DELIVERING SUSTAINABLE GROWTH
25 Years of Consecutive
Annual Dividend Increases
NNN CONSISTENTLY
OUTPERFORMS
the REIT Industry and Major EQUITY Indices
Annual Total Return Comparison For Periods Ending December 31, 2014
TOTAL RETURN
COMPARISON
(NNN = $39.37 at 12/31/2014)
NATIONAL RETAIL PROPERTIES (NNN)
35.8%
20.0%
19.4%
13.3%
17.5%
14.1%
15.9%
1 YEAR
3 YEARS
5 YEARS
10 YEARS
15 YEARS
20 YEARS 25 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)
S&P 600 Index (SML)
* Russell 1000 Index (RIY)
* Russell 1000 Value Index (RLV)
Russell 2000 Index (RTY)
Russell 2000 Value Index (RUJ)
* NNN is a member of this index (removed from S&P 600 and
added to S&P 400 in Dec. 2011; removed from Russell 2000
and added to Russell 1000 in June 2012)
28.0%
30.4%
13.6%
14.8%
9.7%
5.7%
13.2%
13.4%
4.9%
4.2%
16.4%
16.3%
20.3%
23.7%
19.9%
20.2%
20.5%
20.8%
19.2%
18.2%
16.9%
17.0%
15.4%
17.3%
16.5%
17.2%
15.6%
15.4%
15.5%
14.2%
8.3%
8.3%
7.7%
9.3%
9.7%
9.0%
7.9%
7.3%
7.7%
6.8%
12.7%
12.6%
4.2%
1.9%
9.6%
9.8%
4.6%
6.6%
7.4%
n/a
11.5%
11.3%
9.8%
10.5%
12.8%
11.6%
10.0%
10.5%
9.6%
n/a
11.2%
n/a
9.6%
9.8%
n/a
n/a
7.6%
n/a
8.2%
n/a
Source: Bloomberg
TABLE OF CONTENTS
3 | SHAREHOLDER’S LET TER
6 | HISTORICAL FINANCIAL HIGHLIGHTS
16 | OFFICERS AND DIREC TORS
INSIDE BACK COVER | SHAREHOLDER INFORMATION
VALUE OF $1,000
INVESTMENT
As of December 31, 2014
1 YEAR
3 YEARS
5 YEARS
10 YEARS
15 YEARS
20 YEARS 25 YEARS
NATIONAL RETAIL PROPERTIES (NNN)
$
1,358
$
1,726
$
2,424
$
3,489
$
11,221
$
14,085
$
39,830
Indices
* NAREIT Equity REIT Index (FNERTR)
* Morgan Stanley REIT Index (RMS G)
S&P 500 Index (SPX)
Nasdaq (CCMP)
* S&P 400 Index (MID)
S&P 600 Index (SML)
* Russell 1000 Index (RIY)
* Russell 1000 Value Index (RLV)
Russell 2000 Index (RTY)
Russell 2000 Value Index (RUJ)
$
$
$
$
$
$
$
$
$
$
1,280
1,304
1,136
1,148
1,097
1,057
1,132
1,134
1,049
1,042
$
$
$
$
$
$
$
$
$
$
1,575
1,572
1,741
1,891
1,722
1,735
1,751
1,762
1,692
1,651
$
$
$
$
$
$
$
$
$
$
2,183
2,196
2,047
2,218
2,144
2,214
2,064
2,045
2,056
1,944
$
$
$
$
$
$
$
$
$
$
2,222
2,222
2,090
2,424
2,515
2,365
2,145
2,015
2,104
1,938
$
$
$
$
$
$
$
$
$
* NNN is a member of this index (removed from S&P 600 and
added to S&P 400 in Dec. 2011; removed from Russell 2000
and added to Russell 1000 in June 2012)
5,986
5,915
1,862
1,334
$
$
$
$
8,836
$
14,339
8,540
n/a
6,499
$
9,847
7,353
$
10,400
3,961
$
11,142
8,964
n/a
n/a
$
$
$
$
4,087
1,966
2,608
2,898
n/a
6,727
$
6,170
7,313
n/a
6,255
$
7,140
n/a
n/a
CELEBRATING 25 CONSECUTIVE
ANNUAL DIVIDEND INCREASES
We are proud to be celebrating 25 consecutive years of annual dividend increases and joining an elite group
of companies which have been able to consistently grow results through all types of economic environments.
These dividends have been a large part of our 15.9% average annual total return over the past 25 years,
which would have turned a $1,000 investment in 1989 into $39,830.
AT LEAST 8% FFO
GROWTH PER SHARE
in each of 2011, 2012, 2013 and 2014
2
NATIONAL RETAIL PROPERTIES
DEAR FELLOW NNN
SHAREHOLDERS
I am delighted to report that National Retail Properties (NNN) completed another terrific year of
operational performance. In addition to producing excellent per share growth we also maintained a
very strong balance sheet. In 2014, we achieved a milestone when we raised our annual dividend for the
25th consecutive year. This long-term dividend growth track record places us in an elite group of only
99 public companies and is a record we intend to perpetuate.
Our strategy to build long-term shareholder value has not changed 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 increase annually our dividend per share;
• to achieve these dual objectives while assuming below average balance sheet and portfolio risk.
We have generated an average annual total return to NNN shareholders of 15.9% over the past 25 years,
outperforming virtually all of the major equity indices.
While many executives articulate that they manage the best team in their industry, our multi-year financial
results give me great confidence that my belief in our team is, in fact, accurate. I am very proud that our
outstanding associates have on average worked for NNN for 9.2 years and two-thirds of our associates have
worked for the company at least five years. Management has focused extensively on creating a culture and
work environment that is conducive to attracting and retaining high caliber talent. Our strong culture is
complemented by our emphasis on performance at the very highest level.
Robert Collier wrote “Success is the sum of small efforts, repeated day in and day out.” As managers
of your company we strive to ensure that all of the decisions which our team makes drive shareholder
value. Our “A” quality associates are extremely skilled at managing the myriad of small dollar decisions
we make every day. This focus is embedded in all of our departments, especially in the support functions
such as accounting, in-house legal, property management and IT, which are the functional areas where the
majority of our team works.
25
3
In 2014, our portfolio averaged
98.6% OCCUPANCY
12th consecutive year at 96% or more
4
NATIONAL RETAIL PROPERTIES
OUR LONG-TERM
FOCUS AND STRATEGY
Our shareholder value creation strategy continues to include the following primary tactics:
• Maintain a diversified and well-occupied net-leased retail property portfolio. After thoughtful
consideration, we are not pursuing office and industrial properties as our experience shows that
well-located retail locations generate better risk-adjusted shareholder returns.
• Adhere to our differentiated tactic of acquiring 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 an impressive 89% over the last four years.
• Continue 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 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, develop and retain a best-in-class team of talented professionals.
A
EA
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L
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R
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5
55
11
00
22
2015
66
66
011
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22
2016
77
1
0
00
22
2017
88
1
00
200
22
2018
99
1
00
2
22
2019
00
22
00
2
2
2020
11
22
00
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2021
22
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33
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2023
4
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5
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5
OUR HISTORICAL FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
GROSS REVENUES(1)
$ 435,248
$
397,006
$
342,059
$
271,696
$
237,062
2014
2013
2012
2011
2010
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
179,777
191,170
190,601
154,006
160,085
160,145
132,338
141,937
142,015
84,463
92,416
92,325
64,231
73,353
72,997
4,926,714
4,454,523
3,988,026
3,435,043
2,713,575
1,741,054
1,570,059
1,586,964
1,339,109
1,133,685
3,082,515
2,777,045
2,296,285
2,002,498
1,527,483
204,157
189,107
167,495
133,720
125,391
—
19,047
16,387
—
19,047
8,876
1,979
15,449
—
6,785
6,785
—
—
—
—
124,257,558
118,204,148
106,965,156
88,100,076
82,715,645
124,710,226
119,864,824
109,117,515
88,837,057
82,849,362
$ 1.24
$
1.06
$
1.04
$
0.88
$
1.05
1.02
1.24
1.24
1.24
1.65
—
1.11
1.10
1.60
—
1.13
1.11
1.56
0.87
0.96
0.96
1.53
0.69
0.69
0.80
0.80
1.51
0.537760
1.843750
1.843750
Series D preferred depositary stockholders
1.656250
1.656250
1.343403
Series E preferred depositary stockholders
1.425000
0.771875
—
—
—
—
—
OTHER DATA:
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
FUNDS FROM OPERATIONS – AVAILABLE
TO COMMON STOCKHOLDERS(2)
$ 296,733
$
274,421
$
228,130
$
177,728
$
187,914
(541,558)
(568,040)
(601,759)
(752,068)
(220,260)
253,944
260,977
293,028
229,518
373,623
193,682
574,374
139,834
19,169
108,625
(1)Gross revenues include revenues from NNN’s continuing and discontinued operations. Prior to January 1, 2014, in accordance with FASB guidance on Accounting
for the Impairment or Disposal of Long-Lived Assets, NNN 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.
Effective January 1, 2014, NNN has early adopted ASU 2014-08. Therefore, only disposals representing a strategic shift in operations are to be presented as
discontinued operations. This requires the Company to continue to classify any Property disposal or Property classified as held for sale as of December 31, 2013,
as discontinued operations prospectively.
(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.
6
NATIONAL RETAIL PROPERTIES
OUR 2014
PERFORMANCE
The demand for all property types, including net-leased retail properties, continues to be elevated 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 2014 include the following, as we:
• Acquired 221 new properties, investing $618 million. Internally we continue to emphasize repeat
acquisitions from existing relationship tenants. Notably the yield that we receive when we acquire
properties remains higher than those of our peers.
• Sold 27 properties for $55 million generating gains of $11 million. (These gains are not included in FFO.)
• Leased or renewed 44 properties and ended the year with 98.6% portfolio occupancy, which is well
above the REIT industry average. This is the 12th consecutive year that our portfolio has been at least
96% occupied.
• Completed a 10-year, unsecured note offering raising $350 million at an all-in interest rate of 3.92%.
We also took advantage of the attractive equity markets and raised a total of $350 million of common
equity during the year.
• Increased our annual dividend to $1.65 per share, which represents the 25th consecutive annual
dividend increase.
S
25 CONSECUTIVE ANNUAL DIVIDEND INCREASES
S
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7
AVERAGE REMAINING
LEASE TERM OF 12 YEARS
with only 6% of current annualized base rent expiring through 2017
8
NATIONAL RETAIL PROPERTIES
OUR DIVERSIFIED
PORTFOLIO
National Retail Properties owns a fully diversified portfolio of 2,054 retail properties
that on average cost $2.6 million each. Our properties are located in 47 states and
are leased to over 400 national and regional tenants operating in 38 different retail
industry classifications.
We have modest re-leasing risk over the next several years, with only 6% of our current
annualized 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.
Currently, 66% of our rent comes from companies that are either public or have rated
debt securities outstanding. We are pleased that our careful evaluation of retailers has
led us to tenants with improving financial performance. Within the last 24 months,
several of our tenants have either been acquired by investment grade rated companies
or completed initial public offerings.
A DIVERSE NATIONAL PORTFOLIO
AATTTIOOONNNAAALLL PPPOOOORRRTTTFFFOOOLLIOOO
A
AAA
N
N
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D
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STATES WITH NNN PROPERTIES
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LOCATION DISTRIBUTION BY REGION
TTRRIBBUUTT OONN BBYYY RREEGGIOONN
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AT
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C
N
N
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6
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WEST | 4.6%
|
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|
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15.9% AVERAGE
OVER 25 YEARS
annual total return
10
NATIONAL RETAIL PROPERTIES
OUR DIFFERENTIATED
APPROACH TO
ACQUISITIONS
Over the last four years we have acquired 946 properties for $2.7 billion at an average initial cash
yield of 8.0%. Our outstanding performance is due in part to our commitment to being very proactive in
sourcing acquisitions. We agree with Napoleon Hill who wrote “Patience, persistence and perspiration
make an unbeatable combination for success.”
Our disciplined approach to acquisitions has enabled us to meaningfully expand and further diversify our
portfolio. We believe that this approach is sustainable for the following reasons:
• The total size of the single tenant retail property market is estimated to be in the $1 trillion range so there
are plenty of future growth opportunities.
• Given our significant market presence, strong balance sheet and solid reputation, we evaluate all the
major transactions marketed by intermediaries.
Our acquisition officers and our senior management team have developed preferred relationships with growing
retailers. These “partnerships” with our tenants have been built with an aggressive direct calling effort. As a
result, many of our properties are acquired from what we describe as relationship tenants. These are tenants
with whom we have recently completed transactions and established a recurring programmatic pipeline.
Over the last five years our team has done a terrific job of earning the respect and trust of over two dozen
growing retailers that come to us to provide repeat sale-leaseback transactions. By dealing directly with
retailers, we acquire those properties that tenants expect to operate for a long time and have rents that are
at or below market. Both of these factors are attractive risk mitigants.
L
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-
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WELL-LADDERED DEBT MATURITIES (as of December 31, 2014)
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4
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3.4%
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$ 350M _____________________________________________________________________________________________________________________________________________________________________________________
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$ 300M _____________________________________________________________________________________________________________________________________________________________________________________
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$ 250M _____________________________________________________________________________________________________________________________________________________________________________________
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$ 200M _____________________________________________________________________________________________________________________________________________________________________________________
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$ 150M _____________________________________________________________________________________________________________________________________________________________________________________
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$ 100M _____________________________________________________________________________________________________________________________________________________________________________________
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2015
55
11
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2016
6
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2017
77
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2
2018
8
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2019
99
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2020
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2023
3
233
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2024
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2
22
11
66% OF RENT
comes from public companies or those with rated debt
12
NATIONAL RETAIL PROPERTIES
E
OUR CAPITAL STRUCTURE
R
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ross Boook AAssetss)
(as of December 31, 2014 – based on Total Gross Book Assets)
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i
OUR STRONG
BALANCE SHEET
We continue to adhere to our strategy of maintaining an investment grade balance
sheet. At the end of the year our total debt-to-total gross book assets remained just
less than 33%. In recent years, permanent capital has been both well-priced and
plentiful and we consciously chose to take advantage of this opportunity. In the short
term, this had the effect of lowering per share earnings growth, however this “dry
powder” puts us in an excellent position to capitalize on opportunities that we identify.
Inevitably interest rates, in particular those at the short end of the curve, will increase
from the current artificially low rates. We mitigate this risk by maintaining a fortress-
like balance sheet and by using long-term fixed rate debt. By the way, at the end of
2014 we had zero floating rate debt.
E
NNN OCCUPANCY VS. REIT INDUSTRY AVERAGE
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_______________________________________________________________________________________________________________________________________________________________________________________
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_______________________________________________________________________________________________________________________________________________________________________________________
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_______________________________________________________________________________________________________________________________________________________________________________________
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3
2003
03
000
00
22
44
2004
00
00
20
22
55
2005
00
00
22
66
2006
0
000
00
22
77
2007
00
00
20
22
8
2008
88
00
00
22
99
2009
0
00
00
22
00
2010
1
00
20
22
11
2011
11
00
22
2
2012
22
11
00
22
33
2013
1
00
20
22
44
2014
11
00
22
13
87%
of expiring leases were
RENEWED from
2007 through
2014
14
NATIONAL RETAIL PROPERTIES
KEY ELEMENTS FOR
SHAREHOLDER VALUE
CREATION AT NNN
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 which allows for future growth.
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,
yy
Craig Macnab
Chairman and Chief Executive Officer
S
S
S
E
E
E
P
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F
F
N
N
N
NUMBER OF PROPERTIES
M
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B
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R
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88
00
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20
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2008
99
00
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00
22
2009
0
00
11
00
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2010
11
11
00
22
2011
22
11
00
22
2012
33
1
00
2
22
2013
44
1
0
200
22
2014
15
OFFICERS
AND DIRECTORS
EXECUTIVE OFFICERS
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
CHRISTOPHER P.
TESSITORE
Executive Vice President
& General Counsel
STEPHEN A. HORN, JR.
Executive Vice President
& Chief Acquisition 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
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 19, 2015)
16
NATIONAL RETAIL PROPERTIES
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, 2014
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, 2014 was $4,578,105,000.
The number of shares of common stock outstanding as of February 12, 2015 was 132,216,969.
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 2015 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
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Legal Proceedings
Properties
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
1
6
14
14
14
14
15
18
20
37
38
73
73
74
75
75
75
75
75
76
81
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,” and each individually, a "Property"). As of
December 31, 2014, NNN owned 2,054 Properties with an aggregate gross leasable area of approximately 22,479,000 square
feet, located in 47 states, with a weighted average remaining lease term of 12 years. Approximately 99 percent of the
Properties were leased as of December 31, 2014.
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 30, 2015, NNN employed 64 associates.
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 a website at www.nnnreit.com where NNN’s filings with the Securities and Exchange
Commission (the “Commission”) can be downloaded free of charge.
The common shares of National Retail Properties, Inc. are traded on the New York Stock Exchange (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.”
1
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 the Board of Directors and, in general, may be amended or revised
from time to time by management and 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’
retail 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 and real estate taxes and assessments. 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, tenant's line of trade, 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 NNN's performance compared to that of the REIT industry.
The operating strategies employed by NNN have allowed NNN to increase the annual dividend (paid quarterly) per common
share for 25 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 source, 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, age and title status 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,
the tenant’s industry,
the terms of any existing leases,
the rent to be paid by the tenant,
the potential for, and current extent of, any environmental problems, and
any existing indebtedness encumbering the property which may be assumed or incurred in connection with
acquiring or refinancing these investments.
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. Additionally, NNN does not intend to engage in activities that will make NNN an
investment company under the Investment Company Act of 1940, as amended.
2
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.
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 $650,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2014, there was no outstanding
balance and $650,000,000 was available for future borrowings under the Credit Facility.
As of December 31, 2014, NNN’s ratio of total debt to total gross assets (before accumulated depreciation and amortization)
was approximately 33 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 24 percent. Certain financial agreements 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.
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, 2014, NNN owned 2,054 Properties with an aggregate gross leasable area of approximately 22,479,000
square feet, located in 47 states, with a weighted average remaining lease term of 12 years. Approximately 99 percent of total
Properties were leased as of December 31, 2014.
The following table summarizes the Property Portfolio as of December 31, 2014 (in thousands):
Land
Building
Size(1)
Acquisition Cost(2)
High
Low
Average
High
Low
Average
2,223
142
2
1
98
11
$ 8,882
$
5
$
894
29,373
19
1,717
Approximate square feet.
(1)
(2) Costs vary depending upon size, local market conditions and other factors.
3
As of December 31, 2014, NNN has agreed to fund construction commitments on leased Properties. The improvements are
estimated to be completed within 12 months. These construction commitments are outlined in the table below (dollars in
thousands):
Number of properties
Total commitment(1)
Amount funded
Remaining commitment
26
110,081
57,465
52,616
$
$
$
(1)
Includes land, construction costs, tenant improvements and lease costs.
Leases
The following is a summary of the general structure of the leases in the Property Portfolio, 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, 2014, 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 leases
provide for annual base rental payments (payable in monthly installments) ranging from $1,000 to $2,656,000 (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, NNN's 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 the Property
Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2014:
% of
Annual
Base
Rent(1)
1.2%
1.5%
3.2%
6.9%
3.4%
3.9%
2015
2016
2017
2018
2019
2020
# of
Properties
30
31
49
182
74
112
Gross
Leasable
Area(2)
384,000
558,000
1,074,000
1,643,000
1,030,000
1,406,000
% of
Annual
Base
Rent(1)
4.4%
6.4%
3.0%
2.9%
2021
2022
2023
2024
# of
Properties
102
95
55
50
Gross
Leasable
Area(2)
1,005,000
1,171,000
946,000
771,000
Thereafter
63.2%
1,236
11,950,000
Based on annualized base rent for all leases in place as of December 31, 2014.
(1)
(2) Approximate square feet.
4
The following table summarizes the diversification of the 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
Theaters
Family entertainment centers
Automotive parts
Health and fitness
Banks
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Sporting goods
Other
% of Annual Base Rent(1)
2014
18.0%
9.1%
7.2%
6.5%
5.2%
5.1%
4.7%
3.9%
3.7%
3.5%
2013
19.7%
9.7%
7.6%
5.5%
4.5%
2.3%
5.1%
4.3%
4.1%
3.7%
2012
19.8%
10.7%
7.6%
5.2%
4.7%
2.1%
5.6%
3.7%
0.2%
4.0%
33.1%
100.0%
33.5%
100.0%
36.4%
100.0%
(1) Based on annualized base rent for all leases in place as of December 31 of the respective year.
The following table summarizes the diversification of the Property Portfolio by state as of December 31, 2014:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
State
Texas
Florida
North Carolina
Illinois
Georgia
Virginia
Indiana
Ohio
Pennsylvania
California
Other
# of
Properties
419
168
130
71
109
87
84
60
99
40
% of
Annual
Base Rent(1)
20.4%
9.7%
5.5%
5.0%
4.9%
4.2%
4.0%
3.3%
3.3%
3.1%
787
2,054
36.6%
100.0%
(1)
Based on annualized base rent for all leases in place as of December 31, 2014.
As of December 31, 2014, NNN did not have any tenant that accounted for ten percent or more of its rental income.
Mortgages and Notes Receivable
Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):
Mortgages and notes receivable
Accrued interest receivable
2014
2013
$
$
10,974
$
101
11,075
$
16,942
177
17,119
5
Commercial Mortgage Residual Interests
NNN holds the commercial mortgage residual interests (“Residuals”) from seven securitizations. Each of the Residuals is
reported at fair value; 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 $11,626,000 and $11,721,000 at December 31,
2014 and 2013, 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 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 13, 2015, NNN has 69 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 13, 2015, 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 the 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, the 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, NNN’s financial condition,
NNN's results of operations or the trading price of NNN’s shares.
6
Potential consequences of challenging and volatile 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 the 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 2015 and 2024. 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 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 the 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 the Property Portfolio annual base rent is concentrated in specific industry
classifications, tenants and in specific geographic locations.
As of December 31, 2014, approximately,
•
•
•
46.0% of the Property Portfolio annual base rent is generated from five retail lines of trade, including
convenience stores (18.0%) and full-service restaurants (9.1%),
22.8% of the Property Portfolio annual base rent is generated from five tenants, including Energy Transfer
Partners (Sunoco) (6.5%), Mister Car Wash (4.6%), Pantry (4.0%), 7-Eleven (3.9%) and LA Fitness (3.8%),
and
45.5% of the Property Portfolio annual base rent is generated from five states, including Texas (20.4%) and
Florida (9.7%).
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 the 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 the 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 the 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 or its 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 the 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 13, 2015, NNN has 69 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 reduce rent or 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, 2014, the Residuals had a carrying value of $11,626,000. The value of these Residuals is based on
assumptions to determine their fair value. These assumptions include, but are not limited to, discount rate, loan loss,
prepayment speed and interest rate assumptions 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.
As of December 31, 2014, mortgages and notes receivables had an outstanding principal balance of $10,974,000. 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 and 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. 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
9
senior creditors’ claims are satisfied. Where debt senior to NNN’s loans exists, the presence of intercreditor arrangements
may limit NNN’s ability to amend loan documents, assign the loans, accept prepayments, exercise remedies and control
decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy proceedings and litigation can significantly
increase the time needed for NNN to acquire underlying collateral, if any, in the event of a default, during which time the
collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.
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.
The 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, 2014, NNN owned 29 vacant, un-leased Properties, which accounted for approximately one percent of
total Properties. NNN is actively marketing these properties for sale or lease but may not be able to sell or lease these
properties on favorable terms or at all. The lost revenues and increased property expenses resulting from the rejection by any
bankrupt tenant of any of their respective leases with NNN could have a material adverse effect on the liquidity and results of
operations of NNN if NNN is unable to re-lease the Properties at comparable rental rates and in a timely manner. As of
February 13, 2015, less than one percent of the total gross leasable area of the 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, 2014, NNN had outstanding debt including mortgages payable of $26,339,000, total unsecured notes
payable of $1,714,715,000 and zero 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.
11
NNN cannot assure stockholders that any such refinancing, sale of assets or additional financing would be possible or, if
possible, on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable or would
not result in a material decline in earnings.
NNN is obligated to comply with financial and other covenants in its debt 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, 2014, NNN had approximately $1,741,054,000 of outstanding indebtedness, of which approximately
$26,339,000 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 on the property securing the debt,
restricting its ability to amend or modify existing leases on the property securing the debt, and
establishing certain prepayment restrictions.
In addition, NNN’s debt instruments may contain cross-default provisions, in which case a default of NNN under one debt
instrument will be a default of NNN under multiple or all debt instruments of NNN.
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 REIT 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. 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, so long as 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, 2014, 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, impair the company's access to capital, 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 and expose NNN to
liabilities to tenants, employees, capital providers, and other third parties.
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, 2009 and ending
December 31, 2014. The graph assumes an investment of $100 on December 31, 2009.
Comparison to Five-Year Cumulative Total Return
Indexed Total Return
(As of December 31, 2014)
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, 1999 and ending December 31, 2014. The graph assumes an investment of $100 on December 31, 1999.
Comparison to Fifteen-Year Cumulative Total Return
Indexed Total Return
(As of December 31, 2014)
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.
2014
High
Low
Close
Dividends paid per share
2013
High
Low
Close
Dividends paid per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
36.35
$
37.65
$
38.04
$
40.49
$
30.08
34.32
0.405
32.94
37.19
0.405
34.34
34.57
0.420
34.42
39.37
0.420
$
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
40.49
30.08
39.37
1.650
41.98
30.01
30.33
1.600
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
2014
2013
$
1.306992
79.2116% $
1.224568
0.006212
0.008603
0.015362
0.312831
0.3765%
0.5214%
0.9310%
18.9595%
0.056784
—
0.000650
0.317998
76.5355%
3.5490%
—
0.0406%
19.8749%
$
1.650000
100.0000% $
1.600000
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 2015, NNN paid dividends to its stockholders of $55,314,000, or $0.42 per share, of common stock.
On January 30, 2015, there were 1,852 stockholders of record of NNN's common stock.
In February 2015, 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 16, 2015.
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):
2014
2013
2012
2011
2010
$
435,248
$
397,006
$
342,059
$
271,696
$
237,062
179,777
191,170
190,601
4,926,714
1,741,054
3,082,515
154,006
160,085
160,145
4,454,523
1,570,059
2,777,045
204,157
189,107
—
19,047
16,387
—
19,047
8,876
132,388
141,937
142,015
3,988,026
1,586,964
2,296,285
167,495
1,979
15,449
—
84,463
92,416
92,325
3,435,043
1,339,109
2,002,498
133,720
6,785
—
—
64,231
73,353
72,997
2,713,575
1,133,685
1,527,483
125,391
6,785
—
—
124,257,558
118,204,148
106,965,156
88,100,076
82,715,645
124,710,226
119,864,824
109,117,515
88,837,057
82,849,362
$
1.24
$
1.24
1.06
$
1.05
1.04
$
1.02
0.88
$
0.87
1.24
1.24
1.65
—
1.11
1.10
1.60
—
1.656250
1.425000
1.656250
0.771875
1.13
1.11
1.56
0.537760
1.343403
—
0.69
0.69
0.80
0.80
1.51
0.96
0.96
1.53
1.843750
1.843750
—
—
—
—
Operating activities
Investing activities
Financing activities
$
296,733
$
274,421
$
228,130
$
177,728
$
187,914
(541,558)
253,944
(568,040)
293,028
(601,759)
373,623
(752,068)
574,374
(220,260)
19,169
Funds from operations – available to common
stockholders(2)
260,977
229,518
193,682
139,834
108,625
(1) Gross revenues include revenues from NNN’s continuing and discontinued operations. Prior to January 1, 2014, in accordance with
FASB guidance on Accounting for the Impairment or Disposal of Long-Lived Assets, NNN 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. Effective January 1, 2014, NNN has early adopted
ASU 2014-08. Therefore, only disposals representing a strategic shift in operations are to be presented as discontinued operations.
This requires the Company to continue to classify any Property disposal or Property classified as held for sale as of December 31,
2013, as discontinued operations prospectively.
(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
18
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.
Funds From Operations (FFO) Reconciliation
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.
The following table reconciles FFO to the most directly comparable GAAP measure, net earnings for the years ended
December 31:
2014
2013
2012
2011
2010
Reconciliation of funds from operations:
Net earnings attributable to NNN’s stockholders
$
190,601
$
160,145
$
142,015
$
92,325
$
72,997
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)
(16,387)
—
(19,047)
(8,876)
(1,979)
(15,449)
—
—
—
(3,098)
(6,785)
(6,785)
—
—
—
—
—
—
Net earnings available to common stockholders
155,167
132,222
121,489
85,540
66,212
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
115,888
99,048
3
—
—
343
—
—
(10,904)
823
(5,442)
3,347
73,685
1,381
112
(2,341)
(10,956)
10,312
52,270
1,866
176
—
(449)
431
41,680
2,129
178
—
(1,574)
—
FFO available to common stockholders
$
260,977
$
229,518
$
193,682
$
139,834
$
108,625
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,” or each individually, a "Property").
As of December 31, 2014, NNN owned 2,054 Properties, with an aggregate gross leasable area of approximately 22,479,000
square feet, located in 47 states, with a weighted average remaining lease term of 12 years. Approximately 99 percent of the
Properties were leased as of December 31, 2014.
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 reviews the creditworthiness of its current and prospective tenants. This evaluation includes reviewing available
financial statements, press releases, public credit ratings from major credit rating agencies, industry news publications,
financial market data (debt and equity pricing), and developing a thorough understanding of the tenant's business and
operations, including periodically meeting with senior management of certain tenants.
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. The 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, 2014, 2013 and 2012, the Property Portfolio has remained at least 98 percent leased. The
average remaining lease term of the 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.
20
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. Acquisition and closing costs incurred on the acquisition of real estate with an in-place lease is
expensed as incurred and recorded as real estate acquisition costs.
Impairment – Real Estate. Based upon certain events or changes in circumstances, management periodically assesses its
Properties for possible impairment whenever 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 value 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 estimated
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 properties under construction commence upon completion of construction of the
leased asset and delivery of the leased asset to the tenant. 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.
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, utilities, 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, 2014, 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.
21
Results of Operations
Property Analysis
General. The following table summarizes the 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)
2014
2013
2012
2,054
1,860
1,622
22,479,000
20,402,000
19,168,000
2,025
1,827
1,588
99%
12
98%
12
98%
12
Total gross leasable area (square feet) – leased or operated
21,938,000
19,872,000
18,524,000
The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of the Property
Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2014:
% of
Annual
Base Rent(1)
1.2%
1.5%
3.2%
6.9%
3.4%
3.9%
# of
Properties
30
31
49
182
74
112
2015
2016
2017
2018
2019
2020
Gross
Leasable
Area(2)
384,000
558,000
1,074,000
1,643,000
2021
2022
2023
2024
% of
Annual
Base Rent(1)
4.4%
6.4%
3.0%
2.9%
# of
Properties
102
95
55
50
Gross
Leasable
Area(2)
1,005,000
1,171,000
946,000
771,000
1,030,000
Thereafter
63.2%
1,236
11,950,000
1,406,000
(1) Based on the annualized base rent for all leases in place as of December 31, 2014.
(2) Approximate square feet.
22
The following table summarizes the diversification of the 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
Theaters
Family entertainment centers
Automotive parts
Health and fitness
Banks
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Sporting goods
Other
% of Annual Base Rent(1)
2014
18.0%
9.1%
7.2%
6.5%
5.2%
5.1%
4.7%
3.9%
3.7%
3.5%
2013
19.7%
9.7%
7.6%
5.5%
4.5%
2.3%
5.1%
4.3%
4.1%
3.7%
2012
19.8%
10.7%
7.6%
5.2%
4.7%
2.1%
5.6%
3.7%
0.2%
4.0%
33.1%
100.0%
33.5%
100.0%
36.4%
100.0%
(1) Based on annualized base rent for all leases in place as of December 31 of the respective year.
The following table summarizes the diversification of the Property Portfolio by state as of December 31, 2014:
State
Texas
Florida
North Carolina
Illinois
Georgia
Virginia
Indiana
Ohio
Pennsylvania
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
California
Other
# of Properties
419
168
130
71
109
87
84
60
99
40
% of Annual
Base Rent(1)
20.4%
9.7%
5.5%
5.0%
4.9%
4.2%
4.0%
3.3%
3.3%
3.1%
787
2,054
36.6%
100.0%
(1) Based on annualized base rent for all leases in place as of December 31, 2014.
Property Acquisitions. The following table summarizes the Property acquisitions for each of the years ended December 31
(dollars in thousands):
Acquisitions:
Number of Properties
2014
2013
2012
221
275
232
Gross leasable area (square feet)
2,417,000
1,652,000
2,955,000
Initial cash yield
7.5%
7.8%
8.3%
Total dollars invested(1)
(1)
Includes dollars invested in projects under construction or tenant improvements for each respective year.
$
618,145
$
629,896
$
707,233
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 income tax expense (1)
Cap rate
2014
2013
2012
27
317,000
55,378
11,424
$
$
35
360,000
61,000
5,595
$
$
34
211,000
81,120
10,956
$
$
7.2%
7.5%
8.2%
(1) Amounts include deferred gains on previously sold properties.
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, 2014, 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
2014
2013
2012
Percent of Total
2013
2012
2014
2014
Versus
2013
Percent
2013
Versus
2012
Percent
$ 416,842
$ 376,424
$ 315,913
95.9%
95.6%
95.0%
10.7 %
19.2 %
13,875
13,340
11,817
2,296
1,471
2,243
1,834
2,290
2,673
3.2%
0.5%
0.4%
3.4%
0.4%
0.6%
3.5%
4.0 %
12.9 %
0.7%
56.1 %
(34.4)%
0.8%
(19.9)%
(14.3)%
$ 434,847
$ 393,525
$ 332,646
100.0%
100.0%
100.0%
10.5 %
18.3 %
(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 – 2014 versus 2013
Rental Income. Rental Income increased in amount and as a percent of the total revenues from continuing operations for the
year ended December 31, 2014 as compared to the same period in 2013. The increase for the year ended December 31, 2014,
is primarily due to a partial year of Rental Income received as a result of the acquisition of 221 properties with aggregate
gross leasable area of approximately 2,417,000 during 2014 and a full year of Rental Income received as a result of the
acquisition of 275 properties with a gross leasable area of approximately 1,652,000 square feet in 2013. In addition, the
increase was partially offset by a $613,000 decrease in lease termination fees for the year ended December 31, 2014, as
compared to December 31, 2013.
Real Estate Expense Reimbursement from Tenants. Real estate expense reimbursements from tenants increased for the year
ended December 31, 2014, as compared to the same period in 2013, but decreased as a percentage of total revenues from
continuing operations for the same period. The increase is primarily attributable to a full year of reimbursements from
properties acquired in 2013 and a partial year of reimbursements from certain newly acquired properties in 2014.
24
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 with aggregate
gross leasable area of approximately 1,652,000 square feet during 2013 and a full year of Rental Income received as a result
of the acquisition of 232 properties 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.
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 general and administrative expense, but was partially offset by a decrease in impairments during the year ended
December 31, 2014, as compared to the same period in 2013. 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
2014
2013
2012
$
32,518
$
31,095
$
18,905
116,162
256
760
18,497
99,274
1,185
3,580
31,828
17,425
73,806
2,812
3,899
$
$
$
168,601
$
153,631
$
129,770
(357) $
(1,493) $
85,510
1,391
85,822
1,485
86,544
$
85,814
$
(2,232)
83,787
364
81,919
Interest and other income
Interest expense
Real estate acquisition costs
Total other expenses (revenues)
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
Real estate acquisition costs
Percentage of Total
Operating Expenses
Percentage of
Revenues from
Continuing Operations
2014
2013
2012
2014
2013
2012
2014
Versus
2013
Percent
2013
Versus
2012
Percent
19.3 %
11.2 %
68.9 %
20.3 %
12.0 %
64.6 %
24.5 %
13.4 %
7.5 %
4.3 %
7.9 %
4.7 %
9.6 %
5.2 %
56.9 % 26.7 % 25.2 % 22.2 %
4.6 %
2.2 %
17.0 %
(2.3)%
6.2 %
34.5 %
0.2 %
0.8 %
2.2 %
0.1 %
0.3 %
0.8 %
(78.4)%
(57.9)%
0.4 %
2.3 %
3.0 %
0.2 %
0.9 %
1.2 %
(78.8)%
100.0 % 100.0 % 100.0 % 38.8 % 39.0 % 39.0 %
9.7 %
(0.4)%
(1.7)%
(2.7)%
(0.1)%
(0.4)%
(0.7)%
(76.1)%
98.8 % 100.0 % 102.3 % 19.7 % 21.8 % 25.2 %
1.6 %
1.7 %
0.4 %
0.3 %
0.4 %
0.1 %
(0.4)%
(6.3)%
0.9 %
(8.2)%
18.4 %
(33.1)%
2.4 %
308.0 %
4.8 %
Total other expenses (revenues)
100.0 % 100.0 % 100.0 % 19.9 % 21.8 % 24.6 %
25
Comparison of Expenses from Continuing Operations – 2014 versus 2013
General and Administrative Expenses. General and administrative expenses increased for the year ended December 31,
2014, as compared to the same period in 2013, 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, 2014, is primarily attributable to an increase in incentive compensation.
Real Estate. Real estate expenses increased for the year ended December 31, 2014, as compared to the same period in 2013,
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 2014 and a full year of reimbursable expenses from certain properties acquired
in 2013. Additionally, real estate expenses incurred on vacant properties increased for the year ended December 31, 2014.
The increase was partially offset by a decrease in real estate expenses that are not reimbursable by the tenant for the year
ended December 31, 2014, as compared to the same period in 2013.
Depreciation and Amortization. Depreciation and amortization expenses increased in amount and as a percentage of total
operating expenses and as a percentage of revenues from continuing operations for the year ended December 31, 2014, as
compared to the year ended December 31, 2013. The increase in expenses is primarily due to the acquisition of 221
properties with an aggregate gross leasable area of approximately 2,417,000 square feet in 2014 and 275 properties with an
aggregate gross leasable area of approximately 1,652,000 square feet during 2013.
Interest Expense. Interest expense decreased for the year ended December 31, 2014, as compared to the same period in 2013,
and 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)
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;
the issuance in May 2014 of $350,000,000 principal amount of notes payable with a maturity of June 2024,
and stated interest rate of 3.900%;
the repayment in June 2014 of $150,000,000 principal amount of notes payable with a stated interest rate of
6.250%;
the assumption of a mortgage in September 2014 of $2,824,000 in connection with a Property acquisition
with an interest rate of 6.400%;
the assumption of a mortgage in November 2014 of $14,430,000 in connection with a Property acquisition
with an interest rate of 5.230%; and
(vii)
the increase of $15,188,000 in the weighted average debt outstanding on the Credit Facility for the year
ended December 31, 2014, as compared to the same period in 2013.
Comparison of Expenses from Continuing Operations – 2013 versus 2012
General and Administrative Expenses. General and administrative expenses decreased for the year ended December 31,
2013, as compared to the same period in 2012, and decreased both as a percentage of total operating expenses and as a
percentage of revenues from continuing operations. The decrease in general and administrative expenses for the year ended
December 31, 2013, is primarily attributable to 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
26
properties with an aggregate gross leasable area of approximately 1,652,000 square feet in 2013 and 232 properties with an
aggregate gross leasable area of approximately 2,955,000 square feet during 2012.
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.
Discontinued Operations
Earnings. Effective January 1, 2014, NNN has early adopted the FASB issued Accounting Standards Update ("ASU")
2014-08. Under ASU 2014-08, only disposals representing a strategic shift in operations are to be presented as discontinued
operations. ASU 2014-08 requires the Company to continue to classify any Property disposal or Property classified as held
for sale as of December 31, 2013, as discontinued operations prospectively. Therefore, the revenues and expenses related to
these properties are presented as discontinued operations as of December 31, 2014. The Company did not classify any
additional properties as discontinued operations subsequent to December 31, 2013.
The following table summarizes the earnings before income tax expense from discontinued operations for the years ended
December 31 (dollars in thousands):
2014
2013
2012
Properties
Noncontrolling
interests
# of Sold
Properties
2
—
2
Gain
Earnings
$
$
155 (1) $
—
155
$
124
—
124
# of Sold
Properties
35
—
35
(1) Amount includes deferred gains on previously sold properties.
Gain
6,272 (1) $
$
Earnings
5,972
(152)
(163)
$
6,120
$
5,809
# of Sold
Properties
34
—
34
Gain
Earnings
$ 10,956 (1) $
9,549
—
(24)
$ 10,956
$
9,525
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, 2014, 2013 and 2012, NNN recognized real estate impairments on discontinued
operations of $63,000, $541,000 and $6,242,000, respectively.
27
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, 2014, there was no outstanding balance and $650,000,000 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.
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
2014
2013
2012
$
296,733
$
274,421
$
228,130
(541,558)
253,944
9,119
1,485
(568,040)
293,028
(591)
2,076
$
10,604
$
1,485
$
(601,759)
373,623
(6)
2,082
2,076
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
typically 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, 2014, 2013 and 2012, 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.
28
NNN’s financing activities for the year ended December 31, 2014, included the following significant transactions:
•
•
•
•
•
•
•
•
•
$46,400,000 in net payments to NNN's Credit Facility,
$346,068,000 in net proceeds from the issuance of the 3.90% notes payable in May,
$150,000,000 in repayment of the 6.25% notes payable in June,
$199,961,000 in net proceeds from the issuance of 5,462,500 shares of common stock in November,
$14,817,000 in net proceeds from the issuance of 422,406 shares of common stock in connection with the
Dividend Reinvestment and Stock Purchase Plan (“DRIP”),
$134,919,000 in net proceeds from the issuance of 3,758,362 shares of common stock in connection with
the at-the-market ("ATM") equity program,
$19,047,000 in dividends paid to holders of the depositary shares of NNN’s Series D Preferred Stock,
$16,387,000 in dividends paid to holders of the depositary shares of NNN’s Series E Preferred Stock, and
$204,157,000 in dividends paid to common stockholders.
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, proceeds from the disposition of certain 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, 2014, there was no outstanding balance and $650,000,000 was available for future
borrowings under the Credit Facility.
As of December 31, 2014, NNN’s ratio of total debt to total gross assets (before accumulated depreciation and amortization)
was approximately 33 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 24 percent. Certain financial agreements to which NNN is a
party contain covenants that limit NNN’s ability to incur debt under certain circumstances. The organizational documents of
NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its
financing strategy.
Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN’s
contractual obligations and commercial commitments outstanding as of December 31, 2014. The table presents principal cash
flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of
December 31, 2014.
Expected Maturity Date (dollars in thousands)
Total
2015
2016
2017
2018
2019
Thereafter
Long-term debt(1)
Operating lease
Total contractual cash obligations(2)
$ 1,750,448
$ 151,663
$
7,367
$ 253,355
$
7,704
528
714
728
$
624
743
602
758
$ 1,336,837
4,233
$ 1,758,152
$ 152,191
$
8,081
$ 254,083
$
1,367
$
1,360
$ 1,341,070
(1)
Includes amounts outstanding under mortgages payable and notes payable and excludes unamortized mortgage premiums and note
discounts.
(2) Excludes $17,396 of accrued interest payable.
In addition to the contractual obligations outlined above, 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, 2014, are outlined in the table below (dollars in thousands):
Number of properties
Total commitment(1)
Amount funded
Remaining commitment
26
110,081
57,465
52,616
$
$
$
(1) Includes land, construction costs, tenant improvements and lease costs.
29
As of December 31, 2014, 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 the 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 the 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 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, 2014, NNN owned 29 vacant, un-leased Properties
which accounted for approximately one percent of total Properties. Additionally, as of February 13, 2015, less than one
percent of the total gross leasable area of the 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.
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
$
2014
204,157
1.650
$
2013
189,107
1.600
$
2012
167,495
1.560
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
2014
2013
2012
$
1.306992
79.2116% $
1.224568
76.5355% $
1.199003
76.8592%
0.006212
0.008603
0.015362
0.312831
0.3765%
0.5214%
0.9310%
18.9595%
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%
$
1.650000
100.0000% $
1.600000
100.0000% $
1.560000
100.0000%
In February 2015, NNN paid dividends to its common stockholders of $55,314,000, or $0.42 per share of common stock.
30
Holders of NNN’s preferred stock issuances are entitled to receive, when and as authorized by the Board of Directors,
cumulative preferential cash distributions based on the stated rate and liquidation preference per annum. The following table
outlines 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
2014
2013
2012
$
— $
—
— $
—
1,979
0.537760
19,047
1.656250
19,047
1.656250
15,449
1.343403
16,387
1.425000
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.
The following presents the characterizations for tax purposes of such preferred stock dividends for the years ended
December 31:
2014
2013
2012
Series E
Series D
Percentage
of Total
Series E (3)
Series D
Percentage
of Total
Series D (2)
Series C (1)
Percentage
of Total
$ 1.393700
$ 1.619870
97.8035% $ 0.741150
$ 1.590323
96.0195% $ 1.255844
$ 0.502710
93.4823%
0.005738
0.006670
0.4027% 0.030332
0.065084
3.9296% 0.013979
0.005596
1.0406%
0.009177
0.010666
0.6440%
—
—
—
0.022371
0.008956
1.6652%
0.016385
0.019044
1.1498% 0.000393
0.000843
0.0509% 0.051209
0.020498
3.8119%
$ 1.425000
$ 1.656250
100.0000% $ 0.771875
$ 1.656250
100.0000% $ 1.343403
$ 0.537760
100.0000%
Ordinary
dividends
Qualified
dividends
Capital gain
Unrecaptured
Section 1250
Gain
(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 2015, 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 16, 2015.
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 and interest 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.
31
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
Total outstanding debt
2014
—
26,339
1,714,715
1,741,054
$
$
Percentage
of Total
— $
1.5%
98.5%
2013
46,400
9,475
1,514,184
100.0% $
1,570,059
Percentage
of Total
3.0%
0.6%
96.4%
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. Additionally indebtedness
may be used to refinance existing indebtedness.
Line of Credit Payable. In October 2014, NNN amended and restated its credit agreement increasing the borrowing capacity
under its unsecured revolving credit facility from $500,000,000 to $650,000,000 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 $56,590,000 and a weighted average interest rate of 1.2%
for the year ended December 31, 2014. The Credit Facility matures January 2019, with an option to extend maturity to
January 2020. As of December 31, 2014, the Credit Facility bears interest at LIBOR plus 92.5 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, 2014, there was no
outstanding balance and $650,000,000 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, 2014, NNN was in compliance with those covenants. In the event that NNN
violates any of these restrictive financial covenants, it could cause the indebtedness under the Credit Facility to be accelerated
and may impair NNN’s access to the debt and equity markets and limit NNN’s ability to pay dividends to its common and
preferred stockholders, each of which would likely have a material adverse impact on NNN’s financial condition and results
of operations.
Mortgages Payable. The following table outlines the mortgages payable included in NNN’s consolidated financial
statements (dollars in thousands):
Entered(1)
December 2001
December 2001
December 2001
February 2004
March 2005
June 2012(4)
September 2014(4)
November 2014(4)
Initial
Balance
Interest
Rate
Maturity(2)
Carrying
Value of
Encumbered
Asset(s)(3)
Outstanding Principal
Balance at December 31,
2014
2013
9.00% April 2014
$
— $
— $
$
623
698
485
6,952
1,015
6,850
2,957
9.00% April 2019
9.00% April 2019
6.90% January 2017
8.14% September 2016
5.75% April 2016
6.40% February 2017
15,151
5.23% July 2023
868
841
10,554
1,245
8,529
3,797
22,376
223
116
1,577
222
6,180
2,922
15,099
27
263
136
2,257
335
6,457
—
—
$
48,210
$
26,339
$
9,475
(1) Date entered represents the date that NNN acquired real estate subject to a mortgage securing a loan.
(2) Monthly payments include interest and principal, if any; the balance is due at maturity.
(3) Each loan is secured by a first mortgage lien on certain of the Properties. The carrying values of the assets are as of
December 31, 2014.
(4)
Initial balance and outstanding principal balance includes unamortized premium.
32
Notes Payable. Each of NNN’s outstanding series of non-convertible notes is summarized in the table below (dollars in
thousands):
Notes(1)
Issue Date
Principal
Discount(2)
2015(7)
2017(4)
2021(5)
2022
2023(6)
2024(8)
November 2005
$ 150,000
$
September 2007
July 2011
August 2012
April 2013
May 2014
250,000
300,000
325,000
350,000
350,000
390
877
4,269
4,989
2,594
707
Net
Price
Stated
Rate
Effective
Rate(3)
Maturity
Date
$ 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
349,293
3.900%
3.924%
June 2024
(1) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility.
(2) The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest
method.
(3)
Includes the effects of the discount, treasury lock gain/loss and swap gain/loss, as applicable.
(4) 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.
(5) 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.
(6) 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.
(7) NNN plans to use proceeds from the Credit Facility and/or potential debt or equity offerings to repay the outstanding indebtedness.
(8) NNN entered into three forward starting swaps with an aggregate notional amount of $225,000. Upon issuance of the 2024 Notes,
NNN terminated the forward starting swaps resulting in a liability of $6,312, which was deferred in other comprehensive income. The
deferred liability is being amortized over the term of the note using the effective interest method.
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 $15,500,000 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 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, 2014, 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 2014, NNN repaid the $150,000,000 6.250% notes payable that were due in June 2014.
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.
33
A description of NNN’s outstanding series of publicly held notes is found under “Debt – Notes Payable” above.
NNN completed the following underwritten public offerings of cumulative redeemable preferred stock that are still
outstanding ("Preferred Stock Shares") (dollars in thousands, except per share data):
Dividend
Rate(1)
Issued
6.625% February 2012
Depositary
Shares
Outstanding(2)
11,500,000
Gross
Proceeds
Stock
Issuance
Costs(3)
Dividend
Per
Depositary
Share
Earliest
Redemption
Date(4)
$ 287,500
$
9,855
$ 1.656250 February 2017
5.700% May 2013
11,500,000
287,500
9,856
1.425000 May 2018
Series
Series D(5)
Series E(6)
(1) Holders are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends.
(2) Representing 1/100th of a preferred share. Each issuance included 1,500,000 depositary shares in connection with the
underwriters' over-allotment.
(3) Consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses.
(4) NNN may redeem the 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.
(5) NNN used the net proceeds to redeem the 7.375% Series C Cumulative Redeemable Preferred Stock for an aggregate redemption
price of $92,000, excluding accumulated dividends of $283. NNN used the remainder of the net proceeds for general corporate
purposes, including repaying outstanding indebtedness under its Credit Facility.
(6) NNN used the net proceeds from the offering for general corporate purposes and funding property acquisitions.
The Preferred Stock Shares underlying the depositary shares rank senior to NNN’s common stock with respect to dividend
rights and rights upon liquidation, dissolution or winding up of NNN. The Preferred Stock Shares have no maturity date and
will remain outstanding unless redeemed. In addition, upon a change of control, as defined in the articles supplementary
fixing the rights and preferences of the Preferred Stock Shares, NNN may redeem the Preferred Stock Shares 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 Preferred
Stock Shares into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of
February 20, 2015, the Preferred Stock Shares were not redeemable or convertible.
Common Stock Issuances. In November 2014, NNN filed a prospectus supplement to the prospectus contained in its
February 2012 shelf registration statement and issued 5,462,500 shares (including 712,500 shares in connection with the
underwriters' over-allotment) of common stock at a price of $38.16 per share and received net proceeds of $199,961,000. In
connection with this offering, NNN incurred stock issuance costs totaling approximately $8,488,000, consisting primarily of
underwriters' fees and commissions, legal and accounting fees and printing expenses. The Company used the net proceeds
from this offering to repay outstanding indebtedness under the Credit Facility, to fund property acquisitions and for general
corporate purposes.
In May 2012, NNN established an ATM 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, of which 8,958,840 have been issued as of
December 31, 2014. The 2012 ATM will expire in accordance with its terms in May 2015. NNN used the net proceeds from
the 2012 ATM 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 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.
34
There were no common stock issuances pursuant to the 2012 ATM for the year ended December 31, 2014.
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, of which 6,038,812 have been issued as of
December 31, 2014. The 2013 ATM will expire in accordance with its terms in March 2015. NNN used the net proceeds from
the 2013 ATM 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 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)
2014
2013
3,758,362
2,280,450
$
35.90
$
134,919
2,195
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 the year ended December 31 (dollars in thousands):
Shares of common stock
Net proceeds
2014
2013
2012
422,406
764,891
2,101,644
$
14,817
$
25,407
$
56,102
The proceeds from the issuances were used to pay down outstanding indebtedness under NNN’s Credit Facility.
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
2014
2013
$
$
10,974
$
101
11,075
$
16,942
177
17,119
Commercial Mortgage Residual Interests
NNN holds the commercial mortgage residual interests (“Residuals”) from seven securitizations. Each of the Residuals is
recorded at fair value. 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.
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
Other than temporary valuation impairment
2014
2013
2012
$
875
256
$
511
$
1,185
1,132
2,812
35
Based on the expected timing of future cash flows relating to the Residuals certain valuation assumptions are made. During
the years ended December 31, 2014, 2013 and 2012, 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:
2014
2013
20%
20%
0.87% to 26.30% CPR
0.80% to 20.76% CPR
Frequency curve default model
Loss severity of loans in foreclosure
0.70% - 2.45% range
0.07% - 2.43% range
20%
20%
Yield:
LIBOR
Prime
(1) Conditional prepayment rate
Forward 3-month curve
Forward 3-month curve
Forward curve
Forward curve
36
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, 2014, 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, 2014 and 2013. The table presents principal payments and related interest rates by year for debt obligations
outstanding as of December 31, 2014. NNN has a variable interest rate risk on its Credit Facility which had no outstanding
balance as of December 31, 2014. The weighted average rate for the Credit Facility for the year ended December 31, 2014,
was 1.2%. The fair value of the Credit Facility as of December 31, 2014 and 2013 was $0 and $46,400,000, respectively. The
table incorporates only those debt obligations that existed as of December 31, 2014, 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, 2014.
Debt Obligations (dollars in thousands)
Fixed Rate Debt
Mortgages(1)
Unsecured Debt(2)
Debt
Obligation
Weighted
Average
Interest Rate
Debt
Obligation
Effective
Interest
Rate(3)
6.36%
5.90%
6.27%
5.69%
5.42%
5.23%
5.47%
$
$
$
$
1,870
7,514
3,441
710
688
12,116
26,339
26,339
9,475
$
149,952
6.19%
—
—
249,693
6.92%
—
—
4.20%
4.77%
—
—
1,315,070
1,714,715
1,813,439
1,555,672
$
$
$
2015
2016
2017
2018
2019
Thereafter
Total
Fair Value:
December 31, 2014
December 31, 2013
(1) NNN's mortgages payable include unamortized premiums.
(2)
Includes NNN’s notes payable net of unamortized discounts. NNN uses market prices quoted from Bloomberg, a third party, which is
a Level 1 input, to determine the fair value.
(3) Weighted average effective interest rate for periods after 2019.
NNN is also exposed to market risks related to NNN’s Residuals. Factors that may impact the market value of the Residuals
include delinquencies, loan losses, prepayment speeds and interest rates. The Residuals, which are reported at market value,
had a carrying value of $11,626,000 and $11,721,000 as of December 31, 2014 and 2013, 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.
37
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, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework). 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, 2014, 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, 2014 and 2013, and
the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years
in the period ended December 31, 2014 and our report dated February 20, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Orlando, Florida
February 20, 2015
38
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, 2014 and 2013, and the related consolidated statements of income and comprehensive income, equity, and cash
flows for each of the three years in the period ended December 31, 2014. 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, 2014 and 2013, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information
set forth therein.
As discussed in Note 1 of the consolidated financial statements, the Company changed its method for reporting discontinued
operations effective January 1, 2014.
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, 2014, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated February 20, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Orlando, Florida
February 20, 2015
39
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
Real estate portfolio:
ASSETS
December 31,
2014
December 31,
2013
Accounted for using the operating method, net of accumulated depreciation and amortization
$
4,717,680
$
4,259,384
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 $1,784 and $2,822, respectively
Accrued rental income, net of allowance of $3,086 and $3,181, respectively
Debt costs, net of accumulated amortization of $14,353 and $20,213, respectively
Other assets
Total assets
Liabilities:
Line of credit payable
LIABILITIES AND EQUITY
Mortgages payable, including unamortized premium of $890 and $130, respectively
Notes payable, net of unamortized discount of $10,285 and $10,816, 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
6.625% Series D, 115,000 shares issued and outstanding, at stated liquidation value of $2,500
per share
5.700% Series E, 115,000 shares issued and outstanding, at stated liquidation value of $2,500
per share
Common stock, $0.01 par value. Authorized 375,000,000 shares; 132,010,104 and 121,991,677
shares issued and outstanding, respectively
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
See accompanying notes to consolidated financial statements.
16,974
5,395
11,075
11,626
10,604
3,013
25,659
16,453
108,235
18,342
9,324
17,119
11,721
1,485
4,107
24,797
12,877
95,367
$
4,926,714
$
4,454,523
$
— $
26,339
46,400
9,475
1,714,715
1,514,184
17,396
85,172
17,142
89,037
1,843,622
1,676,238
287,500
287,500
287,500
287,500
1,322
1,221
2,711,678
2,353,166
(196,827)
(8,658)
(147,837)
(4,505)
3,082,515
2,777,045
577
1,240
3,083,092
2,778,285
$
4,926,714
$
4,454,523
40
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND 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
Real estate acquisition costs
Year Ended December 31,
2014
2013
2012
$
414,043
$
372,913
$
312,629
1,725
1,074
13,875
2,296
1,834
1,955
1,556
13,340
1,471
2,290
2,119
1,165
11,817
2,243
2,673
434,847
393,525
332,646
—
—
—
32,518
18,905
116,162
256
760
168,601
266,246
(357)
85,510
1,391
86,544
—
—
—
31,095
18,497
99,274
1,185
3,580
153,631
239,894
(1,493)
85,822
1,485
85,814
19,008
(18,542)
466
31,828
17,425
73,806
2,812
3,899
129,770
203,342
(2,232)
83,787
364
81,919
Earnings from continuing operations before income tax benefit (expense) and
equity in earnings of unconsolidated affiliate
179,702
154,080
121,423
Income tax benefit (expense)
Equity in earnings of unconsolidated affiliate
Earnings from continuing operations
Earnings from discontinued operations, net of income tax expense
Earnings before gain on disposition of real estate, net of income tax expense
Gain on disposition of real estate, net of income tax expense
Earnings including noncontrolling interests
Loss (earnings) attributable to noncontrolling interests:
Continuing operations
Discontinued operations
75
—
179,777
124
179,901
11,269
191,170
(569)
—
(569)
(74)
—
154,006
5,972
159,978
107
160,085
223
(163)
60
6,891
4,074
132,388
9,549
141,937
—
141,937
102
(24)
78
Net earnings attributable to NNN
$
190,601
$
160,145
$
142,015
See accompanying notes to consolidated financial statements.
41
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND 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 forward starting swaps
Net gain (loss) – commercial mortgage residual interests
Net gain (loss) – available-for-sale securities
Reclassification of noncontrolling interests
Comprehensive income attributable to NNN
Year Ended December 31,
2014
2013
2012
$
190,601
$
160,145
$
142,015
—
(19,047)
(16,387)
—
(19,047)
(8,876)
(1,979)
(15,449)
—
—
—
(3,098)
155,167
$
132,222
$
121,489
1.24
$
—
1.24
$
1.24
$
—
1.24
$
1.06
$
0.05
1.11
$
1.05
$
0.05
1.10
$
1.04
0.09
1.13
1.02
0.09
1.11
$
$
$
$
$
124,257,558
118,204,148
106,965,156
124,710,226
119,864,824
109,117,515
$
190,601
$
160,145
$
142,015
1,129
(6,312)
1,038
(8)
—
438
(3,141)
(438)
69
949
231
—
1,132
85
—
$
186,448
$
158,022
$
143,463
See accompanying notes to consolidated financial statements.
42
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2014, 2013 and 2012
(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
(Loss)
Accumulated
Other
Comprehensive
Income (Loss)
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 depositary
shares of Series C Preferred Stock
(92,000)
—
—
—
—
—
—
Issuance of 11,500,000 depositary
shares of Series D Preferred Stock
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
Valuation adjustments – available-for-
sale securities
— 287,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
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
Balances at December 31, 2012
$
— $ 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.
43
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2014, 2013 and 2012
(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
(Loss)
Accumulated
Other
Comprehensive
Income (Loss)
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
160,145
(60)
160,085
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
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
Valuation adjustments – available-for-
sale securities
Noncontrolling interests
Balances at December 31, 2013
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 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)
(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)
(438)
69
949
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
—
$
— $ 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.
44
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2014, 2013 and 2012
(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
(Loss)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Noncontrolling
Interests
Total
Equity
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
Net earnings
Dividends declared and paid:
$1.65625 per depositary share of
Series D preferred stock
$1.42500 per depositary share of
Series E preferred stock
$1.65 per share of common stock
Issuance of common stock:
5,493,595 shares
100,161 shares – stock purchase
program
3,758,362 shares – ATM equity
program
Issuance of 360,080 shares of
restricted common stock
Stock issuance costs
Amortization of deferred
compensation
Amortization of interest rate hedges
Fair value forward swaps
Unrealized gain – commercial
mortgage residual interests
Realized gain – commercial mortgage
residual interests
Valuation adjustments – available-for-
sale securities
Realized gain – available-for-sale
securities
Distributions to noncontrolling
interests
Balances at December 31, 2014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
55
1
38
4
—
—
—
—
—
—
—
—
—
—
190,601
—
—
(19,047)
(16,387)
11,443
(204,157)
209,185
3,370
137,077
(313)
(10,683)
8,433
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,129
(6,312)
875
163
111
(119)
—
190,601
569
191,170
(19,047)
(16,387)
(192,711)
209,240
3,371
137,115
(309)
(10,683)
8,433
1,129
(6,312)
875
163
111
(119)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(19,047)
(16,387)
(192,711)
209,240
3,371
137,115
(309)
(10,683)
8,433
1,129
(6,312)
875
163
111
(119)
(1,232)
(1,232)
$
— $ 287,500
$ 287,500
$
1,322
$2,711,678
$ (196,827) $
(8,658) $
3,082,515
$
577
$ 3,083,092
See accompanying notes to consolidated financial statements.
45
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from 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
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
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 (increase) in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in other liabilities
Other
Year Ended December 31,
2014
2013
2012
$
191,170
$
160,085
$
141,937
116,165
823
256
1,238
2,782
(93)
1,129
(6,312)
—
—
(11,742)
58
9,841
(2,808)
—
1,368
76
16
(1,490)
(2,256)
254
(4,746)
1,004
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)
(7,034)
10,136
—
(6,616)
1,624
(187)
(264)
(456)
1,657
2,419
(2,002)
(1,095)
Net cash provided by operating activities
296,733
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
Increase in mortgages and notes receivable
Principal payments on mortgages and notes receivable
Return of investment from unconsolidated affiliate
Other
Net cash used in investing activities
58,853
60,626
81,402
(602,780)
(637,417)
(684,925)
(7,246)
13,346
—
(3,731)
(541,558)
(3,857)
14,617
—
(2,009)
(568,040)
(8,768)
12,804
1,220
(3,492)
(601,759)
See accompanying notes to consolidated financial statements.
46
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
2014
2013
2012
$
678,500
$
601,800
$
1,184,900
(729,600)
(1,076,300)
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
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Interest paid, net of amount capitalized
Taxes paid
(724,900)
(1,151)
349,293
(150,000)
—
(6,321)
360,072
—
—
—
—
(19,047)
(16,387)
(10,726)
(204,157)
(1,232)
253,944
9,119
1,485
10,604
81,829
59
$
$
$
$
$
$
(1,070)
347,406
—
(246,797)
(3,265)
267,613
—
287,500
—
—
(19,047)
(8,876)
(13,529)
(189,107)
—
293,028
(591)
2,076
1,485
80,930
360
$
$
$
$
$
$
$
$
$
$
8,218
582
162
7
2,123
1,156
— $
750
$
— $
— $
— $
(19,390)
320,011
(50,000)
(164,649)
(4,512)
185,223
287,500
—
(92,000)
(1,979)
(15,449)
—
(12,237)
(167,495)
—
373,623
(6)
2,082
2,076
75,283
201
—
8,638
463
298
357
1,448
1,678
6,634
—
—
490
1,595
Supplemental disclosure of noncash investing and financing activities:
Issued 2,407,911 shares of common stock for conversion premium on 2028 Notes $
Issued 371,434, 298,896 and 398,578 shares of restricted and unrestricted
— $
85,224
common stock in 2014, 2013 and 2012, respectively, pursuant to NNN’s
performance incentive plan
Issued 14,999, 16,605 and 16,078 shares of common stock in 2014, 2013 and
2012, respectively, to directors pursuant to NNN’s performance incentive plan
Issued 16,016, 12,308 and 19,212 shares of common stock in 2014, 2013 and
2012, respectively, pursuant to NNN’s Deferred Director Fee Plan
Surrender of 241 and 15,286 shares of restricted common stock in 2013 and 2012,
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
Mortgage receivable accepted in connection with real estate transactions
Note receivable accepted in connection with real estate transactions
Real estate acquired in connection with mortgage receivable foreclosure
Real estate received in note receivable foreclosure
$
$
$
$
$
$
$
$
$
$
$
10,357
527
263
$
$
$
— $
4,153
$
— $
17,254
62
70
$
$
$
— $
— $
See accompanying notes to consolidated financial statements.
47
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
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” or individually a "Property").
Property Portfolio:
Total properties
Gross leasable area (square feet)
States
Weighted average remaining lease term (years)
December 31, 2014
2,054
22,479,000
47
12
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.
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, 2014, 2013 and 2012, NNN recorded $1,629,000, $1,369,000 and $1,540,000,
respectively, in capitalized interest during development.
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. Acquisition
and closing costs incurred on the acquisition of real estate with an in-place lease is expensed as incurred and recorded as real
estate acquisition costs.
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.
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
48
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 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 will renew the option whereby the Company amortizes 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):
2014
2013
$
11,751
$
65,770
11,803
58,456
Value of below market in-place leases, net
29,162
28,708
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.
Impairment – Real Estate – Based upon certain events or changes in circumstances, management periodically assesses its
Property Portfolio for possible impairment whenever 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 carrying 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 value 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 estimated 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
involvement with the former tenant.
49
Valuation of Mortgages, Notes and Accrued Interest – The reserve allowance related to the mortgages, notes and accrued
interest is NNN’s best estimate of the amount of probable credit losses. The reserve allowance is determined on an individual
note basis in reviewing any payment past due for over 90 days. Any outstanding amounts are written off against the reserve
allowance when all possible means of collection have been exhausted.
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. NNN Crow JV was formally dissolved in April 2013.
Commercial Mortgage Residual Interests, at Fair Value – Commercial mortgage residual interests, classified as available for
sale, are reported at their estimated 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 or may be held in accounts without any federal insurance or any other insurance or guarantee.
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, tenant credit-
worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition,
tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-
petition claims.
Debt Costs – Debt costs incurred in connection with NNN’s $650,000,000 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 properties under construction commence upon completion of construction of the
leased asset and delivery of the leased asset to the tenant. 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.
50
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
2014
2013
2012
$
190,601
$
160,145
$
142,015
—
(19,047)
(16,387)
—
155,167
(773)
—
(19,047)
(8,876)
—
132,222
(718)
(1,979)
(15,449)
—
(3,098)
121,489
(741)
$
154,394
$
131,504
$
120,748
125,221,358
118,969,771
107,873,577
(467,968)
(495,832)
(448,590)
(317,033)
(654,127)
(254,294)
124,257,558
118,204,148
106,965,156
—
452,668
1,468,559
192,117
1,987,842
164,517
124,710,226
119,864,824
109,117,515
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, 2014, 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 13). 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 enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The
51
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.
Accumulated Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other
comprehensive income (dollars in thousands):
Gain or Loss on
Cash Flow
Hedges (1)
Gains and
Losses on
Commercial
Mortgage
Residual
Interests (2)
Gains and
Losses on
Available-for-
Sale Securities
Total
Beginning balance, December 31, 2012
$
(5,693)
$
3,244
$
67
$
(2,382)
Other comprehensive income (loss)
Reclassifications from accumulated other
comprehensive income to net earnings
Net current period other comprehensive
income (loss)
Ending balance, December 31, 2013
Other comprehensive income (loss)
Reclassifications from accumulated other
comprehensive income to net earnings
Net current period other comprehensive
income (loss)
(3,141)
(3)
438
(2,703)
(8,396)
(6,312)
(3)
1,129
(5,183)
Ending balance, December 31, 2014
$
(13,579)
$
511
—
(4)
511
3,755
875
163
(4)
1,038
4,793
$
(5)
69
—
69
136
111
(5)
(119)
(8)
128
$
(2,561)
438
(2,123)
(4,505)
(5,326)
1,173
(4,153)
(8,658)
(1) Additional disclosure is included in Note 15 – Derivatives.
(2) Additional disclosure is included in Note 20 – Fair Value Measurements.
(3) Reclassifications out of other comprehensive income are recorded in Interest Expense on the Consolidated Statements of Income and
Comprehensive Income. There is no income tax expense (benefit) resulting from this reclassification.
(4) Reclassifications out of other comprehensive income are recorded in Impairment on the Consolidated Statements of Income and
Comprehensive Income. There is no income tax expense (benefit) resulting from this reclassification.
(5) Reclassifications out of other comprehensive income are recorded in Other Income on the Consolidated Statements of Comprehensive
Income. There is no income tax expense (benefit) resulting from this reclassification.
New Accounting Pronouncements – In July 2013, the FASB issued Accounting Standards Update ("ASU") 2013-11, "Income
Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists." 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
52
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. The
adoption of ASU 2013-11 did not have a significant impact on NNN's financial position or results of operations.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity,”
effective for fiscal years beginning on or after December 15, 2014, with early adoption permitted beginning January 1, 2014.
Under ASU 2014-08, only disposals representing a strategic shift in operations are to be presented as discontinued
operations. NNN has elected early adoption of ASU 2014-08. This requires the Company to continue to classify any Property
disposal or Property classified as held for sale as of December 31, 2013 as discontinued operations prospectively. Therefore,
the revenues and expenses related to these properties are presented as discontinued operations as of December 31, 2014. The
Company did not classify any additional properties as discontinued operations subsequent to December 31, 2013. The
adoption of ASU 2014-08 did not have a significant impact on NNN’s financial position or results of operations. The
adoption of this standard resulted in the operations of certain current year dispositions were no longer classified as
discontinued operations.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” effective for annual
reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The core principle of
ASU 2014-09, is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Certain contracts are excluded from ASU 2014-09, including lease contracts within the scope of the FASB guidance included
in Leases. NNN is currently evaluating to determine the potential impact, if any, the adoption of ASU 2014-09 will have on
its financial position and results of operations.
In June 2014, the FASB issued ASU 2014-12, "Compensation – Stock Compensation (Topic 718)," effective for annual
periods and interim periods within those periods beginning after December 15, 2015. The amendments require that a
performance target that affects vesting and that could be achieved after the requisite service period be treated as a
performance condition. NNN is currently evaluating to determine the potential impact, if any, the adoption of ASU 2014-12
will have on its financial position and results of operations.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early
application is permitted. The amendments in this update provide guidance in GAAP about management's responsibility to
evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related
footnote disclosures. NNN is currently evaluating to determine the potential impact, if any, the adoption of ASU 2014-15 will
have on footnote disclosures.
In November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815)." Entities commonly raise capital
by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights over
the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights,
and liquidation and dividend payment preferences, among other features. One or more of those features may meet the
definition of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid
financial instruments. The objective of this update is to eliminate the use of different methods in practice and thereby reduce
existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. The
amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
NNN is currently evaluating to determine the potential impact, if any, the adoption of ASU 2014-16 will have on its 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, purchase price allocation, 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
53
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.
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.
Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial
statements have been reclassified to conform to the 2014 presentation.
Note 2 – Real Estate:
Real Estate – Portfolio
Leases – The following outlines key information for NNN’s leases at December 31, 2014:
Lease classification:
Operating
Direct financing
Building portion – direct financing/land portion – operating
Weighted average remaining lease term
2,083
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 Property and carry property and liability insurance coverage. Certain of the Properties are subject
to leases under which NNN retains responsibility for specific costs and expenses of the Property. Generally, the leases
provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions of the
base term of the lease, including rent increases.
54
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
2014
2013
$
1,784,494
$
1,652,304
3,414,691
2,960,845
1,290
5,200,475
(511,703)
4,688,772
28,908
1,290
4,614,439
(415,774)
4,198,665
60,719
$
4,717,680
$
4,259,384
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, 2014, 2013 and 2012, NNN recognized collectively in
continuing and discontinued operations, $1,521,000, ($338,000) and $487,000, respectively, of such income, net of reserves.
At December 31, 2014 and 2013, the balance of accrued rental income, net of allowances of $3,086,000 and $3,181,000,
respectively, was $25,659,000 and $24,797,000, respectively.
The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at
December 31, 2014 (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
$
432,369
427,152
417,412
392,925
375,013
3,025,217
$
5,070,088
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
2014
2013
17,376
$
8,274
(8,676)
16,974
$
20,469
8,274
(10,401)
18,342
$
$
55
The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment
at December 31, 2014 (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
$
2,956
2,873
2,035
2,007
1,513
5,992
$
17,376
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).
Real Estate – Held For Sale
On a quarterly basis, the Company evaluates its Properties for held for sale classification based on specific criteria as outlined
in ASC 360, Property, Plant & Equipment, including management’s intent to commit to a plan to sell the asset. In January
2014, NNN completed a strategic review of its Properties held for sale and reclassified one Property that was previously held
for sale to held for investment, included in Real Estate – Portfolio. As of December 31, 2014, NNN had seven of its
Properties categorized as held for sale. NNN anticipates the disposition of these Properties to occur within 12 months. NNN's
real estate held for sale at December 31, 2013, included eight properties, two of which were subsequently sold in 2014. Real
estate held for sale consisted of the following as of (dollars in thousands):
Land and improvements
Building and improvements
Less accumulated depreciation and amortization
Less impairment
2014
2013
3,246
$
4,644
7,890
(1,473)
(1,022)
5,395
$
5,751
8,067
13,818
(2,362)
(2,132)
9,324
$
$
56
Real Estate – Dispositions
The following table summarizes the Properties sold and the corresponding gain recognized on the disposition of Properties
for the years ended December 31 (dollars in thousands):
Gain on disposition of real estate
Income tax expense
Gain on disposition of real estate included in
discontinued operations
Income tax expense
2014
2013
2012
# of Sold
Properties
Gain
# of Sold
Properties
Gain
# of Sold
Properties
Gain
25
$ 11,587
—
$
(318)
11,269
173
(66)
107
—
$
—
—
—
2
155 (1)
—
35
6,272 (1)
(784)
34
$ 11,424
$ 5,595
10,956 (1)
—
$ 10,956
(1) Amount includes the recognition of deferred gains on previously sold properties.
Real Estate – Commitments
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, 2014, are outlined in the table below (dollars in
thousands):
Number of properties
Total commitment(1)
Amount funded
Remaining commitment
26
110,081
57,465
52,616
$
$
$
(1)
Includes land, construction costs, tenant improvements and lease costs.
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
2014
2013
2012
$
$
760
$
3,565
$
63
541
823
$
4,106
$
4,070
6,242
10,312
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 estimating the fair value of its real estate.
57
Note 3 – 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
2014
2013
$
$
10,974
$
101
11,075
$
16,942
177
17,119
Note 4 – Commercial Mortgage Residual Interests:
NNN holds the commercial mortgage residual interests (“Residuals”) from seven securitizations. Each of the Residuals is
recorded at fair value. 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.
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
Other than temporary valuation impairment
2014
2013
2012
$
875
256
$
511
$
1,185
1,132
2,812
Based on the expected timing of future cash flows relating to the Residuals certain valuation assumptions are made. During
the years ended December 31, 2014, 2013 and 2012, 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:
2014
2013
20%
20%
0.87% to 26.30% CPR
0.80% to 20.76% CPR
Frequency curve default model
Loss severity of loans in foreclosure
0.70% - 2.45% range
0.07% - 2.43% range
20%
20%
Yield:
LIBOR
Prime
(1) Conditional prepayment rate
Forward 3-month curve
Forward 3-month curve
Forward curve
Forward curve
58
The following table shows the effects on the key assumptions affecting the fair value of the Residuals at December 31, 2014
(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
$
11,626
$
$
$
$
$
$
$
$
9,824
9,194
11,624
11,623
11,509
11,450
11,849
12,073
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on
variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation of a particular assumption on the fair value of the
retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes
in another, which might magnify or counteract the sensitivities.
Note 5 – Line of Credit Payable:
In October 2014, NNN amended and restated its credit agreement increasing the borrowing capacity under its unsecured
revolving credit facility from $500,000,000 to $650,000,000 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 $56,590,000 and a weighted average interest rate of 1.2% for the year
ended December 31, 2014. The Credit Facility matures January 2019, with an option to extend maturity to January 2020. As
of December 31, 2014, the Credit Facility bears interest at LIBOR plus 92.5 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, 2014, there was no outstanding balance and
$650,000,000 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, 2014, NNN was in compliance with those covenants.
59
Note 6 – Mortgages Payable:
The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in
thousands):
Entered(1)
December 2001
December 2001
December 2001
February 2004
March 2005
June 2012(4)
September 2014(4)
November 2014(4)
Initial
Balance
Interest
Rate
Maturity(2)
Carrying
Value of
Encumbered
Asset(s)(3)
Outstanding Principal
Balance at December 31,
2014
2013
$
$
623
698
485
6,952
1,015
6,850
2,957
9.00% April 2014
$
— $
— $
9.00% April 2019
9.00% April 2019
6.90% January 2017
8.14% September 2016
5.75% April 2016
6.40% February 2017
868
841
10,554
1,245
8,529
3,797
223
116
1,577
222
6,180
2,922
15,151
5.23% July 2023
22,376
15,099
27
263
136
2,257
335
6,457
—
—
$
48,210
$
26,339
$
9,475
(1) Date entered represents the date that NNN acquired real estate subject to a mortgage securing a loan.
(2) Monthly payments include interest and principal, if any; the balance is due at maturity.
(3) Each loan is secured by a first mortgage lien on certain of the Properties. The carrying values of the assets are as of
December 31, 2014.
(4)
Initial balance and outstanding principal balance includes unamortized premium.
The following is a schedule of the scheduled principal payments, net of premium amortization of NNN’s mortgages payable
at December 31, 2014 (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
$
1,870
7,514
3,441
710
688
12,116
$ 26,339
Note 7 – Notes Payable – Convertible:
On September 28, 2012, NNN announced that the market price condition on its 3.950% convertible senior notes due 2026
(the "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.
60
As of December 31, 2012, $223,035,000 of the principal amount of the 5.125% convertible senior notes due 2028 (the "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 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.
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
$
$
2,072
$
5,400
566
4,291
15,744
1,149
8,038
$
21,184
There was no interest expense related to the 2028 Notes and the 2026 Notes for the year ended December 31, 2014.
Note 8 – Notes Payable:
Each of NNN’s outstanding series of non-convertible notes is summarized in the table below (dollars in thousands):
Notes(1)
Issue Date
Principal
Discount(1)
2015(6)
2017(3)
2021(4)
2022
2023(5)
2024(7)
November 2005
$ 150,000
$
September 2007
July 2011
August 2012
April 2013
May 2014
250,000
300,000
325,000
350,000
350,000
390
877
4,269
4,989
2,594
707
Net
Price
Stated
Rate
Effective
Rate(2)
Maturity
Date
$ 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
349,293
3.900%
3.924%
June 2024
(1) The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest
method.
(2)
Includes the effects of the discount, treasury lock gain/loss and swap gain/loss, as applicable.
(3) 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.
(4) 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.
(5) 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.
(6) NNN plans to use proceeds from the Credit Facility and/or potential debt or equity offerings to repay the outstanding indebtedness.
(7) NNN entered into three forward starting swaps with an aggregate notional amount of $225,000. Upon issuance of the 2024 Notes,
NNN terminated the forward starting swaps resulting in a liability of $6,312, which was deferred in other comprehensive income. The
deferred liability is being amortized over the term of the note using the effective interest method.
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
61
(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 $15,500,000 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 2014, NNN repaid the $150,000,000 6.250% notes payable that were due in June 2014.
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, 2014, NNN was in compliance with those covenants.
Note 9 – 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.
NNN completed the following underwritten public offerings of cumulative redeemable preferred stock and are still
outstanding ("Preferred Stock Shares") (dollars in thousands, except per share data):
Series
Series D
Series E
Dividend
Rate(1)
6.625% February 2012
Issued
Depositary
Shares
Outstanding(2)
11,500,000
Gross
Proceeds
$ 287,500
$
5.700% May 2013
11,500,000
287,500
Stock
Issuance
Costs(3)
9,855
9,856
Dividend Per
Depositary
Share
1.656250 February 2017
Earliest
Redemption
Date(4)
$
1.425000 May 2018
(1) Holders are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends.
(2) Representing 1/100th of a preferred share. Each issuance included 1,500,000 depositary shares in connection with the
underwriters' over-allotment.
(3) Consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses.
(4) NNN may redeem the 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.
The Preferred Stock Shares underlying the depositary shares rank senior to NNN’s common stock with respect to dividend
rights and rights upon liquidation, dissolution or winding up of NNN. The Preferred Stock Shares have no maturity date and
will remain outstanding unless redeemed. In addition, upon a change of control, as defined in the articles supplementary
fixing the rights and preferences of the Preferred Stock Shares, NNN may redeem the Preferred Stock Shares 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 Preferred
Stock Shares into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of
February 20, 2015, the Preferred Stock Shares were not redeemable or convertible.
Note 10 – 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 November 2014, NNN filed a prospectus supplement to the prospectus contained in its February 2012 shelf registration
statement and issued 5,462,500 shares (including 712,500 shares in connection with the underwriters' over-allotment) of
common stock at a price of $38.16 per share and received net proceeds of $199,961,000. In connection with this offering,
NNN incurred stock issuance costs totaling approximately $8,488,000, consisting primarily of underwriters' fees and
commissions, legal and accounting fees and printing expenses.
62
In May 2012, NNN established an at-the-market ("ATM") 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, of which 8,958,840 shares had been
issued as of December 31, 2014. The 2012 ATM will expire in accordance with its terms in 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.
There were no common stock issuances pursuant to the 2012 ATM for the year ended December 31, 2014.
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, of which 6,038,812 shares had been issued as
of December 31, 2014. The 2013 ATM will expire in accordance with its terms in March 2015. The following table outlines
the common stock issuances pursuant to the 2013 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)
2014
2013
3,758,362
2,280,450
$
35.90
$
134,919
2,195
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 year
ended December 31 (dollars in thousands):
Shares of common stock
Net proceeds
Note 11 – Employee Benefit Plan:
2014
2013
2012
422,406
764,891
2,101,644
$
14,817
$
25,407
$
56,102
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 generally matches 60 percent of the first
eight percent of a participant’s contributions. Additionally, NNN may make discretionary contributions. NNN’s contributions
to the Retirement Plan for the years ended December 31, 2014, 2013 and 2012 totaled $453,000, $342,000 and $378,000,
respectively.
63
Note 12 – 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
2014
2013
2012
$
1.306992
$
1.224568
$
1.199003
0.006212
0.008603
0.015362
0.312831
0.056784
—
0.000650
0.317998
0.013346
0.021358
0.048890
0.277403
$
1.650000
$
1.600000
$
1.560000
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
$
2014
204,157
1.650
$
2013
189,107
1.600
$
2012
167,495
1.560
On January 15, 2015, NNN declared a dividend of $0.420 per share, which was paid February 17, 2015 to its common
stockholders of record as of January 30, 2015.
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
Series E
2014
2013
2014
Series D
2013
2012
Series C
2012
$ 1.393700
$ 0.741150
$ 1.619870
$ 1.590323
$ 1.255844
$ 0.502710
0.005738
0.030332
0.006670
0.065084
0.013979
0.005596
0.009177
—
0.010666
—
0.022371
0.008956
Unrecaptured Section 1250 Gain
0.016385
0.000393
0.019044
0.000843
0.051209
0.020498
$ 1.425000
$ 0.771875
$ 1.656250
$ 1.656250
$ 1.343403
$ 0.537760
64
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
2014
2013
2012
$
— $
—
— $
—
1,979
0.537760
19,047
1.656250
19,047
1.656250
15,449
1.343403
16,387
1.425000
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 2015, 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 16, 2015.
Note 13 – 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, 2014, 2013 and 2012, 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. As of December 31, 2014, OAMI has no remaining tax
liabilities relating to the built-in gain of its assets.
65
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
2014
2013
$
1,233
$
113
2,756
434
1,689
5,196
994
155
4,728
393
2,706
5,212
11,421
14,188
(619)
—
10,802
14,188
—
(204)
(110)
(314)
(2,163)
(618)
(779)
(3,560)
Net deferred tax asset
$
10,488
$
10,628
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, 2014 and 2013, with the exception of a 2014 capital
loss carryover.
As disclosed 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 increase in the valuation allowance for the year ended December 31, 2014 was $619,000. There was no valuation
allowance as of December 31, 2013.
66
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
2014
2013
2012
$
190,844
$
161,230
$
135,124
(190)
5
(166)
108
(243)
(195)
(90)
(790)
(10)
(1,085)
(136)
(7)
5,871
1,163
6,891
Net earnings attributable to NNN’s stockholders
$
190,601
$
160,145
$
142,015
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
$
(64,887) $
(54,818) $
(45,942)
2014
2013
2012
Nontaxable income of NNN
State taxes, net of federal benefit
Amortization of built-in gain tax
Expiration of built-in gain tax
Other
Valuation allowance (increase) decrease
63,353
53,178
44,746
(196)
372
1,792
(58)
(619)
(200)
761
—
(6)
—
(139)
613
—
(58)
7,671
6,891
Total tax benefit (expense)
$
(243) $
(1,085) $
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 2011 through 2014. NNN also files in many states
with varying open years under statute.
67
Note 14 – Earnings from Discontinued Operations:
Effective January 1, 2014, NNN has early adopted ASU 2014-08. Under ASU 2014-08, only disposals representing a
strategic shift in operations are to be presented as discontinued operations. This requires the Company to continue to classify
any Property disposal or Property classified as held for sale as of December 31, 2014, as discontinued operations
prospectively. Therefore, the revenues and expenses related to these properties are presented as discontinued operations as of
December 31, 2014. The Company did not classify any additional properties as discontinued operations subsequent to
December 31, 2013.
The following is a summary of the earnings from discontinued operations for each of the years ended December 31 (dollars
in thousands):
Revenues:
Rental income from operating leases
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
Real estate acquisition costs
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
2014
2013
2012
$
— $
1,666
$
6,466
—
—
23
21
44
—
9
3
63
75
—
—
—
(31)
155
—
124
—
190
2
97
33
1,988
6
203
343
541
1,093
41
209
250
645
6,272
(945)
5,972
(163)
$
124
$
5,809
$
324
27
153
13
6,983
5
642
1,381
6,215
8,243
137
10
147
(1,407)
10,956
—
9,549
(24)
9,525
Note 15 – 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
68
treasury security. Forward swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges
hedging the variable cash flows associated with floating rate debt involve the receipt of variable rate amounts in exchange for
fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially
reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged
transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings.
NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the
derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging
instrument is no longer appropriate. When hedge accounting is discontinued, NNN continues to carry the derivative at its fair
value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative
at that time.
The following table outlines NNN's derivatives which were hedging the risk of changes in forecasted interest payments on
forecasted issuance of long-term debt (dollars in thousands):
Terminated
Description
Aggregate
Notional
Amount
Fair Value
When
Terminated (1)
Fair Value
Deferred In
Other
Comprehensive
Income (2)
September 2007
Two interest rate hedges
$
100,000 $
3,260 $
June 2011
April 2013
May 2014
Two treasury locks
Four forward starting swaps
Three forward starting swaps
150,000
240,000
225,000
5,300
3,156
6,312
3,228
5,218
3,141
6,312
(1) Liability
(2) The amount reported in accumulated other comprehensive income will be reclassified to interest expense as
interest payments are made on the related notes payable.
As of December 31, 2014, $13,579,000 remains in other comprehensive income related to the effective portion of NNN’s
previous interest rate hedges. During the years ended December 31, 2014, 2013 and 2012, NNN reclassified $1,129,000,
$438,000 and $231,000 out of other comprehensive income as an increase to interest expense. Over the next 12 months,
NNN estimates that an additional $1,685,000 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, 2014.
Note 16 – 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 stock options outstanding or exercisable at December 31, 2014.
69
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, 2014:
Non-vested restricted shares, January 1
Restricted shares granted
Restricted shares vested
Restricted shares forfeited
Restricted shares repurchased
Non-vested restricted shares, December 31
Number
of
Shares
Weighted
Average
Share Price
808,186
$
371,434
(162,622)
—
(11,354)
1,005,644
$
28.18
33.38
23.77
—
26.69
30.93
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, 2014 and 2013, NNN granted 177,433 and 152,901, 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 $33.42 and $33.73, respectively, per share. Once the
performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. For the 2014
and 2013 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 $21.92 and $21.54, 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, 2014, pursuant to the 2007 Plan.
Other share grants under the 2007 Plan:
Directors’ fees
Deferred directors’ fees
Weighted
Average
Share Price
Shares
14,999
$
16,061
31,060
$
35.17
35.20
35.19
Shares available under the 2007 Plan for grant, end of period
3,588,241
The total compensation cost for share-based payments for the years ended December 31, 2014, 2013 and 2012, totaled
$9,224,000, $7,459,000 and $8,131,000, respectively, of such compensation expense. At December 31, 2014, NNN had
$12,852,000 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 2.4 years. In addition, NNN recognized
performance based long-term incentive cash compensation expense of $729,000 and $1,684,000 for the years ended
December 31, 2013 and 2012 respectively. There was no long-term incentive cash recognized in 2014.
Note 17 – 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, 2014 and 2013, approximate fair value based upon current market
prices of similar issues. At December 31, 2014 and 2013, the carrying value and fair value of NNN’s notes payable,
collectively, was $1,813,439,000 and $1,555,672,000, respectively, based upon quoted market prices, which are a Level 1
input.
70
Note 18 – Quarterly Financial Data (unaudited):
The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data):
2014
Revenues as originally reported (1)
Net earnings attributable to NNN’s stockholders
Net earnings per share (2):
Basic
Diluted
2013
Revenues as originally reported
Reclassified to discontinued operations
Adjusted revenue
Net earnings attributable to NNN’s stockholders
Net earnings per share (2):
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
104,064
43,333
$
$
105,613
45,571
$
$
109,856
47,940
$
$
115,315
53,757
0.28
$
0.28
0.30
$
0.30
0.31
$
0.31
0.35
0.35
92,565
$
96,121
$
100,621
$
103,648
(100)
92,465
34,066
$
$
173
96,294
37,486
$
$
155
100,776
44,352
$
$
344
103,992
44,241
0.26
$
0.25
0.28
$
0.27
0.29
$
0.29
0.29
0.29
$
$
$
$
$
$
$
(1) No revenues were reclassified to discontinued operations.
(2) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount.
Note 19 – Segment Information:
For the years ended December 31, 2014, 2013 and 2012, 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 20 – Fair Value Measurements:
NNN currently values its Residuals based upon a 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, 2014 (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
$
11,721
(256)
1,038
1,834
(2,711)
—
—
11,626
163
$
$
Note 21 – Major Tenants:
As of December 31, 2014, NNN had no tenants that accounted for ten percent or more of its rental and earned income.
71
Note 22 – 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 23 – Subsequent Events:
NNN reviewed all subsequent events and transactions that have occurred after December 31, 2014, the date of the
consolidated balance sheet. There were no reportable subsequent events or transactions.
72
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, 2014, 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
73
procedures and the internal control over financial reporting will be maintained and updated (including with improvements
and corrections) as conditions warrant. Management also sought to deal with other control matters in the assessment, and in
each case if a problem was identified, management considered what revision, improvement and/or correction was necessary
to be made in accordance with NNN’s on-going procedures. The assessments of NNN’s disclosure controls and procedures
and NNN’s internal control over financial reporting is done on a quarterly basis so that the conclusions concerning
effectiveness of those controls can be reported in NNN’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.
Assessment of Effectiveness of Disclosure Controls and Procedures.
Based upon the assessments, NNN’s Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2014, 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 – 2013 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, 2014, 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 in connection therewith 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, 2014, 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 over 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.
74
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.
75
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, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and
2012
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of
December 31, 2014
Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2014
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
38
40
41
43
46
48
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 as
Exhibit 3.4 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 19, 2014, and incorporated herein by reference).
Second Amendment to the Third Amended and Restated Bylaws of the Registrant, dated December
13, 2007 (filed as Exhibit 3.5 to the Registrant’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on February 19, 2014, and incorporated herein by reference).
Third Amendment to the Third Amended and Restated Bylaws of the Registrant, dated February 13,
2014 (filed as Exhibit 3.6 to the Registrant’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission on February 19, 2014, and incorporated herein by reference).
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).
76
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. 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 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).
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).
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4.17
4.18
Form of Thirteenth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank
National Association relating to 3.900% Notes due 2024 (filed as Exhibit 4.1 to Registrant's Current
Report on Form 8-K and filed with the Securities and Exchange Commission on May 14, 2014, and
incorporated herein by reference).
Form of 3.900% Notes due 2024 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K
and filed with the Securities and Exchange Commission on May 14, 2014, 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).
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).
78
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 as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission on February 19, 2014, and incorporated herein by reference).
10.20
Second Amendment to Amended and Restated Credit Agreement, dated as of October 27, 2014, 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 October 28, 2014, and incorporated herein by
reference).
12. Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith).
21. Subsidiaries of the Registrant (filed herewith).
23. Consent of Independent Accountants
23.1
Ernst & Young LLP dated February 20, 2015 (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).
79
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, 2014, are 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.
80
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 20th day of February, 2015.
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.
81
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 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
82
SHAREHOLDER
INFORMATION
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM:
Ernst & Young LLP
CORPORATE OFFICE:
National Retail Properties, Inc.
450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) NNN-REIT
(407) 265-7348
www.nnnreit.com
FOR GENERAL INFORMATION:
American Stock Transfer & Trust Company
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
www.amstock.com
SHAREHOLDER TOLL-FREE LINE:
(866) 627-2644
Worldwide: (718) 921-8346
Fax: (718) 236-2641
FOR DIVIDEND REINVESTMENT:
American Stock Transfer & Trust Company
P.O. Box 922
Wall Street Station
New York, NY 10269
FORM 10-K
A copy of the Company’s Form 10-K, as filed with the Securities and Exchange Commission (SEC) for fiscal
2014, 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 2014, 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