Real Estate

3 Months Ended

Mar. 31, 2021

Real Estate:

Real Estate – Portfolio

Leases – At March 31, 2021, NNN’s real estate portfolio had a weighted average remaining lease term of 10.6 years and consisted of 3,150 leases classified as operating leases and an additional six leases accounted for as direct financing.

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.

As of March 31, 2021, NNN has entered into rent deferral lease amendments with certain tenants, for an aggregate $51,269,000 and $4,677,000 of rent originally due for the years ending December 31, 2020 and 2021, respectively. The rent deferral lease amendments require the deferred rents to be repaid at a later time during the lease term. Approximately $3,259,000 of deferred rent was repaid in 2020 and approximately $10,817,000 of deferred rent was repaid during the quarter ended March 31, 2021. An additional $21,107,000 is due in 2021, with the remaining deferred rent to be collected periodically by December 31, 2025.

Historical rent collections and rent relief requests 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 – NNN's real estate consisted of the following at (dollars in thousands):


	March 31, 2021		December 31, 2020
Land and improvements(1)	$	2,501,471	$	2,489,243
Buildings and improvements	6,098,338		6,009,797
Leasehold interests	355		355
	8,600,164		8,499,395
Less accumulated depreciation and amortization	(1,358,764)		(1,317,407)
	7,241,400		7,181,988
Work in progress for buildings and improvements	4,309		26,673
Accounted for using the operating method	7,245,709		7,208,661
Accounted for using the direct financing method	3,904		3,994
	$	7,249,613	$	7,212,655

(1)Includes $2,328 and $8,421 in land for Properties under construction at March 31, 2021 and December 31, 2020, respectively.

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


	Quarter Ended March 31,
	2021		2020
Rental income from operating leases	$	173,583	$	168,733
Earned income from direct financing leases	158		164
Percentage rent	104		403
Real estate expense reimbursement from tenants	5,353		5,247
	$	179,198	$	174,547

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 quarter ended March 31, 2020, NNN recognized accrued rental income, net of reserves and write-offs of ($177,000).

During the quarter ended March 31, 2021, NNN recognized accrued rental income, net of reserves and write-offs of ($8,445,000), which includes ($9,385,000) of net straight-line accrued rent from rent deferral repayments related to the impacts of the rent deferral lease amendments NNN entered into as a result of the COVID-19 pandemic.

At March 31, 2021 and December 31, 2020, the balance of accrued rental income was $45,450,000 and $53,958,000, respectively, net of allowance of $6,030,000 and $6,947,000, respectively.

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, 2021		December 31, 2020
Intangible lease assets (included in other assets):
Above-market in-place leases	$	15,408	$	15,474
Less: accumulated amortization	(10,327)		(10,271)
Above-market in-place leases, net	$	5,081	$	5,203

In-place leases	$	121,486	$	118,416
Less: accumulated amortization	(68,986)		(68,695)
In-place leases, net	$	52,500	$	49,721

Intangible lease liabilities (included in other liabilities):
Below-market in-place leases	$	41,077	$	41,101
Less: accumulated amortization	(26,559)		(26,486)
Below-market in-place leases, net	$	14,518	$	14,615

The amounts amortized as a net increase to rental income for above-market and below-market in-place leases for the quarters ended March 31, 2021 and 2020, were $162,000 and $220,000, respectively. The value of in-place leases amortized to expense for the quarters ended March 31, 2021 and 2020, were $1,800,000 and $2,395,000, 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, 2021, NNN had five of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2020, included five Properties, four of which were sold in 2021. Real estate held for sale consisted of the following as of (dollars in thousands):


	March 31, 2021		December 31, 2020
Land and improvements	$	4,313	$	3,841
Building and improvements	5,480		4,971
	9,793		8,812
Less accumulated depreciation and amortization	(2,316)		(2,536)
Less impairment	(979)		(605)
	$	6,498	$	5,671

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,
	2021			2020
	# of Sold Properties	Net Gain		# of Sold Properties	Net Gain
Gain on disposition of real estate	11	$	4,281	14	$	12,770

Real Estate – Commitments

NNN has committed to fund construction on eight Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of March 31, 2021, are outlined in the table below (dollars in thousands):



Total commitment(1)	$	12,077
Less amount funded	6,637
Remaining commitment	$	5,440
(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 generally 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 $2,131,000 and $5,513,000 for the quarters ended March 31, 2021 and 2020, 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.