Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2014:



Lease classification:
Operating	2,083
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 the 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 December 31 (dollars in thousands):



	2014			2013
Land and improvements	$	1,784,494		$	1,652,304
Buildings and improvements	3,414,691			2,960,845
Leasehold interests	1,290			1,290
	5,200,475			4,614,439
Less accumulated depreciation and amortization	(511,703		)	(415,774		)
	4,688,772			4,198,665
Work in progress	28,908			60,719
	$	4,717,680		$	4,259,384

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, 2014, 2013 and 2012, NNN recognized collectively in continuing and discontinued operations, $1,521,000, ($338,000) and $487,000, respectively, of such income, net of reserves. At December 31, 2014 and 2013, the balance of accrued rental income, net of allowances of $3,086,000 and $3,181,000, respectively, was $25,659,000 and $24,797,000, respectively.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2014 (dollars in thousands):



2015	$	432,369
2016	427,152
2017	417,412
2018	392,925
2019	375,013
Thereafter	3,025,217
	$	5,070,088

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):



	2014			2013
Minimum lease payments to be received	$	17,376		$	20,469
Estimated unguaranteed residual values	8,274			8,274
Less unearned income	(8,676		)	(10,401		)
Net investment in direct financing leases	$	16,974		$	18,342

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2014 (dollars in thousands):



2015	$	2,956
2016	2,873
2017	2,035
2018	2,007
2019	1,513
Thereafter	5,992
	$	17,376

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

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 December 31, 2014, NNN had seven 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, included eight properties, two of which were subsequently sold in 2014. Real estate held for sale consisted of the following as of (dollars in thousands):



	2014			2013
Land and improvements	$	3,246		$	5,751
Building and improvements	4,644			8,067
	7,890			13,818
Less accumulated depreciation and amortization	(1,473		)	(2,362		)
Less impairment	(1,022		)	(2,132		)
	$	5,395		$	9,324

Real Estate – Dispositions

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



	2014					2013					2012
	# of Sold Properties	Gain				# of Sold Properties	Gain				# of Sold Properties	Gain
Gain on disposition of real estate	25	$	11,587			—	$	173			—	$	—
Income tax expense		(318		)			(66		)			—
		11,269					107					—
Gain on disposition of real estate included in discontinued operations	2	155			⁽¹⁾	35	6,272			⁽¹⁾	34	10,956		⁽¹⁾
Income tax expense		—					(784		)			—
		$	11,424				$	5,595				$	10,956

⁽¹⁾ Amount includes the recognition of deferred gains 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 December 31, 2014, are outlined in the table below (dollars in thousands):



Number of properties	26
Total commitment⁽¹⁾	$	110,081
Amount funded	$	57,465
Remaining commitment	$	52,616


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

Real Estate – Impairments

Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant. 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):



	2014		2013		2012
Continuing operations	$	760	$	3,565	$	4,070
Discontinued operations	63		541		6,242
	$	823	$	4,106	$	10,312

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.