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Section 1: 10-Q (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 March 31, 2019
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  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.
162,679,012 shares of common stock, $0.01 par value, outstanding as of April 29, 2019.




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, 2019

December 31, 2018
ASSETS
(unaudited)
 
 
Real estate portfolio:
 
 
 
Accounted for using the operating method, net of accumulated depreciation and amortization
$
6,900,747

 
$
6,844,018

Accounted for using the direct financing method
7,219

 
8,069

Real estate held for sale
21,397

 
23,345

Cash and cash equivalents
80,521

 
114,267

Receivables, net of allowance of $1,039 and $2,273, respectively
2,910

 
3,797

Accrued rental income, net of allowance of $1,842
28,120

 
25,387

Debt costs, net of accumulated amortization of $14,482 and $14,118, respectively
3,757

 
4,081

Other assets
92,317

 
80,474

Total assets
$
7,136,988

 
$
7,103,438

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, including unamortized premium and net of unamortized debt costs
$
12,536

 
$
12,694

Notes payable, net of unamortized discount and unamortized debt costs
2,839,678

 
2,838,701

Accrued interest payable
47,456

 
19,519

Other liabilities
84,431

 
77,919

Total liabilities
2,984,101

 
2,948,833

 


 


Equity:
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value. Authorized 15,000,000 shares
 
 
 
5.700% Series E, 115,000 shares issued and outstanding, at stated liquidation value of $2,500 per share
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; 161,978,308 and 161,503,585 shares issued and outstanding, respectively
1,620

 
1,616

Capital in excess of par value
3,957,835

 
3,950,055

Accumulated deficit
(432,845
)
 
(424,225
)
Accumulated other comprehensive income (loss)
(6,588
)
 
(5,696
)
Total stockholders’ equity of NNN
4,152,522

 
4,154,250

Noncontrolling interests
365

 
355

Total equity
4,152,887

 
4,154,605

Total liabilities and equity
$
7,136,988

 
$
7,103,438

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 March 31,
  
2019
 
2018
Revenues:
 
 
 
Lease income
$
163,026

 
$

Rental income from operating leases

 
147,829

Earned income from direct financing leases

 
230

Percentage rent

 
546

Real estate expense reimbursement from tenants

 
4,158

Interest and other income from real estate transactions
686

 
73

 
163,712

 
152,836

Operating expenses:
 
 
 
General and administrative
9,521

 
8,697

Real estate
7,093

 
5,862

Depreciation and amortization
46,180

 
44,498

Impairment losses – real estate, net of recoveries
3,245

 
2,248

Retirement severance costs

 
261

 
66,039

 
61,566

Gain on disposition of real estate
10,445

 
38,596

Earnings from operations
108,118

 
129,866

Other expenses (revenues):
 
 
 
Interest and other income
(1,924
)
 
(25
)
Interest expense
29,957

 
26,602

Leasing transaction costs
52

 

 
28,085

 
26,577

Net earnings
80,033

 
103,289

Earnings attributable to noncontrolling interests
(10
)
 
(9
)
Net earnings attributable to NNN
80,023

 
103,280

Series E preferred stock dividends
(4,097
)
 
(4,097
)
Series F preferred stock dividends
(4,485
)
 
(4,485
)
Net earnings attributable to common stockholders
$
71,441

 
$
94,698

Net earnings per share of common stock:
 
 
 
Basic
$
0.44

 
$
0.62

Diluted
$
0.44

 
$
0.62

Weighted average number of common shares outstanding:
 
 
 
Basic
161,105,315

 
153,041,056

Diluted
161,614,074

 
153,393,383

Other comprehensive income:
 
 
 
Net earnings attributable to NNN
$
80,023

 
$
103,280

Amortization of interest rate hedges
323

 
525

Fair value of forward starting swaps

 
(2,164
)
Net gain (loss) – available-for-sale securities
(1,215
)
 
(132
)
Comprehensive income attributable to NNN
$
79,131

 
$
101,509


See accompanying notes to condensed consolidated financial statements.


4


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended March 31, 2018
(dollars in thousands, except per share data)

 
Series E
Preferred
Stock
 
Series F
Preferred
Stock
 
Common
Stock
 
Capital in
  Excess of  
Par Value
 
Retained
Earnings (Loss)
 
Accumulated
Other
Comprehensive  
Income (Loss)
 
Total
  Stockholders’  
Equity
 
  Noncontrolling  
Interests
 
Total
Equity
Balances at December 31, 2017
$
287,500

 
$
345,000

 
$
1,537

 
$
3,599,475

 
$
(379,181
)
 
$
(13,738
)
 
$
3,840,593

 
$
317

 
$
3,840,910

Net earnings

 

 

 

 
103,280

 

 
103,280

 
9

 
103,289

Dividends declared and paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$0.356250 per depositary share of Series E preferred stock

 

 

 

 
(4,097
)
 

 
(4,097
)
 

 
(4,097
)
$0.32500 per depositary share of Series F preferred stock

 

 

 

 
(4,485
)
 

 
(4,485
)
 

 
(4,485
)
$0.475 per share of common stock

 

 
1

 
1,544

 
(72,733
)
 

 
(71,188
)
 

 
(71,188
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,597 shares – director compensation and other

 

 

 
296

 

 

 
296

 

 
296

2,537 shares – stock purchase plan

 

 

 
98

 

 

 
98

 

 
98

Issuance of 222,684 shares of restricted common stock

 

 
2

 
(91
)
 

 

 
(89
)
 

 
(89
)
Stock issuance costs

 

 


 
(306
)
 

 

 
(306
)
 

 
(306
)
Amortization of deferred compensation

 

 

 
1,849

 

 

 
1,849

 

 
1,849

Amortization of interest rate hedges

 

 

 

 

 
525

 
525

 

 
525

Fair value of forward starting swaps

 

 

 

 

 
(2,164
)
 
(2,164
)
 

 
(2,164
)
Valuation adjustments – available-for-sale securities

 

 

 

 

 
(132
)
 
(132
)
 

 
(132
)
Balances at March 31, 2018
$
287,500

 
$
345,000

 
$
1,540

 
$
3,602,865

 
$
(357,216
)
 
$
(15,509
)
 
$
3,864,180

 
$
326

 
$
3,864,506













5


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended March 31, 2019
(dollars in thousands, except per share data)

 
Series E
Preferred
Stock
 
Series F
Preferred
Stock
 
Common
Stock
 
Capital in
  Excess of  
Par Value
 
Retained
Earnings (Loss)
 
Accumulated
Other
Comprehensive  
Income (Loss)
 
Total
  Stockholders’  
Equity
 
  Noncontrolling  
Interests
 
Total
Equity
Balances at December 31, 2018
$
287,500

 
$
345,000

 
$
1,616

 
$
3,950,055

 
$
(424,225
)
 
$
(5,696
)
 
$
4,154,250

 
$
355

 
$
4,154,605

Net earnings

 

 

 

 
80,023

 

 
80,023

 
10

 
80,033

Dividends declared and paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$0.356250 per depositary share of Series E preferred stock

 

 

 

 
(4,097
)
 

 
(4,097
)
 

 
(4,097
)
$0.32500 per depositary share of Series F preferred stock

 

 

 

 
(4,485
)
 

 
(4,485
)
 

 
(4,485
)
$0.50 per share of common stock

 

 
1

 
5,159

 
(80,566
)
 

 
(75,406
)
 

 
(75,406
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,007 shares – director compensation and other

 

 

 
322

 

 

 
322

 

 
322

2,324 shares – stock purchase plan

 

 

 
119

 

 

 
119

 

 
119

Issuance of 259,650 shares of restricted common stock

 

 
3

 
(3
)
 

 

 

 

 

Stock issuance costs

 

 

 
(42
)
 

 

 
(42
)
 

 
(42
)
Amortization of deferred compensation

 

 

 
2,225

 

 

 
2,225

 

 
2,225

Amortization of interest rate hedges

 

 

 

 

 
323

 
323

 

 
323

Valuation adjustments – available-for-sale securities

 

 

 

 

 
116

 
116

 

 
116

Realized gain – available-for-sale securities

 

 

 

 

 
(1,331
)
 
(1,331
)
 

 
(1,331
)
Other

 

 

 

 
505

 

 
505

 

 
505

Balances at March 31, 2019
$
287,500

 
$
345,000

 
$
1,620

 
$
3,957,835

 
$
(432,845
)
 
$
(6,588
)
 
$
4,152,522

 
$
365

 
$
4,152,887



6


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


 
Quarter Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net earnings
$
80,033

 
$
103,289

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
46,180

 
44,498

Impairment losses – real estate, net of recoveries
3,245

 
2,248

Amortization of notes payable discount
425

 
458

Amortization of debt costs
920

 
888

Amortization of mortgages payable premium
(21
)
 
(21
)
Amortization of interest rate hedges
323

 
525

Gain on disposition of real estate
(10,445
)
 
(38,596
)
Performance incentive plan expense
2,787

 
2,275

Performance incentive plan payment
(775
)
 
(432
)
Change in operating assets and liabilities, net of assets acquired and liabilities assumed:
 
 
 
Decrease in real estate leased to others using the direct financing method
172

 
228

Decrease in receivables
887

 
125

Increase in accrued rental income
(747
)
 
(998
)
Decrease (increase) in other assets
(12
)
 
414

Increase in accrued interest payable
27,937

 
16,068

Decrease in other liabilities
(7,315
)
 
(1,082
)
Other
(218
)
 
110

Net cash provided by operating activities
143,376

 
129,997

Cash flows from investing activities:
 
 
 
Proceeds from the disposition of real estate
16,909

 
71,627

Additions to real estate:
 
 
 
Accounted for using the operating method
(112,130
)
 
(174,986
)
Other
2,191

 
207

Net cash used in investing activities
(93,030
)
 
(103,152
)
 
See accompanying notes to condensed consolidated financial statements.


7


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


 
Quarter Ended March 31,
 
2019
 
2018
Cash flows from financing activities:
 
 
 
Proceeds from line of credit payable
$

 
$
491,000

Repayment of line of credit payable

 
(435,100
)
Repayment of mortgages payable
(141
)
 
(134
)
Payment of debt issuance costs
(40
)
 
(38
)
Proceeds from issuance of common stock
5,279

 
1,554

Stock issuance costs
(42
)
 
(174
)
Payment of Series E preferred stock dividends
(4,097
)
 
(4,097
)
Payment of Series F preferred stock dividends
(4,485
)
 
(4,485
)
Payment of common stock dividends
(80,566
)
 
(72,733
)
Net cash used in financing activities
(84,092
)
 
(24,207
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(33,746
)
 
2,638

Cash, cash equivalents and restricted cash at beginning of period(1)
114,267

 
1,364

Cash, cash equivalents and restricted cash at end of period(1)
$
80,521

 
$
4,002

Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amount capitalized
$
499

 
$
9,512

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Increase (decrease) in other comprehensive income
$
892

 
$
1,171

Right-of-use assets recorded in connection with lease liabilities
$
7,735

 
$

Mortgage receivable accepted in connection with real estate transactions
$
3,100

 
$

  (1) Cash, cash equivalents and restricted cash is the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. NNN had no restricted cash and cash held in escrow at March 31, 2019 and 2018.

 
See accompanying notes to condensed consolidated financial statements.

8



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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").
 
March 31, 2019
Property Portfolio:
 
Total properties
2,984

Gross leasable area (square feet)
30,698,000

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 ended March 31, 2019, may not be indicative of the results that may be expected for the year ending December 31, 2019. Amounts as of December 31, 2018 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, 2018.
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 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 $126,000 and $828,000 in capitalized interest during the development period for the quarter ended March 31, 2019 and 2018, 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.
The fair value estimate is sensitive to significant assumptions, such as establishing a range of relevant market assumptions for land, building and rent and where the acquired property falls within that range. These market assumptions for land, building and rent use the most relevant comparable properties for an acquisition. The final range relies upon ranking comparable properties' attributes from most similar to least similar.
The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on the determination of their fair values.
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

9



reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease and the applicable option terms if it is probable that the tenant will exercise options. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period.
The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off in that period. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.
Intangible assets and liabilities consisted of the following as of (dollars in thousands):
 
 
March 31, 2019
 
December 31, 2018
Intangible lease assets (included in other assets):
 
 
 
 
Above-market in-place leases
 
$
15,456

 
$
15,175

Less: accumulated amortization
 
(9,404
)
 
(9,239
)
Above-market in-place leases, net
 
$
6,052

 
$
5,936

 
 
 
 
 
In-place leases
 
$
109,558

 
$
104,871

Less: accumulated amortization
 
(61,344
)
 
(60,797
)
In-place leases, net
 
$
48,214

 
$
44,074

 
 
 
 
 
Intangible lease liabilities (included in other liabilities):
 
 
 
 
Below-market in-place leases
 
$
41,395

 
$
41,554

Less: accumulated amortization
 
(25,357
)
 
(25,258
)
Below-market in-place leases, net
 
$
16,038

 
$
16,296



The amounts amortized as a net increase to rental income for above-market and below-market leases for the quarter ended March 31, 2019 and 2018, were $228,000 and $698,000, respectively. The value of in-place leases amortized to expense for the quarter ended March 31, 2019 and 2018, were $2,244,000 and $3,146,000, respectively.
Lease Accounting – In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," ("ASC 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 record a right-of-use ("ROU") asset and lease liability on its balance sheets but recognize expenses in the income statement in a manner similar to previous accounting. The guidance also eliminated certain real estate-specific provisions and changed the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modified the classification criteria and the accounting for sales-type and direct financing leases.
Effective January 1, 2019, NNN adopted the lease guidance using the modified retrospective approach in which the cumulative effect of applying the new standard was recognized at the date of initial application with a positive adjustment to NNN’s opening balance of accumulated deficit. The modified retrospective approach provides a method for recording existing leases upon adoption which in comparative periods approximates the results of a full retrospective approach. NNN elected the package of practical expedients permitted under the transition guidance (which included: (i) an entity need not reassess whether any expired or existing contracts are or contain leases, (ii) an entity need not reassess the lease classification for any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases), the land easement practical expedient to carry forward existing accounting treatment on existing land easements, and the lease and non-lease component combined practical expedient.
NNN estimates the collectibility of its accounts receivable related to rents, expense reimbursements and other revenues. NNN analyzes accounts receivable and historical bad debt levels, tenant credit-worthiness and current economic trends when evaluating the probable collection. At the point NNN deems the collection of lease payments not probable, a bad debt is

10



recognized for any outstanding receivable and any related accrued rent and, subsequently, any lease revenue is only recognized when cash receipts are received.
Adoption of the new standard resulted in the recording of ROU assets and operating lease liabilities of approximately $7,735,000 and $10,155,000 respectively, as of January 1, 2019, additional disclosure is included in Note 3. The condensed consolidated financial statements for the quarter ended March 31, 2019 are presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with NNN's historical accounting policy. ASC 842 did not materially impact NNN’s financial position, or results of operations and had no impact on cash flows.
Debt Costs – Line of Credit Payable Debt costs incurred in connection with NNN’s $900,000,000 line of credit have been deferred and are being amortized to interest expense over the term of the loan commitment using the straight-line method, which approximates the effective interest method. NNN has recorded debt costs associated with the line of credit as an asset, in debt costs on the 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 as of March 31, 2019 and December 31, 2018, are included in mortgages payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $77,000 and $73,000, respectively.
Debt Costs – Notes Payable Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized to interest expense over the term of the respective debt obligation using the effective interest method. These costs of $26,932,000, as of March 31, 2019 and December 31, 2018, respectively, are included in notes payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $7,256,000 and $6,705,000, respectively.
Revenue Recognition – In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09, is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts are excluded from ASU 2014-09, including lease contracts within the scope of the FASB guidance included in Leases (Topic 842). NNN adopted ASU 2014-09 on January 1, 2018, and applied the cumulative catch-up transition method. Through the evaluation and implementation process, NNN determined the key revenue stream impacted by ASU 2014-09 is gain on disposition of real estate reported on the Condensed Consolidated Statements of Income and Comprehensive Income. Prior to the adoption of ASU 2014-09, NNN recognized revenue at the time of closing (i.e., transfer of asset). Following the adoption of ASU 2014-09, NNN evaluates any separate contracts or performance obligations to determine proper timing and/or amount of revenue recognition, as well as, transaction price allocation. The adoption of ASU 2014-09 did not have a material impact on NNN's financial position and results of operations.
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.

11



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,
 
2019
 
2018
Basic and Diluted Earnings:
 
 
 
Net earnings attributable to NNN
$
80,023

 
$
103,280

Less: Series E preferred stock dividends
(4,097
)
 
(4,097
)
Less: Series F preferred stock dividends
(4,485
)
 
(4,485
)
Net earnings available to NNN’s common stockholders
71,441

 
94,698

Less: Earnings allocated to unvested restricted shares
(116
)
 
(147
)
Net earnings used in basic and diluted earnings per share
$
71,325

 
$
94,551

 
 
 
 
Basic and Diluted Weighted Average Shares Outstanding:
 
 
 
Weighted average number of shares outstanding
161,785,877

 
153,678,913

Less: Unvested restricted stock
(232,795
)
 
(237,617
)
Less: Unvested contingent restricted shares
(447,767
)
 
(400,240
)
Weighted average number of shares outstanding used in basic earnings per share
161,105,315

 
153,041,056

Other dilutive securities
508,759

 
352,327

Weighted average number of shares outstanding used in diluted earnings per share
161,614,074

 
153,393,383


Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:
Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.
Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.
Accumulated Other Comprehensive Income (Loss)The following table outlines the changes in accumulated other comprehensive income (loss) (dollars in thousands):
 
Gain or Loss on Cash Flow Hedges (1)
 
Gains and Losses on Available-for-Sale Securities
 
Total
Beginning balance, December 31, 2018
$
(6,911
)
 
$
1,215

 
$
(5,696
)
 
 
 
 
 
 
Other comprehensive income

 
116

 
116

Reclassifications from accumulated other comprehensive income to net earnings
323

(2) 
(1,331
)
(3) 
(1,008
)
Net current period other comprehensive income (loss)
323

 
(1,215
)
 
(892
)
Ending balance, March 31, 2019
$
(6,588
)
 
$

 
$
(6,588
)
(1) Additional disclosure is included in Note 5 – Derivatives.
(2) Recorded in interest expense on the Condensed Consolidated Statements of Income and Comprehensive Income.
(3) Recorded in interest and other income on the Condensed Consolidated Statements of Income and Comprehensive Income.
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

12



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 2019 presentation.

Note 2 – Real Estate:
Real Estate – Portfolio
LeasesThe following outlines key information for NNN’s leases:
 
March 31, 2019
Lease classification:
 
Operating
2,986

Direct financing
7

Building portion – direct financing/land portion – operating
1

Weighted average remaining lease term (years)
11.4


The following is a summary of the general structure of the leases in the Property Portfolio, although the specific terms of each lease can vary significantly. Generally, the Property leases provide for initial terms of 10 to 20 years. The Properties are generally leased under net leases, pursuant to which the tenant typically bears responsibility for substantially all property costs and expenses associated with ongoing maintenance, repair, replacement and operation of the property, including utilities, property taxes and property and liability insurance. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the Property. NNN's leases provide for annual base rental payments (generally payable in monthly installments), and generally provide for limited increases in rent as a result of (i) increases in the Consumer Price Index ("CPI"), (ii) fixed increases, or, to a lesser extent, (iii) increases in the tenant’s sales volume.
Generally, NNN's leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. NNN’s lease term is based on the non-cancellable base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the options. Some of the leases also provide that in the event NNN wishes to sell the Property subject to that lease, NNN first must offer the lessee the right to purchase the Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Property.
Real Estate Portfolio – Accounted for Using the Operating MethodReal estate subject to operating leases consisted of the following as of (dollars in thousands):
 
March 31, 2019
 
December 31, 2018
Land and improvements(1)
$
2,386,548

 
$
2,368,635

Buildings and improvements
5,535,000

 
5,469,460

Leasehold interests
3,630

 
3,630

 
7,925,178

 
7,841,725

Less accumulated depreciation and amortization
(1,043,855
)
 
(1,005,724
)
 
6,881,323

 
6,836,001

Work in progress for buildings and improvements
19,424

 
8,017

 
$
6,900,747

 
$
6,844,018


(1) Includes $10,846 and $5,571 in land for Properties under construction at March 31, 2019 and December 31, 2018,
respectively.
NNN recognized the following revenues in lease income for the quarter ended March 31, 2019 (dollars in thousands):
Rental income from operating leases
$
158,398

Earned income from direct financing leases
213

Percentage rent
422

Real estate expense reimbursement from tenants
3,993

 
$
163,026



13



Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the quarter ended March 31, 2019 and 2018, NNN recognized $630,000 and $872,000, respectively, of such income, net of reserves. At March 31, 2019 and December 31, 2018, the balance of accrued rental income was $28,120,000 and $25,387,000, respectively, net of allowance of $1,842,000, respectively.
The following is a schedule of undiscounted cash flows to be received on noncancellable operating leases as of March 31, 2019 (dollars in thousands):
2019
$
470,392

2020
617,630

2021
599,143

2022
569,341

2023
541,303

Thereafter
4,422,859

 
$
7,220,668


Since lease renewal periods are exercisable at the option of the tenant, the above table only presents undiscounted cash flows due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index ("CPI") or future contingent rents which may be received on the leases based on a percentage of the tenant’s sales volume.
Real Estate Portfolio – Accounted for Using the Direct Financing MethodThe following lists the components of net investment in direct financing leases as of (dollars in thousands):
 
March 31, 2019
 
December 31, 2018
Minimum lease payments to be received
$
10,609

 
$
10,899

Estimated unguaranteed residual values
3,632

 
4,395

Less unearned income
(7,022
)
 
(7,225
)
Net investment in direct financing leases
$
7,219

 
$
8,069


The following is a schedule of undiscounted cash flows to be received on direct financing leases held for investment as of March 31, 2019 (dollars in thousands):
2019
$
1,109

2020
1,045

2021
920

2022
897

2023
895

Thereafter
5,743

 
$
10,609


The table above does not include future minimum lease payments for renewal periods, potential variable CPI rent increases or contingent rental payments that may become due in future periods (see Real Estate Portfolio – Accounted for Using the Operating Method).

14




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 and Equipment, including management’s intent to commit to a plan to sell the asset. NNN anticipates the disposition of Properties classified as held for sale to occur within 12 months. As of March 31, 2019 and December 31, 2018, NNN had seven of its Properties categorized as held for sale, respectively. Real estate held for sale consisted of the following as of (dollars in thousands):
 
March 31, 2019
 
December 31, 2018
Land and improvements
$
13,982

 
$
13,976

Building and improvements
34,166

 
34,166

 
48,148

 
48,142

Less accumulated depreciation and amortization
(10,608
)
 
(10,547
)
Less impairment
(16,143
)
 
(14,250
)
 
$
21,397

 
$
23,345


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 March 31,
 
2019
 
2018
# of Sold
Properties
 
Gain
 
# of Sold
Properties
 
Gain
Gain on disposition of real estate
17
 
$
10,445

 
15
 
$
38,596


Real Estate – Commitments
NNN has committed to fund construction on 26 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of March 31, 2019, are outlined in the table below (dollars in thousands):
Total commitment(1)
$
58,616

Less amount funded
30,270

Remaining commitment
$
28,346

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

Real Estate – Impairments
Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant in a reasonable period of time. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company's review of long-lived assets, including identifiable intangible assets, NNN recognized real estate impairments, net of recoveries of $3,245,000 and $2,248,000 for the quarter ended March 31, 2019 and 2018, 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.


15



Note 3 – Right-Of-Use Assets and Operating Lease Liabilities:

NNN is a lessee for three ground lease arrangements and for its headquarters office lease. NNN recognized an ROU asset (recorded in other assets on the Condensed Consolidated Balance Sheets) and an operating lease liability (recorded in other liabilities on the Condensed Consolidated Balance Sheets) for the present value of the minimum lease payments. ROU assets represent NNN’s right to use an underlying asset for the lease term and lease liabilities represent NNN’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. NNN’s lease term is based on the non-cancellable base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the options.

NNN estimates an incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of the lease payments. NNN gives consideration to the Company's debt issuances, as well as, publicly available data for secured instruments with similar characteristics when calculating its incremental borrowing rates. A 50 basis point increase or decrease in the estimate of the incremental borrowing rate at January 1, 2019 (the date of adoption of ASC 842) would not have a material impact on NNN’s financial position. NNN will reevaluate its incremental borrowing rate on an annual basis.
NNN's lease agreements do not contain any residual value guarantees.

As of March 31, 2019, NNN has recorded the following (dollars in thousands):
 
Ground Leases
 
Headquarters Office Lease
Operating lease – ROU assets(1)
$
4,190

 
$
3,367

Operating lease – lease liabilities
(5,898
)
 
(4,063
)
 
 
 
 
Weighted average remaining lease term (years)
15.2

 
6.0

Weighted average discount rate
4.1
%
 
3.5
%
(1) 
ROU assets are shown net of accrued lease payments of $1,708 and $696, respectively.
The following is a schedule of the undiscounted cash flows to be paid as of March 31, 2019 (dollars in thousands):
 
Ground Leases
 
Headquarters Office Lease
2019
$
364

 
$
572

2020
511

 
773

2021
520

 
788

2022
530

 
804

2023
530

 
821

Thereafter
5,794

 
1,047

 
$
8,249

 
$
4,805



Note 4 – Stockholders' Equity:
In February 2018, 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 2018, NNN filed a shelf registration statement with the Commission for its Dividend Reinvestment and Stock Purchase Plan ("DRIP") which permits the issuance by NNN of up to 10,000,000 shares of common stock. The following table outlines the common stock issuances pursuant to NNN's DRIP (dollars in thousands):
 
Quarter Ended March 31,
 
2019
 
2018
Shares of common stock
101,180

 
44,659

Net proceeds
$
5,279

 
$
1,491



16



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 program:
 
2018 ATM
Established date
February 2018

Termination date
February 2021

Total allowable shares
12,000,000

Total shares issued as of March 31, 2019
7,378,163


There were no common stock issuances pursuant to NNN's ATM equity program for the quarter ended March 31, 2019 and 2018, respectively.
DividendsThe following table outlines the dividends declared and paid for each issuance of NNN's stock (dollars in thousands, except per share data):
 
Quarter Ended March 31,
 
2019
 
2018
Series E preferred stock(1):
 
 
 
Dividends
$
4,097

 
$
4,097

Per depositary share
0.356250

 
0.356250

 
 
 
 
Series F preferred stock(2):
 
 
 
Dividends
4,485

 
4,485

Per depositary share
0.325000

 
0.325000

 
 
 
 
Common stock:
 
 
 
Dividends
80,566

 
72,733

Per share
0.500

 
0.475


(1) The 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock") has no maturity date and will remain outstanding unless redeemed by NNN. As of May 2018, the Series E Preferred Stock is redeemable by NNN.
(2) The 5.200% Series F Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock") 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 April 2019, NNN declared a dividend of $0.500 per share, which is payable in May 2019 to its common stockholders of record as of April 30, 2019.

Note 5 – 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 starting swaps and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward starting swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the variable cash flows associated with floating rate debt and involve the receipt or payment of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
For derivatives designated as cash flow hedges, the change 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.
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-

17



designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, NNN recognizes any changes in its fair value in earnings and continues to carry the derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt.
The following table outlines NNN's terminated derivatives which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (dollars in thousands):
Terminated
Description
Aggregate Notional Amount
Liability (Asset) Fair Value When Terminated
Fair Value Deferred In Other Comprehensive Income (1)
April 2013
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

September 2018
Two forward starting swaps
250,000

(4,080
)
(4,080
)
(1) The amount reported in accumulated other comprehensive income will be reclassified to interest expense as
interest payments are made on the related notes payable.
As of March 31, 2019, $6,588,000 remained in other comprehensive income related to NNN’s previously terminated interest rate hedges. During the quarter ended March 31, 2019 and 2018, NNN reclassified out of other comprehensive income $323,000 and $525,000, respectively, as an increase in interest expense. Over the next 12 months, NNN estimates that an additional $1,317,000 will be reclassified as an increase in interest expense from these terminated derivatives. 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 March 31, 2019.

Note 6 – Fair Value of Financial Instruments:
NNN believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. NNN believes that the carrying value of its mortgages payable at March 31, 2019 and December 31, 2018, approximate fair value based upon current market prices of comparable instruments (Level 3). At March 31, 2019 and December 31, 2018, the fair value of NNN’s notes payable net of unamortized discount and excluding debt costs was $2,914,825,000 and $2,813,583,000, respectively, based upon quoted market prices, which is a Level 1 valuation since NNN's notes payable are publicly traded.

Note 7 – Subsequent Events:
NNN reviewed its subsequent events and transactions that have occurred after March 31, 2019, the date of the condensed consolidated balance sheet. There were no reportable subsequent events or transactions.


18



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, 2018. 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;
Changes in established interest rate index could have an adverse affect on NNN's results of operations;
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 risks;
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 tenant or a borrower;
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 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 value of NNN's securities;
Compliance with REIT requirements, including distribution requirements, may limit NNN's flexibility and may negatively affect NNN's operating decisions;
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

19



Future investment in international markets could subject NNN to additional risks, including foreign currency exchange rate fluctuations, operational risks due to local economic and political conditions and laws and policies of the U.S. affecting foreign investment.

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, 2018, 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 are primarily real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and are primarily held for investment ("Properties" or "Property Portfolio", or individually a "Property").
As of March 31, 2019, NNN owned 2,984 Properties, with an aggregate gross leasable area of approximately 30,698,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.4 years. Approximately 98 percent of the Properties were leased as of March 31, 2019.
NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, industry trends and industry performance compared to that of NNN.
NNN evaluates the creditworthiness of its current and prospective tenants. This evaluation may include reviewing available financial statements, store level financial performance, press releases, public credit ratings from major credit rating agencies, industry news publications and financial market data (debt and equity pricing). NNN may also evaluate the business and operations of its tenants, including past payment history and 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.




20



Results of Operations
Property Analysis
General.  The following table summarizes the Property Portfolio:
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Properties Owned:
 
 
 
 
 
Number
2,984

 
2,969

 
2,800

Total gross leasable area (square feet)
30,698,000

 
30,487,000

 
29,116,000

Properties:
 
 
 
 
 
Leased and unimproved land
2,931

 
2,917

 
2,777

Percent of Properties – leased and unimproved land
98
%
 
98
%
 
99
%
Weighted average remaining lease term (years)
11.4

 
11.5

 
11.4

Total gross leasable area (square feet) – leased
29,618,000

 
29,439,000

 
28,752,000


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
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
1.
 
Convenience stores
 
17.8
%
 
18.0
%
 
17.9
%
2.
 
Restaurants – full service
 
11.3
%
 
11.4
%
 
12.0
%
3.
 
Restaurants – limited service
 
9.0
%
 
8.9
%
 
8.0
%
4.
 
Automotive service
 
8.9
%
 
8.6
%
 
7.6
%
5.
 
Family entertainment centers
 
7.1
%
 
7.1
%
 
6.4
%
6.
 
Health and fitness
 
5.5
%
 
5.6
%
 
5.6
%
7.
 
Theaters
 
4.9
%
 
5.0
%
 
4.8
%
8.
 
Recreational vehicle dealers, parts and accessories
 
3.5
%
 
3.4
%
 
3.1
%
9.
 
Automotive parts
 
3.4
%
 
3.4
%
 
3.6
%
10.
 
Home improvement
 
2.4
%
 
2.2
%
 
1.7
%
 
 
Other
 
26.2
%
 
26.4
%
 
29.3
%
 
 
 
 
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,
 
2019
 
2018
Acquisitions:
 
 
 
Number of Properties
33

 
52

Gross leasable area (square feet)
434,000

 
400,000

Initial cash yield
7.0