Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2018:



Lease classification:
Operating	2,970
Direct financing	8
Building portion – direct financing / land portion – operating	1
Weighted average remaining lease term (years)	11.5

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 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):



	2018			2017
Land and improvements ⁽¹⁾	$	2,374,005		$	2,282,919
Buildings and improvements	5,477,479			4,948,057
Leasehold interests	3,630			5,261
	7,855,114			7,236,237
Less accumulated depreciation and amortization	(1,009,374		)	(874,519		)
	6,845,740			6,361,718
Work in progress - improvements	8,017			41,920
	$	6,853,757		$	6,403,638

⁽¹⁾ Includes $5,571 and $25,799 in land for Properties under construction at December 31, 2018 and 2017,

respectively.

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, 2018, 2017 and 2016, NNN recognized $309,000, $1,411,000 and ($12,000), respectively, of such income, net of reserves. At December 31, 2018 and 2017, the balance of accrued rental income was $25,387,000 and $25,916,000, respectively, net of allowance of $1,842,000 and $1,936,000, respectively.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2018 (dollars in thousands):



2019	$	613,402
2020	599,805
2021	579,904
2022	550,022
2023	522,386
Thereafter	4,243,077
	$	7,108,596

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 Consumer Price Index ("CPI") or future contingent rents which may be received on the leases based on a percentage of the tenant’s sales volume.

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):



	2018			2017
Minimum lease payments to be received	$	10,899		$	9,339
Estimated unguaranteed residual values	4,395			4,967
Less unearned income	(7,225		)	(4,656		)
Net investment in direct financing leases	$	8,069		$	9,650

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2018 (dollars in thousands):



2019	$	1,464
2020	1,013
2021	889
2022	895
2023	895
Thereafter	5,743
	$	10,899

The table above 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, 2018, NNN had three of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2017, included five properties, two of which were sold in 2018. Real estate held for sale consisted of the following as of December 31 (dollars in thousands):



	2018			2017
Land and improvements	$	8,606		$	9,411
Building and improvements	26,147			27,342
	34,753			36,753
Less accumulated depreciation and amortization	(6,897		)	(6,602		)
Less impairment	(14,250		)	(778		)
	$	13,606		$	29,373

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):



	2018			2017			2016
	# of Sold Properties	Gain		# of Sold Properties	Gain		# of Sold Properties	Gain
Gain on disposition of real estate	61	$	65,070	48	$	36,655	38	$	27,182

Real Estate – Commitments

NNN has committed to fund construction on 19 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of December 31, 2018, are outlined in the table below (dollars in thousands):



Total commitment⁽¹⁾	$	34,756
Less amount funded	13,588
Remaining commitment	$	21,168


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

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 real estate impairments, net of recoveries of $28,211,000, $4,953,000 and $8,025,000 for the year ended December 31, 2018, 2017 and 2016, respectively.

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.