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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
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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
56-1431377
(State or other jurisdiction of
incorporation or organization)
(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: (407265-7348
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, $0.01 par value
NNN
New York Stock Exchange
5.200% Series F Preferred Stock, $0.01 par value
NNN/PF
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  No  
Indicate by check mark 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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer  
 
Non-accelerated filer
 
Smaller reporting company 
Emerging growth company
 


 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No  
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
171,637,561 shares of common stock, $0.01 par value, outstanding as of October 30, 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)
 
September 30, 2019

December 31, 2018
ASSETS
(unaudited)
 
 
Real estate portfolio:
 
 
 
Accounted for using the operating method, net of accumulated depreciation and amortization
$
7,121,156

 
$
6,838,907

Accounted for using the direct financing method
6,882

 
8,069

Real estate held for sale
13,961

 
28,456

Cash and cash equivalents
353,688

 
114,267

Receivables, net of allowance of $506 and $2,273, respectively
2,882

 
3,797

Accrued rental income, net of allowance of $1,842
28,570

 
25,387

Debt costs, net of accumulated amortization of $15,210 and $14,118, respectively
3,104

 
4,081

Other assets
97,441

 
80,474

Total assets
$
7,627,684

 
$
7,103,438

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgages payable, including unamortized premium and net of unamortized debt costs
$
12,221

 
$
12,694

Notes payable, net of unamortized discount and unamortized debt costs
2,841,680

 
2,838,701

Accrued interest payable
45,886

 
19,519

Other liabilities
101,393

 
77,919

Total liabilities
3,001,180

 
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; 171,637,247 and 161,503,585 shares issued and outstanding, respectively
1,717

 
1,616

Capital in excess of par value
4,479,600

 
3,950,055

Accumulated deficit
(469,646
)
 
(424,225
)
Accumulated other comprehensive income (loss)
(17,674
)
 
(5,696
)
Total stockholders’ equity of NNN
4,626,497

 
4,154,250

Noncontrolling interests
7

 
355

Total equity
4,626,504

 
4,154,605

Total liabilities and equity
$
7,627,684

 
$
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 September 30,
 
Nine Months Ended September 30,
  
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rental income
$
168,224

 
$
154,656

 
$
495,846

 
$
462,570

Interest and other income from real estate transactions
383

 
675

 
1,265

 
1,113

 
168,607

 
155,331

 
497,111

 
463,683

Operating expenses:
 
 
 
 
 
 
 
General and administrative
8,726

 
8,543

 
27,524

 
25,980

Real estate
6,706

 
5,759

 
20,398

 
17,449

Depreciation and amortization
48,348

 
42,479

 
140,769

 
130,280

Impairment losses – real estate, net of recoveries
10,692

 
3,635

 
21,124

 
9,718

Retirement severance costs

 
222

 

 
743

 
74,472

 
60,638

 
209,815

 
184,170

Gain on disposition of real estate
2,061

 
14,348

 
25,508

 
57,050

Earnings from operations
96,196

 
109,041

 
312,804

 
336,563

Other expenses (revenues):
 
 
 
 
 
 
 
Interest and other income
(501
)
 
(195
)
 
(2,912
)
 
(258
)
Interest expense
29,948

 
27,194

 
89,716

 
80,906

Leasing transaction costs
51

 

 
178

 

 
29,498

 
26,999

 
86,982

 
80,648

Net earnings
66,698

 
82,042

 
225,822

 
255,915

Earnings attributable to noncontrolling interests
(5
)
 
(10
)
 
(428
)
 
(29
)
Net earnings attributable to NNN
66,693

 
82,032

 
225,394

 
255,886

Series E preferred stock dividends
(4,097
)
 
(4,097
)
 
(12,291
)
 
(12,291
)
Series F preferred stock dividends
(4,485
)
 
(4,485
)
 
(13,455
)
 
(13,455
)
Net earnings attributable to common stockholders
$
58,111

 
$
73,450

 
$
199,648

 
$
230,140

Net earnings per share of common stock:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.47

 
$
1.23

 
$
1.49

Diluted
$
0.35

 
$
0.47

 
$
1.22

 
$
1.48

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
164,883,509

 
156,852,984

 
162,641,261

 
154,582,449

Diluted
165,361,731

 
157,286,165

 
163,126,063

 
155,007,857

Other comprehensive income:
 
 
 
 
 
 
 
Net earnings attributable to NNN
$
66,693

 
$
82,032

 
$
225,394

 
$
255,886

Amortization of interest rate hedges
327

 
525

 
975

 
1,581

Fair value of forward starting swaps
(7,818
)
 
2,985

 
(11,738
)
 
4,080

Valuation adjustments – available-for-sale securities

 
13

 
116

 
65

Realized gain – available-for-sale securities

 

 
(1,331
)
 

Comprehensive income attributable to NNN
$
59,202

 
$
85,555

 
$
213,416

 
$
261,612


See accompanying notes to condensed consolidated financial statements.


4



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended September 30, 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 June 30, 2019
$
287,500

 
$
345,000

 
$
1,636

 
$
4,042,318

 
$
(443,822
)
 
$
(10,183
)
 
$
4,222,449

 
$
2

 
$
4,222,451

Net earnings

 

 

 

 
66,693

 

 
66,693

 
5

 
66,698

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
)
$0.515 per share of common stock

 

 
1

 
9,219

 
(83,935
)
 

 
(74,715
)
 

 
(74,715
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,964 shares – director compensation

 

 

 
325

 

 

 
325

 

 
325

1,716 shares – stock purchase plan

 

 
1

 
93

 

 

 
94

 

 
94

848,474 shares – ATM equity program

 

 
8

 
46,516

 

 

 
46,524

 

 
46,524

7,000,000 shares  equity offering

 

 
70

 
395,430

 

 

 
395,500

 

 
395,500

100,000 restricted shares – net of buyback and surrender

 

 
1

 
(1
)
 

 

 

 

 

Stock issuance costs

 

 

 
(16,714
)
 

 

 
(16,714
)
 

 
(16,714
)
Amortization of deferred compensation

 

 

 
2,414

 

 

 
2,414

 

 
2,414

Amortization of interest rate hedges

 

 

 

 

 
327

 
327

 

 
327

Fair value of forward starting swaps

 

 

 

 

 
(7,818
)
 
(7,818
)
 

 
(7,818
)
Balances at September 30, 2019
$
287,500

 
$
345,000

 
$
1,717

 
$
4,479,600

 
$
(469,646
)
 
$
(17,674
)
 
$
4,626,497

 
$
7

 
$
4,626,504


5



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended September 30, 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 June 30, 2018
$
287,500

 
$
345,000

 
$
1,571

 
$
3,734,313

 
$
(368,074
)
 
$
(11,535
)
 
$
3,988,775

 
$
336

 
$
3,989,111

Net earnings

 

 

 

 
82,032

 

 
82,032

 
10

 
82,042

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

 
3,511

 
(78,253
)
 

 
(74,741
)
 

 
(74,741
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,308 shares – director compensation

 

 

 
329

 

 

 
329

 

 
329

2,923 shares – stock purchase plan

 

 

 
132

 

 

 
132

 

 
132

1,859,099 shares – ATM equity program

 

 
19

 
84,668

 

 

 
84,687

 

 
84,687

Stock issuance costs

 

 

 
(1,160
)
 

 

 
(1,160
)
 

 
(1,160
)
Amortization of deferred compensation

 

 

 
1,879

 

 

 
1,879

 

 
1,879

Amortization of interest rate hedges

 

 

 

 

 
525

 
525

 

 
525

Fair value of forward starting swaps

 

 

 

 

 
2,985

 
2,985

 

 
2,985

Valuation adjustments – available-for-sale securities

 

 

 

 

 
13

 
13

 

 
13

Balances at September 30, 2018
$
287,500

 
$
345,000

 
$
1,591

 
$
3,823,672

 
$
(372,877
)
 
$
(8,012
)
 
$
4,076,874

 
$
346

 
$
4,077,220


6



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Nine Months Ended September 30, 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

 

 

 

 
225,394

 

 
225,394

 
428

 
225,822

Dividends declared and paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1.068750 per depositary share of Series E preferred stock

 

 

 

 
(12,291
)
 

 
(12,291
)
 

 
(12,291
)
$0.975000 per depositary share of Series F preferred stock

 

 

 

 
(13,455
)
 

 
(13,455
)
 

 
(13,455
)
$1.515 per share of common stock

 

 
3

 
16,168

 
(245,574
)
 

 
(229,403
)
 

 
(229,403
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21,933 shares – director compensation

 

 

 
968

 

 

 
968

 

 
968

5,872 shares – stock purchase plan

 

 

 
309

 

 

 
309

 

 
309

2,344,022 shares – ATM equity program

 

 
24

 
127,313

 

 

 
127,337

 

 
127,337

7,000,000 shares  equity offering

 

 
70

 
395,430

 

 

 
395,500

 

 
395,500

359,650 restricted shares – net of buyback and surrender

 

 
4

 
(4
)
 

 

 

 

 

Stock issuance costs

 

 

 
(17,480
)
 

 

 
(17,480
)
 

 
(17,480
)
Amortization of deferred compensation

 

 

 
6,841

 

 

 
6,841

 

 
6,841

Amortization of interest rate hedges

 

 

 

 

 
975

 
975

 

 
975

Fair value of forward starting swaps

 

 

 

 

 
(11,738
)
 
(11,738
)
 

 
(11,738
)
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

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(776
)
 
(776
)
Balances at September 30, 2019
$
287,500

 
$
345,000

 
$
1,717

 
$
4,479,600

 
$
(469,646
)
 
$
(17,674
)
 
$
4,626,497

 
$
7

 
$
4,626,504


7



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Nine Months Ended September 30, 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

 

 

 

 
255,886

 

 
255,886

 
29

 
255,915

Dividends declared and paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1.068750 per depositary share of Series E preferred stock

 

 

 

 
(12,291
)
 

 
(12,291
)
 

 
(12,291
)
$0.975000 per depositary share of Series F preferred stock

 

 

 

 
(13,455
)
 

 
(13,455
)
 

 
(13,455
)
$1.45 per share of common stock

 

 
3

 
8,885

 
(223,836
)
 

 
(214,948
)
 

 
(214,948
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31,941 shares – director compensation

 

 

 
1,047

 

 

 
1,047

 

 
1,047

8,429 shares – stock purchase plan

 

 

 
349

 

 

 
349

 

 
349

4,896,563 shares – ATM equity program

 

 
49

 
211,323

 

 

 
211,372

 

 
211,372

221,484 restricted shares – net of buyback and surrender

 

 
2

 
(91
)
 

 

 
(89
)
 

 
(89
)
Stock issuance costs

 

 

 
(2,914
)
 

 

 
(2,914
)
 

 
(2,914
)
Amortization of deferred compensation

 

 

 
5,598

 

 

 
5,598

 

 
5,598

Amortization of interest rate hedges

 

 

 

 

 
1,581

 
1,581

 

 
1,581

Fair value of forward starting swaps

 

 

 

 

 
4,080

 
4,080

 

 
4,080

Valuation adjustments – available-for-sale securities

 

 

 

 

 
65

 
65

 

 
65

Balances at September 30, 2018
$
287,500

 
$
345,000

 
$
1,591

 
$
3,823,672

 
$
(372,877
)
 
$
(8,012
)
 
$
4,076,874

 
$
346

 
$
4,077,220



8


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


 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net earnings
$
225,822

 
$
255,915

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
140,769

 
130,280

Impairment losses – real estate, net of recoveries
21,124

 
9,718

Amortization of notes payable discount
1,297

 
1,401

Amortization of debt costs
2,787

 
2,695

Amortization of mortgages payable premium
(64
)
 
(64
)
Amortization of interest rate hedges
975

 
1,581

Settlement of forward starting swaps

 
4,080

Gain on disposition of real estate
(25,508
)
 
(57,050
)
Performance incentive plan expense
8,581

 
7,231

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
508

 
655

Decrease in receivables
915

 
1,554

Increase in accrued rental income
(1,702
)
 
(871
)
Increase in other assets
(375
)
 
(1,052
)
Increase in accrued interest payable
26,367

 
14,987

Decrease in other liabilities
(1,500
)
 
(4,848
)
Other
(189
)
 
(272
)
Net cash provided by operating activities
399,032

 
365,508

Cash flows from investing activities:
 
 
 
Proceeds from the disposition of real estate
92,586

 
121,810

Additions to real estate:
 
 
 
Accounted for using the operating method
(505,693
)
 
(415,118
)
Principal payments on mortgages and notes receivable
3,100

 

Other
985

 
(433
)
Net cash used in investing activities
(409,022
)
 
(293,741
)
 
See accompanying notes to condensed consolidated financial statements.


9


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


 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from financing activities:
 
 
 
Proceeds from line of credit payable
$
429,200

 
$
1,599,500

Repayment of line of credit payable
(429,200
)
 
(1,720,000
)
Repayment of mortgages payable
(422
)
 
(400
)
Proceeds from notes payable

 
692,913

Payment of debt issuance costs
(115
)
 
(5,506
)
Proceeds from issuance of common stock
539,318

 
220,524

Stock issuance costs
(17,274
)
 
(2,908
)
Payment of Series E preferred stock dividends
(12,291
)
 
(12,291
)
Payment of Series F preferred stock dividends
(13,455
)
 
(13,455
)
Payment of common stock dividends
(245,574
)
 
(223,836
)
Noncontrolling interest distributions
(776
)
 

Net cash provided by financing activities
249,411

 
534,541

Net increase in cash, cash equivalents and restricted cash
239,421

 
606,308

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)
$
353,688

 
$
607,672

Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amount capitalized
$
59,151

 
$
62,806

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Increase (decrease) in other comprehensive income
$
11,978

 
$
(5,726
)
Right-of-use assets recorded in connection with lease liabilities
$
8,224

 
$

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

 
$

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

 
$
565

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

 
$
258

  (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 September 30, 2019 and 2018.

 
See accompanying notes to condensed consolidated financial statements.

10



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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").
 
September 30, 2019
Property Portfolio:
 
Total properties
3,057

Gross leasable area (square feet)
32,209,000

States
48

Weighted average remaining lease term (years)
11.2


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, 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 $797,000 and $2,500,000 in capitalized interest during the development period for the nine months ended September 30, 2019 and 2018, respectively, of which $327,000 and $596,000 was recorded during the quarters ended September 30, 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.

11



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