2013.03.31 Form 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2013
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                      to                     
Commission file number 001-11290
NATIONAL RETAIL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
(State or other jurisdiction of
incorporation or organization)
56-1431377
(I.R.S. Employer Identification No.)
450 South Orange Avenue, Suite 900
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (407) 265-7348

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  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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  x
  
Accelerated filer  ¨
  
Non-accelerated filer  ¨
  
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
118,364,858 shares of common stock, $0.01 par value, outstanding as of April 29, 2013.





TABLE OF CONTENTS
 
 
 
PAGE      
REFERENCE
Part I - Financial Information
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II - Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
 
March 31, 2013
 
December 31, 2012
ASSETS
(unaudited)
 
 
Real estate portfolio:
 
 
 
Accounted for using the operating method, net of accumulated depreciation and amortization
$
3,801,517

 
$
3,788,053

Accounted for using the direct financing method
22,817

 
23,217

Real estate held for sale
23,492

 
23,537

Mortgages, notes and accrued interest receivable
26,884

 
27,770

Commercial mortgage residual interests
13,719

 
13,096

Cash and cash equivalents
3,442

 
2,076

Receivables, net of allowance of $1,353 and $855, respectively
3,260

 
3,112

Accrued rental income, net of allowance of $3,154 and $3,270, respectively
26,161

 
25,458

Debt costs, net of accumulated amortization of $18,002 and $17,965, respectively
11,874

 
12,781

Other assets
68,624

 
68,926

Total assets
$
4,001,790

 
$
3,988,026

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Line of credit payable
$
59,400

 
$
174,200

Mortgages payable, including unamortized premium of $173 and $187, respectively
10,328

 
10,602

Notes payable – convertible, net of unamortized discount of $951 and $2,072, respectively
222,084

 
236,500

Notes payable, net of unamortized discount of $9,103 and $9,338, respectively
1,165,897

 
1,165,662

Accrued interest payable
28,130

 
17,527

Other liabilities
73,191

 
85,950

Total liabilities
1,559,030

 
1,690,441

 


 


Equity:
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value. Authorized 15,000,000 shares
 
 
 
Series D, 11,500,000 depositary shares issued and outstanding, at stated liquidation value
  of $25 per share
287,500

 
287,500

Common stock, $0.01 par value. Authorized 375,000,000 shares; 116,891,268 and
  111,554,997 shares issued and outstanding, respectively
1,171

 
1,117

Excess stock, $0.01 par value. Authorized 390,000,000 shares; none issued or outstanding

 

Capital in excess of par value
2,260,488

 
2,101,002

Retained earnings (deficit)
(105,969
)
 
(90,952
)
Accumulated other comprehensive income (loss)
(1,567
)
 
(2,382
)
Total stockholders’ equity of NNN
2,441,623

 
2,296,285

Noncontrolling interests
1,137

 
1,300

Total equity
2,442,760

 
2,297,585

Total liabilities and equity
$
4,001,790

 
$
3,988,026

See accompanying notes to consolidated financial statements.

3


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
(Unaudited)

 
Quarter Ended March 31,
  
2013
 
2012
Revenues:
 
 
 
Rental income from operating leases
$
87,661

 
$
72,335

Earned income from direct financing leases
566

 
628

Percentage rent
371

 
111

Real estate expense reimbursement from tenants
2,977

 
2,849

Interest and other income from real estate transactions
384

 
707

Interest income on commercial mortgage residual interests
606

 
755

 
92,565

 
77,385

Retail operations:
 
 
 
Revenues

 
11,224

Operating expenses

 
(11,062
)
Net

 
162

Operating expenses:
 
 
 
General and administrative
8,264

 
7,604

Real estate
3,954

 
4,576

Depreciation and amortization
23,755

 
17,765

Impairment losses
1,812

 
35

 
37,785

 
29,980

Earnings from operations
54,780

 
47,567

Other expenses (revenues):
 
 
 
Interest and other income
(334
)
 
(358
)
Interest expense
21,827

 
19,818

 
21,493

 
19,460

Earnings from continuing operations before income tax benefit (expense) and equity in earnings of
   unconsolidated affiliate
33,287

 
28,107

Income tax benefit (expense)
780

 
(115
)
Equity in earnings of unconsolidated affiliate

 
150

Earnings from continuing operations
34,067

 
28,142

Earnings (loss) from discontinued operations, net of income tax expense
(164
)
 
1,682

Earnings including noncontrolling interests
33,903

 
29,824

Loss (earnings) attributable to noncontrolling interests:
 
 
 
Continuing operations
219

 
14

Discontinued operations
(56
)
 
(6
)
 
163

 
8

Net earnings attributable to NNN
$
34,066

 
$
29,832

 
See accompanying notes to consolidated financial statements. 

4


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
(Unaudited)

            
 
Quarter Ended March 31,
  
2013
 
2012
 
 
 
 
Net earnings attributable to NNN
$
34,066

 
$
29,832

Series C preferred stock dividends

 
(1,979
)
Series D preferred stock dividends
(4,762
)
 

Excess of redemption value over carrying value of Series C preferred
  shares redeemed

 
(3,098
)
Net earnings attributable to common stockholders
$
29,304

 
$
24,755

Net earnings per share of common stock:
 
 
 
Basic:
 
 
 
Continuing operations
$
0.26

 
$
0.22

Discontinued operations

 
0.01

Net earnings
$
0.26

 
$
0.23

Diluted:
 
 
 
Continuing operations
$
0.25

 
$
0.22

Discontinued operations

 
0.01

Net earnings
$
0.25

 
$
0.23

Weighted average number of common shares outstanding:
 
 
 
Basic
113,491,101

 
104,840,867

Diluted
115,850,253

 
106,211,366

Other comprehensive income:
 
 
 
Net earnings attributable to NNN
$
34,066

 
$
29,832

Amortization of interest rate hedges
60

 
56

Fair value forward starting swaps
(1,144
)
 

Unrealized gain - commercial mortgage residual interests
869

 

Stock value adjustments
81

 
(1
)
Reclassification of noncontrolling interests
949

 

Comprehensive income attributable to NNN
$
34,881

 
$
29,887

    

See accompanying notes to consolidated financial statements.


5


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)


 
Quarter Ended March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Earnings including noncontrolling interests
$
33,903

 
$
29,824

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Performance incentive plan expense
2,310

 
2,257

Performance incentive plan payment
(2,139
)
 

Depreciation and amortization
23,805

 
18,263

Impairment losses and other charges
2,851

 
7

Amortization of notes payable discount
1,356

 
1,181

Amortization of debt costs
907

 

Amortization of mortgages payable premium
(14
)
 

Amortization of deferred interest rate hedges
60

 
56

Equity in earnings of unconsolidated affiliate

 
(150
)
Distributions received from unconsolidated affiliate

 
187

Gain on disposition of real estate
(505
)
 
(314
)
Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
Additions to held for sale real estate
(1,029
)
 
(4,385
)
Decrease in real estate leased to others using the direct financing method
400

 
402

Increase in work in process
(340
)
 
(430
)
Decrease in mortgages, notes and accrued interest receivable
286

 
50

Decrease (increase) in receivables
(148
)
 
517

Decrease in commercial mortgage residual interests
246

 
283

Increase in accrued rental income
(727
)
 
(537
)
Decrease in other assets
61

 
595

Increase in accrued interest payable
10,603

 
6,777

Decrease in other liabilities
(2,264
)
 
(4,101
)
Increase (decrease) in current tax liability
(799
)
 
118

Net cash provided by operating activities
68,823

 
50,600

Cash flows from investing activities:
 
 
 
Proceeds from the disposition of real estate
4,627

 
5,193

Additions to real estate:
 
 
 
Accounted for using the operating method
(51,431
)
 
(191,745
)
Increase in mortgages and notes receivable
(739
)
 
(3,935
)
Principal payments on mortgages and notes receivable
1,339

 
563

Payment of lease costs
(255
)
 
(615
)
Other
(93
)
 
(139
)
Net cash used in investing activities
(46,552
)
 
(190,678
)
 
See accompanying notes to consolidated financial statements.


6


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)


 
Quarter Ended March 31,
 
2013
 
2012
Cash flows from financing activities:
 
 
 
Proceeds from line of credit payable
$
186,500

 
$
242,400

Repayment of line of credit payable
(301,300
)
 
(281,800
)
Repayment of mortgages payable
(260
)
 
(288
)
Repayment of notes payable - convertible
(20,565
)
 

Proceeds from issuance of common stock
166,067

 
37,550

Proceeds from issuance of preferred stock

 
287,500

Redemption of preferred stock

 
(92,000
)
Payment of Series C preferred stock dividends

 
(1,979
)
Payment of Series D preferred stock dividends
(4,762
)
 

Payment of common stock dividends
(44,321
)
 
(40,432
)
Stock issuance costs
(2,264
)
 
(9,922
)
Net cash provided by (used in) financing activities
(20,905
)
 
141,029

Net increase in cash and cash equivalents
1,366

 
951

Cash and cash equivalents at beginning of year
2,076

 
2,082

Cash and cash equivalents at end of year
$
3,442

 
$
3,033

Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amount capitalized
$
9,297

 
$
12,420

Taxes paid
$
19

 
$
15

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Issued 298,896 and 396,577 shares of restricted and unrestricted
    common stock in 2013 and 2012, respectively, pursuant to NNN’s
    performance incentive plan
$
7,904

 
$
8,576

Issued 4,292 and 4,122 shares of common stock in 2013 and 2012,
    respectively, to directors pursuant to NNN’s performance incentive plan
$
137

 
$
112

Issued 3,227 and 5,317 shares of common stock in 2013 and
    2012, respectively, pursuant to NNN’s Deferred Director Fee Plan
$
38

 
$
74

Change in other comprehensive income
$
815

 
$
55

Change in lease classification (direct financing lease to operating lease)
$

 
$
757

Real estate acquired in connection with mortgage receivable foreclosure
$

 
$
490

 
 
See accompanying notes to consolidated financial statements.

7



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)

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” and the “Company” refer to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable REIT subsidiaries. These taxable subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.”
NNN's assets include: real estate, mortgages and notes receivable, and commercial mortgage residual interests. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Properties” or “Property Portfolio”). 
 
March 31, 2013
Property Portfolio:
 
Total properties
1,636

Gross leasable area (square feet)
19,267,000

States
47

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles ("GAAP"). The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter ended March 31, 2013, may not be indicative of the results that may be expected for the year ending December 31, 2013. Amounts as of December 31, 2012, included in the condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements, included herein, should be read in conjunction with the consolidated financial statements and notes thereto as well as Management's Discussion and Analysis of Financial Condition and Results of Operations in NNN's Form 10-K for the year ended December 31, 2012.
Principles of Consolidation – NNN’s condensed consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates, including transactions whereby NNN has been determined to be the primary beneficiary in accordance with the Financial Accounting Standards Board (“FASB”) guidance included in Consolidation. All significant intercompany account balances and transactions have been eliminated. NNN applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by NNN due to the significance of rights held by other parties.
Real Estate Portfolio – NNN records the acquisition of real estate which is not subject to a lease 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. During the quarters ended March 31, 2013 and 2012, NNN recorded $219,000 and $431,000, respectively, in capitalized interest.
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, value of in-place leases and value of tenant relationships, based in each case on their relative fair values. Acquisition costs incurred in connection with a business combination are expensed when incurred.
The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the determination of the fair values of these assets. The as-if-vacant fair value of a property is provided to management by a qualified appraiser.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant

8



to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease, including the probability of renewal periods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant would renew the option whereby the Company would amortize the value attributable to the renewal over the renewal period.
The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.
Intangible assets and liabilities consisted of the following as of (in thousands):
 
 
March 31, 2013
 
December 31, 2012
Intangible lease assets (included in Other assets):
 
 
 
 
Value of above market in-place leases, net
 
$
6,447

 
$
6,679

Value of in-place leases, net
 
36,735

 
37,889

Intangible lease liabilities (included in Other liabilities):
 
 
 
 
Value of below market in-place leases, net
 
22,851

 
23,708

Investment in an Unconsolidated Affiliate – NNN accounts for its investment in an unconsolidated affiliate under the equity method of accounting. In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV”) with an affiliate of Crow Holdings Realty Partners IV, L.P., which is accounted for under the equity method of accounting. During the quarter ended September 30, 2012, NNN Crow JV sold all of its assets and paid off its bank term loan.
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 equivalents consist of money market accounts and are stated at cost plus accrued interest, which approximates fair value.
Cash accounts maintained on behalf of NNN in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, NNN has not experienced any losses in such accounts.
Valuation of Receivables – NNN estimates the collectability of its accounts receivable related to rents, expense reimbursements and other revenues. NNN analyzes accounts receivable and historical bad debt levels, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.
Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. Effective January 1, 2009, 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.

9



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 (dollars in thousands):
 
 
Quarter Ended March 31,
 
2013
 
2012
Basic and Diluted Earnings:
 
 
 
Net earnings attributable to NNN
$
34,066

 
$
29,832

Less: Series C preferred stock dividends

 
(1,979
)
Less: Series D preferred stock dividends
(4,762
)
 

Less: Excess of redemption value over carrying value of preferred shares redeemed

 
(3,098
)
Net earnings available to NNN’s common stockholders
29,304

 
24,755

Less: Earnings attributable to unvested restricted shares
(102
)
 
(566
)
Net earnings used in basic earnings per share
29,202

 
24,189

Reallocated undistributed loss

 

Net earnings used in diluted earnings per share
$
29,202

 
$
24,189

 
 
 
 
Basic and Diluted Weighted Average Shares Outstanding:
 
 
 
Weighted average number of shares outstanding
114,126,832

 
105,635,630

Less: Unvested restricted stock
(385,258
)
 
(568,163
)
Less: Contingent shares
(250,473
)
 
(226,600
)
Weighted average number of shares outstanding used in basic
   earnings per share
113,491,101

 
104,840,867

Effects of dilutive securities:
 
 
 
Contingent shares

 
25,471

Convertible notes payable
2,191,512

 
1,192,706

Common stock options

 
2,286

Directors’ deferred fee plan
167,640

 
150,036

Weighted average number of shares outstanding used in diluted
   earnings per share
115,850,253

 
106,211,366

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.

10



Other Comprehensive Income – The following outlines the changes in accumulated other comprehensive income (dollars in thousands):
 
Gain or Loss on Cash Flow Hedges (1)
 
Unrealized Gains and Losses on Commercial Mortgage Residual Interests (2)
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Total
 
Beginning balance, December 31, 2012
$
(5,693
)
 
$
3,244

 
$
67

 
$
(2,382
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
(1,144
)
 
1,818

 
81

 
755

 
Reclassifications from accumulated other
  comprehensive income to net earnings
60

 

 

 
60

(3) 
Net current period other comprehensive income
(1,084
)
 
1,818

 
81

 
815

 
 
 
 
 
 
 
 
 
 
Ending balance, March 31, 2013
$
(6,777
)
 
$
5,062

 
$
148

 
$
(1,567
)
 
1) Additional disclosure is included in Note 12 - Derivatives.
2) Additional disclosure is included in Note 6 - Commercial Mortgage Residual Interests.
3) Reclassifications out of other comprehensive income are recorded in Interest Expense on the Condensed Consolidated Statements of Comprehensive Income. There is no income tax expense (benefit) resulting from this reclassification.
New Accounting Pronouncements – In December 2011, the FASB issued Accounting Standards Update ("ASU") 2011-11 amending its guidance on offsetting assets and liabilities in financial statements. The objective of this update will require disclosure to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The amendments in this update are effective for annual reporting periods beginning on or after January 1, 2013. The adoption of the standard did not have a significant impact on NNN's financial position or results of operations.
In February 2013, the FASB issued ASU 2013-02. The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The update requires reporting significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income or cross-reference other required disclosures that provide additional detail about amounts that are not. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of the standard in the quarter ended March 31, 2013, did not have a significant impact on NNN's financial position or results of operations.
In February 2013, the FASB issued ASU 2013-04. The objective of this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. NNN is currently evaluating ASU 2013-04 to determine the potential impact, if any, its adoption will have on NNN's financial position and results of operations.
Use of Estimates – Management of NNN has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Significant estimates include provisions for impairment and allowances for certain assets, accruals, useful lives of assets and purchase price allocation. 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 2013 presentation.


11



Note 2 – Real Estate – Portfolio:
Leases – The following outlines key information for NNN’s leases:
 
March 31, 2013
Lease classification:
 
Operating
1,637

Direct financing
13

Building portion – direct financing / land portion – operating
5

Weighted average remaining lease term
12 Years

The leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the property and carry property and liability insurance coverage. Certain of NNN’s Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the property. Generally, the leases of the Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.
Real Estate Portfolio – Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following as of (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Land and improvements
$
1,479,280

 
$
1,470,348

Buildings and improvements
2,594,925

 
2,562,080

Leasehold interests
1,290

 
1,290

 
4,075,495

 
4,033,718

Less accumulated depreciation and amortization
(350,868
)
 
(332,172
)
 
3,724,627

 
3,701,546

Work in progress
76,890

 
86,507

 
$
3,801,517

 
$
3,788,053

    


Note 3 – Real Estate – Held For Sale:
In March 2013, NNN completed a strategic review of its Properties held for sale and reclassified 15 Properties that were previously held for sale to held for investment, included in Real Estate - Portfolio. As of March 31, 2013, NNN categorized 13 of its Properties as held for sale: 10 improved Properties and three land parcels. As of December 31, 2012, NNN categorized 23 Properties as held for sale: 16 improved Properties and seven land parcels. Real estate held for sale consisted of the following as of (dollars in thousands):
 
 
March 31, 2013
 
December 31, 2012
Property held for sale:
 
 
 
 
Land and improvements
 
$
11,821

 
$
11,419

Building and improvements
 
17,853

 
17,776

Work in process
 
600

 
72

 
 
30,274

 
29,267

Less accumulated depreciation and amortization
 
(1,619
)
 
(1,606
)
Less impairment
 
(5,163
)
 
(4,124
)
 
 
$
23,492

 
$
23,537


12



The following table summarizes the number of held for sale Properties sold and the corresponding gain recognized on the disposition of held for sale Properties included in discontinued operations for the quarters ended March 31 (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
# of Sold
Properties
 
Gain
 
# of Sold
Properties
 
Gain
Discontinued operations (1)
2

 
$
505

 
3

 
$
314

(1) None of the gains from property sales for the period were reported in continuing operations.

Note 4 – Real Estate – Commitments:
In connection with the improvements of leased Properties, NNN has the following funding commitments (dollars in thousands):
 
March 31, 2013
 
# of
Properties
 
Total
Commitment
(1)
 
Amount
Funded
 
Remaining
Commitment
Real estate - portfolio
47

 
$
148,662

 
$
112,387

 
$
36,275

Real estate - held for sale
2

 
1,662

 
947

 
715

 
49

 
$
150,324

 
$
113,334

 
$
36,990

(1) Includes land, construction costs and tenant improvements.

Note 5 – Impairments – Real Estate:

Management periodically assesses the Company's real estate for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations.  Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset.

As a result of the Company's review of long lived assets, including identifiable intangible assets, NNN recognized the following real estate impairments (dollars in thousands):
 
 
Quarter Ended March 31,
 
 
2013
 
2012
 
 
 
 
 
Continuing operations
 
$
1,812

 
$
35

Discontinued operations
 
1,039

 

 
 
$
2,851

 
$
35


The valuation of impaired assets is determined using widely accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties, which are level 3 inputs. NNN may consider a single valuation technique or multiple valuation techniques, as appropriate, when measuring the fair value of its real estate.

Note 6 – Commercial Mortgage Residual Interests:

NNN holds the residual interests (“Residuals”) from seven commercial mortgage securitizations. Each of the Residuals is recorded at fair value based upon an independent valuation. Unrealized gains and losses are reported as other comprehensive income in stockholders' equity and other than temporary losses as a result of a change in the timing, or amount of estimated cash flows are recorded as an other than temporary valuation impairment.


13



Due to the expected timing of future cash flows relating to the Residuals, the independent valuation adjusted certain of the valuation assumptions. The following table summarizes the key assumptions used in determining the value of the Residuals as of:
 
March 31, 2013
 
December 31, 2012
Discount rate
25
%
 
25
%
Average life equivalent CPR (1) speeds range
0.80% to 25.04% CPR

 
0.80% to 24.31% CPR

Foreclosures:
 
 
 
Frequency curve default model
0.08% - 4.76% range

 
0.09% - 4.49% range

Loss severity of loans in foreclosure
20
%
 
20
%
Yield:
 
 
 
LIBOR
Forward 3-month curve

 
Forward 3-month curve

Prime
Forward curve

 
Forward curve

(1) Conditional prepayment rate.

The following table summarizes the recognition of unrealized gains and/or losses recorded as other comprehensive income as well as other than temporary valuation impairments recorded in condensed consolidated statements of earnings (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Unrealized gains
$
869

 
$

There were no other than temporary valuation impairments recorded in the quarters ended March 31, 2013 and 2012 with respect to the Residuals.

Note 7 – Line of Credit Payable:
NNN's $500,000,000 revolving credit facility (the “Credit Facility”) had a weighted average outstanding balance of $127,198,000 and a weighted average interest rate of 1.4% during the quarter ended March 31, 2013. The Credit Facility matures October 2016, unless the Company exercises its option to extend maturity to October 2017. The Credit Facility bears interest at LIBOR plus 117.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature to increase the facility size up to $1,000,000,000, subject to lender approval. As of March 31, 2013, $59,400,000 was outstanding and $440,600,000 was available for future borrowings under the Credit Facility.

14




Note 8 – Notes Payable – Convertible:
Each of NNN’s outstanding series of convertible notes is summarized in the table below (dollars in thousands, except conversion price):
 
Terms
 
2026
Notes(1)(2)
 
 
2028
Notes(1)(3)(4)
 
Issue Date
 
September 2006

  
 
March 2008

  
Net Proceeds
 
$
168,650

  
 
$
228,576

  
Stated Interest Rate
 
3.950
%
  
 
5.125
%
  
Effective Interest Rate (6)
 
5.840
%
 
 
7.192
%
 
Debt Issuance Costs
 
$
3,850

 
 
$
5,459

(5) 
Earliest Conversion Date (7)
 

  
 
April 2013

  
Earliest Put Option Date
 

 
 
June 2013

  
Maturity Date
 

  
 
June 2028

  
Original Principal
 
$
172,500

  
 
$
234,035

  
Repurchases
 
(33,800
)
 
 
(11,000
)
 
Settled
 
(138,700
)
 
 

 
Outstanding principal balance at March 31, 2013
 
$

(8) 
 
$
223,035

  
(1) 
Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method.
(2) 
The conversion rate per $1 principal amount was 42.6237 shares of NNN’s common stock, which is equivalent to a conversion price of $23.4611 per share of common stock.
(3) 
The conversion rate per $1 principal amount was 39.5149 shares of NNN’s common stock, which is equivalent to a conversion price of $25.3069 per share of common stock.
(4) 
NNN repurchased $11,000 in 2009 for a purchase price of $8,588 resulting in a gain of $1,867.
(5) 
Includes $219 of note costs which were written off in connection with the repurchase of $11,000 of the 2028 Notes.
(6) 
With the adoption of the accounting guidance on convertible debt securities in 2009, the effective interest rates for the 2026 Notes and the 2028 Notes are 5.840% and 7.192%, respectively.
(7) 
Prior to the earliest respective conversion date, the notes are only convertible in limited circumstances pursuant to the terms of the notes. In March 2013, certain market conditions for the 2028 Notes were satisfied, making the 2028 Notes convertible during the calendar quarter beginning April 1, 2013.
(8) 
In January 2013, NNN settled the remaining principal balance of $15,537.
Each series of convertible notes represents a senior, unsecured obligation of NNN and is subordinated to all secured indebtedness of the Company. Each note is redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued and unpaid interest thereon through but not including the redemption date and (ii) the make whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.
The carrying values of the Company’s convertible debt and equity components are summarized in the table below (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Carrying value of equity component
$
(20,720
)
 
$
(22,193
)
Principal amount of convertible debt
223,035

 
238,572

Remaining unamortized debt discount
(951
)
 
(2,072
)
Net carrying value of convertible debt
$
201,364

 
$
214,307



15



As of March 31, 2013, the remaining amortization period for the 2028 Notes debt discount was approximately three months and the 2026 Notes debt discount had been fully amortized.
NNN recorded the following in interest expense relating to the 2026 Notes and the 2028 Notes (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Noncash interest charges
$
1,122

 
$
1,044

Contractual interest expense
2,858

 
4,227

Amortization of debt costs
305

 

Total interest expense
$
4,285

 
$
5,271

The if-converted value of the 2028 Notes exceeded the principal amount by $95,739,000 as of March 31, 2013. As of December 31, 2012, the if-converted values which exceeded the principal amount were $5,125,000 and $51,764,000 for the 2026 Notes and the 2028 Notes, respectively.
As of December 31, 2012, $15,537,000 of the principal amount of 2026 Notes were outstanding. In January 2013, the Company paid approximately $20,565,000 in aggregate settlement value for the $15,537,000 of settled notes. The difference between the amount paid and the principal amount of the settled notes of $5,028,000 was recognized as a decrease to additional paid-in capital.

Note 9 – Stockholders' Equity:
The following table outlines the dividends declared and paid for each issuance of NNN's stock (in thousands, except per share data):
 
 
Quarter Ended March 31,
 
 
2013
 
2012
Series C preferred stock (1):
 
 
 
 
Dividends
$

 
$
1,979

 
Per share

 
0.5378

 
 
 
 
 
Series D preferred stock (2):
 
 
 
 
Dividends
4,762

 

 
Per share
0.4141

 

 
 
 
 
 
Common stock:
 
 
 
 
Dividends
44,321

 
40,432

 
Per share
0.395

 
0.385

1) The Series C preferred stock was redeemed in March 2012. The dividends paid during the quarter
ended March 31, 2012 include accumulated and unpaid dividends through the redemption date.
2) The Series D preferred stock has no maturity date and will remain outstanding unless redeemed.

In February 2012, NNN filed a shelf registration statement with the Securities and Exchange Commission (the "Commission") which permits the issuance by NNN of an indeterminate amount of debt and equity securities.
In February 2012, NNN issued 11,500,000 depositary shares representing interests in our 6.625% Series D Cumulative Redeemable Preferred Stock ("Series D Preferred Stock") at a price of $25.00 per depositary share generating gross proceeds of $287,500,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $9,855,000, consisting primarily of underwriters' fees and commissions, legal and accounting fees and printing expenses.
In March 2012, NNN redeemed all 3,680,000 outstanding depositary shares representing interests in its 7.375% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”). The Series C Preferred Stock was redeemed at $25.00 per depositary share, plus accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was $3,098,000, representing Series C Preferred Stock issuance costs.

16



In May 2012, NNN established an at-the-market equity program ("2012 ATM") which allowed NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through May 10, 2015. The following outlines the common stock issuances pursuant to the 2012 ATM (dollars in thousands, except per share data):
 
Quarter Ended March 31,
 
2013
 
2012
Shares of common stock
4,616,542

 

Average price per share
$
32.56

 
$

Net proceeds
150,327

 

Stock issuance costs (1)
2,129

 

(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.
In March 2013, NNN established a second ATM equity program ("2013 ATM") which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through March 31, 2015. NNN incurred $135,000 of stock issuance costs related to the 2013 ATM consisting primarily of legal and accounting fees during the quarter ended March 31, 2013. No shares have been issued under the 2013 ATM as of March 31, 2013.
In April 2013, NNN declared a dividend of $0.395 per share, which is payable in May 2013 to its common stockholders of record as of April 30, 2013.
In February 2012, NNN filed a shelf registration statement with the Commission for its Dividend Reinvestment and Stock Purchase Plan ("DRIP") which permits the issuance by NNN of up to 16,000,000 shares of common stock. The following outlines the common stock issuances pursuant to NNN's DRIP (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Shares of common stock
424,995

 
1,428,069

Net proceeds
$
13,822

 
$
37,666


Note 10 – Income Taxes:
NNN has elected to be taxed as a REIT under the Internal Revenue Code (“Code”), commencing with its taxable year ended December 31, 1984.  To qualify as a REIT, NNN must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income to its stockholders.  NNN intends to adhere to these requirements and maintain its REIT status. As a REIT, NNN generally will not be subject to corporate level federal income tax on taxable income that it distributes currently to its stockholders.  NNN may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income, if any.  The provision for federal income taxes in NNN's consolidated financial statements relates to its TRS operations and any potential taxable built-in gain.  NNN did not have significant tax provisions or deferred income tax items during the periods reported hereunder.
In June 2006, the FASB issued guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with FASB guidance included in Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
NNN, in accordance with FASB guidance included in Income Taxes, has analyzed its various federal and state tax 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.
NNN has had no increases or decreases in unrecognized tax benefits for current or prior years since adopting the guidance. 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 as non-operating expenses. The periods that remain open under federal statute are 2009 through 2013. NNN also files in many states with varying open years under statute.


17



Note 11 – Earnings from Discontinued Operations:
NNN classified the revenues and expenses related to properties which were sold or were held for sale as of March 31, 2013, as discontinued operations. The following is a summary of the earnings (loss) from discontinued operations (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Revenues:
 
 
 
Rental income from operating leases
$
539

 
$
2,116

Earned income from direct financing leases

 
6

Real estate expense reimbursement from tenants
72

 
104

Interest and other income from real estate transactions
5

 
2

 
616

 
2,228

Operating expenses:
 
 
 
General and administrative
2

 
2

Real estate
30

 
280

Depreciation and amortization
50

 
403

Impairment losses and other charges, net of recoveries
1,039

 
(28
)
 
1,121

 
657

Other expenses:
 
 
 
Interest expense
164

 
184

 
164

 
184

Earnings (loss) before gain on disposition of real estate and
  income tax expense
(669
)
 
1,387

Gain on disposition of real estate
505

 
314

Income tax expense

 
(19
)
Earnings (loss) from discontinued operations attributable to NNN including noncontrolling interests
(164
)
 
1,682

Loss (earnings) attributable to noncontrolling interests
(56
)
 
(6
)
Earnings (loss) from discontinued operations attributable to NNN
$
(220
)
 
$
1,676


Note 12 – Derivatives:
In accordance with the guidance on derivatives and hedging, NNN records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
NNN’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, NNN primarily uses treasury locks, forward swaps and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges hedging the variable cash flows associated with floating rate debt involve the receipt of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.
NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is re-

18



designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, NNN continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative at that time.
In March 2013, the Company entered into four forward starting swaps with an aggregate notional amount of $240,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt, such transaction occurred in April 2013 (see Note 15). The outstanding forward starting swaps were designated as cash flow hedges, and as of March 31, 2013, have a fair value of $1,144,000 included in other liabilities and other comprehensive income on the condensed consolidated balance sheet. No hedge ineffectiveness was recognized during the quarter ended March 31, 2013. These derivative financial instruments were still outstanding as of March 31, 2013.
As of March 31, 2013, $5,633,000 remained in other comprehensive income related to the effective portion of NNN’s previous interest rate hedges. During the quarters ended March 31, 2013 and 2012, NNN reclassified out of comprehensive income $60,000 as an increase to interest expense and $56,000 as a reduction to interest expense, respectively. Over the next 12 months, NNN estimates that an additional $256,000 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.

Note 13 – Fair Value Measurements:
NNN currently values its Residuals based upon an independent valuation which provides a discounted cash flow analysis based upon prepayment speeds, expected loan losses and yield curves. These valuation inputs are generally considered unobservable; therefore, the Residuals are considered Level 3 financial assets. The table below presents a reconciliation of the Residuals (dollars in thousands):
 
Quarter Ended
 
March 31, 2013
Balance at beginning of period
$
13,096

Total gains (losses) – realized/unrealized:
 
Included in earnings

Included in other comprehensive income
869

Interest income on Residuals
606

Cash received from Residuals
(852
)
Purchases, sales, issuances and settlements, net

Transfers in and/or out of Level 3

Balance at end of period
$
13,719

Changes in gains (losses) included in earnings attributable to a change in unrealized gains (losses) relating to
    assets still held at the end of period
$


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 cash and cash equivalents, mortgages, notes and other receivables, mortgages payable and other liabilities at March 31, 2013 and December 31, 2012, approximate fair value based upon current market prices of similar issues. At March 31, 2013 and December 31, 2012, the fair value of NNN’s notes payable and convertible notes payable, collectively, was $1,614,028,000 and $1,585,756,000, respectively, based upon the quoted market price, which is a level one valuation since NNN's debt is publicly traded.


19



Note 15 – Subsequent Events:
NNN reviewed its subsequent events and transactions that have occurred after March 31, 2013, the date of the condensed consolidated balance sheet.
In April 2013, NNN closed on its public offering of $350,000,000 principal amount of 3.300% senior unsecured notes due April 15, 2023 (“2023 Notes”). The public offering price was 99.259% of the principal amount for a yield of 3.388%.  The 2023 Notes are senior unsecured obligations of the Company and are registered under the Company's existing shelf registration statement filed with the Securities and Exchange Commission. NNN used a portion of the net proceeds from this offering to repay NNN's outstanding indebtedness under its Credit Facility and NNN intends to use the remainder of the net proceeds to fund future property acquisitions and for general corporate purposes. Additionally, in connection with this note issuance, NNN terminated the forward starting swaps with a aggregate notional amount of $240,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. When terminated, the fair value of the forward starting swaps, designated as cash flow hedges, was a liability of $3,156,000, of which $3,141,000 was deferred in other comprehensive income. The amount reported in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the 2023 Notes.
In March 2013, the market price condition on NNN's 5.125% convertible senior notes due 2028 ("2028 Notes") was satisfied, and the 2028 Notes became convertible during the quarter beginning April 1, 2013. As of May 1, 2013, the 2028 Notes are convertible at a rate of 39.536 shares of NNN's common stock per $1,000 principal amount of 2028 Notes. Through May 2, 2013, approximately $91,000 principal amount of 2028 Notes had been surrendered for conversion, and approximately $222,944,000 principal amount of 2028 Notes remained outstanding. There were no other reportable subsequent events or transactions.

20



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K of National Retail Properties, Inc. for the year ended December 31, 2012. The term “NNN” and the “Company” refer to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.”

Forward-Looking Statements

The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the “Exchange Act”). These statements generally are characterized by the use of terms such as “believe,” “expect,” “intend,” “may,” or similar words or expressions. Forward-looking statements are not historical facts or guarantees of future performance and are subject to known and unknown risks. Certain factors that could cause actual results or events to differ materially from those NNN anticipates or projects include, but are not limited to, the following:

Financial and economic conditions may have an adverse impact on NNN, its tenants, and commercial real estate in general;
NNN may be unable to obtain debt or equity capital on favorable terms, if at all;
Loss of revenues from tenants would reduce NNN's cash flow;
A significant portion of the source of NNN's Property Portfolio annual base rent is heavily concentrated in specific industry classifications, tenants and in specific geographic locations;
Owning real estate and indirect interests in real estate carries inherent risk;
NNN's real estate investments are illiquid;
Costs of complying with changes in governmental laws and regulations may adversely affect NNN's results of operations;
NNN may be subject to known or unknown environmental liabilities and hazardous materials on properties owned by NNN;
NNN may not be able to successfully execute its acquisition or development strategies;
NNN may not be able to dispose of properties consistent with its operating strategy;
A change in the assumptions used to determine the value of commercial mortgage residual interests could adversely affect NNN's financial position;
NNN may suffer a loss in the event of a default or bankruptcy of a borrower or a tenant;
Certain provisions of NNN's leases or loan agreements may be unenforceable;
Property ownership through joint ventures and partnerships could limit NNN's control of those investments;
Competition with numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN's ability to grow;
NNN's loss of key management could adversely affect performance and the value of its common stock;
Uninsured losses may adversely affect NNN's ability to pay outstanding indebtedness;
Acts of violence, terrorist attacks or war may adversely affect the markets in which NNN operates and NNN's results of operations;
Vacant properties or bankrupt tenants could adversely affect NNN's business or financial condition;
The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN's business and financial condition;
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;
The market value of NNN's equity and debt securities is subject to various factors that may cause significant fluctuations or volatility;
NNN's failure to qualify as a real estate investment trust for federal income tax purposes could result in significant tax liability;
Even if NNN remains qualified as a REIT, NNN may face other tax liabilities that reduce operating results and cash flow;
Adverse legislative or regulatory tax changes could reduce NNN's earnings, cash flow and market price of NNN's common stock;
Compliance with REIT requirements, including distribution requirements, may limit NNN's flexibility and negatively affect NNN's operating decisions;

21



Changes in accounting pronouncements could adversely impact NNN's or NNN's tenants' reported financial performance;
NNN's failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results and share price;
NNN's ability to pay dividends in the future is subject to many factors;
Cybersecurity risks and cyber incidents could adversely affect NNN's business and disrupt operations; and
Future investments in international markets could subject NNN to additional risks.

Additional information related to these risks and uncertainties are included in Item 1A. Risk Factors of NNN's Annual Report on Form 10-K for the year ended December 31, 2012, and may cause NNN's actual future results to differ materially from expected results. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. NNN undertakes no obligation to update or revise such forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
NNN, a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. NNN's assets include: real estate, mortgages and notes receivable, and commercial mortgage residual interests. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Properties” or “Property Portfolio”).
As of March 31, 2013, NNN owned 1,636 Properties, with an aggregate gross leasable area of approximately 19,267,000 square feet, located in 47 states. Approximately 98 percent of the Properties in the Property Portfolio were leased as of March 31, 2013.
NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, and industry trends and performance compared to that of NNN.
NNN continues to maintain its diversification by tenant, geography and tenant’s line of trade. NNN’s highest lines of trade concentrations are the convenience store and restaurant (including full and limited service) sectors. These sectors represent a large part of the freestanding retail property marketplace and NNN’s management believes these sectors present attractive investment opportunities. NNN’s Property Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic locations, respectively, could have a material adverse effect on the financial condition and operating performance of NNN.



22



Results of Operations
Property Analysis
General.  The following table summarizes NNN’s Property Portfolio:
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
Properties Owned:
 
 
 
 
 
Number
1,636

 
1,622

 
1,486

Total gross leasable area (square feet)
19,267,000

 
19,168,000

 
16,999,000

Properties:
 
 
 
 
 
Leased and operated
1,600

 
1,581

 
1,460

Percent of Properties – leased and operated
98
%
 
98
%
 
98
%
Weighted average remaining lease term (years)
12

 
12

 
12

Total gross leasable area (square feet) – leased and operated
18,629,000

 
18,524,000

 
16,327,000


The following table summarizes the diversification of NNN’s Property Portfolio based on the top 10 lines of trade:
 
 
 
 
% of Annual Base Rent (1)
 
 
Lines of Trade
 
March 31, 2013
 
December 31, 2012
 
March 31, 2012
1.
 
Convenience stores
 
19.8
%
 
19.8
%
 
23.5
%
2.
 
Restaurants - full service
 
10.7
%
 
10.7
%
 
11.7
%
3.
 
Automotive service
 
7.7
%
 
7.6
%
 
5.3
%
4.
 
Automotive parts
 
5.5
%
 
5.6
%
 
6.2
%
5.
 
Restaurants - limited service
 
5.2
%
 
5.2
%
 
3.6
%
6.
 
Theaters
 
4.8
%
 
4.7
%
 
4.7
%
7.
 
Sporting goods
 
4.0
%
 
4.0
%
 
4.6
%
8.
 
Health and fitness
 
3.6
%
 
3.7
%
 
2.4
%
9.
 
Wholesale clubs
 
3.4
%
 
3.4
%
 
3.8
%
10.
 
Home improvement
 
3.0
%
 
3.0
%
 
2.1
%
 
 
Other
 
32.3
%
 
32.3
%
 
32.1
%
 
 
 
 
100.0
%
 
100.0
%
 
100.0
%
(1) Based on annualized base rent for all leases in place for each respective period.

Property Acquisitions.  The following table summarizes the Property acquisitions (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Acquisitions:
 
 
 
Number of Properties
17

 
67

Gross leasable area (square feet)
162,000

 
594,000

Total dollars invested(1)
$
42,588

 
$
197,978

(1) Includes dollars invested in projects under construction or tenant improvements for each respective year.
NNN typically funds property acquisitions either through available cash, borrowings under it's unsecured revolving Credit Facility (see "Debt – Line of Credit Payable") or by issuing its debt or equity securities in the capital markets.

23



Property Dispositions.  The following table summarizes the Properties sold by NNN (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Number of properties
2

 
3

Gross leasable area (square feet)
21,000

 
20,000

Net sales proceeds
$
3,569

 
$
5,152

Net gain
$
505

 
$
314


NNN typically uses the proceeds from property sales either to pay down the Credit Facility or reinvest in real estate.
Analysis of Revenue From Continuing Operations
General.  During the quarter ended March 31, 2013, rental income increased primarily due to an 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 lease terms.
The following summarizes NNN’s revenues from continuing operations (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
Percent
Increase
(Decrease)
 
 
 
 
 
Percent of Total
 
 
Rental Income(1)
$
88,598

 
$
73,074

 
95.7
%
 
94.4
%
 
21.2%
Real estate expense reimbursement from tenants
2,977

 
2,849

 
3.2
%
 
3.7
%
 
4.5%
Interest and other income from real estate transactions
384

 
707

 
0.4
%
 
0.9
%
 
(45.7)%
Interest income on commercial mortgage residual interests
606

 
755

 
0.7
%
 
1.0
%
 
(19.7)%
Total revenues from continuing operations
$
92,565

 
$
77,385

 
100.0
%
 
100.0
%
 
19.6%

(1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations (“Rental Income”).
Quarter Ended March 31, 2013 versus Quarter Ended March 31, 2012
Rental Income.  Rental Income increased in amount and as a percent of the total revenues from continuing operations for the quarter ended March 31, 2013, as compared to the same period in 2012. The increase for the quarter ended March 31, 2013, is primarily due to the acquisition of 17 properties with aggregate gross leasable area of approximately 162,000 square feet during the quarter ended March 31, 2013 and 232 properties with aggregate gross leasable area of approximately 2,955,000 square feet during 2012.

24



Analysis of Expenses from Continuing Operations
General.  Operating expenses from continuing operations increased for the quarter ended March 31, 2013, primarily due to an increase in depreciation expense from certain properties acquired in 2012. The following table summarizes NNN’s expenses from continuing operations for the quarters ended March 31 (dollars in thousands):
 
 
 
 
 

Percent
Increase
(Decrease)
 
Percentage of Total
 
Percentage of
Revenues from
Continuing Operations
 
2013
 
2012
 
 
2013
 
2012
 
2013
 
2012
General and administrative
$
8,264

 
$
7,604

 
8.7%
 
21.8
 %
 
25.4
 %
 
8.9
 %
 
9.8
 %
Real estate
3,954

 
4,576

 
(13.6)%
 
10.5
 %
 
15.3
 %
 
4.3
 %
 
5.9
 %
Depreciation and amortization
23,755

 
17,765

 
33.7%
 
62.9
 %
 
59.2
 %
 
25.7
 %
 
23.0
 %
Impairment losses and other charges
1,812

 
35

 
5,077.1%
 
4.8
 %
 
0.1
 %
 
2.0
 %
 

Total operating expenses
$
37,785

 
$
29,980

 
26.0%
 
100.0
 %
 
100.0
 %
 
40.9
 %
 
38.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income
$
(334
)
 
$
(358
)
 
(6.7)%
 
(1.6
)%
 
(1.8
)%
 
(0.4
)%
 
(0.5
)%
Interest expense
21,827

 
19,818

 
10.1%
 
101.6
 %
 
101.8
 %
 
23.6
 %
 
25.6
 %
Total other expenses
$
21,493

 
$
19,460

 
10.4%
 
100.0
 %
 
100.0
 %
 
23.2
 %
 
25.1
 %
Quarter Ended March 31, 2013 versus Quarter Ended March 31, 2012
General and Administrative Expenses.   General and administrative expenses increased for the quarter ended March 31, 2013, as compared to the same period in 2012, but decreased as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase in general and administrative expenses is primarily attributable to an increase in incentive compensation.
Real Estate.  Real estate expenses decreased in amount and decreased both as a percent of total operating expenses and as a percentage of revenues from continuing operations for the quarter ended March 31, 2013, as compared to the quarter ended March 31, 2012, primarily due to the leasing of certain vacant properties.
Depreciation and Amortization.  Depreciation and amortization expenses increased as a percentage of total operating expenses and as a percentage of revenues from continuing operations for the quarter ended March 31, 2013 as compared to the same period in 2012. The increase is primarily due to depreciation expense from the 232 properties with aggregate gross leasable area of approximately 2,955,000 square feet acquired in 2012.
Impairment Losses and Other Charges.  NNN reviews long-lived assets for impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive price. Generally, NNN evaluates a possible impairment by comparing the estimated future cash flows to the current net book value. Impairments are measured as the amount by which the current book value of the asset exceeds the fair value of the asset. During the quarters ended March 31, 2013 and 2012, NNN recorded $1,812,000 and $35,000, respectively, of real estate impairments.
Interest Expense.  Interest expense increased for the quarter ended March 31, 2013, as compared to the same period in 2012.
The following represents the primary changes in debt that have impacted interest expense:
(i)
the issuance in August 2012 of $325,000,000 principal amount of notes payable with a maturity of October 2022, and stated interest rate of 3.800%;
(ii)
the repayment in June 2012 of $50,000,000 prinipal amount of notes payable with a stated interest rate of 7.750%;
(iii)
the repayment in July 2012 of a mortgage, with a balance of $18,488,000 at December 31, 2011 and an interest rate of 6.90%;
(iv)
the settlement of $138,700,000 principal amount of 3.95% convertible notes payable, of which $123,163,000 was settled in the fourth quarter 2012 and the remaining $15,537,000 was settled in the first quarter 2013; and

25



(v)
a $76,431,000 increase in the weighted average debt outstanding on the credit facility partially offset by a slightly lower weighted average interest rate for the quarter ended March 31, 2013, as compared to the same period in 2012.
Discontinued Operations
Earnings. NNN classified as discontinued operations the revenues and expenses related to its revenue generating Properties that were sold and any revenue generating Properties that were held for sale at March 31, 2013.
The following table summarizes the earnings from discontinued operations for the quarters ended March 31 (dollars in thousands):
 
2013
 
2012
# of Sold
Properties
 
Gain
 
Earnings
 
# of Sold
Properties
 
Gain
 
Earnings
Properties
2

 
$
505

 
$
(164
)
 
3

 
$
314

 
$
1,682

Noncontrolling interests

 

 
(56
)
 

 

 
(6
)
 
2

 
$
505

 
$
(220
)
 
3

 
$
314

 
$
1,676


NNN periodically sells Properties and may reinvest the sales proceeds to purchase additional properties. NNN evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.

Liquidity
General.  NNN’s demand for funds has been and will continue to be primarily for (i) payment of operating expenses and cash dividends; (ii) property acquisitions and development; (iii) origination of mortgages and notes receivable; (iv) capital expenditures; (v) payment of principal and interest on its outstanding indebtedness; and (vi) other investments.
Cash and Cash Equivalents.  The table below summarizes NNN’s cash flows (in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Cash and cash equivalents:
 
 
 
Provided by operating activities
$
68,823

 
$
50,600

Used in investing activities
(46,552
)
 
(190,678
)
Provided by (used in) financing activities
(20,905
)
 
141,029

Increase
1,366

 
951

Net cash at beginning of period
2,076

 
2,082

Net cash at end of period
$
3,442

 
$
3,033


Cash provided by operating activities represents cash received primarily from rental income from tenants, proceeds from the disposition of certain properties and interest income less cash used for general and administrative expenses, interest expense and acquisition of certain properties. NNN’s cash flow from operating activities, net of cash used in and provided by the acquisition and disposition of certain properties, has been sufficient to pay the distributions for each period presented. NNN generally uses proceeds from its credit facility or from offerings of equity or debt securities in the capital markets to fund the acquisition of its properties. The change in cash provided by operations for the quarters ended March 31, 2013 and 2012, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future.
Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Properties.
NNN’s financing activities for the quarter ended March 31, 2013, included the following significant transactions:
$114,800,000 in net payments on NNN's Credit Facility,
$13,822,000 in net proceeds from the issuance of 424,995 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"),

26



$150,327,000 in net proceeds from the issuance of approximately 4,616,542 shares of common stock in connection with the at-the-market ("ATM") equity program,
$44,321,000 in dividends paid to common stockholders,
$4,762,000 in dividends paid to holders of the depositary shares of NNN’s Series D Preferred Stock, and
$20,565,000 paid in the first quarter 2013 to settle the remaining $15,537,000 principal amount of the 3.95% convertible notes payable.
Contractual Obligations and Commercial Commitments. As of March 31, 2013, NNN has agreed to fund construction commitments in connection with the improvements of leased Properties as outlined in the table below (dollars in thousands):
 
March 31, 2013
 
# of
Properties
 
Total
Commitment
(1)
 
Amount
Funded
 
Remaining
Commitment
Real estate portfolio
47

 
$
148,662

 
$
112,387

 
$
36,275

Real estate held for sale
2

 
1,662

 
947

 
715

 
49

 
$
150,324

 
$
113,334

 
$
36,990

(1) Includes land, construction costs and tenant improvements.
 As of March 31, 2013, NNN did not have any material contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table above and previously disclosed under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in NNN's Annual Report on Form 10-K for the year ended December 31, 2012. 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 generally require the tenant to pay all property taxes and assessments, substantially maintain the interior and exterior of the property and carry property and liability insurance coverage. Therefore, management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain of NNN’s Properties are subject to leases under which NNN retains responsibility for specific costs and expenses associated with the Property. Management anticipates the costs associated with NNN’s vacant Properties or those Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under its credit facility or use other sources of capital in the event of unforeseen significant capital expenditures.
The lost revenues and increased property expenses resulting from vacant properties or uncollectibility of lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is unable to re-lease the Properties at comparable rental rates and in a timely manner. As of March 31, 2013, NNN owned 36 vacant, un-leased Properties which accounted for approximately two percent of total Properties held in NNN’s Property Portfolio.
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 Code, as amended, and related regulations and intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. NNN generally will not be subject to federal income tax on income that it distributes to its stockholders, provided that it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If NNN fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially adversely affect NNN’s income and ability to pay dividends. NNN believes it has been structured as, and its past and present operations qualify NNN as, a REIT.
One of NNN’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends.

27



The following table outlines the dividends declared and paid for each issuance of NNN's stock (in thousands, except per share data):
 
 
Quarter Ended March 31,
 
 
2013
 
2012
Series C preferred stock (1):
 
 
 
 
Dividends
$

 
$
1,979

 
Per share

 
0.5378

 
 
 
 
 
Series D preferred stock (2):
 
 
 
 
Dividends
4,762

 

 
Per share
0.4141

 

 
 
 
 
 
Common stock:
 
 
 
 
Dividends
44,321

 
40,432

 
Per share
0.395

 
0.385

 
 
 
 
 
1) The Series C preferred stock was redeemed in March 2012. The dividends paid during the quarter ended
March 31, 2012 include accumulated and unpaid dividends through the redemption date.
2) The Series D preferred stock has no maturity date and will remain outstanding unless redeemed.

In April 2013, NNN declared a dividend of $0.395 per share which is payable in May 2013 to its common stockholders of record as of April 30, 2013.

Capital Resources
Generally, cash needs for property acquisitions, mortgages and notes receivable investments, debt payments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent, by internally generated funds. Cash needs for operating expenses and dividends have generally been funded by internally generated funds. If available, future sources of capital include proceeds from the public or private offering of NNN’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations.

Debt
The following is a summary of NNN’s total outstanding debt as of (dollars in thousands):
 
March 31, 2013
 
Percentage of
Total
 
December 31, 2012
 
Percentage of
Total
Line of credit payable
$
59,400

 
4.1%
 
$
174,200

 
11.0%
Mortgages payable
10,328

 
0.7%
 
10,602

 
0.7%
Notes payable – convertible
222,084

 
15.2%
 
236,500

 
14.9%
Notes payable
1,165,897

 
80.0%
 
1,165,662

 
73.4%
Total outstanding debt
$
1,457,709

 
100.0%
 
$
1,586,964

 
100.0%

Indebtedness.  NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests, and mortgage and note receivables.
Line of Credit Payable. NNN's $500,000,000 revolving credit facility (the “Credit Facility”) had a weighted average outstanding balance of $127,198,000 and a weighted average interest rate of 1.4% during the quarter ended March 31, 2013. The Credit Facility matures October 2016, unless the Company exercises its to extend maturity to October 2017. The Credit Facility bears interest at LIBOR plus 117.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature to increase the facility size up to $1,000,000,000, subject to lender approval. As of March 31, 2013, $59,400,000 was outstanding and $440,600,000 was available for future borrowings under the Credit Facility.

28



Notes Payable – Convertible.  Each of NNN’s outstanding series of convertible notes is summarized in the table below (dollars in thousands, except per share conversion price):
Terms
 
2026
Notes(1)(2)
 
 
2028
Notes(1)(3)(4)
 
Issue Date
 
September 2006

  
 
March 2008

  
Net Proceeds
 
$
168,650

  
 
$
228,576

  
Stated Interest Rate
 
3.950
%
  
 
5.125
%
  
Effective Interest Rate (6)
 
5.840
%
 
 
7.192
%
 
Debt Issuance Costs
 
$
3,850

 
 
$
5,459

(5) 
Earliest Conversion Date (7)
 

  
 
April 2013

  
Earliest Put Option Date
 

 
 
June 2013

  
Maturity Date
 

  
 
June 2028

  
Original Principal
 
$
172,500

  
 
$
234,035

  
Repurchases
 
(33,800
)
 
 
(11,000
)
 
Settled
 
(138,700
)
 
 

 
Outstanding principal balance at March 31, 2013
 
$

(8) 
 
$
223,035

  
(1) 
Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method.
(2) 
The conversion rate per $1 principal amount was 42.6237 shares of NNN’s common stock, which is equivalent to a conversion price of $23.4611 per share of common stock.
(3) 
The conversion rate per $1 principal amount was 39.5149 shares of NNN’s common stock, which is equivalent to a conversion price of $25.3069 per share of common stock.
(4) 
NNN repurchased $11,000 in 2009 for a purchase price of $8,588 resulting in a gain of $1,867.
(5) 
Includes $219 of note costs which were written off in connection with the repurchase of $11,000 of the 2028 Notes.
(6) 
With the adoption of the accounting guidance on convertible debt securities in 2009, the effective interest rates for the 2026 Notes and the 2028 Notes are 5.840% and 7.192%, respectively.
(7) 
Prior to the earliest respective conversion date, the notes are only convertible in limited circumstances pursuant to the terms of the notes. In March 2013, certain market conditions for the 2028 Notes were satisfied, making the 2028 Notes convertible during the calendar quarter beginning April 1, 2013.
(8) 
In January 2013, NNN settled the remaining principal balance of $15,537.
Each series of convertible notes represents a senior, unsecured obligation of NNN and is subordinated to all secured indebtedness of the Company. Each note is redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued and unpaid interest thereon through but not including the redemption date and (ii) the make whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.
The carrying values of the Company’s convertible debt and equity components are summarized in the table below as of March 31 (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Carrying value of equity component
$
(20,720
)
 
$
(22,193
)
Principal amount of convertible debt
223,035

 
238,572

Remaining unamortized debt discount
(951
)
 
(2,072
)
Net carrying value of convertible debt
$
201,364

 
$
214,307


As of March 31, 2013, the remaining amortization period for the 2028 Notes debt discount was approximately three months and the 2026 Notes debt discount had been fully amortized.

29



NNN recorded the following in interest expense relating to the 2026 Notes and the 2028 Notes (dollars in thousands):
 
Quarter Ended March 31,
 
2,013
 
2012
Noncash interest charges
$
1,122

 
$
1,044

Contractual interest expense
2,858

 
4,227

Amortization of debt costs
305

 

Total interest expense
$
4,285

 
$
5,271

The if-converted value of the 2028 Notes exceeded the principal amount by $95,739,000 as of March 31, 2013. As of December 31, 2012, the if-converted values, which exceeded the principal amount, were $5,125,000 and $51,764,000 for the 2026 Notes and the 2028 Notes, respectively.
As of December 31, 2012, $15,537,000 principal amount of 2026 Notes were outstanding. In January 2013, the Company paid approximately $20,565,000 in aggregate settlement value for the $15,537,000 of settled notes. The difference between the amount paid and the principal amount of the settled notes of $5,028,000 was recognized as a decrease to additional paid-in capital.
Notes Payable. In April 2013, NNN closed on its public offering of $350,000,000 principal amount of 3.300% senior unsecured notes due April 15, 2023. The public offering price was 99.259% of the principal amount for a yield of 3.388%.  The notes will be senior unsecured obligations of the Company and are registered under the Company's existing shelf registration statement filed with the Securities and Exchange Commission. NNN used a portion of the net proceeds from this offering to repay NNN's outstanding indebtedness under its Credit Facility. In addition, NNN intends to use the remainder of the net proceeds to fund future property acquisitions and for general corporate purposes.

Debt and Equity Securities
NNN has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance investment acquisitions.
Securities Offering. In February 2012, NNN filed a shelf registration statement with the Securities and Exchange Commission (the “Commission”) which was automatically effective and permits the issuance by NNN of an indeterminate amount of debt and equity securities.
A description of NNN’s outstanding series of publicly held notes is found under “Debt – Notes Payable – Convertible” and "Debt – Notes Payable" above.
7.375% Series C Cumulative Redeemable Preferred Stock.  In October 2006, NNN issued 3,680,000 depositary shares, each representing 1/100th of a share of Series C Preferred Stock.
In March 2012, NNN redeemed all 3,680,000 outstanding depositary shares representing interests in its Series C Preferred Stock. The Series C Preferred Stock was redeemed at $25.00 per depositary share, plus accumulated and unpaid distributions through the redemption date, for an aggregate redemption price of $25.0768229 per depositary share. The excess carrying amount of preferred stock redeemed over the cash paid to redeem the preferred stock was $3,098,000 of Series C Preferred Stock issuance costs.
6.625% Series D Cumulative Redeemable Preferred Stock. In February 2012, NNN consummated an underwritten public offering of 11,500,000 depositary shares (including 1,500,000 shares in connection with the underwriters over-allotment), each representing a 1/100th interest in a share of Series D Preferred Stock, and received gross proceeds of $287,500,000. In connection with this offering, the Company incurred stock issuance costs of approximately $9,855,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses. NNN used these net offering proceeds to redeem the 7.375% Series C Preferred Stock for an aggregate redemption price of $92,000,000, excluding accumulated dividends of $283,000. NNN used the remainder of the net proceeds for general corporate purposes, including repaying outstanding indebtedness under its Credit Facility.
Holders of the Series D depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 6.625% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.65625 per depositary share). The Series D Preferred Stock underlying the depositary shares ranks senior to NNN’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of NNN. The Series D Preferred Stock has no maturity date and will remain outstanding unless redeemed. NNN may

30



redeem the Series D Preferred Stock underlying the depositary shares on or after September 23, 2017, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated and unpaid dividends. In addition, upon a change of control, as defined in the articles supplementary fixing the rights and preferences of the Series D Preferred Stock, NNN may redeem the Series D Preferred Stock underlying the depositary shares at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated and unpaid dividends, and in limited circumstances the holders of depositary shares may convert some or all of their Series D Preferred Stock into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of April 29, 2013, the Series D Preferred Stock was not redeemable or convertible.
Common Stock Issuances. In May 2012, NNN established an at-the-market equity program ("2012 ATM") which allowed NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through May 10, 2015. The following outlines the common stock issuances pursuant to the 2012 ATM (dollars in thousands, except per share data):
 
Quarter Ended March 31,
 
2013
 
2012
Shares of common stock
4,616,542

 

Average price per share
$
32.56

 
$

Net proceeds
150,327

 

Stock issuance costs (1)
2,129

 

(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.
In March 2013, NNN established a second ATM equity program ("2013 ATM") which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through March 31, 2015. NNN incurred $135,000 of stock issuance costs related to the 2013 ATM consisting primarily of legal and accounting fees during the quarter ended March 31, 2013. No shares have been issued under the 2013 ATM as of March 31, 2013.
In February 2012, NNN filed a shelf registration statement which was automatically effective with the Commission for its DRIP, which permits the issuance by NNN of up to 16,000,000 shares of common stock. NNN’s DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in NNN’s common stock. The following outlines the common stock issuances pursuant to NNN’s DRIP (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Shares of common stock
424,995

 
1,428,069

Net proceeds
$
13,822

 
$
37,666


Commercial Mortgage Residual Interests

The following table summarizes the key assumptions used in determining the value of the Residuals as of:
 
March 31, 2013
 
December 31, 2012
Discount rate
25
%
 
25
%
Average life equivalent CPR (1) speeds range
0.80% to 25.04% CPR

 
0.80% to 24.31% CPR

Foreclosures:
 
 
 
Frequency curve default model
0.08% - 4.76% range

 
0.09% - 4.49% range

Loss severity of loans in foreclosure
20
%
 
20
%
Yield:
 
 
 
LIBOR
Forward 3-month curve

 
Forward 3-month curve

Prime
Forward curve

 
Forward curve

 
 
 
 
(1) Conditional prepayment rate
 
 
 


31



The following table summarizes the recognition of unrealized gains and/or losses recorded as other comprehensive income as well as other than temporary valuation impairments recorded in condensed consolidated statements of earnings (dollars in thousands):
 
Quarter Ended March 31,
 
2013
 
2012
Unrealized gains
$
869

 
$

There were no other than temporary valuation impairments recorded in the quarters ended March 31, 2013 and 2012 with respect to the Residuals.

Recent Accounting Pronouncements

Refer to Note 1 to the March 31, 2013, Condensed Consolidated Financial Statements.

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Item 3.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 are 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 overall borrowing costs. To achieve its objectives, NNN borrows at both fixed and variable rates on its long-term debt. As of March 31, 2013, NNN had four forward starting swaps with an aggregate notional amount of $240,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt.
The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding as of March 31, 2013 and December 31, 2012. The table presents principal payments and related interest rates by year for debt obligations outstanding as of March 31, 2013. The table incorporates only those debt obligations that existed as of March 31, 2013, and it does not consider those debt obligations or positions which could arise after this date. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, NNN’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the quarter, NNN’s hedging strategies at that time and interest rates. If interest rates on NNN’s variable rate debt increased by one percent, NNN’s interest expense would have increased by less than two percent for the quarter ended March 31, 2013.
 
Debt Obligations (dollars in thousands)
  
Variable Rate Debt
 
Fixed Rate Debt
  
Credit Facility
 
Mortgages(1)
 
Unsecured Debt(2)
  
Debt
Obligation
 
Weighted
Average
Interest Rate
 
Debt
Obligation
 
Weighted
Average Effective
Interest Rate
 
Debt
Obligation
 
Effective
Interest
Rate
2013
$

 

 
$
853

 
6.98
%
 
$
222,085

 
7.19
%
2014

 

 
1,158

 
6.90
%
 
149,933

 
5.91
%
2015

 

 
1,207

 
6.86
%
 
149,870

 
6.19
%
2016
59,400

 
1.38
%
 
6,842

 
5.95
%
 

 

2017

 

 
146

 
8.03
%
 
249,527

 
6.92
%
Thereafter

 

 
122

 
9.00
%
 
616,566

 
4.80
%
Total
$
59,400

 
1.38
%
 
$
10,328

 
6.38
%
 
$
1,387,981

 
5.84
%
Fair Value:
 
 
 
 
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