Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases:



	September 30, 2014
Lease classification:
Operating	2,075
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 property and carry property and liability insurance coverage. Certain of NNN’s Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the property. Generally, the leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions of the base term of the lease, including rent increases.

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



	September 30, 2014			December 31, 2013
Land and improvements	$	1,760,747		$	1,650,250
Buildings and improvements	3,360,140			2,953,712
Leasehold interests	1,290			1,290
	5,122,177			4,605,252
Less accumulated depreciation and amortization	(484,955		)	(415,424		)
	4,637,222			4,189,828
Work in progress	25,553			60,719
	$	4,662,775		$	4,250,547

Real Estate – Held For Sale

On a quarterly basis, the Company evaluates its Properties for held for sale classification based on specific criteria as outlined in ASC 360, Property, Plant & Equipment, including management’s intent to commit to a plan to sell the asset. In January 2014, NNN completed a strategic review of its Properties held for sale and reclassified one Property that was previously held for sale to held for investment, included in Real Estate – Portfolio. As of September 30, 2014, NNN had eight of its Properties categorized as held for sale. NNN anticipates the disposition of these Properties to occur within 12 months. NNN's real estate held for sale at December 31, 2013, includes 10 properties, two of which were subsequently sold in 2014. Real estate held for sale consisted of the following as of (dollars in thousands):



	September 30, 2014			December 31, 2013
Land and improvements	$	5,285		$	7,805
Building and improvements	11,777			15,200
	17,062			23,005
Less accumulated depreciation and amortization	(1,980		)	(2,712		)
Less impairment	(1,022		)	(2,132		)
	$	14,060		$	18,161

Real Estate – Dispositions

The following table summarizes the number of Properties sold and the corresponding gain recognized on the disposition of Properties (dollars in thousands):



	Quarter Ended September 30,										Nine Months Ended September 30,
	2014					2013					2014					2013
	# of Sold Properties	Gain				# of Sold Properties	Gain				# of Sold Properties	Gain				# of Sold Properties	Gain
Gain on disposition of real estate	10	$	3,464			—	$	—			22	$	8,472			—	$	—
Income tax expense		(108		)			—					(306		)			—
		3,356					—					8,166					—
Gain on disposition of real estate included in discontinued operations	—	143			⁽¹⁾	22	1,228			⁽¹⁾	2	155			⁽¹⁾	31	4,402			⁽¹⁾
Income tax expense		—					(416		)			—					(782		)
		$	3,499				$	812				$	8,321				$	3,620

⁽¹⁾ Amount includes deferred gain on previously sold properties.

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 September 30, 2014, are outlined in the table below (dollars in thousands):



Number of properties	22
Total commitment⁽¹⁾	$	84,782
Amount funded	$	43,895
Remaining commitment	$	40,887

⁽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 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 the following real estate impairments (dollars in thousands):



	Quarter Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Continuing operations	$	77	$	435		$	562	$	3,535
Discontinued operations	—		292			63		1,196
Impairment recoveries – discontinued operations	—		(728		)	—		(728		)
	$	77	$	(1	)	$	625	$	4,003

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.