,123 1,156 750 $ $ $ $ $ $ $ $ $ $ $ — $ — $ (6) 2,082 2,076 75,283 201 $ $ $ 34 2,048 2,082 63,474 (561) — $ — 8,638 463 298 357 1,448 1,678 6,634 490 1,595 $ $ $ $ $ $ $ $ $ 3,456 250 449 109 (5,491) 3,407 — — — See accompanying notes to consolidated financial statements. 49 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2013, 2012 and 2011 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 Gross leasable area (square feet) States December 31, 2013 1,860 20,402,000 47 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 holds 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. For the years ended December 31, 2013, 2012 and 2011, NNN recorded $1,369,000, $1,540,000 and $1,213,000 in capitalized interest, respectively. 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 and the value of in-place leases, based in each case on their 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- market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The 50 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. Intangible assets and liabilities consisted of the following as of December 31 (in thousands): Intangible lease assets (included in Other assets): Value of above market in-place leases, net Value of in-place leases, net Intangible lease liabilities (included in Other liabilities): 2013 2012 $ 11,803 $ 58,456 6,679 37,889 Value of below market in-place leases, net 28,708 23,708 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, repairs and capital expenditures. 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 – Real estate held for sale is not depreciated and is recorded at the lower of cost or fair value less cost to sell. 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 conditions and the ability of NNN to re-lease or sell properties that are currently vacant or become vacant. Management evaluates 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 51 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. Investment in an Unconsolidated Affiliate – NNN accounted 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, L.P., which is accounted for under the equity method of accounting. During September 2012, NNN Crow JV sold all of its assets and paid off its bank term loan as of December 31, 2012. 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. 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. The Company has no goodwill recorded as of December 31, 2013 or 2012, respectively. Debt Costs – Debt costs incurred in connection with NNN’s $500,000,000 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 to interest expense 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 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. 52 Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. 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): Basic and Diluted Earnings: Net earnings attributable to NNN Less: Series C preferred stock dividends Less: Series D preferred stock dividends Less: Series E preferred stock dividends Less: Excess of redemption value over carrying value of Series C preferred shares redeemed Net earnings attributable to common stockholders Less: Earnings attributable to unvested restricted shares Net earnings used in basic and diluted earnings per share Basic and Diluted Weighted Average Shares Outstanding: Weighted average number of shares outstanding Less: Unvested restricted shares Less: Unvested contingent shares Weighted average number of shares outstanding used in basic earnings per share Effects of dilutive securities: Convertible debt Other Weighted average number of shares outstanding used in diluted earnings per share 2013 2012 2011 $ 160,145 $ 142,015 $ — (19,047) (8,876) — 132,222 (503) (1,979) (15,449) — (3,098) 121,489 (741) $ 131,719 $ 120,748 $ 92,325 (6,785) — — — 85,540 (622) 84,918 118,969,771 107,873,577 88,972,723 (448,590) (317,033) (654,127) (254,294) (630,102) (242,545) 118,204,148 106,965,156 88,100,076 1,468,559 192,117 1,987,842 164,517 512,024 224,957 119,864,824 109,117,515 88,837,057 For the year ended December 31, 2011, the potential dilutive shares related to certain convertible notes payable were not included in computing earnings per common share because their effects would be antidilutive. 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, 2013, 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 14). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to NNN’s taxable REIT subsidiaries and to the Orange Avenue Mortgage Investments, Inc. ("OAMI"), a majority owned and controlled subsidiary, 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 53 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 are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which 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. Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other comprehensive income (dollars in thousands): Unrealized Gains and Losses on Commercial Mortgage Residual Interests (2) Unrealized Gains and Losses on Available-for- Sale Securities Total Gain or Loss on Cash Flow Hedges (1) Beginning balance, December 31, 2011 $ (5,924) $ 2,112 $ (18) $ (3,830) Other comprehensive income (loss) Reclassifications from accumulated other comprehensive income to net earnings Net current period other comprehensive income (loss) Ending balance, December 31, 2012 Other comprehensive income (loss) Reclassifications from accumulated other comprehensive income to net earnings Net current period other comprehensive income (loss) — 231 231 (5,693) (3,141) 438 (2,703) 1,132 — 1,132 3,244 511 — 511 85 — 85 67 69 — 69 Ending balance, December 31, 2013 $ (8,396) $ 3,755 $ 136 $ 1,217 231 (3) 1,448 (2,382) (2,561) 438 (3) (2,123) (4,505) 1) Additional disclosure is included in Note 16 – Derivatives. 2) Additional disclosure is included in Note 5 – Commercial Mortgage Residual Interests. 3) Reclassifications out of other comprehensive income are recorded in Interest Expense on the Consolidated Statements of Comprehensive Income. There is no income tax expense (benefit) resulting from this reclassification. New Accounting Pronouncements – In December 2011, the FASB issued Accounting Standards Update ("ASU") 2011-10, which clarifies the scope of current U.S. generally accepted accounting principles ("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. The adoption of the standard did not have a significant impact on NNN's financial position or results of operations. In December 2011, the FASB issued ASU 2011-11 amending 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 GAAP and those entities that prepare their financial statements on the basis of 54 IFRS. The amendments in this update are effective for annual reporting periods beginning on or after January 1, 2013. The adoption of the standard did not have a significant impact on NNN's financial position or results of operations. In February 2013, the FASB issued ASU 2013-02. The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The update requires reporting significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income or cross-reference other required disclosures that provide additional detail about amounts that are not. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of the standard in the quarter ended March 31, 2013, did not have a significant impact on NNN's financial position or results of operations. In February 2013, the FASB issued ASU 2013-04. The objective of this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of the standard is not expected to have a significant impact on NNN's financial position or results of operations. In July 2013, the FASB issued ASU 2013-10. The amendments in this update permit the Fed Funds Effective Swap Rate (also referred to as Overnight Index Swap Rate) to be used as a United States benchmark interest rate for hedge accounting purposes under Topic 815, in addition to treasury obligations of the United States Government and the London Interbank Offered Rate. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of the standard did not have a significant impact on NNN's financial position or results of operations. In July 2013, the FASB issued ASU 2013-11. The objective of the amendments in this update is to eliminate the diversity in practice of financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The provisions of the update are that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented, with certain exceptions, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. NNN is currently evaluating ASU 2013-11 to determine the potential impact, if any, its adoption will have on NNN's financial position and results of operations. 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 deferred income taxes, and the collectibility of receivables from tenants, including accrued rental income. Actual results could differ from those estimates. Correction of Immaterial Errors – During the year ended December 31, 2012, NNN identified certain immaterial errors related to deferred tax assets and the related valuation allowance. In 2009, NNN incurred a loss on foreclosure and impairment charges associated with acquiring the operations of one of its lessees. The properties and operations were transferred to taxable REIT subsidiaries upon foreclosure. Certain charges associated with the acquisition and impaired properties should have been recorded in NNN’s qualified REIT subsidiaries prior to the properties’ transfer to the taxable REIT subsidiary group. Deferred tax assets associated with the book charges of $10,350,000 in 2009 were inappropriately recorded in the taxable REIT subsidiary group. A valuation allowance for the full amount of the deferred tax assets was also recorded in 2009. In the year ended December 31, 2012, NNN decreased deferred tax assets and the related valuation allowance by $10,350,000 each to correct the error. NNN further reviewed its conclusions in previous periods, commencing in 2009, with respect to the realizability of the remaining deferred tax assets. Upon further review, NNN determined that its available sources of income supported realizability of all but $3,104,000 of its gross deferred tax assets as of December 31, 2009, 2010 and 2011. As a result, NNN determined that it had previously understated its deferred income tax benefit in the years ended December 31, 2010 and 2009 by $3,121,000 and $3,372,000, respectively, and understated its net deferred tax assets by $6,493,000 as of December 31, 2011 and 2010, in its financial statements. NNN corrected this in the year ended December 31, 2012 by reversing the valuation allowance and recording an income tax benefit of $6,493,000. NNN reviewed the impact of correcting the prior period errors in 2012 as well as its impact on prior periods in accordance with SAB Topics 1.M and 1.N and determined that the misstatements did not have a material effect on the Company’s financial position, results of operations, trends in earnings, or cash flows for any of the periods presented. 55 Furthermore, NNN determined in the year ended December 31, 2012 that its available sources of income supported realizability of all of its gross deferred tax assets. In 2012, NNN reversed the remaining valuation allowance and recorded an income tax benefit of $1,178,000. During the year ended December 31, 2013, NNN identified an immaterial error related to its statement of cash flows for the year ended December 31, 2011. The Company previously classified its payment for the termination of interest rate hedges of $5,218,000 in financing activities. These instruments were hedging the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. This amount has been presented in operating activities in the 2013 consolidated financial statements. Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2013 presentation. Note 2 – Real Estate: Real Estate – Portfolio Leases – The following outlines key information for NNN’s leases at December 31, 2013: Lease classification: Operating Direct financing Building portion – direct financing / land portion – operating Weighted average remaining lease term 1,888 12 1 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 2013 2012 $ 1,650,651 $ 1,474,299 2,957,218 2,564,104 1,290 4,609,159 (416,477) 4,192,682 60,682 1,290 4,039,693 (332,156) 3,707,537 86,507 $ 4,253,364 $ 3,794,044 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, 2013, 2012 and 2011, NNN recognized collectively in continuing and discontinued operations, ($338,000), $487,000 and ($222,000), respectively, of such income, net of reserves. At December 31, 2013 and 2012, the balance of accrued rental income, net of allowances of $3,181,000 and $3,270,000, respectively, was $24,797,000 and $25,458,000, respectively. 56 The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2013 (dollars in thousands): 2014 2015 2016 2017 2018 Thereafter $ 384,218 379,726 374,064 365,149 338,197 2,782,929 $ 4,624,283 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the current 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 2013 2012 20,469 $ 8,274 (10,401) 18,342 $ 27,963 10,142 (14,888) 23,217 $ $ The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2013 (dollars in thousands): 2014 2015 2016 2017 2018 Thereafter $ 3,094 2,956 2,873 2,035 2,007 7,504 $ 20,469 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). 57 Real Estate – Held For Sale As of December 31, 2013 and 2012, NNN classified eight Properties as held for sale. Real estate held for sale consisted of the following at December 31 (dollars in thousands): Land and improvements Building and improvements Work in process Less accumulated depreciation and amortization Less impairment Real Estate – Dispositions 2013 2012 $ 7,403 $ 15,037 37 22,477 (1,659) (5,474) $ 15,344 $ 7,839 14,875 72 22,786 (1,623) (3,617) 17,546 The following table summarizes the Properties sold and the corresponding gain recognized on the disposition included in continuing and discontinued operations for the years ended December 31 (dollars in thousands): 2013 2012 2011 # of Properties Gain # of Properties Continuing operations Discontinued operations Noncontrolling interest Real Estate – Commitments — $ 35 — 35 $ 173 6,272 (152) 6,293 Gain — 10,956 — $ 10,956 — $ 34 — 34 # of Properties Gain — $ 8 — 8 $ 297 424 (194) 527 NNN has agreed to fund construction commitments on leased Properties. The improvements are estimated to be completed within 12 months. These construction commitments, as of December 31, 2013, are outlined in the table below (dollars in thousands): Number of properties Total commitment(1) Amount funded Remaining commitment 48 $ 145,818 99,024 46,794 (1) Includes land, construction costs and tenant improvements. 58 Real Estate – Impairments 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 2013 2012 2011 $ $ 1,957 $ 3,258 $ 2,149 7,054 4,106 $ 10,312 $ — 431 431 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, which are level 3 inputs. NNN may consider a single valuation technique or multiple valuation techniques, as appropriate, when measuring the fair value of its real estate. Note 3 – 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 included in Impairment losses and other charges, net of recoveries in the Consolidated Statements of Comprehensive Income during the year ended December 31, 2011. Note 4 – Mortgages, Notes and Accrued Interest Receivable: Mortgage notes 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 receivables Unamortized discount 2013 2012 16,942 $ 26,952 177 — 858 (40) 17,119 $ 27,770 $ $ During the year ended December 31, 2011, $3,115,000 of a previously recorded valuation reserve was recovered and included in Impairment losses and other charges, net of recoveries in the Consolidated Statements of Comprehensive Income. During the years ended December 31, 2013 and 2012, NNN did not record or recover any valuation reserves. Note 5 – 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. 59 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 2013 2012 2011 $ 511 $ 1,132 $ — 1,185 — 2,812 — 246 1,024 Due to the expected timing of future cash flows relating to the Residuals, the independent specialist's valuation adjusted certain of the valuation assumptions. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2013, 2012 and 2011, NNN recorded an other than temporary valuation adjustment as a reduction of earnings from operations. The following table summarizes the key assumptions used in determining the value of the Residuals as of December 31: Discount rate Average life equivalent CPR(1) speeds range Foreclosures: 2013 2012 20% 25% 0.80% to 20.76% CPR 0.80% to 24.31% CPR Frequency curve default model Loss severity of loans in foreclosure 0.07% - 2.43% range 0.09% - 4.49% range 20% 20% Yield: LIBOR Prime (1) Conditional prepayment rate 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, 2013 (dollars in thousands): Carrying amount of retained interests Discount rate assumption: Fair value at 25% discount rate Fair value at 27% 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 $ 11,721 $ $ $ $ $ $ $ $ 9,859 9,208 11,719 11,717 11,502 11,404 11,999 12,267 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 60 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 6 – Line of Credit Payable: In October 2012, NNN amended and restated its credit agreement increasing the borrowing capacity under its unsecured revolving credit facility from $450,000,000 to $500,000,000 and amended 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 $41,402,000 and a weighted average interest rate of 1.4% during the year ended December 31, 2013. The Credit Facility matures October 2016, with an option to extend maturity to October 2017. As of December 31, 2013, the Credit Facility bears interest at LIBOR plus 107.5 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 $1,000,000,000. As of December 31, 2013, $46,400,000 was outstanding and $453,600,000 was available for future borrowings under the Credit Facility. 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, 2013, NNN was in compliance with those covenants. Note 7 – 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) February 2004 (2) March 2005 (2) June 2012 (2)(4) $ Initial Balance 623 698 485 6,952 1,015 6,850 Interest Rate 9.00% 9.00% 9.00% 6.90% 8.14% 5.75% Maturity (3) April 2014 April 2019 April 2019 January 2017 September 2016 April 2016 Carrying Value of Encumbered Asset(s)(1) Outstanding Principal Balance at December 31, 2013 2012 $ 438 968 936 10,797 1,264 8,717 $ 27 $ 263 136 2,257 335 6,457 95 299 155 2,892 439 6,722 $ 23,120 $ 9,475 $ 10,602 (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, 2013. (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) Initial balance and outstanding principal balance includes unamortized premium. The following is a schedule of the annual maturities of NNN’s mortgages payable at December 31, 2013 (dollars in thousands): 2014 2015 2016 2017 2018 Thereafter $ 1,158 1,207 6,842 147 86 35 $ 9,475 61 Note 8 – 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 Effective Interest Rate Debt Issuance Costs Original Principal Repurchases Settled Outstanding principal balance at December 31, 2013 2026 Notes September 2006 $ $ $ $ 168,650 3.950% 5.840% 3,850 172,500 (33,800) (138,700) — $ $ $ $ 2028 Notes March 2008 228,576 5.125% 7.192% 5,459 234,035 (11,000) (223,035) — 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 2013 2012 $ $ — $ (22,193) — — 238,572 (2,072) — $ 214,307 As of December 31, 2013, the debt discount for both the 2028 Notes and the 2026 Notes had been fully amortized. NNN recorded the following in interest expense relating to the 2028 Notes and the 2026 Notes for the years ended December 31 (dollars in thousands): Noncash interest charges Contractual interest expense Amortization of debt costs 2013 2012 2011 $ $ 2,072 $ 4,291 $ 5,400 566 15,744 1,149 5,837 16,909 1,583 8,038 $ 21,184 $ 24,329 On September 28, 2012, NNN announced that the market price condition on its 2026 Notes has been satisfied, and that the 2026 Notes would be convertible during the calendar quarter beginning October 1, 2012. All note holders elected to exercise the conversion feature of the 2026 Notes prior to their redemption. Pursuant to the terms of the 2026 Notes, the Company elected to pay the full settlement value in cash. The settlement value of a note was based on an average of the daily closing price of the Company's common stock over an averaging period that commenced after the Company received a conversion notice from a note holder. The Company paid approximately $164,649,000 in aggregate settlement value for the $123,163,000 of settled 2026 Notes at the end of the applicable averaging periods. The difference between the amount paid and the principal amount of the settled 2026 Notes of $41,486,000 was recognized as a decrease to additional paid-in capital. As of December 31, 2012, $15,537,000 of the principal amount of 2026 Notes were outstanding. In January 2013, the Company paid approximately $20,702,000 in aggregate settlement value for the remaining $15,537,000 of outstanding 2026 Notes. The difference between the amount paid and the principal amount of the settled 2026 Notes of $5,028,000 was recognized as a decrease to additional paid-in capital and $137,000 was recorded as interest expense. As of December 31, 2012, $223,035,000 of the principal amount of 2028 Notes were outstanding. In June 2013, NNN called all of the outstanding 2028 Notes for redemption on July 11, 2013. On July 11, 2013, $130,000 principal amount of the 2028 Notes was settled at par plus accrued interest. The holders of the remaining balance of $222,905,000 principal amount of 2028 Notes elected to convert into cash and shares of the Company's common stock in accordance with the conversion formula which is 62 based on the average daily closing price of NNN's common stock price over a period of 20 days commencing after receipt of a note holder's conversion notice. In 2013, the Company issued 2,407,911 shares of common stock and paid approximately $226,427,000 in aggregate settlement value for the $223,035,000 aggregate principal amount of 2028 Notes outstanding. The difference between the amount paid and the principal amount of the settled notes of $3,197,000 was recognized as a decrease to additional paid-in capital and $195,000 was recorded as interest expense. Note 9 – Notes Payable: Each of NNN’s outstanding series of non-convertible notes is summarized in the table below (dollars in thousands): Notes 2014(1)(2)(5)(9) 2015(1) 2017(1)(6) 2021(1)(7) 2022 (1) 2023(1)(8) Issue Date Principal Discount(3) June 2004 $ 150,000 $ November 2005 September 2007 July 2011 August 2012 April 2013 150,000 250,000 300,000 325,000 350,000 440 390 877 4,269 4,989 2,594 Net Price Stated Rate Effective Rate(4) Maturity Date 149,560 6.250% 5.910% June 2014 149,610 6.150% 6.185% December 2015 249,123 6.875% 6.924% October 2017 295,731 5.500% 5.690% July 2021 320,011 3.800% 3.984% October 2022 347,406 3.300% 3.388% April 2023 (1) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility. (2) The proceeds from the note issuance were used to repay the obligation of the 2004 Notes. (3) The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method. (4) Includes the effects of the discount, treasury lock gain / loss and swap gain / loss, as applicable. (5) NNN entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, NNN terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method. (6) NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a liability of $3,260, of which $3,228 was recorded to other comprehensive income. The liability has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method. (7) 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. (8) NNN entered into four forward starting swaps with an aggregate notional amount of $240,000. Upon issuance of the 2023 Notes, NNN terminated the forward starting swaps resulting in a liability of $3,156, of which $3,141 was deferred in other comprehensive income. The deferred liability is being amortized over the term of the note using the effective interest method. (9) NNN plans to use proceeds from the Credit Facility and/or potential debt or equity offerings to repay the 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 $13,550,000 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 June 2012, NNN repaid the $50,000,000 7.750% notes payable that were due in June 2012. 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, 2013, NNN was in compliance with those covenants. 63 Note 10 – Preferred Stock: 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 Series C Preferred Stock. In March 2012, NNN redeemed all 3,680,000 outstanding depositary shares representing interests in its Series C Preferred Stock. The Series C Preferred Stock was redeemed at $25.00 per depositary share, plus accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was $3,098,000 of Series C Preferred Stock issuance costs. 6.625% Series D Cumulative Redeemable Preferred Stock. In February 2012, NNN completed 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 of a share of 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 $9,855,000, 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 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 in limited circumstances 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 19, 2014, the Series D Preferred Stock was not redeemable or convertible. 5.700% Series E Cumulative Redeemable Preferred Stock. In May 2013, NNN completed an underwritten public offering of 11,500,000 depositary shares (including 1,500,000 shares issued in connection with the underwriters' over-allotment), each representing a 1/100th interest in a share of its newly designated 5.700% Series E Cumulative Redeemable Preferred Stock, and received gross proceeds of $287,500,000. In connection with this offering, the Company incurred stock issuance costs of approximately $9,856,000, consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses. The Company used the net proceeds from the offering for general corporate purposes and funding property acquisitions. Holders of the Series E depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 5.700% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.425 per depositary share). The Series E 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 E Preferred Stock has no maturity date and will remain outstanding unless redeemed. NNN may redeem the Series E Preferred Stock underlying the depositary shares on or after May 30, 2018, 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 change of control, as defined in the articles supplementary fixing the rights and preferences of the Series E Preferred Stock, NNN may redeem the Series E 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 in limited circumstances the holders of depositary shares may convert some or all of their Series E Preferred Stock into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of February 19, 2014, the Series E Preferred Stock was not redeemable or convertible. Note 11 – Common Stock: In February 2012, 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, 64 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. In May 2012, NNN established an at-the-market (“2012 ATM”) equity program which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through May 2015. The following outlines the common stock issuances pursuant to the 2012 ATM for the year ended December 31 (dollars in thousands, except per share data): Shares of common stock Average price per share (net) Net proceeds Stock issuance costs (1) 2013 2012 4,676,542 4,282,298 $ 32.60 $ 152,435 2,161 29.64 126,947 2,145 (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. In March 2013, NNN established a second ATM equity program ("2013 ATM") which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through March 2015. The following table outlines the common stock issuances pursuant to the 2013 ATM (dollars in thousands, except per share data): Shares of common stock Average price per share (net) Net proceeds Stock issuance costs (1) $ 2013 2,280,450 37.80 86,208 1,613 (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. Dividend Reinvestment and Stock Purchase Plan. In February 2012, 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 (dollars in thousands): Shares of common stock Net proceeds Note 12 – Employee Benefit Plan: 2013 2012 2011 764,891 2,101,644 3,745,896 $ 25,407 $ 56,102 $ 93,451 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 a portion 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, 2013, 2012 and 2011 totaled $342,000, $378,000 and $321,000, respectively. 65 Note 13 – 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 2013 2012 2011 $ 1.224568 $ 1.199003 $ 1.088228 0.056784 — 0.000650 0.317998 0.013346 0.021358 0.048890 0.277403 — — — 0.441772 $ 1.600000 $ 1.560000 $ 1.530000 The following table outlines the dividends declared and paid for NNN's common stock for the years ended December 31 (in thousands, except per share data): Dividends Per share $ 2013 189,107 1.600 $ 2012 167,495 1.560 $ 2011 133,720 1.530 On January 15, 2014, NNN declared a dividend of $0.405 per share, which was paid February 14, 2014 to its common stockholders of record as of January 31, 2014. The following presents the characterization for tax purposes of Series C, D and E Preferred Stock dividends per share paid to stockholders for the year ended December 31: Ordinary dividends Qualified dividends Capital gain Unrecaptured Section 1250 Gain 0.000393 0.000843 0.051209 0.020498 Series E 2013 Series D Series C 2013 2012 2012 2011 $ 0.741150 $ 1.590323 $ 1.255844 $ 0.502710 $ 1.843750 0.030332 0.065084 0.013979 0.005596 — — 0.022371 0.008956 — — — $ 0.771875 $ 1.656250 $ 1.343403 $ 0.537760 $ 1.843750 66 The following table outlines the dividends declared and paid for NNN's preferred stock for the years ended December 31(in thousands, except per share data): Series C Preferred Stock (1): Dividends Per share Series D Preferred Stock (2): Dividends Per share Series E Preferred Stock (3): Dividends Per share 2013 2012 2011 $ — $ — 1,979 0.537760 $ 6,785 1.843750 19,047 1.656250 15,449 1.343403 8,876 0.771875 — — — — — — 1) The Series C Preferred Stock was redeemed in March 2012. The dividends paid during the quarter ended March 31, 2012 include accumulated and unpaid dividends through the redemption date. 2) The Series D Preferred Stock dividends paid during the quarter ended June 30, 2012 include accumulated and unpaid dividends from the issuance date through the declaration date. The Series D Preferred Stock has no maturity date and will remain outstanding unless redeemed. 3) The Series E Preferred Stock dividends paid during the quarter ended September 30, 2013 include accumulated and unpaid dividends from the issuance date through the declaration date. The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed. In February 2014, NNN declared a dividend on its Series D and E Preferred Stock of 41.40625 and 35.62500 cents per depositary share, respectively, payable March 14, 2014. Note 14 – Income Taxes: For income tax purposes, NNN has taxable REIT subsidiaries in which certain real estate activities are conducted. 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, 2013, 2012 and 2011, and the statutory rates relate to state taxes and nondeductible expenses. 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. 67 The significant components of the net income tax asset consist of the following at December 31 (dollars in thousands): Deferred tax assets: Cost basis Deferred income Reserves Credits Excess interest expense carryforward Net operating loss carryforward Valuation allowance Total deferred tax assets Deferred tax liabilities: Built-in gain Depreciation Other Total deferred tax liabilities $ 2013 2012 $ 994 155 4,728 393 2,706 5,212 14,188 — 14,188 (2,163) (618) (779) (3,560) 1,118 247 3,735 217 4,508 5,829 15,654 — 15,654 (2,924) (756) (546) (4,226) Net deferred tax asset $ 10,628 $ 11,428 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 and projections for future taxable income management believes it is more likely than not that NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2013 and 2012. As noted in Note 1, during the year ended December 31, 2012, NNN identified certain immaterial errors related to deferred tax assets and the related valuation allowance. NNN decreased deferred tax assets and the related valuation allowance by $10,350,000 each to correct a gross-up error and reversed its valuation allowance by $6,493,000 to reflect an overstatement of its valuation allowance recorded in the years ended December 31, 2010 and 2009. Furthermore, NNN determined in the year ended December 31, 2012 that its available sources of income supported realizability of all of its gross deferred tax assets. In 2012, NNN reversed the remaining valuation allowance and recorded an income tax benefit of $1,178,000. The decrease in the valuation allowance for the year ended December 31, 2012 was $18,021,000. There was no valuation allowance as of December 31, 2013 or 2012, respectively. 68 The income tax benefit (expense) 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 2013 2012 2011 $ 161,230 $ 135,124 $ 93,302 (195) (90) (790) (10) (1,085) (136) (7) 5,871 1,163 6,891 (166) (15) (714) (82) (977) Net earnings attributable to NNN’s stockholders $ 160,145 $ 142,015 $ 92,325 The total income tax benefit (expense) differs from the amount computed by applying the statutory federal tax rate to net earnings before taxes as follows for the years ended December 31 (dollars in thousands): Federal expense at statutory tax rate $ (54,818) $ (45,942) $ (31,723) 2013 2012 2011 Nontaxable income of NNN State taxes, net of federal benefit Amortization of Built-in Gain Tax Other Valuation allowance (increase) decrease 53,178 44,746 30,380 (200) 761 (6) — (139) 613 (58) 7,671 (156) 531 (9) — Total tax benefit (expense) $ (1,085) $ 6,891 $ (977) 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. 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 2009 through 2012. NNN also files in many states with varying open years under statute. 69 Note 15 – Earnings from Discontinued Operations: NNN classified the revenues and expenses related to properties which generated revenue and were sold or generated revenue and were held for sale as of December 31, 2013, 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): 2013 2012 2011 $ 2,631 $ 7,342 $ 10,520 324 27 383 17 420 27 466 62 8,093 11,495 Revenues: Rental income from operating leases Earned income from direct financing leases Percentage rent Real estate expense reimbursement from tenants Interest and other income from real estate transactions Operating expenses: General and administrative Real estate Depreciation and amortization Impairment losses and other charges Other expenses (revenues): 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 including noncontrolling interests Earnings attributable to noncontrolling interests Earnings from discontinued operations attributable to NNN 190 1 327 37 3,186 219 600 371 2,149 3,339 580 580 (733) 6,272 (467) 5,072 (226) 20 1,026 1,480 7,026 9,552 732 732 (2,191) 10,956 (56) 8,709 (29) 41 1,041 1,957 431 3,470 695 695 7,330 424 (78) 7,676 (100) 7,576 $ 4,846 $ 8,680 $ Note 16 – Derivatives: 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. 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. 70 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 April 2013, NNN terminated four forward starting swaps with an aggregate notional amount of $240,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. When terminated, the fair value of the forward starting swaps designated as cash flow hedges, was a liability of $3,156,000, of which $3,141,000 was deferred in other comprehensive income. The amount reported in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the 2023 Notes. 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 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 swaps when terminated was an asset of $4,148,000, which was deferred in other comprehensive income. As of December 31, 2013, $8,396,000 remains in other comprehensive income related to the effective portion of NNN’s previous interest rate hedges. During the years ended December 31, 2013, 2012 and 2011, NNN reclassified $438,000, $231,000 and $9,000 out of other comprehensive income as an increase to interest expense. Over the next 12 months, NNN estimates that an additional $849,000 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, 2013. Note 17 – 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. There were no options outstanding or exercisable at December 31, 2013. Pursuant to the 2007 Plan, NNN has granted and issued shares of restricted stock to certain officers and key associates of NNN. The following summarizes the restricted stock activity for the year ended December 31, 2013: Non-vested restricted shares, January 1 Restricted shares granted Restricted shares vested Restricted shares forfeited Restricted shares repurchased Non-vested restricted shares, December 31 71 Number of Shares Weighted Average Share Price 964,612 $ 298,896 (446,607) (241) (8,474) 808,186 $ 23.40 33.73 21.41 30.68 24.36 28.18 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 five years and generally vest yearly. NNN recognizes compensation expense on a straight-line basis for awards with only service conditions. During the years ended December 31, 2013 and 2012, NNN granted 152,901 and 185,915, respectively, performance based shares subject to its total shareholder return growth after a three years period relative to its peers. The shares were granted to certain executive officers and had weighted average grant price of $33.73 and $26.85, respectively, per share. Once the performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. For the 2013 and 2012 grants, the conditions are based on market conditions, and the fair value was determined at the grant date (for a fair value share price of $21.54 and $15.71, respectively). Compensation expense is recognized over the requisite service period for both grants. The following summarizes other grants made during the year ended December 31, 2013, pursuant to the 2007 Plan. Other share grants under the 2007 Plan: Directors’ fees Deferred directors’ fees Weighted Average Share Price Shares 16,605 $ 12,308 28,913 $ 35.08 35.09 35.08 Shares available under the 2007 Plan for grant, end of period 3,958,300 The total compensation cost for share-based payments for the years ended December 31, 2013, 2012 and 2011, totaled $7,459,000, $8,131,000 and $6,390,000, respectively, of such compensation expense. At December 31, 2013, NNN had $10,929,000 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 2.5 years. In addition, NNN recognized performance based long term incentive cash compensation of $729,000, $1,684,000 and $1,702,000 for the years ended December 31, 2013, 2012 and 2011 respectively. Note 18 – 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, 2013 and 2012, approximate fair value based upon current market prices of similar issues. At December 31, 2013 and 2012, the carrying value and fair value of NNN’s notes payable and convertible notes payable, collectively, was $1,555,672,000 and $1,585,756,000, respectively, based upon quoted market prices, which are a level 1 input. 72 Note 19 – Quarterly Financial Data (unaudited): The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data): 2013 Revenues as originally reported Reclassified to discontinued operations Adjusted revenue Net earnings attributable to NNN’s stockholders Net earnings per share (1): Basic Diluted 2012 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 92,565 $ 96,121 $ 100,621 $ 103,648 (382) 92,183 34,066 $ $ (106) 96,015 37,486 $ $ (139) 100,482 44,352 $ $ — 103,648 44,241 0.26 $ 0.25 0.28 $ 0.27 0.29 $ 0.29 78,658 $ 82,751 $ 85,013 $ (1,526) 77,132 29,832 $ $ (1,655) 81,096 33,505 $ $ (763) 84,250 38,015 $ $ 0.23 $ 0.23 0.26 $ 0.26 0.31 $ 0.30 0.29 0.29 88,899 160 89,059 40,663 0.33 0.32 $ $ $ $ $ $ $ $ (1) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount. Note 20 – Segment Information: For the years ended December 31, 2013, 2012 and 2011, NNN’s operations are reported within one business segment in the consolidated financial statements and all properties are part of the Properties or Property Portfolio. Note 21 – 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 rollforward of the Residuals during the year ended December 31, 2013 (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 $ 13,096 (1,185) (438) 2,290 (2,042) — — 11,721 (328) $ $ Note 22 – Major Tenants: As of December 31, 2013, NNN had no tenants that accounted for ten percent or more of its rental and earned income. 73 Note 23 – Commitments and Contingencies: 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 24 – Subsequent Events: NNN reviewed all subsequent events and transactions that have occurred after December 31, 2013, the date of the consolidated balance sheet. In 2014, the Company entered into three forward starting swaps with a total notional amount of $225,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The outstanding forward starting swaps were designated as cash flow hedges. There were no other reportable subsequent events or transactions. 74 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, 2013, 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 75 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, 2013, 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 – 1992 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, 2013, 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, 2013, 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. 76 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. 77 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, 2013 and 2012 Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011 Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2013 Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2013 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 40 42 43 45 48 50 3.1 3.2 3.3 3.4 3.5 3.6 First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012, and incorporated herein by reference). Articles Supplementary Establishing and Fixing the Rights and Preferences of 6.625% Series D Cumulative Preferred Stock, par value $0.01 per share, dated February 21, 2012 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated February 23, 2012, incorporated herein by reference). Articles Supplementary Establishing and Fixing the Rights and Preferences of 5.700% Series E Cumulative Preferred Stock, par value $0.01 per share, dated May 29, 2013 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated May 30, 2013, incorporated herein by reference). Third Amended and Restated Bylaws of the Registrant, dated May 1, 2006, as amended (filed herewith). Second Amendment to the Third Amended and Restated Bylaws of the Registrant, dated December 13, 2007 (filed herewith). Third Amendment to the Third Amended and Restated Bylaws of the Registrant, dated February 13, 2014 (filed herewith). 4. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 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). 78 4.2 4.3 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 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. 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). Specimen certificate representing the 6.625% Series D 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 February 22, 2012 and filed with the Securities and Exchange Commission on February 22, 2012, 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 4.20 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2012, 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). Form of Eleventh Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 3.80% Notes due 2022 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated August 14, 2012, filed with the Securities and Exchange Commission on August 14, 2012 and incorporated herein by reference). Form of 3.800% Notes due 2022 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K dated August 14, 2012, filed with the Securities and Exchange Commission on August 14, 2012 and incorporated herein by reference). 79 4.17 4.18 4.19 4.20 Form of Twelfth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 3.300% Notes due 2023 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated April 9, 2013, filed with the Securities and Exchange Commission on April 15, 2013 and incorporated herein by reference). Form of 3.300% Notes due 2023 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K dated April 9, 2013, filed with the Securities and Exchange Commission on April 15, 2013 and incorporated herein by reference). Specimen certificate representing the 5.700% Series E Cumulative Redeemable Preferred Stock, par value $.01 per share, of the Registrant (filed as Exhibit 4.3 to the Registrant’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 30, 2013 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 4.1 to the Registrant’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 30, 2013 and incorporated herein by reference). 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). 80 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). 10.15 10.16 10.17 10.18 Form of Restricted Award Agreement - Performance between NNN and the Participant of NNN (filed as Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2012, and incorporated herein by reference). Form of Restricted Award Agreement - Service between NNN and the Participant of NNN (filed as Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2012, and incorporated herein by reference). Form of Restricted Award Agreement - Special Grant between NNN and the Participant of NNN (filed as Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2012, and incorporated herein by reference). First Amendment to Amended and Restated Credit Agreement, dated as of October 31, 2012, 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 November 1, 2012, and incorporated herein by reference). 10.19 Employment Agreement dated as of January 2, 2014, between the Registrant and Stephen A. Horn, Jr. (filed herewith). 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 23.1 Ernst & Young LLP dated February 19, 2014 (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). 81 101 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, 2013, formatted in Extensible Business Reporting Language: (i) consolidated balance sheets, (ii) consolidated statements of comprehensive income, (iii) consolidated statements of cash flows, and (iv) notes to 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). 82 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 19th day of February, 2014. 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. 83 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 19, 2014 February 19, 2014 February 19, 2014 February 19, 2014 February 19, 2014 February 19, 2014 February 19, 2014 February 19, 2014 February 19, 2014 84 (This page intentionally left blank.) (This page intentionally left blank.) SHAREHOLDER INFORMATION INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: Ernst & Young LLP CORPORATE OFFICE: National Retail Properties, Inc. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 www.nnnreit.com 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 FORM 10K A copy of the Company’s Form 10-K, as ﬁled with the Securities and Exchange Commission (SEC) for ﬁscal 2013, 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 by visiting www.nnnreit.com. During ﬁscal 2013, the Company ﬁled with the New York Stock Exchange (NYSE) the Certiﬁcation of its Chief Executive Oﬃcer conﬁrming that the Chief Executive Oﬃcer was not aware of any violations by the Company of the NYSE’s corporate governance listing standards. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT www.nnnreit.com

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