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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2020
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 or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
450 South Orange Avenue, Suite 900
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (407265-7348
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, $0.01 par value
NNN
New York Stock Exchange
Depositary Shares, each representing one-hundredth of a share of 5.200% Series F Preferred Stock, $0.01 par value
NNN/PF
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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  No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
Non-accelerated filer
Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No  
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
171,964,151 shares of common stock, $0.01 par value, outstanding as of April 29, 2020.




TABLE OF CONTENTS
 
 
 
PAGE      
REFERENCE
Part I - Financial Information
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II - Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements
NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
 
March 31, 2020

December 31, 2019
ASSETS
(unaudited)
 
 
Real estate portfolio:
 
 
 
Accounted for using the operating method, net of accumulated depreciation and amortization
$
7,285,236

 
$
7,286,217

Accounted for using the direct financing method
4,143

 
4,204

Real estate held for sale
4,498

 
10,818

Cash and cash equivalents
217,383

 
1,112

Receivables, net of allowance of $506
4,214

 
2,874

Accrued rental income, net of allowance of $1,842
28,592

 
28,897

Debt costs, net of accumulated amortization of $15,939 and $15,574, respectively
2,461

 
2,783

Other assets
100,523

 
97,962

Total assets
$
7,647,050

 
$
7,434,867

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Line of credit payable
$

 
$
133,600

Mortgages payable, including unamortized premium and net of unamortized debt costs
11,895

 
12,059

Notes payable, net of unamortized discount and unamortized debt costs
3,206,563

 
2,842,698

Accrued interest payable
41,698

 
18,250

Other liabilities
85,959

 
96,578

Total liabilities
3,346,115

 
3,103,185

 


 


Equity:
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value. Authorized 15,000,000 shares
 
 
 
5.200% Series F, 138,000 shares issued and outstanding, at stated liquidation value of $2,500 per share
345,000

 
345,000

Common stock, $0.01 par value. Authorized 375,000,000 shares; 171,963,354 and 171,694,209 shares issued and outstanding, respectively
1,721

 
1,718

Capital in excess of par value
4,499,255

 
4,495,314

Accumulated deficit
(526,684
)
 
(499,229
)
Accumulated other comprehensive income (loss)
(18,362
)
 
(11,128
)
Total stockholders’ equity of NNN
4,300,930

 
4,331,675

Noncontrolling interests
5

 
7

Total equity
4,300,935

 
4,331,682

Total liabilities and equity
$
7,647,050

 
$
7,434,867

See accompanying notes to condensed consolidated financial statements.

3


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
(Unaudited)

 
Quarter Ended March 31,
  
2020
 
2019
Revenues:
 
 
 
Rental income
$
174,547

 
$
163,026

Interest and other income from real estate transactions
516

 
686

 
175,063

 
163,712

Operating expenses:
 
 
 
General and administrative
10,100

 
9,521

Real estate
7,635

 
7,093

Depreciation and amortization
49,188

 
46,180

Leasing transaction costs
36

 
52

Impairment losses – real estate, net of recoveries
5,513

 
3,245

 
72,472

 
66,091

Gain on disposition of real estate
12,770

 
10,445

Earnings from operations
115,361

 
108,066

Other expenses (revenues):
 
 
 
Interest and other income
(164
)
 
(1,924
)
Interest expense
33,670

 
29,957

Loss on early extinguishment of debt
16,679

 

 
50,185

 
28,033

Net earnings
65,176

 
80,033

Earnings attributable to noncontrolling interests
2

 
(10
)
Net earnings attributable to NNN
65,178

 
80,023

Series E preferred stock dividends

 
(4,097
)
Series F preferred stock dividends
(4,485
)
 
(4,485
)
Net earnings attributable to common stockholders
$
60,693

 
$
71,441

Net earnings per share of common stock:
 
 
 
Basic
$
0.35

 
$
0.44

Diluted
$
0.35

 
$
0.44

Weighted average number of common shares outstanding:
 
 
 
Basic
171,039,017

 
161,105,315

Diluted
171,231,828

 
161,614,074

Other comprehensive income:
 
 
 
Net earnings attributable to NNN
$
65,178

 
$
80,023

Amortization of interest rate hedges
383

 
323

Fair value of forward starting swaps
(7,617
)
 

Valuation adjustments – available-for-sale securities

 
116

Realized gain – available-for-sale securities

 
(1,331
)
Comprehensive income attributable to NNN
$
57,944

 
$
79,131


See accompanying notes to condensed consolidated financial statements.


4



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended March 31, 2020
(dollars in thousands, except per share data)

 
Series F
Preferred
Stock
 
Common
Stock
 
Capital in
  Excess of  
Par Value
 
Retained
Earnings (Deficit)
 
Accumulated
Other
Comprehensive  
Income (Loss)
 
Total
 Stockholders’  
Equity
 
  Noncontrolling  
Interests
 
Total
Equity
Balances at December 31, 2019
$
345,000

 
$
1,718

 
$
4,495,314

 
$
(499,229
)
 
$
(11,128
)
 
$
4,331,675

 
$
7

 
$
4,331,682

Net earnings

 

 

 
65,178

 

 
65,178

 
(2
)
 
65,176

Dividends declared and paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$0.325 per depositary share of Series F preferred stock

 

 

 
(4,485
)
 

 
(4,485
)
 

 
(4,485
)
$0.515 per share of common stock

 

 
620

 
(88,148
)
 

 
(87,528
)
 

 
(87,528
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,112 shares – director compensation

 

 
298

 

 

 
298

 

 
298

1,477 shares – stock purchase plan

 

 
76

 

 

 
76

 

 
76

253,406 restricted shares – net of forfeitures

 
3

 
(3
)
 

 

 

 

 

Amortization of deferred compensation

 

 
2,950

 

 

 
2,950

 

 
2,950

Amortization of interest rate hedges

 

 

 

 
383

 
383

 

 
383

Fair value of forward starting swaps

 

 

 

 
(7,617
)
 
(7,617
)
 

 
(7,617
)
Balances at March 31, 2020
$
345,000

 
$
1,721

 
$
4,499,255

 
$
(526,684
)
 
$
(18,362
)
 
$
4,300,930

 
$
5

 
$
4,300,935


5



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Quarter Ended March 31, 2019
(dollars in thousands, except per share data)

 
Series E
Preferred
Stock
 
Series F
Preferred
Stock
 
Common
Stock
 
Capital in
  Excess of  
Par Value
 
Retained
Earnings (Deficit)
 
Accumulated
Other
Comprehensive  
Income (Loss)
 
Total
 Stockholders’  
Equity
 
  Noncontrolling  
Interests
 
Total
Equity
Balances at December 31, 2018
$
287,500

 
$
345,000

 
$
1,616

 
$
3,950,055

 
$
(424,225
)
 
$
(5,696
)
 
$
4,154,250

 
$
355

 
$
4,154,605

Net earnings

 

 

 

 
80,023

 

 
80,023

 
10

 
80,033

Dividends declared and paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$0.356250 per depositary share of Series E preferred stock

 

 

 

 
(4,097
)
 

 
(4,097
)
 

 
(4,097
)
$0.32500 per depositary share of Series F preferred stock

 

 

 

 
(4,485
)
 

 
(4,485
)
 

 
(4,485
)
$0.50 per share of common stock

 

 
1

 
5,159

 
(80,566
)
 

 
(75,406
)
 

 
(75,406
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,007 shares – director compensation

 

 

 
322

 

 

 
322

 

 
322

2,324 shares – stock purchase plan

 

 

 
119

 

 

 
119

 

 
119

259,650 restricted shares – net of forfeitures

 

 
3

 
(3
)
 

 

 

 

 

Stock issuance costs

 

 

 
(42
)
 

 

 
(42
)
 

 
(42
)
Amortization of deferred compensation

 

 

 
2,225

 

 

 
2,225

 

 
2,225

Amortization of interest rate hedges

 

 

 

 

 
323

 
323

 

 
323

Valuation adjustments – available-for-sale securities

 

 

 

 

 
116

 
116

 

 
116

Realized gain – available-for-sale securities

 

 

 

 

 
(1,331
)
 
(1,331
)
 

 
(1,331
)
Other

 

 

 

 
505

 

 
505

 

 
505

Balances at March 31, 2019
$
287,500

 
$
345,000

 
$
1,620

 
$
3,957,835

 
$
(432,845
)
 
$
(6,588
)
 
$
4,152,522

 
$
365

 
$
4,152,887


6


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)


 
Quarter Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net earnings
$
65,176

 
$
80,033

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
49,188

 
46,180

Impairment losses – real estate, net of recoveries
5,513

 
3,245

Loss on early extinguishment of debt
16,679

 

Amortization of notes payable discount
1,897

 
425

Amortization of debt costs
1,816

 
920

Amortization of mortgages payable premium
(21
)
 
(21
)
Amortization of interest rate hedges
383

 
323

Settlement of forward starting swaps
(13,141
)
 

Gain on disposition of real estate
(12,770
)
 
(10,445
)
Performance incentive plan expense
3,078

 
2,787

Performance incentive plan payment
(846
)
 
(775
)
Change in operating assets and liabilities, net of assets acquired and liabilities assumed:
 
 
 
Decrease in real estate leased to others using the direct financing method
61

 
172

Decrease (increase) in receivables
(1,340
)
 
887

Increase in accrued rental income
(61
)
 
(747
)
Decrease (increase) in other assets
183

 
(12
)
Increase in accrued interest payable
23,448

 
27,937

Decrease in other liabilities
(11,299
)
 
(7,315
)
Other
140

 
(218
)
Net cash provided by operating activities
128,084

 
143,376

Cash flows from investing activities:
 
 
 
Proceeds from the disposition of real estate
33,384

 
16,909

Additions to real estate:
 
 
 
Accounted for using the operating method
(64,197
)
 
(112,130
)
Principal payments received on mortgages and notes receivable
100

 

Other
59

 
2,191

Net cash used in investing activities
(30,654
)
 
(93,030
)
 
See accompanying notes to condensed consolidated financial statements.


7


NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(dollars in thousands)
(Unaudited)


 
Quarter Ended March 31,
 
2020
 
2019
Cash flows from financing activities:
 
 
 
Proceeds from line of credit payable
$
311,000

 
$

Repayment of line of credit payable
(444,600
)
 

Repayment of mortgages payable
(147
)
 
(141
)
Proceeds from notes payable
692,646

 

Repayment of notes payable
(325,000
)
 

Payment for early extinguishment of debt
(16,679
)
 

Payment of debt issuance costs
(6,397
)
 
(40
)
Proceeds from issuance of common stock
696

 
5,279

Stock issuance costs
(45
)
 
(42
)
Payment of Series E preferred stock dividends

 
(4,097
)
Payment of Series F preferred stock dividends
(4,485
)
 
(4,485
)
Payment of common stock dividends
(88,148
)
 
(80,566
)
Net cash provided by (used in) financing activities
118,841

 
(84,092
)
Net increase (decrease) in cash, cash equivalents and restricted cash
216,271

 
(33,746
)
Cash, cash equivalents and restricted cash at beginning of period(1)
1,112

 
114,267

Cash, cash equivalents and restricted cash at end of period(1)
$
217,383

 
$
80,521

Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amount capitalized
$
6,613

 
$
499

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Decrease in other comprehensive income
$
7,234

 
$
892

Right-of-use assets recorded in connection with lease liabilities
$

 
$
7,735

Work in progress accrual balance
$
24,579

 
$
21,670

Mortgage receivable accepted in connection with real estate transactions
$
3,000

 
$
3,100

  (1) Cash, cash equivalents and restricted cash is the aggregate of cash and cash equivalents and restricted cash and cash held in escrow from the Condensed Consolidated Balance Sheets. NNN had no restricted cash and cash held in escrow at March 31, 2020 and 2019.

 
See accompanying notes to condensed consolidated financial statements.

8



NATIONAL RETAIL PROPERTIES, INC.
and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)

Note 1 – Organization and Summary of Significant Accounting Policies:
Organization and Nature of Business – National Retail Properties, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The terms "NNN" or the "Company" refer to National Retail Properties, Inc. and all of its consolidated subsidiaries.
NNN's assets primarily include real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment ("Properties", "Property Portfolio", or individually a "Property").
 
March 31, 2020
Property Portfolio:
 
Total properties
3,125

Gross leasable area (square feet)
32,500,000

States
48

Weighted average remaining lease term (years)
11.1


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 U.S. generally accepted accounting principles ("GAAP"). The unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring accruals) 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 ended March 31, 2020, may not be indicative of the results that may be expected for the year ending December 31, 2020. See "Footnote 8 – Subsequent Events." Amounts as of December 31, 2019 included in the condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements, included herein, should be read in conjunction with the consolidated financial statements and notes thereto as well as Management's Discussion and Analysis of Financial Condition and Results of Operations in NNN's Form 10-K for the year ended December 31, 2019.
Principles of Consolidation – NNN’s condensed consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates, including transactions whereby NNN has been determined to be the primary beneficiary in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications ("ASC") guidance included in Consolidation. All significant intercompany account balances and transactions have been eliminated.
Real Estate Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of Properties developed or funded by NNN includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. NNN recorded $466,000 and $126,000 in capitalized interest during the development period for the quarter ended March 31, 2020 and 2019, respectively.
Purchase Accounting for Acquisition of Real Estate Subject to a Lease – In accordance with the FASB guidance on business combinations, consideration for the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and, if applicable, to identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases, as applicable, based on their respective fair values.
The fair value estimate is sensitive to significant assumptions, such as establishing a range of relevant market assumptions for land, building and rent and where the acquired property falls within that range. These market assumptions for land, building and rent use the most relevant comparable properties for an acquisition. The final range relies upon ranking comparable properties' attributes from most similar to least similar.
The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on the determination of their fair values.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which

9



reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease and the applicable option terms if it is probable that the tenant will exercise options. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period.
The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off in that period. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.
Lease Accounting – In accordance with FASB Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)," ("ASC 842") NNN used the modified retrospective approach in which the cumulative effect of applying the new standard was recognized at the date of initial application with a positive adjustment to NNN’s opening balance of accumulated deficit. The modified retrospective approach provides a method for recording existing leases upon adoption, which in comparative periods approximates the results of a full retrospective approach. NNN elected the package of practical expedients permitted under the transition guidance (which included: (i) an entity need not reassess whether any expired or existing contracts are or contain leases, (ii) an entity need not reassess the lease classification for any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases), the land easement practical expedient to carry forward existing accounting treatment on existing land easements, and the lease and non-lease component combined practical expedient.
NNN estimates the collectability of its accounts receivable related to rents, expense reimbursements and other revenues. NNN analyzes accounts receivable and historical bad debt levels, tenant credit-worthiness and current economic trends when evaluating the probable collection. At the point NNN deems the collection of lease payments not probable, a bad debt is recognized for any outstanding receivable and any related accrued rent and, subsequently, any lease revenue is only recognized when cash receipts are received.
NNN recorded Right-Of-Use ("ROU") assets and operating lease liabilities of approximately $7,735,000 and $10,155,000 respectively, as of January 1, 2019.
In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. NNN is currently evaluating the impact of this guidance and whether NNN will make this policy election for lease concessions such as rent deferrals for the quarter ended June 30, 2020.
Debt Costs – Notes Payable Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized to interest expense over the term of the respective debt obligation using the effective interest method. These costs of $31,140,000 and $26,932,000, as of March 31, 2020 and December 31, 2019, respectively, are included in notes payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $7,492,000 and $8,962,000, respectively.
Impairment – Real Estate – Based upon certain events or changes in circumstances, management periodically assesses its Properties for possible impairment whenever the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are currently vacant or become vacant in a reasonable period of time. Management evaluates whether an impairment in carrying value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), and the residual value of the real estate, with the carrying value of the individual asset. The future undiscounted cash flows are primarily driven by estimated future market rents. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. NNN's Properties are leased primarily to retail tenants under long-term net leases and primarily held for investment. Generally, NNN’s Property leases provide for initial terms of 10 to 20 years, which provide for cash flows over this term. NNN intends to hold these assets for the long-term, therefore, a temporary change in cash flows due to COVID-19 alone would not be an indicator of impairment.

10



Credit Losses on Financial Instruments – Effective January 1, 2020, NNN adopted FASB ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” (“ASC 326”). The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
ASU 326 requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. The new guidance requires a lifetime credit loss expected at inception and requires pooling of assets, which share similar risk characteristics. NNN is required to evaluate current economic conditions, as well as, make future expectations of economic conditions. In addition, the measurement of the expected credit loss is over the asset’s contractual term.
During the quarter ended March 31, 2020, NNN recorded a mortgage receivable of $2,737,000 included in other assets on the Condensed Consolidated Balance Sheets, net of $174,000 allowance for credit loss. NNN measures the allowance for credit loss based on the fair value of the collateral and the historical collectability trend analysis over 15 years.
Adoption of ASC 326 did not materially impact NNN’s financial position or results of operations and had no impact on cash flows.
Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. The guidance requires classification of the Company’s unvested restricted share units, which carry rights to receive nonforfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.
The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method (dollars in thousands):
 
Quarter Ended March 31,
 
2020
 
2019
Basic and Diluted Earnings:
 
 
 
Net earnings attributable to NNN
$
65,178

 
$
80,023

Less: Series E preferred stock dividends

 
(4,097
)
Less: Series F preferred stock dividends
(4,485
)
 
(4,485
)
Net earnings available to NNN’s common stockholders
60,693

 
71,441

Less: Earnings allocated to unvested restricted shares
(160
)
 
(116
)
Net earnings used in basic and diluted earnings per share
$
60,533

 
$
71,325

 
 
 
 
Basic and Diluted Weighted Average Shares Outstanding:
 
 
 
Weighted average number of shares outstanding
171,827,815

 
161,785,877

Less: Unvested restricted stock
(311,553
)
 
(232,795
)
Less: Unvested contingent restricted shares
(477,245
)
 
(447,767
)
Weighted average number of shares outstanding used in basic earnings per share
171,039,017

 
161,105,315

Other dilutive securities
192,811

 
508,759

Weighted average number of shares outstanding used in diluted earnings per share
171,231,828

 
161,614,074


Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:
Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.
Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are

11



observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.
Accumulated Other Comprehensive Income (Loss)The following table outlines the changes in accumulated other comprehensive income (loss) (dollars in thousands):
 
Gain or Loss on Cash Flow Hedges (1)
 
Beginning balance, December 31, 2019
$
(11,128
)
 
 
 
 
Other comprehensive income
(7,617
)
 
Reclassifications from accumulated other comprehensive income to net earnings
383

(2) 
Net current period other comprehensive income (loss)
(7,234
)
 
Ending balance, March 31, 2020
$
(18,362
)
 
(1) Additional disclosure is included in Note 6 – Derivatives.
(2) Recorded in interest expense on the Condensed Consolidated Statements of Income and Comprehensive Income.
New Accounting Pronouncements – In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” ("ASU 2019-12"), effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. NNN is currently evaluating to determine the potential impact the adoption of ASU 2019-12 will have on NNN's financial position or results of operations.
Use of Estimates – Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with GAAP. Significant estimates include provisions for impairment and allowances for certain assets, accruals, useful lives of assets and purchase price allocation. 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 2020 presentation.

Note 2 – Real Estate:
Real Estate – Portfolio
LeasesThe following outlines key information for NNN’s leases:
 
March 31, 2020
Lease classification:
 
Operating
3,141

Direct financing
6

Weighted average remaining lease term (years)
11.1


The following is a summary of the general structure of the leases in the Property Portfolio, although the specific terms of each lease can vary significantly. Generally, the Property leases provide for initial terms of 10 to 20 years. The Properties are generally leased under net leases, pursuant to which the tenant typically bears responsibility for substantially all property costs and expenses associated with ongoing maintenance, repair, replacement and operation of the property, including utilities, property taxes and property and liability insurance. Certain Properties are subject to leases under which NNN retains responsibility for specific costs and expenses of the Property. NNN's leases provide for annual base rental payments (generally payable in monthly installments), and generally provide for limited increases in rent as a result of (i) increases in the Consumer Price Index ("CPI"), (ii) fixed increases, or, to a lesser extent, (iii) increases in the tenant’s sales volume.
Generally, NNN's leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. NNN’s lease term is based on the non-cancellable

12



base term unless economic incentives make it reasonably certain that an option period to extend the lease will be exercised, in which event NNN includes the options. Some of the leases also provide that in the event NNN wishes to sell the Property subject to that lease, NNN first must offer the lessee the right to purchase the Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Property.
Real Estate Portfolio – Accounted for Using the Operating MethodReal estate subject to operating leases consisted of the following at (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
Land and improvements(1)
$
2,489,398

 
$
2,490,959

Buildings and improvements
5,943,971

 
5,913,799

Leasehold interests
355

 
355

 
8,433,724

 
8,405,113

Less accumulated depreciation and amortization
(1,187,925
)
 
(1,146,334
)
 
7,245,799

 
7,258,779

Work in progress for buildings and improvements
39,437

 
27,438

 
$
7,285,236

 
$
7,286,217


(1) Includes $16,618 and $16,930 in land for Properties under construction at March 31, 2020 and December 31, 2019, respectively.
NNN recognized the following revenues in rental income (dollars in thousands):
 
Quarter Ended March 31,
 
2020
 
2019
Rental income from operating leases
$
168,733

 
$
158,398

Earned income from direct financing leases
164

 
213

Percentage rent
403

 
422

Real estate expense reimbursement from tenants
5,247

 
3,993

 
$
174,547

 
$
163,026


Some leases provide for a free rent term or scheduled rent increases throughout the lease term. Such amounts are recognized on a straight-line basis over the terms of the leases. For the quarter ended March 31, 2020 and 2019, NNN recognized ($177,000) and $630,000, respectively, of such income, net of reserves. At March 31, 2020 and December 31, 2019, the balance of accrued rental income was $28,592,000 and $28,897,000, respectively, net of allowance of $1,842,000.

13



Real Estate – Intangibles
In accordance with purchase accounting for the acquisition of real estate subject to a lease, NNN has recorded intangible assets and lease liabilities that consisted of the following at (dollars in thousands):
 
 
March 31, 2020
 
December 31, 2019
Intangible lease assets (included in other assets):
 
 
 
 
Above-market in-place leases
 
$
15,845

 
$
15,754

Less: accumulated amortization
 
(10,090
)
 
(9,897
)
Above-market in-place leases, net
 
$
5,755

 
$
5,857

 
 
 
 
 
In-place leases
 
$
121,674

 
$
119,846

Less: accumulated amortization
 
(66,048
)
 
(64,918
)
In-place leases, net
 
$
55,626

 
$
54,928

 
 
 
 
 
Intangible lease liabilities (included in other liabilities):
 
 
 
 
Below-market in-place leases
 
$
42,633

 
$
41,767

Less: accumulated amortization
 
(26,351
)
 
(26,135
)
Below-market in-place leases, net
 
$
16,282

 
$
15,632


The amounts amortized as a net increase to rental income for above-market and below-market in-place leases for the quarter ended March 31, 2020 and 2019, were $220,000 and $228,000, respectively. The value of in-place leases amortized to expense for the quarter ended March 31, 2020 and 2019, were $2,395,000 and $2,244,000, respectively.
Real Estate – Held For Sale
On a quarterly basis, the Company evaluates its Properties for held for sale classification based on specific criteria as outlined in ASC 360, Property, Plant and Equipment, including management’s intent to commit to a plan to sell the asset. NNN anticipates the disposition of Properties classified as held for sale to occur within 12 months. As of March 31, 2020, NNN had six of its Properties categorized as held for sale. NNN's real estate held for sale at December 31, 2019, included 11 Properties, five of which were sold in 2020. Real estate held for sale consisted of the following as of (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
Land and improvements
$
3,817

 
$
7,022

Building and improvements
7,972

 
10,888

 
11,789

 
17,910

Less accumulated depreciation and amortization
(3,953
)
 
(5,334
)
Less impairment
(3,338
)
 
(1,758
)
 
$
4,498

 
$
10,818


Real Estate – Dispositions
The following table summarizes the Properties sold and the corresponding gain recognized on the disposition of Properties (dollars in thousands):
 
Quarter Ended March 31,
 
2020
 
2019
# of Sold
Properties
 
Net Gain
 
# of Sold
Properties
 
Net Gain
Net gain on disposition of real estate
14
 
$
12,770

 
17
 
$
10,445



14



Real Estate – Commitments
NNN has committed to fund construction on 17 Properties. The improvements on such Properties are estimated to be completed within 12 months. These construction commitments, as of March 31, 2020, are outlined in the table below (dollars in thousands):
Total commitment(1)
$
74,525

Less amount funded
56,055

Remaining commitment
$
18,470

(1)   Includes land, construction costs, tenant improvements, lease costs and
      capitalized interest.

Real Estate – Impairments
Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are currently vacant or become vacant in a reasonable period of time. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. NNN's Properties are leased primarily to retail tenants under long-term net leases and primarily held for investment.  Generally, NNN’s Property leases provide for initial terms of 10 to 20 years, which provide for cash flows over this term.  NNN intends to hold these assets for the long-term, therefore, a temporary change in cash flows due to COVID-19 alone would not be an indicator of impairment. As a result of the Company's review of long-lived assets, including identifiable intangible assets, NNN recognized real estate impairments, net of recoveries of $5,513,000 and $3,245,000 for the quarter ended March 31, 2020 and 2019, respectively.

The valuation of impaired assets is determined using widely accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties, which are Level 3 inputs. NNN may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.

Note 3 – Line of Credit Payable:
NNN's $900,000,000 unsecured revolving credit facility (the “Credit Facility”) had a weighted average outstanding balance of $75,996,000 and a weighted average interest rate of 2.5% during the quarter ended March 31, 2020. The Credit Facility matures January 2022, unless the Company exercises its option to extend maturity to January 2023. The Credit Facility bears interest at LIBOR plus 87.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature which permits NNN to increase the facility size up to $1,600,000,000, subject to lender approval. As of March 31, 2020, there was no outstanding balance and $900,000,000 was available for future borrowings under the Credit Facility.

Note 4 – Notes Payable:
In February 2020, NNN filed a prospectus supplement to the prospectus contained in its February 2018 shelf registration statement and, subsequently, in March 2020, issued $400,000,000 aggregate principal amount of 2.500% notes due April 2030 (the “2030 Notes”) and $300,000,000 aggregate principal amount of 3.100% notes due April 2050 (the "2050 Notes" and, together with the 2030 Notes, the "Notes").

The 2030 Notes were sold at a discount with an aggregate purchase price of $398,712,000 with interest payable semi-annually commencing on October 15, 2020. The discount of $1,288,000 is being amortized to interest expense over the term of the notes using the effective interest method. The effective interest rate for the 2030 Notes after accounting for the note discount is 2.536%. NNN previously entered into three forward starting swaps with an aggregate notional amount of $200,000,000. Upon issuance of the 2030 Notes, NNN terminated the forward starting swaps resulting in a loss of $13,141,000, which was deferred in other comprehensive income. The loss is being amortized to interest expense over the term of the 2030 Notes using the effective interest method.

The 2050 Notes were sold at a discount with an aggregate purchase price of $293,934,000 with interest payable semi-annually commencing on October 15, 2020. The discount of $6,066,000 is being amortized to interest expense over the term of the notes

15



using the effective interest method. The effective interest rate for the 2050 Notes after accounting for the note discount is 3.205%.

The Notes are senior unsecured obligations of NNN and are subordinated to all secured indebtedness and to the indebtedness and other liabilities of NNN's subsidiaries. Additionally, the Notes are each redeemable at NNN's option, in whole or part anytime, for an amount equal to (i) the sum of the outstanding principal balance of the notes being redeemed plus accrued interest thereon to the redemption date, and (ii) the make-whole amount, if any, as defined in the supplemental indenture dated February 18, 2020, relating to the Notes.

NNN received approximately $395,062,000 and $290,459,000 of net proceeds in connection with the issuance of the 2030 Notes and the 2050 Notes, respectively, after incurring debt issuance costs consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses, totaling $3,650,000 and $3,475,000 for the 2030 Notes and the 2050 Notes, respectively.
On March 20, 2020, NNN redeemed the $325,000,000 3.800% notes payable due October 2022. The notes were redeemed at a price equal to 100% of the principal amount, plus (i) a make-whole amount of $16,679,000, and (ii) accrued and unpaid interest.

Note 5 – Stockholders' Equity:
In February 2018, NNN filed a shelf registration statement with the Securities and Exchange Commission (the "Commission") which permits the issuance by NNN of an indeterminate amount of debt and equity securities.
Dividend Reinvestment and Stock Purchase Plan – In February 2018, NNN filed a shelf registration statement with the Commission for its Dividend Reinvestment and Stock Purchase Plan ("DRIP") which permits the issuance by NNN of up to 10,000,000 shares of common stock. The following table outlines the common stock issuances pursuant to NNN's DRIP (dollars in thousands):
 
Quarter Ended March 31,
 
2020
 
2019
Shares of common stock
12,528

 
101,180

Net proceeds
$
696

 
$
5,279


At-The-Market Offerings – NNN has established an at-the-market equity program ("ATM") which allows NNN to sell shares of common stock from time to time. The following outlines NNN's ATM program:
 
2018 ATM
Established date
February 2018

Termination date
February 2021

Total allowable shares
12,000,000

Total shares issued as of March 31, 2020
9,722,185


There were no common stock issuances pursuant to NNN's ATM equity program for the quarter ended March 31, 2020 and 2019, respectively.

16



DividendsThe following table outlines the dividends declared and paid for each issuance of NNN's stock (dollars in thousands, except per share data):
 
Quarter Ended March 31,
 
2020
 
2019
Series E preferred stock(1):
 
 
 
Dividends
$

 
$
4,097

Per depositary share

 
0.356250

 
 
 
 
Series F preferred stock(2):
 
 
 
Dividends
4,485

 
4,485

Per depositary share
0.325000

 
0.325000

 
 
 
 
Common stock:
 
 
 
Dividends
88,148

 
80,566

Per share
0.515

 
0.500


(1) The 5.700% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock") was redeemed in October 2019. The dividends paid in 2019 include accumulated and unpaid dividends through, but not including, the redemption date.
(2) The 5.200% Series F Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock") has no maturity date and will remain outstanding unless redeemed by NNN. The earliest redemption date for the Series F Preferred Stock is October 2021.
In April 2020, NNN declared a dividend of $0.515 per share, which is payable in May 2020 to its common stockholders of record as of April 30, 2020.

Note 6 – Derivatives:
In accordance with the guidance on derivatives and hedging, NNN records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or a firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
NNN’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, NNN primarily uses treasury locks, forward starting swaps and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward starting swaps also lock the associated swap spread. Interest rate swaps designated as cash flow hedges are used to hedge the variable cash flows associated with floating rate debt and involve the receipt or payment of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
For derivatives designated as cash flow hedges, the change in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings.
NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, the derivative is re-designated as a hedging instrument or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, NNN recognizes any changes in its fair value in earnings and continues to carry the derivative on the balance sheet or may choose to settle the derivative at that time with a cash payment or receipt. NNN records a cash settlement of forward starting swaps in the Condensed Consolidated Statements of Cash Flows as an operating activity.

17



The following table outlines NNN's terminated derivatives which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (dollars in thousands):
Notes Payable
Terminated
Description
Aggregate Notional Amount
Liability (Asset) Fair Value When Terminated
Fair Value Deferred In Other Comprehensive Income (1)
2023
April 2013
Four forward starting swaps
$
240,000

$
3,156

$
3,141

2024
May 2014
Three forward starting swaps
225,000

6,312

6,312

2025
October 2015
Four forward starting swaps
300,000

13,369

13,369

2026
December 2016
Two forward starting swaps
180,000

(13,352
)
(13,345
)
2027
September 2017
Two forward starting swaps
250,000

7,690

7,688

2028
September 2018
Two forward starting swaps
250,000

(4,080
)
(4,080
)
2030
March 2020
Three forward starting swaps
200,000

13,141

13,141

(1) The amount reported in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the related notes payable.
As of March 31, 2020, $18,362,000 remained in other comprehensive income related to NNN’s previously terminated interest rate hedges. During the quarter ended March 31, 2020 and 2019, NNN reclassified out of other comprehensive income $384,000 and $323,000, respectively, as an increase in interest expense. Over the next 12 months, NNN estimates that an additional $2,555,000 will be reclassified as an increase in interest expense from these terminated derivatives. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on NNN’s long-term debt.
NNN does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. NNN had no derivative financial instruments outstanding at March 31, 2020.

Note 7 – Fair Value of Financial Instruments:
NNN believes the carrying value of its Credit Facility approximates fair value based upon its nature, terms and variable interest rate. NNN believes that the carrying value of its mortgages payable at March 31, 2020 and December 31, 2019, approximate fair value based upon current market prices of comparable instruments (Level 3). At March 31, 2020 and December 31, 2019, the fair value of NNN’s notes payable net of unamortized discount and excluding debt costs was $3,277,730,000 and $3,074,538,000, respectively, based upon quoted market prices, which is a Level 1 valuation since NNN's notes payable are publicly traded.

Note 8 – Subsequent Events:
Overview
A novel strain of coronavirus was reported to have surfaced in Wuhan, China in December 2019, and has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. As a result, the COVID-19 pandemic is negatively affecting almost every industry directly or indirectly.
The actions taken by the government to mitigate the spread of COVID-19 by ordering closure of many businesses and ordering residents to generally stay at home has resulted in the loss of revenue for many of NNN's tenants and challenged their ability to pay rent. NNN expects these economic hardships to have a negative effect on its financial results, particularly beginning the quarter ending June 30, 2020. Generally, NNN leases do not allow tenants to withhold rent as a result of such closures or reduced operations by tenants.
NNN is actively working with its tenants that have been impacted by the mandated closures or other social-distancing guidelines resulting from the COVID-19 pandemic. As of April 29, 2020, NNN has collected approximately 52% of annualized base rent originally due in April 2020. As of April 29, 2020, certain tenants, representing approximately 37% of annualized base rent, have requested adjustments to their lease terms, primarily consisting of short-term rent deferrals of 30 to 90 days. NNN is negotiating terms with these tenants that would require the deferred rental revenues to be paid at a later time in the lease term, typically over 3 to 18 months with payment beginning in fourth quarter 2020. Rent collections may continue below amounts required under the leases until economic activity materially improves. April rent collections and rent relief requests to-

18



date may not be indicative of rent collections and requests in the future. Depending upon the duration of impact on tenants and the overall economic downturn resulting from the COVID-19 pandemic, NNN may find deferred rents difficult to collect.
A prolonged imposition of mandated closures or other social-distancing guidelines may adversely impact NNN's tenants’ revenues, and could force tenants to default on their leases, or result in the bankruptcy or insolvency of tenants, which would diminish the rental revenue NNN receives under its leases. The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate adverse impact on NNN. Nevertheless, COVID-19 presents material uncertainty and risk with respect to NNN’s performance, business or financial condition, results from operations and cash flows.
NNN is currently deferring material new property investments until there is more visibility on how and when the economy and capital markets might begin to recover from the COVID-19 pandemic.
Business Continuity
The extent of the effects of COVID-19 on NNN's business, results of operations, cash flows, and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See Item "1A. Risk Factors."
NNN was able to transition a large portion of its associates to work remotely and does not anticipate any adverse impact on its ability to continue to operate its business nor have any material adverse impact on NNN's financial reporting systems, internal controls over financial reporting or disclosure controls and procedures.
NNN reviewed its subsequent events and transactions that have occurred after March 31, 2020, the date of the condensed consolidated balance sheet.
There were no other reportable subsequent events or transactions.


19



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 in the Annual Report on Form 10-K of National Retail Properties, Inc. for the year ended December 31, 2019 ("2019 Annual Report"). The terms “NNN” and the “Company” refer to National Retail Properties, Inc. and all of its consolidated subsidiaries.
Forward-Looking Statements
The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the “Exchange Act”). Also, when NNN uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, NNN is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, NNN’s actual results could differ materially from those set forth in the forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and NNN undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statement:
Changes in financial and economic conditions may have an adverse impact on NNN, its tenants, and commercial real estate in general;
Loss of rent from tenants would reduce NNN's cash flow;
A significant portion of NNN's annual base rent is concentrated in specific industry classifications, tenants and geographic locations;
NNN may not be able to successfully execute its acquisition or development strategies;
NNN may not be able to dispose of properties consistent with its operating strategy;
Certain provisions of NNN's leases or loan agreements may be unenforceable;
Competition from numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN's ability to grow;
NNN's loss of key management personnel could adversely affect performance and the value of its securities;
Uninsured losses may adversely affect NNN's operating results and asset values;
NNN's ability to fully control the management of its net-leased properties may be limited;
Vacant properties or bankrupt tenants could adversely affect NNN's business or financial condition;
NNN's failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results and the market value of NNN's securities;
Cybersecurity risks and cyber incidents could adversely affect NNN's business, disrupt operations and expose NNN to liabilities to tenants, employees, capital providers, and other third parties;
Future investment in international markets could subject NNN to additional risks.
NNN may suffer a loss in the event of a default of or bankruptcy of a tenant or a borrower;
Property ownership through joint ventures and partnerships could limit NNN's control of those investments;
Acts of violence, terrorist attacks or war may affect the markets in which NNN operates and NNN's results of operations;
Changes in accounting pronouncements could adversely impact NNN's or NNN's tenants' reported financial performance;
NNN may be unable to obtain debt or equity capital on favorable terms, if at all;
The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN's business and financial condition;
NNN is obligated to comply with financial and other covenants in its debt instruments that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment of such debt;
The market value of NNN's equity and debt securities is subject to various factors that may cause significant fluctuations or volatility;
NNN's ability to pay dividends in the future is subject to many factors;
The phase-out of LIBOR could affect interest rates under NNN's variable rate debt;
Owning real estate and indirect interests in real estate carries inherent risks;
NNN's real estate investments are illiquid;
NNN may be subject to known or unknown environmental liabilities and hazardous materials on Properties owned by NNN;

20



The cost of complying with changes in governmental laws and regulations may adversely affect NNN's results of operations;
NNN's failure to qualify as a REIT for federal income tax purposes could result in significant tax liability;
Even if NNN remains qualified as a REIT, NNN faces other tax liabilities that reduce operating results and cash flow;
Adverse legislative or regulatory tax changes could reduce NNN's earnings and cash flow and the market value of NNN's securities;
Compliance with REIT requirements, including distribution requirements, may limit NNN's flexibility and may negatively affect NNN's operating decisions;
The share ownership restrictions of the Internal Revenue Code for REITs and the 9.8% share ownership limit in NNN's charter may inhibit market activity in NNN's shares of stock and restrict NNN's business combination opportunities;
Non-compliance with Title III of the Americans with Disabilities Act of 1990 could have an adverse effect on NNN's business and operating results; and
An epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, may precipitate or materially exacerbate one or more of the above-mentioned risks, and may significantly disrupt or prevent NNN from operating its business in the ordinary course for an extended period.

Additional information related to these risks and uncertainties are included in "Item 1A. Risk Factors" of NNN's 2019 Annual Report.
These risks and uncertainties may cause NNN's actual future results to differ materially from expected results, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. NNN undertakes no obligation to update or revise such forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
NNN, a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. NNN's assets are primarily real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and are primarily held for investment ("Properties" or "Property Portfolio", or individually a "Property").
As of March 31, 2020, NNN owned 3,125 Properties, with an aggregate gross leasable area of approximately 32,500,000 square feet, located in 48 states, with a weighted average remaining lease term of 11.1 years. Approximately 99 percent of the Properties were leased as of March 31, 2020.
NNN’s management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, industry trends and industry performance compared to that of NNN.
NNN evaluates the creditworthiness of its current and prospective tenants. This evaluation may include reviewing available financial statements, store level financial performance, press releases, public credit ratings from major credit rating agencies, industry news publications and financial market data (debt and equity pricing). NNN may also evaluate the business and operations of its tenants, including past payment history and periodically meeting with senior management of certain tenants.
NNN continues to maintain its diversification by tenant, geography and tenant's line of trade. NNN’s largest lines of trade concentrations are the convenience store and restaurant (including full and limited service) sectors. These sectors represent a large part of the freestanding retail property marketplace and NNN’s management believes these sectors present attractive investment opportunities. The Property Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic regions could have a material adverse effect on the financial condition and operating performance of NNN.
Impact of COVID-19 on NNN’s Business
Overview
A novel strain of coronavirus was reported to have surfaced in Wuhan, China in December 2019, and has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a

21



pandemic, and on March 13, 2020, the United States declared a national emergency. As a result, the COVID-19 pandemic is negatively affecting almost every industry directly or indirectly.
The actions taken by the government to mitigate the spread of COVID-19 by ordering closure of many businesses and ordering residents to generally stay at home has resulted in the loss of revenue for many of NNN's tenants and challenged their ability to pay rent. NNN expects these economic hardships to have a negative effect on its financial results particularly beginning the quarter ending June 30, 2020. Generally, NNN leases do not allow tenants to withhold rent as a result of such closings or reduced operations by tenants.
NNN is actively working with its tenants that have been impacted by the mandated closures or other social-distancing guidelines resulting from the COVID-19 pandemic to understand the implications that the COVID-19 has had on the tenants’ operations. As of April 29, 2020, NNN has collected approximately 52% of annualized base rent originally due in April 2020. As of April 29, 2020, certain tenants, representing approximately 37% of annualized base rent, have requested adjustments to their lease terms, primarily consisting of short-term rent deferrals of 30 to 90 days. NNN is negotiating terms with these tenants that would require the deferred rental revenues to be paid at a later time in the lease term, typically over 3 to 18 months beginning in fourth quarter 2020. Rent collections may continue below amounts required under the leases until economic activity materially improves. April rent collections and rent relief requests to-date may not be indicative of rent collections and requests in the future. Depending upon the duration of impact on tenants and the overall economic downturn resulting from the COVID-19 pandemic, NNN may find deferred rents difficult to collect.
A prolonged imposition of mandated closures or other social-distancing guidelines may adversely impact NNN's tenants’ ability to generate sufficient revenues, and could force tenants to default on their leases, or result in the bankruptcy or insolvency of tenants, which would diminish the rental revenue NNN receives under its leases. Additionally, an increase in the number of vacant properties would increase NNN’s real estate expenses, including expenses associated with ongoing maintenance and repairs, utilities, property taxes and property and liability insurance.
NNN is currently deferring material new property investments until there is more visibility on how and when the economy and capital markets might begin to recover from the COVID-19 pandemic. As of March 31, 2020, NNN has $217,383,000 of cash and cash equivalents and $900,000,000 available for borrowings under its unsecured revolving credit facility. While the impacts of COVID-19 are unknown, NNN currently expects these combined resources, in addition to the cash provided by NNN's operations to be sufficient to meet NNN's demand for funds.
Business Continuity
The extent of the effects of COVID-19 on NNN's business, results of operations, cash flows, and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See "Item 1A. Risk Factors."
NNN was able to transition a large portion of its employees to work remotely and does not anticipate any adverse impact on its ability to continue to operate its business nor have any material adverse impact on NNN's financial reporting systems, internal controls over financial reporting or disclosure controls and procedures.
The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate adverse impact on NNN. Nevertheless, COVID-19 presents material uncertainty and risk with respect to NNN’s performance, business or financial condition, results from operations and cash flows.

22



Results of Operations
Property Analysis
General.  The following table summarizes the Property Portfolio:
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Properties Owned:
 
 
 
 
 
Number
3,125

 
3,118

 
2,984

Total gross leasable area (square feet)
32,500,000

 
32,460,000

 
30,698,000

Properties:
 
 
 
 
 
Leased and unimproved land
3,088

 
3,086

 
2,931

Percent of Properties – leased and unimproved land
99
%
 
99
%
 
98
%
Weighted average remaining lease term (years)
11.1

 
11.2

 
11.4

Total gross leasable area (square feet) – leased
31,910,000

 
31,818,000

 
29,618,000


The following table summarizes the diversification of the Property Portfolio based on the top 10 lines of trade:
 
 
 
 
% of Annual Base Rent (1)
 
 
Lines of Trade
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
1.
 
Convenience stores
 
18.1
%
 
18.2
%
 
17.8
%
2.
 
Restaurants – full service
 
11.0
%
 
11.1
%
 
11.3
%
3.
 
Automotive service
 
9.9
%
 
9.6
%
 
8.9
%
4.
 
Restaurants – limited service
 
8.7
%
 
8.8
%
 
9.0
%
5.
 
Family entertainment centers
 
6.7
%
 
6.7
%
 
7.1
%
6.
 
Health and fitness
 
5.2
%
 
5.2
%
 
5.5
%
7.
 
Theaters
 
4.7
%
 
4.7
%
 
4.9
%
8.
 
Recreational vehicle dealers, parts and accessories
 
3.4
%
 
3.4
%
 
3.5
%
9.
 
Automotive parts
 
3.1
%
 
3.1
%
 
3.4
%
10.
 
Equipment rental
 
2.6
%
 
2.6
%
 
1.9
%
 
 
Other
 
26.6
%
 
26.6
%
 
26.7
%
 
 
 
 
100.0
%
 
100.0
%
 
100.0
%
(1) Based on annualized base rent for all leases in place for each respective period.

Property Acquisitions.  The following table summarizes the Property acquisitions (dollars in thousands):
 
Quarter Ended March 31,
 
2020
 
2019
Acquisitions:
 
 
 
Number of Properties
21

 
33

Gross leasable area (square feet)
217,000

 
434,000

Initial cash yield
6.9
%
 
7.0
%
Total dollars invested(1)
$
67,197

 
$
116,952

(1) Includes dollars invested in projects under construction or tenant improvements for each respective year.
NNN typically funds Property acquisitions either through borrowings under NNN's unsecured revolving credit facility (the "Credit Facility") (see "Debt – Line of Credit Payable") or by issuing its debt or equity securities in the capital markets.

23



Property Dispositions.  The following table summarizes the Properties sold by NNN (dollars in thousands):
 
Quarter Ended March 31,
 
2020
 
2019
Number of properties
14

 
17

Gross leasable area (square feet)
176,000

 
180,000

Net sales proceeds
$
36,266

 
$
19,389

Net gain
$
12,770

 
$
10,445


NNN typically uses the proceeds from a Property disposition to either pay down the Credit Facility or reinvest in real estate.
Analysis of Revenue
General.  During the quarter ended March 31, 2020, total revenues increased, as compared to the same period in 2019, primarily due to the income generated from Properties acquired during the year ended December 31, 2019 and quarter ended March 31, 2020 (See “Results of Operations – Property Analysis – Property Acquisitions”).
The following table summarizes NNN’s revenues (dollars in thousands):
 
Quarter Ended March 31,
 
 
 
Percent
Increase
(Decrease)
 
2020
 
2019
 
Rental Revenues(1)
$
169,300

 
$
159,033

 
6.5%
Real estate expense reimbursement from tenants
5,247

 
3,993

 
31.4%
Rental income
174,547

 
163,026

 
7.1%
Interest and other income from real estate transactions
516

 
686

 
(24.8%)
Total revenues
$
175,063

 
$
163,712

 
6.9%
(1) 
Includes rental income from operating leases, earned income from direct financing leases and percentage rent ("Rental Revenues").
Quarter Ended March 31, 2020 versus Quarter Ended March 31, 2019
Rental Income. Rental income increased for the quarter ended March 31, 2020, as compared to the same period in 2019. The increase for the quarter ended March 31, 2020, is primarily due to a partial year of rental income received as a result of the acquisition of 21 properties with aggregate gross leasable area of approximately 217,000 square feet during 2020 and a full year of rental income received as a result of the acquisition of 210 properties with a gross leasable area of approximately 3,164,000 square feet in 2019.





24



Analysis of Expenses
General.  Operating expenses increased for the quarter ended March 31, 2020, as compared to the same period in 2019, primarily due to the increase in depreciation expense and impairment losses recognized on real estate. The following table summarizes NNN’s expenses (dollars in thousands):
 
Quarter Ended March 31,
 
 
 
 
 
Percent Increase (Decrease)
 
2020
 
2019
 
General and administrative
$
10,100

 
$
9,521

 
6.1%
Real estate
7,635

 
7,093

 
7.6%
Depreciation and amortization
49,188

 
46,180

 
6.5%
Leasing transaction costs
36

 
52

 
(30.8)%
Impairment losses – real estate, net of recoveries
5,513

 
3,245

 
69.9%
Total operating expenses
$
72,472

 
$
66,091

 
9.7%
 
 
 
 
 
 
Interest and other income
$
(164
)
 
$
(1,924
)
 
(91.5)%
Interest expense
33,670

 
29,957

 
12.4%
Loss on early extinguishment of debt
16,679

 

 
N/C
Total other expenses
$
50,185

 
$
28,033

 
79.0%
As a percentage of total revenues:
 
 
 
 
 
General and administrative
5.8
%
 
5.8
%
 
 
Real estate