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 LONGTERM
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 NETLEASED
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
WELLLADDERED 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
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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 10K
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