Real Estate

3 Months Ended

Mar. 31, 2019

Real Estate:

Real Estate – Portfolio

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



	March 31, 2019
Lease classification:
Operating	2,986
Direct financing	7
Building portion – direct financing/land portion – operating	1
Weighted average remaining lease term (years)	11.4

The following is a summary of the general structure of the leases in the Property Portfolio, although the specific terms of each lease can vary significantly. Generally, the Property leases provide for initial terms of 10 to 20 years. The Properties are generally leased under net leases, pursuant to which the tenant typically bears responsibility for substantially all property costs and expenses associated with ongoing maintenance, repair, replacement and operation of the property, including utilities, property taxes and property and liability insurance. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the Property. NNN's leases provide for annual base rental payments (generally payable in monthly installments), and generally provide for limited increases in rent as a result of (i) increases in the Consumer Price Index ("CPI"), (ii) fixed increases, or, to a lesser extent, (iii) increases in the tenant’s sales volume.

Generally, NNN's leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. NNN’s lease term is based on the non-cancellable base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the options. Some of the leases also provide that in the event NNN wishes to sell the Property subject to that lease, NNN first must offer the lessee the right to purchase the Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Property.

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



	March 31, 2019			December 31, 2018
Land and improvements⁽¹⁾	$	2,386,548		$	2,368,635
Buildings and improvements	5,535,000			5,469,460
Leasehold interests	3,630			3,630
	7,925,178			7,841,725
Less accumulated depreciation and amortization	(1,043,855		)	(1,005,724		)
	6,881,323			6,836,001
Work in progress for buildings and improvements	19,424			8,017
	$	6,900,747		$	6,844,018

⁽¹⁾ Includes $10,846 and $5,571 in land for Properties under construction at March 31, 2019 and December 31, 2018,

respectively.

NNN recognized the following revenues in lease income for the quarter ended March 31, 2019 (dollars in thousands):



Rental income from operating leases	$	158,398
Earned income from direct financing leases	213
Percentage rent	422
Real estate expense reimbursement from tenants	3,993
	$	163,026

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 quarter ended March 31, 2019 and 2018, NNN recognized $630,000 and $872,000, respectively, of such income, net of reserves. At March 31, 2019 and December 31, 2018, the balance of accrued rental income was $28,120,000 and $25,387,000, respectively, net of allowance of $1,842,000, respectively.

The following is a schedule of undiscounted cash flows to be received on noncancellable operating leases as of March 31, 2019 (dollars in thousands):



2019	$	470,392
2020	617,630
2021	599,143
2022	569,341
2023	541,303
Thereafter	4,422,859
	$	7,220,668

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents undiscounted cash flows 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 as of (dollars in thousands):



	March 31, 2019			December 31, 2018
Minimum lease payments to be received	$	10,609		$	10,899
Estimated unguaranteed residual values	3,632			4,395
Less unearned income	(7,022		)	(7,225		)
Net investment in direct financing leases	$	7,219		$	8,069

The following is a schedule of undiscounted cash flows to be received on direct financing leases held for investment as of March 31, 2019 (dollars in thousands):



2019	$	1,109
2020	1,045
2021	920
2022	897
2023	895
Thereafter	5,743
	$	10,609

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 and 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 March 31, 2019 and December 31, 2018, NNN had seven of its Properties categorized as held for sale, respectively. Real estate held for sale consisted of the following as of (dollars in thousands):



	March 31, 2019			December 31, 2018
Land and improvements	$	13,982		$	13,976
Building and improvements	34,166			34,166
	48,148			48,142
Less accumulated depreciation and amortization	(10,608		)	(10,547		)
Less impairment	(16,143		)	(14,250		)
	$	21,397		$	23,345

Real Estate – Dispositions

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



	Quarter Ended March 31,
	2019			2018
	# of Sold Properties	Gain		# of Sold Properties	Gain
Gain on disposition of real estate	17	$	10,445	15	$	38,596

Real Estate – Commitments

NNN has committed to fund construction on 26 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of March 31, 2019, are outlined in the table below (dollars in thousands):



Total commitment⁽¹⁾	$	58,616
Less amount funded	30,270
Remaining commitment	$	28,346
⁽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 $3,245,000 and $2,248,000 for the quarter ended March 31, 2019 and 2018, 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.