10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006.

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             .

Commission File Number 001-11290

NATIONAL RETAIL PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

Maryland	56-1431377
(State of other jurisdiction or incorporation organization)	(I.R.S. Employment Identification No.)

450 South Orange Avenue, Suite 900, Orlando, Florida 32801

(Address of principal executive offices, including zip code)

(407) 265-7348

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) for the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b 2 of the Exchange Act. (Check one):

Large accelerated filer  x     Accelerated filer  ¨    Non-accelerated filer  ¨.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

58,130,296 shares of Common Stock, $0.01 par value, outstanding as of July 31, 2006.

TABLE OF CONTENTS

		PAGE REFERENCE
Part I – Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Earnings	2
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
Part II – Other Information
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Submission of Matters to a Vote of Security Holders	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		45
Exhibit Index		46

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

	June 30, 2006		December 31, 2005
	(unaudited)
ASSETS
Real estate, Investment Portfolio:
Accounted for using the operating method, net of accumulated depreciation and amortization and impairment	$	1,254,077	$	1,296,793
Accounted for using the direct financing method		89,061		95,704
Held for sale, net of impairment		1,180		1,600
Real estate, Inventory Portfolio, held for sale		193,471		131,074
Mortgages, notes and accrued interest receivable, net of allowance of $634 and $676, respectively		24,328		51,086
Mortgage residual interests, net of impairment of $3,669 and $2,382, respectively		41,925		55,184
Cash and cash equivalents		4,682		8,234
Restricted cash		33,959		30,191
Receivables, net of allowance of $772 and $847, respectively		7,797		8,547
Accrued rental income, net of allowance of $2,146 and $2,057, respectively		27,215		27,999
Debt costs, net of accumulated amortization of $10,531 and $9,567, respectively		5,138		6,096
Other assets		17,689		20,908
Total assets	$	1,700,522	$	1,733,416
LIABILITIES AND SHAREHOLDERS’ EQUITY
Line of credit payable	$	149,700	$	162,300
Mortgages payable		36,758		151,133
Notes payable – secured		26,250		28,250
Notes payable, net of unamortized discount of $1,067 and $1,133, respectively, and an unamortized interest rate hedge gain of $3,653 at December 31, 2005		489,733		493,321
Financing lease obligation		26,041		26,041
Accrued interest payable		4,178		5,539
Other liabilities		20,904		20,058
Income tax liability		11,517		13,748
Total liabilities		765,081		900,390
Minority interest		4,979		4,939
Shareholders’ equity:
Preferred stock, $0.01 par value. Authorized 15,000,000 shares
Series A, 1,781,589 shares issued and outstanding, stated liquidation value of $25 per share		44,540		44,540
Series B Convertible, 10,000 shares issued and outstanding at December 31, stated liquidation value of $2,500 per share		—		25,000
Common stock, $0.01 par value. Authorized 190,000,000 shares; 57,997,666 and 55,130,876 shares issued and outstanding June 30 and December 31, respectively		580		551
Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding		—		—
Capital in excess of par value		837,630		778,485
Retained earnings (deficit)		43,929		(20,489	)
Accumulated other comprehensive income		3,783		—
Total shareholders’ equity		930,462		828,087
	$	1,700,522	$	1,733,416

See accompanying notes to condensed consolidated financial statements.

1

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands, except per share data)

(unaudited)

	Quarter Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Rental income from operating leases	$	30,630		$	23,064		$	60,112		$	44,840
Earned income from direct financing leases		2,356			2,518			4,692			5,055
Contingent rental income		55			57			511			450
Real estate expense reimbursement from tenants		914			794			1,910			1,807
Gain on disposition of real estate, Inventory Portfolio		563			378			7,007			846
Interest and other income from real estate transactions		1,668			2,124			3,127			3,432
Interest income on mortgage residual interests		1,947			1,922			4,244			1,922
		38,133			30,857			81,603			58,352
Operating expenses:
General and administrative		7,088			5,739			14,258			10,518
Real estate		1,359			996			2,697			2,272
Depreciation and amortization		5,358			3,872			10,709			7,497
Impairment – real estate		—			741			—			1,328
Impairment – mortgage residual interests		842			—			2,662			—
Restructuring costs		1,580			—			1,580			—
		16,227			11,348			31,906			21,615
Earnings from operations		21,906			19,509			49,697			36,737
Other expenses (revenues):
Interest and other income		(1,015	)		(308	)		(1,831	)		(764	)
Interest expense		11,217			7,566			23,152			14,261
		10,202			7,258			21,321			13,497
Earnings from continuing operations before income tax benefit, minority interest and equity in earnings of unconsolidated affiliates		11,704			12,251			28,376			23,240
Income tax benefit		3,535			343			5,428			946
Minority interest		(255	)		2			(3,452	)		16
Equity in earnings of unconsolidated affiliates		228			100			195			1,180
Earnings from continuing operations		15,212			12,696			30,547			25,382
Earnings from discontinued operations:
Real estate, Investment Portfolio		62,510			2,301			68,831			14,225
Real estate, Inventory Portfolio, net of income tax expense and minority interest		2,479			1,891			4,271			3,285
		64,989			4,192			73,102			17,510
Earnings before extraordinary gain		80,201			16,888			103,649			42,892
Extraordinary gain, net of income tax expense		—			11,805			—			11,805
Net earnings		80,201			28,693			103,649			54,697
Series A preferred stock dividends		(1,002	)		(1,002	)		(2,004	)		(2,004	)
Series B convertible preferred stock dividends		—			(419	)		(419	)		(838	)
Net earnings available to common shareholders – basic		79,199			27,272			101,226			51,855
Series B convertible preferred stock dividends, if dilutive		—			419			419			838
Net earnings available to common shareholders – diluted	$	79,199		$	27,691		$	101,645		$	52,693

See accompanying notes to condensed consolidated financial statements.

2

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED

(dollars in thousands, except per share data)

(unaudited)

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net earnings per share of common stock:
Basic:
Continuing operations	$	0.25	$	0.22	$	0.50	$	0.43
Discontinued operations		1.13		0.08		1.30		0.34
Extraordinary gain		—		0.22		—		0.23
Net earnings	$	1.38	$	0.52	$	1.80	$	1.00
Diluted:
Continuing operations	$	0.25	$	0.21	$	0.50	$	0.43
Discontinued operations		1.12		0.08		1.27		0.33
Extraordinary gain		—		0.22		—		0.22
Net earnings	$	1.37	$	0.51	$	1.77	$	0.98
Weighted average number of common shares outstanding:
Basic		57,258,741		52,164,198		56,368,311		52,034,597
Diluted		57,784,835		53,913,934		57,376,485		53,732,987

See accompanying notes to condensed consolidated financial statements.

3

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net earnings	$	103,649		$	54,697
Adjustments to reconcile net earnings to net cash provided by operating activities:
Stock compensation expense		2,297			732
Depreciation and amortization		12,160			9,414
Impairment – real estate		420			3,306
Impairment – mortgage residual interests		2,662			—
Amortization of notes payable discount		66			(30	)
Amortization of deferred interest rate hedge gains		(170	)		(80	)
Equity in earnings of unconsolidated affiliates		(195	)		190
Distributions received from unconsolidated affiliates		751			3,094
Minority interests		4,115			(932	)
Gain on disposition of real estate, Investment Portfolio		(64,452	)		(9,801	)
Extraordinary gain, net of income tax expense		—			(11,805	)
Deferred income taxes		(4,470	)		(662	)
Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Additions to real estate, Inventory Portfolio		(99,480	)		(34,801	)
Proceeds from disposition of real estate, Inventory Portfolio		47,234			20,169
Gain on disposition of real estate, Inventory Portfolio		(10,733	)		(5,500	)
Decrease in real estate leased to others using the direct financing method		1,518			1,430
Decrease (increase) in work in process		(360	)		819
Increase in mortgages, notes and accrued interest receivable		1,185			352
Decrease in receivables		759			2,139
Decrease in mortgage residual interests		10,897			3,279
Increase in accrued rental income		(4,106	)		(974	)
Decrease in other assets		592			262
Increase in accrued interest payable		(1,361	)		(258	)
Decrease in other liabilities		(236	)		(84	)
Increase (decrease) in current tax liability		2,239			(224	)
Net cash provided by operating activities		4,981			34,732
Cash flows from investing activities:
Proceeds from the disposition of real estate, Investment Portfolio		149,740			32,220
Additions to real estate, Investment Portfolio, accounted for using the operating method		(134,859	)		(65,938	)
Increase in mortgages and notes receivable		(9,617	)		(6,193	)
Mortgage and notes payments received		34,951			9,290
Business combinations, net of cash acquired		—			19,610
Restricted cash		(3,768	)		(23,751	)
Acquisition of 1.3 percent interest in Services		—			(829	)
Payment of lease costs		(1,146	)		(329	)
Other		916			(20	)
Net cash provided by (used in) investing activities	$	36,217		$	(35,940	)

See accompanying notes to condensed consolidated financial statements.

4

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(dollars in thousands)

(unaudited)

	Six Months Ended June 30,
	2006			2005
Cash flows from financing activities:
Proceeds from line of credit payable	$	193,800		$	104,100
Repayment of line of credit payable		(206,400	)		(45,800	)
Repayment of mortgages payable		(19,376	)		(3,930	)
Repayment of notes payable - secured		(2,000	)		—
Repayment of notes payable		—			(9,400	)
Payment of debt costs		(14	)		—
Proceeds from issuance of common stock		31,887			1,176
Payment of Series A Preferred Stock dividends		(2,004	)		(2,004	)
Payment of Series B Convertible Preferred Stock dividends		(419	)		(838	)
Payment of common stock dividends		(36,813	)		(33,889	)
Minority interest distributions		(3,311	)		(802	)
Minority interest contributions		1			—
Stock issuance costs		(101	)		(6	)
Net cash provided by (used in) financing activities		(44,750	)		8,607
Net increase (decrease) in cash and cash equivalents		(3,552	)		7,399
Cash and cash equivalents at beginning of period		8,234			1,947
Cash and cash equivalents at end of period	$	4,682		$	9,346
Supplemental disclosure of cash flow information:
Interest paid, net of amount capitalized	$	26,919		$	17,333
Taxes paid (received)	$	(585	)	$	856
Supplemental disclosure of non-cash investing and financing activities:
Issued 79,500 and 102,900 shares of restricted common stock in 2006 and 2005, respectively, pursuant to the Company’s 2000 Performance Incentive Plan	$	1,763		$	1,940
Converted 10,000 shares of Series B Convertible Preferred Stock to 1,293,996 shares of common stock	$	25,000		$	—
Issued 28,589 shares of common stock in 2006 pursuant to the Company’s Deferred Director Fee Plan	$	571		$	—
Issued 6,566 shares of common stock in 2006 to directors pursuant to the Company’s 2000 Performance Incentive Plan	$	144		$	—
Note and mortgage notes accepted in connection with real estate transactions	$	—		$	1,015
Mortgage note received in connection with real estate disposition	$	—		$	1,000
Issued 1,636,532 shares of common stock in connection with the acquisition of National Properties Corporation (“NAPE”)	$	—		$	31,160
Disposition of real estate held for sale and transfer of related mortgage payable	$	95,000		$	406
Surrender 5,850 shares of restricted common stock in 2005	$	—		$	93
Change in other comprehensive income	$	3,783		$	—

See accompanying notes to condensed consolidated financial statements.

5

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(unaudited)

Note 1 – Organization and Summary of Significant Accounting Policies:

Organization and Nature of Business – National Retail Properties, Inc., a Maryland corporation, formerly known as Commercial Net Lease Realty, Inc., is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term “Company” refers to National Retail Properties, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned qualified REIT subsidiaries of National Retail Properties, Inc., as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (collectively, “NNN TRS”). Effective May 1, 2006, Commercial Net Lease Realty, Inc. changed its name to National Retail Properties, Inc.

Prior to January 1, 2005, the Company held a 98.7 percent, non-controlling and non-voting interest in Commercial Net Lease Realty Services, Inc. and its majority owned and controlled subsidiaries (“Services”). Kevin B. Habicht, an officer and director of the Company, James M. Seneff, Jr. and Gary M. Ralston, each a former officer and director of the Company, (collectively the “Services Investors”) owned the remaining 1.3 percent interest, which was 100 percent of the voting interest in Services. Effective January 1, 2005, the Company acquired the remaining 1.3 percent interest in Services increasing the Company’s ownership in Services to 100 percent. Effective November 1, 2005, Commercial Net Lease Realty Services, Inc. merged into National Retail Properties, Inc. CNLRS Exchange I, Inc., a taxable REIT subsidiary (“TRS”), became the TRS holding company for the Company’s development and exchange activities.

The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments (included in mortgages and notes receivable on the condensed consolidated balance sheet), and mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its majority owned and controlled qualified REIT subsidiaries. The Company acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term commercial net leases (the “Investment Properties” or “Investment Portfolio”). As of June 30, 2006, the Company owned 607 Investment Properties, with aggregate gross leasable area of 8,872,000 square feet, which are located in 41 states. In addition to the Investment Properties, as of June 30, 2006, the Company had $8,886,000 and $41,925,000 in structured finance investments and mortgage residual interests, respectively. The Inventory Assets are operated through the NNN TRS. The NNN TRS, directly and indirectly, through investment interests, acquires and develops real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of June 30, 2006, the NNN TRS owned 91 Inventory Properties.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter and six months ended June 30, 2006 may not be indicative of the results that may be expected for the

6

year ending December 31, 2006. Amounts as of December 31, 2005, included in the condensed consolidated financial statements, have been derived from the audited consolidated financial statements as of that date. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, Management’s Discussion and Analysis and notes thereto included in the Form 10-K for the year ended December 31, 2005.

Principles of Consolidation – In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). This Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. A variable interest entity refers to certain entities subject to consolidation according to the provisions of this interpretation. This interpretation required existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. Effective January 1, 2004, the Company implemented FIN 46R. The adoption of this interpretation did not have a significant impact on the financial position or results of operations of the Company.

The Company’s condensed consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates. All significant intercompany account balances and transactions have been eliminated. The Company applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by the Company due to the significance of rights held by other parties.

The NNN TRS develops real estate through various joint venture development affiliate agreements. The NNN TRS consolidates the joint venture development entities listed in the table below based upon either the Company being the primary beneficiary of the respective variable interest entity or the Company having a controlling interest over the respective entity. The Company eliminates significant intercompany balances and transactions and records a minority interest for its other partners’ ownership percentage. The following table summarizes each of the investments entered into during the six months ended June 30, 2006:

Date of Agreement	Entity Name	Ownership %
February 2006	CNLRS BEP, LP	50	%
February 2006	CNLRS Rockwall, LP	50	%

The Company holds a variable interest in, but is not the primary beneficiary of, CNL Plaza Ltd., a variable interest entity. The Company’s maximum exposure to loss as a result of its involvement with CNL Plaza Ltd. as of June 30, 2006, is $4,707,000. As of June 30, 2006, CNL Plaza, Ltd. had total assets and liabilities of $54,548,000 and $61,682,000, respectively.

In May 2005, the Company exercised its option to purchase 78.9 percent of the common shares of Orange Avenue Mortgage Investments, Inc. (“OAMI”). As a result, the Company has consolidated OAMI in its condensed consolidated financial statements.

Investment in Unconsolidated Affiliate – The Company accounts for its investment in an unconsolidated affiliate under the equity method of accounting (see Note 4). The Company exercises influence over this unconsolidated affiliate, but does not control the affiliate.

Investment Portfolio Intangible Assets and Liabilities – In connection with real estate acquisitions, a value is assigned to the intangible asset or liability: the difference between contractual rent and market value rent and value assigned to in-place leases. Deferred revenue/expense or deferred assets/liabilities recorded in connection with the difference between

7

contractual rent and market rent value for acquired properties are amortized into rental revenue over the life of the leases. The value assigned to in-place leases is amortized over the life of the leases. For the quarter and six months ended June 30, 2005, the Company recorded an impairment of intangible assets of $741,000 and $1,328,000, respectively. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. The Company determines if an impairment should be recognized if the undiscounted future cash flows expected to result from the use or sale of the long-lived asset are less than the current net book value. Generally, the Company calculates a possible impairment by comparing the future cash flows and the current net book value. Impairments are measured as the amount by which the current book value of the intangible asset exceeds the fair value of the asset.

Mortgage Residual Interests, at Fair Value – Mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in shareholders’ equity. The Company had unrealized gains of $300,000 at June 30, 2006. The mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. The Company recognizes the excess of all cash flows attributable to the mortgage residual interests estimated at the acquisition/transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Losses are considered permanent if and when there has been a change in the timing or amount of estimated cash flows that leads to a loss in value. The Company recognized an impairment of $2,662,000 for the six months ended June 30, 2006, of which $842,000 was recognized during the quarter ended June 30, 2006. Certain of the mortgage residual interests have been pledged as security for notes payable.

Other Comprehensive Income – The components for other comprehensive income for the six months ended June 30, 2006 (dollars in thousands):

Balance at beginning of period	$	—
Treasury lock – gain on swaps(1)		4,148
Treasury lock – amortization		(665	)
Mortgage residual interests unrealized gain(2)		300
Balance at end of period	$	3,783

⁽¹⁾ Fair value of interest rate swaps reclassified from the Company’s unsecured notes payable from the unamortized interest rate hedge gain resulting from the termination of the $94,000,000 swap in June 2004.

⁽²⁾ Unrealized gain on mortgage residual interests based upon a third party valuation analysis.

The Company’s total comprehensive income (dollars in thousands):

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net earnings	$	80,201	$	28,693	$	103,649	$	54,697
Other comprehensive income		187		1,254		3,783		1,254
Total comprehensive income	$	80,388	$	29,947	$	107,432	$	55,951

8

Revenue Recognition – Rental revenues for non-development real estate assets are recognized when earned in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting For Leases,” based on the terms of the lease at the time of acquisition of the leased asset. Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant. Some leases provide for scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases.

Earnings Per Share - Basic net earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted net earnings per common share is computed by dividing net earnings available to common shareholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the periods.

The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation:

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Weighted average number of common shares outstanding	57,546,465		52,477,106		56,627,526		52,298,715
Unvested restricted stock	(287,724	)	(312,908	)	(259,215	)	(264,118	)
Weighted average number of common shares outstanding used in basic earnings per share	57,258,741		52,164,198		56,368,311		52,034,597
Weighted average number of common shares outstanding used in basic earnings per share	57,258,741		52,164,198		56,368,311		52,034,597
Effect of dilutive securities:
Restricted stock	77,822		312,908		59,290		264,118
Common stock options	93,402		130,596		114,608		128,740
Directors’ deferred fee plan	27,816		12,236		26,422		11,536
Assumed conversion of Series B Convertible Preferred Stock to common stock	327,054		1,293,996		807,854		1,293,996
Weighted average number of common shares outstanding used in diluted earnings per share	57,784,835		53,913,934		57,376,485		53,732,987

Stock-Based Compensation – On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (R), “Share-Based Payments” (“SFAS 123R”), under the modified prospective method. Under the modified prospective method, compensation cost is recognized for all awards granted after the adoption of this standard and for the unvested portion of previously granted awards that are outstanding as of that date. In accordance with SFAS 123R, the Company will estimate the fair value of restricted stock and stock option grants at the date of grant and amortize those amounts into expense on a straight line basis or amount vested, if greater, over the appropriate vesting period. Adoption of SFAS 123R did not have a significant impact on the Company’s earnings from continuing operations, net earnings, cash flow from operations, cash flow from financing activities and basic and diluted earnings per share for the quarter and six months ended June 30, 2006.

Income Taxes – The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to shareholders, providing it distributes at least 100 percent of its real estate investment trust taxable

9

income and meets certain other requirements for qualifying as a REIT. Notwithstanding the Company’s qualification for federal taxation as a REIT, the Company is subject to certain state and local taxes on its income and real estate.

The Company and the NNN TRS have made timely TRS elections pursuant to the provisions of the REIT Modernization Act. A TRS is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entities are subject to federal and state income taxes (See “Real Estate—Inventory Portfolio”). All provisions for federal income taxes in the accompanying condensed consolidated financial statements are attributable to the NNN TRS and to OAMI’s built-in-gain tax liability.

Income taxes are accounted for under the asset and liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the temporary differences based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

New Accounting Standards – In March 2006, FASB issued SFAS No. 156, ”Accounting for Servicing of Financial Assets.” This statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires prospective application to all transactions after the effective date of this statement. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into certain servicing contracts. This Statement also requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. This statement is effective for the fiscal years beginning after September 15, 2006. The adoption of this statement is not expected to have a significant impact on the financial position or results of operations of the Company.

In June 2006, FASB issued an Emerging Issues Task Force (“EITF”) Consensus in Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The consensus states that the presentation of taxes within the scope on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board (“APB”) Opinion No. 22 “Disclosure of Accounting Policies.” In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. The consensus should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. The adoption of this consensus is not expected to have a significant impact on the financial position or results of operations of the Company.

10

Use of Estimates – The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments on assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include impairments and allowances for certain assets, accruals, useful lives of assets and capitalization of costs. Actual results could differ from those estimates.

Reclassification – Certain items in the prior year’s condensed consolidated financial statements and notes to condensed consolidated financial statements have been reclassified to conform to the 2006 presentation. These reclassifications had no effect on shareholders’ equity or net earnings.

Note 2 – Real Estate – Investment Portfolio:

Leases – As of June 30, 2006, 541 of the Investment Property leases have been classified as operating leases and 66 leases have been classified as direct financing leases. For the Investment Property leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of 43 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2006 and 2026) and provide for minimum rentals. In addition, the majority of the leases provide for contingent rentals and/or scheduled rent increases over the terms of the leases. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry property and liability insurance coverage. Certain of the Company’s Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses of the property. As of June 30, 2006, the weighted average remaining lease term was approximately 12 years. Generally, the leases of the Investment Properties provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease.

Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following (dollars in thousands):

	June 30, 2006			December 31, 2005
Land	$	602,357		$	574,572
Buildings and improvements		724,965			797,832
Leasehold interests		2,532			2,532
		1,329,854			1,374,936
Less accumulated depreciation and amortization		(78,850	)		(79,198	)
		1,251,004			1,295,738
Work in progress		4,656			3,012
		1,255,660			1,298,750
Less impairment		(1,583	)		(1,957	)
	$	1,254,077		$	1,296,793

In connection with the development of the six Investment Properties, the Company has agreed to fund construction commitments of $11,173,000, of which $7,774,000, including land costs, has been funded as of June 30, 2006.

In May 2006, the Company disposed of two office buildings containing an aggregate of 555,000 rentable square feet and a related parking garage with approximately 1,000 parking spaces (“DC Office Properties”). The carrying value of the DC Office Properties was $163,723,000 at

11

December 31, 2005. The sale of the DC Office Properties yielded $227,876,000 of proceeds which included the assumption of a $95,000,000 mortgage secured by the DC Office Properties and the Company recognized a gain of $59,496,000 during the quarter and six months ended June 30, 2006.

Held for Sale – The Investment Portfolio included certain properties that were held for sale, which consisted of the following (dollars in thousands):

	June 30, 2006			December 31, 2005
Land	$	717		$	717
Buildings and improvements		1,459			1,459
		2,176			2,176
Less impairment		(996	)		(576	)
	$	1,180		$	1,600

Impairments – The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company makes a provision for impairment loss if estimated future undiscounted operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. After such review, the Company recognized a $420,000 impairment loss during the quarter and six months ended June 30, 2006. During the quarter and six months ended June 30, 2005, the Company recognized impairment losses of $575,000 and $1,978,000, respectively.

Note 3 – Real Estate – Inventory Portfolio:

As of June 30, 2006, the Company owned 91 Inventory Properties: 69 completed inventory, 10 under construction and 12 land parcels. As of December 31, 2005, the Company owned 63 Inventory Properties: 47 completed inventory, 12 under construction and four land parcels. The Inventory Portfolio consisted of the following (dollars in thousands):

	June 30, 2006		December 31, 2005
Inventory:
Land	$	41,364	$	26,430
Building		62,545		37,081
		103,909		63,511
Construction Projects:
Land		56,745		44,168
Work in process		32,817		23,395
		89,562		67,563
	$	193,471	$	131,074

In connection with the development of 10 of the Inventory Properties, the Company has agreed to fund construction commitments, including land costs, of $68,297,000, of which $50,514,000 has been funded as of June 30, 2006.

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The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized on the disposition of Inventory Properties included in continuing and discontinued operations (dollars in thousands):

	Quarter Ended June 30,							Six Months Ended June 30,
	2006				2005			2006				2005
	# of Properties	Gain			# of Properties	Gain		# of Properties	Gain			# of Properties	Gain
Continuing operations	1	$	563		1	$	378	2	$	7,007		2	$	846
Minority interest			(282	)			—			(3,504	)			—
Total continuing operations			281				378			3,503				846
Discontinued operations	18		2,478		7		2,506	26		3,602		11		4,515
Intersegment eliminations			88				86			124				139
Minority interest			(505	)			—			(505	)			—
Total discontinued operations			2,061				2,592			3,221				4,654
	19	$	2,342		8	$	2,970	28	$	6,724		13	$	5,500

Note 4 – Investments in Unconsolidated Affiliate:

In May 2002, the Company purchased a combined 25 percent partnership interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) for $750,000. Plaza owns a 346,000 square foot office building and an interest in an adjacent parking garage. The Company has severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. The maximum obligation of the Company under this guarantee is $5,834,000, plus interest. Interest accrues based on a tiered rate structure with a maximum of 300 basis points above LIBOR (the current rate is 175 basis points above LIBOR). This guarantee will continue through the loan maturity in December 2010. The fair value of the Company’s guarantee is $47,000. During the six months ended June 30, 2006 and 2005, the Company received $751,000 and $198,000, respectively, in distributions from Plaza. For the six months ended June 30, 2006, the Company recognized earnings of $195,000 of which $228,000 was recognized during the quarter ended June 30, 2006. For the six months ended June 30, 2005 the Company recognized a loss from Plaza of $82,000, of which a loss $52,000 was recognized during the quarter ended June 30, 2005.

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Note 5 – Business Combination:

Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect shareholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the May 2005 acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting. For the six months ended June 30, 2005, the Company recognized $1,467,000 of earnings, of which $342,000 was recognized during the quarter ended June 30, 2005, from the LLCs and is recorded in equity in earnings from unconsolidated affiliates on the condensed consolidated statements of earnings. The Company received $2,749,000 in distributions from the LLCs during the six months ended June 30, 2005.

In May 2005, the Company acquired a 78.9 percent equity interest in OAMI which resulted in an extraordinary gain of $11,805,000, net of income tax expense of $7,223,000 for the quarter and six months ended June 30, 2005. During the quarter ended December 31, 2005, the Company finalized the purchase price allocation based on the fair value of the assets acquired which resulted in a reduction to the extraordinary gain of $4,242,000. The adjustment to the extraordinary gain was recorded in accordance with SFAS No. 141, “Business Combinations.” Additionally, in November 2005, Commercial Net Lease Realty Services, Inc. merged into National Retail Properties, Inc. resulting in a tax benefit of $7,223,000 related to the acquisition of OAMI. The extraordinary gain for the year ended December 31, 2005 related to the OAMI acquisition after all adjustments was $14,786,000.

Also as a result of the acquisition of a 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now part of OAMI in the Company’s condensed consolidated financial statements. Certain officers and directors own preferred shares of OAMI.

Note 6 – Notes Receivable:

The structured finance investments bear a weighted average interest rate of 15.4% per annum, of which 10.2% is payable monthly and the remaining 5.2% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which range between October 2007 and August 2008. The structured finance investments are generally structured as loans secured by the borrowers’ pledge of their respective membership interests in the entities which own real estate. As of June 30, 2006 and December 31, 2005, the outstanding principal balance of the structured finance investments was $8,886,000 and $27,805,000, respectively.

During the six months ended June 30, 2006, the Company entered into structured finance investments of $9,117,000. In addition, the Company received principal payments of $28,036,000 on certain structured finance investments plus accrued interest and prepayment penalties during the six months ended June 30, 2006.

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Note 7 – Mortgage Residual Interests:

OAMI holds the mortgage residual interests (“Residuals”) from seven securitizations (See Note 5 Business Combination). The following table summarizes the investment interests in each of the transactions:

	Investment Interest
Securitization	Company (1)		OAMI (2)		3rd Party
BYL 99-1	—		59.0	%	41.0	%
CCMH I, LLC	42.7	%	57.3	%	—
CCMH II, LLC	44.0	%	56.0	%	—
CCMH III, LLC	36.7	%	63.3	%	—
CCMH IV, LLC	38.3	%	61.7	%	—
CCMH V, LLC	38.4	%	61.6	%	—
CCMH VI, LLC	—		100.0	%	—

⁽¹⁾ The Company owned these investment interests prior to its acquisition of the equity interest in OAMI.

⁽²⁾ The Company owns 78.9 percent of OAMI’s investment interest.

Each of the Residuals is recorded at fair value based upon a third party valuation. Unrealized gains and losses are reported as other comprehensive income in shareholders’ equity, and permanent losses as a result of a change in the timing or amount of estimated cash flows are recorded as an impairment. At June 30, 2006, the Company had unrealized gains of $300,000 recorded in other comprehensive income and recorded an impairment of $2,662,000 for the six months ended June 30, 2006, of which an impairment of $842,000 was recorded during the quarter ended June 30, 2006.

Note 8 – Mortgages Payable:

In February 2006, upon maturity, the Company repaid the outstanding principal balance of its long-term, fixed rate loan with an original principal balance of $39,450,000, which was secured by a first mortgage on certain of the Company’s Investment Properties. Upon repayment of the loan, the Investment Properties were released from the mortgage. As of December 31, 2005, the outstanding principal balance was $18,538,000.

In May 2006, the Company disposed of the DC Office Properties that were subject to a first mortgage with an original and outstanding principal balance of $95,000,000. Upon disposition of these Investment Properties, the buyer assumed the mortgage.

Note 9 – Common Stock:

During the six months ended June 30, 2006, the Company issued 1,396,396 shares of common stock pursuant to the Company’s Dividend Reinvestment and Stock Purchase Plan and received net proceeds of $30,231,000.

During the six months ended June 30, 2006 and 2005, the Company declared and paid dividends to its common shareholders of $36,813,000 and $33,889,000, respectively or $0.65 per share, of common stock.

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Note 10 – Preferred Stock:

Holders of each of the Company’s preferred stock issuances are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions based on the stated rate and liquidation preference per annum. The following table outlines each issuance of the Company’s preferred stock:

Non-Voting Preferred Stock Issuance	Shares Outstanding At June 30, 2006	Liquidation Preference (per share)		Fixed Annual Cash Distribution (per share)		Dividends Declared and Paid For the Six Months Ended June 30,
						2006				2005
						Total		Per Share		Total		Per Share
9% Series A	1,781,589	$	25	$	2.25	$	2,004,000	$	1.125	$	2,004,000	$	1.125
6.7% Series B Cumulative Convertible Perpetual (1)	—	$	2,500		167.50		419,000		41.875		838,000		83.750

⁽¹⁾ In April 2006, the holder of the Company’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock.

Note 11 – Restructuring Costs:

During the quarter and six months ended June 30, 2006, the Company recorded restructuring costs of $1,580,000, which included severance costs and accelerated vesting of restricted stock in connection with the workforce reduction in April 2006.

Note 12 – Income Taxes:

For income tax purposes, the Company has Taxable REIT Subsidiaries in which certain real estate activities are conducted. Additionally, the Company has its 78.9 percent equity interest in OAMI which the Company has consolidated in its financial statements as a result of the Company’s acquisition in May 2005. OAMI, upon making its REIT conversion, has remaining tax liabilities relating to the built-in-gain of its assets. The Company treats some depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between the Company’s effective tax rates for the quarters ended June 30, 2006 and 2005 and the statutory rates, relate to state taxes and nondeductible expenses such as meals and entertainment expenses.

The components of the net income tax asset (liability) consist of the following (dollars in thousands):

	June 30, 2006			December 31, 2005
Temporary differences:
Built-in-gain	$	(11,856	)	$	(14,551	)
Depreciation		(451	)		(315	)
Stock based compensation		159			35
Other		(106	)		(180	)
Net operating loss carryforward		2,255			544
Net deferred income tax asset (liability)	$	(9,999	)	$	(14,467	)
Current income tax asset (payable)		(1,518	)		719
Income tax asset (liability)	$	(11,517	)	$	(13,748	)

In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate

16

realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The net operating loss carryforwards were generated by the Company’s Taxable REIT Subsidiaries. The net operating loss carryforwards completely expire in 2026. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize all of the benefits of these deductible differences that existed as of June 30, 2006. The income tax (expense) benefit consists of the following components (dollars in thousands):

	Quarter Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net earnings (loss) before income taxes	$	78,181		$	36,730		$	100,834		$	62,984
Provision for income taxes: benefit (expense)
Current:
Federal		(411	)		(535	)		(1,392	)		(698	)
State and local		(78	)		(100	)		(261	)		(131	)
Deferred:
Federal		1,966			(150	)		3,470			(198	)
Extraordinary Gain - Federal		—			(6,081	)		—			(6,081	)
State and local		543			(29	)		998			(37	)
Extraordinary Gain - State		—			(1,142	)		—			(1,142	)
Total provision for income taxes		2,020			(8,037	)		2,815			(8,287	)
Total net earnings	$	80,201		$	28,693		$	103,649		$	54,697

In 2005 the Company elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, a portion of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual assets. During the six months ended June 30, 2006, an additional $2,695,000 of OAMI’s tax liability was reduced, of which $1,337,000 was reduced during the quarter ended June 30, 2006, and is included in the income tax benefit on the condensed consolidated statement of earnings.

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Note 13 – Earnings from Discontinued Operations:

Real Estate – Investment Portfolio – In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the revenues and expenses related to (i) all Investment Properties that were sold and leasehold interests that expired subsequent to December 31, 2001, the effective date of SFAS No. 144 and (ii) any Investment Property that was held for sale as of June 30, 2006, as discontinued operations.

	Quarter Ended June 30,					Six Months Ended June 30,
	2006			2005		2006			2005
Revenues:
Rental income from operating leases	$	4,827		$	6,028	$	9,619		$	12,491
Earned income from direct financing leases		—			144		66			289
Real estate expense reimbursement from tenants		231			586		709			1,230
Interest and other income from real estate transactions		112			153		188			214
		5,170			6,911		10,582			14,224
Operating expenses:
General and administrative		67			68		97			101
Real estate		804			1,775		2,276			3,371
Depreciation and amortization		31			947		1,284			1,896
Impairments – real estate		420			575		420			1,978
		1,322			3,365		4,077			7,346
Other expenses (revenues):
Interest expense		672			1,261		1,959			2,454
Earnings before gain on disposition of real estate and loss on extinguishment of mortgage payable		3,176			2,285		4,546			4,424
Gain on disposition of real estate		59,501			16		64,452			9,801
Loss on extinguishment of mortgage payable		(167	)		—		(167	)		—
Earnings from discontinued operations	$	62,510		$	2,301	$	68,831		$	14,225

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company makes a provision for impairment loss if estimated future undiscounted operating cash flows plus estimated disposition proceeds are less than the current book value. Impairment losses are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. After such review, the Company recognized a $420,000 impairment in discontinued operations during the quarter and six months ended June 30, 2006 and impairment losses for the quarter and six months ended June 30, 2005 of $575,000 and $1,978,000, respectively.

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Real Estate – Inventory Portfolio – The Company has classified the revenues and expenses related to (i) its Inventory Properties, which generated rental revenues prior to disposition, and (ii) the Inventory Properties which had generated rental revenues and were held for sale as of June 30, 2006, as discontinued operations.

	Quarter Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Rental income from operating leases	$	2,076		$	711		$	4,002		$	1,145
Real estate expense reimbursement from tenants		102			7			150			38
Gain on disposition of real estate held for sale		2,566			2,592			3,726			4,654
Interest and other from real estate transactions		—			64			—			191
		4,744			3,374			7,878			6,028
Operating expenses:
General and administrative		53			4			57			13
Real estate		108			37			133			136
Depreciation and amortization		—			10			—			21
		161			51			190			170
Other expenses:
Interest expense		5			252			141			520
Earnings before income tax expense and minority interest		4,578			3,071			7,547			5,338
Income tax expense		(1,515	)		(1,157	)		(2,613	)		(2,010	)
Minority interest		(584	)		(23	)		(663	)		(43	)
Earnings from discontinued operations	$	2,479		$	1,891		$	4,271		$	3,285

Note 14 – Performance Incentive Plan:

The Company’s 2000 Performance Incentive Plan (“2000 Plan”) allows the Company to award or grant to key employees, directors and persons performing consulting or advisory services for the Company or its affiliates stock options, stock awards, stock appreciation rights, Phantom Stock Awards, Performance Awards and Leveraged Stock Purchase Awards, each as defined in the 2000 Plan. The 2000 Plan permits the issuance of up to 3,900,000 shares of common stock. The following summarizes the Company’s stock-based compensation activity for the six months ended June 30, 2006:

	Number of Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	461,175		$	15.66
Options granted	—			—
Options exercised	(61,804	)		15.64
Options surrendered	—			—
Options outstanding, end of period	399,371			15.66
Exercisable, end of period	399,371			15.66

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The following summarizes the outstanding and exercisable options at June 30, 2006:

	Option Price Range
	$10.1875 to $13.6875		$14.5700 to $17.8750		Total
Outstanding options:
Number of shares		55,734		343,637		399,371
Weighted-average exercise price	$	11.32	$	16.36	$	15.66
Weighted-average remaining contractual life in years		4.2		3.5		3.6
Exercisable options:
Number of shares		55,734		343,637		399,371
Weighted-average exercise price	$	11.32	$	16.36	$	15.66

One-third of the option grant to each individual becomes exercisable at the end of each of the first three years of service following the date of the grant and the options’ maximum term is 10 years. At June 30, 2006, the intrinsic value of options outstanding was $1,787,000. All options outstanding at June 30, 2006, were exercisable. During the six months ended June 30, 2006 and 2005, the Company received proceeds totaling $967,000 and $670,000, respectively, in connection with the exercise of options, of which $174,000 and $501,000 were received during the quarters ended June 30, 2006 and 2005, respectively. The Company issued new common stock to satisfy share option exercises. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005, was $429,000 and $260,000, respectively. The total intrinsic value of options exercised during the quarters ended June 30, 2006 and 2005 was $166,000 and $200,000, respectively.

Pursuant to the 2000 Plan, the Company has granted and issued shares of restricted stock to certain officers, directors and key associates of the Company. The following summarizes the activity for the six months ended June 30, 2006 of such grants.

	Number of Shares		Weighted Average Share Price
Non-vested restricted shares, beginning of period	398,441		$	17.02
Restricted shares granted	79,500			22.18
Restricted shares vested	(193,252	)		17.06
Restricted shares forfeited	—			—
Non-vested restricted shares, end of period	284,689			18.44

In May 2006, the Company accelerated the vesting and immediately vested 33,661 shares of restricted stock held by certain officers and resulted in the recognition of $557,000 of additional compensation expense during the quarter and six months ended June 30, 2006. These shares would have otherwise vested through January 2009.

Compensation expense for the restricted stock which is not tied to performance goals is determined based upon the fair value at the date of grant, assuming a 1.3% forfeiture rate, and is recognized as the greater of the amount amortized over a straight lined basis or the amount vested over the vesting periods. Vesting periods for officers and key associates of the Company range from four to seven years and generally vest yearly on a straight line basis. Vesting periods for directors are over a two year period and vest yearly on a straight line basis. Compensation expense for the restricted stock grants whose vesting is contingent upon certain performance goals of the Company is based upon the fair value of the grant calculated by a third party using a Monte Carlo Simulation model coupled with a binomial lattice model using the following assumptions: (i) average interest rate of 4.43%, (ii) $0.01 increase in annual dividend, (iii) expected life of five years, and (iv) volatility of 21.26%. Volatility is based upon the historical volatility of the Company’s stock and other factors. The term is assumed to be the vesting date for each tranche. Vesting of these shares is contingent upon achievement of certain performance goals by January 1, 2010.

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The following summarizes other grants made during the six months ended June 30, 2006, pursuant to the 2000 Plan.

	Shares	Weighted Average Share Price
Other share grants under the 2000 Plan:
Directors’ fees	6,566	21.94
Deferred Directors’ fees	5,889	22.15
	12,455	22.04
Shares available under the 2000 Plan for grant, end of period	1,168,292

The total compensation cost for share-based payments for the six months ended June 30, 2006 and 2005, totaled $2,580,000 and $849,000, respectively, of such compensation expense $2,037,000 and $501,000 was for the quarter ended June 30, 2006 and 2005, respectively. At June 30, 2006, the Company had $4,253,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements under the 2000 Plan. This cost is expected to be recognized over a weighted average period of 3.6 years.

Note 15 - Segment Information:

The Company has identified two primary business segments: (i) Investment Assets and (ii) Inventory Assets. The following tables represent the segment data and a reconciliation to the Company’s condensed consolidated totals for the quarters ended June 30 (dollars in thousands):

	Investment Assets		Inventory Assets			Eliminations (Intercompany)			Condensed Consolidated Totals
2006
External revenues	$	43,529	$	5,535		$	—		$	49,064
Intersegment revenues		2,911		(88	)		(2,823	)		—
Earnings from continuing operations		17,691		(3,592	)		1,113			15,212
Net earnings		80,201		(1,113	)		1,113			80,201
Total assets		1,689,253		205,570			(194,301	)		1,700,522
2005
External revenues	$	36,797	$	4,655		$	—		$	41,452
Intersegment revenues		597		(34	)		(563	)		—
Earnings from continuing operations		26,392		10,893			(12,784	)		24,501
Net earnings		30,101		10,862			(12,270	)		28,693
Total assets		1,506,281		123,975			(128,887	)		1,501,369

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The following table represents the segment data and reconciliation to the Company’s condensed consolidated totals for the six months ended June 30, (dollars in thousands):

	Investment Assets		Inventory Assets			Eliminations (Intercompany)			Condensed Consolidated Totals
2006
External revenues	$	151,072	$	15,275		$	—		$	166,347
Intersegment revenues		5,220		(124	)		(5,096	)		—
Earnings from continuing operations		34,818		(4,466	)		195			30,547
Net earnings		103,649		(195	)		195			103,649
Total assets		1,689,253		205,570			(194,301	)		1,700,522
2005
External revenues	$	71,404	$	7,964		$	—		$	79,368
Intersegment revenues		1,024		—			(1,024	)		—
Earnings from continuing operations		40,472		9,881			(13,166	)		37,187
Net earnings		56,105		11,244			(12,652	)		54,697
Total assets		1,506,281		123,975			(128,887	)		1,501,369

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in the Annual Report on Form 10-K of National Retail Properties, Inc. for the year ended December 31, 2005. This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized by the use of terms such as “believe,” expect” and “may.”

The term “Company” refers to National Retail Properties, Inc. and its majority owned and controlled subsidiaries. These subsidiaries include the wholly owned qualified REIT subsidiaries of the Company, as well as the taxable REIT subsidiaries and their majority owned and controlled subsidiaries (collectively, “NNN TRS”). Effective May 1, 2006, Commercial Net Lease Realty, Inc. changed its name to National Retail Properties, Inc.

Overview

The Company’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, structured finance investments (included in mortgages and notes receivable on the condensed consolidated balance sheet) and mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its majority owned and controlled subsidiaries. The Company acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term commercial net leases (the “Investment Properties” or “Investment Portfolio”). As of June 30, 2006, the Company owned 607 Investment Properties, with an aggregate gross leasable area of 8,872,000 square feet, which are located in 41 states. In addition to the Investment Properties, as of June 30, 2006, the Company had $8,886,000 and $41,925,000 in structured finance investments and mortgage residual interests, respectively.

As of October 31, 2005, the Inventory Assets were operated through Commercial Net Lease Realty Services, Inc. (“Services”) and its majority owned and controlled subsidiaries. Effective November 1, 2005, Services merged with and into National Retail Properties, Inc., and a former Services subsidiary, CNLRS Exchange I, Inc., became the holding company for the Company’s development and exchange activities. The NNN TRS, directly and indirectly, through investment interests, owns real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). The NNN TRS develops Inventory Properties (“Development Properties” or “Development Portfolio”) and also acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). As of June 30, 2006 the NNN TRS owned 24 Development Properties (two completed, 10 under construction and 12 land parcels) and 67 Exchange Properties.

The Company’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of the Company. The key indicators for the Company include items such as: the composition of the Company’s Investment Portfolio and structured finance investments (such as tenant, geographic and industry classification diversification), the occupancy rate of the Company’s Investment Portfolio, certain financial performance ratios and profitability measures, industry trends and performance compared to that of the Company, and returns the Company receives on its invested capital.

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Liquidity

General. Historically, the Company’s demand for funds has been primarily for (i) payment of operating expenses and dividends, (ii) property acquisitions, structured finance investments, capital expenditures and development, either directly or through investment interests, (iii) payment of principal and interest on its outstanding indebtedness, and (iv) other investments.

Contractual Obligations and Commercial Commitments. The information in the following table summarizes the Company’s contractual obligations and commercial commitments outstanding as of June 30, 2006. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of June 30, 2006. As the table incorporates only those exposures that exist as of June 30, 2006, it does not consider those exposures or positions which may arise after that date.

	Expected Maturity Date (dollars in thousands)
	Total		2006		2007		2008		2009		2010		Thereafter
Long-term debt (1)	$	579,848	$	2,615	$	20,913	$	113,190	$	21,800	$	21,022	$	400,308
Revolving credit facility		149,700		—		—		—		149,700		—		—
Operating lease		11,334		603		1,236		1,273		1,311		1,351		5,560
Total contractual cash obligations(2)	$	740,882	$	3,218	$	22,149	$	114,463	$	172,811	$	22,373	$	405,868

⁽¹⁾ Includes amounts outstanding under the mortgages payable, secured notes payable, notes payable and financing lease obligation and excludes unamortized note discounts.

⁽²⁾ Excludes $4,178 of accrued interest payable.

In addition to the contractual obligations outlined above, the Company has agreed to fund construction commitments in connection with the development of additional properties as outlined below (dollars in thousands):

	# of Properties	Total Construction Commitment(1)		Amount Funded at June 30, 2006
Investment Portfolio	6	$	11,173	$	7,774
Inventory Portfolio	10		68,297		50,514
	16	$	79,470	$	58,288

⁽¹⁾ Including land costs.

Management anticipates satisfying these obligations with a combination of the Company’s current capital resources, cash on hand, borrowings under its revolving credit facility and debt or equity financings.

As of June 30, 2006 the Company had outstanding letters of credit totaling $10,280,000 under its credit facility.

In addition, the Company has one series of preferred stock with cumulative preferential cash distributions (see “Liquidity – Dividends”). As of June 30, 2006, the Company does not have any other contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected above.

Off Balance Sheet Arrangements. The Company has guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of an unconsolidated affiliate. The maximum obligation to the Company is $5,834,000 plus interest, and the guarantee continues through the loan maturity in December 2010. In the event the Company is required to perform under this guarantee, the Company would use proceeds from its revolving credit facility to fulfill any obligation.

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Liquidity / Business Risk Management

The Company’s Investment Properties are generally net leased; therefore, management anticipates that capital demands to meet obligations with respect to these Investment Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. The leases typically provide that the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the Company’s leases generally provide that the tenant is responsible for roof and structural repairs. Certain of the Company’s Investment Properties are subject to leases under which the Company retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with the Company’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. The Company may be required to borrow under the Company’s revolving credit facility or use other sources of capital in the event of unforeseen significant capital expenditures.

The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with the Company could have a material adverse effect on the liquidity and results of operations of the Company if the Company is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. As of July 31, 2006, the Company owns nine vacant, unleased Investment Properties which account for approximately 1.6 percent of the total gross leasable area of the Company’s Investment Portfolio and four unleased land parcels. Additionally, less than one percent of the total gross leasable area of the Company’s Investment Portfolio is leased to two tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, the tenants have the right to reject or affirm its leases with the Company.

Dividends. The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. The Company generally will not be subject to federal income tax on income that it distributes to its shareholders, provided that it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially affect the Company’s income and its ability to pay dividends. The Company believes it has been organized as, and its past and present operations qualify the Company as, a real estate investment trust. Additionally, the Company intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes.

One of the Company’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its shareholders in the form of dividends. During the six months ended June 30, 2006 and 2005, the Company declared and paid dividends to its common shareholders of $36,813,000 and $33,889,000, respectively or $0.65 per share of common stock.

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Holders of each of the Company’s preferred stock issuances are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions based on the stated rate and liquidation preference per annum. The following table outlines each issuance of the Company’s preferred stock:

Non-Voting Preferred Stock Issuance	Shares Outstanding At June 30, 2006	Liquidation Preference (per share)		Fixed Annual Cash Distribution (per share)		Dividends Declared and Paid For the Six Months Ended June 30,
						2006				2005
						Total		Per Share		Total		Per Share
9% Series A	1,781,589	$	25	$	2.25	$	2,004,000	$	1.125	$	2,004,000	$	1.125
6.7% Series B Cumulative Convertible Perpetual (1)	—		2,500		167.50		419,000		41.875		838,000		83.750

⁽¹⁾ In April 2006, the holder of the Company’s Series B Cumulative Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock.

Restricted Cash. Restricted cash consists of amounts held in restricted accounts in connection with the sale of certain assets of Orange Avenue Mortgage Investments, Inc. (“OAMI”) to a third party (the “Buyer”). The use of the cash is restricted pursuant to agreements with the Buyer and will be released to OAMI in December 2007 subject to any pending indemnity claims. The amount held in these accounts at June 30, 2006 was $34,235,000. The carrying value of $33,959,000 is calculated as the present value of the expected release of monies.

Capital Resources

Generally, cash needs for property acquisitions, structured finance investments, capital expenditures, development and other investments have been funded by equity and debt offerings, bank borrowings, the sale of properties and, to a lesser extent, from internally generated funds. Cash needs for other items have been met from operations. Potential future sources of capital include proceeds from the public or private offering of the Company’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations. For the six months ended June 30, 2006, and 2005, the Company generated $4,981,000 and $34,732,000, respectively, of net cash from operating activities. The change in cash provided by operations for the six months ended June 30, 2006 and 2005 is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations could be expected to fluctuate in the future.

Indebtedness. The Company expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests and structured finance investments. As of June 30, 2006, there were no material changes in the Company’s indebtedness except as noted below.

Mortgage Payable. In February 2006, upon maturity, the Company repaid the outstanding principal balance of its long-term, fixed rate loan with an original principal balance of $39,450,000, which was secured by a first mortgage on certain of the Company’s Investment Properties. Upon repayment of the loan, the Investment Properties were released from the mortgage. As of December 31, 2005, the outstanding principal balance was $18,538,000.

In May 2006, the Company disposed of the three Investment Properties that were subject to a first mortgage with an original and outstanding principal balance of $95,000,000. Upon disposition of these Investment Properties, the buyers assumed the mortgage.

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Payments of principal on the mortgage debt, notes payable and on advances outstanding under the credit facility are expected to be met from borrowings under the credit facility, proceeds from public or private offerings of the Company’s debt or equity securities, the Company’s secured or unsecured borrowings from banks or other lenders or proceeds from the sale of one or more of its properties.

Debt and Equity Securities. The Company has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance investment acquisitions. The Company has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investors Service and Fitch Ratings on its senior, unsecured debt since 1998. In February 2006, the Company filed a shelf registration statement with the Securities and Exchange Commission which permits the issuance by the Company of an indeterminate amount of debt and equity securities.

In February 2006, the Company filed a registration statement permitting up to 12,191,394 shares to be issued under the Company’s Dividend Reinvestment and Stock Purchase Plan. During the six months ended June 30, 2006, the Company received net proceeds totaling $30,231,000 from the issuance of 1,396,396 shares under the plan.

Business Combination. Between June 2001 and July 2003, a wholly owned subsidiary of the Company, Net Lease Funding, Inc. (“NLF”), entered into five limited liability company agreements with OAMI to create five limited liability companies (collectively, the “LLCs”). Kevin B. Habicht, an officer and director of the Company is an officer, director and indirect shareholder of OAMI. Craig Macnab, an officer and director of the Company and Julian E. Whitehurst, an officer of the Company, are each an officer and director of OAMI. Each of the LLCs holds an interest in mortgage loans and is 100 percent equity financed. Prior to the May 2005 acquisition of the 78.9 percent equity interest in OAMI, the Company held a non-voting and non-controlling interest in each of the LLCs ranging between 36.7 and 44.0 percent and accounted for its investment under the equity method of accounting. For the six months ended June 30, 2005, the Company recognized $1,467,000 of earnings, of which $342,000 was recognized during the quarter ended June 30, 2005, from the LLCs and is recorded in equity in earnings from unconsolidated affiliates on the condensed consolidated statements of earnings. The Company received $2,749,000 in distributions from the LLCs during the six months ended June 30, 2005.

In May 2005, the Company acquired a 78.9 percent equity interest in OAMI which resulted in an extraordinary gain of $11,805,000, net of income tax expense of $7,223,000 for the quarter and six months ended June 30, 2005. During the quarter ended December 31, 2005, the Company finalized the purchase price allocation based on the fair value of the assets acquired which resulted in a reduction to the extraordinary gain of $4,242,000. The adjustment to the extraordinary gain was recorded in accordance with SFAS No. 141, “Business Combinations.” Additionally, in November 2005, Commercial Net Lease Realty Services, Inc. merged into National Retail Properties, Inc. resulting in a tax benefit of $7,223,000 related to the acquisition of OAMI. The extraordinary gain for the year ended December 31, 2005 related to the OAMI acquisition after all adjustments was $14,786,000.

Also as a result of the acquisition of a 78.9 percent equity interest in OAMI, the Company’s interest in the LLCs is no longer accounted for as an equity investment and is now part of OAMI in the Company’s condensed consolidated financial statements. Certain officers and directors own preferred shares of OAMI.

As a result of the independent valuations of the mortgage residual interests (“Residuals”), the Company reduced the carrying value of the Residuals and recorded an $2,662,000 impairment during the six months ended June 30, 2006, of which $842,000 was recorded during the quarter ended June 30, 2006. Mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in shareholders’ equity. The Company had unrealized gains of $300,000 at June 30, 2006.

27

In 2005 the Company elected to convert OAMI to a REIT. As a result, effective January 1, 2005, OAMI was taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations. Upon making the REIT conversion, a portion of OAMI’s tax liability was eliminated and recorded as an adjustment to the net assets acquired at the time of the option exercise. The remaining tax liability will be reduced over the next ten years in proportion to the reduction of the basis of the respective mortgage residual assets. During the six months ended June 30, 2006, an additional $2,695,000 of OAMI’s tax liability was reduced, of which $1,337,000 was reduced during the quarter ended June 30, 2006 and is included in the income tax benefit on the condensed consolidated statement of earnings.

Notes Receivable. The structured finance investments outstanding at June 30, 2006, bear a weighted average interest rate of 15.4% per annum, of which 10.2% is payable monthly and the remaining 5.2% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between October 2007 and August 2008. The structured finance investments are generally structured as loans secured by the borrowers’ pledge of their respective membership interests in the entities which own real estate. As of June 30, 2006 and December 31, 2005, the outstanding principal balance of the structured finance investments was $8,886,000 and $27,805,000, respectively.

During the six months ended June 30, 2006, the Company entered into structured finance investments of $9,117,000. In addition, the Company received the total outstanding principal of $28,036,000 on its structured finance investments plus accrued interest and prepayment penalties during the six months ended June 30, 2006.

Results of Operations

Property Analysis – Investment Portfolio

General. As of June 30, 2006, the Company owned 607 Investment Properties that are leased primarily to retail tenants. Approximately 98 percent of the gross leasable area of the Company’s Investment Portfolio was leased at June 30, 2006.

The following table summarizes the Company’s Investment Portfolio:

	June 30, 2006		December 31, 2005		June 30, 2005
Investment Properties Owned:
Number	607		524		427
Total gross leasable area (square feet)	8,872,000		9,227,000		8,840,000
Investment Properties Leased:
Number	595		512		418
Total gross leasable area (square feet)	8,731,000		9,066,000		8,731,000
Percent of total gross leasable area	98	%	98	%	99	%
Weighted average remaining lease term (years)	12		11		11

The Company regularly evaluates its (i) Investment Portfolio, (ii) financial position, (iii) market opportunities and (iv) strategic objectives and, based on certain factors, may decide to acquire or dispose of a given property or portfolio of properties.

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Property Acquisitions. Property acquisitions are typically funded using funds from the Company’s revolving credit facility, proceeds for debt or equity offerings and to a lesser extent, proceeds generated from the sale of properties. The following table summarizes the Investment Property acquisitions (dollars in thousands):

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Acquisitions:
Number of Investment Properties		46		49		86		70
Gross leasable area (square feet)		176,000		439,000		285,000		705,000
Total dollars invested	$	99,841	$	79,162	$	136,133	$	126,155

Property Dispositions. The Company typically uses the proceeds from property sales to either pay down the outstanding indebtedness of the Company’s credit facility or reinvest in real estate. The following table summarizes the Investment Properties sold by the Company (dollars in thousands):

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Number of properties		3		2		6		6
Gross leasable area (square feet)		555,000		70,000		639,000		405,000
Net sales proceeds	$	227,876	$	1,330	$	244,740	$	33,162
Net gain	$	59,501	$	16	$	64,452	$	9,801

In May 2006, the Company disposed of two office buildings containing an aggregate of 555,000 rentable square feet and a related parking garage with approximately 1,000 parking spaces (“DC Office Properties”). The carrying value of the DC Office Properties was $163,723,000 at December 31, 2005. The sale of the DC Office Properties yielded $227,876,000 of net proceeds and the Company recognized a gain of $59,496,000 on the disposition of these Investment Properties.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified all Investment Properties sold subsequent to December 31, 2001, the effective date of SFAS No. 144, as discontinued operations. During the quarter and six months ended June 30, 2006 and 2005, the Company used the proceeds from the sale of Investment Properties to pay down the Company’s credit facility and to reinvest in real estate.

Property Analysis – Inventory Portfolio

General. The Company’s inventory real estate assets are operated through the NNN TRS. The following summarizes the number of properties held for sale in the Company’s Inventory Portfolio:

	June 30, 2006	December 31, 2005	June 30, 2005
Development Portfolio:
Completed Inventory Properties	2	1	1
Properties under construction	10	12	11
Land parcels	12	4	4
	24	17	16
Exchange Portfolio:
Inventory Properties	67	46	3
Total Inventory Properties	91	63	19

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Property Acquisitions. Inventory Property acquisitions are typically funded using funds from the Company’s credit facility and proceeds from debt or equity offerings.

The following table summarizes the Inventory Property acquisitions (dollars in thousands):

	Quarter Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Development Portfolio:
Number of properties acquired		—		3		10		6
Dollars invested (1)	$	19,968	$	11,636	$	46,259	$	30,255
Exchange Portfolio:
Number of properties acquired		25		—		45		6
Dollars invested	$	41,631	$	—	$	54,313	$	1,966
Total dollars invested in real estate held for sale	$	61,599	$	11,636	$	100,572	$	32,221

⁽¹⁾ Includes dollars invested in projects currently under construction.

Property Dispositions. The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized from the disposition of real estate held for sale included in earnings from continuing and discontinued operations (dollars in thousands):

	Quarter Ended June 30,							Six Months Ended June 30,
	2006				2005			2006				2005
	# of Properties	Gain			# of Properties	Gain		# of Properties	Gain			# of Properties	Gain
Development	2	$	1,573		3	$	2,251	4	$	8,334		5	$	3,622
Exchange	17		1,468		5		633	24		2,275		8		1,739
Intercompany eliminations	—		88		—		86	—		124		—		139
Minority interest, development	—		(787	)	—		—	—		(4,009	)	—		—
	19	$	2,342		8	$	2,970	28	$	6,724		13	$	5,500

During the quarter and six months ended June 30, 2006, and 2005, the Company used the proceeds from the sale of the Inventory Properties to pay down the Company’s credit facility and to reinvest in real estate.

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Revenue From Operations Analysis

General. During the six months ended June 30, 2006, the Company’s revenues increased primarily due to the acquisition of Investment Properties (See “Results of Operations – Property Analysis – Investment Portfolio – Property Acquisitions”). The Company anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions.

The following table summarizes the Company’s revenues (dollars in thousands):

	Quarter Ended June 30,								Percent Increase (Decrease)		Six Months Ended June 30,								Percent Increase (Decrease)
	2006		2005		2006		2005				2006		2005		2006		2005
					Percent of Total										Percent of Total
Rental income(1)	$	33,041	$	25,639	86.6	%	83.1	%	28.9	%	$	65,315	$	50,345	80.1	%	86.3	%	29.7	%
Real estate expense reimbursement from tenants		914		794	2.4	%	2.6	%	15.1	%		1,910		1,807	2.3	%	3.1	%	5.7	%
Gain on disposition of real estate, Inventory Portfolio		563		378	1.5	%	1.2	%	48.9	%		7,007		846	8.6	%	1.4	%	728.3	%
Interest and other income from real estate transactions		1,668		2,124	4.4	%	6.9	%	(21.5	)%		3,127		3,432	3.8	%	5.9	%	(8.9	)%
Interest income on mortgage residual interests		1,947		1,922	5.1	%	6.2	%	1.3	%		4,244		1,922	5.2	%	3.3	%	120.8	%
Total revenues from continuing operations	$	38,133	$	30,857	100.0	%	100.0	%	23.6	%		81,603		58,352	100.0	%	100.0	%	39.8	%

⁽¹⁾ Includes rental income from operating leases, earned income from direct financing leases and contingent rental income from continuing operations (“Rental Income”).

Revenue From Operations Analysis by Source of Income. The Company has identified two primary business segments, and thus, sources of revenue: (i) earnings from the Company’s Investment Assets and (ii) earnings from the Company’s Inventory Assets. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The following table summarizes the revenues from continuing operations for the quarters ended June 30 (dollars in thousands):

	Quarter Ended June 30,								Six Months Ended June 30,
	2006		2005		2006		2005		2006		2005		2006		2005
					Percent of Total								Percent of Total
Investment Assets	$	34,689	$	29,047	91.0	%	94.1	%	$	69,367	$	55,466	85.0	%	95.1	%
Inventory Assets		3,444		1,810	9.0	%	5.9	%		12,236		2,886	15.0	%	4.9	%
Total revenues from continuing operations	$	38,133	$	30,857	100.0	%	100.0	%	$	81,603		58,352	100.0	%	100.0	%

The Company evaluates its ability to pay dividends to shareholders by considering the combined effect of income from continuing and discontinued operations.

Rental Income. The increase in Rental Income was relatively consistent for both the quarter and six months ended June 30, 2006 compared to the same periods in 2005 and was relatively consistent as a percentage of total revenues from continuing operations. The increase in Rental Income in 2006, as

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compared to the same periods in 2005 is primarily due to the acquisition of (i) 86 Investment Properties with an aggregate gross leasable area of 285,000 square feet during the six months ended June 30, 2006 (of which 46 Investment Properties with an aggregate gross leasable area of 176,000 square feet were acquired during the quarter ended June 30, 2006) and (ii) the 170 Investment Properties with an aggregate gross leasable area of 1,150,000 square feet during the year ended December 31, 2005, of which 100 Investment Properties with an aggregate gross leasable area of 445,000 square feet were acquired during the six months ended December 31, 2005.

Gain on Disposition of Real Estate Inventory Portfolio. Inventory Properties typically are operating properties and are classified as discontinued operations. The following table summarizes the Inventory Property dispositions included in continuing operations (dollars in thousands):

	Quarter Ended June 30,							Six Months Ended June 30,
	2006				2005			2006				2005
	# of Properties	Gain			# of Properties	Gain		# of Properties	Gain			# of Properties	Gain
Continuing operations	1	$	563		1	$	378	2	$	7,007		2	$	846
Minority interest			(282	)			—			(3,504	)			—
Total continuing operations	1	$	281		1	$	378	2	$	3,503		2	$	846

Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the quarter and six months ended June 30, 2006 compared to the same periods in 2005. For the quarter and six months ended June 30, 2005, the Company recognized $579,000 and $709,000, respectively, of income in connection with disposition and development services. However, the decrease in interest and other income is partially offset by an increase in interest earned on the structured finance investments. During the six months ended June 30, 2006, the Company recognized interest and other income of $499,000 from prepayment penalties resulting from the principal payments received on certain structured finance investments totaling $28,036,000.

Interest Income from Mortgage Residual Interests. The Company recognizes interest income from mortgage residual interests as a result of its acquisition of 78.9 percent of OAMI in May 2005. As a result, the significant increase in interest income for the six months ended June 30, 2006 is due to the Company’s ownership for the full six months of 2006 versus a partial period in 2005 (see “Business Combinations”).

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Expense Analysis

General. During the quarter and six months ended June 30, 2006, operating expenses increased but remained generally proportionate to the Company’s total revenue from continuing operations. The following summarizes the Company’s expenses for the quarters ended June 30 (dollars in thousands):

	2006		2005		Percentage of Total				Percent of Revenues from Continuing Operations				Percentage Increase (Decrease)
					2006		2005		2006		2005
General and administrative	$	7,088	$	5,739	43.7	%	50.6	%	18.6	%	18.6	%	23.5	%
Real estate		1,359		996	8.4	%	8.8	%	3.6	%	3.3	%	36.4	%
Depreciation and amortization		5,358		3,872	33.0	%	34.1	%	14.1	%	12.5	%	38.4	%
Impairment – real estate		—		741	—		6.5	%	—		2.4	%	(100.0	)%
Impairment – mortgage residual interests		842		—	5.2	%	—		2.2	%	—		100.0	%
Restructuring costs		1,580		—	9.7	%	—		4.1	%	—		100.0	%
Total operating expenses from continuing operations	$	16,227	$	11,348	100.0	%	100.0	%	42.6	%	36.8	%	43.0	%

The following summarizes the Company’s expenses for the six months ended June 30 (dollars in thousands):

	2006		2005		Percentage of Total				Percent of Revenues from Continuing Operations				Percentage Increase (Decrease)
					2006		2005		2006		2005
General and administrative	$	14,258	$	10,518	44.7	%	48.7	%	17.5	%	18.0	%	35.6	%
Real estate		2,697		2,272	8.5	%	10.5	%	3.3	%	3.9	%	18.7	%
Depreciation and amortization		10,709		7,497	33.6	%	34.7	%	13.1	%	12.8	%	42.8	%
Impairment – real estate		—		1,328	—		6.1	%	—		2.3	%	(100.0	)%
Impairment – mortgage residual interests		2,662		—	8.3	%	—		3.3	%			100.0	%
Restructuring costs		1,580		—	4.9	%	—		1.9	%	—		100.0	%
Total operating expenses from continuing operations	$	31,906	$	21,615	100.0	%	100.0	%	39.1	%	37.0	%	47.6	%

General and Administrative Expenses. For the quarter and six months ended June 30, 2006, general and administrative expenses increased primarily as a result of (i) an increase in expenses related to personnel and (ii) an increase in professional services provided to the Company. In addition, the increase in general and administrative expenses for the six months ended June 30, 2006 is partially attributable to an increase in lost pursuit costs.

Depreciation and Amortization Expenses. For the quarter and six months ended June 30, 2006, the increase in depreciation and amortization expenses is primarily attributable to the depreciation on (i) the 86 Investment Properties with an aggregate gross leasable area of 285,000 square feet acquired during the six months ended June 30, 2006, of which 46 Investment Properties with an aggregate gross leasable area of 176,000 square feet were acquired during the quarter ended June 30, 2006, and (ii) the 170 Investment Properties with an aggregate gross leasable area of 1,150,000 square feet acquired during the year ended December 31, 2005, of which 100 Investment Properties with an aggregate gross leasable area of 445,000 square feet were acquired during the six months ended December 31, 2005.

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Impairments – Real Estate. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of the Company to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, the Company calculates a possible impairment by comparing the future cash flows and the current net book value. Impairments are measured as the amount by which the current book value of the asset exceeds the fair value of the asset.

Impairments – Mortgage Residual Interests. The Company reduced the carrying value of the Residuals during the quarter and six months ended June 30, 2006 based upon the fair value as determined by an independent valuation. The reduction in the Residuals’ value was recorded as an aggregate impairment of $2,662,000 for the six months ended June 30, 2006 of which $842,000 was recorded during the quarter ended June 2006 (see “Business Combinations”). Mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in shareholders’ equity. The Company had unrealized gains of $300,000 at June 30, 2006.

Restructuring Costs. During the quarter and six months ended June 30, 2006, the Company recorded restructuring costs of $1,580,000, which included severance costs and accelerated vesting of restricted stock in connection with a workforce reduction in April 2006.

Analysis of Other Expenses and Revenues

General. During the quarter and six months ended June 30, 2006, the combined interest and other income and interest expense increased but remained generally proportionate to the Company’s total revenue and expenses. The following summarizes the Company’s other expenses (revenues) from continuing operations for the quarters ended June 30 (dollars in thousands):

	2006			2005			Percentage of Total				Percent of Revenues from Continuing Operations				Percentage Increase (Decrease)
							2006		2005		2006		2005
Interest and other income	$	(1,015	)	$	(308	)	(9.9	)%	(4.2	)%	(2.7	)%	(1.0	)%	229.5	%
Interest expense		11,217			7,566		109.9	%	104.2	%	29.4	%	24.5	%	48.3	%
Total other expenses (revenues) from continuing operations	$	10,202		$	7,258		100.0	%	100.0	%	26.7	%	23.5	%	40.6	%

The following summarizes the Company’s other expenses (revenues) from continuing operations for the six months ended June 30 (dollars in thousands):

	2006			2005			Percentage of Total				Percent of Revenues from Continuing Operations				Percentage Increase (Decrease)
							2006		2005		2006		2005
Interest and other income	$	(1,831	)	$	(764	)	(8.6	)%	(5.7	)%	(2.2	)%	(1.3	)%	139.7	%
Interest expense		23,152			14,261		108.6	%	105.7	%	28.4	%	24.4	%	62.3	%
Total other expenses (revenues) from continuing operations	$	21,321		$	13,497		100.0	%	100.0	%	26.2	%	23.1	%	58.0	%

Interest and Other Income. During the quarter ended June 30, 2006, interest and other income increased due to the increase in interest earned on restricted cash. However, interest and other income remained generally proportionate to the Company’s total revenue and expense.

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Interest Expense. The increase in interest expense for the quarter and six months ended June 30, 2006, over the quarter and six months ended June 30, 2005 was primarily due to a $297,910,000 increase in the weighted average long-term debt outstanding for the six months ended June 30, 2006. The increase in the weighted average long-term debt outstanding included (i) the $30,000,000 secured notes payable assumed in May 2005 in connection with the 78.9 percent equity interest in OAMI, and (ii) the $150,000,000 of notes payable issued in November 2005 with an effective interest rate of 6.185% due in December 2015 which was primarily used to acquire properties. However, the increase in weighted average long-term debt outstanding was partially offset by the maturity of a mortgage with a 7.435% interest rate which had an outstanding principal balance of $18,538,000 at December 31, 2005.

Unconsolidated Affiliates

During the six months ended June 30, 2006 and 2005, the Company recognized equity in earnings of unconsolidated affiliates of $195,000, and $1,081,000, respectively, of which $228,000 and $100,000, was recognized during the quarters ended June 30, 2006 and 2005, respectively. The decrease in equity in earnings of unconsolidated affiliates for the six months ended June 30, 2006, was primarily attributable to a decrease in the income earned on investments in mortgage residual interests as a result of the acquisition of 78.9 percent equity interest in OAMI in May 2005. The Company’s interest in the LLCs is no longer accounted for as an equity investment and is now included as a part of OAMI in the Company’s condensed consolidated financial statements.

Earnings from Discontinued Operations

The Company records discontinued operations by the Company’s identified segments: (i) Investment Assets and (ii) Inventory Assets. As a result, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified the revenues and expenses related to its Investment Properties that were sold and its leasehold interests that expired subsequent to December 31, 2001, as discontinued operations, as well as, the revenues and expenses related to any Investment Property that was held for sale at June 30, 2006. The Company also classified the revenues and expenses of its Inventory Properties that were sold which generated rental revenues as discontinued operations, as well as, the revenues and expenses related to its Inventory Properties held for sale which generated rental revenues as of June 30, 2006. The following table summarizes the earnings from discontinued operations for each of the quarters ended June 30 (dollars in thousands):

	2006					2005
	# of Sold Properties	Gain on Disposition		Earnings		# of Sold Properties	Gain on Disposition		Earnings
Investment Portfolio	3	$	59,501	$	62,510	2	$	16	$	2,301
Inventory Portfolio, net of minority interest	18		2,061		2,479	7		2,592		1,891
	21	$	61,562	$	64,989	9	$	2,608	$	4,192

The following table summarizes the earnings from discontinued operations for each of the six months ended June 30 (dollars in thousands):

	2006					2005
	# of Sold Properties	Gain on Disposition		Earnings		# of Sold Properties	Gain on Disposition		Earnings
Investment Portfolio	6	$	64,452	$	68,831	6	$	9,801	$	14,225
Inventory Portfolio, net of minority interest	26		3,221		4,271	11		4,654		3,285
	32	$	67,673	$	73,102	17	$	14,455	$	17,510

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The Company occasionally sells investment properties and may reinvest the proceeds of the sales to purchase new properties. The Company evaluates its ability to pay dividends to shareholders by considering the combined effect of income from continuing and discontinued operations.

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate changes primarily as a result of its variable rate credit facility and its long-term, fixed rate debt used to finance the Company’s development and acquisition activities and for general corporate purposes. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at both fixed and variable rates on its long-term debt.

The Company had no outstanding derivatives as of June 30, 2006 or December 31, 2005.

The information in the table below summarizes the Company’s market risks associated with its debt obligations outstanding as of June 30, 2006 and December 31, 2005. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of June 30, 2006. As the table incorporates only those exposures that exist as of June 30, 2006, it does not consider those exposures or positions which could arise after this date. Moreover, because firm commitments are not presented in the table below, the information presented therein has limited predictive value. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s hedging strategies at that time and interest rates.

	Debt Obligations (dollars in thousands)
	Variable Rate Debt				Fixed Rate Debt
	Credit Facility & Term Note				Mortgages				Unsecured Debt (2) (3)				Secured Debt
	Debt Obligation		Weighted Average Interest Rate(1)		Debt Obligation		Weighted Average Interest Rate		Debt Obligation		Effective Interest Rate		Debt Obligation		Weighted Average Interest Rate
2006		—	—			865	7.12	%		—	—			—	—
2007		—	—			8,413	7.12	%		—	—			12,250	10.00	%
2008		—	—			1,190	7.04	%		99,939	7.16	%		14,000	10.00	%
2009		170,500	5.67	%		1,000	7.02	%		—	—			—	—
2010		—	—			1,022	7.01	%		19,934	8.60	%		—	—
Thereafter		—	—			24,268	7.00	%		375,102	6.21	%		—	—
Total	$	170,500	5.67	%		36,758	7.12	%		494,975	6.50	%	$	26,250	10.00	%
Fair Value:
June 30, 2006	$	170,500	5.67	%		36,758	7.12	%		495,249	6.50	%	$	26,250	10.00	%
December 31, 2005	$	183,100	4.81	%	$	151,133	6.18	%	$	520,144	6.50	%	$	28,250	10.00	%

⁽¹⁾ The credit facility interest rate varies based upon a tiered rate structure ranging from 70 to 135 basis points above LIBOR based upon the debt rating of the Company. The term note interest rate varies based upon a tiered rate structure ranging from 85 to 165 basis points above LIBOR based upon the debt rating of the Company. The weighted average interest rates shown represent the rates at the end of the period.

⁽²⁾ Includes Company’s notes payable, net of unamortized note discounts.

⁽³⁾ In July 2004, the Company sold five investment properties for $26,041 and subsequently leased back the properties under a 10-year financing lease obligation. The Company may repurchase one or more of the properties subject to put and call options included in the financing lease.

The Company is also exposed to market risks related to the Company’s Residuals. Factors that may impact the market value of the Residuals include delinquencies, loan losses, prepayment speeds and interest rates. The Residuals, which are reported at market value, had a carrying value of $41,925,000 and $55,184,000 as of June 30, 2006 and December 31, 2005, respectively. Unrealized gains and losses are reported as other comprehensive income in shareholders’ equity. Losses are considered permanent and reported as an impairment if and when there has been a change in the timing or amount of estimated cash flows that leads to a loss in value.

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Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness as of June 30, 2006 of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.	Legal Proceedings. Not applicable.
Item 1A.	Risk Factors. As a result of the Company’s sale of two single-tenant office buildings and a related parting garage in the Washington, D.C. metropolitan area (the “DC Office Properties”) in May 2006, the following updates certain disclosure from Item 1A. Risk Factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “Form 10-K”), and should be read in conjunction with those risk factors.
	The “Loss of revenues from tenants would reduce the Company’s cash flow” risk factor in the Form 10-K is replaced in its entirety with the following:
	Loss of revenues from tenants would reduce the Company’s cash flow. The Company had no tenant that accounted for over 10 percent of the annualized base rental income from the Company’s Investment Properties, or base rent, as of June 30, 2006. However, the Company’s five largest tenants – Susser (Circle K), CVS, Best Buy, Uni-Mart and Barnes and Noble, accounted for an aggregate of approximately 26 percent of the Company’s base rent as of June 30, 2006. The default, financial distress or bankruptcy of one or more of the Company’s tenants could cause substantial vacancies among the Company’s investment properties. Vacancies reduce the Company’s revenues until the Company is able to re-lease the affected properties and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, the Company may not be able to re-lease a vacant property at a comparable lease rate or without incurring additional expenditures in connection with such releasing.
	The “Risks associated with the Company’s August 2003 acquisition of two single-tenant office buildings and a related parking garage in the Washington, D.C. metropolitan area (“DC Office Properties”)” risk factors in the Form 10-K are deleted in their entirety.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.
Item 3.	Defaults Upon Senior Securities. Not applicable.
Item 4.	Submission of Matters to a Vote of Security Holders.
	On May 11, 2006, the Company held its Annual Meeting of Shareholders (the “Annual Meeting”). At the Annual Meeting two proposals were considered.
	First, the following nominees were elected to the Board of Directors of the Company: G. N. Beckwith III (51,270,968 for and 245,196 withheld), Kevin B. Habicht (49,782,337 for and 1,733,826 withheld), Clifford R. Hinkle (51,076,238 for and 439,925 withheld), Richard B. Jennings (50,726,622 for and 789,541 withheld), Ted B. Lanier (50,327,697 for and 1,188,466 withheld), Robert C. Legler (51,292,640 for and 223,523 withheld), Craig Macnab (51,018,446 for and 497,717 withheld), Robert Martinez (50,645,617 for and 870,546 withheld).
Item 5.	Other Information. Not applicable.

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Item 6.	Exhibits.
	The following exhibits are filed as a part of this report.
	2.	Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.
		2.1	Agreement and Plan of Merger, dated January 14, 2005, among National Retail Properties, Inc., NAPE Acquisition, Inc., National Properties Corporation and Raymond Di Paglia (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference).
		2.2	Real Estate Purchase and Sale Agreement, dated November 28, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference).
		2.3	Real Estate Purchase and Sale Agreement, dated December 1, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference).
		2.4	Real Estate Purchase Contract dated February 9, among CNLR DC Acquisitions I, LLC, Brookfield Financial Properties, L.P. and the Registrant (filed as Exhibit 10.10 to the Registrant’s Form 10-K filed with Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference).
		2.5	Amendment to Real Estate Purchase Contract, dated February 14, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 10.11 to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference).
		2.6	Second Amendment to Real Estate Purchase Contract, dated February 15, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 10.12 to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference).
		2.7	Third Amendment to Real Estate Purchase Contract, dated April 16, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.4 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference).
		2.8	Fourth Amendment to Real Estate Purchase Contract, dated May 10, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.5 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference).
		2.9	Fifth Amendment to Real Estate Purchase Contract, dated May 12, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.6 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference).

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3.	Articles of Incorporation and By-laws
	3.1	First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated May 1, 2006, and incorporated herein by reference).
	3.2	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (9% Series A Non-Voting Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
	3.3	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
	3.4	Third Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated May 1, 2006, and incorporated herein by reference).
4.	Instruments Defining the Rights of Security Holders, Including Indentures
	4.1	Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference).
	4.2	Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
	4.3	Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
	4.4	Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
	4.5	Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).

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4.6	Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).
4.7	Form of Supplemental Indenture No. 4 dated as of May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.8	Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.9	Form of Supplemental Indenture No. 5 dated as of June 18, 2004, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.25% Notes due 2014 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.10	Form of 6.25% Notes due 2014 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.11	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.12	Specimen Stock Certificate relating to the Series A Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.13	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.14	Specimen Stock Certificate relating to the Series B Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.15	Form of Supplemental Indenture No. 6 dated as of November 17, 2005, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.15% Notes due 2015 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference).

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	4.16	Form of 6.15% Notes due 2015 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference).
10.	Material Contracts
	10.1	2000 Performance Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference).
	10.2	Form of Restricted Stock Agreement between the Company and the Participant of the Company (filed as Exhibit 10.2 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).
	10.3	Employment Agreement dated May 16, 2006, between the Registrant and Craig Macnab (filed herewith).
	10.4	Employment Agreement dated February 1, 2003, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.4 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).
	10.5	Employment Agreement dated January 1, 2003, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.5 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).
	10.6	Eighth Amended and Restated Line of Credit and Security Agreement, dated December 13, 2005, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 15, 2005, and incorporated herein by reference).
	10.7	Form of Lease Agreement, between an affiliate of National Retail Properties, Inc., as landlord and SSP Partners, as tenant (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference).
31.	Section 302 Certifications
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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32.	Section 906 Certifications
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED this 3rd day of August, 2006.
NATIONAL RETAIL PROPERTIES, INC.
By:	/s/ Craig Macnab
	Craig Macnab
	CEO and Director
By:	/s/ Kevin B. Habicht
	Kevin B. Habicht
	CFO, EVP and Director

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EXHIBIT INDEX

Exhibit

2.	Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.
		2.1	Agreement and Plan of Merger, dated January 14, 2005, among National Retail Properties, Inc., NAPE Acquisition, Inc., National Properties Corporation and Raymond Di Paglia (filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated January 19, 2005, and incorporated herein by reference).
		2.2	Real Estate Purchase and Sale Agreement, dated November 28, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference).
		2.3	Real Estate Purchase and Sale Agreement, dated December 1, 2005, between the Company and SSP Partners, as amended (filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference).
		2.4	Real Estate Purchase Contract dated February 9, among CNLR DC Acquisitions I, LLC, Brookfield Financial Properties, L.P. and the Registrant (filed as Exhibit 10.10 to the Registrant’s Form 10-K filed with Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference).
		2.5	Amendment to Real Estate Purchase Contract, dated February 14, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 10.11 to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference).
		2.6	Second Amendment to Real Estate Purchase Contract, dated February 15, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 10.12 to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 27, 2006, and incorporated herein by reference).
		2.7	Third Amendment to Real Estate Purchase Contract, dated April 16, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.4 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference).
		2.8	Fourth Amendment to Real Estate Purchase Contract, dated May 10, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.5 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference).
		2.9	Fifth Amendment to Real Estate Purchase Contract, dated May 12, 2006, by and between CNLR DC Acquisitions I, LLC and Brookfield Financial Properties, L.P. (filed as Exhibit 2.6 to the Registrant’s Current Report on Form 8-K dated May 16, 2006, and incorporated herein by reference).

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3.	Articles of Incorporation and By-laws
		3.1	First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated May 1, 2006, and incorporated herein by reference).
		3.2	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (9% Series A Non-Voting Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
		3.3	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
		3.4	Third Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated May 1, 2006, and incorporated herein by reference).
4.	Instruments Defining the Rights of Security Holders, Including Indentures
		4.1	Specimen Certificate of Common Stock, par value $0.01 per share, of the Registrant (filed as Exhibit 3.4 to the Registrant’s Registration Statement No. 1-11290 on Form 8-B and incorporated herein by reference).
		4.2	Form of Indenture dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
		4.3	Form of Supplemental Indenture No. 1 dated March 25, 1998, by and among Registrant and First Union National Bank, Trustee, relating to $100,000,000 of 7.125% Notes due 2008 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
		4.4	Form of 7.125% Note due 2008 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated March 20, 1998, and incorporated herein by reference).
		4.5	Form of Supplemental Indenture No. 3 dated September 20, 2000, by and among Registrant and First Union National Bank, Trustee, relating to $20,000,000 of 8.5% Notes due 2010 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).

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4.6	Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 20, 2000, and incorporated herein by reference).
4.7	Form of Supplemental Indenture No. 4 dated as of May 30, 2002, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $50,000,000 of 7.75% Notes due 2012 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.8	Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated June 4, 2002, and incorporated herein by reference).
4.9	Form of Supplemental Indenture No. 5 dated as of June 18, 2004, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.25% Notes due 2014 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.10	Form of 6.25% Notes due 2014 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated June 15, 2004, and incorporated herein by reference).
4.11	Articles Supplementary Establishing and Fixing the Rights and Preferences of a Series of Preferred Stock (the Series A Preferred Stock) (filed as Exhibit 3 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.12	Specimen Stock Certificate relating to the Series A Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated November 26, 2001 and filed with the Securities and Exchange Commission on November 27, 2001, and incorporated herein by reference).
4.13	Articles Supplementary Classifying and Designating 10,000 Preferred Shares as the Series B Preferred Stock (filed as Exhibit 3 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.14	Specimen Stock Certificate relating to the Series B Preferred Stock (filed as Exhibit 4 to the Registrant’s Form 8-A dated August 12, 2003 and filed with the Securities and Exchange Commission on August 13, 2003, and incorporated herein by reference).
4.15	Form of Supplemental Indenture No. 6 dated as of November 17, 2005, by and among Registrant and Wachovia Bank, National Association, Trustee, relating to $150,000,000 of 6.15% Notes due 2015 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference).

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		4.16	Form of 6.15% Notes due 2015 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 14, 2005, and incorporated herein by reference).
10.	Material Contracts
		10.1	2000 Performance Incentive Plan (filed as Exhibit 99 to the Registrant’s Registration Statement No. 333-64794 on Form S-8 and incorporated herein by reference).
		10.2	Form of Restricted Stock Agreement between the Company and the Participant of the Company (filed as Exhibit 10.2 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).
		10.3	Employment Agreement dated May 16, 2006, between the Registrant and Craig Macnab (filed herewith).
		10.4	Employment Agreement dated February 1, 2003, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.4 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).
		10.5	Employment Agreement dated January 1, 2003, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.5 to the Registrant’s Form 10-K dated March 14, 2005, and filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).
		10.6	Eighth Amended and Restated Line of Credit and Security Agreement, dated December 13, 2005, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 15, 2005, and incorporated herein by reference).
		10.7	Form of Lease Agreement, between an affiliate of National Retail Properties, Inc., as landlord and SSP Partners, as tenant (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 21, 2005, and incorporated herein by reference).
31.	Section 302 Certifications
		31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
		31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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32.	Section 906 Certifications
		32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
		32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT dated as of May 16, 2006, by and between National Retail Properties, Inc. with its principal place of business at 450 South Orange Avenue, 9th Floor, Orlando, Florida 32801 (the “Company”), and Craig Macnab, residing at the address set forth on the signature page hereof (“Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of February 16, 2004 (the “Existing Employment Agreement”); and

WHEREAS, the Company desires to continue to employ Executive, and Executive desires to continue to be employed by the Company; and

WHEREAS, the Company and Executive desire to amend and restate the Existing Employment Agreement in its entirety, and to enter into this Agreement which sets forth the terms and conditions of Executive’s continuing employment by the Company.

Accordingly, the parties hereto agree as follows:

1. Term. The Company hereby employs Executive, and Executive hereby accepts such employment, for a term (as the same may be extended, the “Term”) commencing as of the date hereof and continuing for a three-year period, unless terminated earlier in accordance with the provisions of Section 4. On the third anniversary of the date hereof, the Term shall automatically be extended for successive two-year periods in accordance with the terms of this Agreement (subject to termination as aforesaid) unless either party notifies the other party of non-renewal in writing, in accordance with Section 8, 180 days prior to the expiration of the initial three-year period or any subsequent renewal period.

2. Duties. During the Term, Executive shall be employed by the Company as Chief Executive Officer of the Company, and, as such, Executive shall faithfully perform for the Company the duties of said office and shall perform such other duties of an executive, managerial or administrative nature as shall be specified and designated from time to time by the Board of Directors of the Company (the “Board”) which duties shall not be materially inconsistent with the duties performed by executives holding similar offices with real estate investment trusts. Executive shall devote substantially all of his business time and effort to the performance of his duties hereunder, except that Executive may devote reasonable time and attention to civic, charitable, business or social activities so long as such activities do not interfere with Executive’s employment duties. The Company acknowledges that Executive is currently a member of the boards of directors of two disclosed public corporations and Executive agrees not to join any other non-charitable boards of directors without the prior consent of the Board. Executive shall comply with the policies, standards, and regulations established from time to time by the Company.

3. Compensation.

3.1 Salary. For purposes of this Agreement, a “Contract Year” shall mean each calendar year during the Term. During the first Contract Year of the Term, the Company shall pay Executive a base salary at the rate of $486,720 per annum, in accordance with the customary payroll practices of the Company applicable to senior executives, but not less frequently than monthly. The Compensation Committee of the Board shall review Executive’s base salary each Contract Year during the Term and may increase such amount as it may deem advisable (such salary, as the same may be increased, the “Annual Salary”).

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3.2 Bonus and Incentive Compensation. Executive will be entitled to participate in the Company’s Annual Bonus Program (the “Bonus Plan”) as follows:

(a) Annual Bonus Compensation. Executive shall be eligible to receive a bonus each Contract Year (“Annual Bonus”) as the Compensation Committee of the Board of Directors shall determine. Executive’s Annual Bonus shall be determined in accordance with the Company’s executive compensation policies as in effect from time to time during the Term and shall be based, in part, on his achieving his individual performance goals for the year and, in part, on the Company’s achieving its performance goals for the year

(b) Equity Incentive Awards. Executive shall be eligible to participate each Contract Year in the Company’s equity incentive plans pursuant to the Company’s 2000 Performance Incentive Plan or such other plans or programs as the Compensation Committee shall determine.

3.3 Benefits - In General. Except with respect to benefits of a type otherwise provided for under Section 3.4, Executive shall be permitted during the Term to participate in any group life, hospitalization or disability insurance plans, health programs, retirement plans, fringe benefit programs and similar benefits that may be available to other senior executives of the Company generally, on the same terms as such other executives, in each case to the extent that Executive is eligible under the terms of such plans or programs.

3.4 Specific Benefits. Without limiting the generality of Section 3.3, the Company shall make available to Executive the fringe benefits set forth on Attachment “A” to this Agreement. Executive shall be entitled to 20 days of paid time off (“PTO”) per Contract Year. Unless otherwise required by law, no more than 10 days of unused PTO may be carried forward (on a “first-in, first-out” basis) to the immediately following year (but not thereafter).

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3.5 Expenses. The Company shall pay or reimburse Executive for all ordinary and reasonable out-of-pocket expenses incurred by Executive during the Term in the performance of Executive’s services under this Agreement; provided that such expenses are incurred and accounted for by Executive in accordance with the policies and procedures established from time to time by the Company.

4. Termination of Employment.

4.1 Termination upon Death or Disability. If Executive dies during the Term, the obligations of the Company to or with respect to Executive shall terminate in their entirety except as otherwise provided under this Section 4.1. If Executive becomes eligible for disability benefits under the Company’s long-term disability plans and arrangements (or, if none, if Executive by virtue of ill health or other disability is unable to perform substantially and continuously the duties assigned to him for at least 120 consecutive or non-consecutive days out of any consecutive 12-month period), the Company shall have the right, to the extent permitted by law, to terminate the employment of Executive upon notice in writing to Executive; provided that the Company will have no right to terminate Executive’s employment if, in the reasonable opinion of a qualified physician acceptable to the Company, it is substantially certain that Executive will be able to resume Executive’s duties on a regular full-time basis within 30 days of the date Executive receives notice of such termination. Upon death or other termination of employment by virtue of disability in accordance with this Section 4.1, Executive (or Executive’s estate or beneficiaries in the case of the death of Executive) shall have no right to receive any compensation or benefit hereunder on and after

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the effective date of the termination of employment other than (i) Annual Salary and other benefits earned and accrued under this Agreement prior to the date of termination (and reimbursement under this Agreement for expenses incurred prior to the date of termination); (ii) a cash payment equal to the prorated portion of the Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates; (iii) elimination of any exclusively time-based vesting conditions on any restricted stock, stock option or other equity awards in the Company he had been granted which he then continues to hold, to the extent then unvested (it being expressly understood and agreed that any performance-based vesting conditions (whether or not in tandem with such time-based vesting conditions) will continue in effect in accordance with their terms, except as may otherwise be provided to the contrary in the applicable award agreements); (iv) in the event of Executive’s death, (A) a cash payment equal to two months of Executive’s Annual Salary payable no later than 10 days after such termination, and (B) continuation to Executive’s spouse and dependents of fully paid health insurance benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) during the one year following the date of termination; and (v) Executive (or, in the case of his death, his estate and beneficiaries) shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder.

4.2 Termination by the Company for Cause; Termination by Executive without Good Reason.

(a) For purposes of this Agreement, “Cause” shall mean Executive’s:

(i) conviction of (or pleading nolo contendere to), or an indictment or information is filed against Executive and is not discharged

5

or otherwise resolved within 12 months thereafter, and said indictment or information charged Executive with a felony, any crime of moral turpitude, or any crime which is likely to result in material injury to the Company;

(ii) the continued failure by Executive substantially to perform his duties or to carry out the lawful directives of the Board of Directors;

(iii) material breach of a fiduciary duty relating to Executive’s employment with the Company, or otherwise engaging in gross misconduct or willful or gross neglect (in connection with the performance of his duties) which is materially injurious to the Company; or

(iv) material breach of any of Section 6 or any other provisions of this Agreement.

provided, that the Company shall not be permitted to terminate Executive for Cause except on written notice given to Executive at any time following the occurrence of any of the events described in clause (i), (ii), (iii) or (iv) above. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause under clause (ii) or (iv) above unless the Company provided written notice to Executive setting forth in reasonable detail the reasons for the Company’s intention to terminate for Cause, Executive has been provided the opportunity, together with counsel, not later than 14 days following such notice to be heard before the Board and Executive failed within 30 days (or, if later, five business days after such hearing) to cure the event or deficiency set forth in the written notice.

(b) The Company may terminate Executive’s employment hereunder for Cause, and Executive may terminate his employment at any time upon 60 days prior written notice to the Company. If the Company terminates Executive for Cause, or Executive terminates his employment and the termination by Executive is not covered by Section 4.3, (i) Executive shall receive Annual Salary and other benefits (but, in all events, and without increasing Executive’s rights under any other provision hereof, excluding any Annual Bonus

6

not yet paid) earned and accrued under this Agreement prior to the termination of employment (and reimbursement under this Agreement for expenses incurred prior to the termination of employment), and (ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder.

4.3 Termination by the Company without Cause; Termination by Executive for Good Reason.

(a) For purposes of this Agreement, “Good Reason” shall mean, unless otherwise consented to by Executive:

(i) a change in Executive’s reporting responsibilities such that he is no longer reporting directly to the Board (which shall mean in the event of a “Change of Control” (as defined in Section 6.8), the board of directors of the ultimate parent entity of the surviving entity);

(ii) a material reduction in Executive’s position, authority, duties or responsibilities (which shall include in the event of a Change of Control, if Executive is no longer the Chief Executive Officer (or, in the case of an entity which is not a corporation, has a comparable title given its form of organization) of the ultimate parent entity of the surviving entity);

(iii) a reduction in Annual Salary of Executive;

(iv) the relocation of Executive’s office to more than 50 miles from the Company’s principal place of business in Orlando, Florida;

(v) the Company’s material breach of this Agreement; or

(vi) the Company’s failure to obtain an agreement from any successor to the business of the Company by which the successor assumes and agrees to perform this Agreement.

Notwithstanding the foregoing, Good Reason under clause (i), (ii), (iii), (iv) or (v) above shall not be deemed to exist unless notice of termination on account thereof (specifying a

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termination date no later than 15 days from the date of such notice) is given by Executive to the Company no later than 30 days after the time at which Executive first becomes or should have become aware of the event or condition purportedly giving rise to Good Reason; and, in such event, the Company shall have 30 days from the date notice of such a termination is given to cure such event or condition and, if the Company does so, such event or condition shall not constitute Good Reason hereunder.

(b) The Company may terminate Executive’s employment at any time for any reason or no reason upon 30 days’ prior written notice to Executive and Executive may terminate Executive’s employment with the Company for Good Reason. If the Company terminates Executive’s employment and the termination is not covered by Sections 4.1, 4.2 or 4.4 or Executive terminates his employment for Good Reason:

(i) Executive shall (subject, in the case of the following clauses (C), (D), (E) and (H), to Executive’s delivery of a general release reasonably acceptable to the Company which shall have become irrevocable) be entitled to:

(A) any accrued but unpaid Annual Salary and PTO due to Executive as of the termination of employment;

(B) reimbursement under this Agreement for expenses incurred but unpaid prior to the termination of employment;

(C) a cash payment equal to 300% of Executive’s Annual Salary, payable in equal installments over a 12–month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following Executive’s termination; provided, however, that, in the event of such a termination upon or after a Change of Control, such payment shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above and the release’s having become irrevocable; and provided, further, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination);

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(D) a cash payment equal to 300% of Executive’s average Annual Bonus for the three Contract Years immediately preceding the date of termination, payable in equal installments over a 12–month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following Executive’s termination; provided, however, that, in the event of such a termination upon or after a Change of Control, such payment shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above and the release’s having become irrevocable; and provided, further, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination);

(E) any payment due under Section 5 hereof;

(F) vesting of any restricted stock, stock options or other equity awards in the Company he had been granted which he then continues to hold, to the extent then unvested;

(G) for a period of one year after termination, such health benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) as Executive would have received under this Agreement (and at such costs to Executive as would have applied in the absence of such termination); provided, however, that the Company shall in no event be required to provide any benefits otherwise required by this clause (G) after such time as Executive becomes entitled to receive benefits of the same type from another employer or recipient of Executive’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements); and

(H) in the event of such a termination upon or after a Change of Control, a prorated Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates;

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provided that the amounts referred to in clauses (A), (B), (E) and (H) shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above, except to the extent that a six-month delay is necessary to avoid tax under Section 409A of the Code; and

(ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder.

4.4 Natural Termination. In the event that Executive’s employment by the Company pursuant to this Agreement terminates at the scheduled expiration of the Term because of a non-renewal of the Term as a result of a decision by the Company not to renew as contemplated by and in accordance with the last sentence of Section 1 (and not theretofore under Section 4.1, 4.2 or 4.3),

(i) Executive shall (subject, in the case of the following clauses (C), (D) and (F), to Executive’s delivery of a general release reasonably acceptable to the Company which shall have become irrevocable) be entitled to:

(A) any accrued but unpaid Annual Salary and PTO due to Executive as of the termination of employment;

(B) reimbursement under this Agreement for expenses incurred but unpaid prior to the termination of employment;

(C) a cash payment equal to 200% of Executive’s Annual Salary in the case of expiration of the initial Term, or 100% of Executive’s Annual Salary in the case of expiration of a renewal of the Term, payable in equal installments over a 12–month period in accordance with the Company’s usual and customary payroll practices, commencing on the first payday following termination of this Agreement; provided, however, that no payments shall be made less than six months after termination to the extent required to comply with Section 409A of the Code (in which case any payments deferred under this provision shall be paid upon the six-month anniversary of termination);

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(D) any payment due under Section 5 hereof;

(E) for a period of one year after termination, such health benefits under the Company’s health plans and programs applicable to senior executives of the Company generally (if and as in effect from time to time) as Executive would have received under this Agreement (and at such costs to Executive as would have applied in the absence of such termination upon expiration); provided, however, that the Company shall in no event be required to provide any benefits otherwise required by this clause (E) after such time as Executive becomes entitled to receive benefits of the same type from another employer or recipient of Executive’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements);

(F) a prorated Annual Bonus at the “target” level for the Contract Year or partial Contract Year in which Executive’s employment hereunder terminates; and

(G) only in the case of expiration of the initial Term, elimination of any exclusively time-based vesting conditions on any restricted stock, stock option or other equity awards in the Company he had been granted which he then continues to hold, to the extent then unvested (it being expressly understood and agreed that any performance-based vesting conditions (whether or not in tandem with such time-based vesting conditions) will continue in effect in accordance with their terms, except as may otherwise be provided to the contrary in the applicable award agreements);

provided that the amounts referred to in clauses (A), (B), (D) and (F) shall be paid to Executive in a single sum no later than 10 days following delivery of the release referenced above, except to the extent that a six-month delay is necessary to avoid tax under Section 409A of the Code; and

(ii) Executive shall have no further rights to any other compensation or benefits hereunder on or after the termination of employment, or any other rights hereunder.

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5. Certain Additional Payments by the Company.

(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, and taking account any withholding obligation on the part of the Company, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

(b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determination, shall be made by the Company’s regular independent accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and

12

expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to Executive, net of any of the Company’s federal or state withholding obligations with respect to such Payment, within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (each, an “Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive.

(c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment (or an additional Gross-Up Payment). Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall:

(i) give the Company any information reasonably requested by the Company relating to such claim,

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(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

(iii) cooperate with the Company in good faith in order effectively to contest such claim, and

(iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest (to the extent applicable to the Excise Tax and the Gross-Up Payment) and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

14

(d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Section 5(c)) promptly pay (in no more than five business days) to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 5(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

6. Non-Competition, Non-Solicitation, and Confidentiality; Certain Other Covenants.

6.1 Disclosure of Confidential Information. Executive acknowledges that the Company will provide Executive with confidential and proprietary information regarding the business in which the Company or any of its current or future subsidiaries or affiliates (collectively, other than the Company, the “Company Affiliates”) are involved, and the Company and the Company Affiliates will provide Executive with trade secrets, as defined in Section 688.002(4) of the Florida Statutes, of the Company and the Company Affiliates (hereinafter all such confidential information and trade secrets referred to as the

15

“Confidential Information”). For purposes of this Agreement, “Confidential Information” includes, but is not limited to:

(a) Information related to the business of the Company and the Company Affiliates, including but not limited to marketing strategies and plans, sales procedures, operating policies and procedures, pricing and pricing strategies, business and strategic plans, financial statements and projections, accounting and tax positions and procedures, and other business and financial information of the Company and the Company Affiliates;

(b) Information regarding the customers of the Company and the Company Affiliates which Executive acquired as a result of his employment with the Company, including but not limited to, customer contracts, customer lists, work performed for customers, customer contacts, customer requirements and needs, data used by the Company and the Company Affiliates to formulate customer proposals, customer financial information and other information regarding the customer’s business;

(c) Information regarding the vendors of the Company and the Company Affiliates which Executive acquired as a result of his employment with the Company, including but not limited to, product and service information and other information regarding the business activities of such vendors;

(d) Training materials developed by and utilized by the Company and the Company Affiliates;

(e) Any other information which Executive acquired as a result of his employment with the Company and which Executive has a reasonable basis to believe the Company or the Company Affiliates, as the case may be, would not want disclosed to a business competitor or to the general public; and

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(f) Information which:

(i) is proprietary to, about or created by the Company or the Company Affiliates;

(ii) gives the Company or any of the Company Affiliates some competitive advantage, the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company or the Company Affiliates;

(iii) is not typically disclosed to non-executives by the Company or otherwise is treated as confidential by the Company or the Company Affiliates; or

(iv) is designated as Confidential Information by the Company or from all the relevant circumstances should reasonably be assumed by Executive to be confidential to the Company or any Company Affiliates;

provided, however, that Confidential Information shall not include information which (x) at the time of receipt or thereafter becomes publicly known through no wrongful act of Executive, (y) is obtainable in the public domain, or (z) if Executive gives prior notice to the Company of any disclosure of information described in the following provisions of this clause (z), can be and is demonstrated by Executive as not having been developed by use of or reference to other Confidential Information and as not having been acquired or developed by Executive in connection with Executive’s employment or affiliation with the Company.

6.2 Covenant Not to Compete. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall

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not, directly or indirectly, for compensation or otherwise, engage in or have any interest in any sole proprietorship, partnership, corporation, company, association, business or any other person or entity (whether as an employee, officer, corporation, business or any creditor, consultant or otherwise) that, directly or indirectly, competes with the Company’s “Business” (as defined below) in any and all states in which the Company or any Company Affiliate conducts such business while Executive is employed by the Company or any Company Affiliate; provided, however, Executive may continue to hold securities of the Company or any Company Affiliate or continue to hold or acquire, solely as an investment, shares of capital stock or other equity securities of any company if (x) he currently holds an interest in such stock or other securities, and before the date hereof has disclosed to the Board in detail (I) the applicable company (or companies) and (II) the specific stock or other equity securities of the entity he owns, or (y) the stock or other securities are traded on any national securities exchange or are regularly quoted in the over-the-counter market, so long as Executive does not control, acquire a controlling interest in, or become a member of a group which exercises direct or indirect control of more than 5% of any class of capital stock of such corporation. For purposes of this Agreement, the Company’s “Business” is defined so as to consist of the development, acquisition, ownership, management, and sale of a diversified portfolio of high-quality, freestanding net-lease properties leased to retail, restaurant, convenience-store and similar businesses, and such other businesses conducted by the Company after the date hereof, and from time to time during the Term, that shall become material and substantial with respect to the Company’s then-overall business.

6.3 Non-Solicitation of Clients. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of

18

Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not, directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association, business or other entity, solicit, attempt to contract with, or enter into a contractual or business relationship of any kind pertaining to any aspect of the Company’s Business, or any other business conducted by the Company or any Company Affiliate at the time of termination of employment or at any time in the prior 12-month period, with any person or entity with which the Company or any Company Affiliate has any contractual or business relationship, or engaged in negotiations toward such a contract, in the previous 12 months, if such solicitation, attempt to contract with, or entering into a contractual or business relationship would have a material adverse effect on the Company’s operations, financial condition, prospects or relationship with such person or entity.

6.4 Non-Solicitation of Employees. While employed by the Company and, in the event of a termination of Executive’s employment (other than in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal), for a period of one year thereafter, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall not

19

directly or indirectly, for himself or as principal, agent, independent contractor, consultant, director, officer, member, or employee of any other person, firm, corporation, partnership, company, association or other entity, either (i) hire, attempt to employ, contact with respect to hiring, solicit with respect to hiring or enter into any contractual arrangement with any employee or former employee of the Company or any Company Affiliate, or (ii) induce or otherwise advise or encourage any employee of the Company or any Company Affiliate to leave his or her employment; unless, in each such case, such employee or former employee has not been employed by the Company or a Company Affiliate for a period in excess of six months at the time of such solicitation, attempt to employ, contact, employment or inducement.

6.5 Confidentiality. While employed by the Company and after Executive’s employment terminates, in consideration of the obligations of the Company hereunder, including without limitation its disclosure of Confidential Information to Executive, Executive shall keep secret and retain in strictest confidence, shall not disclose to any third-party, and shall not use for his benefit or the benefit of others, except in connection with the business affairs of the Company, any Company Affiliate, or any of their officers or directors (collectively, the “Benefited Persons”), all confidential and proprietary information and trade secrets relating to the business of the Company or any of the other Benefited Persons (but not if expressly excluded from being Confidential Information under the proviso of Section 6.1(f)), including, without limitation, the Confidential Information, unless such disclosure is required by a valid subpoena or other legal mandate or otherwise by rule of law or other valid order of a court or government body or agency. In the event disclosure so is required, Executive shall provide the Company with written notice of same at least five business days

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prior to the date on which Executive is required to make the disclosure. Notwithstanding the foregoing, the express terms of this Section 6.5 shall not apply in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal.

6.6 Tangible Items. All files, records, documents, manuals, books, forms, reports, memoranda, studies, data, calculations, recordings, or correspondence, whether visually perceptible, machine-readable or otherwise, in whatever form they may exist, and all copies, abstracts and summaries of the foregoing, and all physical items related to the business of the Company, whether of a public nature or not, and whether prepared by Executive or not, are and shall remain the exclusive property of the Company , and shall not be removed from its premises, except as required in the course of Executive’s employment by the Company, without the prior written consent of the Company. Such items, including any copies or other reproductions thereof, shall be promptly returned by Executive to the Company at any time upon the written request of the Company. Notwithstanding the foregoing, the express terms of this Section 6.6 shall not apply in the event of a Change of Control and subsequent termination by the Company without Cause or by Executive for Good Reason or a termination due to non-renewal of the Term by the Company at the first time on or after the Change of Control that the Term is up for renewal.

6.7 Remedies.

(a) The Company and Executive acknowledge and agree that a breach by Executive of any of the covenants contained in this Section 6 will cause immediate and irreparable harm and damage to the Company and any other Benefited Person, and that

21

monetary damages will be inadequate to compensate the Company, and any other Benefited Person, as the case may be, for such breach. Accordingly, Executive acknowledges that the Company and any other Benefited Person affected shall, in addition to any other remedies available to it at law or in equity, be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of said covenants by Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, without the necessity of proving the inadequacy of legal remedies or irreparable harm.

(b) Except with regard to Section 6.7(a), all disputes between the parties or any claims concerning the performance, breach, construction or interpretation of this Agreement, or in any manner arising out of this Agreement, shall be submitted to binding arbitration in accordance with the Commercial Arbitration Rules, as amended from time to time, of the American Arbitration Association (the “AAA”), which arbitration shall be carried out in the manner set forth below:

(i) Within 15 days after written notice by one party to the other party of its demand for arbitration, which demand shall set forth the name and address of its designated arbitrator, the other party shall appoint its designated arbitrator and so notify the demanding party. Within 15 days thereafter, the two arbitrators so appointed shall appoint the third arbitrator. If the two appointed arbitrators cannot agree on the third arbitrator, then the AAA shall appoint an independent arbitrator as the third arbitrator. The dispute shall be heard by the arbitrators within 90 days after appointment of the third arbitrator. The decision of any two or all three of the arbitrators shall be binding upon the parties without any right of appeal. The decision of the arbitrators shall be final and binding upon the Company, its successors and assigns, and upon Executive, his heirs, personal representatives, and legal representatives.

(ii) The arbitration proceedings shall take place in Orlando, Florida, and the judgment and determination of such proceedings shall be binding on all parties. Judgment upon any award rendered by the arbitrators may be entered into any court having competent jurisdiction without any right of appeal.

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(iii) Each party shall pay its or his own expenses of arbitration, and the expenses of the arbitrators and the arbitration proceeding shall be shared equally. However, if in the opinion of a majority of the arbitrators, any claim or defense was unreasonable, the arbitrators may assess, as part of their award, all or any part of the arbitration expenses of the other party (including reasonable attorneys’ fees) and of the arbitrators and the arbitration proceeding.

6.8 Change of Control. For the purposes of this Agreement, “Change of Control” shall be a change of control under the applicable definition contained in Section 2.4 of the Company’s 2000 Performance Incentive Plan, or successor thereto of comparable import; provided, however, that in no event shall a Change of Control for purposes of this Agreement be deemed to have arisen merely by virtue of a “person” or “group” (which terms shall have the meaning they have when used in Section 13(d) of the Securities Exchange Act of 1934, as amended) having become a direct or indirect owner of Company securities (such that a Change of Control would, without regard to this proviso, otherwise have been deemed to have occurred), if Executive is or is a member of such person or group.

7. Severability. As the provisions of this Agreement are independent of and severable from each other, the Company and Executive agree that if, in any action before any court or agency legally empowered to enforce this Agreement, any term, restriction, covenant, or promise hereof is found to be unreasonable or otherwise unenforceable, then such decision shall not effect the validity of the other provisions of this Agreement, and such invalid term, restriction, covenant, or promise shall also be deemed modified to the extent necessary to make it enforceable.

8. Notice. For purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when received if delivered in person, the next business day if delivered

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by overnight commercial courier (e.g., Federal Express), or the third business day if mailed by United States certified mail, return receipt requested, postage prepaid, to the following addresses:

(a) If to the Company, to:

National Retail Properties, Inc.

450 South Orange Avenue, 9th Floor

Orlando, Florida 32801

Attn: Chairman of the Compensation Committee

          of the Board of Directors

with a copy to:

National Retail Properties, Inc.

450 South Orange Avenue, 9th Floor

Orlando, Florida, 32801

Attention: General Counsel

and

Clifford Chance US LLP

31 West 52nd Street

New York, New York 10019-6131

Attention: Andrew L. Oringer, Esq.

(b) If to Executive, to:

Craig Macnab

at the address set forth on the signature page hereof

with a copy to:

Bass, Berry & Sims PLC

315 Deaderick Street, Suite #2700

Nashville, Tennessee 37238-3001

Attention: J. Page Davidson, Esq.

Either party may change its address for notices in accordance with this Section 8 by providing written notice of such change to the other party.

9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida.

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10. Benefits; Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, legal representatives, successors and permitted assigns. Executive shall not assign this Agreement. However, the Company is expressly authorized to assign this Agreement to a Company Affiliate upon written notice to Executive, provided that (i) the assignee assumes all of the obligations of the Company under this Agreement, (ii) Executive’s role when viewed from the perspective of Company Affiliates in the aggregate is comparable to such role immediately before the assignment, and (iii) the Company, for so long as an affiliate of the assignee, remains secondarily liable for the financial obligations hereunder.

11. Attorney’s Fees. The Company agrees to reimburse Executive for his reasonable legal fees incurred in reviewing this Agreement. In the event of any legal proceeding relating to this Agreement or any term or provision thereof, the losing party shall be responsible to pay or reimburse the prevailing party for all reasonable attorneys’ fees incurred by the prevailing party in connection with such proceeding, except that, in the event of an arbitration, the provisions of Section 6.7(b)(iii) shall apply.

12. Entire Agreement Amendment. This Agreement, including its incorporated Attachment “A,” constitutes the entire agreement between the parties, and all prior understandings, agreements or undertakings between the parties concerning Executive’s employment or the other subject matters of this Agreement (including without limitation the Existing Employment Agreement) are superseded in their entirety by this Agreement.

13. Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance.

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No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.

14. No Duty to Mitigate. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments hereunder be subject to offset in the event Executive does mitigate (except as otherwise provided in clause (i)(G) of the second sentence of Section 4.3(b) or clause (i)(E) of Section 4.4).

15. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but which together shall be one and the same instrument.

16. Tax Advice. Executive confirms and represents to the Company that he has had the opportunity to obtain the advice of legal counsel, financial and tax advisers, and such other professionals as he deems necessary for entering into this Agreement, and he has not relied upon the advice of the Company or the Company’s officers, directors, or employees.

17. Interpretation. As both parties having had the opportunity to consult with legal counsel, no provision of this Agreement shall be construed against or interpreted to the disadvantage of any party by reason of such party having, or being deemed to have, drafted, devised, or imposed such provision.

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IN WITNESS WHEREOF, the parties hereto have signed their names as of the day and year first above written.

NATIONAL RETAIL PROPERTIES, INC.
By:	/s/ Cliford R. Hinkle
Name:	Cliford R. Hinkle
Title:	Chairman of the board
/s/ Craig Macnab
Craig Macnab

[the following to be deleted from all public filings:]
[Executive’s address –
	]

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ATTACHMENT “A”

Additional Fringe Benefits

• $500/month car allowance

• Long-term disability coverage providing benefits equal to two-thirds of Annual Salary

• Life insurance benefits with a face amount equal to Annual Salary (provided that, if at any time the Company cannot obtain such insurance at rates which are reasonable for the provision by the Company of such a benefit, the Company may then self-insure such benefits)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Craig Macnab, Chief Executive Officer of National Retail Properties, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of National Retail Properties, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 3, 2006	/s/ Craig Macnab
Date	Name:	Craig Macnab
	Title:	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Kevin B. Habicht, Chief Financial Officer of National Retail Properties, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of National Retail Properties, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 3, 2006	/s/ Kevin B. Habicht
Date	Name:	Kevin B. Habicht
	Title:	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Craig Macnab, Chief Executive Officer, certifies that (1) this Quarterly Report of National Retail Properties, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of June 30, 2006 and December 31, 2005 and its results of operations for the quarters and six months ended June 30, 2006 and 2005.

August 3, 2006	/s/ Craig Macnab
Date	Name:	Craig Macnab
	Title:	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Kevin B. Habicht, Chief Financial Officer, certifies that (1) this Quarterly Report of National Retail Properties, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company as of June 30, 2006 and December 31, 2005 and its results of operations for the quarters and six months ended June 30, 2006 and 2005.

August 3, 2006	/s/ Kevin B. Habicht
Date	Name:	Kevin B. Habicht
	Title:	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.