Real Estate

3 Months Ended

Mar. 31, 2020

Real Estate:

Real Estate – Portfolio

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



	March 31, 2020
Lease classification:
Operating	3,141
Direct financing	6
Weighted average remaining lease term (years)	11.1

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 (dollars in thousands):



	March 31, 2020			December 31, 2019
Land and improvements⁽¹⁾	$	2,489,398		$	2,490,959
Buildings and improvements	5,943,971			5,913,799
Leasehold interests	355			355
	8,433,724			8,405,113
Less accumulated depreciation and amortization	(1,187,925		)	(1,146,334		)
	7,245,799			7,258,779
Work in progress for buildings and improvements	39,437			27,438
	$	7,285,236		$	7,286,217

⁽¹⁾ Includes $16,618 and $16,930 in land for Properties under construction at March 31, 2020 and December 31, 2019, respectively.

NNN recognized the following revenues in rental income (dollars in thousands):



	Quarter Ended March 31,
	2020		2019
Rental income from operating leases	$	168,733	$	158,398
Earned income from direct financing leases	164		213
Percentage rent	403		422
Real estate expense reimbursement from tenants	5,247		3,993
	$	174,547	$	163,026

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 quarter ended March 31, 2020 and 2019, NNN recognized ($177,000) and $630,000, respectively, of such income, net of reserves. At March 31, 2020 and December 31, 2019, the balance of accrued rental income was $28,592,000 and $28,897,000, respectively, net of allowance of $1,842,000.

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 (dollars in thousands):



	March 31, 2020			December 31, 2019
Intangible lease assets (included in other assets):
Above-market in-place leases	$	15,845		$	15,754
Less: accumulated amortization	(10,090		)	(9,897		)
Above-market in-place leases, net	$	5,755		$	5,857

In-place leases	$	121,674		$	119,846
Less: accumulated amortization	(66,048		)	(64,918		)
In-place leases, net	$	55,626		$	54,928

Intangible lease liabilities (included in other liabilities):
Below-market in-place leases	$	42,633		$	41,767
Less: accumulated amortization	(26,351		)	(26,135		)
Below-market in-place leases, net	$	16,282		$	15,632

The amounts amortized as a net increase to rental income for above-market and below-market in-place leases for the quarter ended March 31, 2020 and 2019, were $220,000 and $228,000, respectively. The value of in-place leases amortized to expense for the quarter ended March 31, 2020 and 2019, were $2,395,000 and $2,244,000, respectively.

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, 2020, NNN had six of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2019, included 11 Properties, five of which were sold in 2020. Real estate held for sale consisted of the following as of (dollars in thousands):



	March 31, 2020			December 31, 2019
Land and improvements	$	3,817		$	7,022
Building and improvements	7,972			10,888
	11,789			17,910
Less accumulated depreciation and amortization	(3,953		)	(5,334		)
Less impairment	(3,338		)	(1,758		)
	$	4,498		$	10,818

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,
	2020			2019
	# of Sold Properties	Net Gain		# of Sold Properties	Net Gain
Net gain on disposition of real estate	14	$	12,770	17	$	10,445

Real Estate – Commitments

NNN has committed to fund construction on 17 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of March 31, 2020, are outlined in the table below (dollars in thousands):



Total commitment⁽¹⁾	$	74,525
Less amount funded	56,055
Remaining commitment	$	18,470
⁽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 currently 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. NNN's Properties are leased primarily to retail tenants under long-term net leases and primarily held for investment. Generally, NNN’s Property leases provide for initial terms of 10 to 20 years, which provide for cash flows over this term. NNN intends to hold these assets for the long-term, therefore, a temporary change in cash flows due to COVID-19 alone would not be an indicator of impairment. 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 $5,513,000 and $3,245,000 for the quarter ended March 31, 2020 and 2019, 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.