Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2016:



Lease classification:
Operating	2,566
Direct financing	9
Building portion – direct financing/land portion – operating	2
Weighted average remaining lease term (years)	11.6

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):



	2016			2015
Land and improvements	$	2,102,915		$	1,909,569
Buildings and improvements	4,489,248			3,876,986
Leasehold interests	4,565			1,290
	6,596,728			5,787,845
Less accumulated depreciation and amortization	(739,505		)	(617,786		)
	5,857,223			5,170,059
Work in progress	24,057			61,354
	$	5,881,280		$	5,231,413

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, 2016, 2015 and 2014, NNN recognized ($12,000), $153,000 and $1,521,000, respectively, of such income, net of reserves. At December 31, 2016 and 2015, the balance of accrued rental income was $25,101,000 and $25,529,000, respectively, net of $3,078,000 allowance.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2016 (dollars in thousands):



2017	$	535,048
2018	522,708
2019	508,143
2020	490,805
2021	470,388
Thereafter	3,721,409
	$	6,248,501

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):



	2016			2015
Minimum lease payments to be received	$	11,200		$	13,900
Estimated unguaranteed residual values	5,664			7,589
Less unearned income	(5,634		)	(6,971		)
Net investment in direct financing leases	$	11,230		$	14,518

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2016 (dollars in thousands):



2017	$	1,862
2018	1,834
2019	1,512
2020	1,043
2021	719
Thereafter	4,230
	$	11,200

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, 2016, NNN had 16 of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2015, included 21 properties, five of which were sold in 2016. Real estate held for sale consisted of the following as of December 31 (dollars in thousands):



	2016			2015
Land and improvements	$	14,114		$	23,024
Building and improvements	15,446			43,327
	29,560			66,351
Less accumulated depreciation and amortization	(2,962		)	(6,821		)
Less impairment	(2,748		)	(2,003		)
	$	23,850		$	57,527

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):



	2016			2015					2014
	# of Sold Properties	Gain		# of Sold Properties	Gain				# of Sold Properties	Gain
Gain on disposition of real estate	38	$	27,182	19	$	10,807		⁽¹⁾	25	$	11,587
Income tax expense		—			(357		)			(318		)
		27,182			10,450					11,269
Gain on disposition of real estate included in discontinued operations	—	—		—	—				2	155			⁽¹⁾
Income tax expense		—			—					—
		$	27,182		$	10,450				$	11,424

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

Real Estate – Commitments

NNN has committed to fund construction commitments on 21 Properties. The improvements are estimated to be completed within 12 months. These construction commitments, at December 31, 2016, are outlined in the table below (dollars in thousands):



Total commitment⁽¹⁾	$	114,206
Amount funded	$	54,782
Remaining commitment	$	59,424


⁽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):



	2016		2015		2014
Continuing operations	$	8,025	$	3,970	$	760
Discontinued operations	—		—		63
	$	8,025	$	3,970	$	823

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.