Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2013:



Lease classification:
Operating	1,888
Direct financing	12
Building portion – direct financing / land portion – operating	1
Weighted average remaining lease term	12 years

The leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry property and liability insurance coverage. Certain of NNN’s Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the property. Generally, the leases of the Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.

Real Estate Portfolio – Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following as of December 31 (dollars in thousands):



	2013			2012
Land and improvements	$	1,650,651		$	1,474,299
Buildings and improvements	2,957,218			2,564,104
Leasehold interests	1,290			1,290
	4,609,159			4,039,693
Less accumulated depreciation and amortization	(416,477		)	(332,156		)
	4,192,682			3,707,537
Work in progress	60,682			86,507
	$	4,253,364		$	3,794,044

Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 2013, 2012 and 2011, NNN recognized collectively in continuing and discontinued operations, ($338,000), $487,000 and ($222,000), respectively, of such income, net of reserves. At December 31, 2013 and 2012, the balance of accrued rental income, net of allowances of $3,181,000 and $3,270,000, respectively, was $24,797,000 and $25,458,000, respectively.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2013 (dollars in thousands):



2014	$	384,218
2015	379,726
2016	374,064
2017	365,149
2018	338,197
Thereafter	2,782,929
	$	4,624,283

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales.

Real Estate Portfolio – Accounted for Using the Direct Financing Method – The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands):



	2013			2012
Minimum lease payments to be received	$	20,469		$	27,963
Estimated unguaranteed residual values	8,274			10,142
Less unearned income	(10,401		)	(14,888		)
Net investment in direct financing leases	$	18,342		$	23,217

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2013 (dollars in thousands):



2014	$	3,094
2015	2,956
2016	2,873
2017	2,035
2018	2,007
Thereafter	7,504
	$	20,469

The above table 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).

Real Estate – Held For Sale

As of December 31, 2013 and 2012, NNN classified eight Properties as held for sale. Real estate held for sale consisted of the following at December 31 (dollars in thousands):



	2013			2012
Land and improvements	$	7,403		$	7,839
Building and improvements	15,037			14,875
Work in process	37			72
	22,477			22,786
Less accumulated depreciation and amortization	(1,659		)	(1,623		)
Less impairment	(5,474		)	(3,617		)
	$	15,344		$	17,546

Real Estate – Dispositions

The following table summarizes the Properties sold and the corresponding gain recognized on the disposition included in continuing and discontinued operations for the years ended December 31 (dollars in thousands):



	2013				2012			2011
	# of Properties	Gain			# of Properties	Gain		# of Properties	Gain
Continuing operations	—	$	173		—	$	—	—	$	297
Discontinued operations	35	6,272			34	10,956		8	424
Noncontrolling interest	—	(152		)	—	—		—	(194		)
	35	$	6,293		34	$	10,956	8	$	527

Real Estate – Commitments

NNN has agreed to fund construction commitments on leased Properties. The improvements are estimated to be completed within 12 months. These construction commitments, as of December 31, 2013, are outlined in the table below (dollars in thousands):



Number of properties	48
Total commitment⁽¹⁾	$	145,818
Amount funded	99,024
Remaining commitment	46,794


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

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. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company’s review of long lived assets, including identifiable intangible assets, NNN recognized the following real estate impairments for the years ended December 31 (dollars in thousands):



	2013		2012		2011
Continuing operations	$	1,957	$	3,258	$	—
Discontinued operations	2,149		7,054		431
	$	4,106	$	10,312	$	431

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