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Real Estate

12 Months Ended

Dec. 31, 2019

Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2019:



Lease classification:
Operating	3,143
Direct financing	6
Weighted average remaining lease term (years)	11.2

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 at December 31 (dollars in thousands):



	2019			2018
Land and improvements ⁽¹⁾	$	2,492,984		$	2,369,014
Buildings and improvements	5,917,525			5,470,968
Leasehold interests	355			3,630
	8,410,864			7,843,612
Less accumulated depreciation and amortization	(1,148,277		)	(1,006,183		)
	7,262,587			6,837,429
Work in progress - improvements	27,438			8,017
	$	7,290,025		$	6,845,446

⁽¹⁾ Includes $16,930 and $5,571 in land for Properties under construction as of December 31, 2019 and 2018, respectively.

NNN recognized the following revenues in rental income for the years ended December 31 (dollars in thousands):



	2019		2018		2017
Rental income from operating leases	$	650,112	$	602,131	$	565,405
Earned income from direct financing leases	798		923		978
Percentage rent	1,310		1,561		1,700
Real estate expense reimbursement from tenants	16,789		16,784		15,512
	$	669,009	$	621,399	$	583,595

Some leases provide for a free rent term or 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, 2019, 2018 and 2017, NNN recognized $1,872,000, $309,000 and $1,411,000, respectively, of such income, net of reserves. At December 31, 2019 and 2018, the balance of accrued rental income was $28,897,000 and $25,387,000, respectively, net of allowance of $1,842,000.

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



2020	$	664,571
2021	648,405
2022	618,646
2023	590,642
2024	569,865
Thereafter	4,458,973
	$	7,551,102

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 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):



	2019			2018
Minimum lease payments to be received	$	9,356		$	10,899
Estimated unguaranteed residual values	1,227			4,395
Less unearned income	(6,379		)	(7,225		)
Net investment in direct financing leases	$	4,204		$	8,069

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



2020	$	900
2021	920
2022	897
2023	895
2024	896
Thereafter	4,848
	$	9,356

are based on the CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s sales volume.

Real Estate – Intangibles

In accordance with purchase accounting for the acquisition of real estate subject to a lease, NNN has recorded intangible assets and lease liabilities that consisted of the following at December 31 (dollars in thousands):



	2019			2018
Intangible lease assets (included in other assets):
Above-market in-place leases	$	15,754		$	15,175
Less: accumulated amortization	(9,897		)	(9,239		)
Above-market in-place leases, net	$	5,857		$	5,936

In-place leases	$	119,846		$	104,871
Less: accumulated amortization	(64,918		)	(60,797		)
In-place leases, net	$	54,928		$	44,074

Intangible lease liabilities (included in other liabilities):
Below-market in-place leases	$	41,767		$	41,554
Less: accumulated amortization	(26,135		)	(25,258		)
Below-market in-place leases, net	$	15,632		$	16,296

The amounts amortized as a net increase to rental income for capitalized above-market and below-market leases for the years ended December 31, 2019, 2018 and 2017 were $768,000, $2,622,000 and $3,355,000, respectively. The value of in-place leases amortized to expense for the years ended December 31, 2019, 2018 and 2017 was $7,900,000, $9,209,000 and $18,841,000, respectively.

The following is a schedule of the amortization of acquired above-market and below-market in-place lease intangibles and the amortization of the in-place lease intangibles as of December 31, 2019 (dollars in thousands):



	Above-Market and Below-Market In-Place Lease Intangibles⁽¹⁾		In-Place Lease Intangibles⁽²⁾
2020	$	695	$	7,502
2021	590		6,800
2022	466		6,339
2023	383		5,833
2024	379		5,138
Thereafter	7,262		23,316
	$	9,775	$	54,928

Weighted average amortization period (years)	18.0		10.3


⁽¹⁾	Recorded as a net increase to rental income.


⁽²⁾	Amortized as an increase to amortization expense.

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, 2019, NNN had seven of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2018, included ten properties, three of which were sold in 2019. Real estate held for sale consisted of the following as of December 31 (dollars in thousands):



	2019			2018
Land and improvements	$	4,996		$	13,597
Building and improvements	6,511			32,658
	11,507			46,255
Less accumulated depreciation and amortization	(3,390		)	(10,088		)
Less impairment	(1,107		)	(14,250		)
	$	7,010		$	21,917

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):



	2019			2018			2017
	# of Sold Properties	Gain		# of Sold Properties	Gain		# of Sold Properties	Gain
Gain on disposition of real estate	59	$	32,463	61	$	65,070	48	$	36,655

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, at December 31, 2019, are outlined in the table below (dollars in thousands):



Total commitment⁽¹⁾	$	75,927
Less amount funded	44,368
Remaining commitment	$	31,559


⁽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 $31,992,000, $28,211,000 and $4,953,000 for the year ended December 31, 2019, 2018 and 2017, 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.