Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives:

In accordance with the guidance on derivatives and hedging, NNN records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or a firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

NNN’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, NNN primarily uses treasury locks, forward starting swaps

and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward starting swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the variable cash flows associated with floating rate debt and involve the receipt or payment of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.

For derivatives designated as cash flow hedges, the change in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings.

NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued, NNN recognizes any changes in its fair value in earnings and continues to carry the derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt. NNN records a cash settlement of forward starting swaps in the statement of cash flows as an operating activity.

The following table outlines NNN's terminated derivatives which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (dollars in thousands):



Terminated	Description	Aggregate Notional Amount		Liability (Asset) Fair Value When Terminated			Fair Value Deferred In Other Comprehensive Income ⁽¹⁾
April 2013	Four forward starting swaps	$	240,000	$	3,156		$	3,141
May 2014	Three forward starting swaps	225,000		6,312			6,312
October 2015	Four forward starting swaps	300,000		13,369			13,369
December 2016	Two forward starting swaps	180,000		(13,352		)	(13,345		)
September 2017	Two forward starting swaps	250,000		7,690			7,688
September 2018	Two forward starting swaps	250,000		(4,080		)	(4,080		)

⁽¹⁾ The amount reported in accumulated other comprehensive income will be reclassified to interest expense as

interest payments are made on the related notes payable.

As of September 30, 2019, $5,936,000 remained in other comprehensive income related to NNN’s previously terminated interest rate hedges. During the nine months ended September 30, 2019 and 2018, NNN reclassified out of other comprehensive income $975,000 and $1,581,000, respectively, as an increase in interest expense. Over the next 12 months, NNN estimates that an additional $1,349,000 will be reclassified as an increase in interest expense from these terminated derivatives. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on NNN’s long-term debt.

During the nine months ended September 30, 2019, NNN entered into three forward starting swaps with a total notional amount of $200,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The outstanding forward swaps were designated as cash flow hedges, and as of September 30, 2019, had a fair value of $11,738,000 included in other liabilities and accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheets. The fair value of the forward starting swaps were based on Level 2 valuation. These derivative financial instruments were still outstanding as of September 30, 2019.

NNN does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges.