National Retail Properties Annual Report 2018

Plain-text annual report

P R O F O U N D 2018 ANNUAL REPORTCOVER: TOROWEAP OVERLOOK ON THE NORTH RIM OF THE GRAND CANYON, AZ INSIDE COVER: PLATEAU VIEW OF THE WINDING COLORADO RIVER NEAR PAGE, AZ A river cuts through rock, not because of its POWER, but because of its PERSISTENCE.5 | SHAREHOLDER’S LET TER 18 | HISTORICAL FINANCIAL HIGHLIGHTS INSIDE BACK COVER OUR OFFICERS AND DIRECTORS SHAR EH O LD ER I N FO R M AT I O N TRIPLE NET LEASE TOTAL SHAREHOLDER RETURN COMPARISON (NNN = $48.51 at December 31, 2018) NATIONAL RETAIL PROPERTIES 17.7% 11.3% 14.8% 16.9% 13.2% 14.1% 12.8% 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) * NNN is a member of this index Source: Bloomberg -4.0% -4.6% -4.4% -2.8% 4.2% 2.9% 9.2% 11.2% 8.3% 7.8% 8.5% 11.1% 12.5% 12.2% 13.1% 16.9% 8.5% 8.2% 7.8% 9.6% 9.9% 9.6% 5.6% 6.7% 9.9% n/a 9.1% 9.9% VALUE OF $1,000 INVESTMENT (As of December 31, 2018) NATIONAL RETAIL PROPERTIES $ 1,177 $ 1,378 $ 1,990 $ 4,762 $ 6,405 $ 13,865 $ 20,356 1 YEAR 3 YEARS 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS Indices * NAREIT Equity REIT Index * Morgan Stanley REIT Index (RMS G) S&P 500 Index (SPX) Nasdaq (CCMP) * NNN is a member of this index $ $ $ $ 960 955 956 972 $ 1,133 $ 1,491 $ 3,253 $ 3,404 $ 6,654 $ 10,615 $ 1,089 $ 1,455 $ 3,153 $ 3,257 $ 6,301 n/a $ 1,304 $ 1,502 $ 3,425 $ 3,068 $ 2,979 $ 8,743 $ 1,374 $ 1,690 $ 4,746 $ 3,934 $ 3,658 $ 10,495 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.3NATIONAL RETAIL PROPERTIES4NATIONAL RETAIL PROPERTIESMY FELLOW SHAREHOLDERS I am pleased to report that your investment in National Retail Properties once again delivered above-average returns while taking below-average risk. Our commitment to consistent per share growth on a multi-year basis produced an annual dividend increase of 4.8% and annual Core FFO per share growth of 5.2% over 2017 results, all while maintaining our low-leverage, conservatively financed balance sheet. We increased our annual dividend for the 29th consecutive year in 2018, a feat matched by only two other REITs and by fewer than 90 U.S. public companies. Even more impressively, our multi-year track record of consistent performance delivered total shareholder returns that beat the REIT averages and most major equity indices over the past 1-, 3-, 5-, 10-, 15-, 20- and 25-year periods, respectively. Throughout this annual report, we will highlight specific details of our 2018 results. Rather than reiterate those outcomes in this letter, I want to highlight a few strengths of our business and culture that position us very well for the years ahead. $4.3B INVESTED IN RELATIONSHIP TENANTS SINCE 2010 29 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 ‘18 5 $2.00 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.90 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.80 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.70 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.60 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.50 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.40 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.30 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.20 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.10 _________________________________________________________________________________________________________________________________________________________________________________________________________ $1.00 _________________________________________________________________________________________________________________________________________________________________________________________________________OUR PEOPLE The team of 67 associates who come to work every day at National Retail Properties are some of the best in the business. A real competitive advantage for our company is the deep experience and long tenure of our associates. Our senior executive team averages over 18 years with the company, as does the next level of department heads and senior managers. Over half of our associates have been with the company for 10 years or longer, and over 70% have been with the company for at least five years. We foster a culture of teamwork and collaboration that emphasizes respect, recognition, professional development, diversity of thought, and support for our community. Our associates are true retail real estate experts, and to encourage continued learning and development we provide hundreds of hours of in-person and online training opportunities that touch on all aspects of our business. This commitment to our people results in deeper relationships with our tenants, more efficient execution of our business plan and invaluable “institutional memory.” I am constantly amazed and inspired by the “Yes I Can” attitude of our associates. OUR RETAIL REAL ESTATE National Retail Properties focuses solely on single tenant retail properties. We are retail real estate experts and we have not deviated from that core competency. The universe of available freestanding retail properties is vast, allowing us to be very selective in our underwriting. Our properties are typically small box buildings located at signalized intersections or along high traffic roads, with good access, signage and visibility and close proximity to homes and workplaces. The compelling real estate attributes of our properties and their flexibility for alternative uses are two of the major drivers of our consistently high occupancy rate. Our well-located and conveniently accessible properties retain enduring value, even as retailing continues its constant evolution. Conservative Balance Sheet Management (As of December 31, 2018 – based on total gross book assets) Common Equity 57.4% | $4,546.3 Million Unsecured Debt 34.4% | $2,724.4 Million Preferred Equity 8.0% | $632.5 Million Not Shown: $12.4 Million Secured Debt (0.2%) Top Lines of Trade (As a percentage of annualized base rent as of December 31, 2018) Convenience Stores | 18.0% Restaurants - Full Service | 11.4% Restaurants - Limited Service | 8.9% Automotive Service | 8.6% Family Entertainment Centers | 7.1% Health & Fitness | 5.6% Theaters | 5.0% Automotive Parts | 3.4% RV Dealers & Parts | 3.4% Wholesale Clubs | 2.3% (Remaining 27 categories make up 26.3%) 6 7NATIONAL RETAIL PROPERTIES8NATIONAL 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 6.5% $2.08 $1.93 $2.65 $2.52 $2.35 $2.22 2013 2014 2015 2016 2017 2018 TOP TENANTS AVERAGE APPROXIMATELY STORES EACH 25 1,100 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% 97.4% 96.9% 97.9% 98.2% 98.6% 99.1% 99.0% 99.1% 98.2% NNN 97.9% Average 93.5% 93.5% 93.0% 92.1% 92.8% 92.0% 92.7% 92.5% 92.0% 93.3% 93.5% 93.7%* 90.5% 90.1% 90.8% 90.7% 2003 2004 2005 2006 2007 2008 2009 2011 2010 Source: SNL Financial 2012 2013 2014 2015 2017 2016 * REIT Industry Average as of Q3 2018 2018 9 OUR TENANT RELATIONSHIPS One of the strategic moats around our business is our focus on building and maintaining deep relationships with our portfolio of large regional and national tenants. In 2018, we did business with 31 relationship tenants. Over the past three years we have done business with 61 relationship tenants, investing over $1.75B, and with those tenants, we develop a comprehensive win-win culture. To our tenants, a recurring relationship with National Retail Properties means reliability, certainty, and creative problem solving, as well as all the benefits that come from having a professional landlord that is a long-term holder, with no property level debt or joint ventures. These tenant relationships take years to build, and involve tremendous effort across our entire company. But it is worth it. When we acquire properties directly from our relationship tenants, we typically get the tenant’s better properties, at better-than-market yields, with a lease document that is tailored to our standards, all of which supports our high occupancy and high lease renewal statistics. OUR STABLE INCOME STREAM Our portfolio of 2,969 single tenant retail properties leased to strong regional and national tenants remains very healthy, at an occupancy rate of over 98%. The highly stable cash flow from our long-term triple net leases of single tenant retail properties is far superior, in our opinion, to the more variable cash flows from other property types in commercial real estate. Our tenants are primarily engaged in businesses focused on customer services, MARY MORRISON Senior Vice President, Financial Reporting and Operations Joined NNN in 1997 “One of the strengths of NNN has been a consistent conservative balance sheet philosophy that maximizes flexibility. We had $0 outstanding on our line of credit at December 31, 2018, and maintain below-average leverage and strong liquidity, providing significant flexibility in accessing capital markets.” Lease Expirations (As a percentage of annualized base rent as of December 31, 2018) Weighted average remaining lease term is 11.5 years 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 THEREAFTER 10 60% _________________________________________________________________________________________________________________________________________________________________________________________________________ 50% _________________________________________________________________________________________________________________________________________________________________________________________________________ 40% _________________________________________________________________________________________________________________________________________________________________________________________________________ 30% _________________________________________________________________________________________________________________________________________________________________________________________________________ 20% _________________________________________________________________________________________________________________________________________________________________________________________________________ 10% _________________________________________________________________________________________________________________________________________________________________________________________________________ 0% 11NATIONAL RETAIL PROPERTIES12NATIONAL RETAIL PROPERTIEScustomer experiences and e-commerce resistant consumer necessities. Our portfolio has little exposure to apparel or other retail concepts that are struggling with competition from Amazon or other e-commerce disruptors. And retailers do not like to relocate their stores. Historically, at the end of the lease term, around 80 to 85% of the time the tenant will renew its lease generally at its then-current rent, all without any investment by the landlord for tenant improvement or lease incentive payments. This high rate of renewal without any additional payment by the landlord is typically unheard of in other areas of commercial real estate. OUR FORTRESS-LIKE BALANCE SHEET Well before it was fashionable, we operated with a very conservative balance sheet philosophy. Our debt level remains low, our interest coverage and fixed charge ratios remain high and our investment grade rating of BBB+/Baa1 allows us to access low cost capital when the market makes it available. When our stock traded higher in the second half of 2018, we took the opportunity to raise well-priced equity and store more dry powder for future investments. During the year we also issued our first 30-year bonds at an impressive interest rate of 4.8%. Notably, we are one of very few REITs to have ever issued 30-year unsecured debt. The proceeds of that offering were used to redeem more expensive debt that was coming due in 2021. Thus, we further de-risked the balance sheet by extending our average maturities while also lowering our overall weighted SUSAN VEGA Investor Relations Representative Joined NNN in 2010 “Increasing our annual dividend for 29 consecutive years and having a 25-year average annual total return of 12.8% have been the result of consistently operating with a multi-year approach while having the ability to adapt as needed to any potential capital market and retail operator challenges.” 5-YEAR AVERAGE ANNUAL DIVIDEND GROWTH RATE OF 4.0% Nationwide Reach (As a percentage of annualized base rent as of December 31, 2018) West | 4.2% Rocky Mountain | 5.7% Midwest | 25.7% South | 22.4% Southeast | 26.7% Northeast | 15.3% 13 average cost of debt. And it is also worth noting that we have achieved our enviable results without relying on short-term and/or floating rate debt – we have appropriately financed long-term leased assets with long-term capital. Although our balance sheet has been strong and flexible for many years, in my opinion it has NEVER been stronger. As we look ahead to a future where many are predicting higher interest rates or a volatile capital market environment, we see very few companies that are better positioned than National Retail Properties to be able to continue to access capital and deliver per share growth to shareholders on a multi-year basis. OUR CONSISTENC Y No word better describes National Retail Properties than “consistent.” Consistent investment focus on single tenant retail properties. Consistency of people and culture. Consistently increasing the annual dividend for 29 consecutive years. Consistent conservative balance sheet philosophy that maintains flexibility and dry powder. Consistently delivering mid-single digits per share growth on a multi-year basis. The disciplined execution of our business plan on a steady, recurring – consistent – multi-year basis has rewarded our shareholders with total returns that exceed the REIT industry averages. We are not slow, but we are certainly steady…and steady wins the race. JON ADAMO Senior Vice President, Acquisitions Joined NNN in 2003 “Our consistent focus on developing and maintaining long-term relationships with growing retail operators has allowed us to offer more than just the lowest cap rate as our value proposition. This strategy has served us well in sourcing off-market opportunities, as evidenced in our results: over 80% of our dollars invested in 2018 were with a diversified pool of over 30 relationship tenants operating in 16 different lines of trade.” Well-Laddered Debt Maturities (As of December 31, 2018; percentages shown are stated interest rates) NNN’s low leverage balance sheet strategy is enhanced by its well-laddered debt maturity. 3.3% 3.9% 3.6% 3.8% 4.0% 3.5% 4.3% 4.8% 5.2% 2019 5.2% 2020 5.2% 2021 14 2022 2023 2024 2025 2026 2027 2028 2048 $ 450M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 400M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 350M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 300M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 250M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 200M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 150M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 100M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 50M _________________________________________________________________________________________________________________________________________________________________________________________________________$ 0M 15NATIONAL RETAIL PROPERTIESSmall disciplines repeated with CONSISTENCY every day lead to GREAT ACHIEVEMENTS gained slowly over time.16NATIONAL RETAIL PROPERTIES2019 WILL ONCE AGAIN REFLEC T THESE STRENGTHS Although many predict 2019 will be a year of increasing volatility and dramatic market shifts, and perhaps slower corporate earnings growth, we will continue to consistently execute our business strategy. Coupled with our safe and growing dividend, our business model positions us to continue producing a total shareholder return that we believe will exceed the REIT equity 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 JAY WHITEHURST President and Chief Executive Officer 12.8% PER YEAR AVERAGE ANNUAL TOTAL RETURN OVER THE PAST 25 YEARS Portfolio Growth (Number of properties owned as of December 31 for each respective year) 2,969 2,764 2,535 2,257 2,054 1,860 1,622 1,422 1,212 1,034 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 17 3,250 _________________________________________________________________________________________________________________________________________________________________________________________________________ 3,000 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,750 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,500 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,250 _________________________________________________________________________________________________________________________________________________________________________________________________________ 2,000 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,750 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,500 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,250 _________________________________________________________________________________________________________________________________________________________________________________________________________ 1,000 _________________________________________________________________________________________________________________________________________________________________________________________________________ 750191,046 191,170 190,601 4,915,551 1,729,891 3,082,515 204,157 19,047 16,387 — 1.24 1.24 1.65 1.656250 1.425000 — HISTORIC AL FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data) GROSS REVENUES(1) $ 624,471 $ 585,255 $ 533,817 $ 483,025 $ 435,278 2018 2017 2016 2015 2014 EARNINGS FROM CONTINUING OPERATIONS (2) NET EARNINGS NET EARNINGS ATTRIBUTABLE TO NNN TOTAL ASSETS TOTAL DEBT 292,485 292,485 292,447 265,371 265,371 264,973 239,506 239,506 239,500 197,961 197,961 197,836 7,103,438 6,560,534 6,334,151 5,460,044 2,851,395 2,580,207 2,311,689 3,916,799 1,975,944 3,342,134 TOTAL STOCKHOLDERS’ EQUITY OF NNN 4,154,250 3,840,593 CASH DIVIDENDS DECLARED TO: Common stockholders Series D preferred stockholders Series E preferred stockholders Series F preferred stockholders WEIGHTED AVERAGE COMMON SHARES: 303,164 — 16,387 17,940 277,120 3,598 16,387 17,940 257,007 228,699 19,047 16,387 3,189 19,047 16,387 — Basic Diluted 155,744,601 149,111,188 144,176,224 133,998,674 124,257,558 156,295,619 149,432,641 144,660,633 134,489,416 124,710,226 PER SHARE INFORMATION: Earnings from continuing operations and net earnings: $ 1.65 $ 1.45 $ 1.39 $ 1.21 $ Basic Diluted Cash dividends declared per share to: Common stockholders Series D preferred depositary stockholders Series E preferred depositary stockholders Series F preferred depositary stockholders 1.425000 1.300000 1.65 1.95 — 1.45 1.86 0.312847 1.425000 1.300000 1.38 1.78 1.656250 1.425000 0.231111 1.20 1.71 1.656250 1.425000 — OTHER DATA: Cash flows provided by (used in): Operating activities Investing activities Financing activities FUNDS FROM OPERATIONS – AVAILABLE TO COMMON STOCKHOLDERS(3) $ 471,909 $ 421,557 $ 415,337 $ 341,095 $ 296,733 (609,371) (625,557) (779,943) (644,544) (541,558) 250,365 395,337 (89,176) 359,179 644,886 330,544 307,105 289,193 253,944 260,902 (1) Gross revenues include the aggregate of total revenue and interest and other income found on the Consolidated Statements of Income and Comprehensive Income. (2) Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to change the presentation of gain on disposition of real estate on the Consolidated Statements of Income and Comprehensive Income. NNN has included gain on disposition of real estate as a component of earnings from operations to present gain and losses on dispositions of properties in accordance with ASC 360-10-45-5. The change was made for the prior periods as the Securities and Exchange Commission (the "Commission") has eliminated Rule 3-15(a) of Regulation S-X as part of Release No. 33-10532; 34-83875; IC-33203, which had required REITs to present gain and losses on disposition of properties outside of continuing operations in the income statement. (3) 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. 18 19NATIONAL RETAIL PROPERTIES20NATIONAL 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, 2018 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 every Interactive Data File required to be submitted 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 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, 2018 was $6,839,989,654. The number of shares of common stock outstanding as of January 31, 2019 was 161,618,400. . 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 2019 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 Item 16. Form 10-K Summary Signatures 1 6 15 15 15 15 16 19 21 38 39 67 67 68 69 69 69 69 69 70 75 76 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, (“TRS”). Statements contained in this Annual Report on Form 10-K, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Also, when NNN uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, NNN is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, NNN’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those NNN anticipates or projects are described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. NNN undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K. Item 1. Business The Company NNN, a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. NNN's assets are primarily real estate assets. NNN's consolidated financial statements are included in Item 8 of this Annual Report on Form 10-K. Real Estate Assets NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and are primarily held for investment ("Properties" or "Property Portfolio," or individually a "Property"). NNN owned 2,969 Properties with an aggregate gross leasable area of approximately 30,487,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.5 years as of December 31, 2018. Approximately 98 percent of the Properties were leased as of December 31, 2018. 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, 2019, NNN employed 68 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 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 "NNN/PE" and the depositary shares, each representing 1/100th of a share of 5.200% Series F Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series F Preferred Stock”), are traded on the NYSE under the symbol "NNN/PF." 1 Business Strategies and Policies The following is a discussion of NNN’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been set by management and the Board of Directors and, in general, may be amended or revised from time to time by management and the Board of Directors without a vote of NNN’s stockholders. Operating Strategies NNN’s strategy is to invest primarily in retail real estate that is typically well located within each local market for its tenants’ retail lines of trade. Management believes that these types of properties, generally leased pursuant to triple-net leases, provide attractive opportunities for stable current returns and the potential for increased returns and capital appreciation. Triple-net leases typically require the tenant to pay property operating expenses such as insurance, utilities, repairs, maintenance, capital expenditures and real estate taxes and assessments. Initial lease terms are generally 10 to 20 years. NNN holds 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 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 29 consecutive years. NNN is one of only three publicly traded REITs to increase its annual dividend per common share for 29 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, redevelopment, 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, any existing indebtedness encumbering the property which may be assumed in connection with acquiring or refinancing these investments, and the merits relative to other opportunities. 2 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, 2018, there was no outstanding balance and $900,000,000 was available for future borrowings under the Credit Facility. As of December 31, 2018, 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 25 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, 2018, NNN owned 2,969 Properties with an aggregate gross leasable area of approximately 30,487,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.5 years. Approximately 98 percent of total Properties were leased as of December 31, 2018. The following table summarizes the Property Portfolio at December 31, 2018 (in thousands): Land Building Size(1) Total Dollars Invested(2) High Low Average High Low Average 3,733 142 2 1 99 10 $ 8,882 $ 5 $ 817 45,286 19 1,889 Approximate square feet. (1) (2) Costs vary depending upon size, improvements, local market conditions and other factors. 3 As of December 31, 2018, NNN has committed to fund construction on 19 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of December 31, 2018, are outlined in the table below (dollars in thousands): Total commitment(1) Less amount funded Remaining commitment $ $ 34,756 13,588 21,168 (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, 2018, 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 $211,000), 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, 2018: % of Annual Base Rent(1) 1.7% 3.0% 3.8% 5.9% 2.9% 3.0% 2019 2020 2021 2022 2023 2024 # of Properties 51 116 121 124 113 75 Gross Leasable Area(2) 648,000 1,498,000 1,317,000 1,636,000 1,420,000 1,284,000 % of Annual Base Rent(1) 4.4% 5.0% 7.6% 5.0% 2025 2026 2027 2028 # of Properties 129 179 193 162 Gross Leasable Area(2) 1,130,000 1,697,000 2,600,000 1,188,000 Thereafter 57.7% 1,651 15,021,000 Based on annualized base rent for all leases in place as of December 31, 2018. (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. Wholesale clubs Other % of Annual Base Rent(1) 2018 18.0% 11.4% 8.9% 8.6% 7.1% 5.6% 5.0% 3.4% 3.4% 2.3% 2017 18.1% 12.1% 7.6% 6.9% 6.4% 5.6% 4.8% 3.6% 3.4% 2.2% 2016 16.9% 11.8% 7.5% 6.6% 5.8% 5.7% 4.9% 3.9% 3.4% 2.4% 26.3% 100.0% 29.3% 100.0% 31.1% 100.0% (1) Based on annualized base rent for all leases in place as of December 31 of the respective year. The following table summarizes the diversification of the Property Portfolio by state as of December 31, 2018: State Texas Florida Ohio Illinois North Carolina Georgia Tennessee Indiana Virginia 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Alabama Other # of Properties 472 219 195 141 148 143 138 125 114 132 1,142 2,969 % of Annual Base Rent(1) 17.3% 8.7% 5.7% 5.2% 4.6% 4.5% 3.9% 3.9% 3.7% 3.1% 39.4% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2018. As of December 31, 2018, 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 2023. 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 5, 2019, NNN has 74 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 5, 2019, 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 2022 and 2048. 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. Changes in established interest rate index could have an adverse affect on NNN's results of operations. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC has proposed that the market transition to SOFR from USD-LIBOR in 2021. NNN's Credit Facility is indexed to USD-LIBOR. Industry organizations are currently working on the transition plan. NNN is currently monitoring this activity and evaluating the risks involved. 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, 2018, approximately, • • • 54.0% of the Property Portfolio annual base rent is generated from tenants in five retail lines of trade, including convenience stores (18.0%) and full-service and limited-service restaurants (20.3%), 21.7% of the Property Portfolio annual base rent is generated from five tenants, 7-Eleven (5.4%), Mister Car Wash (4.4%), Camping World (4.3%), LA Fitness (4.0%) and Flynn Restaurant Group (Taco Bell/ Arby's) (3.6%), and 41.5% of the Property Portfolio annual base rent is generated from properties located in five states, including Texas (17.3%) and Florida (8.7%). 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. 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 8 NNN when required. Furthermore, NNN may have strict liability to governmental agencies or third parties as a result of the existence of hazardous materials on Properties, whether or not NNN knew about or caused such hazardous materials to exist. As of February 5, 2019, NNN has 74 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 2023. 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 under favorable terms 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 borrower. As of December 31, 2018, 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 needed for NNN to acquire underlying collateral, if any, in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. 9 Certain provisions of NNN’s leases or loan agreements may be unenforceable. NNN’s rights and obligations with respect to its leases, mortgage loans or other loans are governed by written agreements. A court could determine that one or more provisions of such an agreement are unenforceable, such as a particular remedy, a master lease covenant, a loan prepayment provision or a provision governing NNN’s security interest in the underlying collateral of a borrower or lessee. NNN could be adversely impacted if this were to happen with respect to an asset or group of assets. Property ownership through joint ventures and partnerships could limit NNN’s control of those investments. Joint ventures or partnerships involve risks not otherwise present for direct investments by NNN. It is possible that NNN’s co-venturers or partners may have different interests or goals than NNN at any time and they may take actions contrary to NNN’s requests, policies or objectives, including NNN’s policy with respect to maintaining its qualification as a REIT. Other risks of joint venture or partnership investments include impasses on decisions because in some instances no single co- venturer or partner has full control over the joint venture or partnership, respectively, or the co-venturer or partner may become insolvent, bankrupt or otherwise unable to contribute to the joint venture or partnership, respectively. Further, disputes may develop with a co-venturer or partner over decisions affecting the property, joint venture or partnership that may result in litigation, arbitration or some other form of dispute resolution. Competition from numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN’s ability to grow. NNN may not complete suitable property acquisitions or developments on advantageous terms, if at all, due to competition for such properties with others engaged in real estate investment activities or lack of properties for sale on terms deemed acceptable to NNN. NNN’s inability to successfully acquire or develop new properties may affect NNN’s ability to achieve anticipated return on investment or realize its investment strategy, which could have an adverse effect on its results of operations. NNN's loss of key management personnel could adversely affect performance and the value of its securities. NNN is dependent on the efforts of its key management. Competition for senior management personnel can be intense and NNN may not be able to retain its key management. Although NNN believes qualified replacements could be found for any departures of key management, the loss of their services could adversely affect NNN's performance and the value of its securities. 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, 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. 10 Vacant properties or bankrupt tenants could adversely affect NNN’s business or financial condition. As of December 31, 2018, NNN owned 52 vacant, un-leased Properties, which accounted for approximately two 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, 2019, less than one percent of total Properties held in the Property Portfolio was leased to one tenant that filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, this tenant has the right to reject or affirm its 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, 2018, NNN had outstanding debt, including mortgages payable, of $12,694,000, total unsecured notes payable of $2,838,701,000 and no outstanding balance 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, 2018, NNN had approximately $2,851,395,000 of outstanding indebtedness, of which approximately $12,694,000 was secured indebtedness. NNN’s unsecured debt instruments contain various restrictive covenants which include, among others, provisions restricting NNN’s ability to: • • • • • • incur or guarantee additional debt, make certain distributions, investments and other restricted payments, enter into transactions with certain affiliates, create certain liens, consolidate, merge or sell NNN’s assets, and pre-pay debt. NNN’s secured debt instruments generally contain customary covenants, including, among others, provisions: • • • • • • requiring the maintenance of the property securing the debt, restricting its ability to sell, assign or further encumber the properties securing the debt, restricting its ability to incur additional debt on the property securing the debt, restricting modifications to property improvements, restricting its ability to amend or modify existing leases on the property securing the debt, and establishing certain prepayment restrictions. In addition, NNN’s debt instruments may contain cross-default provisions, in which case a default of NNN under one debt instrument will be a default of NNN under multiple or all debt instruments of NNN. NNN’s ability to meet some of its debt covenants, including covenants related to the condition of the property or payment of real estate taxes, may be dependent on the performance by NNN’s tenants under their leases. In addition, certain covenants in NNN’s debt instruments, including its Credit Facility, require NNN, among other things, to: • • • limit certain leverage ratios, maintain certain minimum interest and debt service coverage ratios, and limit investments in certain types of assets. NNN’s failure to comply with certain of its debt covenants could result in defaults that accelerate the payment under such debt and limit the dividends paid to NNN’s common and preferred stockholders which would likely have a material adverse impact on NNN’s financial condition and results of operations. In addition, these defaults could impair its access to the debt and equity markets. The market value of NNN’s equity and debt securities is subject to various factors that may cause significant fluctuations or volatility. As with other publicly traded securities, the market price of NNN’s equity and debt securities depends on various factors, which may change from time-to-time and/or may be unrelated to NNN’s financial condition, operating performance or prospects that may cause significant fluctuations or volatility in such prices. These factors, among others, include: • • • • • • • • • • general economic and financial market conditions, level and trend of interest rates, changes in government taxation or regulatory authorities, NNN’s ability to access the capital markets to raise additional capital, the issuance of additional equity or debt securities, changes in NNN’s funds from operations or earnings estimates, changes in NNN’s debt ratings or analyst ratings, NNN’s financial condition and performance, market perception of NNN compared to other REITs, and market perception of REITs compared to other investment sectors. 12 NNN’s failure to qualify as a REIT for federal income tax purposes could result in significant tax liability. NNN intends to operate in a manner that will allow NNN to continue to qualify as a REIT. NNN believes it has been organized as, and its past and present operations qualify NNN as a REIT. However, the Internal Revenue Service (“IRS”) could successfully assert that NNN is not qualified as such. In addition, NNN may not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”) for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within NNN’s control. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for NNN to qualify as a REIT or avoid significant tax liability. If NNN fails to qualify as a REIT, it would not be allowed a deduction for dividends paid to stockholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, NNN could be subject to potentially significant tax liabilities and penalties. Unless entitled to relief under certain statutory provisions, NNN would also be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost. Even if NNN remains qualified as a REIT, NNN faces other tax liabilities that reduce operating results and cash flow. Even if NNN remains qualified for taxation as a REIT, NNN is subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Any 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 may elect to own some of its assets in a 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 entities 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, 2018, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state income, franchise and excise taxes. 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. NNN uses information technology and other computer resources to carry out important operational activities and to maintain its business records. As part of NNN’s normal business activities, NNN collects and stores certain personal identifying and confidential information relating to its tenants, employees, vendors and suppliers, and maintains operational and financial information related to NNN’s business. NNN has implemented systems and processes intended to address ongoing and evolving cybersecurity risks, secure its information technology, applications and computer systems, and prevent unauthorized access to or loss of sensitive, confidential and personal data. Although NNN and its service providers employ what NNN believes are adequate security, disaster recovery and other preventative and corrective measures, NNN’s security measures, taken as a whole, may not be sufficient for all possible situations and may be vulnerable to, among other things, hacking, employee error, system error, and faulty password management. NNN’s ability to conduct its business may be impaired if its information technology resources, including its websites or e- mail systems, are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of its information technology resources by: • • • • • • • • a third party, natural disaster, a failure of hardware or software due to a design or programmatic flaw, a failure of hardware or software security controls, telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions, or lost connectivity to NNN’s networked resources. A significant and extended disruption could damage NNN’s business or reputation and cause: • • lose of revenues or tenant relations, unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information, and • NNN to incur significant expenses to address and remediate or otherwise resolve these kinds of issues. The release of confidential information may also lead to litigation or other proceedings against NNN by affected individuals, business partners and/or regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against NNN’s earnings and cause NNN reputational harm, could have a material and adverse effect on NNN’s business, financial position or results of operations. In addition, the costs of maintaining adequate protection against data security threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or government-mandated standards or obligations 14 regarding protective efforts, could be material to NNN’s financial position or results of operations in a particular period or over various periods. 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. 15 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, 2013 and ending December 31, 2018. The graph assumes an investment of $100 on December 31, 2013. Comparison to Five-Year Cumulative Total Return 16 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, 2008 and ending December 31, 2018. The graph assumes an investment of $100 on December 31, 2008. Comparison to Ten-Year Cumulative Total Return 17 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. 2018 High Low Close Dividends paid per share 2017 High Low Close Dividends paid per share First Quarter Second Quarter Third Quarter Fourth Quarter Year $ 43.32 $ 44.13 $ 46.44 $ 51.48 $ 36.25 39.26 0.475 36.95 43.96 0.475 43.04 44.82 0.500 42.97 48.51 0.500 $ 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 51.48 36.25 48.51 1.950 46.34 36.45 43.13 1.860 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 2018 2017 $ 1.658604 85.0566% (1) $ 0.015534 0.042818 0.233044 0.7966% 2.1958% 11.9510% 1.559781 0.035041 0.012194 0.252984 83.8592% 1.8839% 0.6556% 13.6013% $ 1.950000 100.0000% $ 1.860000 100.0000% (1) Eligible for the 20% qualified business income deduction under section 199A of the Code that was established by the Tax Cuts and Jobs Act signed into law on December 22, 2017, ("TCJA"). 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 2019, NNN declared dividends payable to its stockholders of $80,566,000, or $0.500 per share, of common stock. On January 31, 2019, there were 1,746 registered holders of record of NNN's common stock. 18 Item 6. Selected Financial Data Historical Financial Highlights (dollars in thousands, except per share data) Gross revenues(1) Earnings from continuing operations (2) 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 Earnings from continuing operations per share and net earnings per share: Basic Diluted Cash dividends declared per share 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 2018 2017 2016 2015 2014 $ 624,471 $ 585,255 $ 533,817 $ 483,025 $ 435,278 292,485 292,485 292,447 7,103,438 2,851,395 4,154,250 265,371 265,371 264,973 6,560,534 2,580,207 3,840,593 239,506 239,506 239,500 6,334,151 2,311,689 3,916,799 303,164 277,120 257,007 — 16,387 17,940 3,598 16,387 17,940 19,047 16,387 3,189 197,961 197,961 197,836 5,460,044 1,975,944 3,342,134 228,699 19,047 16,387 — 191,046 191,170 190,601 4,915,551 1,729,891 3,082,515 204,157 19,047 16,387 — 155,744,601 149,111,188 144,176,224 133,998,674 124,257,558 156,295,619 149,432,641 144,660,633 134,489,416 124,710,226 1.65 1.65 1.95 — 1.425000 1.300000 1.45 1.45 1.86 1.39 1.38 1.78 1.21 1.20 1.71 1.24 1.24 1.65 0.312847 1.425000 1.300000 1.656250 1.425000 0.231111 1.656250 1.425000 — 1.656250 1.425000 — $ 471,909 $ 421,557 $ 415,337 $ 341,095 $ 296,733 (609,371) (625,557) (779,943) (644,544) (541,558) 250,365 (89,176) 644,886 307,105 253,944 Funds from operations – available to common stockholders(3) 395,337 359,179 330,544 289,193 260,902 (1) Gross revenues include the aggregate of total revenue and interest and other income found on the Consolidated Statements of Income and Comprehensive Income. (2) Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to change the presentation of gain on disposition of real estate on the Consolidated Statements of Income and Comprehensive Income. NNN has included gain on disposition of real estate as a component of earnings from operations to present gain and losses on dispositions of properties in accordance with ASC 360-10-45-5. The change was made for the prior periods as the Securities and Exchange Commission (the "Commission") has eliminated Rule 3-15(a) of Regulation S-X as part of Release No. 33-10532; 34-83875; IC-33203, which had required REITs to present gain and losses on disposition of properties outside of continuing operations in the income statement. (3) 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, 19 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 $ 258,120 $ 217,193 $ 200,877 $ 162,402 $ 155,167 2018 2017 2016 2015 2014 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 174,076 173,404 148,779 134,380 115,888 — — — — 3 (65,070) (36,258) (27,137) (10,397) (10,904) 28,211 4,840 8,025 2,808 748 FFO available to common stockholders $ 395,337 $ 359,179 $ 330,544 $ 289,193 $ 260,902 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.” 20 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, ("TRS"). 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 2,969 Properties with an aggregate gross leasable area of approximately 30,487,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.5 years as of December 31, 2018. Approximately 98 percent of the Properties were leased as of December 31, 2018. 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 its 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, 2018, 2017 and 2016, the Property Portfolio has remained at least 98 percent leased. As of December 31, 2018, 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 other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. 21 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 on the Consolidated Statements of Income and Comprehensive Income. 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, 2018, Consolidated Financial Statements for a summary and the anticipated impact of each accounting pronouncement on NNN's financial position or results of operations. 22 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 2018 2017 2016 2,969 2,764 2,535 30,487,000 29,093,000 27,204,000 2,917 98% 11.5 2,740 99% 11.5 2,508 99% 11.6 29,439,000 28,703,000 26,700,000 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, 2018: % of Annual Base Rent(1) 1.7% 3.0% 3.8% 5.9% 2.9% 3.0% # of Properties 51 116 121 124 113 75 2019 2020 2021 2022 2023 2024 Gross Leasable Area(2) 648,000 1,498,000 1,317,000 1,636,000 2025 2026 2027 2028 % of Annual Base Rent(1) 4.4% 5.0% 7.6% 5.0% # of Properties 129 179 193 162 Gross Leasable Area(2) 1,130,000 1,697,000 2,600,000 1,188,000 1,420,000 Thereafter 57.7% 1,651 15,021,000 1,284,000 (1) Based on the annualized base rent for all leases in place as of December 31, 2018. (2) Approximate square feet. The following table summarizes the diversification of the Property Portfolio based on the top 10 lines of trade: Top 10 Lines of Trade Convenience stores Restaurants - full service Restaurants - limited service Automotive service Family entertainment centers Health and fitness Theaters Automotive parts Recreational vehicle dealers, parts and accessories 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Wholesale clubs Other % of Annual Base Rent(1) 2018 18.0% 11.4% 8.9% 8.6% 7.1% 5.6% 5.0% 3.4% 3.4% 2.3% 2017 18.1% 12.1% 7.6% 6.9% 6.4% 5.6% 4.8% 3.6% 3.4% 2.2% 2016 16.9% 11.8% 7.5% 6.6% 5.8% 5.7% 4.9% 3.9% 3.4% 2.4% 26.3% 100.0% 29.3% 100.0% 31.1% 100.0% (1) Based on annualized base rent for all leases in place as of December 31 of the respective year. 23 The following table summarizes the diversification of the Property Portfolio by state as of December 31, 2018: State Texas Florida Ohio Illinois North Carolina Georgia Tennessee Indiana Virginia 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Alabama Other # of Properties 472 219 195 141 148 143 138 125 114 132 % of Annual Base Rent(1) 17.3% 8.7% 5.7% 5.2% 4.6% 4.5% 3.9% 3.9% 3.7% 3.1% 1,142 2,969 39.4% 100.0% (1) Based on annualized base rent for all leases in place as of December 31, 2018. Property Acquisitions. The following table summarizes the Property acquisitions for each of the years ended December 31 (dollars in thousands): Acquisitions: Number of Properties 2018 2017 2016 265 276 313 Gross leasable area (square feet) 2,167,000 2,243,000 2,734,000 Initial cash yield Total dollars invested(1) 6.8% 6.9% 6.9% $ 715,572 $ 754,892 $ 846,906 (1) Includes dollars invested in projects under construction or tenant improvements for each respective year. NNN typically funds Property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the "Credit Facility") or by issuing its debt or equity securities in the capital markets. Property Dispositions. The following table summarizes the Properties sold by NNN for each of the years ended December 31 (dollars in thousands): Number of properties Gross leasable area (square feet) Net sales proceeds Gain on disposition of real estate Cap rate 2018 2017 2016 61 686,000 147,646 65,070 5.1% $ $ 48 346,000 96,757 36,655 6.0% $ $ 38 490,000 103,215 27,182 6.8% $ $ NNN typically uses the proceeds from a Property disposition to either pay down the Credit Facility or reinvest in real estate. 24 Analysis of Revenue General. During the year ended December 31, 2018, 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): 2018 2017 2016 Percent of Total 2017 2018 2016 2018 Versus 2017 Percent 2017 Versus 2016 Percent Rental Income(1) Real estate expense reimbursement from tenants Interest and other income from real estate transactions Total revenues $ 604,615 $ 568,083 $ 515,954 97.1% 97.1% 96.7% 6.4 % 10.1 % 16,784 15,512 14,984 1,262 1,338 2,709 2.7% 0.2% 2.7% 0.2% 2.8% 0.5% $ 622,661 $ 584,933 $ 533,647 100.0% 100.0% 100.0% 8.2 % 3.5 % (5.7)% 6.4 % (50.6)% 9.6 % (1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent ("Rental Income"). Comparison of Revenues – 2018 versus 2017 Rental Income. Rental Income increased in amount but remained flat as a percent of the total revenues for the year ended December 31, 2018 as compared to the same period in 2017. The increase for the year ended December 31, 2018 is primarily due to a partial year of Rental Income received as a result of the acquisition of 265 Properties with aggregate gross leasable area of approximately 2,167,000 square feet during 2018 and a full year of Rental Income received as a result of the acquisition of 276 Properties with a gross leasable area of approximately 2,243,000 square feet in 2017. 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 square feet 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. 25 Analysis of Expenses General. Operating expenses increased primarily due to an increase in impairment losses recognized on real estate during the year ended December 31, 2018, as compared to the same period in 2017. 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 Loss on early extinguishment of debt Total other expenses (revenues) 2018 2017 2016 $ 34,248 $ 33,805 $ 25,099 174,398 — 28,211 1,013 23,105 173,720 — 8,955 7,845 36,508 20,852 149,101 6,830 11,287 — $ $ 262,969 $ 247,430 $ 224,578 (1,810) $ (322) $ 115,847 — 18,240 109,109 — — (170) 96,352 563 — $ 132,277 $ 108,787 $ 96,745 General and administrative Real estate Percentage of Total Expenses Percentage of Revenues 2018 2017 2016 2018 2017 2016 13.0 % 13.7 % 16.3 % 9.6 % 9.3 % 9.3 % 5.5 % 4.0 % 5.8 % 4.0 % 6.9% 3.9% Depreciation and amortization 66.3 % 70.2 % 66.4 % 28.0 % 29.7 % 27.9% 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 Loss on early extinguishment of debt — — 3.0 % — — 10.7 % 0.4 % 3.6 % 3.2 % 5.0 % — 4.5 % 0.2 % 1.5 % 1.3 % 1.3% 2.1% — 100.0 % 100.0 % 100.0 % 42.2 % 42.3 % 42.1% (1.4)% (0.3)% (0.2)% (0.3)% (0.1)% — 462.1 % 87.6 % 100.3 % 99.6 % 18.6 % 18.7 % 18.1% — 13.8 % — — 0.6 % — — 2.9 % — — 0.1% — Total other expenses (revenues) 100.0 % 100.0 % 100.0 % 21.2 % 18.6 % 18.2% (1) Not calculable ("N/C") Comparison of Expenses – 2018 versus 2017 2018 Versus 2017 Percent 2017 Versus 2016 Percent 1.3 % 8.6 % 0.4 % (7.4)% 10.8 % 16.5 % — (100.0)% 215.0 % (87.1)% 6.3 % 6.2 % — N/C (1) 21.6 % (20.7)% N/C (1) 10.2 % 89.4 % 13.2 % (100.0)% — 12.4 % General and Administrative Expenses. General and administrative expenses increased in amount but decreased as a percentage of total operating expenses and as a percentage of revenues for the year ended December 31, 2018, as compared to the same period in 2017. The increase in general and administrative expenses for the year ended December 31, 2018, is primarily attributable to an increase in compensation costs. 26 Real Estate. Real estate expenses increased in amount and as a percentage of total operating expenses and remained flat as a percentage of revenues for the year ended December 31, 2018, as compared to the same period in 2017. NNN focuses on real estate expenses, net of reimbursements from tenants. NNN's net real estate expenses for the years ended December 31, 2018 and 2017 were $8,315,000 and $7,593,000, respectively. The increase is primarily attributable to expenses from certain properties that became vacant during the years ended December 31, 2018 and 2017. Depreciation and Amortization. Depreciation and amortization expenses increased in amount but decreased as a percentage of total operating expenses and as a percentage of revenues for the year ended December 31, 2018, as compared to the same period in 2017. The increase in expenses is primarily due to the acquisition of 265 Properties with an aggregate gross leasable area of approximately 2,167,000 square feet in 2018 and 276 Properties with an aggregate gross leasable area of approximately 2,243,000 square feet during 2017. 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, 2018 and 2017, NNN recorded $28,211,000 and $4,953,000, respectively, of real estate impairments. NNN also recorded a $4,000,000 contract dispute settlement charge during the year ended December 31, 2017. Retirement Severance Costs. For the years ended December 31, 2018 and 2017, retirement severance costs relate primarily to Craig Macnab's retirement as CEO on April 28, 2017. Interest Expense. Interest expense increased in amount, decreased as a percentage of total other expenses (revenues) and remained relatively flat as a percentage of revenues for the year ended December 31, 2018, as compared to the same period in 2017. The following represents the primary changes in debt that have impacted interest expense: (i) (ii) (iii) (iv) (v) (vi) 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%, the issuance in September 2018 of $400,000,000 principal amount of notes payable with a maturity of October 2028, and stated interest rate of 4.300%, the issuance in September 2018 of $300,000,000 principal amount of notes payable with a maturity of October 2048, and stated interest rate of 4.800%, the redemption in October 2018 of $300,000,000 principal amount of notes payable with a maturity of July 2021, and stated interest rate of 5.500%, and the increase of $23,341,000 in the weighted average outstanding balance on the Credit Facility and a higher weighted average interest rate for the year ended December 31, 2018, as compared to the same period in 2017. Loss on Early Extinguishment of Debt. In October 2018, NNN redeemed the $300,000,000 5.500% notes payable that were due in July 2021. The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of $18,240,000, and (ii) all accrued and unpaid interest. 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. 27 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 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. 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. 28 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, 2018, there was no outstanding balance and $900,000,000 was available for future borrowings under the Credit Facility. NNN anticipates its long-term capital needs will be funded by the Credit Facility, cash provided from operations, the issuance of long-term debt or the issuance of common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN. Cash and Cash Equivalents. 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 2018 2017 2016 $ 471,909 $ 421,557 $ 415,337 (609,371) 250,365 112,903 1,364 (625,557) (89,176) (293,176) 294,540 $ 114,267 $ 1,364 $ (779,943) 644,886 280,280 14,260 294,540 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, 2018, 2017 and 2016, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future. Changes in cash for investing activities are primarily attributable to acquisitions and dispositions of Properties. NNN typically uses proceeds from its Credit Facility to fund the acquisition of its Properties. NNN’s financing activities for the year ended December 31, 2018, included the following significant transactions: • • • • • • • • • $393,502,000 in net proceeds from the issuance in September of the 4.300% notes payable due in October 2028, $292,386,000 in net proceeds from the issuance in September of the 4.800% notes payable due in October 2048, $300,000,000 in redemption of the 5.500% notes payable in October, $18,240,000 payment of the make-whole amount from the early redemption of the 5.500% notes payable in October, $13,264,000 in net proceeds from the issuance of 311,048 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), $328,196,000 in net proceeds from the issuance of 7,378,163 shares of common stock in connection with the at-the-market ("ATM") equity program, $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 $303,164,000 in dividends paid to common stockholders. 29 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, 2018, there was no outstanding balance and $900,000,000 was available for future borrowings under the Credit Facility. As of December 31, 2018, 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 25 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, 2018. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2018. Expected Maturity Date (dollars in thousands) Long-term debt(1) Long-term debt – interest(2) Operating lease Total 2019 2020 2021 2022 2023 Thereafter $ 2,887,404 $ 567 $ 596 $ 630 $ 325,664 $ 359,947 $ 2,200,000 1,104,365 112,394 112,365 112,331 109,724 91,520 566,031 4,991 758 773 788 804 821 1,047 Total contractual cash obligations $ 3,996,760 $ 113,719 $ 113,734 $ 113,749 $ 436,192 $ 452,288 $ 2,767,078 (1) (2) Includes only principal amounts outstanding under mortgages payable and notes payable and excludes unamortized mortgage premiums, note discounts and note costs. Interest calculation based on stated rate of the principal amount. In addition to the contractual obligations outlined above, NNN has committed to fund construction on 19 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, at December 31, 2018, are outlined in the table below (dollars in thousands): Total commitment(1) Less amount funded Remaining commitment $ $ 34,756 13,588 21,168 (1) Includes land, construction costs, tenant improvements, lease costs and capitalized interest As of December 31, 2018, 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. 30 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, 2018, NNN owned 52 vacant, un-leased Properties which accounted for approximately two percent of total Properties held in the Property Portfolio. Additionally, as of January 31, 2019, less than one percent of total Properties held in the Property Portfolio was leased to one tenant that filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, this tenant has the right to reject or affirm its leases with NNN. NNN generally monitors the financial performance of its significant tenants on an ongoing basis. Dividends. 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 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 is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends, while retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT. 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 $ 2018 303,164 1.950 $ 2017 277,120 1.860 $ 2016 257,007 1.780 The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31: 2018 2017 2016 Ordinary dividends Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions $ 1.658604 85.0566% (1) $ 0.015534 0.042818 0.233044 0.7966% 2.1958% 11.9510% 1.559781 0.035041 0.012194 0.252984 83.8592% $ 1.513705 85.0396% 1.8839% 0.6556% — — — — 13.6013% 0.266295 14.9604% $ 1.950000 100.0000% $ 1.860000 100.0000% $ 1.780000 100.0000% (1) Eligible for the 20% qualified business income deduction under section 199A of the Code that was established by the Tax Cuts and Jobs Act signed into law on December 22, 2017, ("TCJA"). On January 15, 2019, NNN declared a dividend of $0.500 per share, payable February 15, 2019, to its common stockholders of record as of January 31, 2019. 31 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 2018 2017 2016 $ — $ — 3,598 0.312847 $ 19,047 1.656250 16,387 1.425000 16,387 1.425000 16,387 1.425000 17,940 1.300000 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. As of May 2018, the Series E Preferred Stock is redeemable by NNN. (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. 32 The following presents the characterizations for tax purposes of such preferred stock dividends for the years ended December 31: 2018 Percentage of Total Series E Series F (2) 2017 Percentage of Total Series D (1) Series E Series F (2) 2016 Percentage of Total Ordinary Dividends Capital Gain Unrecaptured Section 1250 Gain Totals 96.6015% (3) 0.9047% 2.4938% 100.0000% $ 1.376571 $ 1.255820 $ 0.012892 $ 0.011761 $ 0.035537 $ 0.032419 $ 1.425000 $ 1.300000 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% — — 100.0000% Series D (1) $ 1.656250 $ 1.425000 Series E Series F (2) $ 0.231111 (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. — — — — — — $ 1.656250 $ 1.425000 $ 0.231111 (2) The Series F Preferred Stock was issued in October 2016. (3) Eligible for the 20% qualified business income deduction under section 199A of the Code as established by the TCJA. 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 Total outstanding debt $ 2018 — 12,694 2,838,701 Percentage of Total 2017 Percentage of Total — $ 120,500 0.4% 99.6% 13,300 2,446,407 4.7% 0.5% 94.8% 100.0% $ 2,851,395 100.0% $ 2,580,207 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. 33 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 $121,587,000 and a weighted average interest rate of 2.8% for the year ended December 31, 2018. The Credit Facility matures January 2022, unless the Company exercises its option to extend maturity to January 2023. As of December 31, 2018, 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, 2018, there was no outstanding balance and $900,000,000 was available for future borrowings under the Credit Facility. In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain certain (i) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment limitations. At December 31, 2018, 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, 2018 and 2017, NNN had mortgages payable, including unamortized premium and net of unamortized debt costs, of $12,694,000 and $13,300,000 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 $20,430,000 at December 31, 2018. Notes Payable. Each of NNN’s outstanding series of unsecured 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 2022 2023(4) 2024(5) 2025(6) 2026(7) 2027(8) 2028(9) 2048 August 2012 $ 325,000 $ 4,989 $ 320,011 3.800% 3.985% October 2022 April 2013 May 2014 October 2015 December 2016 September 2017 September 2018 September 2018 350,000 350,000 400,000 350,000 400,000 400,000 300,000 2,594 347,406 3.300% 3.388% April 2023 707 964 3,860 1,628 2,848 4,239 349,293 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 397,152 4.300% 4.388% October 2028 295,761 4.800% 4.890% October 2048 (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. Proceeds from the issuance of the 2028 Notes and the 2048 Notes were also used to redeem all of the $300,000 5.500% notes payable that were due 2021. (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 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. 34 (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. (9) NNN entered into two forward starting swaps with an aggregate notional amount of $250,000. Upon issuance of the 2028 Notes, NNN terminated the forward starting swaps resulting in a gain of $4,080, which was deferred in other comprehensive income. The gain 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 all 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 $26,932,000 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 October 2018, NNN redeemed the $300,000,000 5.500% notes payable that were due in July 2021. The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of $18,240,000, and (ii) all accrued and unpaid interest. 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, 2018, 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 2018, 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. 35 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 May 2018, the Series E Preferred Stock Shares are redeemable by NNN. As of February 12, 2019, the Series F Preferred Stock Shares were not redeemable. 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 2018, 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 10,000,000 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 2018 2017 2016 311,048 229,696 $ 13,264 $ 9,391 $ 187,626 8,340 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, 2018 2018 ATM 2016 ATM 2015 ATM February 2018 March 2016 February 2015 February 2021 February 2018 March 2016 12,000,000 7,378,163 12,000,000 10,044,656 10,000,000 9,852,465 The following table outlines the common stock issuances pursuant to NNN's ATM equity programs (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, 2018 2017 2016 7,378,163 5,821,366 5,716,222 $ $ $ 44.48 328,196 3,821 $ $ $ 41.88 243,822 3,782 $ $ $ 46.48 265,696 4,266 (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. 36 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 year ended December 31, 2016, NNN recorded an other than temporary valuation impairment of $6,830,000, 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, 2018 and 2017, the remaining two Residuals are recorded at a fair value of $36,000 and included in other assets on the Consolidated Balance Sheets. There were no other than temporary valuation impairments recorded during the years ended December 31, 2018 and 2017. 37 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, 2018, 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, 2018 and 2017. The table presents principal payments and related interest rates by year for debt obligations outstanding as of December 31, 2018. NNN has a variable interest rate risk on its Credit Facility which had no outstanding balance as of December 31, 2018 and $120,500,000 as of December 31, 2017. The weighted average rate for the Credit Facility for the year ended December 31, 2018 was 2.8%. The table incorporates only those debt obligations that existed as of December 31, 2018, 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 approximately one percent for the year ended December 31, 2018. Debt Obligations (dollars in thousands) 2019 2020 2021 2022 2023 Thereafter Total Fair Value: December 31, 2018 December 31, 2017 Fixed Rate Debt Mortgages(1) Unsecured Debt(2) Debt Obligation Weighted Average Interest Rate Debt Obligation Effective Interest Rate $ $ $ $ 652 682 716 750 9,968 — 5.23% 5.23% 5.23% 5.23% 5.23% — 12,768 5.23% 12,768 13,392 $ $ $ $ — — — — — — 322,903 3.99% 348,780 2,187,246 3.39% 4.06% (3) 2,858,929 3.97% 2,813,583 2,507,106 (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 2023. 38 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. 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, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the related notes and financial statement schedule listed in the Index at Item15(a) and our report dated February 12, 2019 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 Orlando, Florida February 12, 2019 39 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of National Retail Properties, Inc. 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, 2018 and 2017, 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, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 12, 2019 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 We have served as the Company’s auditor since 2006. Orlando, Florida February 12, 2019 40 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) Real estate portfolio: ASSETS December 31, 2018 December 31, 2017 Accounted for using the operating method, net of accumulated depreciation and amortization $ 6,853,757 $ 6,403,638 Accounted for using the direct financing method Real estate held for sale Cash and cash equivalents Receivables, net of allowance of $2,273 and $1,119, respectively Accrued rental income, net of allowance of $1,842 and $1,936, respectively Debt costs, net of accumulated amortization of $14,118 and $12,667, 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 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; 161,503,585 and 153,577,028 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 8,069 13,606 114,267 3,797 25,387 4,081 80,474 9,650 29,373 1,364 4,317 25,916 5,380 80,896 $ 7,103,438 $ 6,560,534 $ — $ 12,694 120,500 13,300 2,838,701 2,446,407 19,519 77,919 20,311 119,106 2,948,833 2,719,624 287,500 287,500 345,000 345,000 1,616 1,537 3,950,055 3,599,475 (424,225) (5,696) (379,181) (13,738) 4,154,250 3,840,593 355 317 4,154,605 3,840,910 $ 7,103,438 $ 6,560,534 See accompanying notes to consolidated financial statements. 41 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (dollars in thousands, except per share data) Revenues: Rental income from operating leases Earned income from direct financing leases Percentage rent Real estate expense reimbursement from tenants Interest and other income from real estate transactions Operating expenses: General and administrative Real estate Depreciation and amortization Impairment – commercial mortgage residual interests valuation Impairment losses – real estate and other charges, net of recoveries Retirement severance costs Gain on disposition of real estate Earnings from operations Other expenses (revenues): Interest and other income Interest expense Real estate acquisition costs Loss on early extinguishment of debt Net earnings Earnings attributable to noncontrolling interests Net earnings attributable to NNN Year Ended December 31, 2018 2017 2016 $ 602,131 $ 565,405 $ 512,883 923 1,561 16,784 1,262 978 1,700 15,512 1,338 1,336 1,735 14,984 2,709 622,661 584,933 533,647 34,248 25,099 174,398 — 28,211 1,013 262,969 65,070 424,762 (1,810) 115,847 — 18,240 132,277 292,485 (38) 33,805 23,105 173,720 — 8,955 7,845 247,430 36,655 374,158 (322) 109,109 — — 108,787 265,371 (398) 36,508 20,852 149,101 6,830 11,287 — 224,578 27,182 336,251 (170) 96,352 563 — 96,745 239,506 (6) $ 292,447 $ 264,973 $ 239,500 See accompanying notes to consolidated financial statements. 42 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 available 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 interest rate hedges 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, 2018 2017 2016 $ 292,447 $ 264,973 $ 239,500 — (16,387) (17,940) (3,598) (16,387) (17,940) (19,047) (16,387) (3,189) — (9,855) — 258,120 $ 217,193 $ 200,877 1.65 1.65 $ $ 1.45 1.45 $ $ 1.39 1.38 $ $ $ 155,744,601 149,111,188 144,176,224 156,295,619 149,432,641 144,660,633 $ 292,447 $ 264,973 $ 239,500 3,664 4,080 — 298 1,932 (7,688) — 209 2,802 13,345 (4,454) 468 $ 300,489 $ 259,426 $ 251,661 See accompanying notes to consolidated financial statements. 43 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years Ended December 31, 2018, 2017 and 2016 (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 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 13,345 (19,047) (16,387) (3,189) (249,056) 334,103 1,148 389 269,962 (262) (4,266) 9,609 2,802 13,345 (182) (182) (4,272) (4,272) 468 — 468 — — — — — — — — — — — — — — — — — (136) (19,047) (16,387) (3,189) (249,056) 334,103 1,148 389 269,962 (262) (4,266) 9,609 2,802 13,345 (182) (4,272) 468 (136) Balances at December 31, 2016 $ 287,500 $ 287,500 $ 345,000 $ 1,473 $3,322,771 $ (319,254) $ (8,191) $ 3,916,799 $ 129 $ 3,916,928 See accompanying notes to consolidated financial statements. 44 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED Years Ended December 31, 2018, 2017 and 2016 (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 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 (7,688) 209 — — 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) 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. 45 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED Years Ended December 31, 2018, 2017 and 2016 (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, 2017 $ — $ 287,500 $ 345,000 $ 1,537 $3,599,475 $ (379,181) $ (13,738) $ 3,840,593 $ 317 $ 3,840,910 Net earnings Dividends declared and paid: $1.42500 per depositary share of Series E preferred stock $1.30000 per depositary share of Series F preferred stock $1.95 per share of common stock Issuance of common stock: 40,731 shares – director compensation 10,101 shares – stock purchase plan 7,378,163 shares – ATM equity program Issuance of 221,484 shares of restricted common stock Stock issuance costs Amortization of deferred compensation Amortization of interest rate hedges Fair value of forward starting swaps Valuation adjustments – available-for- sale securities — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3 — — 74 2 — — — — — — 292,447 — — (16,387) (17,940) 12,960 (303,164) 1,375 426 331,944 (91) (3,947) 7,913 — — — — — — — — — — — — — — — — — — — — — — 3,664 4,080 298 292,447 38 292,485 (16,387) (17,940) (290,201) 1,375 426 332,018 (89) (3,947) 7,913 3,664 4,080 298 — — — — — — — — — — — — (16,387) (17,940) (290,201) 1,375 426 332,018 (89) (3,947) 7,913 3,664 4,080 298 Balances at December 31, 2018 $ — $ 287,500 $ 345,000 $ 1,616 $3,950,055 $ (424,225) $ (5,696) $ 4,154,250 $ 355 $ 4,154,605 See accompanying notes to consolidated financial statements. 46 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 Loss on early extinguishment of debt Amortization of notes payable discount Amortization of debt costs Amortization of mortgages payable premium Amortization of interest rate hedges Settlement of forward starting swaps Gain on disposition of real estate 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 Net cash provided by operating activities 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 Year Ended December 31, 2018 2017 2016 $ 292,485 $ 265,371 $ 239,506 174,398 28,211 — 18,240 3,263 4,611 (85) 3,664 4,080 (65,070) 10,417 (432) 874 (203) (747) 793 (792) (1,516) (282) 471,909 173,720 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) 421,557 415,337 148,476 97,245 104,117 (756,971) (721,893) (885,966) — (876) 1,250 (2,159) 4,141 (2,235) (609,371) (625,557) (779,943) See accompanying notes to consolidated financial statements. 47 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 for early extinguishment of debt Payment of debt issuance 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 distributions Year Ended December 31, 2018 2017 2016 $ 1,599,500 $ 1,501,700 $ 1,330,200 (1,720,000) (1,381,200) (1,330,200) (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) (277,120) (257,007) (538) 692,913 (300,000) (18,240) (7,156) 345,324 — (3,947) — — (16,387) (17,940) (303,164) — 250,365 112,903 1,364 114,267 107,861 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 received Supplemental disclosure of noncash investing and financing activities: Increase (decrease) in other comprehensive income Change in lease classification (direct financing lease to operating lease) Change in lease classification (operating lease to direct financing lease) $ $ $ $ $ $ (84) (89,176) (293,176) 294,540 1,364 103,761 $ $ $ $ — $ (15) $ (8,042) $ 565 258 $ $ 5,547 696 $ $ — $ (136) 644,886 280,280 14,260 294,540 91,403 (155) (12,161) 1,924 — (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, 2018, 2017 and 2016. See accompanying notes to consolidated financial statements. 48 NATIONAL RETAIL PROPERTIES, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2018, 2017 and 2016 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 may elected to treat certain subsidiaries as taxable REIT subsidiaries, ("TRS"). 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, 2018 2,969 30,487,000 48 11.5 NNN's operations are reported within one operating segment in the consolidated 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, 2018, 2017 and 2016, NNN recorded $2,675,000, $2,435,000 and $1,738,000, 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 on the Consolidated Statements of Income and Comprehensive Income. The fair value estimate is sensitive to significant assumptions, such as establishing a range of relevant market assumptions for land, building and rent and where the acquired property falls within that range. These market assumptions for land, building and rent use the most relevant comparable properties for an acquisition. The final range relies upon ranking comparable properties' attributes from most similar to least similar. 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. 49 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 2018 2017 15,175 $ 16,583 (9,239) 5,936 $ (9,299) 7,284 104,871 $ 104,592 (60,797) (61,004) 44,074 $ 43,588 41,554 $ 44,468 (25,258) (26,055) 16,296 $ 18,413 $ $ $ $ $ $ The amounts amortized as a net increase to rental income for capitalized above-market and below-market leases for the years ended December 31, 2018, 2017, and 2016 were $2,622,000, $3,355,000, and $2,842,000, respectively. The value of in-place leases amortized to expense for the years ended December 31, 2018, 2017, and 2016 was $9,209,000, $18,841,000, and $13,403,000, respectively. 50 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, 2018 (dollars in thousands): 2019 2020 2021 2022 2023 Thereafter Net Increase to Rental Income Increase To Amortization Expense $ $ 730 676 562 440 358 6,716 6,000 5,285 4,817 4,309 7,594 16,947 Weighted average amortization period (years) 18.7 9.8 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. 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 51 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 of 1986, as amended (the "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, 2018 and 2017, are included in mortgages payable on the Consolidated Balance Sheets net of accumulated amortization of $73,000 and $55,000, 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 $26,932,000 and $22,682,000 at December 31, 2018 and 2017, respectively, are included in notes payable on the Consolidated Balance Sheets net of accumulated amortization of $6,705,000 and $6,337,000, 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). NNN adopted ASU 2014-09 on January 1, 2018, and applied the cumulative catch-up transition method. Through the evaluation and implementation process, NNN determined the key revenue stream impacted by ASU 2014-09 is gain on disposition of real estate reported on the Condensed Consolidated Statements of Income and Comprehensive Income. Prior to the adoption of ASU 2014-09, NNN recognized revenue at the time of closing (i.e., transfer of asset). Following the adoption of ASU 2014-09, NNN evaluates any separate contracts or performance obligations to determine proper timing and/or amount of revenue recognition, as well as, transaction price allocation. The adoption of ASU 2014-09 did not have a material impact on NNN's financial position and results of operations. 52 Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. The guidance requires classification of the Company’s unvested restricted share units which contain rights to receive nonforfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method for the years ended December 31 (dollars in thousands): Basic and Diluted Earnings: Net earnings attributable to NNN Less: Series 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 available to common stockholders Less: Earnings attributable to unvested restricted shares Net earnings used in basic and diluted earnings per share 2018 2017 2016 $ 292,447 $ 264,973 $ 239,500 — (16,387) (17,940) — 258,120 (548) (3,598) (16,387) (17,940) (9,855) 217,193 (531) (19,047) (16,387) (3,189) — 200,877 (695) $ 257,572 $ 216,662 $ 200,182 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 156,490,901 149,840,116 145,014,422 (280,633) (465,667) (285,585) (443,343) (390,522) (447,676) 155,744,601 149,111,188 144,176,224 551,018 321,453 484,409 156,295,619 149,432,641 144,660,633 Income Taxes – NNN has made an election to be taxed as a REIT under Sections 856 through 860 of 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, 2018, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state income, franchise and excise taxes. NNN may elect to treat certain subsidiaries as taxable REIT subsidiaries 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. 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. 53 Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels: • Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities. • Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques. Accumulated Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other comprehensive income (loss) (dollars in thousands): Beginning balance, December 31, 2016 Other comprehensive income (loss) Reclassifications from accumulated other comprehensive income to net earnings Net current period other comprehensive income (loss) Ending balance, December 31, 2017 Other comprehensive income (loss) Reclassifications from accumulated other comprehensive income to net earnings Net current period other comprehensive income (loss) Gain or Loss on Cash Flow Hedges(1) $ (8,899) Gains and Losses on Available-for- Sale Securities 708 $ Total $ (8,191) (7,688) 1,932 (2) (5,756) (14,655) 4,080 3,664 (2) 7,744 209 — 209 917 298 — 298 (7,479) 1,932 (5,547) (13,738) 4,378 3,664 8,042 (5,696) Ending balance, December 31, 2018 $ (6,911) $ 1,215 $ (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. 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 today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. Effective January 1, 2019, NNN will adopt the lease guidance using the modified retrospective approach in which the cumulative effect of applying the new standard will be recognized at the date of initial application with an adjustment to NNN’s opening balance of accumulated earnings. NNN plans to elect the package of practical expedients, the land easement practical expedient and the lease and non-lease component practical expedient. NNN is currently evaluating the potential impact the adoption of ASU 2016-02 will have on its financial position or results of operations. In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The FASB issued final guidance that eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The adoption of ASU 2018-13 will not have a significant impact on NNN's financial position or results of operations. 54 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 are required to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to real estate assets purchase accounting for acquisition of real estate subject to a lease, and the recoverability of the carrying value of long-lived assets. 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 2018 presentation. Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to change the presentation of gain on disposition of real estate on the Consolidated Statements of Income and Comprehensive Income. NNN has included gain on disposition of real estate as a component of earnings from operations to present gain and losses on dispositions of properties in accordance with ASC 360-10-45-5. The change was made for the prior periods as the Securities and Exchange Commission (the "Commission") has eliminated Rule 3-15(a) of Regulation S-X as part of Release No. 33-10532; 34-83875; IC-33203, which had required REITs to present gain and losses on disposition of properties outside of continuing operations in the income statement. Note 2 – Real Estate: Real Estate – Portfolio Leases – The following outlines key information for NNN’s leases at December 31, 2018: Lease classification: Operating Direct financing Building portion – direct financing / land portion – operating Weighted average remaining lease term (years) 2,970 8 1 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 2018 2017 $ 2,374,005 $ 2,282,919 5,477,479 4,948,057 3,630 7,855,114 (1,009,374) 6,845,740 8,017 5,261 7,236,237 (874,519) 6,361,718 41,920 $ 6,853,757 $ 6,403,638 (1) Includes $5,571 and $25,799 in land for Properties under construction at December 31, 2018 and 2017, respectively. 55 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, 2018, 2017 and 2016, NNN recognized $309,000, $1,411,000 and ($12,000), respectively, of such income, net of reserves. At December 31, 2018 and 2017, the balance of accrued rental income was $25,387,000 and $25,916,000, respectively, net of allowance of $1,842,000 and $1,936,000, respectively. The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2018 (dollars in thousands): 2019 2020 2021 2022 2023 Thereafter $ 613,402 599,805 579,904 550,022 522,386 4,243,077 $ 7,108,596 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 2018 2017 $ $ 10,899 $ 4,395 (7,225) 8,069 $ 9,339 4,967 (4,656) 9,650 The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2018 (dollars in thousands): 2019 2020 2021 2022 2023 Thereafter $ $ 1,464 1,013 889 895 895 5,743 10,899 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). 56 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, 2018, NNN had three of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2017, included five properties, two of which were sold in 2018. 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 2018 2017 $ 8,606 $ 26,147 34,753 (6,897) (14,250) $ 13,606 $ 9,411 27,342 36,753 (6,602) (778) 29,373 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 61 $ 65,070 48 $ 36,655 38 $ 27,182 2018 2017 2016 # of Sold Properties Gain # of Sold Properties Gain # of Sold Properties Gain Real Estate – Commitments NNN has committed to fund construction on 19 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of December 31, 2018, are outlined in the table below (dollars in thousands): Total commitment(1) Less amount funded Remaining commitment $ $ 34,756 13,588 21,168 (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 $28,211,000, $4,953,000 and $8,025,000 for the year ended December 31, 2018, 2017 and 2016, 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. 57 Note 3 – Commercial Mortgage Residual Interests: As of December 31, 2015, NNN held the commercial mortgage residual interests (“Residuals”) from seven loan securitizations. In 2016, the loan servicer of five of the securitizations exercised its clean-up call option. These clean-up calls allowed the servicers to purchase all of the trusts’ assets, thereby terminating future cash distributions payable to NNN as the holder of these residual interests. During the year ended December 31, 2016, NNN recorded an other than temporary valuation impairment of $6,830,000 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, 2018 and 2017, the remaining two Residuals are recorded at a fair value of $36,000 and included in other assets on the Consolidated Balance Sheets. There were no other than temporary valuation impairments recorded during the years ended December 31, 2018 and 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 $121,587,000 and a weighted average interest rate of 2.8% for the year ended December 31, 2018. The Credit Facility matures January 2022, unless the Company exercises its option to extend maturity to January 2023. As of December 31, 2018, 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, 2018, there was no outstanding balance and $900,000,000 was available for future borrowings under the Credit Facility. In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants which, among other things, require NNN to maintain certain (i) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment and dividend limitations. At December 31, 2018, 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, 2018 2017 15,151 5.23% July 2023 $ 20,430 $ 12,768 $ 13,392 Entered November 2014(1) Debt costs Accumulated amortization Debt costs, net of accumulated amortization Mortgages payable, including unamortized premium and net of unamortized debt costs (147) 73 (74) (147) 55 (92) $ 12,694 $ 13,300 (1) Date entered represents the date that NNN acquired real estate subject to a mortgage securing a loan. Initial balance and outstanding principal balance includes unamortized premium. (2) Monthly payments include interest and principal; the balance is due at maturity. (3) The loan is secured by a first mortgage lien on five of the Properties. The carrying values of the assets at December 31, 2018. 58 The following is a schedule of the scheduled principal payments, including premium amortization of NNN’s mortgages payable at December 31, 2018 (dollars in thousands): 2019 2020 2021 2022 2023 $ 652 682 716 750 9,968 $ 12,768 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 2022 2023(3) 2024(4) 2025(5) 2026(6) 2027(7) 2028(8) 2048 August 2012 $ 325,000 $ 4,989 $ 320,011 3.800% 3.985% October 2022 April 2013 May 2014 October 2015 December 2016 September 2017 September 2018 September 2018 350,000 350,000 400,000 350,000 400,000 400,000 300,000 2,594 347,406 3.300% 3.388% April 2023 707 964 3,860 1,628 2,848 4,239 349,293 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 397,152 4.300% 4.388% October 2028 295,761 4.800% 4.890% October 2048 (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 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. (4) 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. (5) 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. (6) 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. (7) 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. (8) NNN entered into two forward starting swaps with an aggregate notional amount of $250,000. Upon issuance of the 2028 Notes, NNN terminated the forward starting swaps resulting in a gain of $4,080, which was deferred in other comprehensive income. The gain 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 all accrued and unpaid interest thereon through the redemption date and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes. In connection with the outstanding debt offerings, NNN incurred debt issuance costs totaling $26,932,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. 59 Debt issuance costs for all note issuances have been deferred and presented as a reduction to notes payable 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 October 2018, NNN redeemed the $300,000,000 5.500% notes payable that were due in July 2021. The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of $18,240,000, and (ii) all accrued and unpaid interest. NNN’s long-term debt maturities for the next five years include the 2022 Notes and 2023 Notes for an aggregate principal balance of $675,000,000. 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, 2018, 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 May 2018, the Series E Preferred Stock Shares are redeemable by NNN. As of February 12, 2019, the Series F Preferred Stock Shares were not redeemable. 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. Note 8 – Common Stock: In February 2018, NNN filed a shelf registration statement with the Commission which permits the issuance by NNN of an indeterminate amount of debt and equity securities. 60 Dividend Reinvestment and Stock Purchase Plan. In February 2018, 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 10,000,000 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 2018 2017 2016 311,048 229,696 $ 13,264 $ 9,391 $ 187,626 8,340 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, 2018 2018 ATM 2016 ATM 2015 ATM February 2018 March 2016 February 2015 February 2021 February 2018 March 2016 12,000,000 7,378,163 12,000,000 10,044,656 10,000,000 9,852,465 The following table outlines the common stock issuances pursuant to NNN's ATM equity programs (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, 2018 2017 2016 7,378,163 5,821,366 5,716,222 $ $ $ 44.48 328,196 3,821 $ $ $ 41.88 243,822 3,782 $ $ $ 46.48 265,696 4,266 (1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. Note 9 – Employee Benefit Plan: Effective January 1, 1998, NNN adopted a defined contribution retirement plan (the “Retirement Plan”) covering substantially all of the employees of NNN. The Retirement Plan permits participants to defer a portion of their compensation, as defined in the Retirement Plan, subject to limits established by the Code. NNN generally matches 60 percent of the first eight percent of a participant’s contributions. Additionally, NNN may make discretionary contributions. NNN’s contributions to the Retirement Plan for the years ended December 31, 2018, 2017 and 2016 totaled $516,000, $514,000 and $491,000, 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 2018 2017 2016 $ 303,164 1.950 $ 277,120 1.860 $ 257,007 1.780 On January 15, 2019, NNN declared a dividend of $0.500 per share, payable February 15, 2019, to its common stockholders of record as of January 31, 2019. 61 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 Capital gain Unrecaptured Section 1250 Gain Nontaxable distributions 2018 1.658604 (1) $ $ 2017 2016 1.559781 $ 1.513705 0.015534 0.042818 0.233044 0.035041 0.012194 0.252984 — — 0.266295 $ 1.950000 $ 1.860000 $ 1.780000 (1) Eligible for the 20% qualified business income deduction under section 199A of the Code that was established by the Tax Cuts and Jobs Act signed into law on December 22, 2017 ("TCJA"). 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 (dollars in thousands, except per share data): Series F(1) Series E(2) Series D(3) 2018 2017 2016 2018 2017 2016 2017 2016 $1.255820 (4) $1.261789 $0.231111 $ 1.376571 (4) $ 1.383115 $ 1.425000 $ 0.303652 $ 1.656250 0.011761 0.028345 — 0.012892 0.031071 — 0.006821 0.032419 0.009866 — 0.035537 0.010814 — 0.002374 — — $1.300000 $1.300000 $0.231111 $ 1.425000 $ 1.425000 $ 1.425000 $ 0.312847 $ 1.656250 $ 17,940 $ 17,940 $ 3,189 $ 16,387 $ 16,387 $ 16,387 $ 3,598 $ 19,047 Ordinary dividends Capital gain Unrecaptured Section 1250 Gain Dividend paid per share Dividends declared and paid (1) 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. (2) The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed by NNN. As of May 2018, the Series E Preferred Stock is redeemable by NNN. (3) The Series D Preferred Stock was redeemed in February 2017. The dividends paid in 2017 include accumulated and unpaid dividends through the redemption date. (4) Eligible for the 20% qualified business income deduction under section 199A of the Code that was established by the TCJA. Note 11 – Income Taxes: For income tax purposes, NNN may elect to treat certain subsidiaries as taxable REIT subsidiaries in which certain real estate activities may be conducted. NNN currently has no TRS entities. The following information relates to former TRS entities. 62 The significant components of the net deferred income tax asset consist of the following at December 31 (dollars in thousands): Deferred tax assets: Net operating loss carryforward Valuation allowance Total deferred tax assets Deferred tax liabilities: Built-in gain Total deferred tax liabilities Net deferred tax asset 2018 2017 $ 3,899 $ (3,858) 41 3,899 (3,858) 41 (41) (41) (41) (41) $ — $ — 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 former taxable REIT subsidiaries. The net operating loss carryforwards begin to expire in 2028. Management believes it is unlikely that NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2018 and 2017. There was no change in the valuation allowance for the year ended December 31, 2018. The decrease in the valuation allowance for the year ended December 31, 2017 was $1,885,000. For the years ended December 31, 2018, 2017, and 2016, there was no net income tax expense or benefit to NNN's former TRS entities. 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): Loss carryforwards increase (decrease) Built-in gain tax liability Valuation allowance (increase) decrease Total tax expense 2018 2017(1) 2016 $ $ — $ (2,019) $ — — 134 1,885 — $ — $ 55 22 (77) — (1) The changes for the year ended December 31, 2017, includes an amount attributable to the federal tax rate change within the TCJA. 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 2015 through 2018. NNN also files in many states with varying open years under statute. 63 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 starting 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 starting swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the variable cash flows associated with floating rate debt and involve the receipt or payment of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, NNN recognizes any changes in its fair value in earnings and continues to carry the derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt. The following table outlines NNN's terminated 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) April 2013 May 2014 October 2015 December 2016 September 2017 September 2018 Four forward starting swaps $ 240,000 $ 3,156 $ Three forward starting swaps Four forward starting swaps Two forward starting swaps Two forward starting swaps Two forward starting swaps 225,000 300,000 180,000 250,000 250,000 6,312 13,369 (13,352) 7,690 (4,080) 3,141 6,312 13,369 (13,345) 7,688 (4,080) (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, 2018, $6,911,000 remains in other comprehensive income related to the effective portion of NNN’s previous interest rate hedges. During the years ended December 31, 2018, 2017 and 2016, NNN reclassified $3,664,000, $1,932,000 and $2,802,000, respectively, out of other comprehensive income as an increase to interest expense. Over the next 12 months, NNN estimates that an additional $1,306,000 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, 2018. 64 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 "2007 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, 2018. 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, 2018: Non-vested restricted shares, January 1 Restricted shares granted Restricted shares vested Restricted shares forfeited Restricted shares repurchased Non-vested restricted shares, December 31(1) Number of Shares Weighted Average Share Price 735,323 $ 291,281 (175,243) (67,153) (2,644) 781,564 42.65 37.06 40.43 41.00 40.43 41.21 (1) Includes grants made in 2015 and 2016 pursuant to the 2007 Plan to NNN's retired CEO. The performance criteria will be complete January 1, 2019 and 2020, respectively. 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, 2018 and 2017, NNN granted 175,626 and 169,495, 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 $37.06 and $43.73, respectively, per share. Once the performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. For the 2018 and 2017 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 $23.70 and $25.77, 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, 2018, 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 15,712 $ 24,869 40,581 1,471,231 41.75 41.89 41.84 The total compensation expense for share-based payments for the years ended December 31, 2018, 2017 and 2016 totaled $9,282,000, $12,971,000 and $10,758,000, respectively. At December 31, 2018, NNN had $11,029,000 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 2.3 years. In addition, NNN recognized no performance based long-term incentive cash compensation expense for the years ended December 31, 2018, 2017 and 2016. 65 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 payable at December 31, 2018 and 2017, approximate fair value based upon current market prices of comparable instruments (Level 3). At December 31, 2018 and 2017, the carrying value and fair value of NNN’s notes payable net of unamortized discount and excluding debt costs, was $2,813,583,000 and $2,507,106,000, respectively, based upon quoted market prices, which is a Level 1 valuation since NNN's notes payable are publicly traded. Note 15 – Quarterly Financial Data (unaudited): The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data): 2018 Revenues as originally reported Net earnings Net earnings attributable to NNN Net earnings per share(1): Basic Diluted 2017 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 $ 152,861 $ 155,555 $ 155,526 $ 160,529 103,289 103,280 70,583 70,573 82,042 82,032 $ 0.62 $ 0.62 0.40 $ 0.40 0.47 $ 0.47 36,572 36,562 0.17 0.17 $ 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 (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, 2018, 2017 and 2016, NNN’s operations are reported within one operating 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, 2018, 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, 2018, the date of the consolidated balance sheet. There were no 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, 2018, 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 Commission require NNN to present the conclusions of the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer about the effectiveness of NNN’s disclosure controls and procedures and the conclusions of NNN’s management about the effectiveness of NNN’s internal control over financial reporting as of the end of the period covered by this annual report. CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of NNN’s Chief Executive Officer and Chief Financial Officer. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that stockholders are currently reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented. Disclosure Controls and Procedures and Internal Control over Financial Reporting. Disclosure controls and procedures are designed with the objective of providing reasonable assurance that information required to be disclosed in NNN’s reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures are also designed with the objective of providing reasonable assurance that such information is accumulated and communicated to NNN’s management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal control over financial reporting is a process designed by, or under the supervision of, NNN’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, and affected by NNN’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that: • • • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of NNN’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that NNN’s receipts and expenditures are being made in accordance with authorizations of management or the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of NNN’s assets that could have a material adverse effect on NNN’s financial statements. Scope of the Assessments. The assessment by NNN’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer of NNN’s disclosure controls and procedures and the assessment by NNN’s management, including NNN’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of NNN’s internal control over financial reporting included a review of procedures and discussions with NNN’s management and others at NNN. In the course of the assessments, NNN sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. NNN’s internal control over financial reporting is also assessed on an ongoing basis by personnel in NNN’s Accounting department and by NNN’s internal auditors in connection with their internal audit activities. The overall goals of these various assessment activities are to monitor NNN’s disclosure controls and procedures and NNN’s internal control over financial reporting and to make modifications as necessary. NNN’s intent in this regard is that the disclosure controls and 67 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, 2018, 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, 2018, 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, 2018, which appears in this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting. During the three months ended December 31, 2018, 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 sections thereof captioned "Executive Compensation – Equity Compensation Plan Information" and “Security Ownership”, and such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is included in the Registrant's proxy statement including the information, without limitation, contained in the section thereof captioned “Certain Relationships and Related Transactions” and such information is incorporated herein by reference. Item 14. Principal Accountant Fees and Services Reference is made to the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is included in the Registrant's proxy statement including the information, without limitation, contained in the section thereof captioned “Audit Committee Report” and “Proposal III: Ratification of Ernst & Young LLP as the Independent Registered Public Accounting Firm”, and such information is incorporated herein by reference. 69 39 41 42 44 47 49 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, 2018 and 2017 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2018 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 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 4.10 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 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). 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). 71 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 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). Form of Seventeenth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 4.300% Notes due 2028 and 4.800% Notes due 2048 (filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K and filed with the Securities and Exchange Commission on September 27, 2018, and incorporated herein by reference). Form of 4.300% Notes due 2028 (filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K and filed with the Securities and Exchange Commission on September 27, 2018, and incorporated herein by reference). Form of 4.800% Notes due 2048 (filed as Exhibit 4.3 to Registrant's Current Report on Form 8-K and filed with the Securities and Exchange Commission on September 27, 2018, and incorporated herein by reference). 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 10.6 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). 72 10.7 10.8 10.9 Employment Agreement dated as of December 1, 2008, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference). Form of Indemnification Agreement (as entered into between the Registrant and each of its directors and executive officers) (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on June 12, 2009, and incorporated herein by reference). Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Craig Macnab (filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.10 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Paul E. Bayer (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference). 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 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). 10.16 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). 10.17 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). 10.18 First Amendment to Amended and Restated Credit Agreement, dated as of October 31, 2012, by and among the Registrant, certain lenders and Wells Fargo Bank, National Association, as the Administrative Agent (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2012, and incorporated herein by reference). 10.19 Employment Agreement dated as of January 2, 2014, between the Registrant and Stephen A. Horn, Jr. (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 19, 2014, and incorporated herein by reference). 10.20 Second Amendment to Amended and Restated Credit Agreement, dated as of October 27, 2014, by and among the Registrant, certain lenders and Wells Fargo Bank, National Association, as the Administrative Agent (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 28, 2014, and incorporated herein by reference). 73 10.21 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). 10.22 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). 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). 10.28 Amended and Restated Deferred Fee Plan for Directors, dated as of August 16, 2018 (filed as exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 1, 2018, and incorporated herein by reference). 21. Subsidiaries of the Registrant (filed herewith). 23. Consent of Independent Registered Public Accounting Firm 23.1 Ernst & Young LLP dated February 12, 2019 (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). 74 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, 2018, 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. Item 16. Form 10-K Summary None. 75 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 12th day of February 2019. 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. 76 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/ Don DeFosset Don DeFosset /s/ Pamela K. Beall Pamela K. Beall /s/ Steven D. Cosler Steven D. Cosler /s/ David M. Fick David M. Fick /s/ Edward J. Fritsch Edward J. Fritsch ______________ Betsy D. Holden /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 12, 2019 Title Date Chairman of the Board February 12, 2019 Director Director Director Director Director Director February 12, 2019 February 12, 2019 February 12, 2019 February 12, 2019 February 12, 2019 Director, Chief Financial Officer (Principal Financial Officer), Executive Vice President, Assistant Secretary and Treasurer February 12, 2019 Chief Accounting Officer (Principal Accounting Officer) and Executive Vice President February 12, 2019 77 OUR OFFICERS AND DIREC TORS Executive Officers JULIAN E. (JAY) WHITEHURST President & Chief Executive Officer Directors PAMELA K. M. BEALL 1, 2 Executive Vice President 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 & Chief Financial Officer MPLX GP LLC STEVEN D. COSLER 1,3 Operating Partner Water Street Healthcare Partners DON DEFOSSET Chairman DAVID M. FICK 1,3 Professional Faculty Member Johns Hopkins University Carey Business School; and, President BETSY D. HOLDEN 1,3 Senior Advisor McKinsey & Company Retired Co-CEO Kraft Foods, Inc. SAM L. SUSSER 2,3 President Susser Investment Company JULIAN E. (JAY) WHITEHURST President & Chief Executive Officer National Retail Properties, Inc. KEVIN B. HABICHT Executive Vice President & Chief Financial Officer Nandua Oyster Company National Retail Properties, Inc. EDWARD J. FRITSCH 1,2 President & Chief Executive Officer Highwoods Properties, Inc. 1 Member, Audit Committee 2 Member, Governance and Nominating Committee 3 Member, Compensation Committee 29 CONSECUTIVE ANNUAL DIVIDEND INCREASES SHAREHOLDER INFORMATION General Information AST Financial Operations Center 6201 15th Avenue Brooklyn, NY 11219 www.astfinancial.com (866) 627-2644 Independent Registered Public Accounting Firm Ernst & Young LLP Corporate Office National Retail Properties, Inc. 450 S. Orange Avenue, Suite 900 Shareholder Toll‑free Line (866) 627-2644 Worldwide: (718) 921-8346 Fax: (718) 236-2641 Orlando, FL 32801 (800) NNN-REIT (407) 265-7348 www.nnnreit.com For Dividend Reinvestment AST Financial 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 2018, 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 2018, 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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