27 YEARS
OF CONSECUTIVE ANNUAL
DIVIDEND INCREASES
99% occupancy
as of December 31, 2016
Table of Contents
3 | HISTORICAL FINANCIAL HIGHLIGHTS
5 | SHAREHOLDER’S LET TER
16 | OFFICERS AND DIREC TORS
INSIDE BACK COVER | SHAREHOLDER INFORMATION
Total Return Comparison
(NNN = $44.20 at December 31, 2016)
NATIONAL RETAIL PROPERTIES
14.5%
18.3%
16.0%
12.9%
15.3%
12.8%
14.3%
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)
8.6%
8.6%
11.9%
8.9%
12.7%
13.2%
8.8%
10.2%
12.0%
11.9%
14.6%
17.2%
5.1%
5.0%
6.9%
9.6%
10.8%
10.7%
6.7%
8.1%
9.7%
9.6%
7.7%
8.3%
11.1%
n/a
9.1%
9.3%
* NNN is a member of this index (removed from S&P 600 and added to S&P 400 in December 2011; removed from Russell 2000 and added to Russell 1000 in June 2012)
Source: Bloomberg
Value of $1,000 Investment
(As of December 31, 2016)
NATIONAL RETAIL PROPERTIES
$
1,145
$ 1,655
$ 2,103
$ 3,365
$ 8,439
$ 11,161
$ 28,136
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)
$
$
$
$
1,086
$
1,430
$
1,759
1,086
$
1,452
$
1,751
1,119
1,089
$
$
1,289
1,339
$
$
1,977
2,207
$
$
$
$
1,638
$
4,651
$
6,335
$ 13,957
1,623
$ 4,607
$
6,198
1,952
2,496
$
$
2,634
3,230
$
$
4,376
4,954
$
$
n/a
8,864
9,173
* NNN is a member of this index (removed from S&P 600 and added to S&P 400 in December 2011; removed from Russell 2000 and added to Russell 1000 in June 2012)
5.9% Core FFO
growth in 2016
88% of expiring
leases renewed over
the past 10 years
2
NATIONAL RETAIL PROPERTIES
Historical Financial Highlights
(Dollars in thousands, except per share data)
GROSS REVENUES(1)
$
533,817
$
483,025
$
435,278
$
397,008
$
342,057
EARNINGS FROM CONTINUING OPERATIONS
212,324
187,511
179,777
154,006
132,388
2016
2015
2014
2013
2012
EARNINGS INCLUDING
NONCONTROLLING INTERESTS
NET EARNINGS ATTRIBUTABLE TO NNN
TOTAL ASSETS
TOTAL DEBT
TOTAL STOCKHOLDERS’ EQUITY OF NNN
CASH DIVIDENDS DECLARED TO:
Common stockholders
Series C preferred stockholders
Series D preferred stockholders
Series E preferred stockholders
Series F 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
Series F preferred depositary stockholders
OTHER DATA:
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
FUNDS FROM OPERATIONS – AVAILABLE
TO COMMON STOCKHOLDERS(2)
239,506
239,500
6,334,151
2,311,689
3,916,799
197,961
197,836
5,460,044
1,975,944
3,342,134
191,170
190,601
4,915,551
1,729,891
3,082,515
160,085
160,145
4,445,308
1,560,844
2,777,045
257,007
228,699
204,157
189,107
—
19,047
16,387
3,189
—
19,047
16,387
—
—
19,047
16,387
—
—
19,047
8,876
—
141,937
142,015
3,980,210
1,579,148
2,296,285
167,495
1,979
15,449
—
—
144,176,224
133,998,674
124,257,558
118,204,148
106,965,156
144,660,633
134,489,416
124,710,226
119,864,824
109,117,515
$
1.39
$
1.21
$
1.38
1.39
1.38
1.78
—
1.20
1.21
1.20
1.71
—
$
1.24
1.24
$
1.06
1.05
1.24
1.24
1.65
—
1.11
1.10
1.60
—
1.656250
1.425000
0.231111
1.656250
1.425000
—
1.656250
1.425000
—
1.656250
0.771875
—
1.04
1.02
1.13
1.11
1.56
0.537760
1.343403
—
—
$
415,337
$
341,095
$
296,733
$
274,421
$
228,130
(779,943)
644,886
(644,544)
(541,558)
(568,040)
307,105
253,944
293,028
(601,759)
373,623
330,544
289,193
260,902
228,622
193,563
(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 early adopted 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.” 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. Therefore, the revenues and expenses related to these properties are presented as discontinued operations as of December 31, 2014. The Company has not
classified any additional properties as discontinued operations subsequent to December 31, 2013.
(2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relative non-U.S. generally accepted accounting principles (“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 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 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.
3
Top 25 tenants on average operate over 1,000 stores each
4
NATIONAL RETAIL PROPERTIES
Dear Fellow NNN Shareholders
National Retail Properties (NYSE: NNN) delivered another excellent year in 2016 further building on our
solid foundation. Core Funds from Operations (FFO) per share increased 5.9%. We increased our annual
dividend paid per share for the 27th consecutive year, giving us the fourth longest dividend increase
track record among REITs and making us one of only 94 public companies in the United States with this
long-duration accomplishment.
We are also proud to have produced an average annual total return to NNN shareholders of 14.3% over
the past 25 years, outperforming virtually all of the major equity indices. (S&P 500: 9.1%; NASDAQ: 9.3%;
NAREIT Equity REIT Index: 11.1%)
Our strategy to build long-term shareholder value remains anchored in a simple, consistent plan. Our team
continues to focus on three primary goals:
• generate consistent core annual FFO per share growth;
• annually increase our dividend per share;
• achieve these dual objectives while assuming below average balance sheet and portfolio risk.
Again in 2016 we accomplished these strategic objectives while maintaining a very strong balance
sheet, meaning our per share results were not artificially supported by increased leverage or the use
of short-term debt.
27 Consecutive Annual Dividend Increases
Fourth longest run of all public REITS and longer than 99% of all public companies
$1.80 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.70 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.60 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.50 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.40 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.30 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.20 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
$1.10 _______________________________________________________________________________________________________________________________
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__________________________________________________________________________
_
$1.00 _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
_
‘90
‘91
‘92
‘93
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
‘13
‘14
‘15
‘16
5
14.3% per year average annual total shareholder return over the past 25 years
6
NATIONAL RETAIL PROPERTIES
Long-Term Focus and Strategy
We’ve been able to accomplish our successful multi-decade track record by executing these primary tactics:
• Focus on multi-year results. We never fixate on the short-term impact of our business decisions recognizing that we own
long-duration real assets.
• Grow a diversified and well-occupied net-leased retail property portfolio. We are confident that well-located retail locations
generate better risk-adjusted shareholder returns than other property types.
• 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 attain an enviable cost of capital.
Lease Expirations (As a percentage of annualized base rent as of December 31, 2016)
Weighted average remaining lease term is 11.6 years
30% _________________________________________________________________________________________________________________________________________________________________________________________________________
__
20% _________________________________________________________________________________________________________________________________________________________________________________________________________
__
10% _________________________________________________________________________________________________________________________________________________________________________________________________________
__
0%
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
NNN Occupancy vs. REIT Industry Average
NNN
REIT Industry (Excluding Hotels & Healthcare)
100%
97.0%
97.4%
98.3%
98.2%
98.3%
96.7%
96.4%
96.9%
97.4%
97.9%
98.2%
98.6%
99.1%
99.0%
92.1%
93.0%
93.5%
93.5%
92.8%
92.0%
90.5%
90.1%
90.8%
90.7%
92.0%
92.7%
92.5%
93.9%
90%
80%
70%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
7
$846.9 million invested in 313 new properties in 2016
8
NATIONAL RETAIL PROPERTIES
Our 2016 Performance
Highlights for NNN in 2016 included:
• Acquiring 313 new properties investing a record $846.9 million. Internally we continue to emphasize
repeat acquisitions from existing relationship tenants. This past year we completed acquisitions from
40 of these relationship tenants.
• Selling 38 properties for $103.2 million generating gains of $27.1 million. While this gain is not included
in our FFO results, the cash from these dispositions is similar to raising equity.
• Ending the year with 99.0% portfolio occupancy, which is well above the REIT industry average.
• Completing a 10-year unsecured note offering raising $342.8 million at an effective interest rate of
3.28% after settlement of an interest-rate hedge. We also took advantage of the attractive equity
markets and raised a total of $274.0 million of common equity during the year. In addition, we also
raised $334.1 million in net proceeds from the issuance of perpetual preferred stock at a 5.20% yield.
• Increased our annual dividend to $1.78 paid per share, which represents the 27th consecutive annual
dividend increase.
Acquisitions Volume
(Dollars in millions)
__
__
__
__
__
$707
$726
$772
$630
$847
$618
__
__
$900 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$850 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$800 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$750 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$700 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$650 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$600 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$550 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$500 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$450 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$400 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$350 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$300 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$250 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$200 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$250 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$200 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$150 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$100 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$50 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$0 ____________________________________________________________________________________________________________________________________________________________________________________________________________
$238
__
__
__
__
__
__
__
__
__
__
__
__
__
__
2010
2011
2012
2013
2014
2015
2016
9
27 consecutive annual dividend increases
10
NATIONAL RETAIL PROPERTIES
Our Diversified Portfolio
National Retail Properties owns a broadly diversified portfolio of 2,535
retail properties that on average cost $2.7 million each. Our properties
are located in 48 states and are leased to over 400 national and regional
tenants operating in 37 different retail industry classifications.
Our portfolio remains at 99.0% occupied and in 2016 existing tenants
renewed 139 out of 152 expiring leases. Since 2011 our tenants have
renewed 88% of expiring leases. We firmly believe this high rental
renewal rate speaks to the viability of our strategy of owning single
tenant, net-leased freestanding stores because it is an operational format
that has proven successful for retailers.
We concentrate on small box retail, typically around a 5,000 square foot
building on a one-acre site – such as convenience stores and restaurants
– that are located on busy streets, at or near an intersection, and with
easy access into and out of the property.
We seek to partner with retailers that operate in lines of trade that are
less susceptible to an e-commerce threat. Less than 4% of our portfolio
(consumer electronics, books and office supply) has direct exposure to
significant online shopping competition.
Nationwide Reach
(As a percentage of annualized base rent as of December 31, 2016)
Top Lines of Trade
(As a percentage of annualized base rent
as of December 31, 2016)
Convenience Stores | 16.9%
Restaurants - Full Service | 11.8%
Restaurants - Limited Service | 7.5%
Automotive Service | 6.6%
Family Entertainment Centers | 5.8%
Health & Fitness | 5.7%
Theaters | 4.9%
Automotive Parts | 3.9%
RV Dealers & Parts | 3.4%
Banks | 3.1%
(Remaining 17 categories
make up 30.4%)
West | 4.0%
Rocky Mountain | 5.8%
Midwest | 26.6%
South | 22.3%
Southeast | 25.7%
Northeast | 15.6%
11
$2.35 billion invested
with relationship
tenants since 2012
12
NATIONAL RETAIL PROPERTIES
Our Strong Balance Sheet
We continue to adhere to our strategy of maintaining an investment grade rated
balance sheet. At the end of the year our total debt-to-total gross book assets remained
approximately 30%. The average maturity of our debt is 6.6 years and we have employed
very little bank debt in the recent past.
The interest rates on our last five issuances of 10-year notes were 3.8%, 3.3%, 3.9%,
4.0% and 3.6%. With a well-laddered debt maturity schedule (less than $253 million
maturing through 2020) we’ve limited our exposure to interest rate spikes in any
particular year.
Our Capital Structure
(As of December 31, 2016 – based on Total Gross Book Assets)
Secured Debt
0.2% | $13.9 Million
Preferred Equity
13.8% | $920.0 Million
Unsecured Debt
30.0% | $2,003.3 Million
Common Equity
56.0% | $3,747.6 Million
Well-Laddered Debt Maturities
(As of December 31, 2016; percentages shown are weighted average interest rates)
NNN’s low leverage balance sheet strategy is enhanced by its well-laddered debt maturity.
$450M _________________________________________________________________________________________________________________________________________________________________________________________________________
__
$400M _________________________________________________________________________________________________________________________________________________________________________________________________________
__
4.0%
__________________________
3.3%
$350M _______________________________________________________________________________________________________________________________
__
__________________________________________________________________________
3.9%
3.6%
___________________________________________________________________
3.8%
3 8%3 8%
5.5%
$300M _______________________________________________________________________________________________________________________________
________
____
___________________________________________________________
___________________________ __________
___________________________________________________________________
________________________________________________
______________________________________________
_______________________________________________
$250M _______________________________________________________________________________________________________________________________
______
____
________________ ________ _________
____________________________________________________________
__________________________________________
___________________________________________________________________
______________________ ________________
__________________________________________
___________________ _________________
6.9%
_________________________________________ ____
$200M _______________________________________________________________________________________________________________________________
____
__
________________________ __ ________________
__________________________________________________________
_______________________________ __________________ _________________
______________________________________ ________
___________________________________________________________________
__________________________________
__________________________________
___ ___________________________________
$150M _______________________________________________________________________________________________________________________________
____
__
______________________________________________
___________ _______________
_____________ _________ _____________
_ _____ __________ __ __________
___________________________________________________________________
_____________________________________________ _
________________________________
________________________________________________
$100M _______________________________________________________________________________________________________________________________
____
____
_____________________________________ _______
_____________________________________________
_______________________________________ ____________________
__________________________________________________
___________________________________________________________________
_________________________________________________
____________________________________________________
_________________________________________________
$ 50M _______________________________________________________________________________________________________________________________
____
___
_________________________________________________
____________________________________________
______________________________
____________________________________________________________
___________________________________________________________________
______________ ____________________________________
___________________________________________________
____________ ____________________________________
$ 0M
2017
5.2%
2018
5.2%
5.2%
2019
2020
2021
2022
2023
2024
2025
2026
13
Only 7.4% of leases
expire through 2019
14
NATIONAL RETAIL PROPERTIES
Key Elements for Shareholder Value Creation at NNN
Our management team and Board of Directors are 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.
• Continuing to seek out relationship tenants with whom we can do repeat business while maintaining
a high level of service with our existing, expanding retail partners.
• 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.
Steve Jobs astutely said, “Great things in business are never done by one person; they’re done by a team of people.” For many years I’ve
touted the excellent team we’ve assembled at NNN and I’m convinced our long-term performance has proven the accolades I’ve bestowed
on this group to be well-deserved. I truly believe a big part of the secret sauce at our company has been to create an environment which
enhances our ability to attract and retain good people. The statistics bear that out: 52% of our associates have been with NNN for 10 or
more years; 71% have been here five or more years. With that level of retention, you build a team with a deep awareness of our company’s
culture, processes and expectations.
After 13 satisfying and enjoyable years at NNN, I am delighted to be leaving NNN in excellent hands with a great management team that
will continue to execute our strategy. I have every confidence that my successor, Jay Whitehurst, along with our long-tenured CFO, Kevin
Habicht, and our other outstanding colleagues will keep the company in position to raise the dividend every year and continue producing
excellent, consistent results for all our shareholders.
With much appreciation,
Craig Macnab
Chairman and Chief Executive Officer
Portfolio Growth
(Number of properties owned as of December 31 for each respective year)
2,750 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
2,500 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
2,250 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
2,535
2,257
2,000 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
2,054
1,860
1,750 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
1,622
1,500 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
1,422
1,250 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
1,212
1,037
1,034
1,000 _________________________________________________________________________________________________________________________________________________________________________________________________________
__
750
2008
2009
2010
2011
2012
2013
2014
2015
2016
15
Our Officers and Directors
Executive Officers
Directors
CRAIG MACNAB
CRAIG MACNAB
Chief Executive Officer
Chairman
(through April 28, 2017)
JULIAN E. WHITEHURST
President & Chief Operating Officer
(Chief Executive Officer
effective April 28, 2017)
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
MICHELLE L. MILLER
Executive Vice President
& Chief Accounting Officer
DAVID M. FICK*
Professional Faculty Member,
Johns Hopkins University Carey
Business School and President
of Nandua Oyster Company
EDWARD J. FRITSCH*
President & Chief Executive Officer
Highwoods Properties
SAM L. SUSSER*
President
Susser Holdings II, L.P.
*Member audit committee
(As of February 13, 2017)
ROBERT C. LEGLER
Lead Director
JULIAN E. WHITEHURST
KEVIN B. HABICHT
PAMELA K. M. BEALL*
Executive Vice President
Corporate Planning and Strategy
MPLX LP
STEVEN D. COSLER*
Operating Partner
Wall Street Healthcare Partners
DON DEFOSSET
Retired Chairman, President
& Chief Executive Officer
Walter Industries, Inc.
Thank You, Craig
Craig Macnab's positive impact on National Retail Properties cannot be overstated.
Under Craig’s leadership, since 2004, our asset base grew from $1.2 billion to more than $6.3 billion, FFO grew from $62 million
to $331 million for a 15.41% average growth per year and our shareholders enjoyed an average annual total return of 13.1%.
Of equal importance, Craig mentored and developed an executive management team with the skills and culture to carry on
after his retirement. We will miss Craig terribly, but the management team, and all of our talented associates, are energized
and committed to continue the mission to deliver long-term shareholder value.
In every way possible, Craig is leaving us better than he found us. And on a personal note, I could not have asked for a better role
model, mentor and friend.
All of us at National Retail Properties wish Craig and Deirdre the very best in whatever adventures life brings them next.
Cheers.
Julian E. Whitehurst
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, 2016
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
5.200% Series F Preferred Stock, $0.01 par value
Name of exchange on which registered:
New York Stock Exchange
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, 2016 was $7,472,258,000.
The number of shares of common stock outstanding as of January 31, 2017 was 147,235,328.
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 2017 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
69
69
70
71
71
71
71
71
72
77
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 may elect 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 are
primarily real estate assets. NNN's consolidated financial statements are included in Item 8 of this Annual Report on Form
10-K.
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," or individually a "Property"). NNN owned 2,535
Properties with an aggregate gross leasable area of approximately 27,204,000 square feet, located in 48 states, with a
weighted average remaining lease term of 11.6 years as of December 31, 2016. Approximately 99 percent of the Properties
were leased as of December 31, 2016.
Competition
NNN generally competes with numerous other REITs, commercial developers, real estate limited partnerships and other
investors including but not limited to insurance companies, pension funds and financial institutions that own, manage,
finance or develop retail and net leased properties.
Employees
As of January 31, 2017, NNN employed 65 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." National Retail Properties, Inc. has three series of preferred shares outstanding which are traded on the
NYSE: 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"), 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”), and the
depositary shares, each representing a 1/100th of a share of 5.200% Series F Cumulative Redeemable Preferred Stock, par
value $0.01 per share (“Series F Preferred Stock”).
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 stable current returns 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 10 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, portfolio composition, 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,
and industry trends and performance compared to NNN.
The operating strategies employed by NNN have allowed NNN to increase the annual dividend (paid quarterly) per common
share for 27 consecutive years. NNN is one of only four publicly traded REITs to increase its annual dividend per common
share for 27 or more consecutive years.
Investment in Real Estate or Interests in Real Estate
NNN’s management believes that single tenant, freestanding net lease retail properties will continue to provide attractive
investment opportunities and that NNN is well suited to take advantage of these opportunities because of its experience in
accessing capital markets, and its ability to source, underwrite and acquire properties.
In evaluating a particular acquisition, management may consider a variety of factors, including but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 conditions, including potential for growth, market rents, and existing or potential competing
properties or retailers,
the size, age and title status of the property,
the quality of construction and design and the current physical condition of the Property Portfolio,
the potential for, and current extent of, any environmental problems,
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 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 lease,
the rent to be paid by the tenant, and
2
•
any existing indebtedness encumbering the property which may be assumed 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.
Investments in Real Estate Mortgages 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 and other types of real estate interests, (iii) loans secured by personal property, (iv) loans
secured by partnership 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 properties with advances from
its $650,000,000 unsecured revolving credit facility ("Credit Facility"). As of December 31, 2016, there was no outstanding
balance and $650,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit
totaling $230,000.
As of December 31, 2016, NNN’s ratio of total debt to total gross assets (before accumulated depreciation and amortization)
was approximately 30 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 22 percent. Certain financial agreements contain covenants that
limit NNN’s ability to incur additional 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, 2016, NNN owned 2,535 Properties with an aggregate gross leasable area of approximately 27,204,000
square feet, located in 48 states, with a weighted average remaining lease term of 11.6 years. Approximately 99 percent of
total Properties were leased as of December 31, 2016.
The following table summarizes the Property Portfolio at December 31, 2016 (in thousands):
Land
Building
Size(1)
Total Dollars Invested(2)
High
Low
Average
High
Low
Average
3,733
142
2
1
102
$ 8,882
$
5
$
855
11
45,286
19
1,826
Approximate square feet.
(1)
(2) Costs vary depending upon size, local market conditions and other factors.
3
As of December 31, 2016, NNN has committed to fund construction commitments on 21 Properties. The improvements are
estimated to be completed within 12 months. These construction commitments, at December 31, 2016, are outlined in the
table below (dollars in thousands):
Total commitment(1)
Amount funded
Remaining commitment
$
$
$
114,206
54,782
59,424
(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 10 to 20 years. As of December 31, 2016, the
weighted average remaining lease term of the Property Portfolio was approximately 11.6 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 $6,000 to $3,714,000 (average of
$218,000), and generally provide for increases in rent as a result of (i) increases in the Consumer Price Index ("CPI"), (ii)
fixed increases, or, to a lesser extent, (iii) 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, 2016:
% of
Annual
Base
Rent(1)
1.2%
3.2%
3.0%
3.8%
4.4%
6.1%
2017
2018
2019
2020
2021
2022
# of
Properties
27
90
76
132
122
111
Gross
Leasable
Area(2)
502,000
1,153,000
1,122,000
1,571,000
1,320,000
1,456,000
% of
Annual
Base
Rent(1)
2.5%
2.6%
5.0%
6.0%
2023
2024
2025
2026
# of
Properties
85
50
132
181
Gross
Leasable
Area(2)
1,014,000
883,000
1,116,000
1,830,000
Thereafter
62.2%
1,495
14,733,000
Based on annualized base rent for all leases in place as of December 31, 2016.
(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
Restaurants - limited service
Automotive service
Family entertainment centers
Health and fitness
Theaters
Automotive parts
Recreational vehicle dealers, parts and accessories
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Banks
Other
% of Annual Base Rent(1)
2016
16.9%
11.8%
7.5%
6.6%
5.8%
5.7%
4.9%
3.9%
3.4%
3.1%
2015
16.7%
11.0%
7.2%
7.0%
5.6%
3.8%
5.2%
4.2%
3.6%
3.4%
2014
18.0%
9.1%
6.5%
7.2%
5.1%
3.9%
5.2%
4.7%
3.1%
3.7%
30.4%
100.0%
32.3%
100.0%
33.5%
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, 2016:
State
Texas
Florida
Illinois
Ohio
North Carolina
Georgia
Indiana
Virginia
Alabama
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Tennessee
Other
# of
Properties
448
197
132
165
134
118
118
88
101
77
957
2,535
% of
Annual
Base Rent(1)
18.4%
9.1%
5.7%
5.7%
4.7%
4.3%
4.2%
3.5%
3.0%
2.8%
38.6%
100.0%
(1)
Based on annualized base rent for all leases in place as of December 31, 2016.
As of December 31, 2016, NNN did not have any tenant that accounted for ten percent or more of its rental income.
5
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 which
provides some coverage for substantially all of the properties. Such policy 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 a property 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 6, 2017, NNN has 76 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"). 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 6, 2017, 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. Such conditions could
also affect 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 stockholders and increase NNN’s future interest expense,
the recognition of impairment charges on or reduced values of the Properties, 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
(i) 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, (ii) the dislocation of the markets for
NNN’s short-term investments, (iii) increased volatility in market rates for such investments or (iv) 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 2017 and 2026. 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 and results of operations.
Loss of rent from tenants would reduce NNN’s cash flow.
NNN's tenants encounter significant macroeconomic, governmental and competitive forces. Adverse changes in consumer
spending or consumer preferences for particular goods, services or store based retailing could severely impact their ability to
pay rent. Shifts from in-store to online shopping could increase due to changing consumer shopping patterns as well as the
increase in consumer adoption and use of mobile electronic devices. This expansion of e-commerce could have an adverse
impact on NNN's tenants' ongoing viability. 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 NNN may not be able to re-lease the vacant Property at a comparable lease rate.
Furthermore, NNN may incur additional expenditures in connection with such renewal or re-leasing.
A significant portion of the Property Portfolio annual base rent is concentrated in specific industry classifications, tenants
and geographic locations.
As of December 31, 2016, approximately,
•
•
•
48.6% of the Property Portfolio annual base rent is generated from tenants in five retail lines of trade,
including convenience stores (16.9%) and full-service and limited-service restaurants (19.3%),
20.1% of the Property Portfolio annual base rent is generated from five tenants, including Sunoco (5.4%),
Mister Car Wash (4.0%), LA Fitness (3.8%), AMC Theatres (3.5%), and Camping World (3.4%), and
43.6% of the Property Portfolio annual base rent is generated from properties located in five states,
including Texas (18.4%) and Florida (9.1%).
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 stockholders 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, loss of a large employer, 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 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 evidence of some level of known 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 6, 2017, NNN has 76 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 stockholders, and its ability to meet its debt obligations.
In order to mitigate exposure to environmental liability, NNN maintains an environmental insurance policy which provides
some coverage for substantially all of its Properties. That policy expires in August 2018. However, the policy is subject to
exclusions and limitations and does not cover all of the Properties owned by NNN. 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.
NNN may suffer a loss in the event of a default of or bankruptcy of a borrower or a tenant.
As of December 31, 2016, mortgages and notes receivables had an outstanding principal balance of $1,252,000. 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 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.
9
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
master lease covenant, 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 securities.
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
securities.
On September 29, 2016, NNN announced that, as the culmination of its long-term executive succession planning process,
Craig Macnab, Chief Executive Officer (“CEO”) and Chairman of NNN's Board of Directors, will retire as CEO and step
down as Chairman and a member of NNN's Board of Directors effective April 28, 2017. Julian E. (“Jay”) Whitehurst,
currently President and Chief Operating Officer, will assume the role of President and CEO as of April 28, 2017.
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, floods, earthquakes or other types of natural disasters or wars or other acts of violence)
which may be uninsurable, self-insured by tenants, or the cost of insuring against these losses may not be economically
justifiable in the opinion of tenants or NNN. 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.
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,
10
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 or borrowers could adversely affect NNN’s business or financial condition.
As of December 31, 2016, NNN owned 27 vacant, un-leased Properties, which accounted for approximately one percent of
total Properties held in the Property Portfolio. NNN is actively marketing these properties for sale or lease but may not be
able to sell or lease these properties on favorable terms or at all. The lost revenues and increased property expenses resulting
from the rejection by any bankrupt tenant of any of their respective leases with NNN could have a material adverse effect on
the liquidity and results of operations of NNN if NNN is unable to re-lease the Properties at comparable rental rates and in a
timely manner. As of January 31, 2017, 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, 2016, NNN had outstanding debt including mortgages payable of $13,878,000, total unsecured notes
payable of $2,297,811,000 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.
NNN cannot assure stockholders that any such refinancing, sale of assets or additional financing would be possible or, if
possible, on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable or would
not result in a material decline in earnings.
11
NNN is obligated to comply with financial and other covenants in its debt instruments that could restrict its operating
activities, and the failure to comply with such covenants could result in defaults that accelerate the payment of such debt.
As of December 31, 2016, NNN had approximately $2,311,689,000 of outstanding indebtedness, of which approximately
$13,878,000 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 modifications to property improvements,
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,
changes in government taxation or regulatory authorities,
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 has owned
some of its assets in the TRS.
Adverse legislative or regulatory tax changes could reduce NNN’s earnings and cash flow and the market value of NNN’s
securities.
At any time, the federal and state income tax laws or the administrative interpretations of those laws may change. Any such
changes may have current and retroactive effects, 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 securities.
Compliance with REIT requirements, including distribution requirements, may limit NNN’s flexibility and may 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, 2016, 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.
NNN’s failure to maintain effective internal control over financial reporting could have a material adverse effect on its
business, operating results and the market value of NNN's securities.
13
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, the company's access to capital could be
impaired, 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, 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 does not believe that any of these proceedings are
material.
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, 2011 and ending
December 31, 2016. The graph assumes an investment of $100 on December 31, 2011.
Comparison to Five-Year Cumulative Total Return
15
Set forth below is a line graph comparing the cumulative total stockholder return on NNN’s common stock, based on the
market price of the common stock and assuming reinvestment of dividends, with the FTSE National Association of Real
Estate Investment Trusts Equity Index (“NAREIT”) and the S&P 500 Index (“S&P”) for the ten-year period commencing
December 31, 2006 and ending December 31, 2016. The graph assumes an investment of $100 on December 31, 2006.
Comparison to Ten-Year Cumulative Total Return
16
For each calendar quarter and year indicated, the following table reflects respective high, low and closing sales prices for the
common stock as quoted by the NYSE and the dividends paid per share in each such period.
2016
High
Low
Close
Dividends paid per share
2015
High
Low
Close
Dividends paid per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
46.86
$
51.72
$
53.60
$
51.26
$
38.29
46.20
0.435
43.52
51.72
0.435
47.76
50.85
0.455
39.86
44.20
0.455
$
44.43
$
42.11
$
38.91
$
40.37
$
38.60
40.97
0.420
34.86
35.01
0.420
33.62
36.27
0.435
35.51
40.05
0.435
53.60
38.29
44.20
1.780
44.43
33.62
40.05
1.710
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
2016
2015
$
1.513705
85.0396% $
1.363294
79.7248%
—
—
—
—
—
—
0.266295
14.9604%
0.019005
0.007806
0.011055
0.308840
1.1114%
0.4565%
0.6465%
18.0608%
$
1.780000
100.0000% $
1.710000
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 January 2017, NNN declared dividends payable to its stockholders of $66,780,000, or $0.455 per share, of common stock.
On January 31, 2017, there were 1,800 stockholders of record of NNN's common stock.
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 of NNN
Cash dividends declared to:
Common stockholders
Series C preferred stockholders
Series D preferred stockholders
Series E preferred stockholders
Series F 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
Series F preferred depositary stockholders
Other data:
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
2016
2015
2014
2013
2012
$
533,817
$
483,025
$
435,278
$
397,008
$
212,324
239,506
239,500
6,334,151
2,311,689
3,916,799
187,511
197,961
197,836
5,460,044
1,975,944
3,342,134
179,777
191,170
190,601
4,915,551
1,729,891
3,082,515
154,006
160,085
160,145
4,445,308
1,560,844
2,777,045
257,007
228,699
204,157
189,107
—
19,047
16,387
3,189
—
19,047
16,387
—
—
19,047
16,387
—
—
19,047
8,876
—
342,057
132,388
141,937
142,015
3,980,210
1,579,148
2,296,285
167,495
1,979
15,449
—
—
144,176,224
133,998,674
124,257,558
118,204,148
106,965,156
144,660,633
134,489,416
124,710,226
119,864,824
109,117,515
$
1.39
$
1.38
1.21
$
1.20
1.24
$
1.24
1.06
$
1.05
1.39
1.38
1.78
—
1.21
1.20
1.71
—
1.24
1.24
1.65
—
1.11
1.10
1.60
—
1.656250
1.425000
0.231111
1.656250
1.425000
—
1.656250
1.425000
—
1.656250
0.771875
—
1.04
1.02
1.13
1.11
1.56
0.537760
1.343403
—
—
$
415,337
$
341,095
$
296,733
$
274,421
$
228,130
(779,943)
644,886
(644,544)
307,105
(541,558)
253,944
(568,040)
293,028
(601,759)
373,623
Funds from operations – available to common
stockholders(2)
330,544
289,193
260,902
228,622
193,563
(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 early adopted 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.” Therefore, only disposals representing a strategic shift in
18
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. Therefore, the revenues and
expenses related to these properties are presented as discontinued operations as of December 31, 2014. The Company has not
classified any additional properties as discontinued operations subsequent to December 31, 2013.
(2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relative non-
U.S. generally accepted accounting principles (“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 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 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:
Net earnings available to common stockholders
$
200,877
$
162,402
$
155,167
$
132,222
$
121,489
2016
2015
2014
2013
2012
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 income tax
and noncontrolling interests
Impairment losses – depreciable real estate, net of
recoveries and income tax
148,779
134,380
115,888
99,048
—
—
—
—
—
—
3
—
—
343
—
—
73,685
1,381
112
(2,341)
(27,137)
(10,397)
(10,904)
(5,442)
(10,956)
8,025
2,808
748
2,451
10,193
FFO available to common stockholders
$
330,544
$
289,193
$
260,902
$
228,622
$
193,563
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
may elect 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." At the close of business on December 31, 2015,
NNN elected to revoke its election to classify the TRS as taxable REIT subsidiaries ("TRS Revocation Election").
Overview
NNN, a Maryland corporation, is a fully integrated real estate investment trust ("REIT") formed in 1984. NNN's assets
include: real estate assets and mortgages and notes receivable. 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," "Property
Portfolio," or individually a "Property").
NNN owned 2,535 Properties, with an aggregate gross leasable area of approximately 27,204,000 square feet, located in 48
states, with a weighted average remaining lease term of 11.6 years as of December 31, 2016. Approximately 99 percent of the
Properties were leased as of December 31, 2016.
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 evaluates the creditworthiness of its current and prospective tenants. This evaluation includes reviewing available
financial statements, store level financial performance, press releases, public credit ratings from major credit rating agencies,
industry news publications and financial market data (debt and equity pricing). NNN also evaluates 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 largest 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 regions, respectively, could have a material adverse effect on the financial condition and
operating performance of NNN.
As of the years ended December 31, 2016, 2015 and 2014, the Property Portfolio has remained at least 99 percent leased. As
of December 31, 2016, the average remaining lease term of the Property Portfolio was 11.6 years, which is consistent with
the past three years, coupled with a net lease structure, provides enhanced probability of maintaining occupancy and
operating earnings.
Critical Accounting Policies and Estimates
The preparation of NNN’s consolidated financial statements in conformance with accounting principles generally accepted in
the United States of America requires management to make estimates and 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 in a reasonable period of time.
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 – Held For Sale. 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, 2016, 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, 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 and unimproved land
Percent of Properties – leased and unimproved land
Weighted average remaining lease term (years)
Total gross leasable area (square feet) – leased
2016
2015
2014
2,535
2,257
2,054
27,204,000
24,964,000
22,479,000
2,508
2,236
2,025
99%
11.6
99%
11.4
99%
11.6
26,700,000
24,544,000
21,938,000
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, 2016:
% of
Annual
Base Rent(1)
1.2%
3.2%
3.0%
3.8%
4.4%
6.1%
# of
Properties
27
90
76
132
122
111
2017
2018
2019
2020
2021
2022
Gross
Leasable
Area(2)
502,000
1,153,000
1,122,000
1,571,000
2023
2024
2025
2026
% of
Annual
Base Rent(1)
2.5%
2.6%
5.0%
6.0%
# of
Properties
85
50
132
181
Gross
Leasable
Area(2)
1,014,000
883,000
1,116,000
1,830,000
1,320,000
Thereafter
62.2%
1,495
14,733,000
1,456,000
(1) Based on the annualized base rent for all leases in place as of December 31, 2016.
(2) Approximate square feet.
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
Restaurants - limited service
Automotive service
Family entertainment centers
Health and fitness
Theaters
Automotive parts
Recreational vehicle dealers, parts and accessories
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Banks
Other
% of Annual Base Rent(1)
2016
16.9%
11.8%
7.5%
6.6%
5.8%
5.7%
4.9%
3.9%
3.4%
3.1%
2015
16.7%
11.0%
7.2%
7.0%
5.6%
3.8%
5.2%
4.2%
3.6%
3.4%
2014
18.0%
9.1%
6.5%
7.2%
5.1%
3.9%
5.2%
4.7%
3.1%
3.7%
30.4%
100.0%
32.3%
100.0%
33.5%
100.0%
(1) Based on annualized base rent for all leases in place as of December 31 of the respective year.
22
The following table summarizes the diversification of the Property Portfolio by state as of December 31, 2016:
State
Texas
Florida
Illinois
Ohio
North Carolina
Georgia
Indiana
Virginia
Alabama
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Tennessee
Other
# of Properties
448
197
132
165
134
118
118
88
101
77
957
2,535
% of Annual
Base Rent(1)
18.4%
9.1%
5.7%
5.7%
4.7%
4.3%
4.2%
3.5%
3.0%
2.8%
38.6%
100.0%
(1) Based on annualized base rent for all leases in place as of December 31, 2016.
Property Acquisitions. The following table summarizes the Property acquisitions for each of the years ended December 31
(dollars in thousands):
Acquisitions:
Number of Properties
2016
2015
2014
313
221
221
Gross leasable area (square feet)
2,734,000
2,706,000
2,417,000
Initial cash yield
Total dollars invested(1)
6.9%
7.2%
7.5%
$
846,906
$
726,303
$
618,145
(1)
Includes dollars invested in projects under construction or tenant improvements for each respective year.
NNN typically funds Property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the
"Credit Facility") or by issuing its debt or equity securities in the capital markets.
Property Dispositions. The following table summarizes the Properties sold by NNN for each of the years ended
December 31 (dollars in thousands):
Number of properties
Gross leasable area (square feet)
Net sales proceeds
Gain, net of income tax expense(1)
Cap rate
2016
2015
2014
38
490,000
103,215
27,182
6.8%
$
$
19
232,000
39,116
10,450
5.9%
$
$
27
317,000
55,378
11,424
7.2%
$
$
(1) Amounts include deferred gains on previously sold properties.
NNN typically uses the proceeds from a Property disposition to either pay down the Credit Facility or reinvest in real estate.
23
Analysis of Revenue from Continuing Operations
General. During the year ended December 31, 2016, 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
2016
2015
2014
Percent of Total
2015
2014
2016
2016
Versus
2015
Percent
2015
Versus
2014
Percent
$ 515,954
$ 465,282
$ 416,842
96.7%
96.3%
95.9%
10.9 %
11.6 %
14,984
14,868
13,875
1,032
988
2,326
1,677
1,778
1,834
2.8%
0.2%
0.3%
3.1%
0.2%
0.4%
3.2%
0.5%
0.8 %
7.2 %
4.5 %
(57.5)%
0.4%
(5.7)%
(3.1)%
$ 533,647
$ 482,916
$ 434,877
100.0%
100.0%
100.0%
10.5 %
11.0 %
(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 – 2016 versus 2015
Rental Income. Rental Income increased in amount and as a percent of the total revenues from continuing operations for the
year ended December 31, 2016 as compared to the same period in 2015. The increase for the year ended December 31, 2016,
is primarily due to a partial year of Rental Income received as a result of the acquisition of 313 properties with aggregate
gross leasable area of approximately 2,734,000 during 2016 and a full year of Rental Income received as a result of the
acquisition of 221 properties with a gross leasable area of approximately 2,706,000 square feet in 2015.
Comparison of Revenues from Continuing Operations – 2015 versus 2014
Rental Income. Rental Income increased in amount and as a percent of the total revenues from continuing operations for the
year ended December 31, 2015 as compared to the same period in 2014. The increase for the year ended December 31, 2015,
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 2,706,000 during 2015 and a full year of Rental Income received as a result of the
acquisition of 221 properties with a gross leasable area of approximately 2,417,000 square feet in 2014. During the year
ended December 31, 2015, NNN recorded $1,950,000 of rental revenue from a settlement with a prior tenant.
Real Estate Expense Reimbursement from Tenants. Real estate expense reimbursements from tenants increased for the year
ended December 31, 2015, as compared to the same period in 2014, 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 2014 and a partial year of reimbursements from certain newly acquired properties in 2015.
24
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 impairments during the year ended December 31, 2016, as compared to the same period in 2015. 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 – real estate and other charges, net of recoveries
Total operating expenses
2016
2015
2014
$
36,508
$
34,736
$
20,852
149,101
6,830
11,287
19,776
134,798
531
4,420
32,518
18,935
116,162
256
760
$
$
$
224,578
$
194,261
$
168,631
(170) $
(109) $
(357)
96,352
563
90,008
927
96,745
$
90,826
$
85,510
1,391
86,544
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 – real estate and
other charges, net of recoveries
Total operating expenses
Percentage of Total Expenses
Percentage of
Revenues from
Continuing Operations
2016
2015
2014
2016
2015
2014
2016
Versus
2015
Percent
2015
Versus
2014
Percent
16.3 %
9.3 %
66.4 %
17.9 %
10.2 %
69.4 %
19.3 %
11.2 %
68.9 %
6.9%
3.9%
7.2%
4.1%
7.5 %
4.3 %
27.9%
27.9% 26.7 %
5.1 %
5.4 %
10.6 %
6.8 %
4.4 %
16.0 %
3.0 %
0.3 %
0.2 %
1.3%
0.1%
0.1 %
1,186.3 %
107.4 %
5.0 %
2.2 %
0.4 %
2.1%
0.9%
0.2 %
155.4 %
100.0 % 100.0 % 100.0 %
42.1%
40.2% 38.8 %
15.6 %
481.6 %
15.2 %
(69.5)%
5.3 %
(33.4)%
4.9 %
Interest and other income
Interest expense
Real estate acquisition costs
(0.2)%
(0.1)%
(0.4)%
—
—
(0.1)%
99.6 %
99.1 %
98.8 %
18.1%
18.6% 19.7 %
0.6 %
1.0 %
1.6 %
0.1%
0.2%
0.3 %
Total other expenses (revenues)
100.0 % 100.0 % 100.0 %
18.2%
18.8% 19.9 %
56.0 %
7.0 %
(39.3)%
6.5 %
Comparison of Expenses from Continuing Operations – 2016 versus 2015
General and Administrative Expenses. General and administrative expenses increased for the year ended December 31,
2016, as compared to the same period in 2015, 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, 2016, is primarily attributable to an increase in personnel costs.
Real Estate. Real estate expenses increased for the year ended December 31, 2016, as compared to the same period in 2015,
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 and non-reimbursable expenses related to a partial year of
reimbursable and non-reimbursable expenses from certain properties acquired in 2016 and a full year of reimbursable and
non-reimbursable expenses from certain properties acquired in 2015.
25
Depreciation and Amortization. Depreciation and amortization expenses increased in amount, decreased as a percentage of
total operating expenses and remained flat as a percentage of revenues from continuing operations for the year ended
December 31, 2016, as compared to the year ended December 31, 2015. The increase in expenses is primarily due to the
acquisition of 313 properties with an aggregate gross leasable area of approximately 2,734,000 square feet in 2016 and 221
properties with an aggregate gross leasable area of approximately 2,706,000 square feet during 2015.
Impairment – Commercial Mortgage Residual Interests Valuation. As of December 31, 2015, NNN held the commercial
mortgage residual interests (“Residuals”) from seven loan securitizations. In 2016, the loan servicer of five of the
securitizations exercised its clean-up call option. The clean-up call allowed the servicer to purchase all of the trusts’ assets,
thereby terminating future cash distributions payable to NNN as the holder of these residual interests. Unrealized gains and
losses are reported as other comprehensive income in stockholders' equity and other than temporary valuation impairment. As
of December 31, 2016, the remaining two Residuals are recorded at fair value. During the years ended December 31, 2016,
2015 and 2014, NNN recorded other than temporary valuation impairments as a reduction of earnings from operations of
$6,830,000, $531,000 and $256,000. The other than temporary valuation impairment recorded during the year ended
December 31, 2016 related primarily to the execution of the clean-up call option on the five securitizations.
Impairment Losses – Real Estate and Other Charges, Net of Recoveries. NNN reviews long-lived assets for impairment
whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease
properties that are currently vacant or become vacant, and the ability to sell properties at a price that exceeds NNN's carrying
value. Management evaluates whether an impairment in value has occurred by comparing the estimated undiscounted future
cash flows, 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, 2016 and 2015, NNN recorded $8,025,000 and $3,970,000, respectively, of real estate
impairments. NNN also recorded a $3,269,000 loss on mortgages receivable for the year ended December 31, 2016, and a
$450,000 loss on the sale of mortgages receivable during the year ended December 31, 2015.
Interest Expense. Interest expense increased in total and as a percentage of total other expenses (revenues) for the year ended
December 31, 2016, as compared to the same period in 2015, and decreased as a percentage of revenues from continuing
operations.
The following represents the primary changes in debt that have impacted interest expense:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
the issuance in October 2015 of $400,000,000 principal amount of notes payable with a maturity of
November 2025, and stated interest rate of 4.000%,
the repayment in December 2015 of $150,000,000 principal amount of notes payable with a stated interest
rate of 6.150%,
the repayment in January 2016 of $5,876,000 principal amount of mortgages payable with an interest rate
of 5.750%,
the repayment in March 2016 of $722,000 principal amount of mortgages payable with an interest rate of
6.900%,
the repayment in October 2016 of $2,709,000 principal amount of mortgages payable with an interest rate
of 6.400%,
the issuance in December 2016 of $350,000,000 principal amount of notes payable with a maturity of
December 2026, and stated interest rate of 3.600%, and
the decrease of $8,543,000 in the weighted average outstanding balance on the Credit Facility and a slightly
higher weighted average interest rate for the year ended December 31, 2016, as compared to the same
period in 2015.
Comparison of Expenses from Continuing Operations – 2015 versus 2014
General and Administrative Expenses. General and administrative expenses increased for the year ended December 31,
2015, as compared to the same period in 2014, 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, 2015, is primarily attributable to an increase in incentive compensation.
26
Real Estate. Real estate expenses increased for the year ended December 31, 2015, as compared to the same period in 2014,
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 2015 and a full year of reimbursable expenses from certain properties acquired
in 2014.
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, 2015, as
compared to the year ended December 31, 2014. The increase in expenses is primarily due to the acquisition of 221
properties with an aggregate gross leasable area of approximately 2,706,000 square feet in 2015 and 221 properties with an
aggregate gross leasable area of approximately 2,417,000 square feet during 2014.
Impairment Losses – Real Estate and Other Charges, Net of Recoveries. NNN reviews long-lived assets for impairment
whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease
properties that are currently vacant or become vacant, and the ability to sell properties at a price that exceeds NNN's carrying
value. Management evaluates whether an impairment in value has occurred by comparing the estimated undiscounted future
cash flows, 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, 2015 and 2014, NNN recorded $3,970,000 and $760,000, respectively, of real estate impairments.
NNN also recorded a $450,000 loss on the sale of a mortgage receivable during the year ended December 31, 2015.
Interest Expense. Interest expense increased in total and as a percentage of total other expenses (revenues) for the year ended
December 31, 2015, as compared to the same period in 2014, and decreased as a percentage of revenues from continuing
operations.
The following represents the primary changes in debt that have impacted interest expense:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
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 the acquisition of
Properties with an interest rate of 5.230%,
the issuance in October 2015 of $400,000,000 principal amount of notes payable with a maturity of
November 2025, and stated interest rate of 4.000%,
the repayment in December 2015 of $150,000,000 principal amount of notes payable with a stated interest
rate of 6.150%, and
the increase of $22,092,000 in the weighted average debt outstanding on the Credit Facility for the year
ended December 31, 2015, as compared to the same period in 2014, and a slightly lower weighted average
interest rate for the year ended December 31, 2015, as compared to the same period in 2014.
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.
27
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) capital expenditures; (iv) payment of principal and interest on its
outstanding indebtedness; and (v) other investments.
NNN expects to meet short-term liquidity requirements through cash provided from operations and NNN’s Credit Facility. As
of December 31, 2016, there was no outstanding balance and $650,000,000 was available for future borrowings under the
Credit Facility, excluding undrawn letters of credit totaling $230,000. 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. NNN's cash and cash equivalents includes the aggregate of Cash and cash equivalents and
Restricted cash and cash held in escrow from the Consolidated Balance Sheets. The table below summarizes NNN’s cash
flows for each of the years ended December 31 (dollars in thousands):
Cash and cash equivalents:
Provided by operating activities
Used in investing activities
Provided by financing activities
Increase
Net cash at beginning of year
Net cash at end of year
2016
2015
2014
$
415,337
$
341,095
$
296,733
(779,943)
644,886
280,280
14,260
(644,544)
307,105
3,656
10,604
$
294,540
$
14,260
$
(541,558)
253,944
9,119
1,485
10,604
Cash provided by operating activities represents cash received primarily from Rental Income and interest income less cash
used for general and administrative expenses. NNN’s cash flow from operating activities has been sufficient to pay the
distributions for each period presented. The change in cash provided by operations for the years ended December 31, 2016,
2015 and 2014, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash
generated from operations is expected to fluctuate in the future.
Changes in cash for investing activities are primarily attributable to acquisitions and dispositions of Properties. NNN
typically uses proceeds from its Credit Facility to fund the acquisition of its Properties.
NNN’s financing activities for the year ended December 31, 2016, included the following significant transactions:
•
•
•
•
•
•
•
•
$334,103,000 in net proceeds from the issuance of 13,800,000 depositary shares representing interests in
NNN's 5.200% Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock") in October,
$342,765,000 in net proceeds from the issuance of the 3.600% notes payable in December,
$8,340,000 in net proceeds from the issuance of 187,626 shares of common stock in connection with the
Dividend Reinvestment and Stock Purchase Plan (“DRIP”),
$265,696,000 in net proceeds from the issuance of 5,716,222 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,
$3,189,000 in dividends paid to holders of the depositary shares of NNN’s Series F Preferred Stock, and
$257,007,000 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 its 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.
28
NNN typically funds its short-term liquidity requirements, including investments in additional Properties, with cash from its
Credit Facility. As of December 31, 2016, there was no outstanding balance and $650,000,000 was available for future
borrowings under the Credit Facility, excluding undrawn letters of credit totaling $230,000.
As of December 31, 2016, NNN’s ratio of total debt to total gross assets (before accumulated depreciation and amortization)
was approximately 30 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 22 percent. Certain financial agreements to which NNN is a
party contain covenants that limit NNN’s ability to incur additional 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, 2016. The table presents principal cash
flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of
December 31, 2016.
Long-term debt(1)
Long-term debt – interest(2)
Operating lease
Expected Maturity Date (dollars in thousands)
Total
2017
2018
2019
2020
2021
Thereafter
$ 2,338,452
$ 250,510
$
538
$
567
$
596
$ 300,630
$ 1,785,611
606,083
96,958
83,323
83,294
83,265
75,668
183,575
6,462
728
743
758
773
788
2,672
Total contractual cash obligations
$ 2,950,997
$ 348,196
$
84,604
$
84,619
$
84,634
$ 377,086
$ 1,971,858
(1)
(2)
Includes only principal amounts outstanding under mortgages payable and notes payable and excludes unamortized mortgage
premiums, note discounts and note costs.
Interest calculation based on stated rate of the principal amount.
In addition to the contractual obligations outlined above, NNN has committed to fund construction commitments on 21
Properties. The improvements are estimated to be completed within 12 months. These construction commitments, at
December 31, 2016, are outlined in the table below (dollars in thousands):
Total commitment(1)
Amount funded
Remaining commitment
$
$
$
114,206
54,782
59,424
(1) Includes land, construction costs, tenant improvements and lease costs.
As of December 31, 2016, 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, which require the tenant to pay all property taxes and
assessments, to maintain the interior and exterior of the property, and to carry property and liability insurance coverage.
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 re-lease the Properties at
comparable rental rates and in a timely manner. As of December 31, 2016, NNN owned 27 vacant, un-leased Properties
which accounted for approximately one percent of total Properties. Additionally, as of January 31, 2017, 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
29
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 the 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
(dollars in thousands, except per share data):
Dividends
Per share
$
2016
257,007
1.780
$
2015
228,699
1.710
$
2014
204,157
1.650
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
2016
2015
2014
$
1.513705
85.0396% $
1.363294
79.7248% $
1.306992
79.2116%
—
—
—
—
—
—
0.266295
14.9604%
0.019005
0.007806
0.011055
0.308840
1.1114%
0.4565%
0.6465%
18.0608%
0.006212
0.008603
0.015362
0.312831
0.3765%
0.5214%
0.9310%
18.9595%
$
1.780000
100.0000% $
1.710000
100.0000% $
1.650000
100.0000%
On January 17, 2017, NNN declared a dividend of $0.455 per share, payable February 15, 2017 to its common stockholders
of record as of January 31, 2017.
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 (dollars in thousands,
except per share data):
Series D Preferred Stock(1):
Dividends
Per share
Series E Preferred Stock(2):
Dividends
Per share
Series F Preferred Stock(3):
Dividends
Per share
2016
2015
2014
$
19,047
1.656250
$
19,047
1.656250
$
19,047
1.656250
16,387
1.425000
16,387
1.425000
16,387
1.425000
3,189
0.231111
—
—
—
—
(1) In January 2017, NNN called for redemption of all outstanding shares of its Series D Preferred Stock represented by
depositary shares, each representing a 1/100th interest in a Series D Preferred Stock share. The depositary shares will be
30
redeemed on February 23, 2017.
(2) The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed by NNN. The earliest
redemption date for the Series E Preferred Stock is May 2018.
(3) The Series F Preferred Stock was issued October 11, 2016 and has no maturity date and will remain outstanding unless
redeemed by NNN. The earliest redemption date for the Series F preferred stock is October 2021.
The following presents the characterizations for tax purposes of such preferred stock dividends for the years ended
December 31:
Ordinary
dividends
Qualified
dividends
Capital gain
Unrecaptured
Section 1250
Gain
Totals
2016
Percentage of Total
100.0000%
Series D
Series E
Series F(1)
2015
$1.656250
$1.425000
$0.231111
—
—
—
—
—
—
—
—
—
100.0000%
— $ 1.656250
— $ 1.425000
— $ 0.231111
Percentage of Total
97.2400%
1.4134%
0.5570%
0.7896%
100.0000%
Series D
Series E
2014
$ 1.610538
$ 0.023409
$ 0.009225
$ 0.013078
$ 1.656250
$ 1.385670
$ 0.020141
$ 0.007937
$ 0.011252
$ 1.425000
Percentage of Total
97.8035%
0.4027%
0.6440%
1.1498%
100.0000%
Series D
Series E
$ 1.619870
$ 0.006670
$ 0.010666
$ 0.019044
$ 1.656250
$ 1.393700
$ 0.005738
$ 0.009177
$ 0.016385
$ 1.425000
(1) The Series F Preferred Stock was issued in October 2016.
In January 2017, NNN called for redemption of all outstanding shares of its Series D Preferred Stock represented by
depositary shares, each representing a 1/100th interest in a Series D Preferred Stock share. The depositary shares will be
redeemed on February 23, 2017 at $25.00 per depositary share, plus all accrued and unpaid dividends through the redemption
date, for an aggregate redemption price of $25.3128472 per depositary share. After the redemption date, dividends on the
depositary shares representing interests in the Series D Preferred Stock shares will cease to accrue.
Capital Resources
Generally, cash needs for Property acquisitions, 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):
Mortgages payable
Notes payable
Total outstanding debt
2016
13,878
2,297,811
2,311,689
$
$
Percentage
of Total
2015
Percentage
of Total
0.6% $
23,964
99.4%
1,951,980
100.0% $
1,975,944
1.2%
98.8%
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. Additionally, indebtedness may be used to refinance existing
indebtedness.
Line of Credit Payable. NNN's $650,000,000 unsecured revolving credit facility (the “Credit Facility”) had a weighted
average outstanding balance of $70,139,000 and a weighted average interest rate of 1.4% for the year ended December 31,
2016. The Credit Facility matures January 2019, with an option to extend maturity to January 2020. As of December 31,
2016, 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, 2016, there was no outstanding balance and $650,000,000 was
available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $230,000.
In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which,
among other things, require NNN to maintain certain (i) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage,
and (iv) investment limitations. At December 31, 2016, 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)
February 2004(6)
June 2012(4)(5)
September 2014(4)(7)
November 2014(4)
Initial
Balance
$ 6,952
Interest
Rate
Maturity(2)
6.90% January 2017
6,850
2,957
5.75% April 2016
6.40% February 2017
15,151
5.23% July 2023
Debt costs
Accumulated amortization
Debt costs, net of accumulated amortization
Mortgages payable, including unamortized premium and net of
unamortized debt costs
Carrying
Value of
Encumbered
Asset(s)(3)
Outstanding Principal
Balance at December 31,
2016
2015
$
$
— $
— $
—
—
21,403
21,403
—
—
13,987
13,987
(147)
38
(109)
848
5,890
2,804
14,555
24,097
(226)
93
(133)
$
13,878
$
23,964
(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 at December 31,
2016.
Initial balance and outstanding principal balance includes unamortized premium.
(4)
(5) NNN repaid the outstanding principal balance in January 2016.
(6) NNN repaid the outstanding principal balance in March 2016.
(7) NNN repaid the outstanding principal balance in October 2016.
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)
Net
Price
Stated
Rate
Effective
Rate(3)
Maturity
Date
2017(4)
2021(5)
2022
2023(6)
2024(7)
2025(8)
2026(9)
September 2007
$ 250,000
$
877
$ 249,123
6.875%
6.924%
October 2017
July 2011
August 2012
April 2013
May 2014
October 2015
December 2016
300,000
325,000
350,000
350,000
400,000
350,000
4,269
4,989
2,594
707
964
295,731
5.500%
5.689%
July 2021
320,011
3.800%
3.985%
October 2022
347,406
3.300%
3.388%
April 2023
349,293
3.900%
3.924%
June 2024
399,036
4.000%
4.029%
November 2025
3,860
346,140
3.600%
3.733%
December 2026
(1) The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility, fund future property
acquisitions and for general corporate purposes.
(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 at issuance.
(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 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 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 notes using the effective interest method.
(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 notes using the effective interest method.
(8) NNN entered into four forward starting swaps with an aggregate notional amount of $300,000. Upon issuance of the 2025 Notes,
NNN terminated the forward starting swaps resulting in a liability of $13,369, which was deferred in other comprehensive income.
The deferred liability is being amortized over the term of the notes using the effective interest method.
(9) NNN entered into two forward starting swaps with an aggregate notional amount of $180,000. Upon issuance of the 2026 Notes,
NNN terminated the forward starting swaps resulting in a gain of $13,345, which was deferred in other comprehensive income. The
deferred asset is being amortized over the term of the notes 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 outstanding note offerings, NNN incurred debt issuance costs totaling $21,157,000 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 December 2015, NNN repaid the $150,000,000 6.150% notes payable that were due in December 2015.
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, 2016, 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.
33
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 2015, NNN filed a shelf registration statement with the
Securities and Exchange Commission (the “Commission”) which was automatically effective and permits the issuance by
NNN of an indeterminate amount of debt and equity securities.
A description of NNN’s outstanding series of publicly held notes is found under “Debt – Notes Payable” 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
5.200% October 2016
13,800,000
345,000
9,856
10,897
1.425000 May 2018
1.300000 October 2021
Series
Series D(5)
Series E(6)
Series F(7)
(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. Series D and E issuances each included 1,500,000 depositary shares in connection
with the underwriters' over-allotment. Series F issuance included 1,800,000 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.
(7) NNN used the net proceeds from the offering to repay outstanding indebtedness under its Credit Facility, fund property
acquisitions and for general corporate purposes.
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 13, 2017, the Series E and Series F Preferred Stock Shares were not redeemable or convertible.
In January 2017, NNN announced the redemption of all outstanding depositary shares representing interests in its Series D
Preferred Stock. The depositary shares will be redeemed on February 23, 2017 at $25.00 per depositary share, plus all
accrued and unpaid dividends through the redemption date, for an aggregate redemption price of $25.3128472 per depositary
share. After the redemption date, dividends on the depositary shares representing interests in the Series D Preferred Stock will
cease to accrue.
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.
34
Dividend Reinvestment and Stock Purchase Plan. In February 2015, 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
2016
2015
2014
187,626
196,584
$
8,340
$
7,182
$
422,406
14,817
The proceeds from the issuances were used to pay down outstanding indebtedness of NNN’s Credit Facility, fund future
property acquisitions and for general corporate purposes.
At-The-Market Offerings. NNN has established an at-the-market equity program ("ATM") which allows NNN to sell shares
of common stock from time to time. The following outlines NNN's ATM programs:
Established date
Termination date
Total allowable shares
Total shares issued as of December 31, 2016
2016 ATM
2015 ATM
2013 ATM
March 2016 February 2015
March 2013
March 2019
March 2016 February 2015
12,000,000
10,000,000
4,223,290
9,852,465
9,000,000
6,252,812
The following table outlines the common stock issuances pursuant to NNN's ATM equity program (dollars in thousands,
except per share data):
Shares of common stock
Average price per share (net)
Net proceeds
Stock issuance costs(1)
Year Ended December 31,
2016
2015
2014
5,716,222
8,573,533
3,758,362
$
$
$
46.48
265,696
4,266
$
$
$
37.45
321,067
4,016
$
$
$
35.90
134,919
2,195
(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and
accounting fees.
Commercial Mortgage Residual Interests
As of December 31, 2015, NNN held the commercial mortgage residual interests (“Residuals”) from seven loan
securitizations. In 2016, the loan servicer of five of the securitizations exercised its clean-up call option. The clean-up call
allowed the servicer to purchase all of the trusts’ assets, thereby terminating future cash distributions payable to NNN as the
holder of these residual interests. During the years ended December 31, 2016, 2015 and 2014, NNN recorded an other than
temporary valuation impairment as a reduction of earnings from operations. The other than temporary valuation impairment
recorded during the year ended December 31, 2016, includes impairment related to the execution of the clean-up call option
on the five securitizations, as well as the fair value adjustment on the remaining two securitizations.
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 (dollars in thousands):
Unrealized gains (losses), net
Other than temporary valuation impairment
2016
2015
2014
$
(182) $
(585) $
6,830
531
875
256
35
As of December 31, 2016, the remaining two Residuals are recorded at fair value. Certain valuation assumptions are made
based on the expected timing of future cash flows relating to the Residuals. The following table summarizes the key
assumptions used in determining the value of the Residuals as of December 31 (dollars in thousands):
Discount rate
Average life equivalent CPR(1) speeds range
Foreclosures:
Frequency curve default model
Loss severity of loans in foreclosure
Yield:
LIBOR
Prime
Fair value at December 31
(1) Conditional prepayment rate
2016
2015
20%
20%
0.87% to 21.56% CPR
0.87% to 21.73% CPR
0% - 1.33% range
0.72% - 1.57% range
20%
20%
Forward 3-month curve
Forward 3-month curve
Forward curve
Forward curve
$
36
$
11,115
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, 2016, 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, 2016 and 2015. The table presents principal payments and related interest rates by year for debt obligations
outstanding as of December 31, 2016. NNN has a variable interest rate risk on its Credit Facility which had no outstanding
balance as of December 31, 2016. The weighted average rate for the Credit Facility for the year ended December 31, 2016,
was 1.4%. The outstanding balance of the Credit Facility as of December 31, 2016 and 2015 was $0. The table incorporates
only those debt obligations that existed as of December 31, 2016, and it does not consider those debt obligations or positions
which could arise after this date and therefore 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, 2016.
Debt Obligations (dollars in thousands)
Fixed Rate Debt
Mortgages(1)
Unsecured Debt(2)
Debt
Obligation
Weighted
Average
Interest Rate
Debt
Obligation
Effective
Interest
Rate
5.23%
5.23%
5.23%
5.23%
5.23%
5.23%
5.23%
$
$
$
$
596
623
652
682
716
10,718
13,987
13,987
24,097
$
249,907
6.92%
—
—
—
—
—
—
297,764
1,764,921
5.69%
3.73% (3)
2,312,592
4.39%
2,367,102
2,007,242
$
$
$
2017
2018
2019
2020
2021
Thereafter
Total
Fair Value:
December 31, 2016
December 31, 2015
(1) NNN's mortgages payable include unamortized premiums and exclude debt costs.
(2)
Includes NNN’s notes payable, each exclude debt costs and are 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 2021.
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 $36,000 and $11,115,000 as of December 31, 2016 and 2015, 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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). National Retail Properties, Inc. and
Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, National Retail Properties, Inc. and Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2016, 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, 2016 and 2015, 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, 2016 and our report dated February 13, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Orlando, Florida
February 13, 2017
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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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.
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, 2016, 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 13, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Orlando, Florida
February 13, 2017
39
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
Real estate portfolio:
ASSETS
December 31,
2016
December 31,
2015
Accounted for using the operating method, net of accumulated depreciation and amortization
$
5,881,280
$
5,231,413
Accounted for using the direct financing method
Real estate held for sale
Cash and cash equivalents
Restricted cash and cash held in escrow
Receivables, net of allowance of $1,006 and $566, respectively
Mortgages, notes and accrued interest receivable, net of allowance of $14 and $5, respectively
Accrued rental income, net of allowance of $3,078
Debt costs, net of accumulated amortization of $11,268 and $9,877, respectively
Commercial mortgage residual interests
Other assets
Total assets
Liabilities:
LIABILITIES AND EQUITY
Mortgages payable, including unamortized premium and net of unamortized debt costs
Notes payable, net of unamortized discount and unamortized debt costs
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies (Note 19)
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
5.200% Series F, 138,000 shares issued and outstanding, at stated liquidation value of $2,500
per share
Common stock, $0.01 par value. Authorized 375,000,000 shares; 147,149,945 and 141,007,725
shares issued and outstanding, respectively
Capital in excess of par value
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholders’ equity of NNN
Noncontrolling interests
Total equity
Total liabilities and equity
11,230
23,850
294,540
—
3,418
1,252
25,101
2,715
36
90,729
14,518
57,527
13,659
601
3,344
8,688
25,529
4,003
11,115
89,647
$
6,334,151
$
5,460,044
$
13,878
$
23,964
2,297,811
1,951,980
19,665
85,869
20,113
121,594
2,417,223
2,117,651
287,500
287,500
287,500
287,500
345,000
1,473
—
1,412
3,322,771
3,049,198
(319,254)
(8,191)
(263,124)
(20,352)
3,916,799
3,342,134
129
259
3,916,928
3,342,393
$
6,334,151
$
5,460,044
See accompanying notes to consolidated financial statements.
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
Operating expenses:
General and administrative
Real estate
Depreciation and amortization
Impairment – commercial mortgage residual interests valuation
Impairment losses – real estate and other charges, net of recoveries
Earnings from operations
Other expenses (revenues):
Interest and other income
Interest expense
Real estate acquisition costs
Earnings from continuing operations before income tax benefit (expense)
Income tax benefit (expense)
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
Earnings attributable to noncontrolling interests – continuing operations
Year Ended December 31,
2016
2015
2014
$
512,883
$
462,346
$
414,043
1,336
1,735
14,984
1,032
1,677
1,506
1,430
14,868
988
1,778
1,725
1,074
13,875
2,326
1,834
533,647
482,916
434,877
36,508
20,852
149,101
6,830
11,287
224,578
309,069
(170)
96,352
563
96,745
212,324
—
212,324
—
212,324
27,182
239,506
(6)
34,736
19,776
134,798
531
4,420
194,261
288,655
(109)
90,008
927
90,826
197,829
(10,318)
187,511
—
187,511
10,450
197,961
(125)
32,518
18,935
116,162
256
760
168,631
266,246
(357)
85,510
1,391
86,544
179,702
75
179,777
124
179,901
11,269
191,170
(569)
Net earnings attributable to NNN
$
239,500
$
197,836
$
190,601
See accompanying notes to consolidated financial statements.
41
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME – CONTINUED
(dollars in thousands, except per share data)
Net earnings attributable to NNN
Series D preferred stock dividends
Series E preferred stock dividends
Series F preferred stock dividends
Net earnings attributable to common stockholders
Net earnings per share of common stock:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Other comprehensive income:
Net earnings attributable to NNN
Amortization of deferred interest rate hedges
Fair value forward starting swaps
Net gain (loss) – commercial mortgage residual interests
Net gain (loss) – available-for-sale securities
Comprehensive income attributable to NNN
Year Ended December 31,
2016
2015
2014
$
239,500
$
197,836
$
190,601
(19,047)
(16,387)
(3,189)
(19,047)
(16,387)
—
(19,047)
(16,387)
—
200,877
$
162,402
$
155,167
1.39
1.38
$
$
1.21
1.20
$
$
1.24
1.24
$
$
$
144,176,224
133,998,674
124,257,558
144,660,633
134,489,416
124,710,226
$
239,500
$
197,836
$
190,601
2,802
13,345
(4,454)
468
1,902
(13,369)
(339)
112
1,129
(6,312)
1,038
(8)
$
251,661
$
186,142
$
186,448
See accompanying notes to consolidated financial statements.
42
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2016, 2015 and 2014
(dollars in thousands, except per share data)
Series D
Preferred
Stock
Series E
Preferred
Stock
Series F
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:
4
3
5,493,595 shares
100,161 shares – stock purchase plan
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 starting 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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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)
Balances at December 31, 2014
$ 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.
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED
Years Ended December 31, 2016, 2015 and 2014
(dollars in thousands, except per share data)
Series D
Preferred
Stock
Series E
Preferred
Stock
Series F
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, 2014
$ 287,500
$ 287,500
$
— $
1,322
$ 2,711,678
$ (196,827) $
(8,658) $
3,082,515
$
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
$1.71 per share of common stock
Issuance of common stock:
34,230 shares
4
4
12,065 shares – stock purchase plan
8,573,533 shares – ATM equity
program
Issuance of 209,284 shares of restricted
common stock
Stock issuance costs
Amortization of deferred compensation
Amortization of interest rate hedges
Fair value forward starting swaps
Unrealized loss – commercial
mortgage residual interests
Realized gain – commercial mortgage
residual interests
Valuation adjustments – available-for-
sale securities
Contributions from noncontrolling
interests
Distributions to noncontrolling
interests
Sale of noncontrolling interests
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
86
2
—
—
—
—
—
—
—
—
—
—
—
197,836
—
—
(19,047)
(16,387)
6,886
(228,699)
991
455
324,998
(311)
(4,178)
8,679
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,902
(13,369)
197,836
(19,047)
(16,387)
(221,811)
991
455
325,084
(309)
(4,178)
8,679
1,902
(13,369)
(585)
(585)
246
112
—
—
—
246
112
—
—
—
577
125
$ 3,083,092
197,961
—
—
—
—
—
—
—
—
—
—
—
—
—
—
334
(362)
(415)
(19,047)
(16,387)
(221,811)
991
455
325,084
(309)
(4,178)
8,679
1,902
(13,369)
(585)
246
112
334
(362)
(415)
Balances at December 31, 2015
$ 287,500
$ 287,500
$
— $
1,412
$ 3,049,198
$ (263,124) $
(20,352) $
3,342,134
$
259
$ 3,342,393
See accompanying notes to consolidated financial statements.
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED
Years Ended December 31, 2016, 2015 and 2014
(dollars in thousands, except per share data)
Series D
Preferred
Stock
Series E
Preferred
Stock
Series F
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, 2015
$ 287,500
$ 287,500
$
— $
1,412
$3,049,198
$ (263,124) $
(20,352) $
3,342,134
$
259
$ 3,342,393
239,500
6
239,506
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
$0.231111 per depositary share of
Series F preferred stock
$1.78 per share of common stock
4
5
Issuance of 13,800,000 depositary
shares of Series F preferred stock
Issuance of common stock:
31,807 shares
8,444 shares – stock purchase plan
5,716,222 shares – ATM equity
program
Issuance of 222,157 shares of restricted
common stock
Stock issuance costs
Amortization of deferred compensation
Amortization of interest rate hedges
Fair value forward starting swaps
Unrealized loss – commercial
mortgage residual interests
Realized gain – commercial mortgage
residual interests
Valuation adjustments – available-for-
sale securities
Distributions to noncontrolling
interests
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 345,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
57
2
—
—
—
—
—
—
—
—
—
239,500
—
—
—
(19,047)
(16,387)
(3,189)
7,949
(257,007)
(10,897)
1,148
389
269,905
(264)
(4,266)
9,609
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,802
13,345
(19,047)
(16,387)
(3,189)
(249,056)
334,103
1,148
389
269,962
(262)
(4,266)
9,609
2,802
13,345
(182)
(182)
(4,272)
(4,272)
468
—
468
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(136)
(19,047)
(16,387)
(3,189)
(249,056)
334,103
1,148
389
269,962
(262)
(4,266)
9,609
2,802
13,345
(182)
(4,272)
468
(136)
Balances at December 31, 2016
$ 287,500
$ 287,500
$ 345,000
$
1,473
$3,322,771
$ (319,254) $
(8,191) $
3,916,799
$
129
$ 3,916,928
See accompanying notes to consolidated financial statements.
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from operating activities:
Earnings including noncontrolling interests
Adjustments to reconcile earnings including noncontrolling interests to net cash
provided by operating activities:
Depreciation and amortization
Impairment losses – real estate and other charges, net of recoveries
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
Settlement of forward starting swaps
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:
Decrease in real estate leased to others using the direct financing method
Decrease in mortgages, notes and accrued interest receivable
Decrease (increase) in receivables
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,
2016
2015
2014
$
239,506
$
197,961
$
191,170
149,101
11,294
6,830
1,394
3,086
(147)
2,802
13,345
(27,182)
—
11,401
(581)
1,364
26
(74)
(252)
1,663
(448)
2,636
(427)
134,798
116,165
4,420
531
1,306
2,915
(207)
1,902
(13,369)
(10,807)
10,488
10,474
(676)
1,277
74
(335)
(368)
4,996
2,717
(6,610)
(392)
823
256
1,238
2,782
(93)
1,129
(6,312)
(11,742)
58
9,841
(2,808)
1,368
76
16
(1,731)
(2,256)
254
(4,746)
1,245
Net cash provided by operating activities
415,337
341,095
296,733
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
Other
Net cash used in investing activities
104,117
38,502
58,853
(885,966)
(683,243)
(602,780)
—
4,141
(2,235)
—
2,363
(2,166)
(7,246)
13,346
(3,731)
(779,943)
(644,544)
(541,558)
See accompanying notes to consolidated financial statements.
46
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
(dollars in thousands)
Cash flows from financing activities:
Proceeds from line of credit payable
Repayment of line of credit payable
Repayment of mortgages payable
Proceeds from notes payable
Repayment of notes payable
Payment of debt costs
Proceeds from issuance of common stock
Proceeds from issuance of Series F preferred stock
Stock issuance costs
Payment of Series D Preferred Stock dividends
Payment of Series E Preferred Stock dividends
Payment of Series F Preferred Stock dividends
Payment of common stock dividends
Noncontrolling interest contributions
Noncontrolling interest distributions
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year(1)
Cash, cash equivalents and restricted cash at end of year(1)
Supplemental disclosure of cash flow information:
Interest paid, net of amount capitalized
Taxes paid (received)
Supplemental disclosure of noncash investing and financing activities:
Issued 285,573, 285,263 and 386,433 shares of restricted and unrestricted
common stock in 2016, 2015 and 2014, respectively, pursuant to NNN’s
performance incentive plan
Surrender of 1,520 shares of restricted common stock in 2016
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
Year Ended December 31,
2016
2015
2014
$
1,330,200
$
1,262,400
$
678,500
(1,330,200)
(1,262,400)
(9,962)
346,140
—
(3,362)
278,040
345,000
(15,204)
(19,047)
(16,387)
(3,189)
(2,035)
399,036
(150,000)
(3,654)
332,117
—
(4,198)
(19,047)
(16,387)
—
(724,900)
(1,151)
349,293
(150,000)
(6,321)
360,072
—
(10,726)
(19,047)
(16,387)
—
(257,007)
(228,699)
(204,157)
—
(136)
644,886
280,280
14,260
294,540
91,403
$
$
(155) $
11,337
59
12,161
1,924
$
$
$
$
— $
— $
— $
334
(362)
307,105
3,656
10,604
14,260
83,758
234
$
$
$
—
(1,232)
253,944
9,119
1,485
10,604
81,829
59
8,990
$
10,884
— $
11,694
1,179
$
$
— $
500
$
— $
—
4,153
—
17,254
62
70
$
$
$
$
$
$
$
$
$
$
(1) Cash, cash equivalents and restricted cash at the end of the year is the aggregate of Cash and cash equivalents and Restricted cash and cash held in
escrow from the Consolidated Balance Sheets. NNN had restricted cash and cash held in escrow of $601 at December 31, 2015. NNN did not have
restricted cash or cash held in escrow at December 31, 2016 and 2014.
See accompanying notes to consolidated financial statements.
47
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2016, 2015 and 2014
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." At the
close of business on December 31, 2015, NNN elected to revoke its election to classify the TRS as taxable REIT subsidiaries
("TRS Revocation Election").
NNN's assets primarily include real estate assets. NNN acquires, owns, invests in and develops properties that are leased
primarily to retail tenants under long-term net leases and primarily held for investment ("Properties" or "Property Portfolio,"
or individually a "Property").
Property Portfolio:
Total properties
Gross leasable area (square feet)
States
Weighted average remaining lease term (years)
December 31, 2016
2,535
27,204,000
48
11.6
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 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, 2016, 2015 and 2014, NNN recorded $1,738,000, $2,383,000 and $1,629,000,
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, as applicable, based on their respective fair values.
Acquisition costs
incurred in connection with a business combination are expensed when incurred.
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 their
fair values.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-
market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which
reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid
pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place
48
leases, measured over a period equal to the remaining term of the lease and the applicable option terms if it is probable that
the tenant will
exercise options. 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 lease for an option term 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 in that period. 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 (dollars 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):
2016
2015
$
9,591
$
55,290
10,883
61,359
Value of below market in-place leases, net
22,100
25,767
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
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 and the ability of NNN to re-lease or sell properties that are currently vacant or become vacant in a reasonable
period of time. Management evaluates whether an impairment in carrying value has occurred by comparing the estimated
future and undiscounted cash flows, 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.
49
Valuation of Mortgages, Notes and Accrued Interest Receivable – The reserve allowance related to the mortgages, notes and
accrued interest receivable 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.
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.
Restricted Cash and Cash Held in Escrow – Restricted cash and cash held in escrow include (i) cash proceeds from the sale
of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges
under Section 1031 of the Internal Revenue Code, (ii) cash that has been placed in escrow for the future funding of
construction commitments, or (iii) cash that is not immediately available to NNN.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." The
amendments in this update require that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. NNN has elected
early adoption of ASU 2016-18. The adoption of ASU 2016-18 did not impact NNN's financial position or results of
operations.
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 – Line of Credit Payable – Debt costs incurred in connection with NNN’s $650,000,000 line of credit have been
deferred and are being amortized to interest expense over the term of the loan commitment using the straight-line method,
which approximates the effective interest method. NNN has recorded debt costs associated with the line of credit as an asset,
in Debt Costs on the Consolidated Balance Sheets.
Debt Costs – Mortgages Payable – Debt costs incurred in connection with NNN’s 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. These costs of $147,000 and $226,000 at December 31, 2016 and 2015, respectively, are included
in Mortgages Payable on the Consolidated Balance Sheets net of accumulated amortization of $38,000 and $93,000,
respectively.
Debt Costs – Notes Payable – 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. These costs of $21,157,000 and $17,782,000 at December 31, 2016 and 2015, respectively, are included in
Notes Payable on the Consolidated Balance Sheets net of accumulated amortization of $6,376,000 and $4,704,000,
respectively.
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
50
leased asset. Lease termination fees are recognized when the related leases are cancelled and NNN no longer has a
continuing involvement with the former tenant with respect to that property.
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 D preferred stock dividends
Less: Series E preferred stock dividends
Less: Series F preferred stock dividends
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 restricted shares
Weighted average number of shares outstanding used in basic earnings per
share
Effects of dilutive securities:
Other
Weighted average number of shares outstanding used in diluted earnings per
share
2016
2015
2014
$
239,500
$
197,836
$
190,601
(19,047)
(16,387)
(3,189)
200,877
(695)
(19,047)
(16,387)
—
162,402
(706)
(19,047)
(16,387)
—
155,167
(773)
$
200,182
$
161,696
$
154,394
145,014,422
134,868,640
125,221,358
(390,522)
(447,676)
(412,505)
(457,461)
(467,968)
(495,832)
144,176,224
133,998,674
124,257,558
484,409
490,742
452,668
144,660,633
134,489,416
124,710,226
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, 2016, 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 11). 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 wholly owned qualified REIT subsidiary,
built-in gain tax liability.
At the close of business on December 31, 2015, NNN elected to revoke its election to classify the TRS as taxable REIT
subsidiaries ("TRS Revocation Election"). This TRS Revocation Election resulted in an additional tax expense of
approximately $9,607,000 for 2015.
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
51
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities 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 (loss) (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, 2014
$
(13,579)
$
4,793
$
128
$
(8,658)
Other comprehensive income (loss)
Reclassifications from accumulated other
comprehensive income to net earnings
Net current period other comprehensive
income (loss)
Ending balance, December 31, 2015
Other comprehensive income (loss)
Reclassifications from accumulated other
comprehensive income to net earnings
Net current period other comprehensive
income (loss)
(13,369)
(3)
1,902
(11,467)
(25,046)
13,345
(3)
2,802
16,147
(585)
246
(4)
(339)
4,454
(182)
(4)
(4,272)
(4,454)
Ending balance, December 31, 2016
$
(8,899)
$
—
$
112
—
112
240
468
—
468
708
$
(13,842)
2,148
(11,694)
(20,352)
13,631
(1,470)
12,161
(8,191)
(1) Additional disclosure is included in Note 12 – Derivatives.
(2) Additional disclosure is included in Note 17 – Fair Value Measurements.
(3) Reclassifications out of other comprehensive income (loss) 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 (loss) are recorded in Impairment on the Consolidated Statements of Income and
Comprehensive Income. There is no income tax expense (benefit) resulting from this reclassification.
New Accounting Pronouncements – In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606). 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. In March 2016, the FASB issued updated guidance. ASU 2016-08,
52
"Revenue from Contracts with customers (Topic 606) - Principal versus Agent Considerations (Reporting Gross Versus
Net)," clarifies the implementation guidance on principal versus agent considerations included within the scope of ASU
2014-09. The guidance permits two methods of adoption: full retrospectively to each prior reporting period presented, or
modified retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017 and early
adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018,
with an option of applying the standard on the original effective date. NNN will adopt the guidance on January 1, 2018 and
apply the cumulative catch-up transition method. NNN is currently evaluating to determine the potential impact the adoption
of ASU 2014-09 and ASU 2016-08 will have on its financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10) - Recognition and
Measurement of Financial Assets and Financial Liabilities," effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The amendments in this update address certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. The adoption of ASU 2016-01 will not have an impact on
NNN's financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The FASB issued final guidance that requires lessees to put
most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting.
The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions,
initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and
the accounting for sales-type and direct financing leases. NNN is currently evaluating to determine the potential impact the
adoption of ASU 2016-02 will have on NNN's financial position or results of operations.
In March 2016, the FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in
Debt Instruments." The update is effective for financial statements issued for fiscal years beginning after December 15, 2016,
and interim periods within those fiscal years. The update clarifies the requirements for assessing whether contingent call (put)
options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.
The adoption of ASU 2016-06 will not have an impact on NNN's financial position or results of operations.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)," effective for annual
periods beginning after December 15, 2016, and interim periods within those annual periods. The areas for simplification in
this update involve several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The
adoption of ASU 2016-09 will not have an impact on NNN's financial position or results of operations.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments," effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The amendments in this update replace the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. The adoption of ASU 2016-13 will not have an impact on NNN's
financial position or results of operations.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments," effective for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. The amendments in this update provide guidance on certain cash flow classification issues. The objective of the
amendment is to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows under Topic 230. NNN is currently evaluating to determine the potential impact, if
any, the adoption of ASU 2016-15 will have on the presentation of NNN's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a
Business," effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. The
amendments in this update provide a screen to determine when a set is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a
group of similar identifiable assets, the set is not a business. NNN is currently evaluating to determine the potential impact
the adoption of ASU 2017-01 will have on NNN's financial position or 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
53
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.
Reclassification – Certain items in the prior year's consolidated financial statements and notes to consolidated financial
statements have been reclassified to conform to the 2016 presentation.
Note 2 – Real Estate:
Real Estate – Portfolio
Leases – The following outlines key information for NNN’s leases at December 31, 2016:
Lease classification:
Operating
Direct financing
Building portion – direct financing/land portion – operating
Weighted average remaining lease term (years)
2,566
9
2
11.6
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.
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
2016
2015
$
2,102,915
$
1,909,569
4,489,248
3,876,986
4,565
6,596,728
(739,505)
5,857,223
24,057
1,290
5,787,845
(617,786)
5,170,059
61,354
$
5,881,280
$
5,231,413
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, 2016, 2015 and 2014, NNN recognized ($12,000),
$153,000 and $1,521,000, respectively, of such income, net of reserves. At December 31, 2016 and 2015, the balance of
accrued rental income was $25,101,000 and $25,529,000, respectively, net of $3,078,000 allowance.
54
The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at
December 31, 2016 (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
$
535,048
522,708
508,143
490,805
470,388
3,721,409
$
6,248,501
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
2016
2015
$
$
11,200
$
5,664
(5,634)
11,230
$
13,900
7,589
(6,971)
14,518
The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment
at December 31, 2016 (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
$
1,862
1,834
1,512
1,043
719
4,230
$
11,200
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).
55
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. NNN
anticipates the disposition of Properties classified as held for sale to occur within 12 months. As of December 31, 2016, NNN
had 16 of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2015, included 21
properties, five of which were sold in 2016. Real estate held for sale consisted of the following as of December 31 (dollars in
thousands):
Land and improvements
Building and improvements
Less accumulated depreciation and amortization
Less impairment
Real Estate – Dispositions
2016
2015
$
14,114
$
15,446
29,560
(2,962)
(2,748)
$
23,850
$
23,024
43,327
66,351
(6,821)
(2,003)
57,527
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):
2016
2015
2014
Gain on disposition of real estate
Income tax expense
# of Sold
Properties
Gain
# of Sold
Properties
38
$ 27,182
19
# of Sold
Properties
Gain
25
$ 11,587
Gain
$ 10,807 (1)
(357)
10,450
—
27,182
—
—
(318)
11,269
155 (1)
—
Gain on disposition of real estate included in
discontinued operations
—
Income tax expense
—
—
—
2
$ 27,182
$ 10,450
$ 11,424
(1) Amount includes the recognition of deferred gains on previously sold properties.
Real Estate – Commitments
NNN has committed to fund construction commitments on 21 Properties. The improvements are estimated to be completed
within 12 months. These construction commitments, at December 31, 2016, are outlined in the table below (dollars in
thousands):
Total commitment(1)
Amount funded
Remaining commitment
$
$
$
114,206
54,782
59,424
(1)
Includes land, construction costs, tenant improvements and lease costs.
56
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 in a reasonable period of time. 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
2016
2015
2014
$
$
8,025
$
3,970
$
—
—
8,025
$
3,970
$
760
63
823
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 – Commercial Mortgage Residual Interests:
As of December 31, 2015, NNN held the commercial mortgage residual interests (“Residuals”) from seven loan
securitizations. In 2016, the loan servicer of five of the securitizations exercised its clean-up call option. These clean-up calls
allowed the servicers to purchase all of the trusts’ assets, thereby terminating future cash distributions payable to NNN as the
holder of these residual interests. During the years ended December 31 2016, 2015 and 2014, NNN recorded an other than
temporary valuation impairment as a reduction of earnings from operations. The other than temporary valuation impairment
recorded during the year ended December 31, 2016 related to the execution of the clean-up call option on the five
securitizations, as well as the fair value adjustment on the remaining two securitizations.
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 (dollars in thousands):
Unrealized gains (losses), net
Other than temporary valuation impairment
2016
2015
2014
$
(182) $
(585) $
6,830
531
875
256
As of December 31, 2016, the remaining two Residuals are recorded at fair value. Certain valuation assumptions are made
based on the expected timing of future cash flows relating to the Residuals. The following table summarizes the key
assumptions used in determining the value of the Residuals as of December 31 (dollars in thousands):
Discount rate
Average life equivalent CPR(1) speeds range
Foreclosures:
Frequency curve default model
Loss severity of loans in foreclosure
Yield:
LIBOR
Prime
Fair value at December 31
(1) Conditional prepayment rate
2016
2015
20%
20%
0.87% to 21.56% CPR
0.87% to 21.73% CPR
0% - 1.33% range
0.72% - 1.57% range
20%
20%
Forward 3-month curve
Forward 3-month curve
Forward curve
Forward curve
$
36
$
11,115
Note 4 – Line of Credit Payable:
NNN's $650,000,000 unsecured revolving credit facility (the “Credit Facility”) had a weighted average outstanding balance
of $70,139,000 and a weighted average interest rate of 1.4% for the year ended December 31, 2016. The Credit Facility
matures January 2019, with an option to extend maturity to January 2020. As of December 31, 2016, 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, 2016, there was no outstanding balance and $650,000,000 was available for future
borrowings under the Credit Facility, excluding undrawn letters of credit totaling $230,000.
In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants which,
among other things, require NNN to maintain certain (i) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage
and (iv) investment and dividend limitations. At December 31, 2016, NNN was in compliance with those covenants.
58
Note 5 – Mortgages Payable:
The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in
thousands):
Entered(1)
February 2004(6)
June 2012(4)(5)
September 2014(4)(7)
November 2014(4)
Initial
Balance
Interest
Rate
Maturity(2)
$ 6,952
6.90% January 2017
6,850
2,957
5.75% April 2016
6.40% February 2017
15,151
5.23% July 2023
Debt costs
Accumulated amortization
Debt costs, net of accumulated amortization
Mortgages payable, including unamortized premium and net of
unamortized debt costs
Carrying
Value of
Encumbered
Asset(s)(3)
Outstanding Principal
Balance at December 31,
2016
2015
$
$
— $
— $
—
—
21,403
21,403
—
—
13,987
13,987
(147)
38
(109)
848
5,890
2,804
14,555
24,097
(226)
93
(133)
$
13,878
$
23,964
(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 at
December 31, 2016.
(4)
Initial balance and outstanding principal balance includes unamortized premium.
(5) NNN repaid the outstanding principal balance in January 2016.
(6) NNN repaid the outstanding principal balance in March 2016.
(7) NNN repaid the outstanding principal balance in October 2016.
The following is a schedule of the scheduled principal payments, including premium amortization of NNN’s mortgages
payable at December 31, 2016 (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
$
596
623
652
682
716
10,718
$ 13,987
59
Note 6 – Notes Payable:
Each of NNN’s outstanding series of unsecured notes is summarized in the table below (dollars in thousands):
Notes
Issue Date
Principal
Discount(1)
Net
Price
Stated
Rate
Effective
Rate(2)
Maturity
Date
2017(3)
2021(4)
2022
2023(5)
2024(6)
2025(7)
2026(8)
September 2007
$ 250,000
$
877
$ 249,123
6.875%
6.924%
October 2017
July 2011
August 2012
April 2013
May 2014
October 2015
December 2016
300,000
325,000
350,000
350,000
400,000
350,000
4,269
4,989
2,594
707
964
295,731
5.500%
5.689%
July 2021
320,011
3.800%
3.985%
October 2022
347,406
3.300%
3.388%
April 2023
349,293
3.900%
3.924%
June 2024
399,036
4.000%
4.029%
November 2025
3,860
346,140
3.600%
3.733%
December 2026
(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 at issuance.
(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 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 notes 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 notes using the effective interest method.
(6) 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 notes using the effective interest method.
(7) NNN entered into four forward starting swaps with an aggregate notional amount of $300,000. Upon issuance of the 2025 Notes,
NNN terminated the forward starting swaps resulting in a liability of $13,369, which was deferred in other comprehensive income.
The deferred liability is being amortized over the term of the notes using the effective interest method.
(8) NNN entered into two forward starting swaps with an aggregate notional amount of $180,000. Upon issuance of the 2026 Notes,
NNN terminated the forward starting swaps resulting in a gain of $13,345, which was deferred in other comprehensive income. The
deferred asset is being amortized over the term of the notes 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
(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 outstanding debt offerings, NNN incurred debt issuance costs totaling $21,157,000 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 December 2015, NNN repaid the $150,000,000 6.150% notes payable that were due in December 2015.
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, 2016, NNN was in compliance with those covenants.
60
Note 7 – Preferred Stock:
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
Series F
Dividend
Rate(1)
6.625% February 2012
Issued
Depositary
Shares
Outstanding(2)
11,500,000
Gross
Proceeds
$ 287,500
$
5.700% May 2013
5.200% October 2016
11,500,000
13,800,000
287,500
345,000
Stock
Issuance
Costs(3)
9,855
9,856
Dividend Per
Depositary
Share
1.656250 February 2017
Earliest
Redemption
Date
$
1.425000 May 2018
10,897
1.300000 October 2021
(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. Series D and E issuances each included 1,500,000 depositary shares in connection
with the underwriters' over-allotment. Series F issuance included 1,800,000 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.
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 13, 2017, the Series E and Series F Preferred Stock Shares were not redeemable or convertible.
In January 2017, NNN announced the redemption of all outstanding depositary shares representing interests in its 6.625%
Series D Preferred Stock. The depositary shares will be redeemed on February 23, 2017 at $25.00 per depositary share, plus
all accrued and unpaid dividends through the redemption date, for an aggregate redemption price of $25.3128472 per
depositary share. After the redemption date, dividends on the depositary shares representing interests in the Series D
Preferred Stock will cease to accrue.
Note 8 – Common Stock:
In February 2015, NNN filed a shelf registration statement with the Commission which permits the issuance by NNN of an
indeterminate amount of debt and equity securities.
Equity Offerings. 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.
Dividend Reinvestment and Stock Purchase Plan. In February 2015, 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
2016
2015
2014
187,626
196,584
$
8,340
$
7,182
$
422,406
14,817
61
At The Market Offerings. NNN has established an at-the-market equity program ("ATM") which allows NNN to sell shares
of common stock from time to time. The following outlines NNN's ATM programs:
Established date
Termination date
Total allowable shares
Total shares issued as of December 31, 2016
2016 ATM
2015 ATM
2013 ATM
March 2016 February 2015
March 2013
March 2019
March 2016 February 2015
12,000,000
10,000,000
4,223,290
9,852,465
9,000,000
6,252,812
The following table outlines the common stock issuances pursuant to NNN's ATM equity program (dollars in thousands,
except per share data):
Shares of common stock
Average price per share (net)
Net proceeds
Stock issuance costs(1)
Year Ended December 31,
2016
2015
2014
5,716,222
8,573,533
3,758,362
$
$
$
46.48
265,696
4,266
$
$
$
37.45
321,067
4,016
$
$
$
35.90
134,919
2,195
(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.
Note 9 – Employee Benefit Plan:
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, 2016, 2015 and 2014 totaled $491,000, $474,000 and $453,000,
respectively.
Note 10 – 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
2016
2015
2014
$
1.513705
$
1.363294
$
1.306992
—
—
—
0.266295
0.019005
0.007806
0.011055
0.308840
0.006212
0.008603
0.015362
0.312831
$
1.780000
$
1.710000
$
1.650000
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
$
2016
257,007
1.780
$
2015
228,699
1.710
$
2014
204,157
1.650
On January 17, 2017, NNN declared a dividend of $0.455 per share, payable February 15, 2017 to its common stockholders
of record as of January 31, 2017.
62
The following presents the characterization for tax purposes of Series D, E and F Preferred Stock dividends per share and
dividends declared and paid to stockholders for the year ended December 31:
Ordinary dividends
Qualified dividends
Capital gain
Unrecaptured Section 1250 Gain
Dividend paid per share
Series F(3)
Series E(2)
Series D(1)
2016
2016
2015
2014
2016
2015
2014
$ 0.231111
$ 1.425000
$ 1.385670
$ 1.393700
$ 1.656250
$ 1.610538
$ 1.619870
—
—
—
—
—
—
0.020141
0.005738
0.007937
0.009177
0.011252
0.016385
—
—
—
0.023409
0.006670
0.009225
0.010666
0.013078
0.019044
$ 0.231111
$ 1.425000
$ 1.425000
$ 1.425000
$ 1.656250
$ 1.656250
$ 1.656250
Dividends declared and paid
$
3,189
$
16,387
$
16,387
$
16,387
$
19,047
$
19,047
$
19,047
(1) In January 2017, NNN called for redemption of all outstanding shares of its Series D Preferred Stock represented by depositary shares,
each representing a 1/100th interest in a Series D Preferred Stock share. The depositary shares will be redeemed on February 23, 2017.
(2) The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date
for the Series E Preferred Stock is May 2018.
(3) The Series F Preferred Stock was issued October 11, 2016 and has no maturity date and will remain outstanding unless redeemed by
NNN. The earliest redemption date for the Series F preferred stock is October 2021.
Note 11 – Income Taxes:
For income tax purposes, NNN had taxable REIT subsidiaries in which certain real estate activities were 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, 2016, 2015 and 2014, and the
statutory rates relate to state taxes and nondeductible expenses.
At the close of business on December 31, 2015, NNN elected to revoke its election to classify the TRS as taxable REIT
subsidiaries. This TRS Revocation Election resulted in an additional tax expense of approximately $9,607,000 for 2015.
The significant components of the net deferred income tax asset consist of the following at December 31 (dollars in
thousands):
Deferred tax assets:
Capital loss carryforward
Net operating loss carryforward
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Built-in gain
Total deferred tax liabilities
2016
2015
$
830
$
5,088
5,918
880
4,983
5,863
(5,743)
(5,666)
175
197
(175)
(175)
(197)
(197)
Net deferred tax asset
$
— $
—
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.
63
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. Due to the revocation of the TRS election
management believes it is unlikely that NNN will realize all of the benefits of these deductible differences that existed as of
December 31, 2016 and 2015.
The increase in the valuation allowance for the years ended December 31, 2016, 2015 and 2014 was $77,000, $5,047,000 and
$619,000, respectively.
The income tax benefit (expense) consists of the following components for the years ended December 31 (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 expense for income taxes
2016
2015
2014
$
239,500
$
208,511
$
190,844
—
—
—
—
—
(58)
(129)
(8,935)
(1,553)
(10,675)
(190)
5
(166)
108
(243)
Net earnings attributable to NNN’s stockholders
$
239,500
$
197,836
$
190,601
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
$
— $
(70,894) $
(64,887)
2016
2015
2014
Nontaxable income of NNN
State taxes, net of federal benefit
Amortization of built-in gain tax
Expiration of built-in gain tax
Other
Built-in gain tax liability (1)
TRS Revocation Election (1)
Valuation allowance increase (1)
Total tax expense
—
—
—
—
55
22
—
(77)
69,651
(141)
—
316
—
(197)
(4,363)
(5,047)
$
— $
(10,675) $
63,353
(196)
372
1,792
(58)
—
—
(619)
(243)
(1) The change for the year ended December 31, 2015, is due to TRS Revocation Election.
FASB 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. FASB 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 unrecognized tax benefits during any of the years presented. 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
64
months. When applicable, such interest and penalties will be recorded in non-operating expenses. The periods that remain
open under federal statute are 2013 through 2016. NNN also files in many states with varying open years under statute.
Note 12 – 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 and
interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge
forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security.
Forward swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the
variable cash flows associated with floating rate debt and involve the receipt or payment 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 recognizes any changes in its fair value in earnings and continues to carry the
derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt.
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
Liability (Asset)
Fair Value
When
Terminated
Fair Value
Deferred In
Other
Comprehensive
Income(1)
September 2007
Two treasury locks
$
100,000 $
3,260 $
June 2011
April 2013
May 2014
Two treasury locks
Four forward starting swaps
Three forward starting swaps
October 2015
Four forward starting swaps
December 2016
Two forward starting swaps
150,000
240,000
225,000
300,000
180,000
5,300
3,156
6,312
13,369
(13,352)
3,228
5,218
3,141
6,312
13,369
(13,345)
(1) 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, 2016, $8,899,000 remains in other comprehensive income related to the effective portion of NNN’s
previous interest rate hedges. During the years ended December 31, 2016, 2015 and 2014, NNN reclassified $2,802,000,
$1,902,000 and $1,129,000 out of other comprehensive income as an increase to interest expense. Over the next 12 months,
NNN estimates that an additional $1,746,000 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.
65
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, 2016.
Note 13 – 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, 2016.
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, 2016:
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
896,667
$
269,448
(247,106)
(38,138)
(9,153)
871,718
$
35.13
44.70
33.33
33.93
28.94
38.88
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 annually. NNN recognizes compensation expense on a straight-line basis for awards with only
service conditions.
During the years ended December 31, 2016 and 2015, NNN granted 142,199 and 145,916, respectively, performance based
shares subject to its total stockholder 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 $44.70 and $41.00, respectively, per share. Once the
performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. For the 2016
and 2015 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 $34.60 and $22.72, 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, 2016, pursuant to the 2007 Plan.
Other share grants under the 2007 Plan:
Directors’ fees
Deferred directors’ fees
Weighted
Average
Share Price
Shares
16,125
$
17,565
33,690
$
45.27
45.60
45.44
Shares available under the 2007 Plan for grant, end of period
3,088,970
The total compensation expense for share-based payments for the years ended December 31, 2016, 2015 and 2014 totaled
$10,758,000, $9,671,000 and $9,224,000, respectively. At December 31, 2016, NNN had $13,398,000 of unrecognized
compensation cost related to non-vested share-based compensation arrangements under the 2007 Plan. This cost is expected
66
to be recognized over a weighted average period of 2.4 years. In addition, NNN recognized no performance based long-term
incentive cash compensation expense for the years ended December 31, 2016, 2015 and 2014.
Note 14 – 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 mortgages and notes receivable and mortgages payable at December
31, 2016 and 2015, approximate fair value based upon current market prices of comparable instruments (Level 3). At
December 31, 2016 and 2015, the carrying value and fair value of NNN’s notes payable net of unamortized discount and
excluding debt costs, was $2,367,102,000 and $2,007,242,000, respectively, based upon quoted market prices, which is a
Level 1 valuation since NNN's debt is publicly traded.
Note 15 – Quarterly Financial Data (unaudited):
The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data):
2016
Revenues as originally reported
Net earnings attributable to NNN’s stockholders
Net earnings per share(1):
Basic
Diluted
2015
Revenues as originally reported
Net earnings attributable to NNN’s stockholders
Net earnings per share(1):
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
126,999
70,683
$
$
130,998
51,942
$
$
134,558
50,784
$
$
141,261
66,092
0.44
$
0.44
0.30
$
0.30
0.29
$
0.28
0.37
0.37
116,187
53,978
$
$
117,208
46,188
$
$
123,143
55,198
$
$
126,377
42,471
0.34
$
0.34
0.28
$
0.28
0.34
$
0.34
0.24
0.24
$
$
$
$
$
$
(1) Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount.
Note 16 – Segment Information:
For the years ended December 31, 2016, 2015 and 2014, 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 17 – Fair Value Measurements:
As of December 31, 2016, NNN holds the Residuals from two loan securitizations. Each of the Residuals is recorded at
estimated 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.
67
NNN values its Residuals using a discounted cash flow analysis based upon estimated 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, 2016
(dollars in thousands):
Balance at beginning of year
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 year
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
$
11,115
(6,983)
(4,454)
1,677
(1,319)
—
—
36
4,272
$
$
Note 18 – Major Tenants:
As of December 31, 2016, NNN had no tenants that accounted for ten percent or more of its rental and earned income.
Note 19 – Commitments and Contingencies:
A summary of NNN's commitments are included in Note 2 – Real Estate.
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 does not believe that any of these proceedings
are material to NNN's consolidated financial statements.
Note 20 – Subsequent Events:
NNN reviewed all subsequent events and transactions that have occurred after December 31, 2016, the date of the
consolidated balance sheet.
In January 2017, NNN announced the redemption of all outstanding depositary shares representing interests in its 6.625%
Series D Preferred Stock. The depositary shares will be redeemed on February 23, 2017 at $25.00 per depositary share, plus
all accrued and unpaid dividends through the redemption date, for an aggregate redemption price of $25.3128472 per
depositary share. NNN will record a preferred stock redemption charge of $9,855,000, which is the excess carrying amount
of preferred stock to be redeemed over the cash to be paid to redeem the Series D Preferred Stock. After the redemption date,
dividends on the depositary shares representing interests in the Series D Preferred Stock will cease to accrue.
In February 2017, the Company entered into one forward starting swap with a total notional amount of $125,000,000 to
hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The
outstanding forward starting swap was designated as a cash flow hedge.
There were no other reportable subsequent events or transactions.
68
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, 2016, 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, Chief Financial Officer and Chief
Accounting Officer. Rules adopted by the Securities and Exchange Commission (the “Commission”) require NNN to present
the conclusions of the Chief Executive Officer, Chief Financial Officer and Chief Accounting 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, Chief Financial Officer and Chief Accounting 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,
Chief Financial Officer and Chief Accounting 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, Chief Financial Officer and Chief Accounting
Officer of NNN’s disclosure controls and procedures and the assessment by NNN’s management, including NNN’s Chief
Executive Officer, Chief Financial Officer and Chief Accounting 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
69
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, Chief Financial Officer and Chief Accounting Officer have
concluded that, as of December 31, 2016, NNN’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting.
Management, including NNN’s Chief Executive Officer, Chief Financial Officer and Chief Accounting 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, 2016,
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 as of December 31, 2016, which appears in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting.
During the three months ended December 31, 2016, 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, Chief Financial Officer and Chief Accounting 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.
70
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 Insider Trading
Policy” 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 – Director Compensation,”
“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 V: Ratification of Ernst &
Young LLP as the Independent Registered Public Accounting Firm”, and such information is incorporated herein by
reference.
71
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, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of
December 31, 2016
Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2016
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
3.7
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 5.70% 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).
Articles Supplementary Establishing and Fixing the Rights and Preferences of 5.20% Series F
Cumulative Preferred Stock, par value $0.01 per share, dated October 7, 2016 (filed as Exhibit 3.2 to
the Registrant’s Current Report on Form 8-A dated October 11, 2016, 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).
72
4.
Instruments Defining the Rights of Security Holders, Including Indentures
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.1
4.11
4.12
4.13
4.14
Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit
3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B filed with the Securities and
Exchange Commission and incorporated herein by reference).
Indenture, dated as of March 25, 1998, between the Registrant and First Union National Bank, as
trustee (filed as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-3 (Registration No.
333-132095) filed with the Securities and Exchange Commission on February 28, 2006, and
incorporated herein by reference).
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).
73
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
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).
Form of Fourteenth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank
National Association relating to 4.000% Notes due 2025 (filed as Exhibit 4.1 to Registrant's Current
Report on Form 8-K and filed with the Securities and Exchange Commission on October 26, 2015,
and incorporated herein by reference).
Form of 4.000% Notes due 2025 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K
and filed with the Securities and Exchange Commission on October 26, 2015, and incorporated
herein by reference).
Specimen certificate representing the 5.20% Series F 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 October 11, 2016 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 October
11, 2016 and incorporated herein by reference).
Form of Fifteenth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank
National Association relating to 3.60% Notes due 2026 (filed as Exhibit 4.1 to Registrant's Current
Report on Form 8-K and filed with the Securities and Exchange Commission on December 12, 2016,
and incorporated herein by reference).
Form of 3.60% Notes due 2026 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K and
filed with the Securities and Exchange Commission on December 12, 2016, and incorporated herein
by reference).
10. Material Contracts
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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).
74
10.8
10.9
Form of Indemnification Agreement (as entered into between the Registrant and each of its directors
and executive officers) (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated
and filed with the Securities and Exchange Commission on June 12, 2009, and incorporated herein
by reference).
Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and
Craig Macnab (filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).
10.10 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and
Julian E. Whitehurst (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by
reference).
10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and
Kevin B. Habicht (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 24, 2011, and incorporated herein by
reference).
10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and
Paul E. Bayer (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).
10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and
Christopher P. Tessitore (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by
reference).
10.14 Amended and Restated Credit Agreement, dated as of May 25, 2011, by and among the Registrant,
certain lenders and Wells Fargo Bank, National Association, as the Administrative Agent (filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2011, and incorporated herein by reference).
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
10.21
10.22
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).
Form of Restricted Award Agreement - Performance between NNN and the Participant of NNN
(filed as exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on May 2, 2016, and incorporated herein by reference).
Form of Restricted Award Agreement - Service - Non-Executives between NNN and the Participant
of NNN (filed as exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 2, 2016, and incorporated herein by reference).
75
10.23
Form of Restricted Award Agreement - Service between NNN and the Participant of NNN (filed as
exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 2, 2016, and incorporated herein by reference).
10.24 Retirement and Transition Agreement, dated as of September 29, 2016, 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 September 30, 2016, and incorporated herein by reference).
10.25 Amended and Restated Employment Agreement, dated as of September 29, 2016, between the
registrant and Julian Whitehurst (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-
K filed with the Securities and Exchange Commission on September 30, 2016, 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 Registered Public Accounting Firm
23.1
Ernst & Young LLP dated February 13, 2017 (filed herewith).
24. Power of Attorney (included on signature page).
31. Section 302 Certifications
31.1
31.2
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32. Section 906 Certifications
32.1
32.2
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99. Additional Exhibits
99.1
Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock
Exchange Listed Company Manual (filed herewith).
101. Interactive Data File
101.1 The following materials from National Retail Properties, Inc. Annual Report on Form 10-K for the
period ended December 31, 2016, are formatted in Extensible Business Reporting Language: (i)
consolidated balance sheets, (ii) consolidated statements of comprehensive income, (iii) consolidated
statements of stockholders' equity (iv) consolidated statements of cash flows, and (v) notes to
consolidated financial statements.
76
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 13th day of February, 2017.
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.
77
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints each of Craig Macnab, Kevin B. Habicht and
Michelle L. Miller as his or her 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/ Robert C. Legler
Robert C. Legler
/s/ Pamela K. Beall
Pamela K. Beall
/s/ Steven D. Cosler
Steven D. Cosler
/s/ Don DeFosset
Don DeFosset
/s/ David M. Fick
David M. Fick
/s/ Edward J. Fritsch
Edward J. Fritsch
/s/ Sam L. Susser
Sam L. Susser
/s/ Kevin B. Habicht
Kevin B. Habicht
/s/ Michelle L. Miller
Michelle L. Miller
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Lead Director
Director
Director
Director
Director
Director
Director
Date
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
Director, Chief Financial Officer (Principal Financial Officer),
Executive Vice President, Assistant Secretary and Treasurer
February 13, 2017
Chief Accounting Officer (Principal Accounting Officer) and
Executive Vice President
February 13, 2017
78
General Information
American Stock Transfer & Trust
Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
www.astfinancial.com
(866) 627-2644
Form 10-K
A copy of the Company’s Form
10-K, as filed with the Securities
and Exchange Commission (SEC)
for fiscal 2016, 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 2016,
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.
Shareholder
Toll-free Line
(866) 627-2644
Worldwide: (718) 921-8346
Fax: (718) 236-2641
For Dividend
Reinvestment
American Stock Transfer & Trust
Company
P.O. Box 922
Wall Street Station
New York, NY 10269
Independent
Registered Public
Accounting Firm
Ernst & Young LLP
Corporate Office
National Retail Properties, Inc.
450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) NNN-REIT
(407) 265-7348
www.nnnreit.com
450 S. Orange Avenue, Suite 900
Orlando, FL 32801
(800) NNN-REIT
www.nnnreit.com