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Section 1: 10-Q (FORM 10-Q)

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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 September 30, 2017
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                      to                     
Commission file number 001-11290
NATIONAL RETAIL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
(State or other jurisdiction of
incorporation or organization)
56-1431377
(I.R.S. Employer Identification No.)
450 South Orange Avenue, Suite 900
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (407) 265-7348

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  ¨
Emerging growth company ¨
 


 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
152,053,313 shares of common stock, $0.01 par value, outstanding as of October 30, 2017.





TABLE OF CONTENTS
 
 
 
PAGE      
REFERENCE
Part I - Financial Information
 
Item 1.
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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)
 
September 30, 2017

December 31, 2016
ASSETS
(unaudited)
 
 
Real estate portfolio:
 
 
 
Accounted for using the operating method, net of accumulated depreciation and amortization
$
6,241,667

 
$
5,881,496

Accounted for using the direct financing method
9,873

 
11,230

Real estate held for sale
2,423

 
23,634

Cash and cash equivalents
254,263

 
294,540

Receivables, net of allowance of $1,961 and $1,006, respectively
3,495

 
3,418

Accrued rental income, net of allowance of $2,224 and $3,078, respectively
25,886

 
25,101

Debt costs, net of accumulated amortization of $12,315 and $11,268, respectively
1,775

 
2,715

Other assets
86,838

 
92,017

Total assets
$
6,626,220

 
$
6,334,151

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, including unamortized premium and net of unamortized debt costs
$
13,447

 
$
13,878

Notes payable, net of unamortized discount and unamortized debt costs
2,695,414

 
2,297,811

Accrued interest payable
37,055

 
19,665

Other liabilities
114,541

 
85,869

Total liabilities
2,860,457

 
2,417,223

 


 


Equity:
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value. Authorized 15,000,000 shares
 
 
 
6.625% Series D, 115,000 shares issued and outstanding at December 31, 2016, at stated liquidation value of $2,500 per share

 
287,500

5.700% Series E, 115,000 shares issued and outstanding, at stated liquidation value of $2,500 per share
287,500

 
287,500

5.200% Series F, 138,000 shares issued and outstanding, at stated liquidation value of $2,500 per share
345,000

 
345,000

Common stock, $0.01 par value. Authorized 375,000,000 shares; 151,627,386 and 147,149,945 shares issued and outstanding, respectively
1,518

 
1,473

Capital in excess of par value
3,516,360

 
3,322,771

Accumulated deficit
(370,758
)
 
(319,254
)
Accumulated other comprehensive income (loss)
(14,367
)
 
(8,191
)
Total stockholders’ equity of NNN
3,765,253

 
3,916,799

Noncontrolling interests
510

 
129

Total equity
3,765,763

 
3,916,928

Total liabilities and equity
$
6,626,220

 
$
6,334,151

See accompanying notes to condensed consolidated financial statements.

3


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

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
  
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental income from operating leases
$
143,376

 
$
129,944

 
$
421,167

 
$
378,007

Earned income from direct financing leases
241

 
338

 
743

 
1,041

Percentage rent
239

 
321

 
985

 
959

Real estate expense reimbursement from tenants
3,614

 
3,413

 
11,174

 
10,251

Interest and other income from real estate transactions
151

 
141

 
368

 
905

Interest income on commercial mortgage residual interests
84

 
384

 
249

 
1,285

 
147,705

 
134,541

 
434,686

 
392,448

Operating expenses:
 
 
 
 
 
 
 
General and administrative
7,354

 
9,116

 
25,093

 
27,100

Real estate
5,553

 
4,942

 
16,640

 
14,297

Depreciation and amortization
48,409

 
38,970

 
129,878

 
110,114

Impairment – commercial mortgage residual interests valuation

 
5,978

 

 
6,830

Impairment losses – real estate and other charges, net of recoveries
80

 
4,917

 
1,247

 
10,949

Retirement severance costs
225

 

 
7,653

 

 
61,621

 
63,923

 
180,511

 
169,290

Earnings from operations
86,084

 
70,618

 
254,175

 
223,158

Other expenses (revenues):
 
 
 
 
 
 
 
Interest and other income
(64
)
 
(17
)
 
(239
)
 
(108
)
Interest expense
28,204

 
24,257

 
82,092

 
71,923

Real estate acquisition costs

 
111

 

 
520

 
28,140

 
24,351

 
81,853

 
72,335

Earnings before gain on disposition of real estate
57,944

 
46,267

 
172,322

 
150,823

Gain on disposition of real estate
3,185

 
4,505

 
20,864

 
22,558

Earnings including noncontrolling interests
61,129

 
50,772

 
193,186

 
173,381

Loss (earnings) attributable to noncontrolling interests
(9
)
 
12

 
(381
)
 
28

Net earnings attributable to NNN
$
61,120

 
$
50,784

 
$
192,805

 
$
173,409

 
See accompanying notes to condensed consolidated financial statements. 

4


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

            
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net earnings attributable to NNN
$
61,120

 
$
50,784

 
$
192,805

 
$
173,409

Series D preferred stock dividends

 
(4,762
)
 
(3,598
)
 
(14,285
)
Series E preferred stock dividends
(4,097
)
 
(4,097
)
 
(12,291
)
 
(12,291
)
Series F preferred stock dividends
(4,485
)
 

 
(13,455
)
 

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

 

 
(9,855
)
 

Net earnings attributable to common stockholders
$
52,538

 
$
41,925

 
$
153,606

 
$
146,833

Net earnings per share of common stock:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.29

 
$
1.03

 
$
1.02

Diluted
$
0.35

 
$
0.28

 
$
1.03

 
$
1.02

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
149,341,025

 
146,111,041

 
148,223,234

 
143,474,664

Diluted
149,667,609

 
146,681,592

 
148,526,361

 
144,036,165

Other comprehensive income:
 
 
 
 
 
 
 
Net earnings attributable to NNN
$
61,120

 
$
50,784

 
$
192,805

 
$
173,409

Amortization of interest rate hedges
491

 
720

 
1,394

 
2,122

Fair value forward starting swaps
(5,994
)
 
701

 
(7,688
)
 
1,013

Net gain – commercial mortgage residual interests

 
(4,561
)
 

 
(4,454
)
Net gain – available-for-sale securities
125

 
47

 
118

 
600

Comprehensive income attributable to NNN
$
55,742

 
$
47,691

 
$
186,629

 
$
172,690


See accompanying notes to condensed consolidated financial statements.


5


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


 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Earnings including noncontrolling interests
$
193,186

 
$
173,381

Adjustments to reconcile earnings including noncontrolling interests to net cash provided by operating activities:
 
 
 
Depreciation and amortization
129,878

 
110,114

Impairment losses – real estate and other charges, net of recoveries
1,245

 
10,949

Impairment – commercial mortgage residual interests valuation

 
6,830

Amortization of notes payable discount
1,330

 
1,030

Amortization of debt costs
2,611

 
2,276

Amortization of mortgages payable premium
(65
)
 
(126
)
Amortization of deferred interest rate hedges
1,394

 
2,122

Settlement of forward starting swaps
(7,688
)
 

Gain on disposition of real estate
(20,864
)
 
(22,558
)
Performance incentive plan expense
12,100

 
8,714

Performance incentive plan payment
(862
)
 
(581
)
Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
Decrease in real estate leased to others using the direct financing method
661

 
1,054

Decrease (increase) in receivables
(77
)
 
871

Decrease (increase) in accrued rental income
(1,199
)
 
21

Increase in other assets
(353
)
 
(227
)
Increase in accrued interest payable
17,390

 
12,679

Increase in other liabilities
1,659

 
8,315

Other
(131
)
 
(658
)
Net cash provided by operating activities
330,215

 
314,206

Cash flows from investing activities:
 
 
 
Proceeds from the disposition of real estate
56,279

 
83,722

Additions to real estate:
 
 
 
Accounted for using the operating method
(471,396
)
 
(637,603
)
Principal payments on mortgages and notes receivable
500

 
468

Other
(558
)
 
(2,010
)
Net cash used in investing activities
(415,175
)
 
(555,423
)
 
See accompanying notes to condensed consolidated financial statements.


6


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


 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from line of credit payable
$
956,700

 
$
1,090,200

Repayment of line of credit payable
(956,700
)
 
(906,000
)
Repayment of mortgages payable
(379
)
 
(7,125
)
Proceeds from notes payable
398,372

 

Payment of debt costs
(3,237
)
 
(159
)
Proceeds from issuance of common stock
174,499

 
277,076

Stock issuance costs
(2,618
)
 
(4,266
)
Redemption of Series D preferred stock
(287,500
)
 

Payment of Series D preferred stock dividends
(3,598
)
 
(14,285
)
Payment of Series E preferred stock dividends
(12,291
)
 
(12,291
)
Payment of Series F preferred stock dividends
(13,455
)
 

Payment of common stock dividends
(205,110
)
 
(190,277
)
Net cash provided by financing activities
44,683

 
232,873

Net decrease in cash, cash equivalents and restricted cash
(40,277
)
 
(8,344
)
Cash, cash equivalents and restricted cash at beginning of period(1)
294,540

 
14,260

Cash, cash equivalents and restricted cash at end of period(1)
$
254,263

 
$
5,916

Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amount capitalized
$
61,126

 
$
55,185

Taxes received
$
(3
)
 
$
(49
)
Supplemental disclosure of noncash investing and financing activities:
 
 
 
Change in other comprehensive income
$
6,176

 
$
719

Change in lease classification (direct financing lease to operating lease)
$
696

 
$

 
(1) Cash, cash equivalents and restricted cash at the end of the period is the aggregate of Cash and cash equivalents and Restricted cash and cash held in escrow from the Consolidated Balance Sheets. NNN had no restricted cash and cash held in escrow at September 30, 2017 and 2016.

 
See accompanying notes to condensed consolidated financial statements.

7



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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 terms "NNN" or the "Company" refer to National Retail Properties, Inc. and all of its consolidated subsidiaries.
NNN's assets primarily include real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment ("Properties", "Property Portfolio", or individually a "Property").
 
September 30, 2017
Property Portfolio:
 
Total properties
2,687

Gross leasable area (square feet)
28,250,000

States
48

Weighted average remaining lease term (years)
11.4

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 (including normal recurring accruals) 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 and nine months ended September 30, 2017, may not be indicative of the results that may be expected for the year ending December 31, 2017. Amounts as of December 31, 2016, 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, 2016.
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.
Real Estate Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by NNN includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. NNN recorded $1,694,000 and $1,243,000 in capitalized interest during the development period for the nine months ended September 30, 2017 and 2016, respectively, of which $581,000 and $416,000 was recorded during the quarters ended September 30, 2017 and 2016, respectively.
Purchase Accounting for Acquisition of Real Estate Subject to a Lease – In accordance with the FASB guidance on business combinations, the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases, as applicable, based on their respective fair values. Acquisition costs incurred in connection with a business combination are expensed when incurred.
The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on the determination of their fair values.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured

8



over a period equal to the remaining term of the lease and the applicable option terms if it is probable that the tenant will exercise options. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period.
The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off in that period. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.
Intangible assets and liabilities consisted of the following as of (dollars in thousands):
 
September 30, 2017
 
December 31, 2016
Intangible lease assets (included in Other assets):
 
 
 
Value of above-market in-place leases, net
$
7,584

 
$
9,591

Value of in-place leases, net
46,805

 
55,290

Intangible lease liabilities (included in Other liabilities):
 
 
 
Value of below-market in-place leases, net
19,673

 
22,100

Debt Costs – Line of Credit Payable Debt costs incurred in connection with NNN’s $650,000,000 line of credit have been deferred and are being amortized to interest expense over the term of the loan commitment using the straight-line method, which approximates the effective interest method. NNN has recorded debt costs associated with the line of credit as an asset, in Debt costs on the Condensed Consolidated Balance Sheets.
Debt Costs – Mortgages Payable Debt costs incurred in connection with NNN’s mortgages payable have been deferred and are being amortized over the term of the respective loan commitment using the straight-line method, which approximates the effective interest method. These costs of $147,000 at September 30, 2017 and December 31, 2016, are included in Mortgages payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $51,000 and $38,000, respectively.
Debt Costs – Notes Payable Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized to interest expense over the term of the respective debt obligation using the effective interest method. These costs of $24,807,000 and $21,157,000 at September 30, 2017 and December 31, 2016, respectively, are included in Notes payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $7,928,000 and $6,376,000, respectively.
Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. The guidance requires classification of the Company’s unvested restricted share units, which carry 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net earnings attributable to NNN
$
61,120

 
$
50,784

 
$
192,805

 
$
173,409

Less: Series D preferred stock dividends

 
(4,762
)
 
(3,598
)
 
(14,285
)
Less: Series E preferred stock dividends
(4,097
)
 
(4,097
)
 
(12,291
)
 
(12,291
)
Less: Series F preferred stock dividends
(4,485
)
 

 
(13,455
)
 

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

 

 
(9,855
)
 

Net earnings available to NNN’s common stockholders
52,538

 
41,925

 
153,606

 
146,833

Less: Earnings allocated to unvested restricted shares
(132
)
 
(184
)
 
(399
)
 
(510
)
Net earnings used in basic and diluted earnings per share
$
52,406

 
$
41,741

 
$
153,207

 
$
146,323

 
 
 
 
 
 
 
 
Basic and Diluted Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Weighted average number of shares outstanding
150,076,348

 
146,982,759

 
148,934,825

 
144,301,606

Less: Unvested restricted stock
(277,713
)
 
(406,170
)
 
(288,238
)
 
(385,267
)
Less: Unvested contingent restricted shares
(457,610
)
 
(465,548
)
 
(423,353
)
 
(441,675
)
Weighted average number of shares outstanding used in basic earnings per share
149,341,025

 
146,111,041

 
148,223,234

 
143,474,664

Other dilutive securities
326,584

 
570,551

 
303,127

 
561,501

Weighted average number of shares outstanding used in diluted earnings per share
149,667,609

 
146,681,592

 
148,526,361

 
144,036,165

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



Accumulated Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other comprehensive income (loss) (dollars in thousands):
 
Gains or (Losses) on Cash Flow Hedges (1)
 
Gains on Available-for-Sale Securities
 
Total
Beginning balance, December 31, 2016
$
(8,899
)
 
$
708

 
$
(8,191
)
 
 
 
 
 
 
Other comprehensive income (loss)
(7,688
)
 
118

 
(7,570
)
Reclassifications from accumulated other comprehensive income to net earnings
1,394

(2) 

 
1,394

Net current period other comprehensive income (loss)
(6,294
)
 
118

 
(6,176
)
Ending balance, September 30, 2017
$
(15,193
)
 
$
826

 
$
(14,367
)
(1) Additional disclosure is included in Note 6 – Derivatives.
(2) Reclassifications out of other comprehensive income (loss) are recorded in Interest expense on the Condensed Consolidated Statements of Income and Comprehensive Income.
New Accounting Pronouncements – In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09, is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts are excluded from ASU 2014-09, including lease contracts within the scope of the FASB guidance included in Leases (Topic 842). In March 2016, the FASB issued updated guidance. ASU 2016-08, "Revenue from Contracts with customers (Topic 606) - Principal versus Agent Considerations (Reporting Gross Versus Net)," clarifies the implementation guidance on principal versus agent considerations included within the scope of ASU 2014-09. In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)," which clarifies the scope of subtopic 610-20, which was issued as a part of ASU 2014-09, to add guidance for partial sales of nonfinancial assets. The guidance permits two methods of adoption: full retrospective approach to each prior reporting period presented, or modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017, and early adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date.
NNN will adopt ASU 2014-09 on January 1, 2018, and apply the cumulative catch-up transition method. Through the evaluation and implementation process, NNN has determined the key revenue stream impacted by ASU 2014-09 is gain on disposition of real estate reported on the Condensed Consolidated Statements of Income and Comprehensive Income. NNN currently recognizes revenue at the time of closing (i.e., transfer of asset). Upon adoption of ASU 2014-09, NNN will need to evaluate any separate contracts or performance obligations to determine proper timing of revenue recognition, as well as, transaction price allocation. The adoption of ASU 2014-09 will not have a material impact on NNN's financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The FASB issued final guidance that requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. NNN is currently evaluating to determine the potential impact the adoption of ASU 2016-02 will have on its financial position or results of operations.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments in this update provide guidance on certain cash flow classification issues. The objective of the amendment is to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The adoption of ASU 2016-15 will not impact NNN's financial position or results of operations.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting," effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment

11



award require an entity to apply modification accounting in Topic 718. NNN has early adopted ASU 2017-09. The adoption of ASU 2017-09 did not impact NNN's financial position or results of operations.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require a company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the update. The adoption of ASU 2017-12 will not have a material impact on NNN's financial position or results of operations.
Use of Estimates – 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 condensed 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.

Note 2 – Real Estate:
Real Estate – Portfolio
Leases – The following outlines key information for NNN’s leases:
 
September 30, 2017
Lease classification:
 
Operating
2,711

Direct financing
7

Building portion – direct financing/land portion – operating
2

Weighted average remaining lease term (years)
11.4

The leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the Property and carry property and liability insurance coverage. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the Property. Generally, the leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions of the base term of the lease, including rent increases.
Real Estate Portfolio – Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following as of (dollars in thousands):
 
September 30, 2017
 
December 31, 2016
Land and improvements
$
2,220,519

 
$
2,103,185

Buildings and improvements
4,812,663

 
4,488,787

Leasehold interests
5,261

 
4,565

 
7,038,443

 
6,596,537

Less accumulated depreciation and amortization
(846,365
)
 
(739,098
)
 
6,192,078

 
5,857,439

Work in progress
49,589

 
24,057

 
$
6,241,667

 
$
5,881,496



12



Real Estate – Held For Sale
On a quarterly basis, the Company evaluates its Properties for held for sale classification based on specific criteria as outlined in ASC 360, Property, Plant & Equipment, including management’s intent to commit to a plan to sell the asset. NNN anticipates the disposition of Properties classified as held for sales to occur within 12 months. As of September 30, 2017, NNN had three of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2016, included 17 Properties, 14 of which were sold in 2017. Real estate held for sale consisted of the following as of (dollars in thousands):
 
September 30, 2017
 
December 31, 2016
Land and improvements
$
1,310

 
$
12,736

Building and improvements
1,975

 
14,266

 
3,285

 
27,002

Less accumulated depreciation and amortization
(862
)
 
(3,368
)
 
$
2,423

 
$
23,634

Real Estate – Dispositions
The following table summarizes the Properties sold and the corresponding gain recognized on the disposition of Properties (dollars in thousands):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
# of Sold
Properties
 
Gain
 
# of Sold
Properties
 
Gain
 
# of Sold
Properties
 
Gain
 
# of Sold
Properties
 
Gain
 
Gain on disposition of real estate
6
 
$
3,185

 
7
 
$
4,505

 
31
 
$
20,864

 
24
 
$
22,558

 
Real Estate – Commitments
NNN has committed to fund construction commitments on 26 Properties. The improvements are estimated to be completed within 12 months. These construction commitments, as of September 30, 2017, are outlined in the table below (dollars in thousands):
Total commitment(1)
$
175,821

Amount funded
89,243

Remaining commitment
86,578

(1) Includes land, construction costs, tenant improvements and lease costs.
Real Estate – Impairments
Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant in a reasonable period of time. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company's review of long-lived assets, including identifiable intangible assets, NNN recognized real estate impairments, net of recoveries of $1,245,000 and $7,680,000 for the nine months ended September 30, 2017 and 2016, respectively, of which $78,000 and $4,917,000 was recorded during the quarters ended September 30, 2017 and 2016, respectively.

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


13



Note 3 – Line of Credit Payable:
NNN's $650,000,000 unsecured revolving credit facility (the “Credit Facility”) had a weighted average outstanding balance of $100,545,000 and a weighted average interest rate of 2.1% during the nine months ended September 30, 2017. The Credit Facility matures January 2019, unless the Company exercises its option to extend maturity to January 2020. The Credit Facility bears interest at LIBOR plus 92.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature to increase the facility size up to $1,000,000,000, subject to lender approval. As of September 30, 2017, there was no outstanding balance and $650,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $230,000.

Note 4 – Notes Payable:

In September 2017, NNN filed a prospectus supplement to the prospectus contained in its February 2015 shelf registration statement and issued $400,000,000 aggregate principal amount of 3.50% notes due October 2027 (the “2027 Notes”). The 2027 Notes were sold at a discount with an aggregate purchase price of $398,372,000 with interest payable semi-annually commencing on April 15, 2018. The discount of $1,628,000 is being amortized to interest expense over the term of the notes using the effective interest method. The effective interest rate for the 2027 Notes after accounting for the note discount is 3.548%. NNN previously entered into two forward starting swaps with an aggregate notional amount of $250,000,000. Upon issuance of the 2027 Notes, NNN terminated the forward starting swaps resulting in a liability of $7,690,000, of which $7,688,000 was deferred in other comprehensive income. The deferred liability is being amortized to interest expense over the term of the 2027 Notes using the effective interest method.

The 2027 Notes are senior unsecured obligations of NNN and are subordinated to all secured indebtedness and to the indebtedness and other liabilities of NNN's subsidiaries. Additionally, the 2027 Notes are redeemable at NNN's option, in whole or part anytime, for an amount equal to (i) the sum of the outstanding principal balance of the notes being redeemed plus accrued interest thereon to the redemption date, and (ii) the make whole amount, if any, as defined in the supplemental indenture dated September 6, 2017, relating to the 2027 Notes.

NNN received approximately $394,722,000 of net proceeds in connection with the issuance of the 2027 Notes, after incurring debt issuance costs totaling $3,650,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses.

Note 5 – Stockholders' Equity:
In February 2015, 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.
Dividend Reinvestment and Stock Purchase Plan – In February 2015, NNN filed a shelf registration statement with the Commission for its Dividend Reinvestment and Stock Purchase Plan ("DRIP") which permits the issuance by NNN of up to 16,000,000 shares of common stock. The following table outlines the common stock issuances pursuant to NNN's DRIP (dollars in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Shares of common stock
135,721

 
164,640

Net proceeds
$
5,469

 
$
7,376


14



At-The-Market Offerings – NNN has established an at-the-market equity program ("ATM") which allows NNN to sell shares of common stock from time to time. The following outlines NNN's ATM programs:
 
2016 ATM
2015 ATM
Established date
March 2016

February 2015

Termination date
March 2019

March 2016

Total allowable shares
12,000,000

10,000,000

Total shares issued as of September 30, 2017
8,192,542

9,852,465

The following table outlines the common stock issuances pursuant to NNN's ATM equity programs (dollars in thousands, except per share data):
 
Nine Months Ended September 30,
 
2017
 
2016
Shares of common stock
3,969,252

 
5,716,222

Average price per share (net)
$
42.00

 
$
46.48

Net proceeds
$
166,698

 
$
265,696

Stock issuance costs(1)
$
2,563

 
$
4,266

(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.
Dividends – The following table outlines the dividends declared and paid for each issuance of NNN's stock (dollars in thousands, except per share data):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Series D preferred stock(1):
 
 
 
 
 
 
 
Dividends
$

 
$
4,762

 
$
3,598

 
$
14,285

Per depositary share

 
0.414063

 
0.312847

 
1.242188

 
 
 
 
 
 
 
 
Series E preferred stock(2):
 
 
 
 
 
 
 
Dividends
4,097

 
4,097

 
12,291

 
12,291

Per depositary share
0.356250

 
0.356250

 
1.068750

 
1.068750

 
 
 
 
 
 
 
 
Series F preferred stock(3):
 
 
 
 
 
 
 
Dividends
4,485

 

 
13,455

 

Per depositary share
0.325000

 

 
0.975000

 

 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
Dividends
70,670

 
66,676

 
205,110

 
190,277

Per share
0.475

 
0.455

 
1.385

 
1.325

(1) The Series D preferred stock was redeemed in February 2017. The dividends paid in 2017 included accumulated and unpaid dividends through the redemption date.
(2) The Series E preferred stock has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date for the Series E Preferred Stock is May 2018.
(3) The Series F preferred stock was issued in October 2016 and has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date for the Series F preferred stock is October 2021.
In October 2017, NNN declared a dividend of $0.475 per share, which is payable in November 2017 to its common stockholders of record as of October 31, 2017.


15



Note 6 – 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 a firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
NNN’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, NNN primarily uses treasury locks, forward swaps and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the variable cash flows associated with floating rate debt and involve the receipt or payment of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.
NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, NNN recognizes any changes in its fair value in earnings and continues to carry the derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt.
The following table outlines NNN's derivatives which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (dollars in thousands):
Terminated
Description
Aggregate Notional Amount
Liability (Asset) Fair Value When Terminated
Fair Value Deferred In Other Comprehensive Income (1)
September 2007
Two treasury locks
$
100,000

$
3,260

$
3,228

June 2011
Two treasury locks
150,000

5,300

5,218

April 2013
Four forward starting swaps
240,000

3,156

3,141

May 2014
Three forward starting swaps
225,000

6,312

6,312

October 2015
Four forward starting swaps
300,000

13,369

13,369

December 2016
Two forward starting swaps
180,000

(13,352
)
(13,345
)
September 2017
Two forward starting swaps
250,000

7,690

7,688

(1) The amount reported in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the related notes payable.
As of September 30, 2017, $15,193,000 remained in other comprehensive income related to the effective portion of NNN’s previously terminated interest rate hedges. During the nine months ended September 30, 2017 and 2016, NNN reclassified out of other comprehensive income $1,394,000 and $2,122,000, respectively, as an increase in interest expense. Over the next 12 months, NNN estimates that an additional $2,131,000 will be reclassified as an increase in interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on NNN’s long-term debt.
NNN does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. NNN had no derivative financial instruments outstanding at September 30, 2017.


16



Note 7 – Fair Value of Financial Instruments:
NNN believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. NNN believes that the carrying value of its mortgages and notes receivable and mortgages payable at September 30, 2017 and December 31, 2016, approximate fair value based upon current market prices of comparable instruments (Level 3). At September 30, 2017 and December 31, 2016, the fair value of NNN’s notes payable net of unamortized discount and excluding debt costs was $2,765,998,000 and $2,367,102,000, respectively, based upon quoted market prices, which is a Level 1 valuation since NNN's notes payable are publicly traded.

Note 8 – Subsequent Events:
NNN reviewed its subsequent events and transactions that have occurred after September 30, 2017, the date of the condensed consolidated balance sheet.
In October 2017, NNN announced it had amended its Credit Facility, increasing its borrowing capacity from $650,000,000 to $900,000,000 (as so amended, the “Amended Credit Facility”).The Amended Credit Facility matures January 2022, with options by NNN to extend maturity to January 2023. The Amended Credit Facility will initially bear interest at LIBOR plus 87.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Amended Credit Facility also includes an accordion feature for NNN to increase the facility size up to $1,600,000,000, subject to lender approval.
In October 2017, NNN repaid the $250,000,000 6.875% notes payable that were due in October 2017.
There were no additional reportable subsequent events or transactions.



17



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, 2016. The terms “NNN” and the “Company” refer to National Retail Properties, Inc. and all of its consolidated subsidiaries.

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," "estimated" 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 rent from tenants would reduce NNN's cash flow;
A significant portion of the source of the Property Portfolio annual base rent is concentrated in specific industry classifications, tenants and 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;
NNN may suffer a loss in the event of a default of 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 from 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 personnel could adversely affect performance and the value of its securities;
Uninsured losses may adversely affect NNN's operating results and asset values;
Acts of violence, terrorist attacks or war may affect the markets in which NNN operates and NNN's results of operations;
Vacant properties or bankrupt tenants or borrowers 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 REIT for federal income tax purposes could result in significant tax liability;
Even if NNN remains qualified as a REIT, NNN faces other tax liabilities that reduce operating results and cash flow;
Adverse legislative or regulatory tax changes could reduce NNN's earnings and cash flow and the market price of NNN's securities;
Compliance with REIT requirements, including distribution requirements, may limit NNN's flexibility and may negatively affect NNN's operating decisions;
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 the market value of NNN's securities;
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, disrupt operations and expose NNN to liabilities to tenants, employees, capital providers, and other third parties; and

18



Future investment 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, 2016, 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 primarily include real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment ("Properties" or "Property Portfolio", or individually a "Property").
As of September 30, 2017, NNN owned 2,687 Properties, with an aggregate gross leasable area of approximately 28,250,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.4 years. Approximately 99 percent of the Properties were leased as of September 30, 2017.
NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, and industry trends and performance compared to that of NNN.
NNN evaluates the creditworthiness of its current and prospective tenants. This evaluation may include reviewing available financial statements, store level financial performance, press releases, public credit ratings from major credit rating agencies, industry news publications, financial market data (debt and equity pricing). NNN may also evaluate the business and operations of its tenants, including periodically meeting with senior management of certain tenants.
NNN continues to maintain its diversification by tenant, geography and tenant's line of trade. NNN’s largest lines of trade concentrations are the convenience store and restaurant (including full and limited service) sectors. These sectors represent a large part of the freestanding retail property marketplace and NNN’s management believes these sectors present attractive investment opportunities. The Property Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic regions could have a material adverse effect on the financial condition and operating performance of NNN.




19



Results of Operations
Property Analysis
General.  The following table summarizes the Property Portfolio:
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
Properties Owned:
 
 
 
 
 
Number
2,687

 
2,535

 
2,485

Total gross leasable area (square feet)
28,250,000

 
27,204,000

 
26,640,000

Properties:
 
 
 
 
 
Leased and unimproved land
2,656

 
2,508

 
2,459

Percent of Properties – leased and unimproved land
99
%
 
99
%
 
99
%
Weighted average remaining lease term (years)
11.4

 
11.6

 
11.5

Total gross leasable area (square feet) – leased
27,366,000

 
26,700,000

 
26,145,000


The following table summarizes the diversification of the Property Portfolio based on the top 10 lines of trade:
 
 
 
 
% of Annual Base Rent (1)
 
 
Lines of Trade
 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
1.
 
Convenience stores
 
18.3
%
 
16.9
%
 
16.4
%
2.
 
Restaurants – full service
 
11.8
%
 
11.8
%
 
12.3
%
3.
 
Restaurants – limited service
 
7.9
%
 
7.5
%
 
7.6
%
4.
 
Automotive service
 
7.0
%
 
6.6
%
 
6.8
%
5.
 
Family entertainment centers
 
6.4
%
 
5.8
%
 
5.8
%
6.
 
Health and fitness
 
5.6
%
 
5.7
%
 
4.5
%
7.
 
Theaters
 
4.8
%
 
4.9
%
 
5.0
%
8.
 
Automotive parts
 
3.7
%
 
3.9
%
 
4.0
%
9.
 
Recreational vehicle dealers, parts and accessories
 
3.4
%
 
3.4
%
 
3.4
%
10.
 
Banks
 
2.6
%
 
3.1
%
 
3.2
%
 
 
Other
 
28.5
%
 
30.4
%
 
31.0
%
 
 
 
 
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Acquisitions:
 
 
 
 
 
 
 
Number of Properties
18

 
38

 
182

 
249

Gross leasable area (square feet)
206,000

 
350,000

 
1,288,000

 
2,036,000

Initial cash yield
6.9
%
 
7.1
%
 
6.9
%
 
6.9
%
Total dollars invested(1)
$
90,139

 
$
127,796

 
$
497,530

 
$
596,541

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

20



Property Dispositions.  The following table summarizes the Properties sold by NNN (dollars in thousands):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Number of properties
6

 
7

 
31

 
24

Gross leasable area (square feet)
46,000

 
30,000

 
234,000

 
353,000

Net sales proceeds
$
7,543

 
$
10,571

 
$
55,806

 
$
83,077

Gain
$
3,185

 
$
4,505

 
$
20,864

 
$
22,558


NNN typically uses the proceeds from a Property disposition to either pay down the Credit Facility or reinvest in real estate.
Analysis of Revenue
General.  During the quarter and nine months ended September 30, 2017, rental income increased, as compared to the same periods in 2016, primarily due to the increase in rental income from Property acquisitions (See “Results of Operations – Property Analysis – Property Acquisitions”). NNN anticipates increases in rental income will continue to come from additional Property acquisitions and increases in rents pursuant to existing lease terms.
The following table summarizes NNN’s revenues (dollars in thousands):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
 
 
Percent
Increase
(Decrease)
 
Percent of Total
 
 
 
Percent
Increase
(Decrease)
 
Percent of Total
 
2017
 
2016
 
 
2017
 
2016
 
2017
 
2016
 
 
2017
 
2016
Rental Income(1)
$
143,856

 
$
130,603

 
10.1%
 
97.4
%
 
97.1
%
 
$
422,895

 
$
380,007

 
11.3%
 
97.3
%
 
96.9
%
Real estate expense reimbursement from tenants
3,614

 
3,413

 
5.9%
 
2.4
%
 
2.5
%
 
11,174

 
10,251

 
9.0%
 
2.5
%
 
2.6
%
Interest and other income from real estate transactions
151

 
141

 
7.1%
 
0.1
%
 
0.1
%
 
368

 
905

 
(59.3)%
 
0.1
%
 
0.2
%
Interest income on commercial mortgage residual interests
84

 
384

 
(78.1)%
 
0.1
%
 
0.3
%
 
249

 
1,285

 
(80.6)%
 
0.1
%
 
0.3
%
Total revenues
$
147,705

 
$
134,541

 
9.8%
 
100.0
%
 
100.0
%
 
$
434,686

 
$
392,448

 
10.8%
 
100.0
%
 
100.0
%
(1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent (“Rental Income”).
Quarter and Nine Months Ended September 30, 2017 versus Quarter and Nine Months Ended September 30, 2016
Rental Income. Rental Income increased in amount and as a percent of the total revenues for the quarter and nine months ended September 30, 2017, as compared to the same periods in 2016. The increase for the quarter and nine months ended September 30, 2017, is primarily due to a partial year of Rental Income received as a result of the acquisition of 182 properties with aggregate gross leasable area of approximately 1,288,000 during 2017 and a full year of Rental Income received as a result of the acquisition of 313 properties with a gross leasable area of approximately 2,734,000 square feet in 2016.
.






21



Analysis of Expenses
General.  Operating expenses decreased for the quarter ended September 30, 2017 as compared to the same period in 2016, primarily due to a decrease in incentive compensation costs. Operating expenses increased for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to an increase in depreciation expense and retirement severance costs. The following table summarizes NNN’s expenses for the quarter ended September 30, (dollars in thousands):
 
 
 
 
 

Percent
Increase
(Decrease)
 
Percentage of Total
 
Percentage of
Revenues
 
2017
 
2016
 
 
2017
 
2016
 
2017
 
2016
General and administrative
$
7,354

 
$
9,116

 
(19.3)%
 
11.9
 %
 
14.3
 %
 
5.0
%
 
6.8
%
Real estate
5,553

 
4,942

 
12.4%
 
9.0
 %
 
7.7
 %
 
3.7
%
 
3.7
%
Depreciation and amortization
48,409

 
38,970

 
24.2%
 
78.6
 %
 
60.9
 %
 
32.8
%
 
28.9
%
Impairment – commercial mortgage residual interests valuation

 
5,978

 
(100.0)%
 

 
9.4
 %
 

 
4.4
%
Impairment losses – real estate and other charges, net of recoveries
80

 
4,917

 
(98.4)%
 
0.1
 %
 
7.7
 %
 
0.1
%
 
3.7
%
Retirement severance costs
225

 

 
N/C (1)
 
0.4
 %
 

 
0.2
%
 

Total operating expenses
$
61,621

 
$
63,923

 
(3.6)%
 
100.0
 %
 
100.0
 %
 
41.8
%
 
47.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income
$
(64
)
 
$
(17
)
 
276.5%
 
(0.2
)%
 
(0.1
)%
 

 

Interest expense
28,204

 
24,257

 
16.3%
 
100.2
 %
 
99.6
 %
 
19.1
%
 
18.0
%
Real estate acquisition costs

 
111

 
(100.0)%
 

 
0.5
 %
 

 
0.1
%
Total other expenses
$
28,140

 
$
24,351

 
15.6%
 
100.0
 %
 
100.0
 %
 
19.1
%
 
18.1
%
(1) Not calculable ("N/C")

The following table summarizes NNN's expenses for the nine months ended September 30, (dollars in thousands):
 
 
 
 
 

Percent
Increase
(Decrease)
 
Percentage of Total
 
Percentage of
Revenues
 
2017
 
2016
 
 
2017
 
2016
 
2017
 
2016
General and administrative
$
25,093

 
$
27,100

 
(7.4)%
 
13.9
 %
 
16.0
 %
 
5.8
 %
 
6.9
%
Real estate
16,640

 
14,297

 
16.4%
 
9.2
 %
 
8.4
 %
 
3.8
 %
 
3.6
%
Depreciation and amortization
129,878

 
110,114

 
17.9%
 
72.0
 %
 
65.1
 %
 
29.9
 %
 
28.1
%
Impairment – commercial mortgage residual interests valuation

 
6,830

 
(100.0)%
 

 
4.0
 %
 

 
1.7
%
Impairment losses – real estate and other charges, net of recoveries
1,247

 
10,949

 
(88.6)%
 
0.7
 %
 
6.5
 %
 
0.3
 %
 
2.8
%
Retirement severance costs
7,653

 

 
N/C (1)
 
4.2
 %
 

 
1.7
 %
 

Total operating expenses
$
180,511

 
$
169,290

 
6.6%
 
100.0
 %
 
100.0
 %
 
41.5
 %
 
43.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income
$
(239
)
 
$
(108
)
 
121.3%
 
(0.3
)%
 
(0.1
)%
 
(0.1
)%
 

Interest expense
82,092

 
71,923

 
14.1%
 
100.3
 %
 
99.4
 %
 
18.9
 %
 
18.3
%
Real estate acquisition costs

 
520

 
(100.0)%
 

 
0.7
 %
 

 

Total other expenses
$
81,853

 
$
72,335

 
13.2%
 
100.0
 %
 
100.0
 %
 
18.8
 %
 
18.3
%
(1) Not calculable ("N/C")
Quarter and Nine Months Ended September 30, 2017 versus Quarter and Nine Months Ended September 30, 2016
General and Administrative.   General and administrative expenses decreased in amount, as a percentage of total operating expenses and as a percentage of revenues for the quarter and nine months ended September 30, 2017, as compared to the same periods in 2016. The decrease in general and administrative expenses for the quarter and nine months ended September 30, 2017, is primarily attributable to a decrease in incentive compensation costs.

22



Real Estate.  Real estate expenses increased in amount and as a percentage of total operating expenses for the quarter and nine months ended September 30, 2017, as compared to the same periods in 2016. The increase is primarily due to increases in reimbursable and non-reimbursable expenses from certain properties acquired during the nine months ended September 30, 2017, and from certain properties acquired during the year ended December 31, 2016, as well as expenses on certain vacant properties.
Depreciation and Amortization.   Depreciation and amortization expenses increased in amount and as a percentage of total operating expenses and revenues for the quarter and nine months ended September 30, 2017, as compared to the same periods in 2016. The increase in expenses is primarily due to the acquisition of 182 properties with an aggregate gross leasable area of approximately 1,288,000 square feet in 2017 and 313 properties with an aggregate gross leasable area of approximately 2,734,000 square feet during 2016.

Impairment losses – real estate and other charges, net of recoveries. NNN reviews long-lived assets for impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive price. Management evaluates whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. NNN recognized real estate impairments, net of recoveries of $1,245,000 and $7,680,000 for the nine months ended September 30, 2017 and 2016, respectively of which $78,000 and $4,917,000 was recorded during the quarters ended September 30, 2017 and 2016, respectively. In addition, during the quarter ended September 30, 2016, NNN recorded a loss on mortgage receivable of $3,269,000.
Retirement Severance Costs. For the nine months ended September 30, 2017, retirement severance costs relate primarily to Craig Macnab's retirement as CEO on April 28, 2017.
Interest Expense.  Interest expense increased in amount, as a percentage of total other expenses and as a percentage of revenues for the quarter and nine months ended September 30, 2017, as compared to the same periods in 2016.
The following represents the primary changes in debt that have impacted interest expense:
(i)
the repayment in January 2016 of $5,876,000 principal amount of mortgages payable with an interest rate of 5.750%,
(ii)
the repayment in March 2016 of $722,000 principal amount of mortgages payable with an interest rate of 6.900%,
(iii)
the repayment in October 2016 of $2,709,000 principal amount of mortgages payable with an interest rate of 6.400%,
(iv)
the issuance in December 2016 of $350,000,000 principal amount of notes payable with a maturity of December 2026, and stated interest rate of 3.600%,
(v)
the issuance in September 2017 of $400,000,000 principal amount of notes payable with a maturity of October 2027, and stated interest rate of 3.500%, and
(vi)
the increase of $19,795,000 in the weighted average outstanding balance on the Credit Facility and a higher weighted average interest rate for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.

Liquidity
General.  NNN’s demand for funds has been, and will continue to be, primarily for (i) payment of operating expenses and cash dividends; (ii) Property acquisitions and development; (iii) capital expenditures; (iv) payment of principal and interest on its outstanding indebtedness; and (v) other investments.

23



Cash and Cash Equivalents.  NNN's cash and cash equivalents includes the aggregate of Cash and cash equivalents and Restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. The table below summarizes NNN’s cash flows (dollars in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Cash and cash equivalents:
 
 
 
Provided by operating activities
$
330,215

 
$
314,206

Used in investing activities
(415,175
)
 
(555,423
)
Provided by financing activities
44,683

 
232,873

Decrease
(40,277
)
 
(8,344
)
Net cash at beginning of period
294,540

 
14,260

Net cash at end of period
$
254,263

 
$
5,916


Cash provided by operating activities represents cash received primarily from Rental Income and interest income less cash used for general and administrative expenses. NNN’s cash flow from operating activities has been sufficient to pay the distributions for each period presented. The change in cash provided by operations for the nine months ended September 30, 2017, and 2016, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future.
Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Properties. NNN typically uses proceeds from its Credit Facility to fund the acquisition of its Properties.
NNN’s financing activities for the nine months ended September 30, 2017, included the following significant transactions:
$287,500,000 paid to fully redeem NNN's 6.625% Series D Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") in February,
$394,722,000 in net proceeds from the issuance of the 3.500% notes payable in September,
$5,469,000 in net proceeds from the issuance of 135,721 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"),
$166,698,000 in net proceeds from the issuance of 3,969,252 shares of common stock in connection with the at-the-market ("ATM") equity program,
$3,598,000 in dividends paid to holders of the depositary shares of NNN’s Series D Preferred Stock,
$12,291,000 in dividends paid to holders of the depositary shares of NNN’s 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock"),
$13,455,000 in dividends paid to holders of the depositary shares of NNN's 5.200% Series F Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock"), and
$205,110,000 in dividends paid to common stockholders.
Contractual Obligations and Commercial Commitments. NNN has committed to fund construction commitments on 26 Properties. The improvements are estimated to be completed within 12 months. These construction commitments, at September 30, 2017, are outlined in the table below (dollars in thousands):
Total commitment(1)
 
$
175,821

Amount funded
 
89,243

Remaining commitment
 
86,578

(1)   Includes land, construction costs, tenant improvements and lease costs.
 
 
As of September 30, 2017, NNN did not have any other material contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the tables 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, 2016. In addition to items reflected in the tables, 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.

24



Generally, the Properties are leased under long-term net leases, which require the tenant to pay all property taxes and assessments to maintain the interior and exterior of the property and to carry property and liability insurance coverage. Therefore, management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses associated with the Property. Management anticipates that the costs associated with these Properties, NNN's vacant Properties or those Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under its credit facility or use other sources of capital in the event of significant capital expenditures.
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 September 30, 2017, NNN owned 31 vacant, un-leased Properties which accounted for approximately one percent of total Properties held in the Property Portfolio. Additionally, as of September 30, 2017, less than two percent of the Property Portfolio is leased to four tenants, including Gander Mountain, that each filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN.
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 the four years following the year during which qualification is lost. Such an event could materially adversely affect NNN’s income and ability to pay dividends. NNN believes it has been structured as, and its past and present operations qualify NNN as, a REIT.
One of NNN’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends.

25



The following table outlines the dividends declared and paid for each issuance of NNN's stock (dollars in thousands, except per share data):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Series D Preferred Stock(1):
 
 
 
 
 
 
 
Dividends
$

 
$
4,762

 
$
3,598

 
$
14,285

Per depositary share

 
0.414063

 
0.312847

 
1.242188

 
 
 
 
 
 
 
 
Series E Preferred Stock(2):
 
 
 
 
 
 
 
Dividends
4,097

 
4,097

 
12,291

 
12,291

Per depositary share
0.356250

 
0.356250

 
1.068750

 
1.068750

 
 
 
 
 
 
 
 
Series F Preferred Stock(3):
 
 
 
 
 
 
 
Dividends
4,485

 

 
13,455

 

Per depositary share
0.325000

 

 
0.975000

 

 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
Dividends
70,670

 
66,676

 
205,110

 
190,277

Per share
0.475

 
0.455

 
1.385

 
1.325

(1) The Series D Preferred Stock was redeemed in February 2017. The dividends paid in 2017 included accumulated and unpaid dividends through the redemption date.
(2) The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date for the Series E Preferred Stock is May 2018.
(3) The Series F Preferred Stock was issued in October 2016 and has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date for the Series F Preferred Stock is October 2021.
In October 2017, NNN declared a dividend of $0.475 per share which is payable in November 2017 to its common stockholders of record as of October 31, 2017.

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

Debt
The following is a summary of NNN’s total outstanding debt as of (dollars in thousands):
 
September 30, 2017
 
Percentage
of Total
 
December 31, 2016
 
Percentage
of Total
Mortgages payable
$
13,447

 
0.5
%
 
$
13,878

 
0.6
%
Notes payable
2,695,414

 
99.5
%
 
2,297,811

 
99.4
%
Total outstanding debt
$
2,708,861

 
100.0
%
 
$
2,311,689

 
100.0
%

Indebtedness.  NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests. Additionally indebtedness may be used to refinance existing indebtedness.
Line of Credit Payable. NNN's $650,000,000 unsecured revolving Credit Facility had a weighted average outstanding balance of $100,545,000 and a weighted average interest rate of 2.1% during the nine months ended September 30, 2017. The Credit Facility matures January 2019, unless the Company exercises its option to extend maturity to January 2020. The Credit Facility

26



currently bears interest at LIBOR plus 92.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature to increase the facility size up to $1,000,000,000, subject to lender approval. As of September 30, 2017, there was no outstanding balance and $650,000,000 was available for future borrowings, under the Credit Facility, excluding undrawn letters of credit totaling $230,000.
In October 2017, NNN announced it had amended its Credit Facility, increasing its borrowing capacity from $650,000,000 to $900,000,000 (as so amended, the “Amended Credit Facility”). The Amended Credit Facility matures January 2022, with options by NNN to extend maturity to January 2023. The Amended Credit Facility will initially bear interest at LIBOR plus 87.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Amended Credit Facility also includes an accordion feature for NNN to increase the facility size up to $1,600,000,000, subject to lender approval.
Notes Payable. In September 2017, NNN filed a prospectus supplement to the prospectus contained in its February 2015 shelf registration statement and issued $400,000,000 aggregate principal amount of 3.50% notes due October 2027 (the “2027 Notes”). The 2027 Notes were sold at a discount with an aggregate purchase price of $398,372,000 with interest payable semi-annually commencing on April 15, 2018. The discount of $1,628,000 is being amortized to interest expense over the term of the notes using the effective interest method. The effective interest rate for the 2027 Notes after accounting for the note discount is 3.548%. NNN previously entered into two forward starting swaps with an aggregate notional amount of $250,000,000. Upon issuance of the 2027 Notes, NNN terminated the forward starting swaps resulting in a liability of $7,690,000, of which $7,688,000 was deferred in other comprehensive income. The deferred liability is being amortized to interest expense over the term of the 2027 Notes using the effective interest method.

The 2027 Notes are senior unsecured obligations of NNN and are subordinated to all secured indebtedness and to the indebtedness and other liabilities of NNN's subsidiaries. Additionally, the 2027 Notes are redeemable at NNN's option, in whole or part anytime, for an amount equal to (i) the sum of the outstanding principal balance of the notes being redeemed plus accrued interest thereon to the redemption date, and (ii) the make whole amount, if any, as defined in the supplemental indenture dated September 6, 2017, relating to the 2027 Notes.

NNN received approximately $394,722,000 of net proceeds in connection with the issuance of the 2027 Notes, after incurring debt issuance costs totaling $3,650,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. NNN used the net proceeds from this offering to repay all of the outstanding indebtedness under its credit facility, fund future property acquisitions and for general corporate purposes.
In October 2017, NNN repaid the $250,000,000 6.875% notes payable that were due in October 2017.

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 Offerings. In February 2015, NNN filed a shelf registration statement with the Securities and Exchange Commission (the “Commission”) which was automatically effective and permits the issuance by NNN of an indeterminate amount of debt and equity securities.
Information related to NNN's publicly held debt and equity securities is included in NNN's Annual Report on Form 10-K for the year ended December 31, 2016.

27



Dividend Reinvestment and Stock Purchase Plan.  In February 2015, 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):
 
Nine Months Ended September 30,
 
2017
 
2016
Shares of common stock
135,721

 
164,640

Net proceeds
$
5,469

 
$
7,376

At-The-Market Offerings. NNN established an at-the-market equity program ("ATM") which allows NNN to sell shares of common stock from time to time. The following outlines NNN's ATM programs:
 
2016 ATM
2015 ATM
Established date
March 2016

February 2015

Termination date
March 2019

March 2016

Total allowable shares
12,000,000

10,000,000

Total shares issued at September 30, 2017
8,192,542

9,852,465

The following table outlines the common stock issuances pursuant to NNN's ATM equity programs (dollars in thousands, except per share data):
 
Nine Months Ended September 30,
 
2017
 
2016
Shares of common stock
3,969,252

 
5,716,222

Average price per share (net)
$
42.00

 
$
46.48

Net proceeds
$
166,698

 
$
265,696

Stock issuance costs(1)
$
2,563

 
$
4,266

(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees.

Recent Accounting Pronouncements

Refer to Note 1 to the September 30, 2017, Condensed Consolidated Financial Statements.

28




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 is used to finance NNN’s development and acquisition activities, as well as for general corporate purposes. NNN’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. To achieve its objectives, NNN borrows at both fixed and variable rates on its long-term debt. As of September 30, 2017, NNN had no outstanding derivatives.
The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding as of September 30, 2017 and December 31, 2016. The table presents principal payments and related interest rates by year for debt obligations outstanding as of September 30, 2017. NNN has a variable interest rate risk on its Credit Facility which had no outstanding balance as of September 30, 2017. The weighted average rate for the Credit Facility for the nine months ended September 30, 2017, was 2.1%. There was no outstanding balance on the Credit Facility as of September 30, 2017 and December 31, 2016. The table incorporates only those debt obligations that existed as of September 30, 2017, and it does not consider those debt obligations or positions which could arise after this date and therefore has limited predictive value. As a result, NNN’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the 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 one percent for the nine months ended September 30, 2017.
 
Debt Obligations (dollars in thousands)
 
  
Fixed Rate Debt
 
  
Mortgages(1)
 
Unsecured Debt(2)
 
  
Debt
Obligation
 
Weighted
Average Effective
Interest Rate
 
Debt
Obligation
 
Effective
Interest
Rate
 
2017
$
151

 
5.23%
 
$
249,995

 
6.92%
 
2018
623

 
5.23%
 

 
 
2019
653

 
5.23%
 

 
 
2020
682

 
5.23%
 

 
 
2021
716

 
5.23%
 
298,096

 
5.69%
 
Thereafter
10,718

 
5.23%
 
2,164,202

 
3.69%
(3) 
Total
$
13,543

 
5.23%
 
$
2,712,293

 
4.27%
 
Fair Value:
 
 
 
 
 
 
 
 
September 30, 2017
$
13,543

 
 
 
$
2,765,998

 
 
 
December 31, 2016
$
13,987

 
 
 
$
2,367,102

 
 
 

(1) NNN's mortgages payable represent principal payments by year and include unamortized premiums and exclude debt costs.
(2) Includes NNN’s notes payable, each exclude debt costs and are net of unamortized discount. NNN uses market prices quoted from Bloomberg, a third party, which is a Level 1 input, to determine the fair value.
(3) Weighted average effective interest rate for periods after 2021.

29



Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of NNN's management, including NNN's Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, of the effectiveness as of September 30, 2017, of the design and operation of NNN's disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting. There has been no change in NNN's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, NNN's internal control over financial reporting.

30



PART II. OTHER INFORMATION

Item 1.
Legal Proceedings. Not applicable.

Item 1A.
Risk Factors. There were no material changes in NNN's risk factors disclosed in Item 1A. Risk Factors of NNN's Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.

Item 3.
Defaults Upon Senior Securities. Not applicable.

Item 4.
Mine Safety Disclosures. Not applicable.

Item 5.
Other Information. Not applicable.

Item 6.
Exhibits

     The following exhibits are filed as a part of this report.