Real Estate

12 Months Ended

Dec. 31, 2020

Real Estate:

Real Estate – Portfolio

Leases – The following outlines key information for NNN’s leases at December 31, 2020:


Lease classification:
Operating			3,141
Direct financing			6

Weighted average remaining lease term (years)			10.7

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.

During the year ended December 31, 2020, NNN entered into rent deferral lease amendments with certain tenants (including certain tenants accounted for as cash basis), for an aggregate $50,719,000 and $1,410,000 of rent originally due for the year ending December 31, 2020 and 2021, respectively. The rent deferral lease amendments required the deferred rents to be repaid at a later time during the lease term. Approximately $3,259,000 of the deferred rent was repaid in 2020. Deferred rents of $36,794,000, $10,944,000 and $1,132,000 are due to be repaid during the years ended December 31, 2021, 2022 and 2023, respectively. Rent collections and rent relief requests for the year ended December 31, 2020, may not be indicative of collections and requests in the future. Depending on the macroeconomic conditions and the impact on tenants, deferred rents may be difficult to collect.

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):


	2020		2019
Land and improvements (1)	$	2,489,243	$	2,490,935
Buildings and improvements	6,009,797		5,916,149
Leasehold interests	355		355
	8,499,395		8,407,439
Less accumulated depreciation and amortization	(1,317,407)		(1,147,795)
	7,181,988		7,259,644
Work in progress – improvements	26,673		27,438
	$	7,208,661	$	7,287,082

(1) Includes $8,421 and $16,930 in land for Properties under construction as of December 31, 2020 and 2019, respectively.

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


	2020		2019		2018
Rental income from operating leases	$	639,265	$	650,112	$	602,131
Earned income from direct financing leases	647		798		923
Percentage rent	842		1,310		1,561
Real estate expense reimbursement from tenants	18,039		16,789		16,784
	$	658,793	$	669,009	$	621,399

Some leases provide for a free rent period 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, 2020, 2019 and 2018, NNN recognized $25,449,000, $1,872,000, and $309,000, respectively, of accrued rental income, net of reserves. Included in accrued rental income is the impact of the rent deferral lease amendments NNN entered into as a result of the COVID-19 pandemic. During the year ended December 31, 2020, NNN recorded $30,473,000 of net accrued rental income related to such amendments.

Additionally, as a result of reclassifying certain tenants as cash basis for accounting purposes during the year ended December 31, 2020, NNN wrote-off approximately $16,367,000 of accrued rental income for the year ended December 31, 2020.

At December 31, 2020 and 2019, the balance of accrued rental income was $53,958,000 and $28,897,000, respectively, net of allowance of $6,947,000 and $1,842,000, respectively.

The following is a schedule of undiscounted cash flows to be received on noncancellable operating leases as of December 31, 2020 (dollars in thousands):


2021	$	644,591
2022	590,730
2023	561,793
2024	541,901
2025	515,108
Thereafter	3,783,884
	$	6,638,007

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):


	2020		2019
Minimum lease payments to be received	$	8,499	$	9,356
Estimated unguaranteed residual values	1,227		1,227
Less unearned income	(5,732)		(6,379)
Net investment in direct financing leases	$	3,994	$	4,204

The following is a schedule of undiscounted cash flows to be received on direct financing leases held for investment as of December 31, 2020 (dollars in thousands):


2021	$	963
2022	897
2023	895
2024	896
2025	887
Thereafter	3,961
	$	8,499

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):


	2020		2019
Intangible lease assets (included in other assets):
Above-market in-place leases	$	15,474	$	15,754
Less: accumulated amortization	(10,271)		(9,897)
Above-market in-place leases, net	$	5,203	$	5,857

In-place leases	$	118,416	$	119,846
Less: accumulated amortization	(68,695)		(64,918)
In-place leases, net	$	49,721	$	54,928

Intangible lease liabilities (included in other liabilities):
Below-market in-place leases	$	41,101	$	41,767
Less: accumulated amortization	(26,486)		(26,135)
Below-market in-place leases, net	$	14,615	$	15,632

The amounts amortized as a net increase to rental income for capitalized above-market and below-market leases for the years ended December 31, 2020, 2019 and 2018 were $887,000, $768,000 and $2,622,000, respectively. The value of in-place leases amortized to expense for the years ended December 31, 2020, 2019 and 2018 was $8,304,000, $7,900,000 and $9,209,000, 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, 2020 (dollars in thousands):


	Above-Market and Below-Market In-Place Lease Intangibles(1)		In-Place Lease Intangibles(2)
2021	$	594	$	6,903
2022	470		6,443
2023	390		5,969
2024	386		5,281
2025	373		4,563
Thereafter	7,199		20,562
	$	9,412	$	49,721

Weighted average amortization period (years)	18.0		10.0

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


	2020		2019
Land and improvements	$	3,841	$	7,046
Building and improvements	4,971		7,886

	8,812		14,932
Less accumulated depreciation and amortization	(2,536)		(3,872)
Less impairment	(605)		(1,107)
	$	5,671	$	9,953

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):


	2020			2019			2018
	# of Sold Properties	Gain		# of Sold Properties	Gain		# of Sold Properties	Gain
Gain on disposition of real estate	38	$	16,238	59	$	32,463	61	$	65,070

Real Estate – Commitments

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



Total commitment(1)	$	42,443
Less amount funded	35,094
Remaining commitment	$	7,349

(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 changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at a price that exceeds NNN's carrying value. Management evaluates whether an impairment in carrying value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), and the residual value of the real estate, with the carrying value of the individual asset. The future undiscounted cash flows are primarily driven by estimated future market rents. Future cash flow estimates are sensitive to the assumptions made by management regarding future market rents, which are affected by expectations about future market and economic conditions. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. 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 $37,442,000, $31,992,000 and $28,211,000 for the year ended December 31, 2020, 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.