Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2015:



Lease classification:
Operating	2,294
Direct financing	10
Building portion – direct financing/land portion – operating	2
Weighted average remaining lease term (years)	11.4

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):



	2015			2014
Land and improvements	$	1,922,579		$	1,776,222
Buildings and improvements	3,891,239			3,386,810
Leasehold interests	1,290			1,290
	5,815,108			5,164,322
Less accumulated depreciation and amortization	(620,188		)	(508,229		)
	5,194,920			4,656,093
Work in progress	61,354			28,908
	$	5,256,274		$	4,685,001

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, 2015, 2014 and 2013, NNN recognized collectively in continuing and discontinued operations, $153,000, $1,521,000 and ($338,000), respectively, of such income, net of reserves. At December 31, 2015 and 2014, the balance of accrued rental income, net of allowances of $3,078,000 and $3,086,000, respectively, was $25,529,000 and $25,659,000, respectively.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2015 (dollars in thousands):



2016	$	478,512
2017	469,698
2018	445,099
2019	426,224
2020	408,372
Thereafter	3,267,955
	$	5,495,860

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):



	2015			2014
Minimum lease payments to be received	$	13,900		$	17,376
Estimated unguaranteed residual values	7,589			8,274
Less unearned income	(6,971		)	(8,676		)
Net investment in direct financing leases	$	14,518		$	16,974

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2015 (dollars in thousands):



2016	$	2,700
2017	1,862
2018	1,834
2019	1,512
2020	1,043
Thereafter	4,949
	$	13,900

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. NNN anticipates the disposition of Properties classified as held for sale to occur within 12 months. As of December 31, 2015, NNN had six of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2014, included 11 properties, five of which were sold in 2015. Real estate held for sale consisted of the following as of December 31 (dollars in thousands):



	2015			2014
Land and improvements	$	9,419		$	11,518
Building and improvements	27,881			32,525
	37,300			44,043
Less accumulated depreciation and amortization	(4,419		)	(4,947		)
Less impairment	(215		)	(1,022		)
	$	32,666		$	38,074

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):



	2015					2014					2013
	# of Sold Properties	Gain				# of Sold Properties	Gain				# of Sold Properties	Gain
Gain on disposition of real estate	19	$	10,807		⁽¹⁾	25	$	11,587			—	$	173
Income tax expense		(357		)			(318		)			(66		)
		10,450					11,269					107
Gain on disposition of real estate included in discontinued operations	—	—				2	155			⁽¹⁾	35	6,272			⁽¹⁾
Income tax expense		—					—					(784		)
		$	10,450				$	11,424				$	5,595

⁽¹⁾ Amount includes the recognition of deferred gains on previously sold properties.

Real Estate – Commitments

NNN has committed to fund construction commitments on leased Properties. The improvements are estimated to be completed within 12 months. These construction commitments, at December 31, 2015, are outlined in the table below (dollars in thousands):



Number of properties	27
Total commitment⁽¹⁾	$	116,394
Amount funded	$	87,406
Remaining commitment	$	28,988


⁽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 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 for the years ended December 31 (dollars in thousands):



	2015		2014		2013
Continuing operations	$	3,970	$	760	$	3,565
Discontinued operations	—		63		541
	$	3,970	$	823	$	4,106

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.