National Retail Properties Annual Report 2017

Plain-text annual report

2017 I T T A K E S A T E A M 28 ConsecutiveAnnual Dividend Increases S T E A D Y W I N S S T E A D Y W I N S 2017 28 ConsecutiveAnnual Dividend IncreasesTRIPLE NET LEASE 2 A net lease requires the tenant to directly pay many of the costs associated with a property. Our properties are typically leased on a TRIPLE NET LEASE basis, meaning the tenant pays for the real estate TAXES, MAINTENANCE, INSURANCE and utilities at the property level. We believe strongly that triple net leases provide increased stability to our rental revenue over the long term; we are insulated against increases in these property operating costs and our rental income goes directly to the bottom line. The real estate industry moniker for triple net leases is “NNN,” which is the basis for our New York Stock Exchange ticker symbol.NATIONAL RETAIL PROPERTIESTotal Return Comparison (NNN = $43.13 at December 31, 2017) NATIONAL RETAIL PROPERTIES 2.0% 7.5% 11.5% 12.3% 13.6% 11.9% 12.9% 1 YEAR 3 YEARS 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS Indices * NAREIT Equity REIT Index (FNERTR) * Morgan Stanley REIT Index (RMS G) S&P 500 Index (SPX) Nasdaq (CCMP) 8.7% 5.1% 21.8% 29.8% 6.7% 5.4% 11.4% 14.8% 9.8% 9.4% 15.8% 19.5% 7.8% 7.4% 8.5% 11.1% 10.8% 9.9% 11.3% 12.8% 9.1% 8.9% 7.2% 8.7% 10.9% n/a 9.7% 10.6% * 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 99.1% OCCUPANCY AS OF DECEMBER 31, 2017 Value of $1,000 Investment (As of December 31, 2017) NATIONAL RETAIL PROPERTIES $ 1,020 $ 1,243 $ 1,722 $ 3,179 $ 6,727 $ 9,391 $ 20,904 1 YEAR 3 YEARS 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS Indices * NAREIT Equity REIT Index (FNERTR) $ 1,087 $ 1,214 $ 1,599 $ 2,111 $ 4,869 $ 5,719 $ 13,253 * Morgan Stanley REIT Index (RMS G) $ 1,051 $ 1,170 $ 1,563 $ 2,050 $ 4,670 $ 5,492 n/a S&P 500 Index (SPX) $ 1,218 $ 1,382 $ 2,078 $ 2,253 $ 4,115 $ 3,995 $ 10,028 Nasdaq (CCMP) $ 1,298 $ 1,514 $ 2,436 $ 2,928 $ 6,090 $ 5,265 $ 12,357 * 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) TOP 25 TENANTS AVERAGE OVER 1,100 STORES EACH 3 JOSH LEWIS Senior Vice President of Acquisitions Joined NNN in 2008 4 “We do recurring business with numerous proprietary relationship tenants. Our RELATIONSHIP TENANTS tend to be very thoughtful about entering into long‑term leases and therefore self‑select STRONGER PERFORMING STORES for sale‑leaseback to NNN. We have earned their repeat business by giving our relationship tenants confidence in NNN’s ability to execute.”NATIONAL RETAIL PROPERTIESMy Fellow Shareholders It is a pleasure to report that National Retail Properties enjoyed another impressive year of per share growth in 2017, increasing our Core FFO per share by over 7%. Our broadly diversified portfolio of primarily small box retail properties remained healthy and highly occupied; our focus on building and maintaining deep tenant relationships produced another year of high quality investments; and our low leveraged, flexible balance sheet remained one of the strongest among all REITs. We increased our dividend for the 28th consecutive year, a feat matched by only two other REITs and less than 90 public companies in the U.S. The dividend remained safe as well as growing, with our dividend payout ratio at approximately 73%. While we have generated impressive one-year performance, we remain focused on multi-year results. As of the year-end, National Retail Properties delivered total shareholder returns that exceeded the REIT averages and many major equity indices over the past 3-, 5-, 10-, 15-, 20- and 25-year periods, respectively. $2.4 BILLION INVESTED IN RELATIONSHIP TENANTS SINCE 2010 28 Consecutive Annual Dividend Increases Third longest run of all public REITS and longer than 99% of all public companies ‘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 ‘17 5 $1.90 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.80 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.70 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.60 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.50 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.40 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.30 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.20 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.10 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.00 _________________________________________________________________________________________________________________________________________________________________________________________________________6 NATIONAL RETAIL PROPERTIESOur Mission and Our Strategic Drivers Your investment in National Retail Properties is an investment in long-term growth and dividend income. Our business model produces consistent growth in both Core FFO per share and in our common stock dividend. Our mission to create long-term shareholder value remained unchanged in 2017: • Consistently grow Core FFO per share over a multi-year timeframe • Increase the dividend while prudently managing the payout ratio • Conservatively manage the balance sheet 12.9% PER YEAR AVERAGE ANNUAL TOTAL SHAREHOLDER RETURN OVER THE PAST 25 YEARS The strategic drivers of our long-term success also remained unchanged: • A consistent focus on single-tenant, net-leased retail properties. The real estate attributes of single-tenant retail properties are far superior to the attributes of other property types, and the universe of opportunities to acquire these properties remains vast. • A broadly diversified portfolio of single-tenant retail properties that generates a stable, growing cash flow from long-term leases. Our tenants are primarily in lines of trade that provide customer services, customer experiences, or e-commerce resistant consumer necessities. These are the retailers that are growing their businesses, adding new stores and taking market share. • A relationship-oriented acquisition model that results in high quality investments with large regional and national retailers. Our proprietary tenant relationships allow us to obtain higher investment yields, superior lease documents and better quality real estate. • Active asset management that focuses on maximizing the value of each individual property. Our deep real estate expertise enables us to get the most out of our portfolio and to recycle capital through thoughtful, disciplined dispositions. • A fortress-like balance sheet that provides us with the capability to withstand economic turbulence and positions us to perpetuate our long history of consecutive annual dividend increases. • Lastly, but perhaps most importantly, a team of great people in a supportive culture, which is the true backbone of our success. Three-quarters of our associates have been with the company for at least five years, and over half have been with us for 10 or more years. The executive leadership team averages over 18 years’ tenure at the company. That level of commitment to culture and institutional memory is invaluable. As we continue to execute on these strategic drivers, we will consistently deliver Core FFO per share growth and continue our outperformance of REIT averages on a multi-year basis. 5-YEAR ANNUAL DIVIDEND GROWTH RATE OF 3.5% 7 INGRID IRVIN Director of Lease Compliance Joined NNN in 2003 8 “When one of our properties becomes vacant, our PRIORITY IS TO RE‑LEASE it rather than sell it. Our focus on keeping our investment per property lower, and therefore our property rent lower, is an important contributor to our HIGH OCCUPANCY rate and our HIGH LEASE RENEWAL rate.”NATIONAL RETAIL PROPERTIES3.0 2.5 2.0 1.5 1.0 100% 95% 90% 85% CORE FFO Per Share Growth Compounded Annual Growth Rate of 7.7% $2.35 $2.22 $2.52 $2.08 $1.93 $1.74 2012 2013 2014 2015 2016 2017 88% OF EXPIRING LEASES RENEWED OVER PAST 10 YEARS NNN's Strategy Results in Higher Occupancy, Less Volatility NNN REIT Industry (Excluding Hotels & Healthcare) 98.3% 98.2% 98.3% 97.0% 97.4% 96.7% 96.4% 96.9% 97.4% 97.9% 98.2% 98.6% 99.1% 99.0% 99.1% 93.0% 93.5% 93.5% 92.1% 92.8% 92.0% 92.7% 92.5% 92.0% 93.3% 93.5%* 90.5% 90.1% 90.8% 90.7% 2003 2004 2005 2006 2007 2008 2009 2010 Source: SNL Financial 2011 2012 2013 2014 2015 2016 2017 * REIT Industry Average as of Q3 2017 9 10 NATIONAL RETAIL PROPERTIESTop Lines of Trade (As a percentage of annualized base rent as of December 31, 2017) Convenience Stores | 18.1% Restaurants - Full Service | 12.1% Restaurants - Limited Service | 7.6% Automotive Service | 6.9% Family Entertainment Centers | 6.4% Health & Fitness | 5.6% Theaters | 4.8% Automotive Parts | 3.6% RV Dealers & Parts | 3.4% Banks | 2.5% (Remaining 27 categories make up 29.0%) The Highlights of 2017 • Increased Core FFO per share by 7.2%. Our goal is to grow Core FFO per share consistently on a multi-year basis. National Retail Properties has achieved a five-year average annual Core FFO per share growth rate of 7.7%. • Increased our annual dividend by 4.5% to $1.86 per share, which represents our 28th consecutive annual dividend increase. • Acquired 276 single tenant retail properties for $754.9 million, at an initial cash yield of 6.9%. Properties leased to our relationship tenants accounted for approximately 75% of our dollars invested in 2017. • Sold 48 properties for $96.8 million at a cap rate of 6.0%, primarily through our in-house disposition platform. By maintaining this expertise in the company, we minimize transaction costs such as brokerage commissions. • Renewed 46 existing leases and re-leased 27 vacant properties, including all 12 of our former Gander Mountain properties, perpetuating our multi-year track record of occupancy at 98% or higher. • Issued $400M of 10-year unsecured notes at an interest rate of 3.50% and repaid $250M of debt that came due at an interest rate of 6.875%. • Raised $244 million from the issuance of well-priced common equity through our highly efficient ATM program. • Generated $102 million of retained earnings (AFFO less common dividend) that we invested in new single-tenant retail properties. These retained earnings are becoming an increasingly important source of available, low-cost capital for reinvestment. Lease Expirations (As a percentage of annualized base rent as of December 31, 2017) Weighted average remaining lease term is 11.5 years 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029-2038 11 60% _________________________________________________________________________________________________________________________________________________________________________________________________________ 50% _________________________________________________________________________________________________________________________________________________________________________________________________________ 40% _________________________________________________________________________________________________________________________________________________________________________________________________________ 30% _________________________________________________________________________________________________________________________________________________________________________________________________________ 20% _________________________________________________________________________________________________________________________________________________________________________________________________________ 10% _________________________________________________________________________________________________________________________________________________________________________________________________________ 0% MATT WILLIAMS Senior Vice President of Underwriting Joined NNN in 1997 12 “We VISIT EVERY PROPERTY that we are considering buying. What you learn from online research or from a property package can be limited. We want to understand the property, know what the traffic patterns are, observe the trade area, know where the competition is and see what that store’s customers will see. By going to each property we get a truer sense of the viability of that store as a SUCCESSFUL RETAIL LOCATION.”NATIONAL RETAIL PROPERTIESNotable Take-Aways From 2017 As I mentioned earlier, I’m proud of the experience and track record of our associates and executive team. Still, we are constantly evaluating our business model and learning from our tenants, our competitors and our own experiences. Looking outward – while remaining disciplined in the execution of our business plan – is an important part of the culture at National Retail Properties. Although I cannot say that we learned anything startlingly original in 2017, a number of concepts we already knew to be true were reinforced: • Per share results are what really matter. You will never meet a management team more concerned with per share results and less concerned with portfolio growth simply for the sake of appearances. REIT headlines are often devoted to the volume of acquisitions in any given quarter or year. To us, what matters is consistent multi-year growth in per share results while maintaining a conservative balance sheet, NOT headline growth of our asset base. This approach to creating shareholder value allows us to be highly selective in our acquisitions, and positions us to perpetuate our long-term track record of consistent per share growth with less execution risk and more focus on quality real estate. • Not all retail is toxic. Our tenants typically operate large regional and national businesses that focus on customer services, customer experiences and e-commerce resistant consumer necessities. We have very little exposure to apparel or other retail concepts that are struggling with e-commerce and getting negative headlines. The primary lines of trade in our portfolio are expanding and adding stores, and our major tenants are in growth mode. Nationwide Reach (As a percentage of annualized base rent as of December 31, 2017) $754.9 MILLION INVESTED IN 276 NEW PROPERTIES IN 2017 West | 4.1% Rocky Mountain | 5.9% Midwest | 24.7% South | 22.2% Southeast | 27.3% Northeast | 15.8% 13 14 NATIONAL RETAIL PROPERTIES• Not all portfolios are created equal. Our focus is on good real estate locations at reasonable rents. By concentrating our underwriting on these factors, we create an enduring margin of safety that better withstands any turmoil in the general economy or in any tenant’s individual business. During the depth of the recession in 2008 and 2009, our occupancy rate never dipped below 96.4%, and for the last five years our occupancy rate has averaged 98.8%. • Tenant relationships matter. We work tirelessly to identify growing retailers and develop programmatic, off-market business relationships. To our relationship tenants, the NNN value proposition is more than just “lowest cap rate”. We are a reliable, efficient, solution-oriented capital partner to fund the growth of their respective businesses. Since 2010, we have invested a total of $2.4 billion in properties leased to our relationship tenants at an initial yield of 7.3%. • Dry powder matters. When stock prices dropped meaningfully for our sector in the second quarter, our conservative capital structure enabled us to continue our acquisitions unaffected. One never knows when the equity markets may get choppy, thus we maintain prudent debt levels and significant available capacity on our line of credit. We ended 2017 with our balance sheet in a strong position, ready to carry us through any future turbulence in the capital markets. • Our associates make all the difference. The deep experience and expertise of our associates and our management team, and our culture of putting the shareholders’ interests first, positions us to seize the opportunities and address the challenges that face us daily. Even after 25 years of working with this team, I continue to be impressed and humbled by the talent, hard work and dedication of the associates who give their all for the company’s shareholders every day. 5-YEAR AVERAGE CORE FFO/sh COMPOUNDED ANNUAL GROWTH RATE OF 7.7% SINCE 2012 Well-Laddered Debt Maturities (As of December 31, 2017; percentages shown are weighted average interest rates) NNN’s low leverage balance sheet strategy is enhanced by its well-laddered debt maturity. 3.3% 3.9% 3.6% 4.0% 3.5% 3.8% 5.5% 5.2% 2018 5.2% 2019 5.2% 2020 2021 2022 2023 2024 2025 2026 2027 15 $ 450M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 400M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 350M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 300M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 250M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 200M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 150M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 100M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 50M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 0M MARGO MOEDER Vice President of Human Resources Joined NNN in 2005 16 “MORE THAN HALF of our associates have been with NNN OVER 10 YEARS. We provide regularly scheduled educational programs covering business and personal growth topics, as well as many health and wellness programs, going on throughout the year. This focus on individual development and wellness has led to higher levels of EMPLOYEE SATISFACTION AND RETENTION.”NATIONAL RETAIL PROPERTIES2018: Maintain Our Steady Course As we look ahead to 2018, you should expect us to continue executing on the strategic drivers of our business model, generating another year of consistent per share growth. Coupled with our safe and growing dividend, our business model positions us to continue producing a total shareholder return that will exceed the REIT averages over the long-term. On behalf of the board of directors and all the associates at National Retail Properties, thank you for your investment, your trust and your continued support. Best regards, Julian E. (Jay) Whitehurst President and Chief Executive Officer ONLY 4.7% OF LEASES EXPIRE THROUGH 2019 Conservative Balance Sheet Management (As of December 31, 2017 – based on Total Gross Book Assets) Common Equity 56.0% | $4,096.6 Million Unsecured Debt 35.1% | $2,566.9 Million Preferred Equity 8.7% | $632.5 Million Not Shown: $13.3 Million Secured Debt (0.2%) Portfolio Growth (Number of properties owned as of December 31 for each respective year) 2,764 2,535 2,257 2,054 1,860 1,622 1,422 1,037 1,034 1,212 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 17 3,000 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,750 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,500 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,250 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,000 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,750 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,500 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,250 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,000 _________________________________________________________________________________________________________________________________________________________________________________________________________ 75018 NATIONAL RETAIL PROPERTIESHistorical Financial Highlights (Dollars in thousands, except per share data) GROSS REVENUES(1) $ 585,255 $ 533,817 $ 483,025 $ 435,278 $ 397,008 2017 2016 2015 2014 2013 EARNINGS FROM CONTINUING OPERATIONS NET EARNINGS NET EARNINGS ATTRIBUTABLE TO NNN TOTAL ASSETS TOTAL DEBT TOTAL STOCKHOLDERS’ EQUITY OF NNN CASH DIVIDENDS DECLARED TO: Common 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 228,716 265,371 264,973 6,560,534 2,580,207 3,840,593 277,120 3,598 16,387 17,940 212,324 239,506 239,500 6,334,151 2,311,689 3,916,799 187,511 197,961 197,836 179,777 191,170 190,601 154,006 160,085 160,145 5,460,044 4,915,551 4,445,308 1,975,944 3,342,134 1,729,891 1,560,844 3,082,515 2,777,045 257,007 228,699 19,047 16,387 3,189 19,047 16,387 — 204,157 19,047 16,387 — 189,107 19,047 8,876 — 149,111,188 144,176,224 133,998,674 124,257,558 118,204,148 149,432,641 144,660,633 134,489,416 124,710,226 119,864,824 $ 1.45 $ 1.39 $ 1.21 $ 1.24 $ 1.45 1.45 1.45 1.86 1.38 1.39 1.38 1.78 1.20 1.21 1.20 1.71 1.24 1.24 1.24 1.65 1.06 1.05 1.11 1.10 1.60 Series D preferred depositary stockholders Series E preferred depositary stockholders Series F preferred depositary stockholders 0.312847 1.425000 1.300000 1.656250 1.425000 0.231111 1.656250 1.425000 — 1.656250 1.425000 — 1.656250 0.771875 — OTHER DATA: Cash flows provided by (used in): Operating activities Investing activities Financing activities FUNDS FROM OPERATIONS – AVAILABLE TO COMMON STOCKHOLDERS(2) $ 421,557 $ 415,337 $ 341,095 $ 296,733 $ 274,421 (625,557) (779,943) (644,544) (541,558) (568,040) (89,176) 359,179 644,886 330,544 307,105 289,193 253,944 260,902 293,028 228,622 (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 for the year ended 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. 19 20 NATIONAL RETAIL PROPERTIESUNITED 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, 2017 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 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 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 Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2017 was $5,781,786,000. The number of shares of common stock outstanding as of January 31, 2018 was 153,578,881. . 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 2018 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. Properties Legal Proceedings Item 3. Item 4. Mine Safety Disclosures 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 36 37 67 67 68 69 69 69 69 69 70 75 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.” At the close of business on December 31, 2015, NNN elected to revoke its election to classify the TRS as taxable REIT subsidiaries. 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 2,764 Properties with an aggregate gross leasable area of approximately 29,093,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.5 years as of December 31, 2017. Approximately 99 percent of the Properties were leased as of December 31, 2017. 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, 2018, NNN employed 66 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 two series of preferred shares outstanding which are traded on the NYSE in the form of depositary shares: 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”), are traded on the NYSE under the ticker symbol "NNNPRE" and the depositary shares, each representing a 1/100th of a share of 5.200% 1 Series F Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series F Preferred Stock”), are traded on the NYSE under the symbol "NNNPRF." 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 each real estate asset 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, factors NNN may consider may include but are not limited to 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, industry trends, and industry performance compared to NNN. The operating strategies employed by NNN have allowed NNN to increase the annual dividend (paid quarterly) per common share for 28 consecutive years. NNN is one of only three publicly traded REITs to increase its annual dividend per common share for 28 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 such 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, 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, 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 Property 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, proceeds from 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 $900,000,000 unsecured revolving credit facility ("Credit Facility"). As of December 31, 2017, $120,500,000 was outstanding and $779,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $230,000. As of December 31, 2017, NNN’s ratio of total debt to total gross assets (before accumulated depreciation and amortization) was approximately 35 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 27 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, 2017, NNN owned 2,764 Properties with an aggregate gross leasable area of approximately 29,093,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.5 years. Approximately 99 percent of total Properties were leased as of December 31, 2017. The following table summarizes the Property Portfolio at December 31, 2017 (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 $ 846 11 45,286 19 1,846 Approximate square feet. (1) (2) Costs vary depending upon size, improvements, local market conditions and other factors. 3 As of December 31, 2017, NNN has committed to fund construction commitments on 27 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, at December 31, 2017, are outlined in the table below (dollars in thousands): Total commitment(1) Amount funded Remaining commitment $ 129,925 67,719 62,206 (1) Includes land, construction costs, tenant improvements, lease costs, and capitalized interest. 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 significantly. Generally, the Property leases provide for initial terms of 10 to 20 years. As of December 31, 2017, the weighted average remaining lease term of the Property Portfolio was approximately 11.5 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, repair, replacement and operation of the property, including utilities, property taxes and insurance. NNN's leases provide for annual base rental payments (generally payable in monthly installments) ranging from $6,000 to $3,714,000 (average of $215,000), 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, 2017: % of Annual Base Rent(1) 2.0% 2.7% 3.5% 4.1% 6.4% 2.6% 2018 2019 2020 2021 2022 2023 # of Properties 61 75 127 121 125 99 Gross Leasable Area(2) 787,000 1,081,000 1,559,000 1,320,000 1,697,000 1,143,000 % of Annual Base Rent(1) 2.2% 4.7% 5.6% 8.7% 2024 2025 2026 2027 # of Properties 50 128 184 197 Gross Leasable Area(2) 833,000 1,123,000 1,854,000 2,766,000 Thereafter 57.5% 1,566 14,540,000 Based on annualized base rent for all leases in place as of December 31, 2017. (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) 2017 18.1% 12.1% 7.6% 6.9% 6.4% 5.6% 4.8% 3.6% 3.4% 2.5% 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% 29.0% 100.0% 30.4% 100.0% 32.3% 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, 2017: State Texas Florida Illinois Ohio North Carolina Georgia Tennessee Virginia Indiana 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Alabama Other # of Properties 457 211 132 168 154 127 131 119 123 128 % of Annual Base Rent(1) 18.2% 8.7% 5.4% 5.3% 5.1% 4.3% 4.0% 3.9% 3.9% 3.1% 1,014 2,764 38.1% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2017. As of December 31, 2017, 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. NNN may incur costs if the tenant does not comply with these requests. As of February 6, 2018, NNN has 77 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, 2018, 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 can 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 2021 and 2027. 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 source of the Property Portfolio annual base rent is concentrated in specific industry classifications, tenants and geographic locations. As of December 31, 2017, approximately, • • • 51.1% of the Property Portfolio annual base rent is generated from tenants in five retail lines of trade, including convenience stores (18.1%) and full-service and limited-service restaurants (19.7%), 20.6% of the Property Portfolio annual base rent is generated from five tenants, Sunoco (5.1%), Camping World (4.2%), Mister Car Wash (4.1%), LA Fitness (3.8%), AMC Theatres (3.4%), and 42.7% of the Property Portfolio annual base rent is generated from properties located in five states, including Texas (18.2%) and Florida (8.7%). Any financial hardship and/or economic changes in these lines of trade, tenants or states could have an adverse effect on NNN’s results of operations. 7 Owning real estate and indirect interests in real estate carries inherent risks. NNN’s economic performance and the value of its real estate assets are subject to the risk that if the Properties do not generate revenues sufficient to meet its operating expenses, including debt service, NNN’s cash flow and ability to pay distributions to its 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 8 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. As of February 6, 2018, NNN has 77 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, new lines of trade 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 or possible prohibitive income tax liability. 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 tenant or a borrower. As of December 31, 2017, NNN had no outstanding mortgages and notes receivable. 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 9 needed for NNN to acquire underlying collateral, if any, in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. Certain provisions of NNN’s leases or loan agreements may be unenforceable. NNN’s rights and obligations with respect to its leases, mortgage loans or other loans are governed by written agreements. A court could determine that one or more provisions of such an agreement are unenforceable, such as a particular remedy, a 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. 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, 2017, NNN owned 24 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, 2018, less than one percent of total Properties held in the Property Portfolio was leased to two tenants that each filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN. 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, 2017, NNN had outstanding debt including mortgages payable of $13,300,000, total unsecured notes payable of $2,446,407,000 and $120,500,000 outstanding on the Credit Facility. NNN’s organizational documents do not limit the level or amount of debt that it may incur. If NNN incurs additional indebtedness and permits a higher degree of leverage, debt service requirements would increase and could adversely affect NNN’s financial condition and results of operations, as well as NNN’s ability to pay principal and interest on the outstanding indebtedness or cash dividends to its stockholders. In addition, increased leverage could increase the risk that NNN may default on its debt obligations. The amount of debt outstanding at any time could have important consequences to NNN’s stockholders. For example, it could: • • • • • • • require NNN to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing funds available for operations, real estate investments and other business opportunities that may arise in the future, increase NNN’s vulnerability to general adverse economic and industry conditions, limit NNN’s ability to obtain any additional financing it may need in the future for working capital, debt refinancing, capital expenditures, real estate investments, development or other general corporate purposes, make it difficult to satisfy NNN’s debt service requirements, limit NNN’s ability to pay dividends in cash on its outstanding common and preferred stock, limit NNN’s flexibility in planning for, or reacting to, changes in its business and the factors that affect the profitability of its business, and limit NNN’s flexibility in conducting its business, which may place NNN at a disadvantage compared to competitors with less debt or debt with less restrictive terms. NNN’s ability to make scheduled payments of principal or interest on its debt, or to retire or refinance such debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, competition, and economic, financial, and other factors beyond its control. There can be no assurance that NNN’s business will continue to generate sufficient cash flow from operations in the future to service its debt or meet its other cash needs. If NNN is unable to generate sufficient cash flow from its business, it may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing to meet its debt obligations and other cash needs. NNN cannot assure stockholders that any such refinancing, sale of assets or additional financing would be possible or, if possible, on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable or would not result in a material decline in earnings. 11 NNN is obligated to comply with financial and other covenants in its debt instruments that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment of such debt. As of December 31, 2017, NNN had approximately $2,580,207,000 of outstanding indebtedness, of which approximately $13,300,000 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 12 • market perception of REITs compared to other investment sectors. 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 increase of these taxes would decrease earnings and cash available for distribution to stockholders. In addition, in order to meet certain 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, 2017, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state taxes on its income and real estate. Changes in accounting pronouncements could adversely impact NNN’s or NNN’s tenants’ reported financial performance. Accounting policies and methods are fundamental to how NNN records and reports its financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) and the Commission, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of NNN’s financial statements. These changes could have a material impact on NNN’s reported financial condition and results of operations. In some cases, NNN could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could have a material impact on NNN’s tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate. 13 NNN’s failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results and the market value of NNN's securities. 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, 2012 and ending December 31, 2017. The graph assumes an investment of $100 on December 31, 2012. 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, 2007 and ending December 31, 2017. The graph assumes an investment of $100 on December 31, 2007. 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. 2017 High Low Close Dividends paid per share 2016 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter Year $ 46.34 $ 45.63 $ 43.41 $ 43.90 $ 41.91 43.62 0.455 36.45 39.10 0.455 37.45 41.66 0.475 38.97 43.13 0.475 $ 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 46.34 36.45 43.13 1.860 53.60 38.29 44.20 1.780 The following table presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: Ordinary dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions 2017 2016 $ 1.559781 83.8592% $ 1.513705 85.0396% 0.035041 0.012194 0.252984 1.8839% 0.6556% — — — — 13.6013% 0.266295 14.9604% $ 1.860000 100.0000% $ 1.780000 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 2018, NNN declared dividends payable to its stockholders of $72,733,000, or $0.475 per share, of common stock. On January 31, 2018, there were 1,767 registered holders 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 Net earnings Net earnings attributable to NNN Total assets Total debt Total stockholders’ equity of NNN Cash dividends declared to: Common 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 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 2017 2016 2015 2014 2013 $ 585,255 $ 533,817 $ 483,025 $ 435,278 $ 228,716 265,371 264,973 6,560,534 2,580,207 3,840,593 212,324 239,506 239,500 6,334,151 2,311,689 3,916,799 277,120 257,007 3,598 16,387 17,940 19,047 16,387 3,189 187,511 197,961 197,836 5,460,044 1,975,944 3,342,134 228,699 19,047 16,387 — 179,777 191,170 190,601 4,915,551 1,729,891 3,082,515 204,157 19,047 16,387 — 397,008 154,006 160,085 160,145 4,445,308 1,560,844 2,777,045 189,107 19,047 8,876 — 149,111,188 144,176,224 133,998,674 124,257,558 118,204,148 149,432,641 144,660,633 134,489,416 124,710,226 119,864,824 $ 1.45 $ 1.45 1.39 $ 1.38 1.21 $ 1.20 1.24 $ 1.24 1.45 1.45 1.86 0.312847 1.425000 1.300000 1.39 1.38 1.78 1.656250 1.425000 0.231111 1.21 1.20 1.71 1.656250 1.425000 — 1.24 1.24 1.65 1.656250 1.425000 — 1.06 1.05 1.11 1.10 1.60 1.656250 0.771875 — $ 421,557 $ 415,337 $ 341,095 $ 296,733 $ 274,421 (625,557) (89,176) (779,943) 644,886 (644,544) 307,105 (541,558) 253,944 (568,040) 293,028 Funds from operations – available to common stockholders(2) 359,179 330,544 289,193 260,902 228,622 (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. 18 Therefore, the revenues and expenses related to these properties are presented as discontinued operations for the year ended 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 $ 217,193 $ 200,877 $ 162,402 $ 155,167 $ 132,222 2017 2016 2015 2014 2013 Real estate depreciation and amortization: Continuing operations Discontinued operations Gain on disposition of real estate, net of income tax expense and noncontrolling interests Impairment losses – depreciable real estate, net of recoveries and income tax expense 173,404 148,779 134,380 115,888 — — — 3 99,048 343 (36,258) (27,137) (10,397) (10,904) (5,442) 4,840 8,025 2,808 748 2,451 FFO available to common stockholders $ 359,179 $ 330,544 $ 289,193 $ 260,902 $ 228,622 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. Overview 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 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 2,764 Properties with an aggregate gross leasable area of approximately 29,093,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.5 years as of December 31, 2017. Approximately 99 percent of the Properties were leased as of December 31, 2017. 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, industry trends and industry performance compared to that of NNN. NNN evaluates the creditworthiness of its current and prospective tenants. This evaluation may include 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 may also evaluate the business and operations of it's tenants, 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 could have a material adverse effect on the financial condition and operating performance of NNN. As of December 31, 2017, 2016 and 2015, the Property Portfolio has remained at least 99 percent leased. As of December 31, 2017, the average remaining lease term of the Property Portfolio was 11.5 years, which was consistent with the past three years. High occupancy levels coupled with a net lease structure, provides enhanced probability of maintaining 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 20 other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Purchase Accounting for Acquisition of Real Estate Subject to a Lease. In accordance with the Financial Accounting Standards Board ("FASB") guidance on business combinations, the fair value of the real estate acquired with in-place leases is allocated based on their fair values 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 value of in-place leases. Prior to the adoption of ASU 2017-01, "Business Combinations (Topic 805): Clarifying the definition of a Business," on January 1, 2017, acquisition and closing costs incurred on the acquisition of real estate with an in-place lease were expensed as incurred and recorded as real estate acquisition costs. This change did not have a material impact on NNN's financial position or results of operations. 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. 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, 2017, Consolidated Financial Statements for a summary and the anticipated impact of each accounting pronouncement 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 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, 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 2017 2016 2015 2,764 2,535 2,257 29,093,000 27,204,000 24,964,000 2,740 99% 11.5 2,508 99% 11.6 2,236 99% 11.4 28,703,000 26,700,000 24,544,000 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, 2017: % of Annual Base Rent(1) 2.0% 2.7% 3.5% 4.1% 6.4% 2.6% # of Properties 61 75 127 121 125 99 2018 2019 2020 2021 2022 2023 Gross Leasable Area(2) 787,000 1,081,000 1,559,000 1,320,000 2024 2025 2026 2027 % of Annual Base Rent(1) 2.2% 4.7% 5.6% 8.7% # of Properties 50 128 184 197 Gross Leasable Area(2) 833,000 1,123,000 1,854,000 2,766,000 1,697,000 Thereafter 57.5% 1,566 14,540,000 1,143,000 (1) Based on the annualized base rent for all leases in place as of December 31, 2017. (2) Approximate square feet. 22 The following table summarizes the diversification of the Property Portfolio based on the top 10 lines of trade: Top 10 Lines of Trade Convenience stores Restaurants - full service 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) 2017 18.1% 12.1% 7.6% 6.9% 6.4% 5.6% 4.8% 3.6% 3.4% 2.5% 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% 29.0% 100.0% 30.4% 100.0% 32.3% 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, 2017: State Texas Florida Illinois Ohio North Carolina Georgia Tennessee Virginia Indiana 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Alabama Other # of Properties 457 211 132 168 154 127 131 119 123 128 % of Annual Base Rent(1) 18.2% 8.7% 5.4% 5.3% 5.1% 4.3% 4.0% 3.9% 3.9% 3.1% 1,014 2,764 38.1% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2017. Property Acquisitions. The following table summarizes the Property acquisitions for each of the years ended December 31 (dollars in thousands): Acquisitions: Number of Properties 2017 2016 2015 276 313 221 Gross leasable area (square feet) 2,243,000 2,734,000 2,706,000 Initial cash yield Total dollars invested(1) 6.9% 6.9% 7.2% $ 754,892 $ 846,906 $ 726,303 (1) Includes dollars invested in projects under construction or tenant improvements for each respective year. 23 NNN typically funds Property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the "Credit Facility") or by issuing its debt or equity securities in the capital markets. Property Dispositions. The following table summarizes the Properties sold by NNN for each of the years ended December 31 (dollars in thousands): Number of properties Gross leasable area (square feet) Net sales proceeds Gain, net of income tax expense Cap rate 2017 2016 2015 48 346,000 96,757 36,655 $ $ 38 490,000 103,215 27,182 $ $ 19 232,000 39,116 10,450 $ $ 6.0% 6.8% 5.9% NNN typically uses the proceeds from a Property disposition to either pay down the Credit Facility or reinvest in real estate. Analysis of Revenue General. During the year ended December 31, 2017, 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 (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 2017 2016 2015 Percent of Total 2016 2017 2015 2017 Versus 2016 Percent 2016 Versus 2015 Percent $ 568,083 $ 515,954 $ 465,282 97.1% 96.7% 96.3% 10.1 % 10.9 % 15,512 14,984 14,868 724 614 1,032 988 1,677 1,778 2.7% 0.1% 0.1% 2.8% 0.2% 0.3% 3.1% 3.5 % 0.8 % 0.2% (29.8)% 4.5 % 0.4% (63.4)% (5.7)% 10.5 % $ 584,933 $ 533,647 $ 482,916 100.0% 100.0% 100.0% 9.6 % (1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent ("Rental Income"). Comparison of Revenues – 2017 versus 2016 Rental Income. Rental Income increased in amount and as a percent of the total revenues for the year ended December 31, 2017 as compared to the same period in 2016. The increase for the year ended December 31, 2017 is primarily due to a partial year of Rental Income received as a result of the acquisition of 276 Properties with aggregate gross leasable area of approximately 2,243,000 during 2017 and a full year of Rental Income received as a result of the acquisition of 313 Properties with a gross leasable area of approximately 2,734,000 square feet in 2016. Comparison of Revenues – 2016 versus 2015 Rental Income. Rental Income increased in amount and as a percent of the total revenues 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. 24 Analysis of Expenses General. Operating expenses increased primarily due to an increase in depreciation expense during the year ended December 31, 2017, as compared to the same period in 2016. The following summarizes NNN’s expenses for the year ended December 31 (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 Retirement severance costs Total operating expenses Interest and other income Interest expense Real estate acquisition costs Total other expenses (revenues) 2017 2016 2015 $ 33,805 $ 36,508 $ 23,105 173,720 — 8,955 7,845 20,852 149,101 6,830 11,287 — 34,736 19,776 134,798 531 4,420 — $ $ $ 247,430 $ 224,578 $ 194,261 (322) $ (170) $ (109) 109,109 — 96,352 563 108,787 $ 96,745 $ 90,008 927 90,826 General and administrative Real estate Percentage of Total Expenses Percentage of Revenues 2017 2016 2015 2017 2016 2015 13.7 % 16.3 % 9.3 % 9.3 % 17.9 % 10.2 % 5.8 % 4.0 % 6.9% 3.9% 7.2% 4.1% Depreciation and amortization 70.2 % 66.4 % 69.4 % 29.7 % 27.9% 27.9% 2017 Versus 2016 Percent 2016 Versus 2015 Percent (7.4)% 10.8 % 16.5 % 5.1 % 5.4 % 10.6 % Impairment – commercial mortgage residual interests valuation Impairment losses – real estate and other charges, net of recoveries Retirement severance costs Total operating expenses Interest and other income Interest expense Real estate acquisition costs — 3.0 % 0.3 % — 1.3% 0.1% (100.0)% 1,186.3 % 3.6 % 3.2 % 5.0 % 2.2 % — — 1.5 % 1.3 % 2.1% 0.9% — — 100.0 % 100.0 % 100.0 % 42.3 % 42.1% 40.2% (0.3)% (0.2)% (0.1)% (0.1)% — — 100.3 % 99.6 % 99.1 % 18.7 % 18.1% 18.6% (20.7)% N/C (1) 10.2 % 89.4 % 13.2 % — 0.6 % 1.0 % — 0.1% 0.2% (100.0)% 155.4 % — 15.6 % 56.0 % 7.0 % (39.3)% 6.5 % Total other expenses (revenues) 100.0 % 100.0 % 100.0 % 18.6 % 18.2% 18.8% 12.4 % (1) Not calculable ("N/C") Comparison of Expenses – 2017 versus 2016 General and Administrative Expenses. General and administrative expenses decreased in amount for the year ended December 31, 2017, as compared to the same period in 2016, as well as a percentage of total operating expenses and as a percentage of revenues. The decrease in general and administrative expenses for the year ended December 31, 2017, is primarily attributable to a decrease in compensation costs. Real Estate. Real estate expenses increased for the year ended December 31, 2017, as compared to the same period in 2016, but remained flat as a percentage of total operating expenses and as a percentage of revenues. The increase is primarily due to increases in reimbursable and non-reimbursable expenses from certain properties acquired during the year 25 ended December 31, 2017, and from certain properties acquired during the year ended December 31, 2016, as well as expenses on vacant properties. Depreciation and Amortization. Depreciation and amortization expenses increased in amount, as a percentage of total operating expenses and as a percentage of revenues for the year ended December 31, 2017, as compared to the year ended December 31, 2016. The increase in expenses is primarily due to the acquisition of 276 Properties with an aggregate gross leasable area of approximately 2,243,000 square feet in 2017 and 313 Properties with an aggregate gross leasable area of approximately 2,734,000 square feet during 2016. 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 future cash flows (undiscounted and without interest charges), and 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, 2017 and 2016, NNN recorded $4,953,000 and $8,025,000, respectively, of real estate impairments. NNN also recorded a $4,000,000 contract dispute settlement charge during the year ended December 31, 2017 and a $3,269,000 loss on mortgages receivable for the year ended December 31, 2016. Retirement Severance Costs. For the year ended December 31, 2017, retirement severance costs relate primarily to Craig Macnab's retirement as CEO on April 28, 2017. Interest Expense. Interest expense increased in amount, as a percentage of total other expenses (revenues) and as a percentage of revenues for the year ended December 31, 2017, as compared to the same period in 2016. The following represents the primary changes in debt that have impacted interest expense: (i) (ii) (iii) (iv) (v) (vi) (vii) 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%, the issuance in September 2017 of $400,000,000 principal amount of notes payable with a maturity of October 2027, and stated interest rate of 3.500%, the repayment in October 2017 of $250,000,000 principal amount of notes payable with a stated interest rate of 6.875%, and the increase of $28,138,000 in the weighted average outstanding balance on the Credit Facility and a higher weighted average interest rate for the year ended December 31, 2017, as compared to the same period in 2016. Comparison of Expenses – 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. The increase in general and administrative expenses for the year ended December 31, 2016, is primarily attributable to an increase in compensation 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. 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. 26 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 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. 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. 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, and 2015, NNN recorded other than temporary valuation impairments as a reduction of earnings from operations of $6,830,000 and, $531,000. 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 future cash flows (undiscounted and without interest charges), and 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 amount 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. 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. 27 Impact of Inflation NNN’s leases typically contain provisions to mitigate the adverse impact of inflation on NNN’s results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or, to a lesser extent, increases in the tenant’s sales volume. During times when inflation is greater than increases in rent, rent increases will not keep up with the rate of inflation. Properties are leased to tenants under long-term, net leases which typically require the tenant to pay certain operating expenses for a Property, thus, NNN’s exposure to inflation is reduced with respect to these expenses. Inflation may have an adverse impact on NNN’s tenants. Liquidity General. NNN’s demand for funds has been and will continue to be primarily for (i) payment of operating expenses and cash dividends; (ii) Property acquisitions and development; (iii) 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, 2017, there was $120,500,000 outstanding balance and $779,500,000 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 (used in) financing activities Increase (decrease) Net cash at beginning of year Net cash at end of year 2017 2016 2015 $ 421,557 $ 415,337 $ 341,095 (625,557) (89,176) (293,176) 294,540 (779,943) 644,886 280,280 14,260 $ 1,364 $ 294,540 $ (644,544) 307,105 3,656 10,604 14,260 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, 2017, 2016 and 2015, 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. 28 NNN’s financing activities for the year ended December 31, 2017, included the following significant transactions: • • • • • • • • • $287,500,000 paid to fully redeem NNN's 6.625% Series D Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") in February, $394,722,000 in net proceeds from the issuance of the 3.500% notes payable in September, $250,000,000 in repayment of the 6.875% notes payable in October, $9,391,000 in net proceeds from the issuance of 229,696 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), $243,822,000 in net proceeds from the issuance of 5,821,366 shares of common stock in connection with the at-the-market ("ATM") equity program, $3,598,000 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 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock"), $17,940,000 in dividends paid to holders of the depositary shares of NNN’s 5.200% Series F Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock"), and $277,120,000 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. NNN typically funds its short-term liquidity requirements, including investments in additional Properties, with cash from its Credit Facility. As of December 31, 2017, there was $120,500,000 outstanding balance and $779,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $230,000. As of December 31, 2017, NNN’s ratio of total debt to total gross assets (before accumulated depreciation and amortization) was approximately 35 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 27 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, 2017. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2017. Long-term debt(1) Long-term debt – interest(2) Credit Facility Operating lease Expected Maturity Date (dollars in thousands) Total 2018 2019 2020 2021 2022 Thereafter $ 2,487,942 $ 538 $ 567 $ 596 $ 300,630 $ 325,664 $ 1,859,947 646,209 120,500 5,734 97,323 97,294 97,265 89,669 — 743 — 758 — 773 — 788 78,124 120,500 804 186,534 — 1,868 Total contractual cash obligations $ 3,260,385 $ 98,604 $ 98,619 $ 98,634 $ 391,087 $ 525,092 $ 2,048,349 (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. 29 In addition to the contractual obligations outlined above, NNN has committed to fund construction commitments on 27 Properties. The improvements on such Properties are estimated to be completed within 12 months on such Properties. These construction commitments, at December 31, 2017, are outlined in the table below (dollars in thousands): Total commitment(1) Amount funded Remaining commitment $ 129,925 67,719 62,206 (1) Includes land, construction costs, tenant improvements, lease costs and capitalized interest As of December 31, 2017, 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 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 these Properties, NNN's vacant Properties or those Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under its Credit Facility or use other sources of capital in the event of significant capital expenditures or major repairs. 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, 2017, NNN owned 24 vacant, un-leased Properties which accounted for approximately one percent of total Properties held in the Property Portfolio. Additionally, as of January 31, 2018, less than one percent of total Properties held in the Property Portfolio was leased to two tenants that each filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN. Dividends. NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Code, as amended, and related regulations and intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. NNN generally will not be subject to federal income tax on income that it distributes to its stockholders, provided that it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If NNN fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for 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. NNN believes it has been structured as, and its past and present operations qualify NNN as, a REIT. 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 $ 2017 277,120 1.860 $ 2016 257,007 1.780 $ 2015 228,699 1.710 30 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 2017 2016 2015 $ 1.559781 83.8592% $ 1.513705 85.0396% $ 1.363294 79.7248% — 0.035041 0.012194 0.252984 — 1.8839% 0.6556% — — — — — — 13.6013% 0.266295 14.9604% 0.019005 0.007806 0.011055 0.308840 1.1114% 0.4565% 0.6465% 18.0608% $ 1.860000 100.0000% $ 1.780000 100.0000% $ 1.710000 100.0000% On January 16, 2018, NNN declared a dividend of $0.475 per share, payable February 15, 2018, to its common stockholders of record as of January 31, 2018. 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 2017 2016 2015 $ 3,598 0.312847 $ 19,047 1.656250 $ 19,047 1.656250 16,387 1.425000 16,387 1.425000 16,387 1.425000 17,940 1.300000 3,189 0.231111 — — (1) The Series D Preferred Stock was redeemed in February 2017. The dividends paid in 2017 include accumulated and unpaid dividends through the redemption date. (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 in October 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. 31 The following presents the characterizations for tax purposes of such preferred stock dividends for the years ended December 31: 2017 Percentage of Total Series D (1) Series E Series F (2) 2016 Percentage of Total Series D (1) Series E Series F (2) 2015 Percentage of Total Series D (1) Series E Ordinary Dividends Qualified Dividends Capital Gain Unrecaptured Section 1250 Gain Totals 97.0607% — 2.1804% 0.7589% 100.0000% $ 0.303652 $ 1.383115 $ 1.261789 — $ 0.006821 — $ 0.031071 — $ 0.028345 $ 0.002374 $ 0.010814 $ 0.009866 $ 0.312847 $ 1.425000 $ 1.300000 100.0000% $ 1.656250 $ 1.425000 $ 0.231111 — — — — — — — — — 100.0000% — $ 1.656250 — $ 1.425000 — $ 0.231111 97.2400% 1.4134% 0.5570% 0.7896% 100.0000% $ 1.610538 $ 1.385670 $ 0.023409 $ 0.020141 $ 0.009225 $ 0.007937 $ 0.013078 $ 0.011252 $ 1.656250 $ 1.425000 (1) The Series D Preferred Stock was redeemed in February 2017. The dividends paid in 2017 included accumulated and unpaid dividends through the redemption date. (2) The Series F Preferred Stock was issued in October 2016. 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. Debt The following is a summary of NNN’s total outstanding debt as of December 31 (dollars in thousands): Line of credit payable Mortgages payable Notes payable 2017 Percentage of Total $ 120,500 4.7% $ 13,300 2,446,407 0.5% 94.8% 2016 — 13,878 2,297,811 Total outstanding debt $ 2,580,207 100.0% $ 2,311,689 Percentage of Total — 0.6% 99.4% 100.0% Indebtedness. NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests. Additionally, indebtedness may be used to refinance existing indebtedness. 32 Line of Credit Payable. In October 2017, NNN amended its credit agreement to increase the borrowing capacity under its unsecured revolving credit facility from $650,000,000 to $900,000,000 and amend certain other terms under the former revolving credit facility (as the context requires, the previous and new revolving credit facility, the "Credit Facility"). The Credit Facility had a weighted average outstanding balance of $98,277,000 and a weighted average interest rate of 2.2% for the year ended December 31, 2017. The Credit Facility matures January 2022, unless the Company exercises its option to extend maturity to January 2023. As of December 31, 2017, the Credit Facility bears interest at LIBOR plus 87.5 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 for NNN to increase the facility size up to $1,600,000,000, subject to lender approval. As of December 31, 2017, there was a balance of $120,500,000 and $779,500,000 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, 2017, 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. As of December 31, 2017 and 2016, NNN had mortgages payable, including unamortized premium and net of unamortized debt costs, of $13,300,000 and $13,878,000 respectively. The mortgages payable had an interest rate of 5.23% and matures July 2023. The loan is secured by a first lien on five of the Properties and the carrying value of the assets was $20,917,000 at December 31, 2017. 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 2021(4) 2022 2023(5) 2024(6) 2025(7) 2026(8) 2027(9) July 2011 August 2012 April 2013 May 2014 October 2015 December 2016 September 2017 $ 300,000 $ 4,269 $ 295,731 5.500% 5.689% July 2021 325,000 350,000 350,000 400,000 350,000 400,000 4,989 2,594 707 964 3,860 1,628 320,011 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 346,140 3.600% 3.733% December 2026 398,372 3.500% 3.548% October 2027 (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 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. 33 (9) NNN entered into two forward starting swaps with an aggregate notional amount of $250,000. Upon issuance of the 2027 Notes, NNN terminated the forward starting swaps resulting in a liability of $7,690, of which $7,688 was deferred in other comprehensive income. The deferred liability 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 $22,682,000 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 October 2017, NNN repaid the $250,000,000 6.875% notes payable that were due in October 2017. 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, 2017, 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. 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 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 5.700% May 2013 Depositary Shares Outstanding(2) 11,500,000 Gross Proceeds Stock Issuance Costs(3) Dividend Per Depositary Share Earliest Redemption Date(4) $ 287,500 $ 9,856 $ 1.425000 May 2018 5.200% October 2016 13,800,000 345,000 10,897 1.300000 October 2021 Series Series E(5) Series F(6) (1) Holders are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends. (2) Representing 1/100th of a preferred share. Series E issuance 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 from the offering for general corporate purposes and funding property acquisitions. (6) 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 34 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, 2018, the Series E and Series F Preferred Stock Shares were not redeemable or convertible. In February 2017, NNN redeemed all outstanding depositary shares (11,500,000) representing interests in its 6.625% Series D Preferred Stock. The Series D Preferred Stock was redeemed 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. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was $9,855,000 of issuance costs. 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. NNN's DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in NNN's common stock. The following outlines the common stock issuances pursuant to the DRIP for the year ended December 31 (dollars in thousands): Shares of common stock Net proceeds 2017 2016 2015 229,696 187,626 $ 9,391 $ 8,340 $ 196,584 7,182 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, 2017 2016 ATM 2015 ATM 2013 ATM March 2016 February 2015 March 2013 March 2019 March 2016 February 2015 12,000,000 10,044,656 10,000,000 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, 2017 2016 2015 5,821,366 5,716,222 8,573,533 $ $ $ 41.88 243,822 3,782 $ $ $ 46.48 265,696 4,266 $ $ $ 37.45 321,067 4,016 (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. 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 and 2015, NNN recorded an other than temporary valuation impairment of $6,830,000 and $531,000, respectively, 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. As of December 31, 2017 and 2016, the remaining two Residuals are recorded at a fair value of $36,000 and included in Other Assets on the Consolidated Balance Sheets. There was no other than temporary valuation impairment recorded during the year ended December 31, 2017. 35 Item7A. Quantitative and Qualitative Disclosures About Market Risk NNN is exposed to interest rate risk primarily as a result of its variable rate Credit Facility and its fixed rate debt which is used to finance NNN’s development and acquisition activities, as well as for general corporate purposes. NNN’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, NNN borrows at both fixed and variable rates on its long-term debt. As of December 31, 2017, 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, 2017 and 2016. The table presents principal payments and related interest rates by year for debt obligations outstanding as of December 31, 2017. The table incorporates only those debt obligations that existed as of December 31, 2017, 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, 2017. Debt Obligations (dollars in thousands) Variable Rate Debt Credit Facility Fixed Rate Debt Mortgages(1) Unsecured Debt(2) Debt Obligation Weighted Average Interest Rate Debt Obligation Weighted Average Interest Rate Debt Obligation Effective Interest Rate $ $ $ $ — — — — — — — — 120,500 2.16% — — 120,500 2.16% 120,500 — $ $ $ $ 623 652 682 716 750 9,969 13,392 13,392 13,987 5.23% 5.23% 5.23% 5.23% 5.23% 5.23% 5.23% $ $ $ $ — — — — — — 298,209 5.69% 322,400 1,842,143 3.99% 3.67% (3) 2,462,752 4.00% 2,507.106 2,367,102 2018 2019 2020 2021 2022 Thereafter Total Fair Value: December 31, 2017 December 31, 2016 (1) NNN's mortgages payable represent principal payments by year and 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 2022. 36 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of National Retail Properties, Inc. and Subsidiaries Opinion on Internal Control over Financial Reporting We have audited National Retail Properties, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, 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). In our opinion, National Retail Properties, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules listed in the Index at Item15(a) and our report dated February 13, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control Over Financial Reporting 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. /s/ Ernst & Young LLP Certified Public Accountants Orlando, Florida February 13, 2018 37 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of National Retail Properties, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of National Retail Properties, Inc. and Subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, 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, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP Certified Public Accountants We have served as the Company’s auditor since 2006. Orlando, Florida February 13, 2018 38 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) Real estate portfolio: ASSETS December 31, 2017 December 31, 2016 Accounted for using the operating method, net of accumulated depreciation and amortization $ 6,428,928 $ 5,879,046 Accounted for using the direct financing method Real estate held for sale Cash and cash equivalents Receivables, net of allowance of $1,119 and $1,006, respectively Accrued rental income, net of allowance of $1,936 and $3,078, respectively Debt costs, net of accumulated amortization of $12,667 and $11,268, respectively Other assets Total assets Liabilities: Line of credit payable 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 18) 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 December 31, 2016, 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; 153,577,028 and 147,149,945 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 9,650 4,083 1,364 4,317 25,916 5,380 80,896 11,230 26,084 294,540 3,418 25,101 2,715 92,017 $ 6,560,534 $ 6,334,151 $ 120,500 $ 13,300 2,446,407 20,311 119,106 — 13,878 2,297,811 19,665 85,869 2,719,624 2,417,223 — 287,500 287,500 287,500 345,000 345,000 1,537 1,473 3,599,475 3,322,771 (379,181) (13,738) (319,254) (8,191) 3,840,593 3,916,799 317 129 3,840,910 3,916,928 $ 6,560,534 $ 6,334,151 See accompanying notes to consolidated financial statements. 39 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 Retirement severance costs Earnings from operations Other expenses (revenues): Interest and other income Interest expense Real estate acquisition costs Earnings from operations before income tax expense 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 Net earnings Earnings attributable to noncontrolling interests Net earnings attributable to NNN Year Ended December 31, 2017 2016 2015 $ 565,405 $ 512,883 $ 462,346 978 1,700 15,512 724 614 1,336 1,735 14,984 1,032 1,677 1,506 1,430 14,868 988 1,778 584,933 533,647 482,916 33,805 23,105 173,720 — 8,955 7,845 247,430 337,503 (322) 109,109 — 108,787 228,716 — 228,716 36,655 265,371 (398) 36,508 20,852 149,101 6,830 11,287 — 224,578 309,069 (170) 96,352 563 96,745 212,324 — 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 10,450 197,961 (125) $ 264,973 $ 239,500 $ 197,836 See accompanying notes to consolidated financial statements. 40 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 Excess of redemption value over carrying value of Series D preferred shares redeemed 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 Deferred fair value of forward starting swaps Net loss – commercial mortgage residual interests Net gain – available-for-sale securities Comprehensive income attributable to NNN Year Ended December 31, 2017 2016 2015 $ 264,973 $ 239,500 $ 197,836 (3,598) (16,387) (17,940) (9,855) (19,047) (16,387) (3,189) — (19,047) (16,387) — — 217,193 $ 200,877 $ 162,402 1.45 1.45 $ $ 1.39 1.38 $ $ 1.21 1.20 $ $ $ 149,111,188 144,176,224 133,998,674 149,432,641 144,660,633 134,489,416 $ 264,973 $ 239,500 $ 197,836 1,932 (7,688) — 209 2,802 13,345 (4,454) 468 1,902 (13,369) (339) 112 $ 259,426 $ 251,661 $ 186,142 See accompanying notes to consolidated financial statements. 41 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2017, 2016 and 2015 (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 – director compensation 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 Deferred fair value of 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 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,902 197,836 (19,047) (16,387) (221,811) 991 455 325,084 (309) (4,178) 8,679 1,902 (13,369) (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. 42 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED Years Ended December 31, 2017, 2016 and 2015 (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 Issuance of 13,800,000 depositary shares of Series F preferred stock Issuance of common stock: 31,807 shares – director compensation 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 Deferred fair value of 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 (19,047) (16,387) (3,189) (249,056) 334,103 1,148 389 269,962 (262) (4,266) 9,609 2,802 13,345 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. 43 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED Years Ended December 31, 2017, 2016 and 2015 (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, 2016 $ 287,500 $ 287,500 $ 345,000 $ 1,473 $3,322,771 $ (319,254) $ (8,191) $ 3,916,799 $ Net earnings Dividends declared and paid: $0.312847 per depositary share of Series D preferred stock $1.42500 per depositary share of Series E preferred stock $1.30000 per depositary share of Series F preferred stock $1.86 per share of common stock — — — — — Redemption of 11,500,000 depositary shares of Series D preferred stock (287,500) Issuance of common stock: 35,456 shares – director compensation 13,695 shares – stock purchase plan 5,821,366 shares – ATM equity program Issuance of 274,102 shares of restricted common stock Stock issuance costs Amortization of deferred compensation Amortization of interest rate hedges Deferred fair value of forward starting swaps Valuation adjustments – available-for- sale securities Distributions to noncontrolling interests Noncontrolling interests — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2 — 1 — 58 3 — — — — — — — — 264,973 — — — (3,598) (16,387) (17,940) 8,825 (277,120) 9,855 (9,855) 1,175 563 247,546 (234) (3,782) 12,630 — — — — 126 — — — — — — — — — — — — — — — — — — — — — — — 1,932 264,973 (3,598) (16,387) (17,940) (268,293) (287,500) 1,176 563 247,604 (231) (3,782) 12,630 1,932 (7,688) (7,688) 209 — — 209 — 126 129 398 $ 3,916,928 265,371 — — — — — — — — — — — — — — (84) (126) (3,598) (16,387) (17,940) (268,293) (287,500) 1,176 563 247,604 (231) (3,782) 12,630 1,932 (7,688) 209 (84) — Balances at December 31, 2017 $ — $ 287,500 $ 345,000 $ 1,537 $3,599,475 $ (379,181) $ (13,738) $ 3,840,593 $ 317 $ 3,840,910 See accompanying notes to consolidated financial statements. 44 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings 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: Decrease in real estate leased to others using the direct financing method Increase in receivables Increase in accrued rental income Decrease in other assets Increase (decrease) in accrued interest payable Increase (decrease) in other liabilities Other Year Ended December 31, 2017 2016 2015 $ 265,371 $ 239,506 $ 197,961 173,720 4,953 — 1,788 3,502 (85) 1,932 (7,688) (36,655) — 14,223 (862) 884 (175) (1,752) 1,960 646 (90) (115) 149,101 11,294 6,830 1,394 3,086 (147) 2,802 13,345 (27,182) — 11,401 (581) 1,364 (74) (252) 1,663 (448) 2,636 (401) 134,798 4,420 531 1,306 2,915 (207) 1,902 (13,369) (10,807) 10,488 10,474 (676) 1,277 (335) (368) 4,996 2,717 (6,610) (318) 341,095 Net cash provided by operating activities 421,557 415,337 Cash flows from investing activities: Proceeds from the disposition of real estate Additions to real estate: Accounted for using the operating method Principal payments on mortgages and notes receivable Other Net cash used in investing activities 97,245 104,117 38,502 (721,893) (885,966) (683,243) 1,250 (2,159) 4,141 (2,235) 2,363 (2,166) (625,557) (779,943) (644,544) See accompanying notes to consolidated financial statements. 45 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 Redemption of Series D preferred stock 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 (used in) financing activities Net increase (decrease) 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: Change in other comprehensive income Change in lease classification (direct financing lease to operating lease) Mortgage receivable accepted in connection with real estate transactions Year Ended December 31, 2017 2016 2015 $ 1,501,700 $ 1,330,200 $ 1,262,400 (1,381,200) (1,330,200) (1,262,400) (510) 398,372 (250,000) (7,837) 256,764 — (3,836) (287,500) (3,598) (16,387) (17,940) (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) — (277,120) (257,007) (228,699) — (84) (89,176) (293,176) 294,540 1,364 103,761 $ $ — (136) 644,886 280,280 14,260 294,540 91,403 $ $ (15) $ (155) $ 5,547 696 $ $ — $ 12,161 1,924 $ $ — $ $ $ $ $ $ $ 334 (362) 307,105 3,656 10,604 14,260 83,758 234 11,694 1,179 500 (1) Cash, cash equivalents and restricted cash is the aggregate of Cash and cash equivalents and Restricted cash and cash held in escrow from the Consolidated Balance Sheets. NNN did not have restricted cash or cash held in escrow at December 31, 2017 and 2016 and had $601 at December 31, 2015. See accompanying notes to consolidated financial statements. 46 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2017, 2016 and 2015 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 are 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, 2017 2,764 29,093,000 48 11.5 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, 2017, 2016 and 2015, NNN recorded $2,435,000, $1,738,000 and $2,383,000, 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. Prior to the adoption of ASU 2017-01, "Business Combinations (Topic 805): Clarifying the definition of a Business," on January 1, 2017, acquisition and closing costs incurred on the acquisition of real estate with an in-place lease were expensed as incurred and recorded as real estate acquisition costs. The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on the determination of their fair values. 47 In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in- place leases, measured over a period equal to the remaining term of the lease 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): Above-market in-place leases Less: accumulated amortization Above market in-place leases, net In-place leases Less: accumulated amortization In-place leases, net Intangible lease liabilities (included in Other liabilities): Below-market in-place leases Less: accumulated amortization Below market in-place leases, net 2017 2016 16,583 $ 18,352 (9,299) 7,284 $ (8,761) 9,591 104,592 $ 112,951 (61,004) (57,661) 43,588 $ 55,290 44,468 $ 46,151 (26,055) (24,051) 18,413 $ 22,100 $ $ $ $ $ $ The amounts amortized as a net increase to rental income for capitalized above-market and below-market leases for the years ended December 31, 2017, 2016, and 2015 were $3,355,000, $2,842,000, and $3,046,000, respectively. The value of in-place leases amortized to expense for the years ended December 31, 2017, 2016, and 2015 was $18,841,000, $13,403,000, and $14,380,000, respectively. 48 The following is a schedule of the amortization of acquired above-market and below-market in-place lease intangibles and the amortization of the in-place lease intangibles at December 31, 2017 (dollars in thousands): 2018 2019 2020 2021 2022 Thereafter Net Increase to Rental Income Increase To Amortization Expense $ 1,412 $ 684 609 489 363 8,249 5,976 5,220 4,494 4,024 7,572 15,625 Weighted average amortization period (years) 17.9 9.6 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 and improvements 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 cash flows (undiscounted and without interest charges), and 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. 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. 49 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. 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 $900,000,000 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 at December 31, 2017 and 2016, are included in Mortgages Payable on the Consolidated Balance Sheets net of accumulated amortization of $55,000 and $38,000, 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 $22,682,000 and $21,157,000 at December 31, 2017 and 2016, respectively, are included in Notes Payable on the Consolidated Balance Sheets net of accumulated amortization of $6,337,000 and $6,376,000, 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 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. 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 (Topic 842). In March 2016, the FASB issued updated guidance. ASU 2016-08, "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. In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)," which clarifies the scope of subtopic 610-20, which was issued as a part of ASU 2014-09, to add guidance for partial sales of nonfinancial assets. The guidance permits two methods of adoption: full 50 retrospective approach to each prior reporting period presented, or modified retrospective approach 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 ASU 2014-09 on January 1, 2018, and apply the cumulative catch-up transition method. Through the evaluation and implementation process, NNN has determined the key revenue stream impacted by ASU 2014-09 is gain on disposition of real estate reported on the Consolidated Statements of Income and Comprehensive Income. NNN currently recognizes revenue at the time of closing (i.e., transfer of asset). Upon adoption of ASU 2014-09, NNN will need to evaluate any separate contracts or performance obligations to determine proper timing of revenue recognition, as well as, transaction price allocation. The adoption of ASU 2014-09 will not have a material impact on NNN's financial position or results of operations. 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 Less: Excess of redemption value over carrying value of Series D preferred shares redeemed Net earnings attributable to common stockholders Less: Earnings attributable to unvested restricted shares Net earnings used in basic and diluted earnings per share 2017 2016 2015 $ 264,973 $ 239,500 $ 197,836 (3,598) (16,387) (17,940) (9,855) 217,193 (531) (19,047) (16,387) (3,189) — 200,877 (695) (19,047) (16,387) — — 162,402 (706) $ 216,662 $ 200,182 $ 161,696 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 149,840,116 145,014,422 134,868,640 (285,585) (443,343) (390,522) (447,676) (412,505) (457,461) 149,111,188 144,176,224 133,998,674 321,453 484,409 490,742 149,432,641 144,660,633 134,489,416 51 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, 2017, 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 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. 52 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 Gains and Losses on Available-for- Sale Securities Total Beginning balance, December 31, 2015 $ (25,046) $ 4,454 $ 240 $ (20,352) Other comprehensive income (loss) Reclassifications from accumulated other comprehensive income to net earnings Net current period other comprehensive income (loss) Ending balance, December 31, 2016 Other comprehensive income (loss) Reclassifications from accumulated other comprehensive income to net earnings Net current period other comprehensive income (loss) 13,345 2,802 (2) 16,147 (8,899) (7,688) 1,932 (2) (5,756) Ending balance, December 31, 2017 $ (14,655) $ (182) (4,272) (3) (4,454) — — — — — $ 468 — 468 708 209 — 209 917 $ 13,631 (1,470) 12,161 (8,191) (7,479) 1,932 (5,547) (13,738) (1) Additional disclosure is included in Note 12 – Derivatives. (2) 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. (3) 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 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 current 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 its 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. The adoption of ASU 2016-15 will not impact NNN's financial position or results of operations. In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting," effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. NNN has early adopted ASU 2017-09 as of January 1, 2017. The adoption of ASU 2017-09 did not impact NNN's financial position or results of operations. In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require a company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of 53 retained earnings as of the beginning of the fiscal year that an entity adopts the update. The adoption of ASU 2017-12 will not have a material impact 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 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 2017 presentation. Note 2 – Real Estate: Real Estate – Portfolio Leases – The following outlines key information for NNN’s leases at December 31, 2017: Lease classification: Operating Direct financing Building portion – direct financing / and portion – operating Weighted average remaining lease term (years) 2,791 7 2 11.5 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 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 (1) Buildings and improvements Leasehold interests Less accumulated depreciation and amortization Work in progress - improvements 2017 2016 $ 2,289,749 $ 2,101,923 4,972,233 4,487,509 5,261 7,267,243 (880,235) 6,387,008 41,920 4,565 6,593,997 (739,008) 5,854,989 24,057 $ 6,428,928 $ 5,879,046 (1) Includes $25,799 and $30,725 in land for Properties under construction at December 31, 2017 and 2016, respectively. 54 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, 2017, 2016 and 2015, NNN recognized $1,411,000, ($12,000) and $153,000, respectively, of such income, net of reserves. At December 31, 2017 and 2016, the balance of accrued rental income was $25,916,000 and $25,101,000, respectively, net of allowance of $1,936,000 and $3,078,000, respectively. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2017 (dollars in thousands): 2018 2019 2020 2021 2022 Thereafter $ 574,030 561,799 545,134 524,730 494,183 3,989,805 $ 6,689,681 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 Consumer Price Index ("CPI") or future contingent rents which may be received on the leases based on a percentage of the tenant’s sales volume. 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 2017 2016 9,339 $ 4,967 (4,656) 9,650 $ 11,200 5,664 (5,634) 11,230 $ $ The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2017 (dollars in thousands): 2018 2019 2020 2021 2022 Thereafter $ $ 1,834 1,512 1,043 720 726 3,504 9,339 The table above 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, 2017, NNN had four of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2016, included 18 properties, 14 of which were sold in 2017. 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 2017 2016 2,581 $ 3,252 5,833 (886) (864) 4,083 $ 15,106 17,185 32,291 (3,459) (2,748) 26,084 $ $ The following table summarizes the Properties sold and the corresponding gain recognized on the disposition of Properties for the years ended December 31 (dollars in thousands): Gain on disposition of real estate 48 $ 36,655 38 $ 27,182 19 $ 10,807 2017 2016 2015 # of Sold Properties Gain # of Sold Properties Gain # of Sold Properties Gain Income tax expense Real Estate – Commitments — $ 36,655 — $ 27,182 (357) $ 10,450 NNN has committed to fund construction commitments on 27 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, at December 31, 2017, are outlined in the table below (dollars in thousands): Total commitment(1) Amount funded Remaining commitment $ 129,925 67,719 62,206 (1) Includes land, construction costs, tenant improvements, lease costs and capitalized interest. 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 real estate impairments, net of recoveries of $4,953,000, $8,025,000 and $3,970,000 for the years ended December 31, 2017, 2016 and 2015, respectively. 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. 56 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 and 2015, NNN recorded an other than temporary valuation impairment of $6,830,000 and $531,000, respectively, 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. As of December 31, 2017 and 2016, the remaining two Residuals are recorded at a fair value of $36,000 and included in Other Assets on the Consolidated Balance Sheets. There was no other than temporary valuation impairment recorded during the year ended December 31, 2017. Note 4 – Line of Credit Payable: In October 2017, NNN amended its credit agreement to increase the borrowing capacity under its unsecured revolving credit facility from $650,000,000 to $900,000,000 and amend certain other terms under the former revolving credit facility (as the context requires, the previous and new revolving credit facility, the "Credit Facility"). The Credit Facility had a weighted average outstanding balance of $98,277,000 and a weighted average interest rate of 2.2% for the year ended December 31, 2017. The Credit Facility matures January 2022, unless the Company exercises its option to extend maturity to January 2023. As of December 31, 2017, the Credit Facility bears interest at LIBOR plus 87.5 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 $1,600,000,000. As of December 31, 2017, there was a balance of $120,500,000 and $779,500,000 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, 2017, NNN was in compliance with those covenants. Note 5 – Mortgages Payable: The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in thousands): Initial Balance Interest Rate Maturity(2) Carrying Value of Encumbered Asset(s)(3) Outstanding Principal Balance at December 31, 2017 2016 15,151 5.23% July 2023 $ 20,917 $ 13,392 $ 13,987 Entered(1) November 2014(4) Debt costs Accumulated amortization Debt costs, net of accumulated amortization Mortgages payable, including unamortized premium and net of unamortized debt costs (147) 55 (92) (147) 38 (109) $ 13,300 $ 13,878 (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; the balance is due at maturity. (3) Each loan is secured by a first mortgage lien on five of the Properties. The carrying values of the assets at December 31, 2017. (4) Initial balance and outstanding principal balance includes unamortized premium. 57 The following is a schedule of the scheduled principal payments, including premium amortization of NNN’s mortgages payable at December 31, 2017 (dollars in thousands): 2018 2019 2020 2021 2022 Thereafter $ 623 652 682 716 750 9,969 $ 13,392 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 2021(3) 2022 2023(4) 2024(5) 2025(6) 2026(7) 2027(8) July 2011 August 2012 April 2013 May 2014 October 2015 December 2016 September 2017 $ 300,000 $ 4,269 $ 295,731 5.500% 5.689% July 2021 325,000 350,000 350,000 400,000 350,000 400,000 4,989 2,594 707 964 3,860 1,628 320,011 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 346,140 3.600% 3.733% December 2026 398,372 3.500% 3.548% October 2027 (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 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. (4) 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. (5) 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. (6) 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. (7) 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. (8) NNN entered into two forward starting swaps with an aggregate notional amount of $250,000. Upon issuance of the 2027 Notes, NNN terminated the forward starting swaps resulting in a liability of $7,690, of which $7,688 was deferred in other comprehensive income. The deferred liability 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. 58 In connection with the outstanding debt offerings, NNN incurred debt issuance costs totaling $22,682,000 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 October 2017, NNN repaid the $250,000,000 6.875% notes payable that were due in October 2017. 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, 2017, NNN was in compliance with those covenants. 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 E Series F Dividend Rate(1) 5.700% May 2013 Issued Depositary Shares Outstanding(2) 11,500,000 Gross Proceeds Stock Issuance Costs(3) $ 287,500 $ 9,856 Earliest Dividend Per Redemption Depositary Share Date 1.425000 May 2018 $ 5.200% October 2016 13,800,000 345,000 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 E issuance 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, 2018, the Series E and Series F Preferred Stock Shares were not redeemable or convertible. In February 2017, NNN redeemed all outstanding depositary shares (11,500,000) representing interests in its 6.625% Series D Preferred Stock. The Series D Preferred Stock was redeemed 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. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was $9,855,000 of issuance costs. 59 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. 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 2017 2016 2015 229,696 187,626 $ 9,391 $ 8,340 $ 196,584 7,182 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, 2017 2016 ATM 2015 ATM 2013 ATM March 2016 February 2015 March 2013 March 2019 March 2016 February 2015 12,000,000 10,044,656 10,000,000 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) Year Ended December 31, 2017 2016 2015 5,821,366 5,716,222 8,573,533 $ 41.88 $ 46.48 $ 37.45 Net proceeds Stock issuance costs(1) (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. 243,822 265,696 4,266 3,782 $ $ $ $ $ $ 321,067 4,016 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, 2017, 2016 and 2015 totaled $514,000, $491,000 and $474,000, respectively. Note 10 – Dividends: The following table outlines the dividends declared and paid for NNN's common stock for the years ended December 31 (in thousands, except per share data): Dividends Per share 2017 2016 2015 $ 277,120 1.860 $ 257,007 1.780 $ 228,699 1.710 60 On January 16, 2018, NNN declared a dividend of $0.475 per share, payable February 15, 2018, to its common stockholders of record as of January 31, 2018. 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 2017 2016 2015 $ 1.559781 $ 1.513705 $ 1.363294 — 0.035041 0.012194 0.252984 — — — 0.266295 0.019005 0.007806 0.011055 0.308840 $ 1.860000 $ 1.780000 $ 1.710000 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: Series F(3) Series E(2) Series D(1) 2017 2016 2017 2016 2015 2017 2016 2015 $ 1.261789 $ 0.231111 $ 1.383115 $ 1.425000 $ 1.385670 $ 0.303652 $ 1.656250 $ 1.610538 Ordinary dividends Qualified dividends Capital gain Unrecaptured — 0.028345 — — — — 0.031071 0.010814 — — — 0.020141 — 0.007937 0.006821 0.011252 0.002374 — — — 0.023409 0.009225 0.013078 $ 0.231111 $ 1.425000 $ 1.425000 $ 1.425000 $ 0.312847 $ 1.656250 $ 1.656250 Section 1250 Gain 0.009866 Dividend paid per share $ 1.300000 Dividends declared and paid $ 17,940 $ 3,189 $ 16,387 $ 16,387 $ 16,387 $ 3,598 $ 19,047 $ 19,047 (1) The Series D Preferred Stock was redeemed in February 2017. The dividends paid in 2017 include accumulated and unpaid dividends through the redemption date. (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 in October 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, 2017, 2016 and 2015, 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. 61 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 Net deferred tax asset 2017 2016 $ — $ 3,899 3,899 (3,858) 41 830 5,088 5,918 (5,743) 175 (41) (41) (175) (175) $ — $ — In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The net operating loss carryforwards were generated by NNN’s taxable REIT subsidiaries. The net operating loss carryforwards begin to expire in 2028. 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, 2017 and 2016. The decrease in the valuation allowance for the year ended December 31, 2017, was $1,885,000. The increase in the valuation allowance for the years ended December 31, 2016 and 2015, was $77,000 and $5,047,000, 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 2017 2016 2015 $ 264,973 $ 239,500 $ 208,511 — — — — — — — — — — (58) (129) (8,935) (1,553) (10,675) Net earnings attributable to NNN’s stockholders $ 264,973 $ 239,500 $ 197,836 62 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 Nontaxable income of NNN State taxes, net of federal benefit Expiration of built-in gain tax Loss carryforwards increase (decrease) (2) Built-in gain tax liability (1), (2) TRS Revocation Election (1) Valuation allowance (increase) decrease (1), (2) 2017 2016 2015 $ — $ — $ (70,894) — — — (2,019) 134 — 1,885 — — — 55 22 — (77) 69,651 (141) 316 — (197) (4,363) (5,047) Total tax expense $ — $ — $ (10,675) (1) The change for the year ended December 31, 2015, is due to TRS Revocation Election. (2) The change for the year ended December 31, 2017, includes an amount attributable to the federal tax rate change within the Tax Cuts and Jobs Act signed into law on December 22, 2017. The net income statement effect of the federal rate change is zero. 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 months. When applicable, such interest and penalties will be recorded in non-operating expenses. The periods that remain open under federal statute are 2014 through 2017. 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. 63 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) June 2011 April 2013 May 2014 October 2015 December 2016 September 2017 Two treasury locks $ 150,000 $ 5,300 $ Four forward starting swaps Three forward starting swaps Four forward starting swaps Two forward starting swaps Two forward starting swaps 240,000 225,000 300,000 180,000 250,000 3,156 6,312 13,369 (13,352) 7,690 5,218 3,141 6,312 13,369 (13,345) 7,688 (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, 2017, $14,655,000 remains in other comprehensive income related to the effective portion of NNN’s previously interest rate hedges. During the years ended December 31, 2017, 2016 and 2015, NNN reclassified $1,932,000, $2,802,000 and $1,902,000, respectively, out of other comprehensive income as an increase to interest expense. Over the next 12 months, NNN estimates that an additional $2,139,000 will be reclassified as an increase in interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on NNN’s long-term debt. NNN does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. NNN had no derivative financial instruments outstanding at December 31, 2017. Note 13 – Performance Incentive Plan: In May 2017, NNN filed a registration statement on Form S-8 with the Commission which permits the issuance of up to 1,800,000 shares of common stock pursuant to NNN’s 2017 Performance Incentive Plan (the “2017 Plan”). The 2017 Plan replaced NNN’s previous 2007 Performance Incentive Plan. The 2017 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 2017 Plan. There were no stock options outstanding or exercisable at December 31, 2017. 64 Pursuant to the 2017 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, 2017: 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 871,718 $ 292,968 (410,497) (11,356) (7,510) 735,323 38.88 43.61 35.80 33.42 30.80 42.65 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, 2017 and 2016, NNN granted 169,495 and 142,199, respectively, performance based shares subject to its total stockholder return after a three year period relative to its peers. The shares were granted to certain executive officers and had weighted average grant price of $43.73 and $44.70, respectively, per share. Once the performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. For the 2017 and 2016 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 $25.77 and $34.60, 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, 2017, pursuant to the 2017 Plan. Other share grants under the 2017 Plan: Directors’ fees Deferred directors’ fees Shares available under the 2017 Plan for grant, end of period Weighted Average Share Price Shares 14,007 $ 21,329 35,336 1,733,296 40.09 40.31 40.22 The total compensation expense for share-based payments for the years ended December 31, 2017, 2016 and 2015 totaled $12,971,000, $10,758,000 and $9,671,000, respectively. At December 31, 2017, NNN had $10,542,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements under the 2017 Plan. This cost is expected 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, 2017, 2016 and 2015. 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, 2017 and 2016, approximate fair value based upon current market prices of comparable instruments (Level 3). At December 31, 2017 and 2016, the carrying value and fair value of NNN’s notes payable net of unamortized discount and excluding debt costs, was $2,507,106,000 and $2,367,102,000, respectively, based upon quoted market prices, which is a Level 1 valuation since NNN's notes payable are publicly traded. 65 Note 15 – Quarterly Financial Data (unaudited): The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data): 2017 Revenues as originally reported Net earnings Net earnings attributable to NNN Net earnings per share(1): Basic Diluted 2016 Revenues as originally reported Net earnings Net earnings attributable to NNN Net earnings per share(1): Basic Diluted First Quarter Second Quarter Third Quarter Fourth Quarter $ 141,569 $ 145,587 $ 147,769 $ 150,330 73,648 73,657 58,409 58,028 61,129 61,120 $ 0.35 $ 0.35 0.33 $ 0.33 0.35 $ 0.35 72,185 72,168 0.42 0.42 $ 126,999 $ 130,998 $ 134,558 $ 141,261 70,676 70,683 51,933 51,942 50,772 50,784 $ 0.44 $ 0.44 0.30 $ 0.30 0.29 $ 0.28 66,126 66,092 0.37 0.37 (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, 2017, 2016 and 2015, 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 – Major Tenants: As of December 31, 2017, NNN had no tenants that accounted for ten percent or more of its rental and earned income. Note 18 – 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 19 – Subsequent Events: NNN reviewed all subsequent events and transactions that have occurred after December 31, 2017, the date of the consolidated balance sheet. In February 2018, the Company entered into two forward starting swaps with an aggregate notional amount of $250,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The outstanding forward starting swaps were each designated as a cash flow hedge. There were no other reportable subsequent events or transactions. 66 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, 2017, 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 67 financial reporting and to make modifications as necessary. NNN’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Management also sought to deal with other control matters in the assessment, and in each case if a problem was identified, management considered what revision, improvement and/or correction was necessary to be made in accordance with NNN’s on-going procedures. The assessments of NNN’s disclosure controls and procedures and NNN’s internal control 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, 2017, 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, 2017, 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, 2017, which appears in this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting. During the three months ended December 31, 2017, 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. 68 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 “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 III: Ratification of Ernst & Young LLP as the Independent Registered Public Accounting Firm”, and such information is incorporated herein by reference. 69 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, 2017 and 2016 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2017 Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2017 All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto. (3) Exhibits The following exhibits are filed as a part of this report. 3. Articles of Incorporation and Bylaws 37 39 40 42 45 47 3.1 3.2 3.3 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 3.2 to the Registrant’s Registration Statement on Form 8-A 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 Registration Statement 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). 70 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 4.3 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 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 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 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 3.800% Notes due 2022 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K 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 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 2022 (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 5.70% 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). 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). 71 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 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). Form of Sixteenth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 3.50% Notes due 2027 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K and filed with the Securities and Exchange Commission on September 19, 2017, and incorporated herein by reference). Form of 3.50% Notes due 2027 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K and filed with the Securities and Exchange Commission on September 19, 2017, 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). 72 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 1, 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). 73 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). 10.26 2017 Performance Incentive Plan (filed as Annex A to the Registrant’s 2017 Annual Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 29, 2017, and incorporated herein by reference). 10.27 Third Amendment to Amended and Restated Credit Agreement, dated as of October 25, 2017, 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 26, 2017, 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, 2018 (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, 2017, 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. 74 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, 2018. SIGNATURES NATIONAL RETAIL PROPERTIES, INC. By: /s/ Julian E. Whitehurst Julian E. Whitehurst Chief Executive Officer, President and Director 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. 75 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of Julian E. Whitehurst, 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 or her 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 or her substitutes may do or cause to be done by virtue hereof. Signature /s/ Julian E. Whitehurst Julian E. Whitehurst /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 Chief Executive Officer, President and Director February 13, 2018 Title Date Chairman of the Board Director Director Director Director Director Director February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 Director, Chief Financial Officer (Principal Financial Officer), Executive Vice President, Assistant Secretary and Treasurer February 13, 2018 Chief Accounting Officer (Principal Accounting Officer) and Executive Vice President February 13, 2018 76 Our Officers and Directors Executive Officers Directors JULIAN E. (JAY) WHITEHURST President & Chief Executive Officer ROBERT C. LEGLER Chairman 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 PAMELA K. M. BEALL 1, 2 Executive Vice President & Chief Financial Officer MPLX GP LLC STEVEN D. COSLER 1,3 Operating Partner EDWARD J. FRITSCH 1,2 President & Chief Executive Officer Highwoods Properties, Inc. SAM L. SUSSER 2,3 President Susser Investment Company JULIAN E. (JAY) WHITEHURST President & Chief Executive Officer Water Street Healthcare Partners National Retail Properties, Inc. DON DEFOSSET 2,3 Retired Chairman, President & Chief Executive Officer Walter Industries, Inc. DAVID M. FICK 1,3 Professional Faculty Member Johns Hopkins University Carey Business School; and, President Nandua Oyster Company KEVIN B. HABICHT Executive Vice President & Chief Financial Officer National Retail Properties, Inc. 1 Member, Audit Committee 2 Member, Governance and Nominating Committee 3 Member, Compensation Committee Shareholder Information General Information Independent Registered Public Accounting Firm Ernst & Young LLP Corporate Office National Retail Properties, Inc. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 www.nnnreit.com American Stock Transfer & Trust Company, LLC Operations Center 6201 15th Avenue Brooklyn, NY 11219 www.astfinancial.com (866) 627-2644 Shareholder Toll-free Line (866) 627-2644 Worldwide: (718) 921-8346 Fax: (718) 236-2641 For Dividend Reinvestment American Stock Transfer & Trust Company P.O. Box 922 Wall Street Station New York, NY 10269 Form 10-K A copy of the Company’s Form 10-K, as filed with the Securities and Exchange Commission (SEC) for fiscal 2017, 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 2017, the Company filed with the New York Stock Exchange (NYSE) the Certification of its Chief Executive Officer confirming that the Chief Executive Officer was not aware of any violations by the Company of the NYSE’s corporate governance listing standards. 450 S. Orange Avenue, Suite 900 Orlando, FL 32801 (800) NNN-REIT www.nnnreit.com

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