10-K 1 d10k.htm FORM 10-K Form 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2007

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: (407) 265-7348

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:    Name of exchange on which registered:

Common Stock, $0.01 par value

7.375% Non-Voting Series C Preferred Stock, $0.01 par value

               New York Stock Exchange            

New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes  ¨    No  x

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  x     No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨

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

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2007 was $66,159,208.

The number of shares of common stock outstanding as of February 14, 2008 was 72,534,884.


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DOCUMENTS INCORPORATED BY REFERENCE:

Registrant incorporates by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K portions of National Retail Properties, Inc.’s definitive Proxy Statement for the 2008 Annual Meeting of Stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A. The definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.


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TABLE OF CONTENTS

 

 

PAGE      

REFERENCE

Part I

    
 

Item 1.

  Business    1
 

Item 1A.

  Risk Factors    9
 

Item 1B.

  Unresolved Staff Comments    16
 

Item 2.

  Properties    17
 

Item 3.

  Legal Proceedings    17
 

Item 4.

  Submission of Matters to a Vote of Security Holders    17
Part II     
 

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    18
  Item 6.   Selected Financial Data    20
  Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation    22
  Item 7A.   Quantitative and Qualitative Disclosures About Market Risk    46
  Item 8.   Financial Statements and Supplementary Data    47
  Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    94
  Item 9A.   Controls and Procedures    94
  Item 9B.   Other Information    96
Part III     
  Item 10.   Directors, Executive Officers and Corporate Governance    97
  Item 11.   Executive Compensation    97
  Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    97
  Item 13.   Certain Relationships and Related Transactions, and Director Independence    97
  Item 14.   Principal Accountant Fees and Services    97
Part IV     
  Item 15.   Exhibits and Financial Statement Schedules    98
Signatures    103


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PART I

Unless the context otherwise requires, references in this Annual Report on Form 10-K to the terms “registrant” or “NNN” or “the Company” refer to National Retail Properties, Inc. and its [consolidated] subsidiaries, including taxable real estate investment trust (“REIT”) subsidiaries and their majority owned and controlled subsidiaries (collectively the “TRS”).

Statements contained in this annual report on Form 10-K, including the documents that are incorporated by reference, that are not historical facts are 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. 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. Certain factors that could cause actual results or events to differ materially from those NNN anticipates or projects are described in Item 1A. “Risk Factors” of this Annual Report on Form 10-K.

Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. NNN undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K.

Item 1.  Business

The Company

NNN, a Maryland corporation, is a fully integrated REIT formed in 1984. NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets and mortgages and notes receivable (including structured finance) (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its wholly owned subsidiaries. The Inventory Assets are held in the TRS.

Real Estate Assets

NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). As of December 31, 2007, NNN owned 908 Investment Properties, with an aggregate leasable area of 10,610,000 square feet, located in 44 states. Approximately 98 percent of NNN’s Investment Portfolio was leased at December 31, 2007. The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily for the purpose of resale (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2007, the TRS owned 56 Inventory Properties.

Mortgages and Notes Receivable

Mortgages are loans secured by real estate, real estate securities or other assets. As of December 31, 2007, these receivables totaled $49,336,000.

 

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Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns or leases the real estate and/or other acceptable collateral such as fixtures, equipment or cash. These agreements are sometimes subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2007, the structured finance agreements had an outstanding principal balance of $14,359,000.

Investment in Unconsolidated Affiliate

Crow Holdings. In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV I plans to acquire from unrelated third parties up to $220,000,000 of real estate assets leased to convenience store operators.

Competition

NNN generally competes with numerous other REITs, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, that own, manage, finance or develop retail and net leased properties.

Employees

As of January 31, 2008, NNN employed 72 full-time associates including executive and administrative personnel.

NNN’s executive offices are located at 450 S. Orange Avenue, Suite 900, Orlando, Florida 32801, and its telephone number is (407) 265-7348. NNN has an Internet website at www.nnnreit.com where NNN’s filings with the Securities and Exchange Commission can be downloaded free of charge. The common shares of National Retail Properties, Inc. are traded on the New York Stock Exchange (“NYSE”), under the ticker symbol “NNN.”

Business Strategies and Policies

The following is a discussion of NNN’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been set by management and/or the Board of Directors and, in general, may be amended or revised from time to time by management and/or the Board of Directors without a vote of NNN’s stockholders.

Operating Strategies

NNN’s strategy is to invest primarily in retail real estate that is typically located along high-traffic commercial corridors near areas of commercial and residential density. Management believes that these types of properties, when leased to national or regional retailers generally pursuant to triple-net leases, provide attractive opportunities for a stable current return and the potential for increased current returns and capital appreciation. Triple-net leases typically require the tenant to pay property operating expenses such as real estate taxes, assessments and other government charges, insurance, utilities, and repairs and maintenance. Initial lease terms are generally 15 to 20 years.

 

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In some cases, NNN’s investment in real estate is in the form of mortgages, structured finance investments or other loans which may be secured by real estate, a borrower’s pledge of ownership interests in the entity that owns the real estate or other assets. These investments may be subordinated to senior loans secured by other loans encumbering the underlying real estate or assets. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans.

NNN holds investment real estate assets until it determines that the sale of such a property is advantageous in view of NNN’s investment objectives. In deciding whether to sell a real estate investment asset, NNN may consider factors such as potential capital appreciation, net cash flow, tenant credit quality, market lease rates, potential use of sale proceeds and federal income tax considerations.

NNN acquires and/or develops inventory real estate assets primarily for the purpose of resale.

NNN’s management team considers certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN may include items such as: the composition of NNN’s Investment Portfolio (such as tenant, geographic and industry classification diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios, profitability measures and industry trends compared to that of NNN.

The operating strategies employed by NNN have allowed it to increase dividends paid per common share for 18 consecutive years.

Investment in Real Estate or Interests in Real Estate

NNN’s management believes that attractive acquisition opportunities for retail properties will continue to be available and that NNN is well suited to take advantage of these opportunities because of its access to capital markets, ability to underwrite and acquire properties, and because of management’s experience in seeking out, identifying and evaluating potential acquisitions.

In evaluating a particular acquisition, management may consider a variety of factors, including:

 

   

the location, visibility and accessibility of the property,

 

   

the geographic area and demographic characteristics of the community, as well as the local real estate market, including potential for growth and existing or potential competing properties or retailers,

 

   

the size of the property,

 

   

the purchase price,

 

   

the non-financial terms of the proposed acquisition,

 

   

the availability of funds or other consideration for the proposed acquisition and the cost thereof,

 

   

the compatibility of the property with NNN’s existing portfolio,

 

   

the potential for, and current extent of, any environmental problems,

 

   

the quality of construction and design and the current physical condition of the property,

 

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the financial and other characteristics of the existing tenant,

 

   

the tenant’s business plan, operating history and management team,

 

   

the tenant’s industry,

 

   

the terms of any existing leases, and

 

   

the rent to be paid by the tenant.

NNN intends to engage in future investment activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make NNN an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments.

Investments in Real Estate Mortgages, Commercial Mortgage Residual Interests, and Securities of or Interests in Persons Engaged in Real Estate Activities

While NNN’s primary business objectives and current portfolio ownership primarily emphasize retail properties, NNN may invest in (i) a wide variety of property and tenant types, (ii) leases, mortgages, commercial mortgage residual interests and other types of real estate interests, (iii) loans secured by collateral related to business operations of an owned or leased property, or (iv) securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. For example, NNN from time to time has made investments in mortgage loans or held mortgages on properties that NNN has sold and has made structured finance investments and other loans related to properties acquired or sold.

Financing Strategy

NNN’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategies while servicing its debt requirements and providing value to its stockholders. NNN generally utilizes debt and equity security offerings, bank borrowings, the sale of properties, and to a lesser extent, internally generated funds to meet its capital needs.

NNN typically funds its short-term liquidity requirements including investments in additional retail properties with cash from its $400,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000.

For the year ended December 31, 2007, NNN’s ratio of total indebtedness to total gross assets (before accumulated depreciation) was approximately 43 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 39 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN’s ability to incur debt under certain circumstances.

NNN anticipates it will be able to obtain additional financing for short-term and long-term liquidity requirements as further described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity.” However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN.

 

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The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy at any time. NNN has not engaged in trading, underwriting or agency distribution or sale of securities of other issues and does not intend to do so.

Strategies and Policy Changes

Any of NNN’s strategies or policies described above may be changed at any time by NNN without notice to or a vote of NNN’s stockholders.

Investment Properties

As of December 31, 2007, NNN owned 908 Investment Properties with an aggregate gross leasable area of 10,610,000 square feet, located in 44 states. Approximately 98 percent of the gross leasable area was leased at December 31, 2007. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of NNN’s Investment Properties and their respective carrying costs.

The following table summarizes NNN’s Investment Properties as of December 31, 2007 (in thousands):

 

     Size(1)    Cost(2)
     High    Low    Average    High    Low    Average

Land

   2,223    7    115    $     10,197    $     25    $     1,078

Building

   135    1    12      13,874      44      1,440

 

 

(1)

Approximate square feet.

 

(2)

Costs vary depending upon size and local demographic factors.

In connection with the development of 27 Investment Properties, NNN has agreed to fund construction commitments (including land costs) of $71,883,000, of which $44,561,000 has been funded as of December 31, 2007.

During 2006, NNN disposed of the properties leased to the United States of America which had accounted for more than 10 percent of NNN's total rental income in 2005. As of December 31, 2007, NNN does not have any one tenant that accounts for ten percent or more of its rental income.

Leases.  Although there are variations in the specific terms of the leases, the following is a summary of the general structure of NNN's leases. Generally, the leases of the Investment Properties provide for initial terms of 15 to 20 years. As of December 31, 2007, the weighted average remaining lease term was approximately 13 years. The Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of NNN's leases provide that the tenant is responsible for roof and structural repairs. The leases of the Investment Properties provide for annual base rental payments (payable in monthly installments) ranging from $11,000 to $1,800,000 (average of $217,000). Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume.

 

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Generally, the Investment Property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Some of the leases also provide that in the event NNN wishes to sell the Investment Property subject to that lease, NNN first must offer the lessee the right to purchase the Investment Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Investment Property.

Certain Investment Properties have leases that provide the tenant with a purchase option to acquire the Investment Property from NNN. The purchase price calculations are generally stated in the lease agreement or are based on current market value.

The following table summarizes the lease expirations of NNN’s Investment Portfolio as of December 31, 2007:

 

     % of
Annual
Base
Rent
(1)
   # of
Properties
   Gross
Leasable
Area
(2)
        % of
Annual
Base
Rent
(1)
   # of
Properties
   Gross
Leasable
Area
(2)

2008

   0.7%    14    258,000    2014    5.0%    31    509,000

2009

   1.8%    24    458,000    2015    2.9%    20    469,000

2010

   3.1%    38    401,000    2016    2.3%    16    262,000

2011

   2.3%    21    336,000    2017    4.9%    27    674,000

2012

   4.0%    35    563,000    2018    4.3%    33    505,000

2013

   4.3%    32    687,000    Thereafter    64.4%    601    5,233,000

 

 

(1)

Based on annualized base rent for all leases in place as of December 31, 2007.

 

(2)

Approximate square feet.

The following table summarizes the diversification of trade of NNN’s Investment Portfolio based on the top 10 lines of trade:

 

          % of Annual Base Rent(1)
    

Top 10 Lines of Trade

   2007    2006    2005

1.

   Convenience Stores    23.9%    16.3%    12.1%

2.

   Restaurants – Full Service    10.3%    12.1%    6.6%

3.

   Drug Stores    5.0%    8.3%    10.0%

4.

   Automotive Parts    4.9%    1.6%    0.1%

5.

   Books    4.4%    5.7%    5.8%

6.

   Consumer Electronics    4.3%    5.6%    5.9%

7.

   Theaters    4.2%    -    -

8.

   Car Washes    4.0%    -    -

9.

   Sporting Goods    3.9%    7.3%    7.4%

10.

   Restaurants – Limited Service    3.7%    4.7%    3.0%
   Other    31.4%    38.4%    49.1%
                 
      100.0%    100.0%    100.0%
                 

(1)

   Based on annualized base rent for all leases in place as of December 31, of the respective year.

 

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The following table summarizes the diversification by state of NNN’s Investment Portfolio as of December 31, 2007:

 

    State                

   # of
Properties
   % of
Annual
Base Rent(1)
1.   

Texas

   201    20.2%
2.   

Florida

   84    11.3%
3.   

North Carolina

   62    6.8%
4.   

Illinois

   38    6.6%
5.   

Georgia

   48    5.3%
6.   

Pennsylvania

   80    4.7%
7.   

Indiana

   36    3.7%
8.   

Colorado

   15    3.4%
9.   

Ohio

   28    3.4%
10.   

Missouri

   19    3.0%
  

Other

   297    31.6%
            
      908    100.0%
            
(1)   Based on annualized base rent for all leases in place as of December 31, 2007.

Mortgages and Notes Receivable

As of December 31, 2007 and 2006, NNN held mortgages and notes receivables with an aggregate principal balance of $51,556,000 and $17,227,000, respectively. The mortgages and notes receivables bear interest rates ranging from 7.00% to 12.00% with maturity dates ranging from May 2008 through October 2028.

Structured finance agreements are typically loans secured by a borrower’s pledge of its ownership interest in the entity that owns or leases the real estate and/or other acceptable collateral such as fixtures, equipment or cash. These agreements are sometimes subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans.

In 2007 and 2006, NNN made structured finance investments of $12,376,000 and $16,477,000, respectively. As of December 31, 2007, the structured finance investments bear a weighted average interest rate of 11.26% per annum, of which 9.78% is payable monthly and the remaining 1.48% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between January 2009 and March 2010. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. As of December 31, 2007 and 2006, the outstanding principal balance of the structured finance investments was $14,359,000 and $13,917,000, respectively.

Commercial Mortgage Residual Interests

Orange Avenue Mortgage Investments, Inc. (“OAMI”), a majority owned and consolidated subsidiary of NNN, holds the residual interests (“Residuals”) from seven commercial real estate loan securitizations. Each of the Residuals is reported at fair value based upon an independent valuation; unrealized gains or losses are reported as other comprehensive income in stockholders’ equity, and

 

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other than temporary losses as a result of a change in timing or amount of estimated cash flows are recorded as an other than temporary valuation impairment. The Residuals had an estimated fair value of $24,340,000 at December 31, 2007.

Inventory Assets

The TRS develops Inventory Properties (“Development Properties” or “Development Portfolio”) as well as acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”). NNN's Inventory Portfolio is held with the intent to sell the properties to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2007, the TRS owned 23 Development Properties (eight completed, nine under construction and six land parcels) and 33 Exchange Properties. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Inventory Properties and their respective carrying costs.

The following table summarizes the eight completed Development Properties and 33 Exchange Properties as of December 31, 2007 (in thousands):

 

     Size(1)    Cost(2)
         High            Low            Average            High            Low            Average    

Completed Development Properties:

                 

Land

   1,255    47    378    $         8,959    $         244    $         172

Building

   125    8    34      37,007      1,635      9,212

Exchange Properties:

                 

Land

   294    11    64    $ 3,665    $ 121    $ 1,403

Building

   47    2    15      4,785      184      2,033

(1) Approximate square feet.

(2) Costs vary depending upon size and local demographic factors.

Under Construction.  In connection with the development of nine Inventory Properties by the TRS, NNN has agreed to fund total construction commitments (including land costs) of $24,097,000, of which $17,125,000 has been funded as of December 31, 2007.

Governmental Regulations Affecting Properties

Property Environmental Considerations.  NNN may acquire a property that contains some level of contamination or potential contamination exists, subject to a determination of the level of risk and potential cost of remediation. Investments in real property create a potential for substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property, regardless of fault. As a part of its acquisition due diligence process, NNN generally obtains an environmental site assessment for each property. In such cases where NNN intends to acquire real estate where contamination or potential contamination exists, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, or (iii) agree to other arrangements deemed appropriate by NNN to address environmental conditions at the property.

NNN has 70 Investment Properties currently under some level of environmental remediation. In general, the seller, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Investment Properties.

 

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Americans with Disabilities Act of 1990.  The Investment and Inventory Properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”). Investigation of a property may reveal non-compliance with the ADA. The tenants will typically have primary responsibility for complying with the ADA, but NNN may incur costs if the tenant does not comply. As of February 15, 2008, NNN has not been notified by any governmental authority of, nor is NNN’s management aware of, any non-compliance with the ADA that NNN’s management believes would have a material adverse effect on its business, financial condition or results of operations.

Other Regulations.  State and local fire, life-safety and similar requirements regulate the use of NNN’s Investment and Inventory Properties. The leases generally require that each tenant will have primary responsibility for complying with regulations, but failure to comply could result in fines by governmental authorities, awards of damages to private litigants, or restrictions on the ability to conduct business on such properties.

Item 1A.  Risk Factors.

Carefully consider the following risks and all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and the notes thereto. If any of the events or developments described below were actually to occur, NNN’s business, financial condition or results of operations could be adversely affected.

Loss of revenues from tenants would reduce NNN’s cash flow.

NNN’s five largest tenants accounted for an aggregate of approximately 25 percent of NNN’s annual base rent as of December 31, 2007. The default, financial distress or bankruptcy of one or more of NNN’s tenants could cause substantial vacancies among NNN’s Investment Portfolio. Vacancies reduce NNN’s revenues until NNN 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, NNN may not be able to re-lease a vacant property at a comparable lease rate or without incurring additional expenditures in connection with such re-leasing.

A significant portion of the source of NNN’s annual base rent is heavily concentrated in a specific industry classification and in specific geographic locations.

As of December 31, 2007, an aggregate of approximately 38 percent of NNN’s annual base rent is generated from two retail lines of trade, convenience stores and restaurants, each representing more than 10 percent. In addition, as of December 31, 2007, an aggregate of approximately 32 percent of NNN’s annual base rent is generated from properties in Texas and Florida, each representing more than 10 percent. Any financial hardship and/or changes in these industries or states could have an adverse effect on NNN’s financial results.

There are a number of risks inherent in owning real estate and indirect interests in real estate.

NNN’s economic performance and the value of its real estate assets are subject to the risk that if NNN’s properties do not generate revenues sufficient to meet its operating expenses, including debt service, NNN’s cash flow and ability to pay distributions to its shareholders will be adversely affected. As a real estate company, NNN is susceptible to the following real estate industry risks, which are beyond its control:

 

   

changes in national, regional and local economic conditions and outlook,

 

   

decreases in consumer spending and retail sales,

 

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economic downturns in the areas where NNN’s properties are located,

 

   

adverse changes in local real estate market conditions, such as an oversupply, reduction in demand or intense competition for tenants,

 

   

changes in tenant preferences that reduce the attractiveness of NNN’s properties to tenants,

 

   

zoning, regulatory restrictions, or change in taxes, and

 

   

changes in interest rates or availability of financing.

All of these factors could result in decreases in market rental rates and increases in vacancy rates, which could adversely affect NNN’s results of operations.

NNN’s real estate investments are illiquid.

Because real estate investments are relatively illiquid, NNN’s ability to adjust the portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including: (i) debt service (if any), (ii) real estate taxes, and (iii) operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced income from investment. Such reduction in investment income could have an adverse effect on NNN’s financial condition.

NNN may be subject to known or unknown environmental liabilities.

NNN may acquire a property that contains some level of contamination or potential contamination exists, subject to a determination of the level of risk and potential cost of remediation. Investments in real property create a potential for substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property, regardless of fault. It is NNN's policy, as a part of its acquisition due diligence process, generally to obtain an environmental site assessment for each property. In such cases that NNN intends to acquire real estate where contamination or potential contamination exists, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, or (iii) agree to other arrangements deemed appropriate by NNN to address environmental conditions at the property.

NNN has 70 Investment Properties currently under some level of environmental remediation. In general, the seller, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Investment Properties. In the event of a bankruptcy or other inability on the part of these parties to cover these costs, NNN may have to cover the costs of remediation, fines or other environmental liabilities at these and other properties. NNN may also own properties where required remediation has not begun or adverse environmental conditions have not yet been detected. This may require remediation or otherwise subject NNN to liability. NNN cannot assure that (i) it will not be required to undertake or pay for removal or remediation of any contamination of the properties currently or previously owned by NNN, (ii) NNN will not be subject to fines by governmental authorities or litigation, or (iii) the costs of such removal, remediation fines or litigation would not be material.

NNN may not be able to successfully execute its acquisition or development strategies.

NNN cannot assure that it will be able to implement its investment strategies successfully. Additionally, NNN cannot assure that its property portfolio will expand at all, or if it will expand at any specified rate or to any specified size. In addition, investment in additional real estate assets is subject to a number of risks. Because NNN expects to invest in markets other than the ones in which its current properties are located or properties which may be leased to tenants other than those to which

 

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NNN has historically leased properties, NNN will also be subject to the risks associated with investment in new markets or with new tenants that may be relatively unfamiliar to NNN’s management team.

NNN’s development activities are subject to without limitation, risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks from factors beyond NNN’s control, such as weather or labor conditions or material shortages), the risk of finding tenants for the properties and the ability to obtain both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken or provide a tenant the opportunity to terminate a lease. Any of these situations may delay or eliminate proceeds or cash flows NNN expects from these projects, which could have an adverse effect on NNN’s financial condition.

NNN may not be able to dispose of properties consistent with its operating strategy.

NNN may be unable to sell properties targeted for disposition (including its Inventory Properties) due to adverse market conditions. This may adversely affect, among other things, NNN’s ability to sell under favorable terms, execute its operating strategy, achieve target earnings or returns, retire debt or pay dividends.

A change in the assumptions used to determine the value of commercial mortgage residual interests could adversely affect NNN’s financial position.

As of December 31, 2007, the Residuals had a carrying value of $24,340,000. The value of these Residuals is based on discount rate, loan loss, prepayment speed and interest rate assumptions made by NNN to determine their value. If actual experience differs materially from these assumptions, the actual future cash flow could be less than expected and the value of the Residuals, as well as NNN’s earnings, could decline.

NNN may suffer a loss in the event of a default or bankruptcy of a borrower.

If a borrower defaults on a mortgage, structured finance loan or other loan made by NNN, and does not have sufficient assets to satisfy the loan, NNN may suffer a loss of principal and interest. In the event of the bankruptcy of a borrower, NNN may not be able to recover against all of the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the balance due on the loan. In addition, certain of NNN’s loans may be subordinate to other debt of a borrower. These investments are typically loans secured by a borrower’s pledge of its ownership interests in the entity that owns the real estate or other assets. These agreements are typically subordinated to senior loans secured by other loans encumbering the underlying real estate or assets. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2007, mortgages and notes receivables had an outstanding principal balance of $51,556,000 and the structured finance investments had an outstanding principal balance of $14,359,000. If a borrower defaults on the debt senior to NNN’s loan, or in the event of the bankruptcy of a borrower, NNN’s loan will be satisfied only after the borrower’s senior creditors’ claims are satisfied. Where debt senior to NNN’s loans exists, the presence of intercreditor arrangements may limit NNN’s ability to amend loan documents, assign the loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy proceedings and litigation can significantly increase the time needed for NNN to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.

 

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Certain provisions of the leases or loan agreements may be unenforceable.

NNN’s rights and obligations with respect to its leases, structured finance loans, mortgage loans or other loans are governed by written agreements. A court could determine that one or more provisions of an agreement are unenforceable, such as a particular remedy, a loan prepayment provision or a provision governing NNN’s security interest in the underlying collateral of a borrower. NNN could be adversely impacted if this were to happen with respect to an asset or group of assets.

Property ownership through joint ventures and partnerships could limit NNN’s control of those investments.

Joint ventures or partnerships involve risks not otherwise present for direct investments by NNN. It is possible that NNN’s co-venturers or partners may have different interests or goals than NNN at any time and they may take actions contrary to NNN’s requests, policies or objectives, including NNN’s policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investments include impasses on decisions, because no single co-venturer or partner has full control over the joint venture or partnership. Additionally, the partner may become insolvent or bankrupt.

Competition with numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN’s ability to grow.

NNN may not be in a position or have the opportunity in the future to complete suitable property acquisitions or developments on advantageous terms due to competition for such properties with others engaged in real estate investment activities. NNN’s inability to successfully acquire or develop new properties may affect NNN’s ability to achieve anticipated return on investment, which could have an adverse effect on its results of operations.

Uninsured losses may adversely affect NNN’s ability to pay outstanding indebtedness.

NNN’s properties are generally covered by comprehensive liability, fire, flood, and extended coverage. NNN believes that the insurance carried on its properties is adequate in accordance with industry standards. There are, however, types of losses (such as from hurricanes, wars or earthquakes) which may be uninsurable, or the cost of insuring against these losses may not be economically justifiable. If an uninsured loss occurs or a loss exceeds policy limits, NNN could lose both its invested capital and anticipated revenues from the property, whereby reducing NNN’s cash flow.

Acts of violence, terrorist attacks or war may affect the markets in which NNN operates and NNN’s results of operations.

Terrorist attacks may negatively affect NNN's operations. There can be no assurance that there will not be further terrorist attacks against the United States or United States businesses. These attacks may directly impact NNN’s physical facilities or the businesses of its tenants.

The United States is engaged in armed conflict, which could have an impact on NNN’s tenants. The consequences of armed conflict are unpredictable, and NNN may not be able to foresee events that could have an adverse effect on its business.

More generally, any of these events or threats of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial

 

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markets and economies. They also could result in, or cause a deepening of, economic recession in the United States or abroad. Any of these occurrences could have a significant adverse impact on NNN’s financial condition or results of operations.

Vacant properties or bankrupt tenants could adversely affect NNN.

As of December 31, 2007, NNN owned 12 vacant, unleased Investment Properties, which accounted for approximately two percent of the total gross leasable area of NNN’s Investment Portfolio, in addition to three vacant land parcels. NNN is actively marketing these properties for sale or lease but may not be able to sell or lease these properties on favorable terms or at all. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with NNN could have a material adverse effect on the liquidity and results of operations of NNN if NNN is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. Less than one percent of the total gross leasable area of NNN’s Investment Portfolio is leased to three tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their lease with NNN.

The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN’s business and financial condition.

As of December 31, 2007, NNN had total mortgage debt and secured notes payable outstanding of approximately $39,480,000, total unsecured notes payable of $890,790,000 and $129,800,000 outstanding on the Credit Facility. NNN’s organizational documents do not limit the level or amount of debt that it may incur. If NNN incurs additional indebtedness and permits a higher degree of leverage, debt service requirements would increase and could adversely affect NNN’s financial condition and results of operations, as well as NNN’s ability to pay principal and interest on the outstanding indebtedness or dividends to its stockholders. In addition, increased leverage could increase the risk that NNN may default on its debt obligations. The Credit Facility contains financial covenants that could limit the amount of distributions to NNN’s common and preferred stockholders.

The amount of debt outstanding at any time could have important consequences to NNN’s stockholders. For example, it could:

 

   

require NNN to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing funds available for operations, real estate investments and other appropriate business opportunities that may arise in the future,

 

   

increase NNN’s vulnerability to general adverse economic and industry conditions,

 

   

limit NNN’s ability to obtain any additional financing it may need in the future for working capital, debt refinancing, capital expenditures, real estate investments, development or other general corporate purposes,

 

   

make it difficult to satisfy NNN’s debt service requirements,

 

   

limit NNN’s ability to pay dividends on its outstanding common and preferred stock,

 

   

limit NNN’s flexibility in planning for, or reacting to, changes in its business and the factors that affect the profitability of its business, and

 

   

limit NNN’s flexibility in conducting its business, which may place NNN at a disadvantage compared to competitors with less debt or debt with less restrictive terms.

 

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NNN’s ability to make scheduled payments of principal or interest on its debt, or to refinance such debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, competition, as well as economic, financial, and other factors beyond its control. There can be no assurance that NNN’s business will continue to generate sufficient cash flow from operations in the future to service its debt or meet its other cash needs. If NNN is unable to generate sufficient cash flow from its business, it may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing to meet its debt obligations and other cash needs.

NNN cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable.

NNN is obligated to comply with financial and other covenants in its debt that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment under its debt.

NNN’s unsecured debt contains various restrictive covenants which include, among others, provisions restricting NNN’s ability to:

 

   

incur or guarantee additional debt,

 

   

make certain distributions, investments and other restricted payments, including dividend payments on its outstanding common and preferred stock,

 

   

limit the ability of restricted subsidiaries to make payments to NNN,

 

   

enter into transactions with certain affiliates,

 

   

create certain liens, and

 

   

consolidate, merge or sell NNN’s assets.

NNN’s secured debt generally contains customary covenants, including, among others, provisions:

 

   

relating to the maintenance of the property securing the debt,

 

   

restricting its ability to sell, assign or further encumber the properties securing the debt,

 

   

restricting its ability to incur additional debt,

 

   

restricting its ability to amend or modify existing leases, and

 

   

relating to certain prepayment restrictions.

NNN’s ability to meet some of the covenants in its debt, including covenants related to the condition of the property or payment of real estate taxes, may be dependent on the performance by NNN’s tenants under their leases.

In addition, certain covenants in NNN’s debt, including its Credit Facility, require NNN, among other things, to:

 

   

maintain certain maximum leverage ratios,

 

   

maintain certain minimum interest and debt service coverage ratios,

 

   

limit dividends declared and paid to NNN’s common and preferred stockholders, and

 

   

limit investments in certain types of assets.

 

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The market value of NNN’s equity and debt securities could be substantially affected by various factors.

As with other publicly traded securities, the market price of NNN’s equity and debt securities depends on various factors, which may change from time-to-time and may be unrelated to NNN’s operating performance or prospects. These factors include among many:

 

   

general economic and financial market conditions,

 

   

level and trend of interest rates,

 

   

NNN’s financial condition and performance,

 

   

market perception of NNN compared to other REITs, and

 

   

market perception of REITs compared to other investment sectors.

NNN’s failure to qualify as a real estate investment trust for federal income tax purposes could result in significant tax liability.

NNN intends to operate in a manner that will allow NNN to continue to qualify as a real estate investment trust (“REIT”). NNN believes it has been organized as, and its past and present operations qualify NNN as a REIT. However, the Internal Revenue Service, (“IRS”) could successfully assert that NNN is not qualified as such. In addition, NNN may not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within NNN’s control. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for NNN to qualify as a REIT.

If NNN fails to qualify as a REIT, it would not be allowed a deduction for dividends paid to stockholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, NNN could be subject to potentially significant tax liabilities and penalties. Unless entitled to relief under certain statutory provisions, NNN would also be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost. Even if NNN maintains its REIT status, NNN may be subject to certain federal, state and local taxes on its income and property.

Even if NNN remains qualified as a REIT, NNN may face other tax liabilities that reduce operating results and cash flow.

Even if NNN remains qualified for taxation as a REIT, NNN may be subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease earnings and cash available for distribution to stockholders. In addition, in order to meet the REIT qualification requirements, NNN holds some of its assets through the TRS.

 

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Adverse legislative or regulatory tax changes could reduce the NNN’s earnings, cash flow and market price of our common stock.

At any time, the federal and state income tax laws governing REITs or the administrative interpretations of those laws may change. Any such changes may have retroactive effect, and could adversely affect NNN or its stockholders. For example, legislation enacted in 2003 and extended in 2006 generally reduced the federal income tax rate on most dividends paid by corporations to individual investors to a maximum of 15 percent (through 2010). REIT dividends, with limited exceptions, will not benefit from the rate reduction, because a REIT’s income generally is not subject to corporate level tax. As such, this legislation could cause shares in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs, and could have an adverse effect on the value of our common stock.

Changes in accounting pronouncements could adversely impact NNN reported financial performance.

Accounting policies and methods are fundamental to how NNN records and reports its financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) and the Commission, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards that govern the preparation of its financial statements. These changes could have a material impact on NNN’s reported financial condition and results of operations. In some cases, NNN could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements.

Compliance with REIT requirements, including distribution requirements, may limit NNN’s flexibility and negatively affect NNN’s operating decisions.

To maintain its status as a REIT for U.S. federal income tax purposes, NNN must meet certain requirements, on an on-going basis, including requirements regarding its sources of income, the nature and diversification of its assets, the amounts NNN distributes to its stockholders and the ownership of its shares. NNN may also be required to make distributions to its stockholders when it does not have funds readily available for distribution or at times when NNN’s funds are otherwise needed to fund capital expenditures or to fund debt service requirements. NNN generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2007, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state taxes on its income and real estate.

Item 1B.   Unresolved Staff Comments.

None.

 

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Item 2.  Properties

Please refer to Item 1. “Business.”

Item 3.  Legal Proceedings

In the ordinary course of its business, NNN is a party to various legal actions that management believes is routine in nature and incidental to the operation of the business of NNN. Management believes that the outcome of these proceedings will not have a material adverse effect upon its operations, financial condition or liquidity.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

 

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PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of NNN currently is traded on the NYSE under the symbol “NNN.” Set forth below is a line graph comparing the cumulative total stockholder return on NNN’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the FTSE National Association of Real Estate Investment Trusts Equity Index (“NAREIT”) and the S&P 500 Index (“S&P 500”) for the five year period commencing December 31, 2002 and ending December 31, 2007. The graph assumes an investment of $100 on December 31, 2002.

LOGO

 

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For each calendar quarter indicated, the following table reflects respective high, low and closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such period.

 

2007

   First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Year

High

   $         25.950    $         25.450    $         24.580    $         26.150    $         26.150

Low

     22.390      21.760      20.200      22.480      20.200

Close

     24.190      21.860      24.380      23.380      23.380

Dividends paid per share

     0.335      0.355      0.355      0.355      1.400

2006

                        

High

   $         23.540    $ 23.370    $ 22.460    $ 24.100    $ 24.100

Low

     20.220      18.810      19.820      21.250      18.810

Close

     23.300      19.950      21.600      22.950      22.950

Dividends paid per share

     0.325      0.325      0.335      0.335      1.320

The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31:

 

      2007    2006

Ordinary dividends

   $ 1.397402    99.8144%    $ 1.150780    87.1803%

Qualified dividends

     0.000414    0.0296%      -    -

Capital gain

     0.002184    0.1560%      0.150261    11.3834%

Unrecaptured Section 1250 Gain

     -    -      0.018959    1.4363%
                       
   $ 1.400000    100.0000%    $ 1.320000    100.0000%
                       

NNN intends to pay regular quarterly dividends to its stockholders, although all future distributions will be declared and paid at the discretion of the board of directors and will depend upon cash generated by operating activities, NNN’s financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as the board of directors deems relevant.

In February 2008, NNN paid dividends to its stockholders of $21,598,000 or $0.355 per share of common stock.

On January 31, 2008, there were 1,556 stockholders of record of common stock.

 

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Item 6.  Selected Financial Data

Historical Financial Highlights

(dollars in thousands, except per share data)

 

          2007             2006             2005             2004             2003      

Gross revenues(1)

   $ 208,630     $ 180,878     151,831     133,875     112,073  

Earnings from continuing operations

     85,150       64,695     35,610     30,317     22,519  

Net earnings

     157,110       182,505     89,400     64,934     53,473  

Total assets

     2,539,605       1,917,497     1,736,588     1,300,517     1,211,639  

Total debt

     1,060,070       776,737     861,045     524,241     467,419  

Total equity

     1,407,285       1,096,505     828,087     756,998     730,754  

Cash dividends declared to:

          

Common stockholders

     92,989       76,035     69,018     66,272     55,473  

Series A Preferred Stock stockholders

     -       4,376     4,008     4,008     4,008  

Series B Convertible Preferred Stock stockholders

     -       419     1,675     1,675     502  

Series C Preferred Stock stockholders

     6,785       923     -     -     -  

Weighted average common shares:

          

Basic

     66,152,437       57,428,063     52,984,821     51,312,434     43,108,213  

Diluted

     66,407,530       58,079,875     54,640,143     51,742,518     43,896,800  

Per share information:

          

Earnings from continuing operations:

          

Basic

     1.18       1.03     0.56     0.48     0.42  

Diluted

     1.18       1.02     0.58     0.48     0.42  

Net earnings:

          

Basic

     2.27       3.08     1.58     1.15     1.14  

Diluted

     2.26       3.05     1.56     1.15     1.13  

Dividends declared to:

          

Common stockholders

     1.40       1.32     1.30     1.29     1.28  

Series A Preferred Stock stockholders

     -       2.45625     2.25     2.25     2.25  

Series B Convertible Preferred Stock stockholders

     -       41.875     167.50     167.50     50.25  

Series C Preferred Stock depositary stockholders

     1.84375       0.250955     -     -     -  

Other data:

          

Cash flows provided by (used in):

          

Operating activities

     129,634       1,676     19,226     85,800     54,215  

Investing activities

     (536,717 )     (90,099 )   (230,738 )   (69,963 )   (256,870 )

Financing activities

     432,907       81,864     217,844     (19,225 )   205,965  

Funds from operations – diluted(2)

     124,113       97,121     81,803     73,065     61,749  

 

 

(1)

Gross revenues include revenues from NNN’s continuing and discontinued operations. FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the presentation of discontinued operations in the income statement to include a component of an entity. Accordingly, the results of operations related to these certain properties that have been classified as held for sale or have been disposed of subsequent to December 31, 2001, the effective date of SFAS No. 144, have been reclassified as earnings from discontinued operations.

 

(2)

The National Association of Real Estate Investment Trusts (“NAREIT”) developed FFO as a relative non-GAAP financial measure of performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT and is used by NNN as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of real estate held for investment, and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures.

 

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FFO is generally considered by industry analysts to be the most appropriate measure of operating performance of real estate companies. FFO does not necessarily represent cash provided by operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of NNN’s operating performance or to cash flow as a measure of liquidity or ability to make distributions. Management considers FFO an appropriate measure of operating performance of an equity REIT because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted it as an operating performance measure. NNN’s computation of FFO may differ from the methodology for calculating FFO used by other equity REITs, and therefore, may not be comparable to such other REITs.

NNN has earnings from discontinued operations in each of its segments, investment assets and inventory assets, real estate held for investment and real estate held for sale. All property dispositions from NNN’s investment segment are classified as discontinued operations. In addition, certain properties in NNN’s inventory segment that have generated revenues before disposition are classified as discontinued operations. These inventory properties have not historically been classified as discontinued operations, therefore, prior period comparable consolidated financial statements have been restated to include these properties in its earnings from discontinued operations. These adjustments resulted in a decrease in NNN’s reported total revenues and total and per share earnings from continuing operations and an increase in NNN’s earnings from discontinued operations. However, NNN’s total and per share net earnings available to common stockholders is not affected.

The following table reconciles FFO to their most directly comparable GAAP measure, net earnings for the years ended December 31:

 

    2007     2006     2005     2004     2003  

Reconciliation of funds from operations:

         

Net earnings

  $ 157,110     $ 182,505     $ 89,400     $ 64,934     $ 53,473  

Real estate depreciation and amortization:

         

Continuing operations

    30,067       20,358       14,331       10,871       9,219  

Discontinued operations

    315       2,061       6,076       4,844       2,653  

Partnership/joint venture real estate depreciation

    31       463       606       622       699  

Partnership gain on sale of asset

    -       (262 )     -       -       -  

Gain on disposition of equity investment

    -       (11,373 )     -       -       -  

Gain on disposition of investment assets

    (56,625 )     (91,332 )     (9,816 )     (2,523 )     (287 )

Extraordinary gain

    -       -       (14,786 )     -       -  
                                       

FFO

    130,898       102,420       85,811       78,748       65,757  

Series A Preferred Stock dividends(1)

    -       (4,376 )     (4,008 )     (4,008 )     (4,008 )

Series B Convertible Preferred Stock dividends(1)

    -       (419 )     (1,675 )     (1,675 )     (502 )

Series C Preferred Stock dividends

    (6,785 )     (923 )     -       -       -  
                                       

FFO available to common stockholders – basic

    124,113       96,702       80,128       73,065       61,247  

Series B Convertible Preferred Stock dividends, if dilutive

    -       419       1,675       -       502  
                                       

FFO available to common stockholders – diluted

  $ 124,113     $ 97,121     $ 81,803     $ 73,065     $ 61,749  
                                       

 

 

(1)

The Series A and Series B Convertible Preferred stock issuances are no longer outstanding.

For a discussion of material events affecting the comparability of the information reflected in the selected financial data, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.”

 

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Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, and the forward-looking disclaimer language in italics before Item 1. “Business.”

Overview

NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets and mortgages, and notes receivable (including structured finance investments) on the consolidated balance sheets (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Investment Assets are operated through National Retail Properties, Inc. and its wholly owned subsidiaries. NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). The Inventory Assets are operated through the TRS. The TRS, directly and indirectly, through investment interests, owns real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). Additionally, the TRS acquires and develops Inventory Properties (“Development Properties” or “Development Portfolio”) and also acquires existing Inventory Properties (“Exchange Properties” or “Exchange Portfolio”).

As of December 31, 2007, NNN owned 908 Investment Properties, with an aggregate leasable area of 10,610,000 square feet, located in 44 states. Approximately 98 percent of NNN’s Investment Portfolio was leased at December 31, 2007. In addition to the Investment Properties, as of December 31, 2007, NNN had $65,964,000 and $24,340,000 in mortgages and notes receivable (including accrued interest receivable) and commercial mortgage residual interests, respectively. As of December 31, 2007, the TRS owned 23 Development Properties (eight completed inventory, nine under construction and six land parcels) and 33 Exchange Properties.

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 NNN’s Investment Portfolio and structured finance investments (such as tenant, geographic and industry classification diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios and profitability measures, industry trends and performance compared to that of NNN, and returns NNN receives on its invested capital.

The growth of the Investment Portfolio from 524 properties to 908 properties over the three years ending December 31, 2007 has increased property diversification. NNN has increased its investments in the convenience store sector. This sector represents a large part of the freestanding retail property marketplace which NNN believes represents an area of attractive investment opportunity. Similarly, NNN has some geographic concentration in the south and southeast which NNN believes are areas of above average population growth.

NNN formed a joint venture with an institutional investor in 2007. This joint venture plans to acquire up to $220 million of real estate assets leased to convenience store operators. NNN owns a 15 percent equity ownership interest in the joint venture which mitigates NNN’s convenience store sector concentration compared to acquiring these assets in the Investment Portfolio. Additionally, the joint venture provides an additional source of capital to fund property acquisitions.

 

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As of December 31, 2007, 2006 and 2005, occupancy of the Investment Portfolio has averaged 98 percent. The Investment Portfolio’s average remaining lease term of 13 years has remained fairly constant over the past three years which, coupled with its net lease structure, provide enhanced probability of maintaining occupancy and operating earnings in periods of soft economic conditions.

Critical Accounting Policies and Estimates

The preparation of NNN’s consolidated financial statements in conformance 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, liabilities, revenues and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and judgments; however, actual results may differ from these estimates and assumptions which in turn could have a material impact on NNN’s financial statements. A summary of NNN’s accounting policies and procedures are included in Note 1 of NNN’s consolidated financial statements. Management believes the following critical accounting policies among others affect its more significant judgments and estimates used in the preparation of NNN’s consolidated financial statements.

Real Estate – Investment Portfolio.  NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed 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.

Purchase Accounting for Acquisition of Real Estate Subject to a Lease – For acquisitions of real estate subject to a lease subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases, and value of tenant relationships, based in each case on their relative fair values.

Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below:

Operating method  –  Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

Direct financing method  –  Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on NNN’s net investment in the leases.

 

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Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.

Real Estate   –  Inventory Portfolio.   The TRS acquires and/or develops and owns properties for the purpose of re-sale. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been, or are currently being, constructed by the TRS. The TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the TRS includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate held for sale is not depreciated.

Commercial Mortgage Residual Interest at Fair Value.  Commercial 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 stockholders’ equity. The commercial mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. NNN recognizes the excess of all cash flows attributable to the commercial 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 other than temporary valuation impairments if and when there has been a change in the timing or amount of estimated cash flows, exclusive of changes in interest rates, that leads to a loss in value. Certain of the commercial mortgage residual interests have been pledged as security for notes payable.

Revenue Recognition.  Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 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.

Use of Estimates.  Additional critical accounting policies of NNN include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Additional critical accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to real estate assets, the recoverability of the carrying value of long-lived assets, including the commercial mortgage residual interests, the collectibility of receivables from tenants, including accrued rental income, and capitalized overhead relating to development projects. Actual results could differ from those estimates.

 

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Table of Contents

Results of Operations

Property Analysis – Investment Portfolio

General.  The following table summarizes NNN’s Investment Portfolio as of December 31:

 

     2007    2006    2005

Investment Properties Owned:

        

Number

   908    710    524

Total gross leasable area (square feet)

   10,610,000    9,341,000    9,227,000

Investment Properties Leased:

        

Number

   892    697    512

Total gross leasable area (square feet)

   10,355,000    9,173,000    9,066,000

Percent of total gross leasable area – leased

   98%    98%    98%

Weighted average remaining lease term (years)

   13    12    11

The following table summarizes the lease expirations of NNN’s Investment Portfolio as of December 31, 2007:

 

    %
of Annual
Base
Rent
(1)
   # of
Properties
   Gross
Leasable
Area
(2)
        %
of Annual
Base
Rent
(1)
   # of
Properties
   Gross
Leasable
Area
(2)

2008

  0.7%    14    258,000    2014    5.0%    31    509,000

2009

  1.8%    24    458,000    2015    2.9%    20    469,000

2010

  3.1%    38    401,000    2016    2.3%    16    262,000

2011

  2.3%    21    336,000    2017    4.9%    27    674,000

2012

  4.0%    35    563,000    2018    4.3%    33    505,000

2013

  4.3%    32    687,000    Thereafter    64.4%    601    5,233,000

 

 

(1)

Based on the annualized base rent for all leases in place as of December 31, 2007.

 

(2)

Approximate square feet.

The following table summarizes the diversification of NNN’s Investment Portfolio based on the top 10 lines of trade:

 

          % of Annual Base Rent(1)
    

Top 10 Lines of Trade

       2007            2006            2005    
1.    Convenience Stores    23.9%    16.3%    12.1%
2.    Restaurants – Full Service    10.3%    12.1%    6.6%
3.    Drug Stores    5.0%    8.3%    10.0%
4.    Automotive Parts    4.9%    1.6%    0.1%
5.    Books    4.4%    5.7%    5.8%
6.    Consumer Electronics    4.3%    5.6%    5.9%
7.    Theaters    4.2%    -    -
8.    Car Washes    4.0%    -    -
9.    Sporting Goods    3.9%    7.3%    7.4%
10.    Restaurants – Limited Service    3.7%    4.7%    3.0%
   Other    31.4%    38.4%    49.1%
                 
      100.0%    100.0%    100.0%
                 

 

 

(1)

Based on annualized base rent for all leases in place as December 31, of the respective year.

 

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The following table shows the top 10 states in which NNN’s Investment Properties are located in as of December 31, 2007:

 

    

State

   # of
Properties
   % of
Annual
Base
Rent
(1)

1.

   Texas    201    20.2%

2.

   Florida    84    11.3%

3.

   North Carolina    62    6.8%

4.

   Illinois    38    6.6%

5.

   Georgia    48    5.3%

6.

   Pennsylvania    80    4.7%

7.

   Indiana    36    3.7%

8.

   Colorado    15    3.4%

9.

   Ohio    28    3.4%

10.

   Missouri    19    3.0%
   Other    297    31.6%
            
      908    100.0%
            

(1)

   Based on annualized base rent for all leases in place as of December 31, 2007.

Property Acquisitions.  The following table summarizes the Investment Properties acquired for each of the years ended December 31 (dollars in thousands):

 

     2007    2006    2005

Acquisitions:

        

Number of Investment Properties

     235      213      170

Gross leasable area (square feet)

         2,205,000          1,130,000          1,150,000

Total dollars invested(1)

   $ 696,682    $ 371,898    $ 332,461

 

 

(1)

Includes dollars invested on projects under construction for each respective year.

Property Dispositions.  The following table summarizes the Investment Properties sold by NNN for each of the years ended December 31 (dollars in thousands):

 

      2007    2006    2005

Number of properties

     37      30      12

Gross leasable area (square feet)

         997,000          1,015,000          476,000

Net sales proceeds

   $ 146,041    $ 319,361    $ 40,377

Net gain

   $ 56,625    $ 91,332    $ 9,816

Property Analysis  –  Inventory Portfolio

General.   The following summarizes the number of properties held for sale in the Inventory Portfolio as of December 31:

 

     2007    2006    2005

Development Portfolio:

        

Completed Inventory Properties

   8    11    1

Properties under construction

   9    5    12

Land parcels

   6    13    4
              
   23    29    17
              

Exchange Portfolio:

        

Inventory Properties

   33    68    46
              

Total Inventory Properties

   56    97    63
              

 

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Table of Contents

Property Acquisitions.  The following table summarizes the property acquisitions and dollars invested in the Inventory Portfolio for each of the years ended December 31 (dollars in thousands):

 

      2007    2006    2005

Development Portfolio:

        

Number of properties acquired

     3      16      15

Dollars invested(1)

   $ 64,694    $ 82,524    $ 67,846

Exchange Portfolio:

        

Number of properties acquired

     23      77      58

Dollars invested

   $     105,152    $     118,553    $ 66,527

Total dollars invested

   $ 169,846    $ 201,077    $     134,373

 

 

(1)

Includes dollars invested on projects under construction for each respective year.

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 for each of the years ended December 31 (dollars in thousands):

 

      2007    2006    2005
      # of
Properties
   Gain    # of
Properties
   Gain    # of
Properties
   Gain

Development(1)

   13    $ 5,125    9    $ 5,774    12    $ 12,987

Exchange

   58      5,888    55      3,892    16      2,641
                                   
   71    $     11,013    64    $     9,666    28    $     15,628
                                   

 

 

(1)

Net of any intercompany eliminations or minority interest.

Business Combinations

Orange Avenue Mortgage Investments, Inc.  In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, leaving OAMI with an interest in seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. On May 2, 2005, NNN exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. As a result of the option exercise, NNN has consolidated OAMI in its consolidated financial statements.

In accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), NNN recorded the assets and liabilities of OAMI at fair value and recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets.

Between June 2001 and July 2003, a wholly owned subsidiary of NNN, 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 NNN, is an officer, director and indirect stockholder of OAMI. Craig Macnab, an officer and director of NNN, and Julian E. Whitehurst, an officer of NNN, 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 acquisition of the 78.9 percent equity interest in OAMI, NLF 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.

 

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As a result of NNN’s acquisition of 78.9 percent equity interest in OAMI, NNN’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in NNN’s consolidated financial statements. In addition, certain officers and directors of NNN own preferred shares of OAMI.

Prior to the acquisition of 78.9 percent equity interest in OAMI, NNN received $2,749,000 in distribution from the LLCs during the year ended December 31, 2005. For the year ended December 31, 2005, NNN recognized $1,467,000 of earnings from the LLCs.

In connection with the independent valuations of the Residuals’ fair value, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. NNN recorded an other than temporary valuation impairment of $638,000 and $8,779,000 for the years ended December 31, 2007 and 2006, respectively. In addition, NNN recorded $326,000 of unrealized losses and $1,992,000 of unrealized gains as other comprehensive income for the years ended December 31, 2007 and 2006, respectively.

NNN merged certain of its wholly owned subsidiaries into National Retail Properties, Inc. and 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 election, $3,453,000 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 commercial mortgage residual interests.

National Properties Corporation.  On June 16, 2005, NNN acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE stockholders received 1,636,532 newly issued shares of NNN’s common stock. In accordance with SFAS 141, the acquisition price of $32,199,000 was allocated to the assets acquired and liabilities assumed at their fair values.

Revenue from Continuing Operations Analysis

General.  During the year ended December 31, 2007, NNN’s rental income increased primarily due to the acquisition of Investment Properties (See “Results of Operations – Property Analysis – Investment Portfolio – Property Acquisitions”). NNN anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions.

The following summarizes NNN’s revenues from continuing operations (dollars in thousands):

 

                    2007
Versus
2006

Percent
Increase

(Decrease)
  2006
Versus
2005

Percent
Increase

(Decrease)
                Percent of Total    
    2007   2006   2005   2007   2006   2005    

Rental Income(1)

  $   170,733   $   125,004   $ 91,876   91.6%   88.6%   84.1%   36.6%   36.1%

Real estate expense reimbursement from tenants

    5,720     4,619     3,902   3.1%   3.3%   3.6%   23.8%   18.4%

Interest and other income from real estate transactions

    5,076     4,265     6,111   2.7%   3.0%   5.6%   19.0%   (30.2)%

Interest income on commercial mortgage residual interests

    4,882     7,268     7,349   2.6%   5.1%   6.7%   (32.8)%   (1.1)%
                                 

Total revenues from continuing operations

  $ 186,411   $ 141,156   $     109,238   100.0%   100.0%   100.0%   32.1%   29.2%
                                 

 

(1)

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

 

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Revenue from Operations by Source of Income.  NNN has identified two primary operating segments, and thus, sources of revenue: (i) earnings from NNN’s Investment Assets and (ii) earnings from NNN’s Inventory Assets. NNN revenues from continuing operations come primarily from Investment Assets The following table summarizes the revenues from continuing operations for each of the years ended December 31, (dollars in thousands):

 

                    Percent of Total    2007
Versus
2006
Percent
Increase
(Decrease)
   2006
Versus
2005
Percent
Increase
(Decrease)
     2007    2006    2005    2007    2006    2005      

Investment Assets

   $     170,234    $     124,702    $     104,681    91.3%    88.3%    95.8%    36.5%    19.1%

Inventory Assets

     16,177      16,454      4,557    8.7%    11.7%    4.2%    (1.7)%    261.1%
                                         

Total revenues

   $ 186,411    $ 141,156    $ 109,238    100.0%    100.0%    100.0%    32.1%    29.2%
                                         

Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006.

Rental Income.  Rental income increased for the year ended December 31, 2007 as compared to the same period in 2006 primarily from NNN’s acquisition of 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet during the year ended December 31, 2007. The Investment Portfolio occupancy rate remained relatively stable at approximately 98 percent for each of the years ended December 31, 2007 and 2006.

Real Estate Expense Reimbursements from Tenants.  Real estate expense reimbursements from tenants remained relatively constant as a percentage of revenues from continuing operations, but increased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 was attributable to a full year of reimbursement from certain properties acquired in 2006 and the reimbursements from the newly acquired Investment Properties acquired in 2007.

Interest and Other Income from Real Estate Transactions.  Interest and other income from real estate transactions increased for the year ended December 31, 2007 as compared to the same period in 2006. This increase is primarily attributable to an increase in interest income on its mortgages and notes receivables. The aggregate principal balance of NNN’s mortgages and notes receivables at December 31, 2007 and 2006 was $51,556,000 and $17,227,000, respectively. The increase in interest income was partially offset by a lower weighted average outstanding principal balance on NNN’s structured finance investments during 2007. NNN recorded interest income of $4,240,000 and $3,966,000 for the years ended December 31, 2007 and 2006, respectively.

Interest Income on Commercial Mortgage Residual Interests.  The decrease in interest income on commercial mortgage residual interests for the year ended December 31, 2007 as compared to 2006 is primarily the result of the amortization and pre-payments of the underlying notes.

Gain from Disposition of Real Estate, Inventory Portfolio.  Inventory Properties typically are operating properties and are classified as discontinued operations. However, the gains on the sale of Inventory Properties which are sold prior to rent commencement are reported in continuing operations. The decrease in the gain from the disposition of real estate is primarily due to the timing of sales of these Inventory Properties.

 

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The following table summarizes the Inventory Property dispositions included in continuing operations for the years ended December 31 (dollars in thousands):

 

     2007    2006  
     # of
    Properties    
       Gain        # of
    Properties    
       Gain      

Gain

   2    $         332    6    $         8,000  

Minority interest

   -      -    -      (3,609 )
                         

Gain, net of minority interest

   2    $ 332    6    $ 4,391  
                         

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005.

Rental Income.  NNN’s Rental Income increased primarily due to the addition of an aggregate gross leasable area of 1,130,000 square feet to NNN’s Investment Portfolio resulting from the acquisition of an additional 213 Investment Properties during the year ended December 31, 2006. The Investment Portfolio occupancy rate remained relatively stable at approximately 98 percent for each of the years ended December 31, 2006 and 2005.

Real Estate Expense Reimbursements from Tenants.  Real estate expense reimbursements from tenants remained fairly constant as a percent of total revenues from continuing operations. The increase for the year ended December 31, 2006 as compared to the year ended December 31, 2005 was attributable to a full year of reimbursements from certain tenants acquired in 2005 and the reimbursements from the newly acquired Investment Properties in 2006.

Interest and Other Income from Real Estate Transactions.  Interest and other income from real estate transactions decreased for the year ended December 31, 2006, primarily due to a decrease in interest earned on the structured finance investments compared to the year ended December 31, 2005. The weighted average outstanding principal balance of the structured finance investments during the year ended December 31, 2006 and 2005 was $16,834,000 and $27,584,000, respectively. In addition, NNN received $886,000 of disposition and development fee income during the year ended December 31, 2006. There was no fee income recognized in 2006.

Interest Income on Commercial Mortgage Residual Interests.  NNN recognizes interest income on commercial mortgage residual interests as a result of its acquisition of 78.9 percent equity interest in OAMI in May 2005. As a result of the timing of the acquisition, NNN recognized such income for the entire year ended December 31, 2006, versus a partial period in 2005 (see “Business Combinations”). However, the increase in interest income from the commercial mortgage residual interests for the year ended December 31, 2006, is partially offset by a decrease in interest income as a result of the amortization and prepayments of the underlying loans.

Gain from Disposition of Real Estate, Inventory Portfolio.  Inventory Properties typically are operating properties and are classified as discontinued operations. However, the gains on the sale of Inventory Properties which are sold prior to rent commencement are reported in continuing operations. The increase in the gain from the disposition of real estate is primarily due to the varying gross margin on sales of these Inventory Properties and the timing of such sales.

 

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The following table summarizes the Inventory Property dispositions included in continuing operations for the years ended December 31 (dollars in thousands):

 

     2006     2005
     # of
    Properties    
       Gain         # of
    Properties    
       Gain    

Gain

   6    $       8,000     6    $       2,010

Minority interest

   -      (3,609 )   -      -
                        

Gain, net of minority interest

   6    $ 4,391     6    $ 2,010
                        

Analysis of Expenses from Continuing Operations

General.  During 2007, operating expenses from continuing operations increased primarily as a result of the acquisition of additional properties and was offset by a decrease in impairments. Operating expenses from continuing operations decreased as a percentage from NNN’s total revenues from continuing operations due to increased efficiencies. The following summarizes NNN’s expenses from continuing operations (dollars in thousands):

 

     2007     2006     2005  

General and administrative

   $         23,542     $         24,009     $         22,401  

Real estate

     8,272       6,701       5,613  

Depreciation and amortization

     32,593       22,445       16,252  

Impairment – real estate

     791       -       1,673  

Impairment – commercial mortgage residual interests valuation

     638       8,779       2,382  

Restructuring costs

     -       1,580       -  
                        

    Total operating expenses

   $ 65,836     $ 63,514     $ 48,321  
                        

Interest and other income

   $ (4,753 )   $ (3,816 )   $ (2,039 )

Interest expense

     49,286       45,872       33,309  
                        

    Total other expenses (revenues)

   $ 44,533     $ 42,056     $ 31,270  
                        

 

     Percentage of Total
Operating Expenses
   Percentage of Revenues
from Continuing
Operations
   2007
Versus
2006
Percent
Increase

(Decrease)
   2006
Versus
2005
Percent
Increase

(Decrease)
     2007    2006    2005    2007    2006    2005      

General and administrative

   35.8%    37.8%    46.4%    12.6%    17.0%    20.5%    (1.9)%    7.2%

Real estate

   12.5%    10.6%    11.6%    4.5%    4.8%    5.1%    23.4%    19.4%

Depreciation and amortization

   49.5%    35.3%    33.6%    17.5%    15.9%    14.9%    45.2%    38.1%

Impairment – real estate

   1.2%    -    3.5%    0.4%    -    1.5%    100.0%    (100.0)%

Impairment – commercial mortgage residual interests valuation

   1.0%    13.8%    4.9%    0.3%    6.2%    2.2%    (92.7)%    268.6%

Restructuring costs

   -    2.5%    -    -    1.1%    -    (100.0)%    100.0%
                                   

    Total operating expenses

   100.0%    100.0%    100.0%    35.3%    45.0%    44.2%    3.7%    31.4%
                                   

Interest and other income

   (10.7)%    (9.1)%    (6.5)%    (2.5)%    (2.7)%    (1.9)%    24.6%    87.2%

Interest expense

   110.7%    109.1%    106.5%    26.4%    32.5%    30.5%    7.4%    37.7%
                                   

    Total other expenses (revenues)

   100.0%    100.0%    100.0%    23.9%    29.8%    28.6%    5.9%    34.5%
                                   

 

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Comparison of Year End December 31, 2007 to Year Ended December 31, 2006.

General and Administrative.  General and administrative expenses decreased slightly for the year ended December 31, 2007 as compared to the same period in 2006; however, such expenses remained fairly consistent as a percentage of total operating expense from continuing operations. The decrease in general and administrative expenses for 2007 was primarily attributable to a decrease in expenses related to personnel compensation, and a decrease in lost pursuit costs.

Real Estate.  Real estate expenses increased for the year ended December 31, 2007, as compared to the year ended December 31, 2006; however, such expenses remained fairly consistent as a percentage of total revenues from continuing operations. The increase in real estate expenses for 2007 as compared to the same period for 2006 is primarily attributable to (i) an increase in tenant reimbursable real estate expenses, and (ii) an increase in certain real estate expenses that were not reimbursable by tenants.

Depreciation and Amortization.  Depreciation and amortization expenses increased for the year ended December 31, 2007, as compared to the year ended December 31, 2006. The increase for the year ended December 31, 2007, as compared to the same period in 2006 is attributable to (i) the acquisition of 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet in 2007, and (ii) a full year of depreciation and amortization on the 213 Investment Properties with an aggregate gross leasable area of 1,130,000 square feet which were acquired during 2006. The increase in depreciation and amortization was partially offset by the disposition of 37 Investment Properties with an aggregate gross leasable area of 997,000 square feet during the year ended December 31, 2007.

Impairment – Real Estate.  NNN 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 NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN calculates a possible impairment by comparing the future cash flows to 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. During the year ended December 31, 2007, NNN recorded impairments totaling $791,000. No impairments were recorded during the year ended December 31, 2006.

Impairment – Commercial Mortgage Residual Interests Valuation.  In connection with the independent valuations of the Residuals’ fair value, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007 and 2006. In 2007, due to changes in market conditions relating to residual assets, the independent valuation increased the discount rate from 17% to 25%. Other than temporary valuation adjustments are recorded as a reduction of earnings from operations. For the years ended December 2007 and 2006, NNN recorded an other than temporary impairment of $638,000 and $8,779,000, respectively.

Restructuring Costs.   During the year ended December 31, 2006, NNN 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. No such costs were incurred during 2007.

Interest Expense.  The increase in interest expense for the year ended December 31, 2007, as compared to the year ended December 31, 2006, is primarily attributable to an increase of $126,164,000 in weighted average long-term debt outstanding. The increase in the weighted average long-term debt was due to the increase in dollars invested in Investment and Inventory Properties. The increase in interest expense was partially offset by an increase of $1,440,000 in the interest capitalized to construction

 

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projects in 2007, as well as by a decrease in the overall weighted average interest rate for 2007 as compared to 2006. The following represents the primary changes in debt:

 

  (i) issuance of $250,000,000 of notes payable in September 2007 with an effective interest rate of 6.92% due in October 2017,
  (ii) repayment of mortgage in September 2007 with balance of $7,305,000 at December 31, 2006 and an interest rate of 7.37%,
  (iii) the decrease in the weighted average debt outstanding on the revolving credit facility (decreased by $28,506,000),
  (iv) issuance of $172,500,000 of notes payable in September 2006 with an effective interest rate of 3.95% due in September 2026,
  (v) payoff of the $20,800,000 variable rate term note in October 2007, which was assumed in connection with the acquisition of NAPE in June 2005,
  (vi) repayment of a mortgage in February 2006 with a balance of $18,538,000 at December 31, 2005 with an interest rate of 7.435%, and
  (vii) payoff of the $10,500,000 OAMI secured note payable with a stated interest rate of 10.00%.

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005.

General and Administrative.  General and administrative expenses increased for the year ended December 31, 2006, however, such expenses decreased as a percentage of total operating expenses from continuing operations for the year ended December 31, 2006. The increase in general and administrative expenses for 2006 was primarily attributable to (i) an increase in expenses related to personnel compensation, (ii) an increase in professional services provided to NNN, and (iii) an increase in lost pursuit costs. The increase in 2006 was partially offset by the decrease in expenses related to personnel as a result of a workforce reduction in April 2006 and an increase in costs capitalized to projects under development.

Real Estate.  Real estate expenses increased for the year ended December 31, 2006, as compared to the year ended December 31, 2005; however, such expenses remained fairly consistent as a percentage of total operating expenses and total revenues from continuing operations. The increase in real estate expenses for 2006 when compared to the same period for 2005 is primarily attributable to (i) an increase in tenant reimbursable real estate expenses, (ii) an increase in expenses related to vacant properties, and (iii) an increase in certain real estate expenses that were not reimbursable by tenants.

Depreciation and Amortization.  Depreciation and amortization expenses increased for the year ended December 31, 2006, as compared to the year ended December 31, 2005; however, such expenses remained fairly consistent as a percentage of total operating expenses and total revenues from continuing operations. The increase for the year ended December 31, 2006, when compared to the same period in 2005 is attributable to (i) the acquisition of 213 Investment Properties with an aggregate gross leasable area of 1,130,000 square feet in 2006 and (ii) a full year of depreciation and amortization on the 170 Investment Properties with an aggregate gross leasable area of 1,150,000 square feet acquired in 2005. The increase in depreciation and amortization was partially offset by the disposition of 30 Investment Properties with an aggregate gross leasable area of 1,015,000 square feet during the year ended December 31, 2006.

Impairment – Real Estate.  NNN 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

 

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circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN calculates a possible impairment by comparing the future cash flows to 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.

Impairment – Commercial Mortgage Residual Interests Valuation.  In connection with the independent valuations of the Residuals’ fair value, NNN recorded an other than temporary valuation impairment of $8,779,000 and $2,382,000 for the years ended December 31, 2006 and 2005, respectively.

The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment. The reduction in the Residuals’ value acquired at the time of the option exercise that related to the period subsequent to the option exercise, as well as the reduction in value related to the portion of the Residuals previously owned by NLF, were recorded as an aggregate other than temporary valuation impairment in 2005 (see “Business Combinations”).

NNN reduced the carrying value of the Residuals during the year ended December 31, 2006, based upon the fair value as determined by an independent valuation. The decrease in the value of the Residuals was primarily the result of the increase in prepayment speeds of the underlying loans. The valuation adjustments that are considered other than temporary are recorded as a reduction of earnings from operations.

Restructuring Costs.  During the year ended December 31, 2006, NNN 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.

Interest Expense.  The increase in interest expense for the year ended December 31, 2006, over the year ended December 31, 2005, was primarily due to a $241,104,000 increase in the weighted average long-term debt outstanding for the year ended December 31, 2006. The increase in the weighted average long-term debt outstanding is attributable to the increase in Investment and Inventory Properties and the acquisition of the 78.9 percent equity interest in OAMI. This increase was offset slightly by a 25 basis point decrease in the overall weighted average interest rate for 2006 compared to 2005. The following represents the primary changes in debt:

 

  (i) issuance of $150,000,000 of notes payable in November 2005 with an effective interest rate of 6.185% due in December 2015,
  (ii) the increase in the weighted average debt outstanding on the revolving credit facility (increased by $61,819,000),
  (iii) issuance of $172,500,000 of notes payable in September 2006 with an effective interest rate of 3.95% due in September 2026,
  (iv) the $20,800,000 variable rate term note assumed in connection with the acquisition of NAPE in June 2005,
  (v) the $32,000,000 secured notes payable acquired in May 2005 in connection with the 78.9 percent equity interest in OAMI, and
  (vi) repayment of a mortgage in February 2006 with a balance of $18,538,000 at December 31, 2005 with an interest rate of 7.435%.

 

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Investment in Unconsolidated Affiliates

In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”) with an affiliate of Crow Holdings Realty Partners IV, L.P. and holds a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interests. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was paid in full in November 2007.

In October 2006, NNN sold its equity investment in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) for $10,239,000 and recognized a gain of $11,373,000. Plaza owned a 346,000 square foot office building, one floor of which serves as NNN’s headquarters office, and an interest in an adjacent parking garage. In connection with the sale, NNN was released as a guarantor of Plaza’s $14,000,000 unsecured promissory note.

During the years ended December 31, 2007, 2006 and 2005, NNN recognized equity in earnings of unconsolidated affiliates of $49,000, $122,000, and $1,209,000, respectively. The decrease in equity in earnings of unconsolidated affiliates prior to the years ended December 31, 2007 and 2006, was primarily attributable to the decrease in the income earned on investments in commercial mortgage residual interests as a result of the acquisition of 78.9 percent equity interest in OAMI in May 2005. Subsequent to the acquisition, NNN’s interest in the LLCs was no longer being accounted for as an equity investment and is now included as a part of OAMI in NNN’s consolidated financial statements.

Earnings from Discontinued Operations

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN classified as discontinued operations the revenues and expenses related to its Investment Properties that were sold and its leasehold interests that expired subsequent to December 31, 2001, as well as, the revenues and expenses related to any Investment Property that was held for sale at December 31, 2007. NNN also classified as discontinued operations the revenues and expenses of its Inventory Properties which generated rental revenues. NNN records discontinued operations by NNN’s identified segments: (i) Investment Assets, and (ii) Inventory Assets. The following table summarizes the earnings from discontinued operations for the years ended December 31 (dollars in thousands):

 

    2007   2006   2005
    # of Sold
Properties
  Gain   Earnings   # of Sold
Properties
  Gain   Earnings   # of Sold
Properties
  Gain   Earnings

Investment Assets

  37   $ 56,625   $ 63,338   30   $ 91,332   $ 109,664   12   $ 9,816   $ 29,453

Inventory Assets, net of minority interest

  69     10,681     8,622   58     5,275     8,146   22     13,618     9,551
                                               
  106   $   67,306   $   71,960   88   $   96,607   $   117,810   34   $   23,434   $   39,004
                                               

NNN occasionally sells Investment Properties and may reinvest the proceeds of the sales to purchase new properties. NNN evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.

 

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Extraordinary Gain

During the year ended December 31, 2005, NNN recognized an extraordinary gain of $14,786,000, which resulted from the difference between NNN’s portion of the fair value of net assets acquired in the acquisition of 78.9 percent equity interest in OAMI and the purchase price (see “Business Combinations”).

Impact of Inflation

NNN’s leases typically contain provisions to mitigate the adverse impact of inflation on NNN’s results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. During times when inflation is greater than increases in rent, rent increases may not keep up with the rate of inflation.

The Investment Properties are leased to tenants under long-term, net leases which typically require the tenant to pay certain operating expenses of a property, thus, NNN’s exposure to inflation is reduced. Inflation may have an adverse impact on NNN’s tenants.

Liquidity

General.   NNN’s demand for funds has been and will continue to be primarily for (i) payment of operating expenses and dividends; (ii) property acquisitions and development, mortgages and notes receivable, structured finance investments and capital expenditures; (iii) payment of principal and interest on its outstanding indebtedness, and (iv) other investments.

NNN expects to meet these requirements (other than amounts required for additional property investments, mortgages and notes receivables and structured finance investments) through cash provided from operations and NNN’s revolving credit facility. NNN utilizes its credit facility to meet its short term working capital requirements. As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the credit facility, excluding undrawn letters of credit totaling $2,685,000. NNN anticipates that any additional investments in properties, mortgages and notes receivables and structured finance investments during the next 12 months will be funded with cash provided from operations, long-term debt and the issuance of common or preferred equity, which may be initially funded with proceeds from NNN’s revolving credit facility. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN.

Below is a summary of NNN’s cash flows for each of the years ended December 31 (in thousands):

 

      2007     2006     2005  

Cash and cash equivalents:

      

Provided by operating activities

   $ 129,634     $ 1,676     $ 19,226  

Used in investing activities

     (536,717 )     (90,099 )     (230,783 )

Provided by financing activities

     432,907       81,864       217,844  
                        

Increase (decrease)

     25,824       (6,559 )     6,287  

January 1

     1,675       8,234       1,947  
                        

December 31

   $ 27,499     $ 1,675     $ 8,234  
                        

 

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Cash provided by operating activities represents cash received primarily from rental income from tenants, proceeds from the disposition of Inventory Properties and interest income less general and administrative expenses, interest expense and acquisition of Inventory Properties. NNN’s cash flow from operating activities, net of cash used in and provided by the acquisition and disposition of its Inventory Properties, has been sufficient to pay the distributions for each period presented. NNN uses proceeds from its Credit Facility to fund the acquisition of its Inventory Properties. The change in cash provided by operations for the years ended December 31, 2007, 2006 and 2005, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future.

Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Investment Properties.

NNN’s financing activities for the year ended December 31, 2007 included the following significant transactions:

 

   

$247,498,000 in net proceeds from issuance of notes due in October 2017,

 

   

$135,750,000 in net proceeds from the issuance of 5,750,000 shares of common stock,

 

   

$99,150,000 in net proceeds from the issuance of 4,000,000 shares of common stock,

 

   

$92,989,000 in dividends paid to common stockholders,

 

   

$6,785,000 in dividends paid to holders of the depositary shares of NNN’s Series C Preferred stock,

 

   

$44,540,000 paid to redeem all outstanding shares of Series A Preferred stock,

 

   

$101,800,000 in net proceeds from NNN’s credit facility,

 

   

$62,980,000 in net proceeds from the issuance of 2,645,257 common shares in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”),

 

   

$10,500,000 repayment of secured note payable,

 

   

$20,800,000 repayment of term note, and

 

   

$26,007,000 repurchase of the properties under the financing lease obligation.

Financing Strategy

NNN’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements and providing value to NNN’s stockholders. NNN generally utilizes debt and equity security offerings, bank borrowings, the sale of properties, and to a lesser extent, internally generated funds to meet its capital needs.

NNN typically funds its short-term liquidity requirements including investments in additional Investment Properties with cash from its $400,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000.

 

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For the year ended December 31, 2007, NNN’s ratio of total indebtedness to total gross assets (before accumulated depreciation) was approximately 43 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 39 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN’s ability to incur debt under certain circumstances. The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy.

Contractual Obligations and Commercial Commitments.  The information in the following table summarizes NNN’s contractual obligations and commercial commitments outstanding as of December 31, 2007. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2007.

 

   

Expected Maturity Date

(dollars in thousands)

    Total   2008   2009   2010   2011   2012   Thereafter

Long-term debt(1)

  $ 931,980   $ 113,190   $ 1,001   $ 21,022   $ 173,598   $ 69,291   $ 553,878

Credit Facility

    129,800     -     129,800     -     -     -     -

Operating lease

    6,261     839     865     891     917     945     1,804
                                         

Total contractual cash obligations(2)

  $     1,068,041   $     114,029   $     131,666   $     21,913   $     174,515   $     70,236   $     555,682
                                         

 

(1)

Includes amounts outstanding under the mortgages payable, secured notes payable, convertible notes payable and notes payable and excludes unamortized note discounts.

(2)

Excludes $11,243 of accrued interest payable.

In addition to the contractual obligations outlined above, NNN 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 December 31,
2007

Investment Portfolio

   27    $               71,883    $               44,561

Inventory Portfolio

   9      24,097      17,125
                  
   36    $ 95,980    $ 61,686
                  

(1)    Including land costs.

As of December 31, 2007 NNN had outstanding letters of credit totaling $2,685,000 under its Credit Facility.

As of December 31, 2007, NNN does not have any other contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, NNN has preferred stock with cumulative preferential cash distributions, as described below under “Dividends.”

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

 

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Many of the Investment Properties are recently constructed and 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. Certain of NNN's Investment Properties are subject to leases under which NNN retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with NNN’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under NNN’s 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 NNN could have a material adverse effect on the liquidity and results of operations if NNN is unable to release the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2008, NNN owns 13 vacant, unleased Investment Properties which account for approximately three percent of the total gross leasable area of NNN’s Investment Portfolio in addition to three vacant land parcels. Additionally, less than one percent of the total gross leasable area of NNN’s Investment Portfolio is leased to three tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN.

Dividends.  NNN 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. NNN generally will not be subject to federal income tax on income that it distributes to its stockholders, provided that it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If NNN 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 NNN’s income and its ability to pay dividends. NNN believes it has been organized as, and its past and present operations qualify NNN as, a REIT. Additionally, NNN intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes.

One of NNN’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 stockholders in the form of dividends. During the years ended December 31, 2007, 2006 and 2005, NNN declared and paid dividends to its common stockholders of $92,989,000, $76,035,000, and $69,018,000, respectively, or $1.40, $1.32 and $1.30 per share respectively, of common stock.

The following presents the characterizations for tax purposes of such common stock dividends for the years ended December 31:

 

    2007   2006   2005

Ordinary dividends

  $   1.397402   99.8144%   $   1.150780   87.1803%   $   1.068470   82.1900%

Qualified dividends

    0.000414   0.0296%     -   -     0.224510   17.2700%

Capital gain

    0.002184   0.1560%     0.150261   11.3834%     -   -

Unrecaptured Section 1250 Gain

    -   -     0.018959   1.4363%     0.002210   0.1700%

Nontaxable distributions

    -   -     -   -     0.004810   0.3700%
                             
  $ 1.400000   100.0000%   $ 1.320000   100.0000%   $ 1.300000   100.0000%
                             

 

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In February 2008, NNN paid dividends to its common stockholders of $21,598,000, or $0.355 per share of common stock.

Holders of each of NNN’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 NNN’s preferred stock (dollars in thousands, except per share data):

 

Non-Voting

Preferred

Stock

Issuance

  Shares
Outstanding
At
December 31,
2007
  Liquidation
Preference
(per share)
  Fixed Annual
Cash
Distribution
(per share)
 

Dividends Declared and Paid

For the Year Ended December 31,

        2007   2006   2005
        Total   Per
Share
  Total   Per
Share
  Total   Per
Share

9% Series A(1)

  -   $       25.00   $       25.00000   $ -   $ -   $     4,376   $     2.456250   $     4,008   $     2.25

6.7% Series B Convertible(2)

  -     2,500.00     167.50000     -     -     419     41.875000     1,675     167.50

7.375% Series C(3)

  3,680,000     25.00     1.84375         6,785,000         1.84375     923     0.250955     -     -

 

(1)

Effective January 2, 2007, NNN redeemed all 1,781,589 shares of Series A Preferred Stock at their redemption price of $25.00 per share plus all accumulated and unpaid dividends through the redemption date of $0.20625 per share, for an aggregate redemption price of $25.20625. Dividends declared and paid in 2006 include $367 of dividends payable at December 31, 2006, which were paid in 2007.

(2)

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

(3)

In October 2006, NNN issued 3,680,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Preferred Stock. See Capital Resources – Debt and Equity Securities.”

Restricted Cash.  Restricted cash consisted of amounts held in restricted accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”). In December 2007, in accordance to agreements with the Buyer, all restrictions were released, therefore, as of December 31, 2007 NNN has no cash held in restricted accounts. The amount held in these accounts at December 31, 2006 was $36,728,000. NNN used a portion of the amounts released to repay the $10,500,000 OAMI secured note payable.

Capital Resources

Generally, cash needs for property acquisitions, mortgages and notes receivable, 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 NNN’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.

Debt

The following is a summary of NNN’s total outstanding debt as of December 31 (dollars in thousands):

 

     2007      Percentage  
of Total
   2006      Percentage  
of Total

Line of credit payable

   $         129,800    12.2%    $         28,000    3.6%

Mortgages payable

     27,480    2.6%      35,892    4.6%

Notes payable – secured

     12,000    1.1%      24,500    3.2%

Notes payable – convertible

     172,500    16.3%      172,500    22.2%

Notes payable

     718,290    67.8%      489,804    63.1%

Financing lease obligation

     -    -      26,041    3.3%
                       

Total outstanding debt

   $ 1,060,070    100.0%    $ 776,737    100.0%
                       

 

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Line of Credit Payable.  In October 2007, NNN exercised the $100,000,000 accordion feature of its existing revolving Credit Facility increasing the borrowing capacity to $400,000,000 from $300,000,000. The terms of the Credit Facility provide for (i) a tiered interest rate structure of a maximum of 112.5 basis points above LIBOR (based upon the debt rating of NNN, the current interest rate is 80 basis points above LIBOR), (ii) requires NNN to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of NNN, the current commitment fee is 20 basis points), (iii) provides for a competitive bid option for up to 50 percent of the facility amount and (iv) expires on May 8, 2009. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which NNN may request to be extended for an additional 12 months. As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000.

In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment limitations. At December 31, 2007, NNN was in compliance with those covenants. In the event that NNN violates any of these restrictive financial covenants, its access to the debt or equity markets may become impaired.

Mortgages Payable.  In September 2007, upon maturity, NNN repaid the outstanding principal balance on the long-term fixed rate loan which had an original principal balance of $12,000,000, and was secured by a first mortgage on nine Investment Properties. Upon repayment of the loan, the encumbered Investment Properties were released from the mortgage. As of December 31, 2006, the outstanding principal balance was $7,305,000 with an interest rate of 7.37%.

In February 2006, upon maturity, NNN 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 NNN’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 with an interest rate of 7.44%.

In May 2006, NNN disposed of three Investment Properties that were subject to a first mortgage with an original and outstanding principal balance of $95,000,000 with an interest rate of 5.40%. Upon disposition of these Investment Properties, the buyer assumed the mortgage.

Notes Payable – Secured.  In December 2007, NNN repaid the outstanding principal balance of $10,500,000 on one of its secured notes which had an interest rate of 10.00%. NNN repaid the outstanding balance of the note with the restricted cash that was released in December 2007.

Notes Payable – Convertible.  In September 2006, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued $150,000,000 of 3.95% convertible senior notes due September 2026 (with a 2011 put option). Subsequently, NNN issued an additional $22,500,000 in connection with the underwriters’ over-allotment option (collectively, the “Convertible Notes”). The Convertible Notes were sold at par with interest payable semi-annually commencing on March 15, 2007 (effective interest rate of 3.95%).

The notes are convertible, at the option of the holder, at any time on or after September 15, 2025. Prior to September 15, 2025, holders may convert their Convertible Notes under certain circumstances. The initial conversion rate per $1,000 principal amount of Convertible Notes was 40.9015 shares of NNN’s

 

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common stock, which was equivalent to an initial conversion price of $24.4490 per share of common stock. The initial conversion rate is subject to adjustment in certain circumstances. As a result of the increase in NNN’s dividend, the conversion rate was adjusted to 41.0028, which is equivalent to a conversion price of $24.3886 per share. Upon conversion of each $1,000 principal amount of Convertible Notes, NNN will settle any amounts up to the principal amount of the notes in cash and the remaining conversion value, if any, will be settled, at NNN’s option, in cash, common stock or a combination thereof.

The Convertible Notes are redeemable at the option of NNN, in whole or in part, on or after September 20, 2011 for cash equal to 100% of the principal amount of the Convertible Notes being redeemed plus unpaid interest accrued to, but not including, the redemption date. In addition, on September 20, 2011, September 15, 2016 and September 15, 2021 note holders may require NNN to repurchase the notes for cash equal to the principal amount of the Convertible Notes to be repurchased plus accrued interest thereon.

In connection with the Convertible Notes offering, NNN incurred debt issuance costs totaling $3,850,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been deferred and are being amortized over the period to the earliest put option of the holders, September 20, 2011, using the effective interest method.

NNN used the proceeds of the Convertible Notes to pay down outstanding indebtedness under the Credit Facility.

Notes Payable.  Each of NNN’s outstanding series of publicly held non-convertible notes are summarized in the table below (dollars in thousands).

 

      Notes      

      Issue Date           Principal         Discount(3)     Net
Price
  Stated
Rate
  Effective
Rate(4)
      Commencement    
of Semi-
Annual Interest
Payments
      Maturity    
Date

2008(1)(7)

  March 1998   $       100,000   $               271   $       99,729   7.125%   7.163%   September 1998   March 2008

2010(1)

  September 2000     20,000     126     19,874   8.500%   8.595%   March 2001   September 2010

2012(1)

  June 2002     50,000     287     49,713   7.750%   7.833%   December 2002   June 2012

2014(1)(2)(5)

  June 2004     150,000     440     149,560   6.250%   5.910%   June 2004   June 2014

2015(1)

  November 2005     150,000     390     149,610   6.150%   6.185%   June 2006   December 2015

2017(1)(6)

  September 2007     250,000     877     249,123   6.875%   6.924%   April 2008   October 2017

 

(1)

The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN's Credit Facility.

(2)

The proceeds from the note issuance were used to repay the obligation of the 2004 Notes.

(3)

The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method.

(4)

Includes the effects of the discount and interest rate hedge (as applicable).

(5)

NNN entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, NNN terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method.

(6)

NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a loss of $3,228. The loss has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method.

(7)

NNN anticipates using proceeds from the Credit Facility to fund the maturity of the 2008 Note.

Each series of notes represent senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of NNN. The notes are redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as defined in the respective supplemental indenture relating to the notes.

 

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In connection with the note offerings, NNN incurred debt issuance costs totaling $6,667,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs for all note issuances have been deferred and are being amortized over the term of the respective notes using the effective interest method.

In accordance with the terms of the indenture, pursuant to which NNN’s notes have been issued, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2007, NNN was in compliance with those covenants. In the event that NNN violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired.

In addition, in connection with the acquisition of NAPE, NNN assumed a $20,800,000 term note payable (“Term Note”). In October 2007, NNN repaid the outstanding principal balance on its $20,800,000 term note. The term note had a weighted interest rate of 6.62% as of December 2006.

Financing Lease Obligation.  In July 2004, NNN sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. NNN may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate,” NNN has recognized the sale as a financing transaction. The 10-year financing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option was exercised. In November 2007, NNN repurchased the properties under the agreements of the put option for approximately $26,007,000.

Debt and Equity Securities.

NNN 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. NNN has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investor Service and Fitch Ratings on its senior, unsecured debt since 1998. In February 2006, NNN filed a shelf registration statement with the Securities and Exchange Commission which permits the issuance by NNN of an indeterminate amount of debt and equity securities.

A description of NNN’s outstanding series of publicly held notes is found under “Debt – Notes Payable – Convertible” and “Debt – Notes Payable” above.

7.375% Series C Cumulative Redeemable Preferred Stock.  In October 2006, NNN issued 3,200,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock (“Series C Redeemable Preferred Stock”), and received gross proceeds of $80,000,000. Subsequently, NNN issued an additional 480,000 depositary shares in connection with the underwriters’ over-allotment option and received gross proceeds of $12,000,000. In connection with this offering, NNN incurred stock issuance costs of approximately $3,098,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses.

Holders of the depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 7.375% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.84375 per depositary share). The Series C Redeemable Preferred Stock underlying the depositary shares ranks senior to NNN’s common stock with respect to dividend rights and rights upon liquidation, dissolution

 

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or winding up of NNN. NNN may redeem the Series C Redeemable Preferred Stock underlying the depositary shares on or after October 12, 2011, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated, accrued and unpaid dividends.

In January 2007, NNN used $44,540,000 of the net proceeds from the offering to redeem the Series A Preferred Stock; and the remainder of the net proceeds were to repay borrowings under the Credit Facility.

Common Stock Issuances.  In March 2007, NNN issued 5,000,000 shares of common stock at a price of $24.70 per share and received net proceeds of $118,020,000. Subsequently, in April 2007, NNN issued an additional 750,000 shares of common stock in connection with the underwriters’ over-allotment option and received net proceeds of $17,730,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $6,217,000 consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses.

In October 2007, NNN issued 4,000,000 shares of common stock at a price of $25.94 per share and received net proceeds of $99,150,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $4,874,000 consisting primarily of underwriter’s fees and commissions, legal and accounting fees. In October 2007, NNN used a portion of the net proceeds to repay the outstanding principal balance on its term note.

In June 2005, in connection with the acquisition of National Properties Corporation (see “Results of Operations – Business Combination”), NNN issued 1,636,532 newly issued shares of NNN’s common stock in exchange for 100 percent of the common stock of NAPE.

Dividend Reinvestment and Stock Purchase Plan.  In February 2006, NNN filed a shelf registration statement with the Securities and Exchange Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”), which permits the issuance by NNN of up to 12,191,394 shares of common stock. The DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in NNN’s common stock. The following outlines the common stock issuances pursuant to NNN’s DRIP for each of the years ended December 31 (dollars in thousands):

 

      2007    2006

Shares of common stock

         2,645,257          3,046,408

Net proceeds

   $ 62,980    $ 65,722

The proceeds from the issuances were used to pay down outstanding indebtedness under NNN’s Credit Facility.

Investment in Unconsolidated Affiliates – In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV I plans to acquire up to $220,000,000 of real estate assets leased to convenience store operators from unrelated third parties. NNN owns a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interest. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was paid in full in November 2007.

Mortgages and Notes Receivable. Mortgages are loans secured by real estate, real estate securities or other assets. As of December 31, 2007, these receivables totaled $49,336,000.

 

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Structured finance agreements are typically loans secured by a borrower’s pledge of ownership interests in the entity that owns or leases the real estate and/or other acceptable collateral such as fixtures, equipment or cash. These agreements are sometimes subordinated to senior loans secured by first mortgages encumbering the underlying real estate. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2007, the structured finance agreements had an outstanding principal balance of $14,359,000.

As of December 31, 2007, the structured finance investments bear a weighted average interest rate of 11.26% per annum, of which 9.78% is payable monthly and the remaining 1.48% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between January 2009 and March 2010. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own the respective real estate.

Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):

 

     2007     2006  

Mortgages and notes receivable

   $     51,556     $     17,227  

Structured Finance

     14,359       13,917  

Accrued interest receivables

     545       641  
                
     66,460       31,785  

    Less loan origination fees, net

     (100 )     (206 )

    Less allowance

     (396 )     (634 )
                
   $ 65,964     $ 30,945  
                

Commercial Mortgage Residual Interests. In connection with the independent valuations of the commercial mortgage residual interests’ (the “Residuals”) fair value, NNN adjusted carrying value of the Residuals to reflect such fair value at December 31, 2007. The adjustments in the Residuals’ were recorded as an aggregate other than temporary valuation impairment of $638,000 and $8,779,000, for the years ended December 31, 2007 and 2006, respectively. NNN recorded $326,000 of unrealized losses and $1,992,000 of unrealized gains as other comprehensive income for the years ended December 31, 2007 and 2006, respectively.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

NNN is exposed to interest changes primarily as a result of its variable rate Credit Facility and its long-term, fixed rate debt used to finance NNN’s development and acquisition activities, and for general corporate purposes. NNN’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, NNN borrows at both fixed and variable rates on its long-term debt. As of December 31, 2007, NNN has one interest rate hedge with a value of $109,000 which is included in other liabilities. As of December 31, 2006, NNN had no outstanding derivatives.

The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding as of December 31, 2007 and 2006. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of December 31, 2007. The variable interest rates shown represent the weighted average rates for the Credit Facility and Term Note at the end of the periods. The table incorporates only those debt obligations that exist as of December 31, 2007 it does not consider those debt obligations 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, NNN’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, NNN’s hedging strategies at that time and interest rates. If interest rates on NNN’s variable rate debt increased by one percent, NNN’s interest expense would have increased approximately three percent for the year ended December 31, 2007.

 

    Debt Obligations (dollars in thousands)
    Variable Rate Debt   Fixed Rate Debt
    Credit Facility and Term
Note
(1)
  Mortgages   Unsecured Debt(3)(4)   Secured Debt
    Debt
  Obligation  
  Weighted
Average

Interest
Rate(2)
  Debt
  Obligation  
  Weighted
Average

Interest
Rate
  Debt
  Obligation  
  Effective
Interest
Rate
  Debt
  Obligation  
  Weighted
Average

Interest
Rate

2008

    -   -     1,190   7.04%     99,992   7.16%     12,000   10.00%

2009

    129,800   6.24%     1,000   7.02%     -   -     -   -

2010

    -   -     1,022   7.01%     19,955   8.60%     -   -

2011

    -   -     1,098   7.00%     172,500   3.95%     -   -

2012

    -   -     19,291   6.73%     49,846   7.83%     -   -

Thereafter

    -   -     3,879   7.60%     548,497   6.45%     -   -
                               

Total

  $     129,800   6.24%   $     27,480   7.04%   $     890,790   6.17%   $     12,000   10.00%
                               

Fair Value:

               

December 31, 2007

  $ 129,800   6.24%   $ 27,480   7.04%   $ 921,507   6.17%   $ 12,000   10.00%
                                       

December 31, 2006

  $ 48,800   5.98%   $ 35,892   7.12%   $ 690,198   5.84%   $ 24,500   10.00%
                                       

 

(1)

In October 2007, NNN repaid the outstanding principal balance on the Term Note.

(2)

The Credit Facility interest rate varies based upon a tiered rate structure ranging from 55 to 112.5 basis points above LIBOR based upon the debt rating of NNN.

(3)

Includes NNN’s notes payable, net of unamortized note discounts and convertible notes payable.

(4)

In July 2004, NNN sold Investment Properties for $26,041 and subsequently leased back the properties under a 10 year financing lease obligation which was subsequently repurchased in November 2007.

NNN is also exposed to market risks related to NNN’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 $24,340,000 and $31,512,000 as of December 31, 2007 and December 31, 2006, respectively. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity. Losses are considered other than temporary and reported as a valuation impairment in earnings from operations 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 8.  Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

National Retail Properties, Inc.

We have audited National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). National Retail Properties, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements’ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operative effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, National Retail Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of National Retail Properties, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended of National Retail Properties, Inc. and our report dated February 22, 2008, expressed an unqualified opinion thereon.

LOGO

Certified Public Accountants

February 22, 2008

Miami, Florida

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

National Retail Properties, Inc.

We have audited the accompanying consolidated balance sheets of National Retail Properties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Retail Properties, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2008, expressed an unqualified opinion thereon.

LOGO

February 22, 2008

Miami, Florida

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

National Retail Properties, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheet of National Retail Properties, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules III and IV for the years ended December 31, 2005 and 2004. These consolidated financial statements and financial statement schedules are the responsibility of NNN’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules for 2005 and 2004 information based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Retail Properties, Inc. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the 2005 and 2004 information included in the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

LOGO

Orlando, Florida

February 17, 2006, except as to notes 2, 3, 20, 26 and 27 which are as of February 16, 2007

Certified Public Accountants

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

ASSETS

   December 31,
2007
   December 31,
2006

Real estate, Investment Portfolio:

     

Accounted for using the operating method, net of accumulated depreciation and amortization

   $         2,055,846    $         1,440,996

Accounted for using the direct financing method

     37,497      71,334

Real estate, Inventory Portfolio, held for sale

     248,611      228,159

Investment in unconsolidated affiliates

     4,139      -

Mortgages, notes and accrued interest receivable, net of allowance

     65,964      30,945

Commercial mortgage residual interests

     24,340      31,512

Cash and cash equivalents

     27,499      1,675

Restricted cash

     -      36,587

Receivables, net of allowance of $1,582 and $722, respectively

     3,818      7,915

Accrued rental income, net of allowance

     24,652      26,510

Debt costs, net of accumulated amortization of $13,424 and $11,339, respectively

     8,548      8,180

Other assets

     38,691      33,684
             

Total assets

   $ 2,539,605    $ 1,917,497
             

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Line of credit payable

   $ 129,800    $ 28,000

Mortgages payable

     27,480      35,892

Notes payable – secured

     12,000      24,500

Notes payable – convertible

     172,500      172,500

Notes payable, net of unamortized discount of $1,710 and $996, respectively

     718,290      489,804

Financing lease obligation

     -      26,041

Accrued interest payable

     11,243      5,989

Other liabilities

     57,002      30,828

Income tax liability

     1,671      6,340
             

Total liabilities

     1,129,986      819,894
             

Commitments and contingencies (Note 28)

     

Minority interest

     2,334      1,098

Stockholders’ 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

Series C, 3,680,000 depositary shares issued and outstanding, at stated liquidation value of $25 per share

     92,000      92,000

Common stock, $0.01 par value. Authorized 190,000,000 shares; 72,527,729 and 59,823,031 shares issued and outstanding at December 31, 2007 and 2006, respectively

     725      598

Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding

     -      -

Capital in excess of par value

     1,175,364      873,885

Retained earnings (accumulated dividends in excess of net earnings)

     137,599      80,263

Accumulated other comprehensive income

     1,597      5,219
             

Total stockholders’ equity

     1,407,285      1,096,505
             
   $ 2,539,605    $ 1,917,497
             

See accompanying notes to consolidated financial statements.

 

50


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended December 31, 2007, 2006 and 2005

(dollars in thousands, except per share data)

 

     Year Ended December 31,  
      2007     2006     2005  

Revenues:

      

Rental income from operating leases

   $ 165,511     $ 120,632     $ 87,559  

Earned income from direct financing leases

     3,650       3,640       3,874  

Percentage rent

     1,572       732       443  

Real estate expense reimbursement from tenants

     5,720       4,619       3,902  

Interest and other income from real estate transactions

     5,076       4,265       6,111  

Interest income on commercial mortgage residual interests

     4,882       7,268       7,349  
                        
     186,411       141,156       109,238  
                        

Disposition of real estate, Inventory Portfolio:

      

Gross proceeds

     1,750       36,705       13,569  

Costs

     (1,418 )     (28,705 )     (11,559 )
                        

Gain

     332       8,000       2,010  
                        

Operating expenses:

      

General and administrative

     23,542       24,009       22,401  

Real estate

     8,272       6,701       5,613  

Depreciation and amortization

     32,593       22,445       16,252  

Impairment – real estate

     791       -       1,673  

Impairment – commercial mortgage residual interests valuation

     638       8,779       2,382  

Restructuring costs

     -       1,580       -  
                        
     65,836       63,514       48,321  
                        

Earnings from operations

     120,907       85,642       62,927  
                        

Other expenses (revenues):

      

Interest and other income

     (4,753 )     (3,816 )     (2,039 )

Interest expense

     49,286       45,872       33,309  
                        
     44,533       42,056       31,270  
                        

Earnings from continuing operations before income tax benefit, minority interest, equity in earnings of unconsolidated affiliates and gain on disposition of equity investment

     76,374       43,586       31,657  

Income tax benefit

     8,537       11,206       2,882  

Minority interest

     190       (1,592 )     (138 )

Equity in earnings of unconsolidated affiliates

     49       122       1,209  

Gain on disposition of equity investment

     -       11,373       -  
                        

Earnings from continuing operations

     85,150       64,695       35,610  

Earnings from discontinued operations:

      

Real estate, Investment Portfolio

     63,338       109,664       29,453  

Real estate, Inventory Portfolio, net of income tax expense and minority interest

     8,622       8,146       9,551  
                        
     71,960       117,810       39,004  
                        

Earnings before extraordinary gain

     157,110       182,505       74,614  

Extraordinary gain

     -       -       14,786  
                        

Net earnings

     157,110       182,505       89,400  

Other comprehensive income

     (3,622 )     5,219       -  
                        

Total comprehensive income

   $ 153,488     $ 187,724     $ 89,400  
                        

See accompanying notes to consolidated financial statements.

 

51


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED

Years Ended December 31, 2007, 2006 and 2005

(dollars in thousands, except per share data)

 

     Year Ended December 31,  
      2007     2006     2005  

Net earnings

   $ 157,110     $ 182,505     $ 89,400  

Series A preferred stock dividends

     -       (4,376 )     (4,008 )

Series B Convertible preferred stock dividends

     -       (419 )     (1,675 )

Series C preferred stock dividends

     (6,785 )     (923 )     -  
                        

Net earnings available to common stockholders – basic

     150,325       176,787       83,717  

Series B Convertible preferred stock dividends, if dilutive

     -       419       1,675  
                        

Net earnings available to common stockholders – diluted

   $ 150,325     $ 177,206     $ 85,392  
                        

Net earnings per share of common stock:

      

Basic:

      

Continuing operations

   $ 1.18     $ 1.03     $ 0.56  

Discontinued operations

     1.09       2.05       0.74  

Extraordinary gain

     -       -       0.28  
                        

Net earnings

   $ 2.27     $ 3.08     $ 1.58  
                        

Diluted:

      

Continuing operations

   $ 1.18     $ 1.02     $ 0.58  

Discontinued operations

     1.08       2.03       0.71  

Extraordinary gain

     -       -       0.27  
                        

Net earnings

   $ 2.26     $ 3.05     $ 1.56  
                        

Weighted average number of common shares outstanding:

      

Basic

     66,152,437       57,428,063       52,984,821  
                        

Diluted

     66,407,530       58,079,875       54,640,143  
                        

See accompanying notes to consolidated financial statements.

 

52


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2007, 2006 and 2005

(dollars in thousands, except per share data)

 

      Series A
  Preferred  
Stock
   Series B
Convertible
Preferred
Stock
   Series C
Preferred
Stock
   Common
Stock
   Capital in
  Excess of  
Par Value
    Retained
Earnings
  (Accumulated  
Dividends in
Excess of Net
Earnings)
      Accumulated  
Other
Comprehensive
Income
   Total  

Balances at December 31, 2004

     44,540      25,000      -      521      722,125       (35,188 )     -      756,998  

Net earnings

     -      -      -      -      -       89,400       -      89,400  

Dividends declared and paid:

                     

$2.25 per share of Series A Preferred Stock

     -      -      -      -      -       (4,008 )     -      (4,008 )

$167.50 per share of Series B Convertible Preferred Stock

     -      -      -      -      -       (1,675 )     -      (1,675 )

$1.30 per share of common stock

     -      -      -      1      2,684         (69,018 )     -      (66,333 )

Issuance of common stock:

                     

1,636,532 shares in connection with business combination

     -      -      -      16      31,143       -       -      31,159  

180,580 shares

     -      -      -      2      2,649       -       -      2,651  

912,334 shares under discounted stock purchase program

     -      -      -      9      18,063       -       -      18,072  

Issuance of 216,168 shares of restricted common stock

     -      -      -      2      (2 )     -       -      -  

Stock issuance costs

     -      -      -      -      (8 )     -       -      (8 )

Amortization of deferred compensation

     -      -      -      -      1,831       -       -      1,831  
                                                           

Balances at December 31, 2005

   $         44,540    $         25,000    $         -    $         551    $         778,485     $ (20,489 )   $                     -    $         828,087  

See accompanying notes to consolidated financial statements.

 

53


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – CONTINUED

Years Ended December 31, 2007, 2006 and 2005

(dollars in thousands, except per share data)

 

      Series A
  Preferred  
Stock
   Series B
Convertible
Preferred
Stock
    Series C
Preferred
Stock
   Common
Stock
   Capital in
  Excess of  
Par Value
    Retained
Earnings
  (Accumulated  
Dividends in
Excess of Net
Earnings)
      Accumulated  
Other
Comprehensive
Income
    Total  

Balances at December 31, 2005

   $         44,540    $         25,000     $ -    $         551    $         778,485     $     (20,489 )   $ -     $     828,087  

Net earnings

     -      -       -      -      -       182,505       -       182,505  

Dividends declared and paid:

                   

$2.25 per share of Series A Preferred Stock

     -      -       -      -      -       (4,376 )     -       (4,376 )

$41.875 per share of Series B Convertible Preferred Stock(1)

     -      -       -      -      -       (419 )     -       (419 )

$0.250955 per depositary share of Series C Preferred Stock

     -      -       -      -      -       (923 )     -       (923 )

$1.32 per share of common stock

     -      -       -      3      7,073       (76,035 )     -       (68,959 )

Conversion of 10,000 shares of Series B Convertible Preferred Stock to 1,293,996 shares of common stock

     -      (25,000 )     -      13      24,987       -       -       -  

Issuance of 3,680,000 depositary shares of Series C Preferred Stock

     -      -       92,000      -      -       -       -       92,000  

Issuance of common stock:

                   

272,184 shares

     -      -       -      3      4,654       -       -       4,657  

2,715,235 shares – discounted stock purchase program

     -      -       -      27      58,632       -       -       58,659  

Issuance of 79,500 shares of restricted common stock

     -      -       -      1      (1 )     -       -       -  

Stock issuance costs

     -      -       -      -      (3,111 )     -       -       (3,111 )

Amortization of deferred compensation

     -      -       -      -      3,166       -       -       3,166  

Treasury lock – gain on interest rate hedge(2)

     -      -       -      -      -       -       3,653       3,653  

Amortization of interest rate hedge

     -      -       -      -      -       -       (345 )     (345 )

Unrealized gain – Commercial mortgage residual interests

     -      -       -      -      -       -       1,992       1,992  

Stock value adjustment

     -      -       -      -      -       -       (81 )     (81 )
                                                             

Balances at December 31, 2006

   $ 44,540    $ -     $ 92,000    $ 598    $ 873,885     $ 80,263     $                 5,219     $ 1,096,505  

 

(1)

Includes $367 dividends paid in January 2007.

(2)

Fair value of interest rate hedge net of prior year amortization reclassified from NNN’s unsecured notes payable from the unamortized interest rate hedge gain resulting from the termination of the $94,000 swap in June 2004.

See accompanying notes to consolidated financial statements.

 

54


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – CONTINUED

Years Ended December 31, 2007, 2006 and 2005

(dollars in thousands, except per share data)

 

     Series A
  Preferred  
Stock
    Series B
Convertible
Preferred
Stock
   Series C
Preferred
Stock
   Common
Stock
   Capital in
  Excess of  

Par Value
    Retained
Earnings
  (Accumulated  
Dividends in
Excess of Net
Earnings)
      Accumulated  
Other
Comprehensive
Income
    Total  

Balances at December 31, 2006

   $     44,540     $                 -    $         92,000    $         598    $         873,885     $         80,263     $                 5,219     $     1,096,505  

Net earnings

     -       -      -      -      -       157,110       -       157,110  

Dividends declared and paid:

                   

$1.84375 per depositary share of Series C Preferred Stock

     -       -      -      -      -       (6,785 )     -       (6,785 )

$1.40 per share of common stock

     -       -      -      6      13,947       (92,989 )     -       (79,036 )

Redemption of 1,781,589 shares of Series A Preferred Stock

     (44,540 )     -      -      -      -       -       -       (44,540 )

Issuance of common stock:

                   

9,861,323 shares

     -       -      -      98      247,643       -       -       247,741  

2,054,805 shares – discounted stock purchase program

     -       -      -      21      49,006       -       -       49,027  

Issuance of 198,119 shares of restricted common stock

     -       -      -      2      (2 )     -       -       -  

Stock issuance costs

     -       -      -      -      (11,206 )     -       -       (11,206 )

Amortization of deferred compensation

     -       -      -      -      2,091       -       -       2,091  

Interest rate hedge termination

     -       -      -      -      -       -       (3,119 )     (3,119 )

Amortization of interest rate hedges

     -       -      -      -      -       -       (309 )     (309 )

Unrealized loss – Commercial mortgage residual interests

     -       -      -      -      -       -       (326 )     (326 )

Stock value adjustment

     -       -      -      -      -       -       132       132  
                                                             

Balances at December 31, 2007

   $ -     $ -    $ 92,000    $ 725    $ 1,175,364     $ 137,599     $ 1,597     $ 1,407,285  

See accompanying notes to consolidated financial statements.

 

55


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

     Year Ended December 31,  
     2007     2006     2005  

Cash flows from operating activities:

      

Net earnings

   $ 157,110     $ 182,505     $ 89,400  

Adjustments to reconcile net earnings to net cash provided by operating activities:

      

Stock compensation expense

     2,091       3,170       1,971  

Depreciation and amortization

     32,976       24,524       22,350  

Impairment – real estate

     1,970       693       3,729  

Impairment – commercial mortgage residual interests valuation adjustment

     638       8,779       2,382  

Amortization of notes payable discount

     164       137       105  

Amortization of deferred interest rate hedges

     (309 )     (345 )     (326 )

Equity in earnings of unconsolidated affiliates

     (49 )     (122 )     (1,209 )

Distributions received from unconsolidated affiliates

     30       864       3,293  

Minority interests

     1,143       2,622       (5,854 )

Gain on disposition of real estate, Investment Portfolio

     (56,625 )     (91,165 )     (9,816 )

Gain on disposition of equity investment

     -       (11,373 )     -  

Gain on disposition of real estate, Inventory Portfolio

     (12,133 )     (13,781 )     (21,627 )

Extraordinary gain

     -       -       (14,786 )

Deferred income taxes

     (4,590 )     (8,366 )     (1,709 )

Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:

      

Additions to real estate, Inventory Portfolio

     (165,160 )     (195,956 )     (137,286 )

Proceeds from disposition of real estate, Inventory Portfolio

     160,173       101,324       79,065  

Decrease in real estate leased to others using the direct financing method

     2,130       2,982       2,915  

Increase in work in process

     (4,217 )     (3,315 )     (4,355 )

Decrease (increase) in mortgages, notes and accrued interest receivable

     (301 )     795       6,465  

Decrease in receivables

     3,924       642       7,730  

Decrease (increase) in accrued rental income

     (2,631 )     (5,777 )     593  

Decrease (increase) in other assets

     3,615       (520 )     877  

Increase in accrued interest payable

     5,254       450       913  

Increase (decrease) in other liabilities

     4,510       1,951       (4,365 )

Increase (decrease) in current tax liability

     (79 )     958       (1,229 )
                        

Net cash provided by operating activities

     129,634       1,676       19,226  
                        

Cash flows from investing activities:

      

Proceeds from the disposition of real estate, Investment Portfolio

     136,295       222,778       38,982  

Proceeds from the disposition of equity investment

     -       10,239       -  

Additions to real estate, Investment Portfolio:

      

Accounted for using the operating method

     (677,101 )     (351,100 )     (267,488 )

Accounted for using the direct financing method

     -       (1,449 )     (309 )

Investment in unconsolidated affiliates

     (4,156 )     -       -  

Increase in mortgages and notes receivable

     (44,888 )     (18,371 )     (17,738 )

Mortgage and notes payments received

     19,862       39,075       16,846  

Cash received from commercial mortgage residual interests

     6,208       16,885       11,704  

Business combination, net of cash acquired

     -       -       2,183  

Restricted cash

     36,587       (6,396 )     (12,764 )

Acquisition of 1.3 percent interest in Services

     -       -       (829 )

Payment of lease costs

     (2,912 )     (2,790 )     (1,253 )

Other

     (6,612 )     1,030       (117 )
                        

Net cash used in investing activities

     (536,717 )     (90,099 )     (230,783 )
                        

See accompanying notes to consolidated financial statements.

 

56


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(dollars in thousands)

 

     Year Ended December 31,  
      2007     2006     2005  

Cash flows from financing activities:

      

Proceeds from line of credit payable

   $       662,300     $       379,000     $     373,500  

Repayment of line of credit payable

     (560,500 )     (513,300 )     (229,100 )

Repayment of mortgages payable

     (8,412 )     (20,241 )     (6,644 )

Proceeds from notes payable – convertible

     -       172,500       -  

Repayment of notes payable – secured

     (33,300 )     -       -  

Proceeds from notes payable

     249,122       -       149,610  

Repayment of notes payable

     -       (3,750 )     (11,150 )

Payment of interest rate hedge

     (3,228 )     -       -  

Payment of debt costs

     (2,453 )     (3,864 )     (3,073 )

Repayment of financing lease obligation

     (26,007 )     -       -  

Proceeds from issuance of common stock

     310,721       70,392       23,268  

Proceeds from issuance of preferred stock

     -       88,902       -  

Redemption of 1,781,589 shares of Series A Preferred Stock

     (44,540 )     -       -  

Payment of Series A Preferred Stock dividends

     -       (4,376 )     (4,008 )

Payment of Series B Convertible Preferred Stock dividends

     -       (419 )     (1,675 )

Payment of Series C Preferred Stock dividends

     (6,785 )     (923 )     -  

Payment of common stock dividends

     (92,989 )     (76,039 )     (69,018 )

Minority interest distributions

     (62 )     (5,817 )     (3,858 )

Minority interest contributions

     155       2       -  

Stock issuance costs

     (11,115 )     (203 )     (8 )
                        

Net cash provided by financing activities

     432,907       81,864       217,844  
                        

Net increase (decrease) in cash and cash equivalents

     25,824       (6,559 )     6,287  

Cash and cash equivalents at beginning of year

     1,675       8,234       1,947  
                        

Cash and cash equivalents at end of year

   $ 27,499     $ 1,675     $ 8,234  
                        

Supplemental disclosure of cash flow information:

      

    Interest paid, net of amount capitalized

   $ 51,824     $ 50,774     $ 38,684  
                        

    Taxes paid

   $ 1,375     $ 1,137     $ 4,494  
                        

Supplemental disclosure of non-cash investing and financing activities:

      

Issued 206,718, 79,500 and 223,468 shares of restricted and unrestricted common stock in 2007, 2006 and 2005, respectively, pursuant to NNN’s performance incentive plan

   $ 4,214     $ 1,763     $ 4,003  
                        

Converted 10,000 shares of Series B Convertible Preferred Stock to 1,293,996 shares of common stock in 2006

   $ -     $ 25,000     $ -  
                        

Issued 7,750 and 14,062 shares of common stock in 2007 and 2006, respectively to directors pursuant to NNN’s performance incentive plan

   $ 182     $ 307     $ -  
                        

Issued 16,346 and 33,379 shares of common stock in 2007 and 2006, respectively pursuant to NNN’s Deferred Director Fee Plan

   $ 331     $ 655     $ -  
                        

Surrender of 8,600 and 30,135 shares of restricted common stock in 2007 and 2005, respectively

   $ 182     $ -     $ 461  
                        

Dividends on unvested restricted stock shares

     -     $ 4     $ -  
                        

Change in other comprehensive income

   $ (3,622 )   $ 5,219     $ 1,254  
                        

Change in lease classification

   $ -     $ 885     $ 2,158  
                        

Transfer of real estate from Inventory Portfolio to Investment Portfolio

   $ 14,845     $ 12,933     $ 4,752  
                        

Note and mortgage notes receivable accepted in connection with real estate transactions

   $ 9,747     $ 1,582     $ 2,415  
                        

Assignment of mortgage payable in connection with the disposition of real estate

   $ -     $ 95,000     $ 406  
                        

Issued 1,636,532 shares of common stock in connection with the acquisition of National Properties Corporation (“NAPE”) in 2005

   $ -     $ -     $ 31,160  
                        

Interest rate hedge

   $ 109     $ -     $ -  
                        

See accompanying notes to consolidated financial statements.

 

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NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2007, 2006 and 2005

Note 1 – Organization and Summary of Significant Accounting Policies:

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

NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, mortgages and notes receivable (including structured finance investments) on the consolidated balance sheets and commercial 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 wholly owned subsidiaries. NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). As of December 31, 2007, NNN owned 908 Investment Properties, with an aggregate gross leasable area of 10,610,000 square feet, located in 44 states. In addition to the Investment Properties, as of December 31, 2007, NNN had $65,964,000 and $24,340,000 in mortgages and notes receivables (including structured finance investments) and commercial mortgage residual interests, respectively. The Inventory Assets are operated through the TRS. The 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 December 31, 2007, the TRS owned 56 Inventory Properties.

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.

NNN’s 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. NNN applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by NNN due to the significance of rights held by other parties.

 

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The TRS develops real estate through various joint venture development affiliate agreements. NNN consolidates the joint venture development entities listed in the table below based upon either NNN being the primary beneficiary of the respective variable interest entity or NNN having a controlling interest over the respective entity. NNN 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 as of December 31, 2007:

 

Date of Agreement

  

Entity Name

   TRS’
    Ownership %    

November 2002

   WG Grand Prairie TX, LLC    60%

February 2003

   Gator Pearson, LLC    50%

February 2004

   CNLRS Yosemite Park CO, LLC    50%

September 2004

   CNLRS Bismarck ND, LLC    50%

December 2005

   CNLRS P&P, L.P.    50%

February 2006

   CNLRS BEP, L.P.    50%

February 2006

   CNLRS Rockwall, L.P.    50%

September 2006

   NNN Harrison Crossing, L.P.    50%

September 2006

   CNLRS RGI Bonita Springs, LLC    50%

NNN no longer holds an interest in the collective partnership interest of CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”). In October 2006, NNN sold its equity investment for $10,239,000 (see Note 4).

In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JVI”) with an affiliate of Crow Holdings Realty Partners IV, LP (see Note 4).

In May 2005, NNN (through a wholly owned subsidiary of the TRS) exercised its option to purchase 78.9 percent of the common shares of Orange Avenue Mortgage Investments, Inc. (“OAMI”). As a result, NNN has consolidated OAMI in its consolidated financial statements (see Note 22).

Real Estate – Investment Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed 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.

Purchase Accounting for Acquisition of Real Estate Subject to a Lease – For acquisitions of real estate subject to a lease subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of tenant relationships, based in each case on their relative fair values.

The fair value of the tangible assets of an acquired leased 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 the relative fair values of these assets. The as-if-vacant fair value of a property is provided to management by a qualified appraiser.

 

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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 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 non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term.

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.

The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.

Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below:

Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

Direct financing method – Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on NNN’s net investment in the leases.

Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.

 

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Real Estate – Inventory Portfolio – The TRS acquires, develops and owns properties that it intends to sell. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been, or are currently being, constructed by the TRS. The TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the TRS includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate held for sale is not depreciated. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the TRS classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated (see Note 19).

Real Estate Dispositions – When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued rental income for operating leases and the net investment for direct financing leases are removed from the accounts and gains and losses from the dispositions are reflected in income. Gains from the disposition of real estate are generally recognized using the full accrual method in accordance with the provisions of SFAS No. 66 “Accounting for Real Estate Sales,” provided that various criteria relating to the terms of the sale and any subsequent involvement by NNN with the real estate sold are met. Lease termination fees are recognized when the related leases are cancelled and NNN no longer has a continuing obligation to provide services to the former tenants.

Valuation of Mortgages, Notes and Accrued Interest – The allowance related to the mortgages, notes and accrued interest is NNN’s best estimate of the amount of probable credit losses. The allowance is determined on an individual note basis in reviewing any payment past due for over 90 days. Any outstanding amounts are written off against the allowance when all possible means of collection have been exhausted.

Investment in Unconsolidated Affiliates – NNN accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 4).

Commercial Mortgage Residual Interests, at Fair Value – Commercial 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 stockholders’ equity. The commercial mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of OAMI. NNN recognizes the excess of all cash flows attributable to the commercial 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 other than temporary valuation impairments if and when there has been a change in the timing or amount of estimated cash flows, exclusive of changes in interest rates, that leads to a loss in value. Certain of the commercial mortgage residual interests have been pledged as security for notes payable.

Cash and Cash Equivalents – NNN considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.

 

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Cash accounts maintained on behalf of NNN in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, NNN has not experienced any losses in such accounts. NNN limits investment of temporary cash investments to financial institutions with high credit standing; therefore, management believes it is not exposed to any significant credit risk on cash and cash equivalents.

Restricted Cash – Restricted cash consisted of amounts held in restricted accounts in connection with the sale of certain assets of OAMI to a third party (the “Buyer”). As of December 31, 2007, NNN has no cash held in restricted accounts. The amount held in these accounts at December 31, 2006 was $36,728,000. In December 2007, in accordance to agreements with the Buyer, the restrictions expired. NNN used a portion of the amounts released to repay the $10,500,000 OAMI secured note payable.

Valuation of Receivables – NNN estimates of the collectibility of its accounts receivable related to rents, expense reimbursements and other revenues. NNN analyzes accounts receivable and historical bad debt levels, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.

Debt Costs – Debt costs incurred in connection with NNN’s $400,000,000 line of credit and mortgages payable have been deferred and are being amortized over the term of the respective loan commitment using the straight-line method, which approximates the effective interest method. Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized over the term of the respective debt obligation using the effective interest method.

Revenue Recognition – Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 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.

Earnings Per Share – Basic net earnings per share is computed by dividing net earnings available to common stockholders 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 stockholders 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.

 

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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 for each of the years ended December 31:

 

      2007     2006     2005  

Weighted average number of common shares outstanding

   66,519,519     57,698,533     53,272,997  

    Unvested restricted stock

   (367,082 )   (270,470 )   (288,176 )
                  

Weighted average number of common shares outstanding used in basic earnings per share

   66,152,437     57,428,063     52,984,821  
                  

Weighted average number of common shares outstanding used in basic earnings per share

   66,152,437     57,428,063     52,984,821  

Effect of dilutive securities:

      

Restricted stock

   143,550     114,367     221,337  

Common stock options

   69,040     107,909     128,944  

Assumed conversion of Series B Convertible Preferred Stock to common stock

   -     400,607     1,293,996  

Directors’ deferred fee plan

   42,503     28,929     11,045  
                  

Weighted average number of common shares outstanding used in diluted earnings per share

   66,407,530     58,079,875     54,640,143  
                  

In April 2006, the Series B Convertible Preferred shares were converted into 1,293,996 shares of common stock and therefore are included in the computation of both basic and diluted weighted average shares outstanding. In addition, the potential dilutive shares related to convertible notes payable were not included in computing earnings per common share because their effects would be antidilutive.

Stock-Based Compensation – On January 1, 2006, NNN 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, NNN 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 NNN’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 year ended December 31, 2007.

Income Taxes – NNN 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. NNN generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100 percent of its real estate investment trust taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2007, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state taxes on its income and real estate.

NNN and its taxable REIT subsidiaries 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

 

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the federal income tax regulations. As a result, certain activities of NNN which occur within its TRS entities are subject to federal and state income taxes (See Note 3). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to NNN’s taxable REIT subsidiaries 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 carryforwards. 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 September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The changes to current practice resulting from the application of the SFAS 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price) and not the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price). This statement also emphasizes that fair value is a market-based measurement, not an entity specific measurement and subsequently a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The statement also clarifies that the market participant assumptions include assumptions about risk, and assumptions about the effect of a restriction on the sale or use of an asset. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This statement should be applied prospectively as of the beginning of the year in which this statement is initially applied. A limited form of retrospective application of SFAS 157 is allowed for certain financial instruments. NNN has evaluated the provisions of SFAS 157 and determined that the adoption of SFAS 157 will not have a significant impact on NNN’s financial position or results of operations.

In February 2007, FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which expands the scope of what companies may carry at fair value. This statement also includes an amendment to SFAS Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). SFAS 159 offers an irrevocable option to carry the vast majority of recognized financial assets and liabilities at fair value with changes in fair value recorded in earnings. This statement can be applied instrument by instrument but must be applied to the entire financial instrument and not portions thereof. This statement does not apply to: (a) financial assets and financial liabilities recognized under leases as defined in SFAS Statement No. 13 “Accounting for Leases” with the exception of a guarantee of a third party lease obligation or a contingent obligation arising from a cancelled lease; (b) financial instruments that are in whole or part,

 

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classified by the issuer as a component of stockholder’s equity (such as convertible debt security with a non-contingent beneficial conversion feature); (c) non-financial insurance contracts and warranties; and (d) financial instruments resulting from the separation of an embedded non-financial derivative instrument from a non-financial hybrid instrument and various employers’ and plan obligations for pension benefits, post retirement benefits and other forms of deferred compensation arrangements including stock purchase plans and stock option plans. The amendment to SFAS 115 affects entities with available-for-sale and trading securities. This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 will not have a significant impact on NNN’s financial position or results of operation.

In May 2007, a FASB Staff Position (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation 48,” was issued to amend Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FSP FIN 48-1 clarifies that a tax position could be effectively settled upon examination by a taxing authority. An enterprise should make the assessment on a position-by-position basis, but an enterprise could conclude that all positions in a particular tax year are effectively settled. In determining effective settlement an enterprise shall evaluate all the following conditions (a) the taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required and expected to perform for the tax position; (b) the enterprise does not intend to appeal or litigate any aspect of the tax position included in the completed examination, and (c) it is remote that the taxing authority would examine or reexamine any aspect of the tax position. In making this assessment management shall consider the taxing authority’s policy on reopening closed examinations and the specific facts and circumstances of the tax position. Management shall presume the taxing authority has full knowledge of all relevant information in making the assessment on whether the taxing authority would reopen a previously closed examination. This FSP was applied upon initial adoption of FIN 48. If an enterprise did not apply FIN 48 in a manner consistent to this FSP then adoption of the provisions of FSP FIN 48-1 should be retrospectively applied to the date of the initial adoption of FIN 48. The adoption of this FSP did not have a significant impact on the NNN’s financial position or results of operations.

In June 2007, FASB issued and ratified Emerging Issues Task Force No. 06-11, (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends On Share-Based Payment Award.” EITF 06-11 concludes that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified non-vested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 should be applied prospectively and is effective for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. Retroactive application to previously issued financial statements is prohibited. The adoption of EITF 06-11 will not have a significant impact on NNN’s financial position or results of operation.

In December 2007, FASB issued Statements No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) the objective of which is to improve and simplify the accounting for business combinations. SFAS 141(R) will improve reporting by creating greater consistency in the accounting and financial reporting of business combinations. This statement requires the new acquiring entity to recognize all assets acquired and liabilities assumed in business combination

 

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transactions; establishes an acquisition-date fair value for said assets and liabilities; and fully disclose to investors the financial effect the acquisition will have. SFAS 141(R) applies to business combinations between mutual entities, including those combinations achieved in the absence of a transaction involving the acquirer such as through the lapse of minority veto rights and combinations achieved without the transfer of consideration, for example, by contract alone. FAS 141(R) specifically excludes joint ventures and common control transactions. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. NNN is currently evaluating the provisions for SFAS 141(R) to determine the potential impact, if any, the adoption will have on NNN’s financial position or results of operations.

In December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), an amendment to Accounting Research Board No. 51 SFAS 160 objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. NNN is currently evaluating the provisions for SFAS 160 to determine the potential impact, if any, the adoption will have on NNN’s financial position or results of operations.

The FASB is currently reviewing comments on a proposed FASB Staff Position (the “proposed FSP”) which, if issued, would require separate accounting for the debt and equity components of convertible instruments. The proposed FSP would require the value assigned to the debt component to be the estimated fair value of a similar bond without the conversion feature, which would result in the debt being recorded at a discount. The debt discount would be amortized over the expected life of the debt as additional interest expense. The proposed FSP would be effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The guidance in the proposed FSP would be applied retrospectively to all periods presented and could result in additional annual interest expense recognized by NNN if adopted, as proposed.

Use of Estimates – Management of NNN 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates include provision for impairment and allowances for certain assets, accruals, useful lives of assets and capitalization of costs. Actual results could differ from those estimates.

 

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Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2007 presentation. These reclassifications had no effect on stockholders’ equity or net earnings.

The statements of cash flow for the years ended December 31, 2006 and 2005 reflect a reclassification of $16,855,000 and $11,704,000, respectively, to reclassify the cash received from commercial mortgage residual assets from “cash flows from operating activities” to “cash flows from investing activities.” For the year ended December 31, 2006, the reclassification resulted in a change in the “net cash provided by operating activities” from $18,561,000 to $1,676,000 and a change in the “net cash used in investing activities” from $106,984,000 to $90,099,000. For the year ended December 31, 2005, the reclassification resulted in a change in the “net cash provided by operating activities” from $30,930,000 to $19,226,000 and a change in the “net cash used in investing activities” from $242,487,000 to $230,783,000. The reclassification does not effect the net change in cash for either of the years ended December 31, 2006 and 2005 and has no impact on the consolidated balance sheets, consolidated statements of earnings and the related earnings per share amounts or the consolidated statements of stockholders’ equity.

Note 2 – Real Estate – Investment Portfolio:

Leases – NNN generally leases its Investment Properties to established tenants. As of December 31, 2007, 892 of the Investment Property leases have been classified as operating leases and 26 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 10 of these leases are accounted for as operating leases. Substantially all leases have initial terms of 10 to 20 years (expiring between 2008 and 2027) and provide for minimum rentals. In addition, the tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. 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 NNN’s Investment Properties are subject to leases under which NNN retains responsibility for certain costs and expenses of the property. As of December 31, 2007, the weighted average remaining lease term was approximately 13 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.

Investment Portfolio – Accounted for Using the Operating Method – Real estate subject to operating leases consisted of the following as of December 31 (dollars in thousands):

 

     2007    2006

Land and improvements

   $ 938,804    $ 693,187

Buildings and improvements

     1,201,999      830,450

Leasehold interests

     2,532      2,532
             
     2,143,335      1,526,169

Less accumulated depreciation and amortization

     (111,087)      (87,359)
             
     2,032,248      1,438,810

Work in progress

     25,556      3,769
             
     2,057,804      1,442,579

Less impairment

     (1,958)      (1,583)
             
   $     2,055,846    $     1,440,996
             

 

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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. For the years ended December 31, 2007, 2006 and 2005, NNN recognized collectively in continuing and discontinued operations, $2,672,000, $3,160,000, and $2,053,000, respectively, of such income. At December 31, 2007 and 2006, the balance of accrued rental income, net of allowances of $3,077,000 and $2,536,000, respectively, was $24,652,000 and $26,510,000, respectively.

In connection with the development of 27 Investment Properties, NNN has agreed to fund construction commitments (including land costs) of $71,883,000, of which $44,561,000 has been funded as of December 31, 2007.

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2007 (dollars in thousands):

 

2008

   $ 189,858

2009

     188,275

2010

     185,705

2011

     181,700

2012

     176,464

Thereafter

     1,652,500
      
   $     2,574,502
      

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index (“CPI”) or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales.

Investment Portfolio – Accounted for Using the Direct Financing Method – The following lists the components of net investment in direct financing leases at December 31 (dollars in thousands):

 

      2007     2006  

Minimum lease payments to be received

   $     54,967     $     104,756  

Estimated unguaranteed residual values

     13,622       25,015  

Less unearned income

     (31,092 )     (58,437 )
                

Net investment in direct financing leases

   $ 37,497     $ 71,334  
                

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2007 (dollars in thousands):

 

2008

   $ 5,024

2009

     5,104

2010

     5,123

2011

     5,108

2012

     5,139

Thereafter

     29,469
      
   $     54,967
      

 

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The above table does not include future minimum lease payments for renewal periods, potential variable CPI rent increases or contingent rental payments that may become due in future periods (See Real Estate – Accounted for Using the Operating Method).

Impairments – As a result of NNN’s review of long lived assets for impairment, including identifiable intangible assets, NNN recognized the following impairments for each of the years ended December 31 (dollars in thousands):

 

      2007    2006    2005

Continuing operations:

        

    Real estate

   $ 503    $ -    $ 345

    Intangibles(1)

     288      -      1,328
                    
     791      -      1,673

Discontinued operations:

        

    Real estate

     335      693      2,056
                    
   $     1,126    $     693    $     3,729
                    

 

 

(1)

Included in Other Assets on the Consolidated Balance Sheets.

Note 3 – Real Estate – Inventory Portfolio:

As of December 31, 2007, the TRS owned 56 Inventory Properties: 41 completed inventory, nine under construction and six land parcels. As of December 31, 2006, the TRS owned 97 Inventory Properties: 79 complete inventory, five under construction and 13 land parcels. The real estate Inventory Portfolio consisted of the following (dollars in thousands):

 

      2007    2006

Inventory:

     

    Land

   $ 65,983    $ 62,554

    Building

     140,970      101,168
             
     206,953      163,722

Construction projects:

     

    Land

     30,477      42,303

    Work in process

     12,025      22,134
             
     42,502      64,437

Less impairment

     (844)      -
             
   $     248,611    $     228,159
             

In connection with the development of nine Inventory Properties by the TRS, NNN has agreed to fund construction commitments of $24,097,000, of which $17,125,000 has been funded as of December 31, 2007.

 

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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 for the years ended December 31 (dollars in thousands):

 

      2007     2006     2005  
      # of
Properties
   Gain     # of
Properties
   Gain     # of
Properties
   Gain  

Continuing operations

   2    $ 332     6    $ 8,000     6    $ 2,010  

Minority interest

        -          (3,609 )        -  
                                 

Total continuing operations

        332          4,391          2,010  
                                 

Discontinued operations

   69      10,957     58      5,590     22      18,696  

Intersegment eliminations

        844          190          921  

Minority interest

        (1,120 )        (505 )        (5,999 )
                                 

Total discontinued operations

        10,681          5,275          13,618  
                                       
   71    $     11,013     64    $     9,666     28    $     15,628  
                                       

Note 4 – Investments in Unconsolidated Affiliates:

Crow Holdings.  In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV I”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV I plans to acquire up to $220,000,000 of real estate assets leased to convenience store operators from unrelated third parties. NNN owns a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interest. For the year ended December 31, 2007, NNN recognized earnings of $49,000 for NNN Crow JV I. NNN manages the joint venture pursuant to a management agreement and earned management fees of $21,000 for the year ended December 31, 2007.

During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was repaid in full in November 2007.

CNL Plaza.  In May 2002, NNN purchased a 25 percent partnership interest in CNL Plaza Ltd. and CNL Plaza Venture Ltd. (collectively “Plaza”) for $750,000. The remaining partnership interests in Plaza were owned by affiliates of James M. Seneff, Jr. and Robert A. Bourne, each a former member of NNN’s Board of Directors. Plaza owned a 346,000 square foot office building and an interest in an adjacent parking garage. NNN had severally guaranteed 41.67 percent of a $14,000,000 unsecured promissory note on behalf of Plaza. In October 2006, NNN sold its equity investment in Plaza for $10,239,000 and recognized a gain of $11,373,000. In connection with the sale, NNN was released as guarantor of Plaza’s $14,000,000 unsecured promissory note.

During the years ended December 31, 2006 and 2005, NNN received $1,042,000, and $471,000, respectively, in distributions from Plaza. For the year ended December 31, 2006, NNN recognized earnings from Plaza of $122,000, and a loss of $218,000 for the year ended December 31, 2005.

Since November 1999, NNN has leased its headquarters office space from Plaza. NNN’s lease expires in October 2014. In October 2006, NNN amended its lease with Plaza to reduce the square footage leased by NNN. During the years ended December 31, 2007, 2006 and 2005, NNN incurred rental expenses in connection with the lease of $938,000, $1,024,000 and

 

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$1,035,000, respectively. In May 2000, NNN subleased a portion of its office space to affiliates of James M. Seneff, Jr. In October 2006, NNN terminated these subleases in connection with NNN’s amendment. During the years ended December 31, 2006 and 2005, NNN earned $337,000 and $397,000, respectively, in rental and accrued rental income from these affiliates.

The following is a schedule of NNN’s future minimum lease payments related to the office space leased from Plaza at December 31, 2007 (dollars in thousands):

 

2008

   $ 839

2009

     865

2010

     891

2011

     917

2012

     945

Thereafter

     1,804
      
   $     6,261
      

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. NNN has the option to renew its lease with Plaza for three successive five-year periods subject to similar terms and conditions as the initial lease.

Note 5 – Mortgages, Notes and Accrued Interest Receivable:

Mortgage receivables and structured finance are loans secured by real estate, real estate securities or other assets.

As of December 31, 2007 and 2006, NNN held mortgages and notes receivable with an aggregate principal balance of $51,556,000 and $17,227,000, respectively. The mortgage receivables bear interest rates ranging from 7.00% to 12.00% with maturity dates ranging from May 2008 through October 2028.

As of December 31, 2007, the structured finance investments bear a weighted average interest rate of 11.26% per annum, of which 9.78% is payable monthly and the remaining 1.48% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity, which ranges between January 2009 and March 2010. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the certain subsidiaries which own the respective real estate.

Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):

 

     2007     2006  

Mortgages and notes receivable

   $ 51,556     $ 17,227  

Structured Finance

     14,359       13,917  

Accrued interest receivables

     545       641  
                
     66,460       31,785  

Less loan origination fees, net

     (100 )     (206 )

Less allowance

     (396 )     (634 )
                
   $     65,964     $     30,945  
                

 

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Note 6 – Commercial Mortgage Residual Interests:

OAMI holds the commercial mortgage residual interests (“Residuals”) from seven securitizations. 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)

NNN owned these investment interests prior to its acquisition of the equity interest in OAMI.

 

(2)

NNN owns 78.9 percent of OAMI’s investment interest.

Each of the Residuals is recorded at fair value based upon an independent valuation. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity, and other than temporary losses as a result of a change in the timing or amount of estimated cash flows are recorded as an other than temporary valuation impairment. Due to changes in market conditions relating to residual assets, the independent valuation increased the discount rate from 17% to 25% during 2007. As a result of the increase in discount rate and an increase in prepayments of underlying loans of the Residuals, NNN recognized an other than temporary valuation impairment of $638,000 for the year ended 2007. In 2006, as a result of the increase in historical prepayments, the independent valuation changed the assumption in future pay prepayments. As a result, NNN recognized an other than temporary valuation impairment of $8,779,000 for the year ended December 31, 2006.

NNN recorded $326,000 of unrealized losses and $1,992,000 of unrealized gains as other comprehensive income for the years ended December 31, 2007 and 2006, respectively.

The following table summarizes the key assumptions used in determining the value of these assets as of December 31:

 

     2007    2006

Discount rate

   25%    17%

Average life equivalent CPR speeds range

   33.0% to 45.7% CPR    38.7% to 47.6% CPR

Foreclosures:

     

Frequency curve default model

   1.1% maximum rate    1.1% maximum rate

Loss severity of loans in foreclosure

   10%    10%

Yield:

     

LIBOR

   Forward 3-month curve    Forward 3-month curve

Prime

   Forward curve    Forward curve

The following table shows the effects on the key assumptions affecting the fair value of the Residuals at December 31, 2007 (dollars in thousands).

 

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     Residuals

Carrying amount of retained interests

   $     24,340

Discount rate assumption

  

    Fair value at 27% discount rate

   $ 23,807

    Fair value at 30% discount rate

   $ 23,041

Prepayment speed assumption

  

    Fair value of 1% increases above the CPR Index

   $ 24,317

    Fair value of 2% increases above the CPR Index

   $ 25,727

Expected credit losses

  

    Fair value 2% adverse change

   $ 25,745

    Fair value 3% adverse change

   $ 25,742

Yield Assumptions

  

    Fair value of Prime/LIBOR spread contracting 25 basis points

   $ 26,172

    Fair value of Prime/LIBOR spread contracting 50 basis points

   $ 26,608

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on adverse variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation of a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

Note 7 – Line of Credit Payable:

In October 2007, NNN exercised the $100,000,000 accordion feature of its existing revolving credit facility (the “Credit Facility”) increasing the borrowing capacity to $400,000,000 from $300,000,000. NNN’s Credit Facility’s current loan agreement terms as amended and restated in December 2005, (i) lowers the interest rates of the tiered rate structure from a maximum of 135 points above LIBOR to a maximum rate of 112.5 basis points above LIBOR (based upon the debt rating of NNN, the current interest rate is 80 basis points above LIBOR), (ii) requires NNN to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of NNN, the current commitment fee is 20 basis points), (iii) provides for a competitive bid option for up to 50 percent of the facility amount, (iv) extends the expiration date to May 8, 2009 and (v) amends certain of the financial covenants of NNN. The principal balance is due in full upon expiration of the Credit Facility in May 2009, which NNN may request to be extended for an additional 12 months. As of December 31, 2007, $129,800,000 was outstanding and approximately $270,200,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $2,685,000. The Credit Facility had a weighted average interest rate of 6.24% and 5.91% for the years ended December 31, 2007 and 2006, respectively. In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain certain (i) maximum leverage ratios, (ii) debt service coverage, (iii) cash flow coverage and (iv) investment and dividend limitations. At December 31, 2007, NNN was in compliance with those covenants.

 

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For the years ended December 31, 2007, 2006 and 2005, interest cost incurred was $5,937,000, $7,310,000, and $2,948,000 respectively, of which $3,718,000, $2,278,000 and $2,563,000, respectively, was capitalized by NNN as a cost of buildings constructed. For the years ended December 31, 2007, 2006 and 2005, $2,219,000, $5,032,000 and $385,000, respectively, were charged to operations.

Note 8 – Mortgages Payable:

The following table outlines the mortgages payable included in NNN’s consolidated financial statements (dollars in thousands):

 

Entered

   Balance    Interest
Rate
   Maturity(4)    Carrying
Value of
Encumbered
Asset(s)
(1)
    Outstanding Principal
Balance at

December 31,
              2007    2006

June 1996(2)

   $     1,916    8.250%    December 2008    $ 1,739 (5)   $ 263    $ 506

December 1999

     350    8.500%    December 2009      3,270       95      136

December 2001

     623    9.000%    April 2014      962       358      398

December 2001

     698    9.000%    April 2019      1,344       441      463

December 2001

     485    9.000%    April 2019      1,317       226      236

June 2002

     21,000    6.900%    July 2012      25,654       19,759      20,027

February 2004(2)

     6,952    6.900%    January 2017      12,248       5,487      5,907

February 2004(3)

     12,000    7.370%    September 2007      -       -      7,304

March 2005(2)

     1,015    8.140%    September 2016      1,380       851      915
                              
            $     47,914     $     27,480    $     35,892
                              

 

 

(1)

Each loan is secured by a first mortgage lien on certain of NNN’s properties. The carrying values of the assets are as of December 31, 2007.

 

(2)

Date entered represents the date that NNN acquired real estate subject to a mortgage securing a loan. The corresponding original principal balance represents the outstanding principal balance at the time of acquisition.

 

(3)

NNN assumed this long term fixed rate loan when NNN increased its ownership in Net Lease Institutional Realty, L.P. In September 2007, upon maturity, NNN repaid the outstanding principal balance on this long-term fixed rate loan.

 

(4)

Monthly payments include interest and principal, if any; the balance is due at maturity.

 

(5)

NNN has a $354,000 letter of credit that also secures the loan.

The following is a schedule of the annual maturities of NNN’s mortgages payable at December 31, 2007 (dollars in thousands):

 

2008

   $ 1,190

2009

     1,000

2010

     1,022

2011

     1,098

2012

     19,291

Thereafter

     3,879
      
   $     27,480
      

Note 9 – Notes Payable – Secured:

NNN’s consolidated financial statements include the following notes payable, resulting from the acquisition of OAMI (see Note 22) (dollars in thousands):

 

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     Outstanding Principal Balance
at December 31,
   Stated
Rate
   Maturity
Date
         2007                2006              

02-1 Notes(1)

   $ -    $ 10,500    10%    December 2007

03-1 Notes(2)(3)

     12,000      14,000    10%    June 2008
                   
   $     12,000    $     24,500      
                   

 

 

(1)

NNN repaid the outstanding principal amount in December 2007.

 

(2)

Secured by certain equity investments in commercial mortgage residual interests of NNN with a carrying value of $5,445.

 

(3)

Interest is payable quarterly with annual principal payments of $2,000 payable June 30.

The 03-1 Note can be prepaid at the option of OAMI, in whole or in part, without premium or penalty after the pre-payment date, as defined in each respective note.

Note 10 – Notes Payable:

NNN filed a prospectus supplement to its shelf registration for each issuance of notes outlined in the table below (dollars in thousands).

 

Notes

  Issue Date   Principal   Discount(3)   Net
Price
   Stated
Rate
   Effective
Rate
(4)
   Commencement
of Semi-
Annual Interest
Payments
  Maturity
Date

2008(1)

  March 1998   $     100,000   $             271   $ 99,729    7.125%    7.163%    September 1998   March 2008

2010(1)

  September 2000     20,000     126     19,874    8.500%    8.595%    March 2001   September 2010

2012(1)

  June 2002     50,000     287     49,713    7.750%    7.833%    December 2002   June 2012

2014(1)(2)(5)

  June 2004     150,000     440     149,560    6.250%    5.910%    June 2004   June 2014

2015(1)

  November 2005     150,000     390     149,610    6.150%    6.185%    June 2006   December 2015

2017(6)

  September 2007     250,000     877     249,123    6.875%    6.924%    April 2008   October 2017

 

(1)

The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN's Credit Facility.

(2)

The proceeds from the note issuance were used to repay the obligation of the 2004 Notes.

(3)

The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method.

(4)

Includes the effects of the discount, treasury lock gain and swap gain (as applicable).

(5)

NNN entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, NNN terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method.

(6)

NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a liability of $3,260, of which $3,228 was recorded to other comprehensive income. The liability has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method.

Each series of the notes represent senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of NNN. Each of the notes are redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued interest thereon through the redemption date and (ii) the make-whole amount, as defined in the respective supplemental indenture notes.

In connection with the debt offerings, NNN incurred debt issuance costs totaling $6,667,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs for all note issuances have been

 

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deferred and are being amortized over the term of the respective notes using the effective interest method.

In accordance with the terms of the indenture, pursuant to which NNN’s notes have been issued, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain (i) certain leverage ratios and (ii) certain interest coverage. At December 31, 2007, NNN was in compliance with those covenants.

Term Note – In connection with the acquisition of NAPE (see Note 22), NNN assumed a $20,800,000 term note payable (“Term Note”). The principal balance on the Term Note was due in full upon June 2009. The Term Note bore interest based on a tiered rate structure to a maximum rate of 165 basis points above LIBOR. In accordance with the terms of Term Note, NNN was required to meet certain restrictive financial covenants, which among other things, required NNN to maintain certain (i) maximum leverage ratios, (ii) debt service coverage and (iii) cash flow coverage.

In October 2007, NNN repaid the outstanding principal balance on the Term Note. For the year ended December 31, 2006, the Term Note had a weighted average interest rate of 6.62%.

Note 11 – Notes Payable – Convertible:

In September 2006, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued $150,000,000 of 3.95% convertible senior notes due September 2027 (with a 2011 put option). Subsequently, NNN issued an additional $22,500,000 in connection with the underwriters’ over-allotment option (collectively, the “Convertible Notes”). The Convertible Notes were sold at par with interest payable semi-annually commencing on March 15, 2007 (effective interest rate of 3.95%).

The notes are convertible, at the option of the holder, at any time on or after September 15, 2025. Prior to September 15, 2025, holders may convert their Convertible Notes under certain circumstances. The initial conversion rate per $1,000 principal amount of Convertible Notes was 40.9015 shares of NNN’s common stock, which was equivalent to an initial conversion price of $24.4490 per share of common stock. The initial conversion rate is subject to adjustment in certain circumstances. As a result of the increase in NNN’s dividend, the conversion rate was adjusted to 41.0028, which is equivalent to a conversion price of $24.3886. Upon conversion of each $1,000 principal amount of Convertible Notes, NNN will settle any amounts up to the principal amount of the notes in cash and the remaining conversion value, if any, will be settled, at NNN’s option, in cash, common stock or a combination thereof.

The Convertible Notes are redeemable at the option of NNN, in whole or in part, on or after September 20, 2011 for cash equal to 100 percent of the principal amount of the Convertible Notes being redeemed plus unpaid interest accrued to, but not including, the redemption date. In addition, on September 20, 2011, September 15, 2016 and September 15, 2021 note holders may require NNN to repurchase the notes for cash equal to the principal amount of the Convertible Notes to be repurchased plus accrued interest thereon.

In connection with the Convertible Note offering, NNN incurred debt issuance costs totaling $3,850,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs have been

 

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deferred and are being amortized over the period to the earliest put option of the holders, September 20, 2011 using the effective interest method.

Note 12 – Financing Lease Obligation:

In July 2004, NNN sold five investment properties for approximately $26,041,000 and subsequently leased back the properties under a 10-year financing lease obligation. NNN may repurchase one or more of the properties subject to put and call options included in the financing lease. In accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate,” NNN has recognized the sale as a financing transaction. The 10-year financing lease bears an interest rate of 5.00% annually with monthly interest payments of $109,000 and expires in June 2014 unless either the put or call option was exercised. In November 2007, NNN repurchased the properties under the agreements of the put option for approximately $26,007,000.

Note 13 – Preferred Stock:

The following table outlines each issuance of NNN’s preferred stock (dollars in thousands):

 

Non-Voting Preferred Stock Issuance

   Shares
Outstanding
At
December 31,
2007
   Liquidation
Preference
(per share)
   Fixed Annual
Cash
Distribution
(per share)

9% Series A

   -    $ 25.00    $ 2.25000

6.7% Series B Convertible

   -          2,500.00          167.50000

7.375% Series C Redeemable Depositary Shares

   3,680,000      25.00      1.84375

9% Non-Voting Series A Preferred Stock.  In December 2001, NNN issued 1,999,974 shares of 9% Non-Voting Series A Preferred Stock (the “Series A Preferred Stock”). Holders of the Series A Preferred Stock are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions at a rate of nine percent of the $25.00 liquidation preference per annum (equivalent to a fixed annual amount of $2.25 per share). The Series A Preferred Stock ranked senior to NNN’s common stock with respect to distribution rights and rights upon liquidation, dissolution or winding up of NNN.

In January 2007, NNN redeemed all outstanding shares of Series A Preferred Stock at a redemption price of $25.00 per share, plus all accumulated and unpaid distributions through the redemption date of $0.20625 per share.

6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred Stock.  In August 2003, NNN filed a prospectus supplement to its shelf registration statement and issued 10,000 shares of 6.70% Non-Voting Series B Cumulative Convertible Perpetual Preferred Stock (the “Series B Convertible Preferred Stock”) and received gross proceeds of $25,000,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $687,000, consisting primarily of placement fees and legal and accounting fees. Holders of the Series B Convertible Preferred Stock were entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions based on the stated rate and liquidation preferences per annum. In April 2006, the holder of NNN’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock.

 

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7.375% Series C Cumulative Redeemable Preferred Stock.  In October 2006, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 3,200,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), and received gross proceeds of $80,000,000. In addition, NNN issued an additional 480,000 depositary shares in connection with the underwriters’ over-allotment option and received gross proceeds of $12,000,000. In connection with this offering NNN incurred stock issuance costs of approximately $3,098,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses.

Holders of the depositary shares are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash dividends at the rate of 7.375% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.84375 per depositary share). The Series C Preferred Stock underlying the depositary shares ranks senior to NNN’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of NNN. NNN may redeem the Series C Preferred Stock underlying the depositary shares on or after October 12, 2011, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated, accrued and unpaid dividends.

Note 14 – Common Stock:

In June 2005, NNN issued 1,636,532 shares of common stock pursuant to the acquisition of National Properties Corporation (“NAPE”) (see Note 22).

In March 2007, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 5,000,000 shares of common stock at a price of $24.70 per share and received net proceeds of $118,020,000. Subsequently, in April 2007, NNN issued an additional 750,000 shares of common stock in connection with the underwriters’ over-allotment option and received net proceeds of $17,730,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $6,217,000, consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses.

In June 2007, NNN filed a registration statement on Form S-8 with the Securities and Exchange Commission which permits the issuance by NNN of up to 5,900,000 shares of common stock pursuant to NNN’s 2007 Performance Incentive Plan.

In October 2007, NNN filed a prospective supplement to the prospectus contained in its February 2006 Shelf Registration Statement and issued 4,000,000 shares of common stock at a price of $25.94 per share and received net proceeds of $99,150,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $4,874,000, consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses.

Dividend Reinvestment and Stock Purchase Plan.  In February 2006, NNN filed a shelf registration statement with the Securities and Exchange Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”) which permits the issuance by NNN of 12,191,394 shares of common stock. The following outlines the common stock issuances pursuant to the DRIP for the years ended December 31:

 

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     2007    2006

Shares of common stock

         2,645,257          3,046,408

Net proceeds

   $ 62,980    $ 65,722

Note 15 – Employee Benefit Plan:

Effective January 1, 1998, NNN adopted a defined contribution retirement plan (the “Retirement Plan”) covering substantially all of the employees of NNN. The Retirement Plan permits participants to defer up to a maximum of 60 percent of their compensation, as defined in the Retirement Plan, subject to limits established by the Internal Revenue Code. NNN matches up to 60 percent of the participants’ contributions based on a tiered rate structure up to a maximum of eight percent of a participant’s annual compensation. NNN’s contributions to the Retirement Plan for the years ended December 31, 2007, 2006 and 2005 totaled $428,000, $248,000, and $194,000, respectively.

Note 16 – Dividends:

The following presents the characterization for tax purposes of common stock dividends paid to stockholders for the years ended December 31:

 

          2007            2006            2005    

Ordinary dividends

   $ 1.397402    $ 1.150780    $ 1.068470

Qualified dividends

     0.000414      -      0.224510

Capital gain

     0.002184      0.150261      -

Unrecaptured Section 1250 Gain

     -      0.018959      0.002210

Nontaxable distributions

     -      -      0.004810
                    
   $     1.400000    $     1.320000    $     1.300000
                    

The following presents the characterization for tax purposes of preferred stock dividends per share paid to stockholders for the year ended December 31:

 

    Total   Ordinary
Dividends
  Qualified
Dividend
  Capital Gain   Unrecaptured
Section 1250
Gain

2007:

         

Series A(1)

  $ 0.206250   $ 0.205867   $ 0.000061   $ 0.000322   $ -

Series C

    1.843750     1.840328         0.000546         0.002876     -

2006:

         

Series A

    2.250000     1.961557     -     0.256127         0.032316

Series B Convertible(1)

    41.875000     36.506800     -     4.766800     0.601400

Series C(2)

    0.250955     0.218784     -     0.028567     0.003604

2005:

         

Series A

    2.250000     2.250000     -     -     -

Series B Convertible

    167.500000         167.500000     -     -     -

 

 

(1)

Shares of Series A and Series B convertible are no longer outstanding.

 

(2)

Issued in October 2006.

 

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Note 17 – Restructuring Costs:

During the year ended December 31, 2006, NNN 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.

Note 18 – Income Taxes:

In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

NNN is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed its various federal and state filing positions. NNN believes that its income tax filing positions and deductions are well documented and supported. Additionally, NNN believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, NNN did not record a cumulative effect adjustment related to the adoption of FIN 48.

NNN has had no increases or decreases in unrecognized tax benefits for current or prior years since the date of adoption. Further, no interest or penalties have been included since no reserves were recorded and no significant increases or decreases are expected to occur within the next 12 months. When applicable, such interest and penalties will be recorded in non-operating expenses. The periods that remain open under federal statute are 2004 through 2007. NNN also files in many states with varying open years under statute.

For income tax purposes, NNN has taxable REIT subsidiaries in which certain real estate activities are conducted. Additionally, in May 2005, NNN acquired a 78.9 percent equity interest in OAMI, and has consolidated OAMI in its financial statements. OAMI, upon making its REIT election, has remaining tax liabilities relating to the built-in-gain of its assets.

NNN treats some depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between NNN’s effective tax rates for the years ended December 31, 2007, 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 at December 31 (dollars in thousands):

 

     2007     2006  

Temporary differences:

    

Built-in-gain

   $ (6,768 )   $ (9,480 )

Depreciation

     (632 )     (600 )

Other

     79       8  

Excess interest expense carryforward

     5,676       2,010  

Net operating loss carryforward

     134       1,961  
                

Net deferred income tax asset (liability)

   $ (1,511 )   $ (6,101 )

Current income tax asset (payable)

     (160 )     (239 )
                

Income tax asset (liability)

   $ (1,671 )   $ (6,340 )
                

 

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In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate 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 NNN’s taxable REIT subsidiaries. The net operating loss carryforwards expire in 2027. 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 NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2007.

The income tax (expense) benefit consists of the following components for the years ended December 31 (dollars in thousands):

 

     2007     2006     2005  

Net earnings before income taxes

   $     153,849     $     176,283     $     92,362  

Provision for income tax benefit (expense):

      

Current:

      

Federal

     (1,120 )     (1,805 )     (2,402 )

State and local

     (209 )     (339 )     (451 )

Deferred:

      

Federal

     3,570       6,493       (44 )

State and local

     1,020       1,873       (65 )
                        

Total provision for income taxes

     3,261       6,222       (2,962 )
                        

Total net earnings

   $ 157,110     $ 182,505     $ 89,400  
                        

 

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Note 19 – Earnings from Discontinued Operations:

Real Estate – Investment Portfolio – In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN has classified the revenues and expenses related to (i) all Investment Properties that were sold and expired leasehold interests, and (ii) any Investment Property that was held for sale as of December 31, 2007, as discontinued operations. The following is a summary of the earnings from discontinued operations from the Investment Portfolio for each of the years ended December 31 (dollars in thousands):

 

     2007     2006     2005  

Revenues:

      

Rental income from operating leases

   $ 4,400     $ 18,855     $ 28,059  

Earned income from direct financing leases

     2,267       5,552       6,645  

Percentage rent

     -       34       37  

Real estate expense reimbursement from tenants

     318       1,077       2,448  

Interest and other income from real estate transactions

     624       505       390  
                        
     7,609       26,023       37,579  
                        

Operating expenses:

      

General and administrative

     (45 )     97       (66 )

Real estate

     294       2,848       6,736  

Depreciation and amortization

     315       2,071       6,076  

Impairments – real estate

     335       693       2,056  
                        
     899       5,709       14,802  
                        

Other expenses (revenues):

      

Interest and other income

     (3 )     (1 )     (14 )

Interest expense

     0       1,816       3,154  
                        
     (3 )     1,815       3,140  
                        

Earnings before gain on disposition of real estate and loss on extinguishment of mortgage payable

     6,713       18,499       19,637  

Gain on disposition of real estate

     56,625       91,332       9,816  

Loss on extinguishment of mortgage payable

     -       (167 )     -  
                        

Earnings from discontinued operations

   $     63,338     $     109,664     $     29,453  
                        

 

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Real Estate – Inventory Portfolio – NNN 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 December 31, 2007, as discontinued operations. The following is a summary of the earnings from discontinued operations from the Inventory Portfolio for each of the years ended December 31 (dollars in thousands):

 

      2007     2006     2005  

Revenues:

      

Rental income from operating leases

   $         8,616     $         9,235     $         1,986  

Percentage rent

     -       -       6  

Real estate expense reimbursement from tenants

     1,008       311       69  

Interest and other from real estate transactions

     224       336       899  
                        
     9,848       9,882       2,960  
                        

Disposition of real estate:

      

Gross proceeds

     164,338       80,856       70,967  

Costs

     (152,537 )     (75,076 )     (51,350 )
                        

Gain

     11,801       5,780       19,617  
                        

Operating expenses:

      

General and administrative

     78       57       8  

Real estate

     1,504       389       318  

Depreciation and amortization

     68       8       21  

Impairments – real estate

     844       -       -  
                        
     2,494       454       347  
                        

Other expenses (revenues):

      

Interest and other income

     (5 )     -       (1 )

Interest expense

     3,928       1,049       815  
                        

Earnings before income tax expense and minority interest

     15,232       14,159       21,416  

Income tax expense

     (5,276 )     (4,984 )     (5,844 )

Minority interest

     (1,334 )     (1,029 )     (6,021 )
                        

Earnings from discontinued operations

   $ 8,622     $ 8,146     $ 9,551  
                        

Real Estate – Impairment – NNN 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 NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN 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, NNN recognized a $335,000, $693,000 and $2,056,000 impairment in discontinued operations in the Investment Portfolio during the years ended December 31, 2007, 2006 and 2005, respectively. Additionally, NNN recognized an $844,000 impairment in discontinued operations in the Inventory Portfolio during the year ended December 31, 2007. NNN had no impairments in the Inventory Portfolio for the years ended December 31, 2006 and 2005.

 

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Note 20 – Derivatives:

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, 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 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 and interest rate swaps as part of its cash flow hedging strategy. Treasury locks designated as cash flow hedges lock in the yield or price of a treasury security. Treasury locks are cash settled either as a cash inflow or outflow, depending on movements in interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. To date, such derivatives have been used to hedge the variable cash flows associated with floating rate debt and forecasted interest payments of a forecasted issuance of debt.

For derivatives designated as cash flow hedges, the effective portion of changes 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, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.

NNN discontinues hedge accounting prospectively when it is determined that the derivative is no longer highly 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 continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings or may choose to cash settle the derivative at that time.

NNN is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 6 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

In September 2007, NNN terminated two interest rate hedges with a combined notional amount of $100,000,000 that were hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate hedges when terminated was a liability of $3,260,000, of which $3,228,000 was deferred in other comprehensive income.

 

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In June 2004, NNN terminated its forward-starting interest rate swaps with a notional amount of $94,000,000 that was hedging the risk of changes in forecasted interest payments on a forecasted issuance of long-term debt. The fair value of the interest rate swaps when terminated was an asset of $4,148,000, which was deferred in other comprehensive income.

As of December 31, 2007, $229,000 remains in other comprehensive income related to the fair value of the interest rate hedges. During the year ended December 31, 2007 and 2006, NNN reclassified $309,000 and $345,000, respectively, out of other comprehensive income as a reduction to interest expense. During 2008, NNN estimates that an additional $162,000 will be reclassified to interest expense. 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.

As of December 31, 2007 NNN has one interest rate hedge with a positive fair value of $109,000 included in other liabilities. NNN recorded an immaterial amount of hedge ineffectiveness on cash flow hedges as interest expense during the year ended December 31, 2007.

Additionally, 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 December 31, 2006.

Note 21 – Performance Incentive Plan:

In June 2007, NNN filed a registration statement on Form S-8 with the Securities and Exchange Commission which permits the issuance of up to 5,900,000 shares of common stock pursuant to NNN’s 2007 Performance Incentive Plan (the “2007 Plan”). The 2007 Plan replaces NNN’s previous Performance Incentive Plan. The 2007 Plan allows NNN to award or grant to key employees, directors and persons performing consulting or advisory services for NNN 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 2007 Plan. The following summarizes NNN’s stock-based compensation activity for each of the years ended December 31:

 

     Number of Shares  
     2007     2006     2005  

Outstanding, January 1

   236,371     461,175     639,765  

Options granted

   -     -     -  

Options exercised

   (82,767 )   (224,804 )   (173,280 )

Options surrendered

   (34,800 )   -     (5,310 )
                  

Outstanding, December 31

   118,804     236,371     461,175  
                  

Exercisable, December 31

   118,804     236,371     457,000  
                  

The following represents the weighted average option exercise price information for each of the years ended December 31:

 

     2007    2006    2005

Outstanding, January 1

   $     14.92    $     15.66    $     15.33

Granted during the year

     -      -      -

Exercised during the year

     16.12      16.43      14.48

Outstanding, December 31

     13.64      14.92      15.66

Exercisable, December 31

     13.64      14.92      15.67

 

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The following summarizes the outstanding options and the exercisable options at December 31, 2007:

 

     Option Price Range
     $10.1875
to
  $13.6875  
   $14.5700
To
  $17.3750  
   Total

Outstanding options:

        

Number of shares

     52,600      66,204      118,804

Weighted-average exercise price

   $ 11.32    $ 15.49    $ 13.64

Weighted-average remaining contractual life in years

     2.64      3.96      3.38

Exercisable options:

        

Number of shares

     52,600      66,204      118,804

Weighted-average exercise price

   $         11.32    $         15.49    $         13.64

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 December 31, 2007, the intrinsic value of options outstanding was $1,038,000. All options outstanding at December 31, 2007, were exercisable. During the years ended December 31, 2007, 2006 and 2005, NNN received proceeds totaling $1,334,000, $3,694,000 and $2,509,000, respectively, in connection with the exercise of options. NNN issued new common stock to satisfy share option exercises. The total intrinsic value of options exercised during the year ended December 31, 2007, 2006 and 2005, was $664,000, $1,300,000 and $1,026,000, respectively.

Pursuant to the 2007 Plan, NNN has granted and issued shares of restricted stock to certain officers, directors and key associates of NNN. The following summarizes the activity for the year ended December 31, 2007 of such grants.

 

     Number
of
Shares
    Weighted
Average
Share Price

Non-vested restricted shares, January 1

   284,689     $         18.44

Restricted shares granted

   206,719       20.16

Restricted shares vested

   (96,047 )     17.59

Restricted shares forfeited

   (8,600 )     21.18
        

Non-vested restricted shares, December 31

   386,761       19.51
        

In May 2006, NNN 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 for the year ended December 31, 2006. These shares would have otherwise vested through January 2009.

During the years ended December 31, 2007 and 2005, NNN cancelled 8,600 and 30,135 shares, respectively, of restricted stock. No restricted stock was cancelled in 2005.

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 NNN 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.

 

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During the year ended December 31, 2007, NNN granted 79,000 performance based shares with a weighted average grant price of $12.94 to certain executive officers of NNN. The compensation expense for the grant is based upon the fair value of the grant lattice model with the following assumptions: (i) risk free interest rate of 4.8%, (ii) a dividend rate of 5.3%, (iii) a term of five years, and (iv) volatility of 17.5%. Volatility is based upon the historical volatility of NNN’s stock and other factors. The term is assumed to be the vesting date for each tranche. The vesting of these shares is contingent upon achievement of certain performance goals by January 1, 2012.

During the year ended December 31, 2005, NNN granted 38,273 performance based shares with a weighted average grant price of $11.23 to certain executive officers of NNN. Compensation expense for the grant 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 NNN’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. As of December 31, 2007, 15,309 of these shares have vested as a result of the achievement of certain of these performance goals.

The following summarizes other grants made during the year ended December 31, 2007, pursuant to the 2000 Plan.

 

         Shares        Weighted
Average
  Share Price  

Other share grants under the 2007 Plan:

     

Directors’ fees

   7,750    23.54

Deferred Directors’ fees

   16,346    23.59

Non-restricted grant

   4,400    24.70
       
   28,496    23.75
       

Shares available under the 2007 Plan for grant, end of period

   2,964,191   
       

The total compensation cost for share-based payments for the years ended December 31, 2007, 2006 and 2005, totaled $2,583,000, $3,766,000 and $2,156,000, respectively, of such compensation expense. At December 31, 2007, NNN had $5,321,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements under the 2007 Plan. This cost is expected to be recognized over a weighted average period of 3.1 years.

Note 22 – Business Combinations:

Orange Avenue Mortgage Investments, Inc. – On May 2, 2005, NNN exercised its option to acquire 78.9 percent of the common shares of OAMI for $9,379,000. In December 2004, OAMI sold its loan origination, securitization and servicing operations and the majority of its assets and liabilities to a third party, resulting in OAMI becoming a passive owner in a pool of seven commercial real estate loan securitization residual interests. The loans in each of the securitizations are secured by first mortgages on commercial real estate and generally borrower personal guarantees. As a result of the option exercise, NNN has consolidated OAMI in its consolidated financial statements.

 

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In accordance with SFAS 141, NNN recorded the assets and liabilities of OAMI at fair value. NNN recognized an extraordinary gain of $14,786,000, equal to the excess fair value over the option price, as all assets acquired were financial assets and current assets.

The following table summarizes the extraordinary gain recognized by NNN (dollars in thousands) during the year ended December 31, 2005:

 

NNN’s share of net assets acquired

   $         24,434  

Less option price

     (9,379 )

Basis of option

     (269 )
        

Extraordinary gain

   $ 14,786  
        

NNN’s net earnings for the year ended December 31, 2005, includes 78.9 percent of OAMI’s net earnings since the date of the acquisition in the amount of $1,411,000.

Between June 2001 and July 2003, a wholly owned subsidiary of NNN, 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 NNN, is an officer, director and indirect stockholder of OAMI. Craig Macnab, an officer and director of NNN and Julian E. Whitehurst, an officer of NNN, 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 acquisition of the 78.9 percent equity interest in OAMI, NNN 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 (see Note 6).

As a result of NNN’s acquisition of 78.9 percent equity interest in OAMI, NNN’s interest in the LLCs is no longer accounted for as an equity investment and is now included as part of OAMI in NNN’s consolidated financial statements. In addition, certain officers and directors of NNN own preferred shares of OAMI.

Prior to the acquisition of 78.9 percent equity interest in OAMI, NNN received $2,749,000 and $10,562,000 in distributions from the LLCs during the years ended December 31, 2005 and 2004, respectively. For the years ended December 31, 2005 and 2004, NNN recognized $1,467,000 and $5,042,000 of earnings, respectively, from the LLCs.

In 2003, in connection with a loan to OAMI, NNN pledged a portion of its interest in two of the LLCs as partial collateral for the notes payable-secured (see Note 9).

In connection with the independent valuations of the Residuals’ fair value, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007, 2006 and 2005. The reduction in the Residuals’ value that related to the Residuals acquired at the time of the option exercise was recorded as a purchase price allocation adjustment.

NNN merged certain of its wholly owned subsidiaries into National Retail Properties, Inc. and 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, $3,453,000 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 commercial mortgage residual interests.

 

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National Properties Corporation – On June 16, 2005, NNN acquired 100 percent of National Properties Corporation (“NAPE”), a publicly traded company, which owned 43 freestanding properties located in 12 states. Results of NAPE operations have been included in the consolidated financial statements since the date of acquisition. NAPE stockholders received 1,636,532 newly issued shares of NNN’s common stock.

NNN’s net earnings for the year ended December 31, 2005, includes NAPE’s net earnings since the date of acquisition in the amount of $1,867,000.

Note 23 – 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 cash and cash equivalents, restricted cash, mortgages, notes and accrued interest receivable, receivables, mortgages payable, note payable – secured, accrued interest payable, financing lease obligation and other liabilities at December 31, 2007 and 2006, approximate fair value based upon current market prices of similar issues. At December 31, 2007 and 2006, the fair value of NNN’s notes and convertible notes, collectively, was $921,507, 000 and $690,198,000, respectively, based upon the quoted market price.

Note 24 – Related Party Transactions:

For additional related party disclosures see Note 4 and Note 22.

In June 2005, James M. Seneff, Jr. and Robert A. Bourne each retired from the Board of Directors (“Retired Directors”).

NNN has revolving lines of credit with the TRS that allow for an aggregate borrowing capacity of $280,000,000, as of December 31, 2007. The lines of credit each bear interest at 75 percent of the Prime rate plus 4.10% per annum and expire on May 8, 2009 and are secured by a pledge of the real estate and/or the other assets owned by the respective borrower. The outstanding aggregate principal balance of the lines of credit at December 31, 2007 and 2006 was $220,515,000 and $208,395,000, and bore interest at a rate of 9.54% and 10.29%, respectively. In connection with the lines of credit from the TRS, NNN earned $15,851,000, $16,287,000 and $3,511,000 in interest and fees during the years ended December 31, 2007, 2006 and 2005, respectively, each of which was eliminated in consolidation.

In 2005, NNN provided disposition and development services to an affiliate of the Retired Directors. In connection therewith, NNN received an aggregate of $886,000 in fees during the years ended December 31, 2005. There were no fees recognized during the years ended December 31, 2007 and 2006.

In 2002, NNN extended the maturity dates to dates between June and December 2007 of four mortgages securing an original aggregate principal indebtedness totaling $8,514,000 from affiliates of the Retired Directors. In June 2005, NNN received the outstanding principal balance for three of the mortgage loans. In July 2005, NNN received the entire outstanding principal balance for the remaining mortgage loan. In connection therewith, NNN recorded $96,000, as interest and other income from real estate transactions during the year ended December 31, 2005.

 

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Note 25 – Quarterly Financial Data (unaudited):

The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data):

 

2007

   First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Revenues as originally reported

   $     42,713     $     46,421     $     47,783     $     52,565  

Reclassified to discontinued operations

     (2,269 )     (679 )     (123 )     -  
                                

Adjusted revenue

   $ 40,444     $ 45,742     $ 47,660     $ 52,565  
                                

Net earnings

   $ 26,704       48,655       47,386       34,365  
                                

Net earnings per share(1):

        

Basic

   $ 0.41     $ 0.71     $ 0.68     $ 0.46  

Diluted

     0.41       0.70       0.68       0.46  

2006

                        

Revenues as originally reported

   $ 37,026     $ 37,570     $ 37,966     $ 41,578  

Reclassified to discontinued operations

     (3,760 )     (3,725 )     (3,009 )     (2,490 )
                                

Adjusted revenue

   $ 33,266     $ 33,845     $ 34,957     $ 39,088  
                                

Net earnings

   $ 23,448     $ 80,201     $ 21,455     $ 57,401  

Net earnings per share(1):

        

Basic

   $ 0.40     $ 1.38     $ 0.35     $ 0.93  

Diluted

     0.39       1.37       0.35       0.93  

 

 

(1)

Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount.

 

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Note 26 – Segment Information:

NNN has identified two primary financial segments: (i) Investment Assets and (ii) Inventory Assets. The following tables represent the segment data and reconciliation to NNN’s consolidated totals for the years ended December 31, 2007, 2006 and 2005 (dollars in thousands):

 

         Investment    
Assets
        Inventory    
Assets
        Eliminations    
(Intercompany)
        Consolidated    
Totals

2007

                      

External revenues

   $ 177,596     $ 327     $ -     $ 177,923

Intersegment revenues

     15,851       -       (15,851 )     -

Interest revenue

     8,319       40       -       8,359

Interest revenue on commercial mortgage residuals interests

     4,882       -       -       4,882

Gain on the disposition of real estate, Inventory Portfolio

     -       332       -       332

Interest expense

     55,633       8,502       (14,849 )     49,286

Depreciation and amortization

     32,484       109       -       32,593

Operating expenses

     24,109       7,705       -       31,814

Impairments – real estate

     1,302       128       (1 )     1,429

Equity in earnings of

unconsolidated affiliates

     (1,334 )     -       1,383       49

Income tax benefit

     2,675       5,862       -       8,537

Minority interest

     (689 )     879       -       190
                              

Earnings (loss) from continuing operations

     93,772       (9,004 )     382       85,150

Earnings from discontinued operations

     63,338       7,778       844       71,960
                              

Net earnings (loss)

   $ 157,110     $ (1,226 )   $ 1,226     $ 157,110
                              

Assets

   $         2,519,360     $         263,369     $         (243,124)     $         2,539,605
                              

Additions to long-lived assets:

        

Real estate

   $ 677,101     $ 165,160     $ -     $ 842,261
                              

 

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       Investment  
Assets
      Inventory  
Assets
      Eliminations  
(Intercompany)
      Consolidated  
Totals
 

2006

                        

External revenues

   $ 130,230     $ 441     $ -     $ 130,671  

Intersegment revenues

     16,379       -       (16,379 )     -  

Interest revenue

     6,972       61       -       7,033  

Interest revenue on commercial mortgage residuals interests

     7,268       -       -       7,268  

Gain on the disposition of real estate, Inventory Portfolio

     -       8,000       -       8,000  

Interest expense

     48,801       12,352       (15,281 )     45,872  

Depreciation and amortization

     22,386       59       -       22,445  

Operating expenses

     22,103       10,189       (2 )     32,290  

Impairments – real estate

     8,779       -       -       8,779  

Equity in earnings of unconsolidated affiliates

     (2,677 )     -       2,799       122  

Gain on disposition of equity investment

     11,335       38       -       11,373  

Income tax benefit

     5,050       6,156       -       11,206  

Minority interest

     353       (1,945 )     -       (1,592 )
                                

Earnings (loss) from continuing operations

     72,841       (9,849 )     1,703       64,695  

Earnings from discontinued operations

     109,664       7,955       191       117,810  
                                

Net earnings (loss)

   $ 182,505     $ (1,894 )   $ 1,894     $ 182,505  
                                

Assets

   $     1,910,003     $     242,466     $     (234,971 )   $     1,917,498  
                                

Additions to long-lived assets:

        

Real estate

   $ 352,549     $ 195,956     $ -     $ 548,505  
                                

2005

                        

External revenues

   $ 96,550     $ 1,240     $ -     $ 97,790  

Intersegment revenues

     3,511       -       (3,511 )     -  

Interest revenue

     5,702       436       -       6,138  

Interest revenue on commercial mortgage residuals interests

     7,349       -       -       7,349  

Gain on the disposition of real estate, Inventory Portfolio

     -       2,010       -       2,010  

Interest expense

     32,554       3,335       (2,580 )     33,309  

Depreciation and amortization

     16,031       221       -       16,252  

Operating expenses

     18,629       9,395       (9 )     28,015  

Equity in earnings of unconsolidated affiliates

     2,859       (40 )     (1,610 )     1,209  

Impairments – real estate

     4,055       -       -       4,055  

Income tax benefit

     835       2,047       -       2,882  

Minority interest

     (378 )     240       -       (138 )
                                

Earnings (loss) from continuing operations

     45,161       (7,018 )     (2,532 )     35,611  

Earnings from discontinued operations

     29,453       8,629       921       39,003  

Extraordinary gain

     14,786       -       -       14,786  
                                

Net earnings

   $ 89,400     $ 1,611     $ (1,611 )   $ 89,400  
                                

Assets

   $     1,729,778     $     137,291     $     (130,481 )   $     1,736,588  
                                

Additions to long-lived assets:

        

Real estate

   $ 267,797     $ 137,286     $ -     $ 405,083  
                                

 

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Note 27 – Major Tenants:

In the year ended December 31, 2005, NNN recorded rental and earned income from one of its tenants, the United States of America, of $18,827,000. The rental and earned income from the United States of America represented more than 10 percent of NNN’s rental and earned income for the year ended December 2005. As of December 31, 2007 and 2006, NNN did not have any one tenant that accounts for ten percent or more of its rental and earned income.

Note 28 – Commitments and Contingencies:

As of December 31, 2007, NNN had letters of credit totaling $2,685,000 outstanding under its Credit Facility.

In the ordinary course of its business, NNN is a party to various other legal actions which management believes is routine in nature and incidental to the operation of the business of NNN. Management believes that the outcome of the proceedings will not have a material adverse effect upon its operations, financial condition or liquidity.

 

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Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

Process for Assessment and Evaluation of Disclosure Controls and Procedures and Internal Control over Financing Reporting.

NNN carried out an assessment as of December 31, 2007 of the effectiveness of the design and operation of its disclosure controls and procedures and its internal control over financial reporting. This assessment was done under the supervision and with the participation of management, including NNN’s Chief Executive Officer and Chief Financial Officer. Rules adopted by the Commission require NNN to present the conclusions of the Chief Executive Officer and Chief Financial Officer about the effectiveness of NNN’s disclosure controls and procedures and the conclusions of NNN’s management about the effectiveness of NNN’s internal control over financial reporting as of the end of the period covered by this annual report.

CEO and CFO Certifications.  Included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification” of NNN’s Chief Executive Officer and Chief Financial Officer. The forms of Certification are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K that you are currently reading is the information concerning the assessment referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Procedures and Internal Control over Financial Reporting.  Disclosure controls and procedures are designed with the objective of providing reasonable assurance that information required to be disclosed in NNN’s reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures are also designed with the objective of providing reasonable assurance that such information is accumulated and communicated to NNN’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal control over financial reporting is a process designed by, or under the supervision of, NNN’s Chief Executive Officer and Chief Financial Officer, and affected by NNN’s Board of Directors, management and other personnel, 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 (“GAAP”) and includes those policies and procedures that:

 

   

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of NNN’s assets;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that NNN’s receipts and expenditures are being made in accordance with authorizations of management or the Board of Directors; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of NNN’s assets that could have a material adverse effect on NNN’s financial statements.

 

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Scope of the Assessments.  The assessment by NNN’s Chief Executive Officer and Chief Financial Officer of NNN’s disclosure controls and procedures and the assessment by NNN’s management, including NNN’s Chief Executive Officer and Chief Financial Officer, of NNN’s internal control over financial reporting included a review of procedures and discussions with NNN’s management and others at NNN. In the course of the assessments, NNN sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken.

NNN’s internal control over financial reporting is also assessed on an ongoing basis by personnel in NNN’s Accounting department and by NNN’s internal auditors in connection with their internal audit activities. The overall goals of these various assessment activities are to monitor NNN’s disclosure controls and procedures and NNN’s internal control over financial reporting and to make modifications as necessary. NNN’s intent in this regard is that the disclosure controls and procedures and the internal control over financial reporting will be maintained and updated (including with improvements and corrections) as conditions warrant. Management also sought to deal with other control matters in the assessment, and in each case if a problem was identified, management considered what revision, improvement and/or correction was necessary to be made in accordance with NNN’s on-going procedures. The assessments of NNN’s disclosure controls and procedures and NNN’s internal control over financial reporting is done on a quarterly basis so that the conclusions concerning effectiveness of those controls can be reported in NNN’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.

Assessment of Effectiveness of Disclosure Controls and Procedures.

Based upon the assessments, NNN’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, NNN’s disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting.

Management, including NNN’s Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting for NNN. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework to assess the effectiveness of NNN’s internal control over financial reporting. Based upon the assessments, NNN’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, NNN’s internal control over financial reporting was effective. NNN’s independent registered public accounting firm has audited the consolidated financial statements in this Annual Report on Form 10-K and have issued an attestation report on management’s assessment of NNN’s internal control over financial reporting and its opinion on the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting.

During the three months ended December 31, 2007, there were no changes in NNN’s internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, NNN’s internal control for financial reporting.

 

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Limitations on the Effectiveness of Controls.

Management, including NNN’s Chief Executive Officer and Chief Financial Officer, do not expect that NNN’s disclosure controls and procedures or NNN’s internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NNN have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B.  Other Information.

None.

 

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned “Proposal I: Election of Directors – Nominees,” “Proposal I: Election of Directors – Executive Officers,” “Proposal I: Election of Directors – Code of Business Conduct” and “Security Ownership,” and the information in such sections is incorporated herein by reference.

Item 11.  Executive Compensation

Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the sections thereof captioned “Proposal I: Election of Directors – Compensation of Directors,” “Executive Compensation” and “Compensation Committee Report,” and the information in such sections are incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Executive Compensation – Equity Compensation Plan Information,” and “Security Ownership,” and the information in such sections are incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Certain Transactions and the information in such section is incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services

Reference is made to the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14(a); information responsive to this Item is contained in the section thereof captioned “Audit Committee Report,” and the information in such section is incorporated herein by reference.

 

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PART IV

Item 15.  Exhibits and Financial Statement Schedules

 

(a) The following documents are filed as part of this report.

 

(1)    Financial Statements   
   Reports of Independent Registered Public Accounting Firm   
   Consolidated Balance Sheets as of December 31, 2007 and 2006   
   Consolidated Statements of Earnings for the years ended December 31, 2007, 2006 and 2005   
   Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005   
   Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005   
   Notes to Consolidated Financial Statements   
(2)    Financial Statement Schedules   
   Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2007   
   Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2007   

All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto.

 

  (3) Exhibits

The following exhibits are filed as a part of this report.

 

  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 7.375% Series C Cumulative Preferred Stock, par value $0.01 per share, dated October 11, 2006 (filed as Exhibit 3.2 to the Registrant’s Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

  3.3 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).

 

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  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 Indenture, dated as of March 25, 1998, between the Registrant and First Union National Bank, as trustee (filed as Exhibit 4.4 to the Registrant’s Form S-3 (Registration No. 333-132095) filed with the Securities and Exchange Commission on February 28, 2006, 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).

 

  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).

 

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Table of Contents
  4.11 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).

 

  4.12 Seventh Supplemental Indenture, dated as of September 13, 2006, between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006, and incorporated herein by reference).

 

  4.13 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).

 

  4.14 Form of 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 7, 2006, and incorporated herein by reference).

 

  4.15 Specimen certificate representing the 7.375% Series C Cumulative Redeemable Preferred Stock, par value $.01 per share, of the Registrant (filed as Exhibit 4.4 to the Registrant’s Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

  4.16 Deposit Agreement, among the Registrant, American Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts (filed as Exhibit 4.18 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference).

 

  4.17 Form of 6.875% Notes due 2017 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 4, 2007 and incorporated herein by reference).

 

  4.18 Form of Eighth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 4, 2007, and incorporated hereby 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 NNN and the Participant of NNN (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).

 

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Table of Contents
  10.3 Employment Agreement dated May 16, 2006, between the Registrant and Craig Macnab (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on August 3, 2006, and incorporated herein by reference).

 

  10.4 Employment Agreement dated August 17, 2006, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.1 to the Registrant’s Form 8-K dated August 17, 2006, and filed with the Securities and Exchange Commission on August 22, 2006, and incorporated herein by reference).

 

  10.5 Employment Agreement dated August 17, 2006, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.2 to the Registrant’s Form 8-K dated August 17, 2006, and filed with the Securities and Exchange Commission on August 22, 2006, 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 First Amendment to Eighth Amended and Restated Line of Credit and Security Agreement, dated February 20, 2007, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.8 with the Securities and Exchange Commission on February 21, 2007, and incorporated herein by reference).

 

  10.8 Employment Agreement dated January 2, 2007, between the Registrant and Paul Bayer (filed herewith).

 

  10.9 Employment Agreement dated January 2, 2007, between Christopher P. Tessitore (filed herewith).

 

  12. Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith).

 

  21. Subsidiaries of the Registrant (filed herewith).

 

  23. Consent of Independent Accountants

 

  23.1 Ernst & Young LLP dated February 22, 2008 (filed herewith).

 

  23.2 KPMG LLP dated February 22, 2008 (filed herewith).

 

  24. Power of Attorney (included on signature page).

 

  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).

 

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Table of Contents
  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).

 

  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).

 

  99. Additional Exhibits

 

  99.1 Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith).

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 22nd day of February, 2008.

 

NATIONAL RETAIL PROPERTIES, INC.

By:

    /s/ Craig Macnab
    Craig Macnab
 

  Chairman of the Board and

  Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints each of Craig Macnab and Kevin B. Habicht as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof.

 

Signature

  

Title

 

Date

/s/ Craig Macnab

Craig Macnab

  

Chairman of the Board and

Chief Executive Officer

  February 22, 2008

/s/ Clifford R. Hinkle

Clifford R. Hinkle

   Lead Director   February 22, 2008

Dennis Gershenson

   Director   February 22, 2008

/s/ Richard B. Jennings

Richard B. Jennings

   Director   February 22, 2008

/s/ Ted B. Lanier

Ted B. Lanier

   Director   February 22, 2008

/s/ Robert C. Legler

Robert C. Legler

   Director   February 22, 2008

/s/ Robert Martinez

Robert Martinez

   Director   February 22, 2008

/s/ Kevin B. Habicht

Kevin B. Habicht

  

Director, Chief Financial

Officer (Principal Financial

and Accounting Officer),

Executive Vice President,

Assistant Secretary and

Treasurer

  February 22, 2008

 

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Table of Contents

Exhibit Index

 

  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 7.375% Series C Cumulative Preferred Stock, par value $0.01 per share, dated October 11, 2006 (filed as Exhibit 3.2 to the Registrant’s Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

  3.3 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 Indenture, dated as of March 25, 1998, between the Registrant and First Union National Bank, as trustee (filed as Exhibit 4.4 to the Registrant’s Form S-3 (Registration No. 333-132095) filed with the Securities and Exchange Commission on February 28, 2006, 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).

 

  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

 

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Table of Contents
 

$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 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).

 

  4.12 Seventh Supplemental Indenture, dated as of September 13, 2006, between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006, and incorporated herein by reference).

 

  4.13 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).

 

  4.14 Form of 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 7, 2006, and incorporated herein by reference).

 

  4.15 Specimen certificate representing the 7.375% Series C Cumulative Redeemable Preferred Stock, par value $.01 per share, of the Registrant (filed as Exhibit 4.4 to the Registrant’s Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

  4.16 Deposit Agreement, among the Registrant, American Stock Transfer & Trust Company, as Depositary, and the holders of depositary receipts (filed as Exhibit 4.18 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference).

 

  4.17 Form of 6.875% Notes due 2017 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 4, 2007 and incorporated herein by reference).

 

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Table of Contents
  4.18 Form of Eighth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 4, 2007, and incorporated hereby 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 NNN and the Participant of NNN (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 as Exhibit 10.3 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on August 3, 2006, and incorporated herein by reference).

 

  10.4 Employment Agreement dated August 17, 2006, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.1 to the Registrant’s Form 8-K dated August 17, 2006, and filed with the Securities and Exchange Commission on August 22, 2006, and incorporated herein by reference).

 

  10.5 Employment Agreement dated August 17, 2006, as amended, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.2 to the Registrant’s Form 8-K dated August 17, 2006, and filed with the Securities and Exchange Commission on August 22, 2006, 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 First Amendment to Eighth Amended and Restated Line of Credit and Security Agreement, dated February 20, 2007, by and among Registrant, certain lenders and Wachovia Bank, N.A., as the Agent, relating to a $300,000,000 loan (filed as Exhibit 10.8 with the Securities and Exchange Commission on February 21, 2007, and incorporated herein by reference).

 

  10.8 Employment Agreement dated January 2, 2007, between the Registrant and Paul Bayer (filed herewith).

 

  10.9 Employment Agreement dated January 2, 2007, between Christopher P. Tessitore (filed herewith).

 

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Table of Contents
  12. Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith).

 

  21. Subsidiaries of the Registrant (filed herewith).

 

  23. Consent of Independent Accountants

 

  23.1 Ernst & Young LLP dated February 22, 2008 (filed herewith).

 

  23.2 KPMG LLP dated February 22, 2008 (filed herewith).

 

  24. Power of Attorney (included on signature page).

 

  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).

 

  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).

 

  99. Additional Exhibits

 

  99.1 Certification of Chief Executive Officer pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual (filed herewith).

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2007

 

    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Real Estate Held for Investment the Company has Invested in Under Operating Leases:

                       

Academy:

                       

Beaumont, TX

  $ —     $ 1,423,701   $ 2,449,261   $ —     $ —     $ 1,423,701   $ 2,449,261   $ 3,872,962   $ 538,327   1992     03/99     40 years  

Houston, TX

    —       2,310,845     1,627,872     —       —       2,310,845     1,627,872     3,938,717     357,793   1976     03/99     40 years  

Pasadena, TX

    —       899,768     2,180,574     —       —       899,768     2,180,574     3,080,342     479,272   1994     03/99     40 years  

College Station, TX

    —       1,407,855     2,230,756     —       —       1,407,855     2,230,756     3,638,611     141,746   2002     06/05     40 years  

Franklin, TN

    —       1,807,096     2,108,278     —       —       1,807,096     2,108,278     3,915,374     178,618   1999     06/05     30 years  

Ace Hardware and Lighting:

                       

Bourbonnais, IL

    —       298,192     1,329,492     —       —       298,192     1,329,492     1,627,684     228,506   1997     11/98     37 years  

A.C. Moore Arts & Crafts Inc.

                       

Dover, NJ

    —       1,138,296     3,238,083     —       —       1,138,296     3,238,083     4,376,379     738,687   1995     11/98     40 years  

Advanced Auto Parts:

                       

Miami, FL

    —       867,177     —       1,035,275     —       867,177     1,035,275     1,902,452     65,783   2005     12/04 (g)   40 years  

AJ Petroleum:

                       

Lake Placid, FL

    —       2,531,533     1,157,265       —       2,531,533     1,157,265     3,688,798     64,942   1990     12/05     40 years  

All Star Sports:

                       

Wichita, KS

    —       3,275,372     1,630,685     —       —       3,275,372     1,630,685     4,906,057     25,479   1988     05/07     40 years  

Wichita, KS

    —       1,550,654     965,402     —       —       1,550,654     965,402     2,516,056     15,084   1987     05/07     40 years  

Amazing Jakes:

                       

Aurora, CO

    —       5,075,945     13,873,887     —       —       5,075,945     13,873,887     18,949,832     245,683   1986     04/07     40 years  

American Payday Loans:

                       

Des Moines, IA

    —       108,421     379,067     —       —       108,421     379,067     487,488     24,087   1979     06/05     40 years  

AmerUs Group Warehouse:

                       

Des Moines, IA

    —       28,465     85,396     —       —       28,465     85,396     113,861     21,705   1949     06/05     10 years  

Amoco:

                       

Miami, FL

    —       969,156     —       —       —       969,156     —       969,156     —     (i )   05/03     (i )

Sunrise, FL

    —       949,185     —       —       —       949,185     —       949,185     —     (i )   06/03     (i )

Amscot:

                       

Tampa, FL

    —       1,159,733     352,305     —       —       1,159,733     352,305     1,512,038     19,450   1981     10/05     40 years  

Orlando, FL

    —       764,473     —       865,674     —       764,473     865,674     1,630,147     35,168   2006     12/05     40 years  

Orlando, FL

    —       664,213     1,010,821     —       —       664,213     1,010,821     1,675,034     30,535   2006     12/05     40 years  

Orlando, FL

    —       358,354     —       922,218     —       358,354     922,218     1,280,572     33,623   2006     02/06 (g)   40 years  

Orlando, FL

    —       546,475     —       937,758     —       546,475     937,758     1,484,233     32,235   2006     02/06 (g)   40 years  

Clearwater, FL

      455,524     331,614     —       —       455,524     331,614     787,138     10,708   1967     09/06 (g)   40 years  

Applebee’s:

                       

Ballwin, MO

    —       1,496,173     1,403,581     —       —       1,496,173     1,403,581     2,899,754     211,999   1995     12/01     40 years  

Arby’s:

                       

Colorado Springs, CO

    —       205,957     533,540     —       —       205,957     533,540     739,497     80,587   1998     12/01     40 years  

Thomson, GA

    —       267,842     503,550     —       —       267,842     503,550     771,392     76,057   1997     12/01     40 years  

Washington Courthouse, OH

    —       156,875     545,841     —       —       156,875     545,841     702,716     82,445   1998     12/01     40 years  

Whitmore Lake, MI

    —       170,515     468,916     —       —       170,515     468,916     639,431     70,826   1993     12/01     40 years  

Ashley Furniture:

                       

Altamonte Springs, FL

    —       2,906,409     4,877,225     315,000     —       2,906,409     5,192,225     8,098,634     1,302,103   1997     09/97     40 years  

Louisville, KY

    —       1,666,700     4,989,452     —       —       1,666,700     4,989,452     6,656,152     348,222   2005     03/05     40 years  

Babies “R” Us:

                       

Arlington, TX

    —       830,689     2,611,867     —       —       830,689     2,611,867     3,442,556     751,456   1996     06/96     40 years  

Independence, MO

    —       1,678,794     2,301,909     114,769     —       1,678,794     2,416,678     4,095,472     349,896   1996     12/01     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-1


Table of Contents
    Encum-
brances (k)
    Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
  Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
    Total        

Barnes & Noble:

                       

Brandon, FL

  —       1,476,407   1,527,150   —     —     1,476,407   1,527,150     3,003,557   495,486     1995   08/94 (f)   40 years  

Denver, CO

  —       3,244,785   2,722,087   —     —     3,244,785   2,722,087     5,966,872   901,803     1994   09/94     40 years  

Houston, TX

  —       3,307,562   2,396,024   —     —     3,307,562   2,396,024     5,703,586   733,790     1995   10/94 (f)   40 years  

Plantation, FL

  4,820,120 (p)   3,616,357   —     —     —     3,616,457   (c )   3,616,457   (c )   1996   05/95 (f)   (c )

Freehold, NJ (r)

  —       2,917,219   2,260,663   —     —     2,917,219   2,260,663     5,177,882   673,803     1995   01/96     40 years  

Dayton, OH

  —       1,412,614   3,324,525   —     —     1,412,614   3,324,525     4,737,139   857,649     1996   05/97     40 years  

Redding, CA

  —       497,179   1,625,702   —     —     497,179   1,625,702     2,122,881   428,440     1997   06/97     40 years  

Memphis, TN

  —       1,573,875   2,241,639   —     —     1,573,875   2,241,639     3,815,514   219,494     1997   09/97     40 years  

Marlton, NJ

  —       2,831,370   4,318,554   —     —     2,831,370   4,318,554     7,149,924   985,170     1995   11/98     40 years  

Bassett Furniture:

                       

Fairview Heights, IL

  —       1,257,729   2,622,952   —     —     1,257,729   2,622,952     3,880,681   144,809     1980   10/05     40 years  

Beall’s:

                       

Sarasota, FL

  —       1,077,802   1,795,174   —     —     1,077,802   1,795,174     2,872,976   184,009     1996   09/97     40 years  

Beautiful America Dry Cleaners:

                       

Orlando, FL

  65,839 (o)   40,200   110,531   —     —     40,200   110,531     150,731   10,708     2001   02/04     40 years  

Bed, Bath & Beyond:

                       

Richmond, VA

  2,762,751 (p)   1,184,144   2,842,759   —     —     1,184,144   2,842,759     4,026,903   396,802     1997   06/98     40 years  

Glendale, AZ

  —       1,082,092   —     2,758,452   —     1,082,092   2,758,452     3,840,544   583,297     1999   12/98 (g)   40 years  

Midland, MI

  —       231,356   —     2,702,271   —     231,356   2,702,271     2,933,627   76,430     2006   07/03     40 years  

Beneficial:

                       

Eden Prairie, MN

  —       75,736   210,628   94,277   —     75,736   304,905     380,641   42,574     1997   12/01     40 years  

Bennigan’s:

                       

Milford, CT (r)

  —       921,200   697,298   —     —     921,200   697,298     1,618,498   105,321     1985   12/01     40 years  

Altamonte Springs, FL

  —       1,088,282   924,425   —     —     1,088,282   924,425     2,012,707   139,627     1979   12/01     40 years  

Schaumburg, IL

  —       2,064,964   1,311,190   —     —     2,064,964   1,311,190     3,376,154   198,044     1998   12/01     40 years  

Wichita Falls, TX

  —       818,611   1,107,418   —     —     818,611   1,107,418     1,926,029   167,266     1982   12/01     40 years  

Best Buy:

                       

Brandon, FL

  —       2,985,156   2,772,137   —     —     2,985,156   2,772,137     5,757,293   753,675     1996   02/97     40 years  

Cuyahoga Falls, OH

  —       3,708,980   2,359,377   —     —     3,708,980   2,359,377     6,068,357   621,794     1970   06/97     40 years  

Rockville, MD

  —       6,233,342   3,418,783   —     —     6,233,342   3,418,783     9,652,125   893,869     1995   07/97     40 years  

Fairfax, VA

  —       3,052,477   3,218,018   —     —     3,052,477   3,218,018     6,270,495   834,673     1995   08/97     40 years  

St. Petersburg, FL

  4,408,646 (p)   4,031,744   2,610,980   —     —     4,031,744   2,610,980     6,642,724   416,513     1997   09/97     35 years  

Pittsburgh, PA

  —       2,330,847   2,292,932   —     —     2,330,847   2,292,932     4,623,779   546,960     1997   06/98     40 years  

Denver, CO

  —       8,881,890   4,372,684   —     —     8,881,890   4,372,684     13,254,574   715,116     1991   06/01     40 years  

Billy Bob’s:

                       

Gresham, OR

  —       817,311   108,294   —     —     817,311   108,294     925,605   16,357     1993   12/01     40 years  

BJ’s Wholesale Club:

                       

Orlando, FL

  5,097,052 (o)   3,270,851   8,626,657   366,650   —     3,270,851   8,993,307     12,264,158   844,379     2001   02/04     40 years  

Blockbuster Video:

                       

Conyers, GA

  —       320,029   556,282   —     —     320,029   556,282     876,311   146,604     1997   06/97     40 years  

Alice, TX

  —       318,285   578,268   —     —     318,285   578,268     896,553   87,342     1995   12/01     40 years  

Gainesville, GA

  —       294,882   611,570   —     —     294,882   611,570     906,452   92,372     1997   12/01     40 years  

Glasgow, KY

  —       302,859   560,904   —     —     302,859   560,904     863,763   84,719     1997   12/01     40 years  

Kingsville, TX

  —       498,849   457,695   29,555   —     498,849   487,250     986,099   69,382     1995   12/01     40 years  

Mobile, AL

  —       491,453   498,488   —     —     491,453   498,488     989,941   75,292     1997   12/01     40 years  

Mobile, AL

  —       843,121   562,498   —     —     843,121   562,498     1,405,619   84,961     1997   12/01     40 years  

BMW:

                       

Duluth, GA

  —       4,433,613   4,080,186   4,225,787   —     4,504,324   8,305,973     12,810,297   660,297     1984   12/01     40 years  

Borders Books & Music:

                       

Wilmington, DE

  —       3,030,764   6,061,538   —     —     2,994,395   6,061,538     9,055,933   1,974,073     1994   12/94     40 years  

Richmond, VA

  —       2,177,310   2,599,587   —     —     2,177,310   2,599,587     4,776,897   816,343     1995   06/95     40 years  

Ft. Lauderdale, FL

  4,643,774 (p)   3,164,984   3,319,234   —     —     3,164,984   3,319,234     6,484,218   561,588     1995   02/96     33 years  

Bangor, ME

  —       1,546,915   2,486,761   —     —     1,546,915   2,486,761     4,033,676   716,671     1996   06/96     40 years  

Altamonte Springs, FL

  —       1,947,198   —     —     —     1,947,198   (c )   1,947,198   (c )   1997   09/97     (c )

Boston Market:

                       

Burton, MI

  —       619,778   707,242   —     —     619,778   707,242     1,327,020   106,823     1997   12/01     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-2


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
    Total        

Geneva, IL

  —     1,125,347   1,036,952   —     —     1,125,347   893,485     2,018,833   137,129     1996     12/01     40 years  

North Olmsted, OH

  —     601,800   460,521   —     —     601,800   389,065     990,865   59,849     1996     12/01     40 years  

Novi, MI

  —     835,669   651,108   —     —     835,669   297,567     1,133,236   50,304     1995     12/01     40 years  

Orland Park, IL

  —     562,384   556,201   —     —     562,384   377,244     939,628   59,692     1995     12/01     40 years  

Warren, OH

  —     562,446   467,592   —     —     562,446   467,592     1,030,038   70,625     1997     12/01     40 years  

Wheaton, IL

  —     1,115,457   1,014,184   —     —     1,115,457   872,736     1,988,193   133,964     1995     12/01     40 years  

Buck’s:

                       

St. Louis, MO

  —     775,246   —     —     —     775,246   —       775,246   —       (e )   12/07 (q)   (e )

Buffalo Wild Wings:

                       

Michigan City, IN

  —     162,538   492,007   —     —     162,538   492,007     654,545   74,313     1996     12/01     40 years  

Bugaboo Creek:

                       

Lithonia, GA

  —     922,578   1,276,222   —     —     922,578   1,276,222     2,198,800   17,282     2002     06/07     40 years  

Rochester, NY

  —     792,275   1,535,158   —     —     792,275   1,535,158     2,327,433   20,789     1995     06/07     40 years  

Burger King:

                       

Colonial Heights, VA

  —     662,345   609,787   —     —     662,345   609,787     1,272,132   92,103     1997     12/01     40 years  

Carino’s:

                       

Beaumont, TX

  —     439,076   1,363,447   —     —     439,076   1,363,447     1,802,523   205,937     2000     12/01     40 years  

Lewisville, TX

  —     1,369,836   1,018,659   —     —     1,369,836   1,018,659     2,388,495   153,860     1994     12/01     40 years  

Lubbock, TX

  —     1,007,432   1,205,512   —     —     1,007,432   1,205,512     2,212,944   182,082     1995     12/01     40 years  

Carl’s Jr:

                       

Chandler, AZ

  —     729,291   644,148   —     —     729,291   644,148     1,373,439   81,860     1984     06/05     20 years  

Tucson, AZ

  —     681,386   536,023   103,000   —     681,386   639,023     1,320,409   144,734     1988     06/05     10 years  

CarMax:

                       

Albuquerque, NM

  —     10,197,135   —     8,128,062   —     10,197,135   8,128,062     18,325,197   635,005     2004     04/04 (f)   40 years  

Cash Advance:

                       

Mesa, AZ

  —     43,043   112,764   250,696   —     43,043   363,460     406,503   4,543     1997     12/01     40 years  

Certified Auto Sales:

                       

Albuquerque, NM

  —     1,112,876   —     1,418,552   —     1,112,876   1,418,552     2,531,428   87,182     2005     04/04 (f)   40 years  

Champps:

                       

Alpharetta, GA

  —     3,032,965   1,641,820   —     —     3,032,965   1,641,820     4,674,785   247,983     1999     12/01     40 years  

Irving, TX

  —     1,760,020   1,724,220   —     —     1,760,020   1,724,220     3,484,240   260,429     2000     12/01     40 years  

Charhut:

                       

Sunrise, FL

  —     286,834   423,837   —     —     286,834   423,837     710,671   38,277     1979     05/04     40 years  

Checkers:

                       

Orlando, FL

  —     256,568   —     —     —     256,568   (c )   256,568   (c )   1988     07/92     (c )

Chili’s:

                       

Camden, SC

  —     626,897   1,887,732   —     —     626,897   1,887,732     2,514,629   108,151     2005     09/05     40 years  

Milledgeville, GA

  —     516,118   1,996,627   —     —     516,118   1,996,627     2,512,745   114,390     2005     09/05     40 years  

Sumter, SC

  —     800,329   1,717,221   —     —     800,329   1,717,221     2,517,550   87,650     2004     12/05     40 years  

Hinesville, GA

  —     920,971   1,898,416   —     —     920,971   1,898,416     2,819,387   41,528     2006     02/07     40 years  

Albany, GA

  —     610,385   —     —     —     610,385   —       610,385   (e )   (e )   06/07 (q)   (e )

Statesboro, GA

  —     687,947   —     —     —     687,947   —       687,947   (e )   (e )   06/07 (q)   (e )

Florence, SC

  —     888,837   1,715,454   —     —     888,837   1,715,454     2,604,291   23,230     2007     06/07     40 years  

Valdosta, GA

  —     716,196   —     —     —     716,196   —       716,196   (e )   (e )   07/07 (q)   (e )

Chili Verde Restaurant:

                       

Indianapolis, IN

  —     639,584   1,015,173   91,738   —     639,584   1,106,911     1,746,495   154,884     1996     12/01     40 years  

Circuit City:

                       

Gastonia, NC

  —     2,548,040   3,879,911   —     —     2,548,040   3,879,911     6,427,951   295,035     2004     12/04     40 years  

St. Peters, MO

  —     1,740,807   5,406,298   —     —     1,740,807   5,406,298     7,147,105   332,262     2005     06/05 (g)   40 years  

East Palo Alto, CA

  —     2,271,634   3,404,843   —     —     2,271,634   3,404,843     5,676,477   748,356     1998     12/98 (f)   40 years  

Foothill Ranch, CA

  —     1,456,113   2,505,022   —     —     1,456,113   2,505,022     3,961,135   689,218     1995     12/96     40 years  

Claim Jumper:

                       

Roseville, CA

  —     1,556,732   2,013,650   —     —     1,556,732   2,013,650     3,570,382   304,145     2000     12/01     40 years  

Tempe, AZ

  —     2,530,892   2,920,575   —     —     2,530,892   2,920,575     5,451,467   441,128     2000     12/01     40 years  

CompUSA:

                       

Baton Rouge, LA (r)

  —     609,069   913,603   —     —     609,069   913,603     1,522,672   274,142     1995     12/95     40 years  

Roseville, MN (r)

  —     1,599,311   1,419,396   —     —     1,599,311   1,419,396     3,018,707   72,448     1994     12/05     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-3


Table of Contents
    Encum-
brances (k)
    Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
  Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
    Total        

Cool Crest:

                       

Independence, MO

  —       1,837,672   1,533,729   —     —     1,837,672   1,533,729     3,371,401   23,965     1988   05/07     40 years  

CORA Rehabilitation Clinics:

                       

Orlando, FL

  131,678 (o)   80,400   221,063   —     —     80,400   221,063     301,463   21,415     2001   02/04     40 years  

Corpus Christi Flea Market:

                       

Corpus Christi, TX

  —       223,998   2,158,955   —     —     223,998   2,158,955     2,382,953   474,520     1983   03/99     40 years  

CVS:

                       

San Antonio, TX

  —       440,985   —     —     —     440,985   (c )   440,985   (c )   1993   12/93     (c )

Lafayette, LA

  —       967,528   —     —     —     967,528   (c )   967,528   (c )   1995   01/96     (c )

Midwest City, OK

  —       673,369   1,103,351   —     —     673,369   1,103,351     1,776,720   326,185     1996   03/96     40 years  

Irving, TX (r)

  —       1,000,222   —     —     —     1,000,222   (c )   1,000,222   (c )   1996   12/96     (c )

Pantego, TX

  —       1,016,062   1,448,911   —     —     1,016,062   1,448,911     2,464,973   381,848     1997   06/97     40 years  

Ellenwood, GA

  —       616,289   921,173   —     —     616,289   921,173     1,537,462   90,198     1996   09/97     40 years  

Flower Mound, TX

  —       932,233   881,448   —     —     932,233   881,448     1,813,681   86,308     1996   09/97     40 years  

Ft. Worth, TX

  —       558,657   —     —     —     558,657   (c )   558,657   (c )   1996   09/97     (c )

Arlington, TX

  —       2,078,542   —     1,396,508   —     2,078,542   1,396,508     3,475,050   327,306     1998   11/97 (g)   40 years  

Leavenworth, KS

  —       726,438   —     1,330,830   —     726,438   1,330,830     2,057,268   317,458     1998   11/97 (g)   40 years  

Lewisville, TX

  —       789,237   —     1,335,426   —     789,237   1,335,426     2,124,663   310,208     1998   04/98 (g)   40 years  

Forest Hill, TX

  —       692,165   —     1,174,549   —     692,165   1,174,549     1,866,714   275,285     1998   04/98 (g)   40 years  

Garland, TX

  —       1,476,838   —     1,400,278   —     1,476,838   1,400,278     2,877,116   319,439     1998   06/98 (g)   40 years  

Garland, TX

  —       522,461   —     1,418,531   —     522,461   1,418,531     1,940,992   320,647     1998   06/98 (g)   40 years  

Oklahoma City, OK

  —       1,581,480   —     1,471,105   —     1,581,480   1,471,105     3,052,585   329,466     1999   08/98 (g)   40 years  

Dallas, TX

  —       2,617,656   —     2,570,569   —     2,617,656   2,570,569     5,188,225   270,445     2003   06/99     40 years  

Gladstone, MO

  94,795     1,851,374   —     1,739,568   —     1,851,374   1,739,568     3,590,942   320,733     2000   12/99 (g)   40 years  

Dave & Buster’s:

                       

Hilliard, OH

  —       934,210   4,689,004   —     —     934,210   4,689,004     5,623,214   131,878     1998   11/06     40 years  

Denny’s:

                       

Columbus, TX

  —       428,429   816,644   —     —     428,429   816,644     1,245,073   123,347     1997   12/01     40 years  

Alexandria, VA

  —       603,730   195,658   —     —     603,730   195,658     799,388   12,636     1981   09/06     20 years  

Amarillo, TX

  —       589,996   632,121   —     —     589,996   632,121     1,222,117   40,824     1982   09/06     20 years  

Arlington Heights, IL

  —       469,593   227,673   —     —     469,593   227,673     697,266   14,703     1977   09/06     20 years  

Austintown, OH

  —       466,124   397,387   —     —     466,124   397,387     863,511   25,665     1980   09/06     20 years  

Boardman Township, OH

  —       497,083   257,518   —     —     497,083   257,518     754,601   16,631     1977   09/06     20 years  

Campbell, CA

  —       459,751   238,205   —     —     459,751   238,205     697,956   15,384     1976   09/06     20 years  

Carson, CA

  —       1,245,768   157,375   —     —     1,245,768   157,375     1,403,143   10,164     1975   09/06     20 years  

Chelais, WA

  —       414,994   287,174   —     —     414,994   287,174     702,168   18,546     1977   09/06     20 years  

Chubbock, ID

  —       350,461   394,243   —     —     350,461   394,243     744,704   25,461     1983   09/06     20 years  

Clackamus, OR

  —       468,281   407,268   —     —     468,281   407,268     875,549   26,303     1993   09/06     20 years  

Collinsville, IL

  —       675,704   282,912   —     —     675,704   282,912     958,616   18,271     1979   09/06     20 years  

Colorado Springs, CO

  —       321,006   376,744   —     —     321,006   376,744     697,750   24,331     1984   09/06     20 years  

Colorado Springs, CO

  —       585,425   390,275   —     —     585,425   390,275     975,700   25,202     1978   09/06     20 years  

Corpus Christi, TX

  —       344,821   775,618   —     —     344,821   775,618     1,120,439   50,092     1980   09/06     20 years  

Dallas, TX

  —       497,170   149,862   —     —     497,170   149,862     647,032   9,679     1979   09/06     20 years  

Enfield, CT

  —       684,235   228,981   —     —     684,235   228,981     913,216   14,788     1976   09/06     20 years  

Fairfax, VA

  —       768,438   682,921   —     —     768,438   682,921     1,451,359   44,105     1979   09/06     20 years  

Federal Way, WA

  —       542,951   192,650   —     —     542,951   192,650     735,601   12,441     1977   09/06     20 years  

Florissant, MO

  —       442,700   237,959   —     —     442,700   237,959     680,659   15,368     1977   09/06     20 years  

Ft. Worth, TX

  —       392,306   314,262   —     —     392,306   314,262     706,568   20,296     1974   09/06     20 years  

Hermitage, PA

  —       320,918   419,980   —     —     320,918   419,980     740,898   27,123     1980   09/06     20 years  

Hialeah, FL

  —       432,479   175,245   —     —     432,479   175,245     607,724   11,318     1978   09/06     20 years  

Houston, TX

  —       503,797   347,749   —     —     503,797   347,749     851,546   22,459     1976   09/06     20 years  

Indianapolis, IN

  —       325,937   511,345   —     —     325,937   511,345     837,282   33,024     1978   09/06     20 years  

Indianapolis, IN

  —       310,383   589,689   —     —     310,383   589,689     900,072   38,084     1981   09/06     20 years  

Indianapolis, IN

  —       358,295   766,627   —     —     358,295   766,627     1,124,922   49,511     1978   09/06     20 years  

Indianapolis, IN

  —       222,629   482,909   —     —     222,629   482,909     705,538   31,188     1979   09/06     20 years  

Indianapolis, IN

  —       231,236   511,175   —     —     231,236   511,175     742,411   33,013     1974   09/06     20 years  

Kernersville, NC

  —       406,544   557,465   —     —     406,544   557,465     964,009   36,002     2000   09/06     20 years  

Lafayette, IN

  —       423,516   773,096   —     —     423,516   773,096     1,196,612   49,929     1978   09/06     20 years  

Laurel, MD

  —       527,596   379,327   —     —     527,596   379,327     906,923   24,498     1976   09/06     20 years  

Little Rock, AR

  —       671,665   76,507   —     —     671,665   76,507     748,172   4,941     1979   09/06     20 years  

 

See accompanying report of independent registered public accounting firm.

 

F-4


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Little Rock, AR

  —     702,789   179,699   —     —     702,789   179,699   882,488   11,606     1979     09/06     20 years  

Maplewood, MN

  —     630,007   271,268   —     —     630,007   271,268   901,275   17,519     1983     09/06     20 years  

Merrivile, IN

  —     368,152   813,167   —     —     368,152   813,167   1,181,319   52,517     1976     09/06     20 years  

Middleburg Heights, OH

  —     496,963   259,581   —     —     496,963   259,581   756,544   16,764     1976     09/06     20 years  

N. Miami, FL

  —     855,381   151,216   —     —     855,381   151,216   1,006,597   9,766     1977     09/06     20 years  

Nampa, ID

  —     356,591   729,175   —     —     356,591   729,175   1,085,766   47,093     1979     09/06     20 years  

North Palm Beach, FL

  —     450,257   161,978   —     —     450,257   161,978   612,235   10,461     1977     09/06     20 years  

North Richland Hills, TX

  —     500,352   129,840   —     —     500,352   129,840   630,192   8,386     1970     09/06     20 years  

Novi, MI

  —     545,175   305,344   —     —     545,175   305,344   850,519   19,720     1979     09/06     20 years  

Omaha, NE

  —     496,452   314,303   —     —     496,452   314,303   810,755   20,298     1994     09/06     20 years  

Parma, OH

  —     370,120   238,145   —     —     370,120   238,145   608,265   15,380     1977     09/06     20 years  

Pompano Beach, FL

  —     436,153   393,590   —     —     436,153   393,590   829,743   25,419     1976     09/06     20 years  

Portland, OR

  —     764,431   161,462   —     —     764,431   161,462   925,893   10,428     1977     09/06     20 years  

Provo, UT

  —     519,038   216,015   —     —     519,038   216,015   735,053   13,951     1978     09/06     20 years  

Pueblo, CO

  —     475,420   301,725   —     —     475,420   301,725   777,145   19,486     1980     09/06     20 years  

Raleigh, NC

  —     1,094,361   482,297   —     —     1,094,361   482,297   1,576,658   31,148     1984     09/06     20 years  

Santa Ana, CA

  —     515,866   279,400   —     —     515,866   279,400   795,266   18,045     1977     09/06     20 years  

Sherman, TX

  —     232,670   126,149   —     —     232,670   126,149   358,819   8,147     1969     09/06     20 years  

Southfield, MI

  —     401,401   330,496   —     —     401,401   330,496   731,897   21,344     1980     09/06     20 years  

St. Louis, MO

  —     519,641   265,824   —     —     519,641   265,824   785,465   17,168     1973     09/06     20 years  

Sugarland, TX

  —     315,186   334,027   —     —     315,186   334,027   649,213   21,573     1997     09/06     20 years  

Tacoma, WA

  —     580,288   200,559   —     —     580,288   200,559   780,847   12,953     1984     09/06     20 years  

Tulsa, OK

  —     324,751   313,897   —     —     324,751   313,897   638,648   20,273     1978     09/06     20 years  

Tuscon, AZ

  —     922,401   290,221   —     —     922,401   290,221   1,212,622   18,743     1979     09/06     20 years  

W. Palm Beach, FL

  —     619,003   160,924   —     —     619,003   160,924   779,927   10,393     1984     09/06     20 years  

Weathersfield, CT

  —     883,538   176,136   —     —     883,538   176,136   1,059,674   11,375     1978     09/06     20 years  

Worcester, MA

  —     383,194   492,602   —     —     383,194   492,602   875,796   31,814     1978     09/06     20 years  

Boise, ID

  —     514,340   476,967   —     —     514,340   476,967   991,307   24,842     1983     12/06     20 years  

St. Louis, MO

  —     634,924   302,979   —     —     634,924   302,979   937,903   14,518     1980     01/07     20 years  

Virginia Gardens, FL

  —     793,432   132,605   —     —     793,432   132,605   926,037   6,354     1977     01/07     20 years  

Dick’s Sporting Goods:

                       

Taylor, MI

  —     1,920,032   3,526,868   —     —     1,920,032   3,526,868   5,446,900   995,961     1996     08/96     40 years  

White Marsh, MD

  —     2,680,532   3,916,889   —     —     2,680,532   3,916,889   6,597,421   1,106,100     1996     08/96     40 years  

Dollar Tree:

                       

Garland, TX

  —     239,014   626,170   —     —     239,014   626,170   865,183   101,753     1994     02/94     40 years  

Copperas Cove, TX

  —     241,650   511,624   194,167   —     241,650   705,791   947,441   145,122     1972     11/98     40 years  

Donato’s:

                       

Medina, OH

  —     405,113   463,582   —     —     405,113   463,582   868,696   70,020     1996     12/01     40 years  

Dr. Clean Dry Cleaners:

                       

Monticello, NY

  —     19,625   71,570   —     —     19,625   71,570   91,195   4,995     1996     03/05     40 years  

Easyhome:

                       

Cohoes, NY

  —     58,969   317,885   —     —     58,969   317,885   376,854   26,815     1994     09/04     40 years  

Eckerd:

                       

Douglasville, GA

  —     413,438   995,209   —     —     413,438   995,209   1,408,647   296,627     1996     01/96     40 years  

Conyers, GA

  —     574,666   998,900   —     —     574,666   998,900   1,573,566   263,252     1997     06/97     40 years  

Augusta, GA

  —     568,606   1,326,748   —     —     568,606   1,326,748   1,895,354   333,069     1997     12/97     40 years  

Riverdale, GA

  —     1,088,896   1,707,448   —     —     1,088,896   1,707,448   2,796,344   428,640     1997     12/97     40 years  

Warner Robins, GA

  —     707,488   —     1,227,330   —     707,488   1,227,330   1,934,818   274,871     1999     03/98 (g)   40 years  

West Mifflin, PA

  —     1,401,632   2,043,862   —     —     1,401,632   2,043,862   3,445,494   300,192     1999     02/02     40 years  

Norfolk, VA

  —     2,742,194   1,796,508   —     —     2,742,194   1,796,508   4,538,702   263,862     2001     02/02     40 years  

Thorndale, PA

  —     2,260,618   2,472,039   —     —     2,260,618   2,472,039   4,732,657   363,081     2001     02/02     40 years  

El Mariachi Grill:

                       

Montgomery, AL

  —     1,418,158   1,140,080   —     —     1,418,158   1,044,075   2,462,233   166,034     1999     12/01     40 years  

El Meskal:

                       

Hammond, LA

  —     247,600   813,514   62,287   —     247,600   627,601   875,201   109,955     1997     12/01     40 years  

El Paso Barbeque:

                       

Tuscon, AZ

  —     996,435   —     2,741,660   —     996,435   2,741,660   3,738,095   19,991     2007     12/06 (q)   40 years  

Farmington, NM

  —     2,756,524   —     —     —     2,756,524   —     2,756,524   (e )   (e )   12/07 (q)   (e )

Enterprise Rent-A-Car:

                       

Wilmington, NC

  —     218,126   327,329   —     —     218,126   327,329   545,455   49,440     1981     12/01     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-5


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
    Total        

Fallas Paredes:

                       

Arlington, TX

  —     317,838   1,680,428   242,483   —     317,838   1,922,911     2,240,749   465,560     1996     06/96     38 years  

Family Dollar:

                       

Cohoes, NY

  —     95,644   515,502   —     —     95,644   515,502     611,146   41,712     1994     09/04     40 years  

Hudson Falls, NY

  —     51,055   379,789   —     —     51,055   379,789     430,844   31,253     1993     09/04     40 years  

Monticello, NY

  —     96,445   351,721   —     —     96,445   351,721     448,166   24,547     1996     03/05     40 years  

Fantastic Sams:

                       

Eden Prairie, MN

  —     64,916   180,538   80,809   —     64,916   261,347     326,263   36,492     1997     12/01     40 years  

Fazoli’s Restaurant:

                       

Bay City, MI

  —     647,055   633,899   —     —     647,055   633,899     1,280,953   95,745     1997     12/01     40 years  

Ferguson;

                       

Destin, FL

  —     553,552   1,011,898   —     —     553,552   1,011,898     1,565,450   20,027     2006     03/07     40 years  

Food Fast:

                       

Bossier City, LA

  —     882,882   657,929   —     —     882,882   657,929     1,540,811   23,759     1975     06/07     15 years  

Brownsboro, TX

  —     327,611   385,088   —     —     327,611   385,088     712,699   6,952     1990     06/07     30 years  

Flint, TX

  —     272,007   410,803   —     —     272,007   410,803     682,810   8,900     1985     06/07     25 years  

Forney, TX

  —     545,133   707,160   —     —     545,133   707,160     1,252,293   12,768     1989     06/07     30 years  

Forney, TX

  —     473,290   653,516   —     —     473,290   653,516     1,126,806   11,800     1990     06/07     30 years  

Gun Barrel City, TX

  —     241,890   467,271   —     —     241,890   467,271     709,161   10,124     1988     06/07     25 years  

Gun Barrel City, TX

  —     269,871   386,429   —     —     269,871   386,429     656,300   8,372     1986     06/07     25 years  

Jacksonville, TX

  —     660,275   632,166   —     —     660,275   632,166     1,292,441   22,828     1976     06/07     15 years  

Kemp, TX

  —     580,596   505,102   —     —     580,596   505,102     1,085,698   10,944     1986     06/07     25 years  

Longview, TX

  —     252,373   303,925   —     —     252,373   303,925     556,298   6,585     1983     06/07     25 years  

Longview, TX

  —     271,236   430,518   —     —     271,236   430,518     701,754   7,773     1990     06/07     30 years  

Longview, TX

  —     425,860   381,585   —     —     425,860   381,585     807,445   8,268     1984     06/07     25 years  

Longview, TX

  —     359,539   535,304   —     —     359,539   535,304     894,843   11,598     1983     06/07     25 years  

Longview, TX

  —     403,420   571,962   —     —     403,420   571,962     975,382   12,393     1985     06/07     25 years  

Longview, TX

  —     178,176   235,972   —     —     178,176   235,972     414,148   6,391     1977     06/07     20 years  

Mabank,TX

  —     229,097   493,568   —     —     229,097   493,568     722,665   10,694     1986     06/07     25 years  

Mt. Vernon, TX

  —     292,251   666,046   —     —     292,251   666,046     958,297   14,430     1990     06/07     25 years  

Shreveport, LA

  —     360,801   249,918   —     —     360,801   249,918     610,719   9,025     1969     06/07     15 years  

Tyler, TX

  —     323,146   283,153   —     —     323,146   283,153     606,299   7,669     1978     06/07     20 years  

Tyler, TX

  —     487,716   831,325   —     —     487,716   831,325     1,319,041   22,515     1980     06/07     20 years  

Tyler, TX

  —     742,070   545,967   —     —     742,070   545,967     1,288,037   11,829     1985     06/07     25 years  

Tyler, TX

  —     256,415   542,486   —     —     256,415   542,486     798,901   14,692     1980     06/07     20 years  

Tyler, TX

  —     188,162   328,622   —     —     188,162   328,622     516,784   7,120     1984     06/07     25 years  

Tyler, TX

  —     542,144   403,494   —     —     542,144   403,494     945,638   8,742     1984     06/07     25 years  

Tyler, TX

  —     257,981   418,816   —     —     257,981   418,816     676,797   11,343     1978     06/07     20 years  

Tyler, TX

  —     316,208   544,790   —     —     316,208   544,790     860,998   9,836     1989     06/07     30 years  

Tyler, TX

  —     301,853   455,181   —     —     301,853   455,181     757,034   12,328     1981     06/07     20 years  

Food 4 Less:

                       

Chula Vista, CA

  —     3,568,862   —     —     —     3,568,862   (c )   3,568,862   (c )   1995     11/98     (c )

Fresh Market:

                       

Gainesville, FL

  —     317,386   1,248,404   655,827   —     317,386   1,904,231     2,221,617   144,321     1982     03/99     40 years  

Furr’s Family Dining:

                       

Las Cruces, NM

  —     947,476   —     2,181,954     947,476   2,181,954     3,129,430   70,459     2006     01/06 (q)   40 years  

Tuscon, AZ

  —     1,170,722   —     —     —     1,170,722   —       1,170,722   —       (e )   07/06 (q)   (e )

Moore, OK

  —     938,701   —     2,429,401   —     938,701   2,429,401     3,368,102   12,653     2007     03/07 (q)   40 years  

Gander Mountain:

                       

Amarillo, TX

  —     1,513,714   5,781,294   —     —     1,513,714   5,781,294     7,295,008   451,664     2004     11/04     40 years  

Gate Petroleum:

                       

Concord, NC

  —     852,225   1,200,862   —     —     852,225   1,200,862     2,053,087   76,305     2001     06/05     40 years  

Rocky Mountain, NC

  —     258,764   1,164,438   —     —     258,764   1,164,438     1,423,202   73,990     2000     06/05     40 years  

Gen-X Clothing:

                       

Federal Way, WA

  —     2,037,392   1,661,577   257,414   —     2,037,392   1,918,991     3,956,383   423,437     1998     06/98     40 years  

Golden Corral:

                       

Abbeville, LA

  —     98,577   362,416   —     —     98,577   362,416     460,993   240,748     1985     04/85     35 years  

Lake Placid, FL

  —     115,113   305,074   43,797   —     115,113   348,871     463,984   211,416     1985     05/85     35 years  

Tampa, FL

  —     1,329,793   1,390,502   —     —     1,329,793   1,390,502     2,720,296   210,024     1998     12/01     40 years  

Dallas, TX

  —     1,138,129   1,024,747   —     —     1,138,129   1,024,747     2,162,875   154,779     1994     12/01     40 years  

Temple Terrace, FL

  —     1,187,614   1,339,000   —     —     1,187,614   1,339,000     2,526,614   202,245     1997     12/01     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-6


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land     Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land     Building,
Improve-

ments and
Leasehold
Interests
    Total        

Goodyear Truck & Tire:

                       

Wichita, KS

  —     213,640     686,700   —     —     213,640     686,700     900,340   87,268     1989     06/05     20 years  

Anthony, TX

  —     (l )   1,241,517   —     —     (l )   1,241,517     1,241,517   14,226     2007     02/07     40 years  

GymKix:

                       

Copperas Cove, TX

  —     203,908     431,715   171,477   —     203,908     603,192     807,100   123,601     1972     11/98     40 years  

H&R Block:

                       

Swansea, IL

  —     45,842     132,440   69,029   —     45,842     201,469     247,311   29,307     1997     12/01     40 years  

Hastings:

                       

Nacogdoches, TX

  —     397,074     1,257,402   —     —     397,074     1,257,402     1,654,477   286,845     1997     11/98     40 years  

Haverty’s:

                       

Clearwater, FL

  —     1,184,938     2,526,207   44,005   —     1,189,188     2,570,212     3,759,400   930,917     1992     05/93     40 years  

Orlando, FL

  —     820,397     2,184,721   176,425   —     820,397     2,361,146     3,181,543   811,364     1992     05/93     40 years  

Pensacola, FL

  263,188   633,125     1,595,405   —     —     603,111     1,595,405     2,198,516   459,122     1994     06/96     40 years  

Bowie, MD

  —     1,965,508     4,221,074   —     —     1,965,508     4,221,074     6,186,582   927,357     1997     12/97     38 years  

Healthy Pet:

                       

Suwannee, GA

  —     175,183     1,038,492   —     —     175,183     1,038,492     1,213,675   27,044     1997     12/06     40 years  

Colonial Heights, VA

  —     159,879     746,261   —     —     159,879     746,261     906,140   17,879     1996     01/07     40 years  

Heilig-Meyers:

                       

Baltimore, MD

  —     469,781     813,073   —     —     469,781     813,073     1,282,854   185,482     1968     11/98     40 years  

Glen Burnie, MD

  —     631,712     931,931   —     —     631,712     931,931     1,563,643   212,550     1968     11/98     40 years  

Hollywood Video:

                       

Cincinnati, OH

  —     282,200     520,623   279,308   —     543,438     538,693     1,082,132   78,787     1998     12/01     40 years  

Clifton, CO

  —     245,462     732,477   —     —     245,462     732,477     977,939   110,634     1998     12/01     40 years  

Lafayette, LA

  —     603,190     1,149,251   —     —     603,190     1,149,251     1,752,441   58,660     1999     12/05     40 years  

Ridgeland, MS

  —     778,874     933,314   —     —     778,874     933,314     1,712,188   47,638     1997     12/05     40 years  

Home Décor:

                       

Memphis, TN

  —     549,309     539,643   364,460   —     549,309     904,103     1,453,412   176,448     1998     11/98     40 years  

Home Depot:

                       

Sunrise, FL

  —     5,148,657     —     —     —     5,148,657     —       5,148,657   —       (i )   05/03     (i )

HomeGoods:

                       

Fairfax, VA

  —     977,839     1,414,261   937,301   —     977,839     2,351,562     3,329,401   249,166     1995     12/95     40 years  

Hooters:

                       

Tampa, FL

  —     783,923     504,768   —     —     783,923     504,768     1,288,692   76,241     1993     12/01     40 years  

Hope Rehab:

                       

Houston, TX

  —     112,150     509,179   —     —     112,150     509,179     621,329   26,202     1995     12/05     40 years  

Horizon Travel Plaza:

                       

Midland City, AL

  —     728,990     2,538,232   —     —     728,990     2,538,232     3,267,222   66,100     2006     12/06     40 years  

Dothan, AL

  —     773,671     1,886,333   —     —     773,671     1,886,333     2,660,004   37,334     2007     03/07     40 years  

Lebanon, TN

  —     581,612     —     —     —     581,612     —       581,612   (e )   (e )   03/07 (q)   (e )

Humana:

                       

Sunrise, FL

  —     800,271     252,717   —     —     800,271     252,717     1,052,988   22,849     1984     05/04     40 years  

Hy-Vee:

                       

St. Joseph, MO

  —     1,579,583     2,849,246   —     —     1,579,583     2,849,246     4,428,829   376,938     1991     09/02     40 years  

International House of Pancakes:

                       

Sunset Hills, MO

  —     271,853     —     —     —     271,853     (c )   271,853   (c )   1993     10/93     (c )

Matthews, NC

  —     380,043     —     —     —     380,043     (c )   380,043   (c )   1993     12/93     (c )

Midwest City, OK

  —     407,268     —     —     —     407,268     —       407,268   (i )   (i )   11/00     (i )

Ankeny, IA

  —     692,956     515,035   —     —     692,956     515,035     1,207,991   43,635     2002     06/05     30 years  

Jack-in-the-Box:

                       

Plano, TX

  —     1,055,433     1,236,590   —     —     1,055,433     1,236,590     2,292,023   78,575     2001     06/05     40 years  

Jacobson Industrial:

                       

Des Moines, IA

  —     60,517     112,390   —     —     60,517     112,390     172,907   14,283     1973     06/05     20 years  

Jared Jewelers:

                       

Richmond, VA

  —     955,134     1,336,152   —     —     955,134     1,336,152     2,291,286   201,815     1998     12/01     40 years  

Brandon, FL

  —     1,196,900     1,182,150   —     —     1,196,900     1,182,150     2,379,050   166,409     2001     05/02     40 years  

Lithonia, GA

  —     1,270,517     1,215,818   —     —     1,270,517     1,215,818     2,486,335   171,149     2001     05/02     40 years  

Houston, TX

  —     1,675,739     1,439,597   —     —     1,675,739     1,439,597     3,115,336   181,449     1999     12/02     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-7


Table of Contents
    Encum-
brances (k)
    Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Jo-Ann Etc:

                       

Corpus Christi, TX

  —       818,448   896,395   12,222   —     818,448   908,617   1,727,065   320,316     1967     11/93   40 years  

Kangaroo Express:

                       

Belleview, FL

  —       471,029   1,451,277   —     —     471,029   1,451,277   1,922,306   49,888     2006     08/06   40 years  

Carthage, NC

  —       485,461   353,643   —     —     485,461   353,643   839,104   12,156     1989     08/06   40 years  

Jacksonville, FL

  —       807,477   1,239,085   —     —     807,477   1,239,085   2,046,562   42,594     1975     08/06   40 years  

Jacksonville, FL

  —       684,639   1,361,897   —     —     682,510   1,361,897   2,044,407   46,815     1969     08/06   40 years  

Sanford, NC

  —       666,330   660,594   —     —     666,330   660,594   1,326,924   22,708     2000     08/06   40 years  

Sanford, NC

  —       1,638,444   1,370,558   —     —     1,638,444   1,370,558   3,009,002   47,112     2003     08/06   40 years  

Siler City, NC

  —       586,174   645,290   —     —     586,174   645,290   1,231,464   22,182     1998     08/06   40 years  

West End, NC

  —       426,114   516,010   —     —     426,114   516,010   942,124   17,738     1999     08/06   40 years  

Destin, FL

  —       1,365,569   1,192,192   —     —     1,365,569   1,192,192   2,557,761   38,498     2000     09/06   40 years  

Niceville, FL

  —       1,433,652   1,124,109   —     —     1,433,652   1,124,109   2,557,761   36,299     2000     09/06   40 years  

Interlachen, FL

  —       518,814   —     —     —     518,814   —     518,814   (e )   (e )   10/06   (e )

Kill Devil Hills, NC

  —       679,169   552,393   —     —     679,169   552,393   1,231,562   16,691     1990     10/06   40 years  

Kill Devil Hills, NC

  —       490,309   741,222   —     —     490,309   741,222   1,231,531   22,397     1995     10/06   40 years  

Clarksville, TN

  —       521,023   709,784   —     —     521,023   709,784   1,230,807   18,484     1999     12/06   40 years  

Clarksville, TN

  —       275,897   954,910   —     —     275,897   954,910   1,230,807   24,867     1999     12/06   40 years  

Gallatin, TN

  —       474,297   756,510   —     —     474,297   756,510   1,230,807   19,406     1999     12/06   40 years  

Naples, FL

  —       3,194,938   1,403,297   —     —     3,194,938   1,403,297   4,598,235   36,544     2001     12/06   40 years  

Oxford, MS

  —       440,413   1,096,748   —     —     440,413   1,096,748   1,537,161   28,561     1998     12/06   40 years  

Columbiana, AL

  —       770,793   988,907   —     —     770,793   988,907   1,759,700   23,693     1982     01/07   40 years  

Naples, FL

  —       3,161,883   1,596,602   —     —     3,161,883   1,596,602   4,758,485   34,926     1995     02/07   40 years  

Kentwood, LA

  —       985,372   891,185   —     —     985,372   891,185   1,876,557   17,638     2001     03/07   40 years  

Longs, SC

  —       745,488   757,865   —     —     745,488   757,865   1,503,353   14,999     2001     03/07   40 years  

Naples, FL

  —       2,412,119   1,589,011   —     —     2,412,119   1,589,011   4,001,130   24,828     2000     05/07   40 years  

Montgomery, AL

  —       666,002   1,185,069   —     —     666,002   1,185,069   1,851,071   16,048     1998     06/07   40 years  

Cary, NC

  —       1,314,197   2,124,513   —     —     1,314,197   2,124,513   3,438,711   19,917     2007     08/07   40 years  

Kash N’ Karry:

                       

Brandon, FL

  3,124,261 (p)   322,476   1,221,661   —     —     322,476   1,221,661   1,544,137   128,529     1983     03/99   40 years  

Sarasota, FL

  —       470,600   1,343,746   —     —     470,600   1,343,746   1,814,346   141,373     1983     03/99   40 years  

Keg Steakhouse:

                       

Bellingham, WA (r)

  —       397,443   455,605   —     —     397,443   455,605   853,048   68,815     1981     12/01   40 years  

Lynnwood, WA

  —       1,255,513   649,236   —     —     1,255,513   649,236   1,904,748   98,062     1992     12/01   40 years  

Tacoma, WA

  —       526,792   794,722   —     —     526,792   794,722   1,321,515   120,036     1981     12/01   40 years  

Kerasotes:

                       

Bloomington, IN

  —       2,337,910   4,000,182   —     —     2,337,910   4,000,182   6,338,092   46,669     1987     09/07   25 years  

Bolingbrook, IL

  —       2,937,193   3,032,087   —     —     2,937,193   3,032,087   5,969,280   29,479     1994     09/07   30 years  

Brighton, CO

  —       1,069,710   5,490,668   —     —     1,069,710   5,490,668   6,560,379   40,036     2005     09/07   40 years  

Castle Rock, CO

  —       2,904,550   5,001,791   —     —     2,904,550   5,001,791   7,906,342   36,471     2005     09/07   40 years  

Evansville, IN

  —       1,300,359   4,268,824   —     —     1,300,359   4,268,824   5,569,183   35,574     1999     09/07   35 years  

Galesburg, IL

  —       1,204,699   2,441,058   —     —     1,204,699   2,441,058   3,645,758   17,799     2003     09/07   40 years  

Machesney Park, IL

  —       3,017,551   8,769,548   —     —     3,017,551   8,769,548   11,787,099   63,945     2005     09/07   40 years  

Michigan City, IN

  —       1,995,639   8,421,666   —     —     1,995,639   8,421,666   10,417,305   61,407     2005     09/07   40 years  

Muncie, IN

  —       1,243,157   5,511,584   —     —     1,243,157   5,511,584   6,754,741   40,189     2005     09/07   40 years  

Naperville, IL

  —       6,141,054   11,624,187   —     —     6,141,054   11,624,187   17,765,241   84,760     2006     09/07   40 years  

New Lenox, IL

  —       6,777,804   10,979,958   —     —     6,777,804   10,979,958   17,757,762   80,062     2004     09/07   40 years  

KFC:

                       

Erie, PA

  —       516,508   496,092   —     —     516,508   496,092   1,012,601   74,931     1996     12/01   40 years  

Marysville, WA

  —       646,779   545,592   —     —     646,779   545,592   1,192,371   82,407     1996     12/01   40 years  

Evansville, IN

  —       369,740   766,635   —     —     369,740   766,635   1,136,375   31,145     2004     05/06   40 years  

Fenton, MO

  —       307,068   496,410   —     —     307,068   496,410   803,478   233,667     1985     07/92   33 years  

Kohl’s:

                       

Florence, AL

  —       817,661   —     1,046,515   —     817,661   1,046,515   1,864,176   32,704     (i )   06/04   40 years  

Kum & Go:

                       

Omaha, NE

  —       392,847   214,280   —     —     392,847   214,280   607,127   27,231     1979     06/05   20 years  

Light Restaurant:

                       

Columbus, OH

  —       1,032,008   1,107,250   —     —     1,032,008   1,107,250   2,139,258   167,240     1998     12/01   40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-8


Table of Contents
    Encum-
brances (k)
    Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
  Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Lil’ Champ:

                       

Gainesville, FL

  —       900,141   —     1,800,281   —     900,141   1,800,281   2,700,422   35,631   2007   07/05 (q)   40 years

Jacksonville, FL

  —       2,225,177   315,315   —     —     2,225,177   315,315   2,540,492   18,722   2006   08/05     40 years

Ocala, FL

  —       845,827   —     1,563,500   —     845,827   1,563,500   2,409,327   21,172   2007   02/06 (q)   40 years

Logan’s Roadhouse:

                       

Alexandria, LA

  —       1,217,567   3,048,693   —     —     1,217,567   3,048,693   4,266,260   85,744   1998   11/06     40 years

Beckley, WV

  —       1,396,024   2,404,817   —     —     1,396,024   2,404,817   3,800,841   67,635   2006   11/06     40 years

Cookeville, TN

  —       1,262,430   2,270,596   —     —     1,262,430   2,270,596   3,533,026   63,860   1997   11/06     40 years

Fort Wayne, IN

  —       1,274,315   2,109,860   —     —     1,274,315   2,109,860   3,384,175   59,340   2003   11/06     40 years

Greenwood, IN

  —       1,341,188   2,105,213   —     —     1,341,188   2,105,213   3,446,401   59,209   2000   11/06     40 years

Hurst, TX

  —       1,857,628   1,915,877   —     —     1,857,628   1,915,877   3,773,505   53,884   1999   11/06     40 years

Jackson, TN

  —       1,199,765   2,246,330   —     —     1,199,765   2,246,330   3,446,095   63,178   1994   11/06     40 years

Lake Charles, LA

  —       1,284,898   2,202,447   —     —     1,284,898   2,202,447   3,487,345   61,944   1998   11/06     40 years

McAllen, TX

  —       1,607,806   2,177,715   —     —     1,607,806   2,177,715   3,785,521   61,248   2005   11/06     40 years

Opelika, AL

  —       1,028,484   1,753,045   —     —     1,028,484   1,753,045   2,781,529   49,304   2005   11/06     40 years

Roanoke, VA

  —       2,302,414   1,947,141   —     —     2,302,414   1,947,141   4,249,555   54,763   1998   11/06     40 years

San Marcos, TX

  —       836,979   1,453,300   —     —     836,979   1,453,300   2,290,279   40,874   2000   11/06     40 years

Sanford, FL

  —       1,677,782   1,730,390   —     —     1,677,782   1,730,390   3,408,172   48,667   1999   11/06     40 years

Smyrna, TN

  —       1,334,998   2,047,465   —     —     1,334,998   2,047,465   3,382,463   57,585   2002   11/06     40 years

Warner Robins, GA

  —       905,301   1,533,748   —     —     905,301   1,533,748   2,439,049   43,136   2004   11/06     40 years

Franklin, TN

  —       2,519,485   1,704,790   —     —     2,519,485   1,704,790   4,224,275   44,396   1995   12/06     40 years

Southaven, MS

  —       1,297,767   1,338,118   —     —     1,297,767   1,338,118   2,635,885   34,847   2005   12/06     40 years

Lowe’s:

                       

Memphis, TN

  —       3,214,835   9,169,885   —     —     3,214,835   9,169,885   12,384,720   1,271,710   2001   06/02     40 years

Magic China Café:

                       

Orlando, FL

  65,839 (o)   40,200   110,531   —     —     40,200   110,531   150,731   10,708   2001   02/04     40 years

Magic Mountain:

                       

Columbus, OH

  —       2,075,527   1,906,370   —     —     2,075,527   1,906,370   3,981,897   25,815   1990   06/07     40 years

Columbus, OH

  —       5,379,851   2,693,295   —     —     5,379,851   2,693,295   8,073,146   36,471   1990   06/07     40 years

Majestic Liquors:

                       

Arlington, TX

  —       1,235,214   1,222,434   —     —     1,235,214   1,222,434   2,457,648   87,862   1990   02/05     40 years

Coffee City, TX

  —       1,330,427   3,858,445   —     —     1,330,427   3,858,445   5,188,872   277,326   1996   02/05     40 years

Ft. Worth, TX

  —       1,461,333   1,673,229   —     —     1,461,333   1,673,229   3,134,562   120,263   1999   02/05     40 years

Ft. Worth, TX

  —       1,651,570   2,017,770   —     —     1,651,570   2,017,770   3,669,340   145,027   2000   02/05     40 years

Ft. Worth, TX

  —       2,505,249   2,138,400   —     —     2,505,249   2,138,400   4,643,649   153,698   1988   02/05     40 years

Ft. Worth, TX

  —       977,290   2,368,447   —     —     977,290   2,368,447   3,345,737   170,232   1997   02/05     40 years

Ft. Worth, TX

  —       611,366   1,608,555   —     —     611,366   1,608,555   2,219,921   115,615   1974   02/05     40 years

Hudson Oaks, TX

  —       361,371   1,029,053   —     —     361,371   1,029,053   1,390,424   73,963   1993   02/05     40 years

Granbury, TX

  —       786,159   1,233,984   —     —     786,159   1,233,984   2,020,143   55,272   2006   05/05 (g)   40 years

Dallas, TX

  —       1,554,411   1,228,778   —     —     1,554,411   1,228,778   2,783,189   78,079   1982   06/05     40 years

Dallas, TX

  —       2,407,203   2,050,580   248,000   —     2,407,203   2,298,580   4,705,783   139,344   1971   06/05     40 years

Azle, TX

  —       648,274   859,435   —     —     648,274   859,435   1,507,709   11,638   1970   06/07     40 years

Ft. Worth, TX

  —       574,618   933,091   —     —     574,618   933,091   1,507,709   12,636   1982   06/07     40 years

Lubbock, TX

  —       1,293,214   1,210,826   —     —     1,293,214   1,210,826   2,504,040   13,874   1983   07/07     40 years

Lubbock, TX

  —       2,606,118   2,897,922   —     —     2,606,118   2,897,922   5,504,040   33,205   1983   07/07     40 years

Merchant’s Tires:

                       

Hampton, VA

  —       179,835   426,895   —     —     179,835   426,895   606,730   29,794   1986   03/05     40 years

Newport News, VA

  —       233,812   259,046   —     —     233,812   259,046   492,858   18,079   1986   03/05     40 years

Norfolk, VA

  —       398,132   507,743   —     —     398,132   507,743   905,875   35,436   1986   03/05     40 years

Rockville, MD

  —       1,030,156   306,147   —     —     1,030,156   306,147   1,336,303   21,367   1974   03/05     40 years

Washington, DC

  —       623,607   577,948   —     —     623,607   577,948   1,201,555   40,336   1983   03/05     40 years

Mi Pueblo Foods:

                       

Watsonville, CA

  —       805,056   1,648,934   —     —     805,056   1,648,934   2,453,990   173,482   1984   03/99     40 years

Michaels:

                       

Fairfax, VA

  —       986,131   1,426,254   706,501   —     986,131   2,132,755   3,118,886   476,206   1995   12/95     40 years

Grapevine, TX (r)

  —       1,017,934   2,066,715   —     —     1,017,934   2,066,715   3,084,649   492,997   1998   06/98     40 years

Plymouth Meeting, PA

  —       2,911,111   —     2,594,720   —     2,911,111   2,594,720   5,505,831   494,507   1999   10/98 (g)   40 years

 

See accompanying report of independent registered public accounting firm.

 

F-9


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
  Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Mister Car Wash:

                       

Anoka, MN

  —     212,378   214,461   —     —     212,378   214,461   426,839   10,127   1968   04/07   15 years

Brooklyn Park, MN

  —     438,259   778,217   —     —     438,259   778,217   1,216,476   22,050   1985   04/07   25 years

Cedar Rapids, IA

  —     390,848   816,402   —     —     390,848   816,402   1,207,250   23,131   1989   04/07   25 years

Clive, IA

  —     1,141,010   934,829   —     —     1,141,010   934,829   2,075,839   33,109   1983   04/07   20 years

Cottage Grove, MN

  —     274,404   484,572   —     —     274,404   484,572   758,976   13,730   1992   04/07   25 years

Des Moines, IA

  —     212,694   475,795   —     —     212,694   475,795   688,489   16,851   1964   04/07   20 years

Des Moines, IA

  —     248,517   595,659   —     —     248,517   595,659   844,176   14,064   1990   04/07   30 years

Eden Prairie, MN

  —     865,400   751,139   —     —     865,400   751,139   1,616,539   26,603   1984   04/07   20 years

Edina, MN

  —     894,483   686,718   —     —     894,483   686,718   1,581,201   24,321   1985   04/07   20 years

Houston, TX

  —     287,729   465,697   —     —     287,729   465,697   753,426   21,991   1970   04/07   15 years

Houston, TX

  —     2,260,395   1,806,419   —     —     2,260,395   1,806,419   4,066,814   51,182   1975   04/07   25 years

Houston, TX

  —     3,193,137   1,305,127   —     —     3,193,137   1,305,127   4,498,264   26,413   1995   04/07   35 years

Houston, TX

  —     1,846,219   1,592,457   —     —     1,846,219   1,592,457   3,438,676   45,120   1983   04/07   25 years

Houston, TX

  —     1,960,385   1,144,516   —     —     1,960,385   1,144,516   3,104,901   32,427   1983   04/07   25 years

Houston, TX

  —     1,347,305   1,701,671   —     —     1,347,305   1,701,671   3,048,976   40,178   1984   04/07   30 years

Houston, TX

  —     795,775   678,201   —     —     795,775   678,201   1,473,976   19,216   1986   04/07   25 years

Houston, TX

  —     623,760   1,108,129   —     —     623,760   1,108,129   1,731,889   26,164   1988   04/07   30 years

Houston, TX

  —     5,125,771   1,267,125   —     —     5,125,771   1,267,125   6,392,896   25,644   1995   04/07   35 years

Humble, TX

  —     1,204,234   1,516,641   —     —     1,204,234   1,516,641   2,720,875   30,694   1993   04/07   35 years

Plymouth, MN

  —     827,427   181,549   —     —     827,427   181,549   1,008,976   12,860   1955   04/07   10 years

Roseville, MN

  —     861,100   563,575   —     —     861,100   563,575   1,424,675   19,959   1963   04/07   20 years

Spokane, WA

  —     214,246   580,318   —     —     214,246   580,318   794,564   13,702   1990   04/07   30 years

Spokane, WA

  —     1,252,856   1,146,358   —     —     1,252,856   1,146,358   2,399,214   23,200   1997   04/07   35 years

St. Cloud, MN

  —     242,717   391,259   —     —     242,717   391,259   633,976   13,857   1986   04/07   20 years

Stillwater, MN

  —     288,745   214,419   —     —     288,745   214,419   503,164   10,125   1971   04/07   15 years

Sugarland, TX

  —     3,789,092   1,972,484   —     —     3,789,092   1,972,484   5,761,576   39,919   1995   04/07   35 years

West St Paul, MN

  —     835,651   235,825   —     —     835,651   235,825   1,071,476   8,352   1972   04/07   20 years

Rochester, MN

  —     318,975   451,053   —     —     318,975   451,053   770,028   2,349   1994   10/07   40 years

Rochester, MN

  —     1,054,930   2,327,307   —     —     1,054,930   2,327,307   3,382,237   12,121   2003   10/07   40 years

Birmingham, AL

  —     2,377,589   2,144,987   —     —     2,377,589   2,144,987   4,522,576   8,937   1985   11/07   30 years

Clearwater, FL

  —     825,012   765,491   —     —     825,012   765,491   1,590,503   3,827   1969   11/07   25 years

Mesquite, TX

  —     1,595,876   2,201,161   —     —     1,595,876   2,201,161   3,797,037   11,005   1987   11/07   25 years

Seminole, FL

  —     2,165,896   1,495,994   —     —     2,165,896   1,495,994   3,661,890   6,233   1985   11/07   30 years

Tampa, FL

  —     2,992,859   1,669,069   —     —     2,992,859   1,669,069   4,661,928   8,345   1969   11/07   25 years

Vestavia Hills, AL

  —     1,008,794   955,811   —     —     1,008,794   955,811   1,964,605   4,779   1967   11/07   25 years

El Paso, TX

  —     988,006   1,046,430   —     —     988,006   1,046,430   2,034,436   1,246   1998   12/07   40 years

El Paso, TX

  —     1,399,045   1,467,945   —     —     1,399,045   1,467,945   2,866,990   1,748   1991   12/07   40 years

El Paso, TX

  —     664,183   823,521   —     —     664,183   823,521   1,487,704   980   1991   12/07   40 years

El Paso, TX

  —     1,423,681   1,305,604   —     —     1,423,681   1,305,604   2,729,285   1,813   1986   12/07   30 years

El Paso, TX

  —     1,807,249   2,287,451   —     —     1,807,249   2,287,451   4,094,700   3,177   1983   12/07   40 years

Mountain Jack’s:

                       

Centerville, OH

  —     850,625   1,059,430   —     —     850,625   1,059,430   1,910,055   160,018   1986   12/01   40 years

Mr. E’s Music Supercenter:

                       

Arlington, TX

  —     435,002   2,299,881   334,059   —     435,002   2,633,940   3,068,942   637,178   1996   06/96   40 years

Muchas Gracias Mexican Restaurant:

                       

Salem, OR

  —     555,951   735,651   —     —     555,951   735,651   1,291,602   111,114   1996   12/06   40 years

New Covenant Church:

                       

Augusta, GA

  —     176,656   674,253   —     —     176,656   674,253   850,909   101,840   1998   12/01   40 years

Office Depot:

                       

Arlington, TX

  —     596,024   1,411,432   —     —     596,024   1,411,432   2,007,456   490,980   1991   01/94   40 years

Richmond, VA

  —     888,772   1,948,036   —     —     888,772   1,948,036   2,836,808   564,380   1996   05/96   40 years

Hartsdale, NY

  —     4,508,753   2,327,448   —     —     4,508,753   2,327,448   6,836,201   227,831   1996   09/97   40 years

OfficeMax:

                       

Cincinnati, OH

  —     543,489   1,574,551   —     —     543,489   1,574,551   2,118,040   530,737   1994   07/94   40 years

Evanston, IL

  —     1,867,831   1,757,618   —     —     1,867,831   1,757,618   3,625,449   551,941   1995   06/95   40 years

Altamonte Springs, FL

  —     1,689,793   3,050,160   —     —     1,689,793   3,050,160   4,739,953   905,775   1995   01/96   40 years

Cutler Ridge, FL

  —     989,370   1,479,119   —     —     989,370   1,479,119   2,468,489   425,555   1995   06/96   40 years

Sacramento, CA

  —     1,144,167   2,961,206   —     —     1,144,167   2,961,206   4,105,373   814,528   1996   12/96   40 years

Salinas, CA

  —     1,353,217   1,829,325   —     —     1,353,217   1,829,325   3,182,542   497,348   1995   02/97   40 years

Redding, CA

  —     667,174   2,181,563   —     —     667,174   2,181,563   2,848,737   574,933   1997   06/97   40 years

 

See accompanying report of independent registered public accounting firm.

 

F-10


Table of Contents
    Encum-
brances (k)
    Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
  Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Kelso, WA

  —       868,003   —     1,805,539   —     868,003   1,805,539   2,673,542   449,504   1998   09/97 (g)   40 years

Lynchburg, VA

  —       561,509   —     1,851,326   —     561,509   1,851,326   2,412,835   430,047   1998   02/98     40 years

Leesburg, FL

  —       640,019   —     1,929,028   —     640,019   1,929,028   2,569,047   436,040   1998   08/98     40 years

Griffin, GA

  —       685,470   —     1,801,905   —     685,470   1,801,905   2,487,375   392,290   1999   11/98 (g)   40 years

Tigard, OR

  —       1,539,873   2,247,321   —     —     1,539,873   2,247,321   3,787,194   512,670   1995   11/98     40 years

Orlando Metro Gymnastics:

                       

Orlando, FL

  —       427,661   1,344,660   —     —     427,661   1,344,660   1,772,321   99,448   2003   01/05     40 years

Palais Royale:

                       

Sealy, TX

    475,185   519,176   —     —     475,185   519,176   994,361   115,508   1982   03/99     40 years

Palm Tree Computer Systems:

                       

Orlando, FL

  60,351 (o)   36,850   101,320   —     —     36,850   101,320   138,170   9,815   2001   02/04     40 years

Party City:

                       

Memphis, TN

  —       266,383   —     1,136,334   —     266,383   1,136,334   1,402,717   242,655   1999   06/99     40 years

Pep Boys:

                       

Chicago, IL

  —       1,077,006   3,756,102   —     —     1,077,006   3,756,102   4,833,108   13,414   1993   11/07     35 years

Cicero, IL

  —       1,341,244   3,760,263   —     —     1,341,244   3,760,263   5,101,507   13,429   1993   11/07     35 years

Cornwell Heights, PA

  —       2,058,189   3,101,900   —     —     2,058,189   3,101,900   5,160,089   15,510   1972   11/07     25 years

East Brunswick, NJ

  —       2,449,212   5,025,778   —     —     2,449,212   5,025,778   7,474,990   20,940   1987   11/07     30 years

Jacksonville, FL

  —       809,881   2,330,983   —     —     809,881   2,330,983   3,140,864   8,325   1989   11/07     35 years

Joliet, IL

  —       1,505,821   3,726,894   —     —     1,505,821   3,726,894   5,232,715   13,310   1993   11/07     35 years

Lansing, IL

  —       868,936   3,439,711   —     —     868,936   3,439,711   4,308,647   12,284   1993   11/07     35 years

Las Vegas, NV

  —       1,917,220   2,530,354   —     —     1,917,220   2,530,354   4,447,574   9,037   1989   11/07     35 years

Marietta, GA

  —       1,311,037   3,555,989   —     —     1,311,037   3,555,989   4,867,026   14,817   1987   11/07     30 years

Marlton, NJ

  —       1,608,391   4,141,816   —     —     1,608,391   4,141,816   5,750,207   17,258   1983   11/07     30 years

Philadelphia, PA

  —       1,300,283   3,830,376   —     —     1,300,283   3,830,376   5,130,659   13,680   1995   11/07     35 years

Quakertown, PA

  —       1,128,592   3,251,721   —     —     1,128,592   3,251,721   4,380,313   11,613   1995   11/07     35 years

Roswell, GA

  —       930,986   2,732,320   —     —     930,986   2,732,320   3,663,306   11,385   2007   11/07     30 years

Turnersville, NJ

  —       989,911   3,493,815   —     —     989,911   3,493,815   4,483,726   14,558   1986   11/07     30 years

Perfect Teeth:

                       

Rio Rancho, NM

  —       61,517   122,142   —     —     61,517   122,142   183,659   18,465   1997   12/01     40 years

Perkins Restaurant:

                       

Des Moines, IA

  —       255,874   136,103   —     —     255,874   136,103   391,977   34,593   1976   06/05     10 years

Des Moines, IA

  —       225,922   203,330   —     —     225,922   203,330   429,252   51,679   1976   06/05     10 years

Des Moines, IA

  —       269,938   218,248   —     —     269,938   218,248   488,186   55,471   1977   06/05     10 years

Newton, IA

  —       353,816   401,630   —     —     353,816   401,630   755,446   102,081   1979   06/05     10 years

Urbandale, IA

  —       376,690   581,414   —     —     376,690   581,414   958,104   73,888   1979   06/05     20 years

Petco:

                       

Grand Forks, ND

  —       306,629   909,671   —     —     306,629   909,671   1,216,301   228,389   1996   12/97     40 years

Petro Express:

                       

Belmont, NC

  —       1,507,766   1,622,165   —     —     1,507,766   1,622,165   3,129,931   32,829   2001   04/07     35 years

Charlotte, NC

  —       1,025,233   1,604,698   —     —     1,025,233   1,604,698   2,629,931   37,888   1986   04/07     30 years

Charlotte, NC

  —       1,292,976   1,836,951   —     —     1,292,976   1,836,951   3,129,927   43,372   1987   04/07     30 years

Charlotte, NC

  —       1,457,711   2,047,217   —     —     1,457,711   2,047,217   3,504,928   48,337   1987   04/07     30 years

Charlotte, NC

  —       1,290,989   1,838,939   —     —     1,290,989   1,838,939   3,129,928   43,419   1988   04/07     30 years

Charlotte, NC

  —       1,777,717   1,977,210   —     —     1,777,717   1,977,210   3,754,927   46,684   1992   04/07     30 years

Charlotte, NC

  —       1,322,626   869,805   —     —     1,322,626   869,805   2,192,431   20,537   1982   04/07     30 years

Charlotte, NC

  —       506,975   697,953   —     —     506,975   697,953   1,204,928   24,719   1967   04/07     20 years

Charlotte, NC

  —       629,337   875,591   —     —     629,337   875,591   1,504,928   20,674   1986   04/07     30 years

Charlotte, NC

  —       429,432   425,496   —     —     429,432   425,496   854,928   10,046   1983   04/07     30 years

Charlotte, NC

  —       2,315,876   2,064,051   —     —     2,315,876   2,064,051   4,379,927   41,772   1996   04/07     35 years

Charlotte, NC

  —       1,037,423   1,467,505   —     —     1,037,423   1,467,505   2,504,928   29,700   1997   04/07     35 years

Charlotte, NC

  —       2,165,285   1,964,643   —     —     2,165,285   1,964,643   4,129,928   39,761   1997   04/07     35 years

Charlotte, NC

  —       1,339,787   1,790,140   —     —     1,339,787   1,790,140   3,129,927   36,229   1998   04/07     35 years

Charlotte, NC

  —       2,784,480   3,720,448   —     —     2,784,480   3,720,448   6,504,928   75,295   1998   04/07     35 years

Charlotte, NC

  —       1,532,107   1,972,821   —     —     1,532,107   1,972,821   3,504,928   39,926   1998   04/07     35 years

Charlotte, NC

  —       1,030,292   1,724,636   —     —     1,030,292   1,724,636   2,754,928   40,721   1983   04/07     30 years

Charlotte, NC

  —       1,810,009   2,569,919   —     —     1,810,009   2,569,919   4,379,928   45,509   2004   04/07     40 years

Charlotte, NC

  —       1,257,718   1,559,712   —     —     1,257,718   1,559,712   2,817,430   27,619   2004   04/07     40 years

Charlotte, NC

  —       1,696,967   2,418,814   —     —     1,696,967   2,418,814   4,115,781   42,833   2005   04/07     40 years

Concord, NC

  —       2,144,009   1,985,919   —     —     2,144,009   1,985,919   4,129,928   40,191   2000   04/07     35 years

 

See accompanying report of independent registered public accounting firm.

 

F-11


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Concord, NC

  —     1,828,292   1,676,647   —     —     1,828,292   1,676,647   3,504,939   33,932     2002     04/07     35 years  

Conover, NC

  —     917,090   1,275,337   —     —     917,090   1,275,337   2,192,427   25,810     1999     04/07     35 years  

Cornelius, NC

  —     1,653,202   2,664,228   —     —     1,653,202   2,664,228   4,317,430   53,919     2000     04/07     35 years  

Denver, NC

  —     2,317,321   1,750,110   —     —     2,317,321   1,750,110   4,067,431   35,418     1999     04/07     35 years  

Fort Mill, SC

  —     3,825,461   2,554,459   —     —     3,825,461   2,554,459   6,379,920   51,697     1998     04/07     35 years  

Fort Mill, SC

  —     1,883,231   1,559,190   —     —     1,883,231   1,559,190   3,442,421   36,814     1988     04/07     30 years  

Gastonia, NC

  —     964,906   1,227,521   —     —     964,906   1,227,521   2,192,427   24,843     2001     04/07     35 years  

Gastonia, NC

  —     335,424   544,504   —     —     335,424   544,504   879,928   9,642     2000     04/07     40 years  

Gastonia, NC

  —     1,070,390   1,184,517   —     —     1,070,390   1,184,517   2,254,907   23,972     1990     04/07     35 years  

Gastonia, NC

  —     744,571   760,356   —     —     744,571   760,356   1,504,927   13,465     2003     04/07     40 years  

Hickory, NC

  —     1,975,267   1,529,667   —     —     1,975,267   1,529,667   3,504,934   30,957     2002     04/07     35 years  

Kings Mountain, NC

  —     1,210,397   982,031   —     —     1,210,397   982,031   2,192,428   19,874     1988     04/07     35 years  

Lake Wylie, SC

  —     1,972,180   1,282,737   —     —     1,972,180   1,282,737   3,254,917   25,960     2003     04/07     35 years  

Lake Wylie, SC

  —     1,380,939   2,061,482   —     —     1,380,939   2,061,482   3,442,421   41,720     1998     04/07     35 years  

Lincolnton, NC

  —     722,773   532,154   —     —     722,773   532,154   1,254,927   12,565     1989     04/07     30 years  

Lincolnton, NC

  —     2,358,754   1,771,201   —     —     2,358,754   1,771,201   4,129,955   35,846     2000     04/07     35 years  

Matthews, NC

  —     1,196,544   1,745,883   —     —     1,196,544   1,745,883   2,942,427   41,222     1987     04/07     30 years  

Mineral Springs, NC

  —     677,575   577,353   —     —     677,575   577,353   1,254,928   10,224     2002     04/07     40 years  

Monroe, NC

  —     420,625   834,302   —     —     420,625   834,302   1,254,927   16,885     1997     04/07     35 years  

Monroe, NC

  —     709,082   795,846   —     —     709,082   795,846   1,504,928   16,106     1999     04/07     35 years  

Monroe, NC

  —     857,369   1,022,565   —     —     857,369   1,022,565   1,879,934   18,108     2004     04/07     40 years  

Rock Hill, SC

  —     2,118,790   1,886,128   —     —     2,118,790   1,886,128   4,004,918   38,172     1998     04/07     35 years  

Rock Hill, SC

  —     3,095,160   1,909,758   —     —     3,095,160   1,909,758   5,004,918   38,650     1999     04/07     35 years  

Rock Hill, SC

  —     777,836   727,082   —     —     777,836   727,082   1,504,918   17,167     1990     04/07     30 years  

Statesville, NC

  —     1,885,746   2,181,682   —     —     1,885,746   2,181,682   4,067,428   44,153     1999     04/07     35 years  

Thomasville, NC

  —     993,898   1,761,032   —     —     993,898   1,761,032   2,754,930   35,640     2000     04/07     35 years  

Waxhaw, NC

  —     508,235   746,698   —     —     508,235   746,698   1,254,933   13,223     2002     04/07     40 years  

York, SC

  —     2,306,150   1,448,777   —     —     2,306,150   1,448,777   3,754,927   29,320     1999     04/07     35 years  

Charlotte, NC

  —     1,231,265   1,214,175   —     —     1,231,265   1,214,175   2,445,440   18,971     1997     05/07     40 years  

Charlotte, NC

  —     1,849,143   2,279,590   —     —     1,849,143   2,279,590   4,128,733   35,618     2005     05/07     40 years  

Rock Hill, SC

  —     3,107,907   2,145,815   —     —     3,107,907   2,145,815   5,253,722   33,528     1999     05/07     40 years  

PETsMART:

                       

Chicago, IL

  —     2,724,138   3,565,721   —     —     2,724,138   3,565,721   6,289,859   828,279     1998     09/98     40 years  

Picture Factory:

                       

Sarasota, FL

  —     1,167,618   1,903,810   218,564   —     1,167,618   2,122,374   3,289,992   205,716     1996     09/97     40 years  

Pier 1 Imports:

                       

Anchorage, AK

  —     928,321   1,662,584   —     —     928,321   1,662,584   2,590,905   492,087     1995     02/96     40 years  

Memphis, TN

  —     713,319   821,770   —     —     713,319   821,770   1,535,089   216,571     1997     09/96 (f)   40 years  

Sanford, FL

  —     738,051   803,082   —     —     738,051   803,082   1,541,133   196,588     1998     06/97 (f)   40 years  

Knoxville, TN

  —     467,169   734,833   —     —     467,169   734,833   1,202,002   164,571     1999     01/98 (f)   40 years  

Mason, OH

  —     593,571   885,047   —     —     593,571   885,047   1,478,617   188,994     1999     06/98 (f)   40 years  

Harlingen, TX

  —     316,640   756,406   —     —     316,640   756,406   1,073,046   155,221     1999     11/98 (f)   40 years  

Valdosta, GA

  —     390,838   805,912   —     —     390,838   805,912   1,196,750   163,701     1999     01/99 (f)   40 years  

Pizza Hut:

                       

Monroeville, AL

  —     547,300   44,237   —     —     547,300   44,237   591,537   6,682     1976     12/01     40 years  

Pizza Place, The:

                       

Cohoes, NY

  —     16,396   88,372   —     —     16,396   88,372   104,768   7,151     1994     09/04     40 years  

Popeye’s:

                       

Snellville, GA

  —     642,169   436,512   —     —     642,169   436,512   1,078,681   65,931     1995     12/01     40 years  

Pueblo Viejo Restaurant:

                       

Chandler, AZ

  —     654,765   765,164   7,500   —     654,765   772,664   1,427,429   122,640     1997     12/01     40 years  

Pull-A-Part:

                       

Birmingham, AL

  —     1,164,780   2,090,094   —     —     1,164,780   2,090,094   3,254,874   71,847     1964     08/06     40 years  

Augusta, GA

  —     1,414,381   —     1,450,906   —     1,414,381   1,450,906   2,865,287   19,648     2007     08/06 (q)   40 years  

Conley, GA

  —     1,685,604   1,387,170   —     —     1,685,604   1,387,170   3,072,774   47,684     1999     08/06     40 years  

Norcross, GA

  —     1,831,129   1,040,317   —     —     1,831,129   1,040,317   2,871,446   35,761     1998     08/06     40 years  

Louisville, KY

  —     3,205,591   1,531,842   —     —     3,205,591   1,531,842   4,737,433   52,657     2006     08/06     40 years  

Harvey, LA

  —     1,881,371   —     —     —     1,881,371   —     1,881,371   (e )   (e )   08/06 (q)   (e )

Charlotte, NC

  —     2,912,842   1,724,045   —     —     2,912,842   1,724,045   4,636,887   59,264     2006     08/06     40 years  

Knoxville, TN

  —     961,067   —     2,384,443   —     961,067   2,384,443   3,345,510   27,322     2007     08/06 (q)   40 years  

Nashville, TN

  —     2,164,234   1,414,129   —     —     2,164,234   1,414,129   3,578,363   48,611     2006     08/06     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-12


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Lafayette, LA

  —     1,034,830   —     —     —     1,034,830   —     1,034,830   (e )   (e )   08/06 (q)   (e )

Cleveland, OH

  —     4,555,684   —     2,096,448   —     4,555,684   2,096,448   6,652,132   6,551     2007     08/06     40 years  

Montgomery, AL

  —     934,023   —     —     —     934,023   —     934,023   (e )   (e )   11/06 (q)   (e )

Jackson, MS

  —     1,314,846   —     —     —     1,314,846   —     1,314,846   (e )   (e )   12/06 (q)   (e )

Baton Rouge, LA

  —     890,122   —     —     —     890,122   —     890,122   (e )   (e )   01/07 (q)   (e )

Memphis, TN

  —     1,779,169   —     —     —     1,779,169   —     1,779,169   (e )   (e )   05/07 (q)   (e )

Mobile, AL

  —     549,485   —     —     —     549,485   —     549,485   (e )   (e )   06/07 (q)   (e )

Winston-Salem, NC

  —     845,948   —     —     —     845,948   —     845,948   (e )   (e )   08/07 (q)   (e )

Lithonia, GA

  —     2,409,908   —     —     —     2,409,908   —     2,409,908   (e )   (e )   08/07 (q)   (e )

Columbia, SC

  —     934,755   —     —     —     934,755   —     934,755   (e )   (e )   09/07 (q)   (e )

QuikTrip:

                       

Alpharetta, GA

  —     1,048,309   606,916   —     —     1,048,309   606,916   1,655,225   38,564     1996     06/05     40 years  

Clive, IA

  —     623,473   556,970   —     —     623,473   556,970   1,180,443   47,188     1994     06/05     30 years  

Des Moines, IA

  —     258,759   792,448   —     —     258,759   792,448   1,051,207   67,138     1990     06/05     30 years  

Des Moines, IA

  —     379,435   455,322   —     —     379,435   455,322   834,757   38,576     1996     06/05     30 years  

Gainesville, GA

  —     592,192   912,962   —     —     592,192   912,962   1,505,154   77,348     1989     06/05     30 years  

Herculaneum, MO

  —     856,001   1,612,887   —     —     856,001   1,612,887   2,468,888   136,647     1991     06/05     30 years  

Johnston, IA

  —     394,289   385,119   —     —     394,289   385,119   779,408   32,628     1991     06/05     30 years  

Lee's Summit, MO

  —     373,770   1,224,099   —     —     373,770   1,224,099   1,597,869   77,781     1999     06/05     40 years  

Norcross, GA

  —     948,051   293,896   —     —     948,051   293,896   1,241,947   24,900     1993     06/05     30 years  

Norcross, GA

  —     844,216   296,867   —     —     838,826   296,867   1,135,693   25,151     1989     06/05     30 years  

Norcross, GA

  —     966,145   202,430   —     —     966,145   202,430   1,168,575   17,150     1994     06/05     30 years  

Olathe, KS

  —     792,656   1,391,981   —     —     792,656   1,391,981   2,184,637   88,449     1999     06/05     40 years  

Tulsa, OK

  —     1,224,843   649,917   —     —     1,224,843   649,917   1,874,760   55,062     1990     06/05     30 years  

Urbandale, IA

  —     339,566   764,025   —     —     339,566   764,025   1,103,591   48,547     1993     06/05     40 years  

Wichita, KS

  —     127,250   542,934   —     —     127,250   542,934   670,184   45,999     1990     06/05     30 years  

Wichita, KS

  —     118,012   453,891   —     —     118,012   453,891   571,903   38,455     1989     06/05     30 years  

Woodstock, GA

  —     488,383   1,041,883   —     —     488,383   1,041,883   1,530,266   66,203     1997     06/05     40 years  

Quizno’s:

                       

Rio Rancho, NM

  —     48,566   96,428   13,398   —     48,566   109,826   158,392   16,186     1997     12/01     40 years  

Qwest Corporation Service Center:

                       

Cedar Rapids, IA

  —     184,490   628,943   —     —     184,490   628,943   813,433   79,928     1976     06/05     20 years  

Decorah, IA

  —     71,899   271,620   —     —     71,899   271,620   343,519   69,037     1974     06/05     10 years  

Rally’s:

                       

Toledo, OH

  —     125,882   319,770   —     —     125,882   319,770   445,652   127,868     1989     07/92     39 years  

REB Oil:

                       

Deerfield Beach, FL

  —     769,522   273,756   —     —     769,522   273,756   1,043,278   13,973     1980     12/05     40 years  

Red Lion Chinese Restaurant:

                       

Cohoes, NY

  —     27,327   147,286   —     —     27,327   147,286   174,613   11,918     1994     09/04     40 years  

Reliable:

                       

St. Louis, MO

  —     2,077,893   13,762,491   —     —     2,077,893   13,762,491   15,840,384   1,192,793     1975     05/04     40 years  

Rent-A-Center:

                       

Rio Rancho, NM

  —     145,698   289,284   40,193   —     145,698   329,477   475,175   48,883     1997     12/01     40 years  

Rite Aid:

                       

Mobile, AL

  —     1,136,618   1,694,187   —     —     1,136,618   1,694,187   2,830,805   255,893     2000     12/01     40 years  

Orange Beach, AL

  —     1,409,980   1,996,043   —     —     1,409,980   1,996,043   3,406,023   301,486     2000     12/01     40 years  

Albany, NY

  —     24,707   867,257   —     —     24,707   867,257   891,964   71,367     1994     09/04     40 years  

Albany, NY (r)

  —     33,794   823,923   —     —     33,794   823,923   857,717   67,802     1992     09/04     40 years  

Hudson Falls, NY

  —     56,737   780,091   38,787   —     56,737   818,878   875,615   64,802     1990     09/04     40 years  

Saratoga Springs, NY

  —     762,303   590,978   —     —     762,303   590,978   1,353,281   48,633     1980     09/04     40 years  

Ticonderoga, NY

  —     88,867   688,622   —     —     88,867   688,622   777,489   56,668     1993     09/04     40 years  

Monticello, NY

  850,549   664,400   768,795   —     —     664,400   768,795   1,433,195   53,656     1996     03/05     40 years  

Rite Rug:

                       

Columbus, OH

  —     1,596,197   934,236   13,345   —     1,604,615   939,163   2,543,778   73,339     1970     11/04     40 years  

Roadhouse Grill:

                       

Cheektowaga, NY

  —     689,040   386,251   —     —     689,040   386,251   1,075,290   58,340     1994     12/01     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-13


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Road Ranger:

                       

Belvidere, IL

  —     748,237   1,256,106   —     —     748,237   1,256,106   2,004,344   48,412     1997     06/06     40 years

Brazil, IN

  —     2,199,280   907,034   —     —     2,199,280   907,034   3,106,314   34,958     1990     06/06     40 years

Cherry Valley, IL

  —     1,409,312   1,897,360   —     —     1,409,312   1,897,360   3,306,672   73,127     1991     06/06     40 years

Cottage Grove, WI

  —     2,174,548   1,733,398   —     —     2,174,548   1,733,398   3,907,946   66,808     1990     06/06     40 years

Decatur, IL

  —     815,213   1,314,354   —     —     815,213   1,314,354   2,129,568   50,657     2002     06/06     40 years

Dekalb, IL

  —     747,109   1,657,951   —     —     747,109   1,657,951   2,405,060   63,900     2000     06/06     40 years

Elk Run Heights, IA

  —     1,537,734   2,470,191   —     —     1,537,734   2,470,191   4,007,925   95,205     1989     06/06     40 years

Lake Station, IN

  —     3,171,775   1,111,643   —     —     3,171,775   1,111,643   4,283,418   42,845     1987     06/06     40 years

Mendota, IL

  —     959,012   1,295,780   —     —     959,012   1,295,780   2,254,792   49,941     1996     06/06     40 years

Oakdale, WI

  —     1,844,068   1,663,137   —     —     1,844,068   1,663,137   3,507,205   64,100     1998     06/06     40 years

Rockford, IL

  —     1,094,045   1,661,684   —     —     1,094,045   1,661,684   2,755,729   64,044     1996     06/06     40 years

Rockford, IL

  —     623,214   1,331,082   —     —     623,214   1,331,082   1,954,296   51,302     2000     06/06     40 years

Springfield, IL

  —     704,648   1,500,279   —     —     704,648   1,500,279   2,204,927   57,823     1997     06/06     40 years

Springfield, IL

  —     1,794,961   1,862,562   —     —     1,794,961   1,862,562   3,657,523   71,786     1978     06/06     40 years

Champaign, IL

  —     3,241,075   2,007,662   —     —     3,241,075   2,007,662   5,248,737   43,918     2006     02/07     40 years

Dekalb, IL

  —     504,730   1,503,084   —     —     504,730   1,503,084   2,007,814   32,880     2004     02/07     40 years

Fenton, MO

  —     2,583,565   2,621,722   —     —     2,583,565   2,621,722   5,205,287   57,350     2007     02/07     40 years

Hampshire, IL

  —     1,307,002   1,500,812   1,629,412   —     1,307,002   3,130,224   4,437,226   34,560     1988     02/07     40 years

Princeton, IL

  —     1,141,447   3,066,368   —     —     1,141,447   3,066,368   4,207,815   67,077     2003     02/07     40 years

South Beloit, IL

  —     3,823,872   2,308,942   —     —     3,823,872   2,308,942   6,132,814   50,508     2002     02/07     40 years

Cedar Rapids, IA

  —     1,024,606   983,509   —     —     1,024,606   983,509   2,008,115   19,465     1990     03/07     40 years

Marion, IA

  —     736,574   1,071,226   —     —     736,574   1,071,226   1,807,800   21,201     1974     03/07     40 years

Okawville, IL

  —     929,718   1,147,323   —     —     929,718   1,147,323   2,077,041   10,756     1997     08/07     40 years

Dubuque, IA

  —     560,523   1,941,477   —     —     560,523   1,941,477   2,502,000   14,157     2000     09/07     40 years

Belvidere, IL

  —     520,800   —     —     —     520,800   —     520,800   (e )   (e )   09/07     40 years

South Beloit, IL

  —     1,182,152   —     —     —     1,182,152   —     1,182,152   (e )   (e )   09/07     40 years

Robb & Stucky:

                       

Ft. Myers, FL

  —     2,188,440   6,225,401   —     —     2,188,440   6,225,401   8,413,841   1,580,217     1997     12/97     40 years

Roger & Mary’s:

                       

Kenosha, WI

  —     1,917,606   3,431,364   —     —     1,917,606   3,431,364   5,348,970   928,213     1992     02/97     40 years

Ross Dress For Less:

                       

Coral Gables, FL

  —     1,782,346   1,661,174   —     —     1,782,346   1,661,174   3,443,520   427,005     1994     06/96     40 years

Lodi, CA

  —     613,710   1,414,592   —     —     613,710   1,414,592   2,028,302   148,827     1984     03/99     40 years

Schlotzsky’s Deli:

                       

Phoenix, AZ

  —     706,306   315,469   —     —     706,306   315,469   1,021,775   47,649     1995     12/01     40 years

Scottsdale, AZ

  —     717,138   310,610   —     —     717,138   310,610   1,027,748   46,915     1995     12/01     40 years

7-Eleven:

                       

Land O’ Lakes, FL

  —     1,076,572   —     816,944   —     1,076,572   816,944   1,893,516   182,961     1999     10/98 (g)   40 years

Tampa, FL

  —     1,080,670   —     917,432   —     1,080,670   917,432   1,998,102   201,644     1999     12/98 (g)   40 years

Shek’s Chinese Express:

                       

Eden Prairie, MN

  —     64,916   261,347   —     —     64,916   261,347   326,263   36,492     1997     12/01     40 years

Shoes on a Shoestring:

                       

Albuquerque, NM

  —     1,441,777   2,335,475   —     —     1,441,777   2,335,475   3,777,251   615,495     1997     06/97     40 years

Shop-a-Snak:

                       

Jasper, AL

  —     551,417   747,418   —     —     551,417   747,418   1,298,835   30,364     1998     05/06     40 years

Bessemer, AL

  —     563,863   742,457   —     —     563,863   742,457   1,306,320   30,162     2002     05/06     40 years

Birmingham, AL

  —     489,664   769,343   —     —     489,664   769,343   1,259,007   31,254     1992     05/06     40 years

Birmingham, AL

  —     438,536   704,005   —     —     438,536   704,005   1,142,541   28,600     1989     05/06     40 years

Birmingham, AL

  —     361,182   744,195   —     —     361,182   744,195   1,105,377   30,233     1989     05/06     40 years

Chelsea, AL

  —     391,275   627,502   —     —     391,275   627,502   1,018,777   25,492     1981     05/06     40 years

Homewood, AL

  —     467,950   656,964   —     —     467,950   656,964   1,124,914   26,689     1990     05/06     40 years

Hoover, AL

  —     712,752   864,527   —     —     712,752   864,527   1,577,279   35,121     1998     05/06     40 years

Hoover, AL

  —     764,461   1,156,598   —     —     764,461   1,156,598   1,921,059   46,987     2005     05/06     40 years

Hoover, AL

  —     445,980   671,989   —     —     445,980   671,989   1,117,969   27,300     1989     05/06     40 years

Trussville, AL

  —     271,728   541,741   —     —     271,728   541,741   813,469   22,008     1992     05/06     40 years

Tuscaloosa, AL

  —     385,947   732,669   —     —     385,947   732,669   1,118,616   29,765     1991     05/06     40 years

Tuscaloosa, AL

  —     525,165   462,868   —     —     525,165   462,868   988,033   18,804     1991     05/06     40 years

Tuscaloosa, AL

  —     431,917   559,403   —     —     431,917   559,403   991,320   22,726     1991     05/06     40 years

 

See accompanying report of independent registered public accounting firm.

 

F-14


Table of Contents
    Encum-
brances (k)
    Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
    Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Shop & Save:

                       

Homestead, PA

  —       1,139,419   —     2,158,167 (j)   —     1,139,419   2,158,167   3,297,586   166,837   1994     02/97     40 years  

Soaks Express Car Wash:

                       

Ankeny, IA

  —       661,958   —     —       —     661,958   —     661,958   —     (e )   06/05     (e )

Sofa Express:

                       

Buford, GA

  —       1,925,129   5,034,846   —       —     1,925,129   5,034,846   6,959,975   435,304   2004     07/04     40 years  

Sonic Automotive:

                       

Charlotte, NC

  —       3,618,837   4,853,587   —       —     3,618,837   4,853,587   8,472,424   75,837   1996     05/07     40 years  

Spa and Nails Club:

                       

Orlando, FL

  65,839 (o)   40,200   110,531   —       —     40,200   110,531   150,731   10,708   2001     02/04     40 years  

Spencer’s A/C & Appliances:

                       

Glendale, AZ

  —       341,713   982,429   —       —     341,713   982,429   1,324,143   207,301   1999     12/98 (g)   40 years  

Sports Authority:

                       

Tampa, FL

  —       2,127,503   1,521,730   —       —     2,127,503   1,521,730   3,649,233   437,814   1994     06/96     40 years  

Sarasota, FL

  —       1,427,840   1,702,852   —       —     1,427,840   1,702,852   3,130,692   166,738   1996     09/97     40 years  

Memphis, TN (r)

  —       820,340   —     2,573,264     —     820,340   2,573,264   3,393,604   592,387   1998     12/97 (g)   40 years  

Little Rock, AR

  —       3,113,375   2,660,206   —       —     3,113,375   2,660,206   5,773,581   617,944   1997     09/98     40 years  

Woodbridge, NJ

  —       3,749,990   5,982,660   —       —     3,749,990   5,982,660   9,732,650   741,600   1994     01/03     40 years  

Bradenton, FL

  —       1,526,340   4,139,363   —       —     1,526,340   4,139,363   5,665,703   409,624   1997     01/04     40 years  

Sportsman’s Warehouse:

                       

Sioux Falls, SD

  —       2,619,810   1,929,895   —       —     2,619,810   1,929,895   4,549,705   163,505   1998     06/05     30 years  

Steak & Ale:

                       

Jacksonville, FL

  —       986,565   855,523   —       —     986,565   855,523   1,842,088   129,220   1996     12/01     40 years  

Stone Mountain Chevrolet:

                       

Lilburn, GA

  —       3,027,056   4,685,189   —       —     3,027,056   4,685,189   7,712,245   395,313   2004     08/04     40 years  

Stop & Go:

                       

Grand Prairie, TX

  —       421,254   684,568   —       —     421,254   684,568   1,105,822   103,398   1986     12/01     40 years  

Kennedale, TX

  —       399,988   692,190   —       —     391,208   692,190   1,083,398   104,549   1985     12/01     40 years  

Stripes:

                       

Brownsville, TX

  —       1,842,992   1,418,941   —       —     1,842,992   1,418,941   3,261,933   72,425   2000     12/05     40 years  

Brownsville, TX

  —       1,181,713   1,105,326   —       —     1,181,713   1,105,326   2,287,039   56,418   2000     12/05     40 years  

Brownsville, TX

  —       2,915,173   1,800,409   —       —     2,915,173   1,800,409   4,715,582   91,896   2000     12/05     40 years  

Brownsville, TX

  —       2,416,656   1,828,304   —       —     2,416,656   1,828,304   4,244,960   93,320   2000     12/05     40 years  

Brownsville, TX

  —       1,015,092   1,307,774   —       —     1,015,092   1,307,774   2,322,866   66,751   2003     12/05     40 years  

Brownsville, TX

  —       1,038,788   1,144,916   —       —     1,038,788   1,144,916   2,183,704   58,438   2004     12/05     40 years  

Brownsville, TX

  —       1,392,201   1,443,817   —       —     1,392,201   1,443,817   2,836,018   73,695   2005     12/05     40 years  

Brownsville, TX

  —       1,279,447   1,014,702   —       —     1,279,447   1,014,702   2,294,149   51,792   1990     12/05     40 years  

Brownsville, TX

  —       2,529,864   1,124,953   —       —     2,529,864   1,124,953   3,654,817   57,419   1990     12/05     40 years  

Brownsville, TX

  —       2,033,467   1,287,564   —       —     2,033,467   1,287,564   3,321,031   65,719   1995     12/05     40 years  

Brownsville, TX

  —       933,149   699,086   —       —     933,149   699,086   1,632,235   35,683   1999     12/05     40 years  

Corpus Christi, TX

  —       1,384,743   1,418,948   —       —     1,384,743   1,418,948   2,803,691   72,425   1982     12/05     40 years  

Corpus Christi, TX

  —       852,629   1,416,208   —       —     852,629   1,416,208   2,268,837   72,286   2005     12/05     40 years  

Corpus Christi, TX

  —       1,399,622   1,530,910   —       —     1,399,622   1,530,910   2,930,532   78,140   1984     12/05     40 years  

Corpus Christi, TX

  —       703,182   1,036,506   —       —     703,182   1,036,506   1,739,688   52,905   1986     12/05     40 years  

Donna, TX

  —       1,003,876   1,126,591   —       —     1,003,876   1,126,591   2,130,466   57,503   1995     12/05     40 years  

Edinburg, TX

  —       1,317,408   1,623,891   —       —     1,317,408   1,623,891   2,941,299   82,886   1999     12/05     40 years  

Edinburg, TX

  —       970,145   1,286,006   —       —     970,145   1,286,006   2,256,151   65,640   2003     12/05     40 years  

Falfurias, TX

  —       4,243,940   4,458,007   —       —     4,243,940   4,458,007   8,701,947   227,544   2002     12/05     40 years  

Freer, TX

  —       1,150,862   1,158,251   —       —     1,150,862   1,158,251   2,309,113   59,119   1984     12/05     40 years  

George West, TX

  —       1,243,224   695,074   —       —     1,243,224   695,074   1,938,298   35,478   1996     12/05     40 years  

Harlingen, TX

  —       906,427   952,530   —       —     906,427   952,530   1,858,957   48,619   1991     12/05     40 years  

Harlingen, TX

  —       753,595   1,152,311   —       —     753,595   1,152,311   1,905,906   58,816   1999     12/05     40 years  

Harlingen, TX

  —       755,002   600,721   —       —     755,002   600,721   1,355,723   30,662   1987     12/05     40 years  

La Feria, TX

  —       900,096   1,346,774   —       —     900,096   1,346,774   2,246,870   68,742   1988     12/05     40 years  

Laredo, TX

  —       1,552,558   1,774,827   —       —     1,552,558   1,774,827   3,327,385   90,590   2000     12/05     40 years  

Laredo, TX

  —       840,629   738,907   —       —     840,629   738,907   1,579,536   37,715   2001     12/05     40 years  

Laredo, TX

  —       736,451   670,332   —       —     736,451   670,332   1,406,784   34,215   1984     12/05     40 years  

Laredo, TX

  —       459,027   459,946   —       —     459,027   459,946   918,973   23,476   1983     12/05     40 years  

Laredo, TX

  —       1,494,871   1,400,482   —       —     1,494,871   1,400,482   2,895,353   71,482   1993     12/05     40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-15


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
  Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Laredo, TX

  —     675,128   533,047   —     —     675,128   533,047   1,208,175   27,208   1993   12/05   40 years

Lawton, OK

  —     696,670   964,441   —     —     696,670   964,441   1,661,111   49,227   1984   12/05   40 years

Los Indios, TX

  —     1,386,972   1,456,932   —     —     1,386,972   1,456,932   2,843,903   74,364   2005   12/05   40 years

McAllen, TX

  —     975,217   1,029,752   —     —     975,217   1,029,752   2,004,968   52,560   2003   12/05   40 years

McAllen, TX

  —     987,020   893,376   —     —     987,020   893,376   1,880,396   45,599   1999   12/05   40 years

Mission, TX

  —     880,169   1,101,301   —     —     880,169   1,101,301   1,981,471   56,212   1999   12/05   40 years

Mission, TX

  —     1,125,457   1,213,398   —     —     1,125,457   1,213,398   2,338,855   61,934   2003   12/05   40 years

Olmito, TX

  —     3,687,971   2,880,099   —     —     3,687,971   2,880,099   6,568,070   147,005   2002   12/05   40 years

Pharr, TX

  —     981,840   1,177,948   —     —     981,840   1,177,948   2,159,788   60,124   1988   12/05   40 years

Pharr, TX

  —     784,402   804,743   —     —     784,402   804,743   1,589,144   41,075   2000   12/05   40 years

Pharr, TX

  —     2,426,134   1,880,867   —     —     2,426,134   1,880,867   4,307,001   96,003   2003   12/05   40 years

Port Isabel, TX

  —     2,062,009   1,298,501   —     —     2,062,009   1,298,501   3,360,510   66,278   1994   12/05   40 years

Portland, TX

  —     655,735   914,512   —     —     655,735   914,512   1,570,247   46,678   1983   12/05   40 years

Progresso, TX

  —     1,768,974   1,811,221   —     —     1,768,974   1,811,221   3,580,195   92,448   1999   12/05   40 years

Riviera, TX

  —     2,351,060   2,158,069   —     —     2,351,060   2,158,069   4,509,128   110,151   2005   12/05   40 years

San Benito, TX

  —     1,103,210   1,586,235   —     —     1,103,210   1,586,235   2,689,445   80,964   2005   12/05   40 years

San Benito, TX

  —     790,629   1,857,158   —     —     790,629   1,857,158   2,647,787   94,792   1994   12/05   40 years

San Juan, TX

  —     1,123,838   1,171,582   —     —     1,123,838   1,171,582   2,295,420   59,800   1996   12/05   40 years

San Juan, TX

  —     1,424,383   1,545,557   —     —     1,424,383   1,545,557   2,969,940   78,888   2004   12/05   40 years

South Padre Island, TX

  —     1,366,721   1,388,764   —     —     1,366,721   1,388,764   2,755,485   70,885   1988   12/05   40 years

Wichita Falls, TX

  —     905,117   1,350,908   —     —     905,117   1,350,908   2,256,025   68,953   2000   12/05   40 years

Wichita Falls, TX

  —     484,202   827,999   —     —     484,202   827,999   1,312,201   42,262   1983   12/05   40 years

Wichita Falls, TX

  —     439,646   751,484   —     —     439,646   751,484   1,191,130   38,356   1984   12/05   40 years

Palm View, TX

  —     835,383   1,372,061   —     —     835,383   1,372,061   2,207,444   41,447   2005   10/06   40 years

Harlingen, TX

  —     638,186   1,806,562   —     —     638,186   1,806,562   2,444,748   47,046   2006   12/06   40 years

Rio Grande City

  —     1,871,354   1,612,282   —     —     1,871,354   1,612,282   3,483,636   41,987   2006   12/06   40 years

San Juan, TX

  —     815,902   1,433,890   —     —     815,902   1,433,890   2,249,792   37,341   2006   12/06   40 years

Zapata, TX

  —     1,332,662   1,772,564   —     —     1,332,662   1,772,564   3,105,226   46,161   2006   12/06   40 years

Orange Grove, TX

  —     1,766,745   1,838,068   —     —     1,766,745   1,838,068   3,604,813   32,549   2007   04/07   40 years

Harlingen, TX

  —     407,920   825,732   —     —     407,920   825,732   1,233,652   3,440   1982   11/07   30 years

Laredo, TX

  —     467,915   727,548   —     —     467,915   727,548   1,195,463   3,031   1973   11/07   30 years

Laredo, TX

  —     584,244   958,472   —     —     584,244   958,472   1,542,716   3,994   1981   11/07   30 years

Laredo, TX

  —     447,733   734,498   —     —     447,733   734,498   1,182,231   3,060   1981   11/07   30 years

Laredo, TX

  —     698,261   1,168,532   —     —     698,261   1,168,532   1,866,793   4,869   1981   11/07   30 years

Laredo, TX

  —     348,351   1,168,124   —     —     348,351   1,168,124   1,516,475   4,867   1983   11/07   30 years

San Benito, TX

  —     419,729   1,135,228   —     —     419,729   1,135,228   1,554,957   4,730   1985   11/07   40 years

Del Rio, TX

  —     1,565,013   758,296   —     —     1,565,013   758,296   2,323,309   2,369   1996   11/07   40 years

Kerrville, TX

  —     640,368   1,616,290   —     —     640,368   1,616,290   2,256,658   5,051   1996   11/07   40 years

Monahans, TX

  —     2,627,558   2,973,453   —     —     2,627,558   2,973,453   5,601,011   9,293   1996   11/07   40 years

Odessa, TX

  —     2,632,935   3,198,762   —     —     2,632,935   3,198,762   5,831,697   9,996   2006   11/07   40 years

San Angelo, TX

  —     194,277   471,407   —     —     194,277   471,407   665,684   1,473   1998   11/07   40 years

Pharr, TX

  —     573,354   1,228,572   —     —     573,354   1,228,572   1,801,926   1,280   2000   12/07   40 years

Subway:

                       

Eden Prairie, MN

  —     54,097   150,449   67,341   —     54,097   217,790   271,887   30,410   1997   12/01   40 years

Albany, NY

  —     2,734   66,667   —     —     2,734   66,667   69,401   5,486   1992   09/04   40 years

Cohoes, NY

  —     21,862   117,829   —     —     21,862   117,829   139,691   9,534   1994   09/04   40 years

SuperValu:

                       

Huntington, WV

  —     1,254,238   760,602   —     —     1,254,238   760,602   2,014,840   206,788   1971   02/97   40 years

Maple Heights, OH

  —     1,034,758   2,874,414   —     —     1,034,758   2,874,414   3,909,172   781,481   1985   02/97   40 years

Susser:

                       

Corpus Christi, TX

  —     630,043   3,131,407   —     —     630,043   3,131,407   3,761,450   688,257   1983   03/99   40 years

Swansea Quick Cash:

                       

Swansea, IL

  —     45,815   132,365   —     —     45,815   132,365   178,180   19,995   1997   12/01   40 years

Taco Bell:

                       

Ocala, FL

  —     275,023   754,990   —     —     275,023   754,990   1,030,013   114,035   2001   12/01   40 years

Ormond Beach, FL

  —     632,337   525,616   —     —     632,337   525,616   1,157,953   79,390   2001   12/01   40 years

Phoenix, AZ

  —     593,718   282,777   —     —     593,718   282,777   876,495   42,711   1995   12/01   40 years

Bedford, IN

  —     796,772   936,942   —     —     796,772   936,942   1,733,714   38,063   1989   05/06   40 years

Columbus, IN

  —     1,256,948   2,054,570   —     —     1,256,948   2,054,570   3,311,518   83,466   1990   05/06   40 years

Columbus, IN

  —     690,142   1,212,681   —     —     690,142   1,212,681   1,902,823   49,265   2005   05/06   40 years

Evansville, IN

  —     221,196   828,023   —     —     221,196   828,023   1,049,219   33,638   2003   05/06   40 years

 

See accompanying report of independent registered public accounting firm.

 

F-16


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
  Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Evansville, IN

  —     308,068   1,300,511   —     —     308,068   1,300,511   1,608,579   52,833   2000   05/06   40 years

Evansville, IN

  —     524,368   1,815,101   —     —     524,368   1,815,101   2,339,469   73,738   2005   05/06   40 years

Fishers, IN

  —     989,998   486,260   —     —     989,998   486,260   1,476,258   19,754   1998   05/06   40 years

Greensburg, IN

  —     648,296   1,079,007   —     —     648,296   1,079,007   1,727,303   43,834   1998   05/06   40 years

Indianapolis, IN

  —     1,031,743   1,649,975   —     —     1,031,743   1,649,975   2,681,718   67,030   2004   05/06   40 years

Indianapolis, IN

  —     547,218   703,287   —     —     547,218   703,287   1,250,505   28,571   2004   05/06   40 years

Madisonville, KY

  —     682,108   1,192,867   —     —     682,108   1,192,867   1,874,975   48,460   1999   05/06   40 years

Owensboro, KY

  —     638,693   1,326,161   —     —     638,693   1,326,161   1,964,854   53,875   2005   05/06   40 years

Shelbyville, IN

  —     670,216   1,755,847   —     —     670,216   1,755,847   2,426,063   71,331   1998   05/06   40 years

Speedway, IN

  —     407,707   1,426,319   —     —     407,707   1,426,319   1,834,026   57,944   2003   05/06   40 years

Terre Haute, IN

  —     1,037,327   1,655,660   —     —     1,037,327   1,655,660   2,692,987   67,261   2003   05/06   40 years

Terre Haute, IN

  —     1,313,692   2,249,313   —     —     1,313,692   2,249,313   3,563,005   91,378   2003   05/06   40 years

Vincennes, IN

  —     501,783   879,791   —     —     501,783   879,791   1,381,574   35,742   2004   05/06   40 years

Taco Bron Restaurant:

                       

Tucson, AZ

  —     827,002   305,209   17,814   —     844,816   305,209   1,150,025   52,810   1974   12/01   40 years

Texas Roadhouse:

                       

Grand Junction, CO

  —     584,237   920,143   —     —     584,237   920,143   1,504,380   138,979   1997   12/01   40 years

Thornton, CO

  —     598,556   1,019,164   —     —     598,556   1,019,164   1,617,720   153,936   1998   12/01   40 years

TGI Friday’s:

                       

Corpus Christi, TX

  —     1,209,702   1,532,125   —     —     1,209,702   1,532,125   2,741,827   231,414   1995   12/01   40 years

Thomasville:

                       

Buford, GA

  —     1,266,527   2,405,629   —     —     1,266,527   2,405,629   3,672,156   207,987   2004   07/04   40 years

Top’s:

                       

Lacey, WA

  —     2,777,449   7,082,150   —     —     2,777,449   7,082,150   9,859,599   1,925,460   1992   02/97   40 years

Tractor Supply Co.:

                       

Aransas Pass, TX

  —     100,967   1,599,293   —     —     100,967   1,599,293   1,700,260   305,694   1983   03/99   40 years

Ultra Car Wash:

                       

Mobile, AL

  —     1,070,724   1,086,104   —     —     1,070,724   1,086,104   2,156,828   10,182   2005   08/07   40 years

Uni-Mart:

                       

Avis, PA

  —     391,801   326,046   —     —     391,801   326,046   717,847   38,718   1976   08/05   20 years

Bear Creek, PA (r)

  —     190,558   230,193   —     —     190,558   230,193   420,752   27,335   1980   08/05   20 years

Bloomsburg, PA (r)

  —     206,402   501,424   —     —     206,402   501,424   707,826   59,544   1981   08/05   20 years

Bloomsburg, PA (r)

  —     540,561   146,127   —     —     540,561   146,127   686,689   17,352   1967   08/05   20 years

Bloomsburg, PA (r)

  —     515,108   888,074   —     —     515,108   888,074   1,403,182   105,459   1998   08/05   20 years

Chambersburg, PA (r)

  —     75,678   197,035   —     —     75,678   197,035   272,713   23,397   1990   08/05   20 years

Coraopolis, PA

  —     475,572   347,360   —     —     475,572   347,360   822,932   41,248   1983   08/05   20 years

Dallas, PA (r)

  —     890,855   1,435,745   —     —     890,855   1,435,745   2,326,601   170,494   1995   08/05   20 years

East Brady, PA (r)

  —     269,433   583,204   —     —     269,433   583,204   852,637   69,255   1987   08/05   20 years

Emporium, PA

  —     380,032   568,625   —     —     380,032   568,625   948,657   67,524   1996   08/05   20 years

Hazleton, PA

  —     670,271   377,355   —     —     670,271   377,355   1,047,625   44,811   1974   08/05   20 years

Hazleton, PA (r)

  —     2,529,165   727,550   —     —     2,529,165   727,550   3,256,716   86,396   2001   08/05   20 years

Johnsonburg, PA (r)

  —     780,536   503,662   —     —     780,536   503,662   1,284,198   59,809   1978   08/05   20 years

Larksville, PA (r)

  —     245,870   333,875   —     —     245,870   333,875   579,745   39,648   1990   08/05   20 years

Luzerne, PA

  —     170,866   415,295   —     —     170,866   415,295   586,161   49,316   1989   08/05   20 years

Moosic, PA (r)

  —     323,126   308,844   —     —     323,126   308,844   631,970   36,675   1980   08/05   20 years

Pleasant Gap, PA (r)

  —     331,885   592,844   —     —     331,885   592,844   924,730   70,400   1996   08/05   20 years

Port Vue, PA (r)

  —     824,158   117,629   —     —     824,158   117,629   941,787   13,968   1953   08/05   20 years

Punxsutawney, PA (r)

  —     252,648   541,842   —     —     252,648   541,842   794,490   64,344   1983   08/05   20 years

Ridgway, PA

  —     382,341   258,740   —     —     382,341   258,740   641,081   30,725   1975   08/05   20 years

Shamokin, PA (r)

  —     323,994   506,335   —     —     323,994   506,335   830,329   60,127   1956   08/05   20 years

Shippensburg, PA (r)

  —     203,610   330,098   —     —     203,610   330,098   533,708   39,199   1989   08/05   20 years

St. Clair, PA

  —     212,150   475,086   —     —     212,150   475,086   687,236   56,416   1984   08/05   20 years

St. Mary’s, PA

  —     274,323   260,942   —     —     274,323   260,942   535,265   30,986   1979   08/05   20 years

Taylor, PA (r)

  —     180,533   526,884   —     —     180,533   526,884   707,417   62,567   1973   08/05   20 years

White Haven, PA (r)

  —     485,984   866,602   —     —     485,984   866,602   1,352,587   102,909   1990   08/05   20 years

Wilkes-Barre, PA (r)

  —     178,104   471,437   —     —     178,104   471,437   649,541   55,983   1989   08/05   20 years

Wilkes-Barre, PA (r)

  —     171,040   422,438   —     —     171,040   422,438   593,478   50,164   1999   08/05   20 years

Wilkes-Barre, PA (r)

  —     875,774   1,956,613   —     —     875,774   1,956,613   2,832,386   232,348   1998   08/05   20 years

Williamsport, PA (r)

  —     908,758   122,164   —     —     908,758   122,164   1,030,922   14,507   1950   08/05   20 years

 

See accompanying report of independent registered public accounting firm.

 

F-17


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Yeagertown, PA

  —     142,061   180,073   —     —     142,061   180,073   322,134   21,384     1977     08/05   20 years  

Ashland, PA (r)

  —     355,322   545,140   —     —     355,322   545,140   900,462   62,464     1977     09/05   20 years  

Bear Creek, PA (r)

  —     689,374   274,920   —     —     689,374   274,920   964,294   31,501     1980     09/05   20 years  

Mountaintop, PA (r)

  —     422,770   616,488   —     —     422,770   616,488   1,039,259   70,639     1987     09/05   20 years  

Abbottstown, PA

  —     110,362   400,101   —     —     110,362   400,101   510,463   19,588     2000     01/06   40 years  

Beech Creek, PA

  —     476,516   612,664   —     —     476,516   612,664   1,089,180   29,994     1988     01/06   40 years  

Canisteo, NY

  —     141,912   485,183   —     —     141,912   485,183   627,095   23,753     1983     01/06   40 years  

Carlisle, PA

  —     347,858   411,491   —     —     347,858   411,491   759,349   20,145     1988     01/06   40 years  

Curwensville, PA (r)

  —     226,015   607,989   —     —     226,015   607,989   834,004   29,766     1983     01/06   40 years  

Dansville, PA (r)

  —     179,736   359,203   —     —     179,736   359,203   538,939   17,585     1988     01/06   40 years  

Effort, PA (r)

  —     1,297,431   1,201,954   —     —     1,297,431   1,201,954   2,499,385   58,845     2000     01/06   40 years  

Ellwood City, PA

  —     196,089   526,155   —     —     196,089   526,155   722,244   25,760     1987     01/06   40 years  

Export, PA (r)

  —     221,840   214,852   —     —     221,840   214,852   436,692   10,519     1988     01/06   40 years  

Hastings, PA

  —     199,089   455,379   —     —     199,089   455,379   654,468   22,295     1989     01/06   40 years  

Howard, PA

  —     136,416   374,695   —     —     136,416   374,695   511,111   18,345     1987     01/06   40 years  

Hughesville, PA (r)

  —     290,136   566,229   —     —     290,136   566,229   856,365   27,721     1977     01/06   40 years  

Jersey Shore, PA (r)

  —     514,708   381,372   —     —     514,708   381,372   896,080   18,671     1960     01/06   40 years  

Leeper, PA

  —     285,510   643,886   —     —     285,510   643,886   929,396   31,523     1987     01/06   40 years  

Lewisberry, PA

  —     412,356   533,848   —     —     412,356   533,848   946,204   26,136     1988     01/06   40 years  

McSherrytown, PA (r)

  —     134,501   364,946   —     —     134,501   364,946   499,447   17,867     1988     01/06   40 years  

Mercersburg, PA

  —     672,259   746,309   —     —     672,259   746,309   1,418,568   36,538     1988     01/06   40 years  

Milesburg, PA (r)

  —     133,831   372,913   —     —     133,831   372,913   506,744   18,257     1987     01/06   40 years  

Minersville, PA (r)

  —     679,595   581,718   —     —     679,595   581,718   1,261,313   28,479     1974     01/06   40 years  

Montoursville, PA (r)

  —     158,346   415,372   —     —     158,346   415,372   573,718   20,336     1988     01/06   40 years  

Nanticoke, PA (r)

  —     174,583   482,239   —     —     174,583   482,239   656,822   23,610     1988     01/06   40 years  

New Florence, PA

  —     298,364   812,449   —     —     298,364   812,449   1,110,813   39,776     1989     01/06   40 years  

Newstead, NY

  —     254,635   835,411   —     —     254,635   835,411   1,090,046   40,900     1990     01/06   40 years  

Nuangola, PA (r)

  —     1,062,388   1,202,832   —     —     1,062,388   1,202,832   2,265,220   58,888     2000     01/06   40 years  

Phillipsburg, PA

  —     428,193   268,962   —     —     428,193   268,962   697,155   13,168     1978     01/06   40 years  

Pittsburgh, PA

  —     905,332   1,346,177   —     —     905,332   1,346,177   2,251,509   65,907     1967     01/06   40 years  

Plainfield, PA (r)

  —     243,945   382,518   —     —     243,945   382,518   626,463   18,727     1988     01/06   40 years  

Plains, PA (r)

  —     204,417   401,264   —     —     204,417   401,264   605,681   19,645     1994     01/06   40 years  

Punxsutawney, PA (r)

  —     293,717   649,800   —     —     293,717   649,800   943,517   31,813     1983     01/06   40 years  

Reynoldsville, PA

  —     113,312   327,933   —     —     113,312   327,933   441,245   16,055     1983     01/06   40 years  

Summerville, PA

  —     92,798   271,832   —     —     92,798   271,832   364,630   13,308     1988     01/06   40 years  

Warriors Mark, PA (r)

  —     148,499   404,981   —     —     148,499   404,981   553,480   19,827     1995     01/06   40 years  

Williamsport, PA (r)

  —     295,036   378,715   —     —     295,036   378,715   673,751   18,541     1988     01/06   40 years  

Zelienople, PA (r)

  —     160,219   437,168   —     —     160,219   437,168   597,387   21,403     1988     01/06   40 years  

United Rentals:

                       

Carrollton, TX

  —     477,893   534,807   —     —     477,893   534,807   1,012,700   40,667     1981     12/04   40 years  

Cedar Park, TX

  —     535,091   829,241   —     —     535,091   829,241   1,364,332   63,056     1990     12/04   40 years  

Clearwater, FL

  —     1,173,292   1,810,665   —     —     1,173,292   1,810,665   2,983,957   137,685     2001     12/04   40 years  

Fort Collins, CO

  —     2,057,322   977,971   —     —     2,057,322   977,971   3,035,293   74,367     1975     12/04   40 years  

Irving, TX

  —     708,389   910,786   —     —     708,389   910,786   1,619,175   69,257     1984     12/04   40 years  

La Porte, TX

  —     1,114,553   2,125,426   —     —     1,114,553   2,125,426   3,239,979   161,620     2000     12/04   40 years  

Littleton, CO

  —     1,743,092   1,943,650   —     —     1,743,092   1,943,650   3,686,742   147,798     2002     12/04   40 years  

Oklahoma City, OK

  —     744,145   1,264,885   —     —     744,145   1,264,885   2,009,030   96,183     1997     12/04   40 years  

Perrysberg, OH

  —     641,867   1,119,085   —     —     641,867   1,119,085   1,760,952   85,097     1979     12/04   40 years  

Plano, TX

  —     1,030,426   1,148,065   —     —     1,030,426   1,148,065   2,178,491   87,301     1996     12/04   40 years  

Temple, TX

  —     1,159,775   1,360,379   —     —     1,159,775   1,360,379   2,520,154   103,445     1998     12/04   40 years  

Ft. Worth, TX

  —     510,490   1,127,796   —     —     510,490   1,127,796   1,638,286   83,409     1997     01/05   40 years  

Ft. Worth, TX

  —     1,427,764   —     —     —     1,427,764   —     1,427,764   (i )   (i )   01/05   (i )

Melbourne, FL

  —     746,558   607,128   —     —     746,558   607,128   1,353,686   39,843     1970     05/05   40 years  

United Trust Bank:

                       

Bridgeview, IL

  —     673,238   744,154   —     —     673,238   744,154   1,417,392   112,398     1997     12/01   40 years  

Vacant Land:

                       

Longwood, FL

  —     585,152   —     —     —     585,152   —     585,152   (e )   (e )   03/06   (e )

Florence, AL

  —     1,022,509   —     —     —     1,022,509   —     1,022,509   (e )   (e )   06/04   (e )

Florence, AL

  —     243,266   —     —     —     243,266   —     243,266   (e )   (e )   06/04   (e )

Vacant Property:

                       

Mesa, AZ

  —     152,609   399,801   112,765   —     152,609   512,566   665,175   77,418     1997     12/01   40 years  

Dallas, GA

  —     1,287,630   1,952,791   —     —     1,287,630   1,952,791   3,240,421   225,793     1997     05/03   40 years  

 

See accompanying report of independent registered public accounting firm.

 

F-18


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
    Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land     Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land     Building,
Improve-

ments and
Leasehold
Interests
  Total        

Woodstock, GA

    —       1,937,017       1,284,901     —       —       1,890,769       1,284,901     3,175,670     148,568     1997     05/03     40 years  

Bonham, TX

    —       54,999       202,085     —       —       54,999       104,974     159,973     17,360     1984     07/04     40 years  

Red Oak, TX

    —       73,290       520,950     —       —       73,290       242,896     316,186     78,344     1986     12/01     40 years  

Corpus Christi, TX

    —       893,270       978,344     76,664     —       893,270       1,055,008     1,948,278     372,149     1967     11/93     40 years  

Spokane, WA

    —       470,840       530,289     —       —       470,840       530,289     1,001,130     80,096     1996     12/01     40 years  

Swansea, IL

    —       91,709       264,956     —       —       91,709       264,956     356,665     40,055     1997     12/01     40 years  

Everett, PA

    —       226,366       1,159,833     7,830     —       226,366       817,667     1,044,033     148,722     1998     11/98     40 years  

Aransas Pass, TX

    —       89,537       1,240,882     —       —       89,537       1,240,882     1,330,419     275,219     1983     03/99     40 years  

Houston, TX

    —       421,897       1,915,483     —       —       421,897       1,915,483     2,337,380     97,557     1995     12/05     40 years  

Sealy, TX

    —       873,758       964,185     —       —       873,758       964,185     1,837,943     210,523     1982     03/99     40 years  

Southfield, MI

    —       405,107       643,759     —       —       405,107       643,759     1,048,866     111,798     1976     12/01     40 years  

Montgomery, AL

    —       592,730       1,186,705     —       —       592,730       1,186,705     1,779,435     60,571     1998     12/05     40 years  

Cohoes, NY

    —       48,482       261,352     —       —       48,482       261,352     309,834     22,048     1994     09/04     40 years  

Value City:

                       

Florissant, MO

    —       2,490,210       2,937,449     —       —       2,490,210       2,937,449     5,427,659     345,762     1996     04/03     40 years  

Value City Furniture:

                       

White Marsh, MD

    —       3,762,030       —       3,006,391     —       3,762,030       3,006,391     6,768,421     735,939     1998     03/98 (g)   40 years  

Walgreens:

                       

Sunrise, FL

    —       1,957,974       1,400,970     —       —       1,957,974       1,400,970     3,358,944     161,987     1994     05/03     40 years  

Tulsa, OK

    —       1,193,187       3,055,724     —       —       1,193,187       3,055,724     4,248,911     194,165     2003     06/05     40 years  

Wal-Mart:

                       

Beeville, TX

    —       507,231       2,315,424     —       —       507,231       2,315,424     2,822,655     508,910     1983     03/99     40 years  

Winfield, AL

    —       419,811       1,684,505     —       —       419,811       1,684,505     2,104,316     370,240     1983     03/99     40 years  

Washington Bike Center:

                       

Fairfax, VA

    —       192,830       278,892     83,773     —       192,830       362,665     555,495     35,690     1995     12/95     40 years  

Wendy’s Old Fashioned Hamburger:

                       

Sacramento, CA

    —       585,872       —       —       —       585,872       —       585,872     (i )   (i )   02/98     (i )

New Kensington, PA

    —       501,136       333,445     —       —       501,136       333,445     834,581     50,364     1980     12/01     40 years  

Whataburger:

                       

Albuquerque, NM

    —       624,318       418,975     —       —       624,318       418,975     1,043,293     63,282     1995     12/01     40 years  

Brunswick, GA

    —       290,860       —       910,051     —       290,860       910,051     1,200,911     16,115     2007     12/06 (q)   40 years  

Jacksonville, FL

    —       823,643       934,191     —       —       823,643       934,191     1,757,834     22,381     2006     01/07     40 years  

Starke, FL

    —       476,055       981,779     —       —       476,055       981,779     1,457,834     23,521     2006     01/07     40 years  

Yulee, FL

    —       893,834       1,013,995     —       —       893,834       1,013,995     1,907,829     24,293     2006     01/07     40 years  

Wherehouse Music:

                       

Homewood, AL

    —       1,031,974       696,950     —       —       1,031,974       696,950     1,728,924     105,269     1997     12/01     40 years  

Independence, MO

    —       502,623       1,209,307     —       —       502,623       1,209,307     1,711,930     61,725     1994     12/05     40 years  

Wingfoot:

                       

Beaverdam, OH

    —       (l )     1,521,190     —       —       (l )     1,521,190     1,521,190     23,768     2004     05/07     40 years  

Benton, AR

    —       (l )     308,519     —       —       (l )     308,519     308,519     3,535     2001     05/07     40 years  

Bowman, SC

    —       (l )     969,274     —       —       (l )     969,274     969,274     17,308     1998     05/07     40 years  

Brunswick, GA

    —       (l )     1,450,274     —       —       (l )     1,450,274     1,450,274     22,661     2003     05/07     40 years  

Dalton, GA

    —       (l )     1,540,648     —       —       (l )     1,540,648     1,540,648     24,017     2004     05/07     40 years  

Dandrige, TN

    —       (l )     1,030,351     —       —       (l )     1,030,351     1,030,351     18,399     1989     05/07     35 years  

Franklin, OH

    —       (l )     562,698     —       —       (l )     562,698     562,698     10,048     1998     05/07     40 years  

Gary, IN

    —       (l )     1,486,297     —       —       (l )     1,486,297     1,486,297     23,223     2004     05/07     40 years  

Georgetown, KY

    —       (l )     678,799     —       —       (l )     678,799     678,799     14,141     1997     05/07     40 years  

Mebane, NC

    —       (l )     561,025     —       —       (l )     561,025     561,025     10,018     1998     05/07     35 years  

Piedmont, SC

    —       (l )     566,582     —       —       (l )     566,582     566,582     10,117     1999     05/07     35 years  

Port Wentworth, GA

    —       (l )     551,919     —       —       (l )     551,919     551,919     9,856     1998     05/07     35 years  

Valdosta, GA

    —       (l )     1,476,879     —       —       (l )     1,476,879     1,476,879     23,076     2004     05/07     40 years  

Whiteland, IN

    —       (l )     1,471,230     —       —       (l )     1,471,230     1,471,230     16,857     2004     07/07     40 years  

Des Moines, IA

    —       (l )     816,275     —       —       (l )     816,275     816,275     9,353     1987     07/07     40 years  

Evansville, IN

    —       (l )     575,761     —       —       (l )     575,761     575,761     6,597     2002     07/07     40 years  

Kearney, MO

    —       (l )     1,268,709     —       —       (l )     1,268,709     1,268,709     14,537     2003     07/07     40 years  

Winn-Dixie:

                       

Columbus, GA

    —       1,023,371       1,874,875     —       —       1,023,371       1,874,875     2,898,246     208,970     1984     07/03     40 years  

Ziebart:

                       

Maplewood, MN

    —       307,846       311,313     —       —       307,846       311,313     619,159     22,376     1990     02/05     40 years  

Middleburg Heights, OH

    —       199,234       148,106     —       —       199,234       148,106     347,340     10,799     1961     02/05     40 years  

Zio’s Restaurant:

                       

Aurora, CO

    —       1,168,457       1,104,345     —       —       1,168,457       1,104,345     2,272,802     93,706     2000     06/05     30 years  

Leasehold Interests:

    —       2,532,133       —       —       —       2,532,133       —       2,532,133     1,547,131     —       (n )   (m )
                                                                 
  $ 26,454,684   $ 941,102,953     $ 1,116,459,120   $ 85,827,593   $ —     $ 941,336,554     $ 1,200,041,008   $ 2,141,377,563   $ 111,086,973        
                                                                 

 

See accompanying report of independent registered public accounting firm.

 

F-19


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
    Accumulated
Depreciation
and
Amortization
    Date of
Con-
struction
    Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land     Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land     Building,
Improve-

ments and
Leasehold
Interests
    Total          

Real Estate Held for Investment the Company has Invested in Under Direct Financing Leases:

                       

Barnes and Noble:

                       

Plantation, FL

    —       —         3,498,559     —       —       —         (c )     (c )     (c )   1996     05/95   (c )

Borders Books & Music:

                       

Altamonte Springs, FL

    —       —         3,267,579     —       —       —         (c )     (c )     (c )   1997     09/97   (c )

Checkers:

                       

Orlando, FL

    —       —         286,910     —       —       —         (c )     (c )     (c )   1988     07/92   (c )

CVS:

                       

San Antonio, TX

    —       —         783,974     —       —       —         (c )     (c )     (c )   1993     12/93   (c )

Amarillo, TX

    —       158,851       855,348     —       —       (d )     (d )     (d )     (d )   1994     12/94   (d )

Lafayette, LA

    —       —         949,128     —       —       —         (c )     (c )     (c )   1995     01/96   (c )

Irving, TX

    —       —         1,228,436     —       —       —         (c )     (c )     (c )   1996     12/96   (c )

Oklahoma City, OK

    —       (l )     1,365,125     —       —       (l )     (c )     (c )     (c )   1997     06/97   (c )

Oklahoma City, OK

    —       (l )     1,419,093     —       —       (l )     (c )     (c )     (c )   1997     06/97   (c )

Ft. Worth, TX

    —       —         1,135,110     —       —       —         (c )     (c )     (c )   1996     09/97   (c )

Haltom City, TX

    —       413,918       1,660,859     —       —       (d )     (d )     (d )     (d )   1996     09/97   (d )

Denny’s:

                       

Stockton, CA

    —       939,974       508,573     —       —       (d )     (d )     (d )     (d )   1982     09/06   (d )

Eckerd:

                       

Kennett Square, PA

    —       (l )     —       1,984,435     —       (l )     (c )     (c )     (c )   2000     12/00   (c )

Arlington, VA

    —       —         3,201,489     —       —       —         (c )     (c )     (c )   2002     02/02   (c )

Food 4 Less:

                       

Chula Vista, CA

    —       —         4,266,181     —       —       —         (c )     (c )     (c )   1995     11/98   (c )

Heilig-Meyers:

                       

Marlow Heights, MD

    —       415,926       1,397,178     —       —       (d )     (d )     (d )     (d )   1968     11/98   (d )

York, PA

    —       279,312       1,109,609     —       —       (d )     (d )     (d )     (d )   1997     11/98   (d )

International House of Pancakes:

                       

Sunset Hills, MO

    —       —         736,345     —       —       —         (c )     (c )     (c )   1993     10/93   (c )

Matthews, NC

    —       —         655,668     —       —       —         (c )     (c )     (c )   1993     12/93   (c )

Jared Jewelers:

                       

Glendale, AZ

    —       (l )     1,599,105     —       —       (l )     (c )     (c )     (c )   1998     12/01   (c )

Lewisville, TX

    225,603     (l )     1,502,903     —       —       (l )     (c )     (c )     (c )   1998     12/01   (c )

Oviedo, FL

    441,309     (l )     1,500,145     —       —       (l )     (c )     (c )     (c )   1998     12/01   (c )

Phoenix, AZ

    358,516     (l )     1,241,827     —       —       (l )     (c )     (c )     (c )   1998     12/01   (c )

Toledo, OH

    —       (l )     1,457,625     —       —       (l )     (c )     (c )     (c )   1998     12/01   (c )

Kash N’ Karry:

                       

Valrico, FL

    —       1,234,519       3,255,257     —       —       (d )     (d )     (d )     (d )   1997     06/02   (d )

Uni-Mart:

                       

Olean, NY (r)

    —       41,774       267,755     —       —       (d )     (d )     (d )     (d )   1990     08/05   (d )
                                                                     
  $ 1,025,428   $ 3,484,274     $ 39,149,782   $ 1,984,435   $ —     $ —       $ —       $ —       $ —          
                                                                     

Real Estate Held for Sale the Company has Invested in:

                       

AJ Petroleum:

                       

Hollywood, FL

    —       417,487       184,170     —       —       417,487       184,170       601,657       —       1961     12/05   —    

Hollywood, FL

    —       645,533       313,657     —       —       645,533       313,657       959,190       —       1960     12/05   —    

Keybank:

                       

Beavercreek, OH

    —       422,184       —       —       —       422,184       —         422,184       —       (e )   02/07   (e )

Pep Boys:

                       

Anaheim, CA

    —       2,671,814       2,586,628     —       —       2,671,814       2,586,628       5,258,442       —       1983     11/07   —    

Annandale, VA

    —       2,718,604       3,048,482     —       —       2,718,604       3,048,482       5,767,086       —       1970     11/07   —    

Artesia, CA

    —       3,140,404       2,630,276     —       —       3,140,404       2,630,276       5,770,680       —       1983     11/07   —    

Escondido, CA

    —       3,664,675       4,785,117     —       —       3,664,675       4,785,117       8,449,792       —       1983     11/07   —    

Fullerton, CA

    —       3,555,665       1,885,292     —       —       3,555,665       1,885,292       5,440,957       —       1959     11/07   —    

 

See accompanying report of independent registered public accounting firm.

 

F-20


Table of Contents
    Encum-
brances (k)
  Initial Cost to
Company
  Costs Capitalized
Subsequent to
Acquisition
  Gross Amount at Which
Carried at Close of Period (b)
  Accumulated
Depreciation
and
Amortization
  Date of
Con-
struction
    Date
Acquired
  Life on
Which
Depreciation
and
Amortization
in Latest
Income
Statement is
Computed
 
      Land   Building,
Improve-
ments and
Leasehold
Interests
  Improve-
ments
  Carrying
Costs
  Land   Building,
Improve-

ments and
Leasehold
Interests
  Total        

Glendale, AZ

    —       2,117,771     2,885,232     —       —       2,117,771     2,885,232     5,003,003     —     1990     11/07   —    

Guayama, PR

    —       1,729,000     2,731,785     —       —       1,729,000     2,731,785     4,460,785     —     1998     11/07   —    

Houston, TX

    —       892,935     4,502,444     —       —       892,935     4,502,444     5,395,379     —     1994     11/07   —    

Manassas, VA

    —       1,374,760     3,486,484     —       —       1,374,760     3,486,484     4,861,244     —     1992     11/07   —    

Merced, CA

    —       228,337     2,305,923     —       —       228,337     2,305,923     2,534,260     —     1988     11/07   —    

North Hollywood, CA

    —       3,586,201     2,262,137     —       —       3,586,201     2,262,137     5,848,338     —     1996     11/07   —    

Oceanside, CA

    —       3,380,442     4,466,453     —       —       3,380,442     4,466,453     7,846,895     —     1988     11/07   —    

Orlando, FL

    —       1,719,331     1,978,950     —       —       1,719,331     1,978,950     3,698,281     —     1991     11/07   —    

Phoenix, AZ

    —       972,652     1,674,741     —       —       972,652     1,674,741     2,647,393     —     1988     11/07   —    

Rancho Cucamonga, CA

    —       2,022,876     3,374,339     —       —       2,022,876     3,374,339     5,397,215     —     1985     11/07   —    

Reading, PA

    —       1,188,532     3,366,975     —       —       1,188,532     3,366,975     4,555,507     —     1989     11/07   —    

Reseda, CA

    —       1,522,988     2,025,447     —       —       1,522,988     2,025,447     3,548,435     —     1986     11/07   —    

San Bernardino, CA

    —       960,573     2,207,543     —       —       960,573     2,207,543     3,168,116     —     1969     11/07   —    

Tempe, AZ

    —       1,084,055     1,923,866     —       —       1,084,055     1,923,866     3,007,921     —     1974     11/07   —    

West Covina, CA

    —       2,783,506     3,059,286     —       —       2,783,506     3,059,286     5,842,792     —     1983     11/07   —    

Power Center:

                       

Big Flats, NY

    —       2,248,422     7,159,309     —       —       2,248,422     6,314,756     8,563,178     —     2006     08/05   —    

Bismarck, ND

    —       1,839,240     10,262,109     10,406,939     —       1,839,240     20,669,048     22,508,288     —     2006     10/04   —    

Midland, MI

    —       1,085,180     1,634,602     —       —       1,085,180     1,634,602     2,719,782     —     2005     05/05   —    

Topsham, ME

    —       1,884,772     1,734,694     —       —       1,884,772     1,734,694     3,619,466     —     2007     02/06   —    

Irving, TX

    —       910,077     —       —       —       910,077     —       910,077     —     (e )   02/06   (e )

Waxahachie, TX

    —       1,208,017     —       —       —       1,208,017     —       1,208,017     —     (e )   02/06   (e )

Harlingen, TX

    —       745,992     —       —       —       745,992     —       745,992     —     (e )   10/06   (e )

Lapeer, MI

    —       729,834     3,733,213     —       —       729,834     3,733,213     4,463,047     —     2007     09/06   —    

Lapeer, MI

    —       243,535     1,759,243     —       —       243,535     1,759,243     2,002,778     —     2007     09/06   —    

Rockwall, TX

    —       8,958,882     37,006,653     —       —       8,958,882     37,006,653     45,965,535     —     2007     02/06   —    

Rite Aid:

                       

Largo, MD

    —       1,927,636     —       —       —       1,927,636     —       1,927,636     —     (e )   03/07   (e )

Road Ranger:

                       

Rockford, IL

    —       635,452     1,118,486     —       —       635,452     1,118,486     1,753,938     —     1988     06/06   —    

Stock Building Supply:

                       

Hillman, MI

    —       166,886     822,950     —       —       166,886     822,950     989,836     —     1952     10/06   —    

Stripes:

                       

Corpus Christi, TX

    —       1,308,398     2,151,142     —       —       1,308,398     2,151,142     3,459,540     —     1995     12/05   —    

Uni-Mart:

                       

Bradford, PA

    —       184,231     761,512     —       —       184,231     761,512     945,743     —     1983     08/05   —    

Kane, PA

    —       156,967     913,017     —       —       156,967     913,017     1,069,984     —     1984     08/05   —    

Midway, PA

    —       310,893     708,427     —       —       310,893     708,427     1,019,320     —     1990     01/06   —    

Clairton, PA

    —       215,405     700,821     —       —       215,405     700,821     916,226     —     1986     01/06   —    

Houtzdale, PA

    —       311,707     729,052     —       —       311,707     729,052     1,040,759     —     1977     01/06   —    

Burnham, PA (r)

    —       264,741     510,262     —       —       264,741     510,262     775,003     —     1978     07/06   —    

Mechanicsburg, PA

    —       120,639     357,897     —       —       120,639     357,897     478,536     —     1972     07/06   —    

Port Royal, PA

    —       238,052     635,213     —       —       238,052     635,213     873,265     —     1989     07/06   —    

Vacant Land:

                       

Grand Prairie, TX

    —       386,807     —       —       —       386,807     —       386,807     —     (e )   12/02   (e )

Fairfield Township, OH

    —       3,201,116     —       —       —       3,201,116     —       3,201,116     —     (e )   08/06   (e )

Bonita Springs, FL

    —       151,781     —       —       —       151,781     —       151,781     —     (e )   09/06   (e )

Topsham, ME

    —       311,714     —       —       —       1,034,215     —       1,034,215     —     (e )   02/06   (e )

Plano, TX

    —       10,034,740     —       —       —       10,034,740     —       10,034,740     —     (e )   12/05   (e )

Harlingen, TX

    —       245,483     —       —       —       245,483     —       245,483     —     (e )   09/06   (e )

Harlingen, TX

    —       284,907     —       —       —       284,907     —       284,907     —     (e )   09/06   (e )

Rockwall, TX

    —       9,275,959     —       —       —       9,275,959     —       9,275,959     —     (e )   09/06   (e )

Vacant Property:

                       

North Richland Hills, TX

    —       583,650     179,509     —       —       583,650     179,509     763,159     —     1989     02/06   —    

Walgreens:

                       

Beavercreek, OH

    —       1,445,473     —       —       —       1,445,473     —       1,445,473     —     (e )   10/07   (e )

Harlingen, TX

    —       1,321,108     —       —       —       1,321,108     —       1,321,108     —     (e )   09/06   (e )
                                                           
  $ —     $ 95,738,021   $ 130,563,338   $ 10,406,939   $ —     $ 96,460,522   $ 140,125,724   $ 236,586,246   $ —        
                                                           

 

See accompanying report of independent registered public accounting firm.

 

F-21


Table of Contents

NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO SCHEDULE III - REAL ESTATE AND

ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2007

(dollars in thousands)

 

(a) Transactions in real estate and accumulated depreciation during 2007, 2006, and 2005 are summarized as follows:

 

     2007      2006      2005  

Land, buildings, and leasehold interests:

        

Balance at the beginning of year

   $ 1,756,514      $ 1,508,664      $ 1,129,126  

Acquisitions, completed construction and tenant improvements

     864,116        558,766        469,384  

Disposition of land, buildings, and leasehold interests

     (203,403 )      (310,223 )      (87,446 )

Provision for loss on impairment of real estate

     (1,683 )      (693 )      (2,400 )
                          

Balance at the close of year

   $ 2,415,544      $ 1,756,514      $ 1,508,664  
                          

Accumulated depreciation and amortization:

        

Balance at the beginning of year

   $ 87,359      $ 79,197      $ 61,802  

Disposition of land, buildings, and leasehold interests

     (3,667 )      (12,413 )      (1,665 )

Depreciation and amortization expense

     27,395        20,575        19,060  
                          

Balance at the close of year

   $ 111,087      $ 87,359      $ 79,197  
                          

 

(b) As of December 31, 2007, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2007, the aggregate cost of the properties owned by the Company that under operating leases were $2,262,306, and financing leases were $9,048.

 

(c) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease; therefore, depreciation is not applicable.

 

(d) For financial reporting purposes, the lease for the land and building has been recorded as a direct financing lease; therefore, depreciation is not applicable.

 

(e) The Company owns only the land for this property.

 

(f) Date acquired represents acquisition date of land. Pursuant to lease agreement, the Company purchased the buildings from the tenants upon completion of construction, generally within 12 months from the acquisition of the land.

 

(g) Date acquired represents acquisition date of land. The Company developed the buildings, generally completing construction within 12 months from the acquisition date of the land.

 

(h) Date acquired represents date of building construction completion. The land has been recorded as operating lease.

 

(i) The Company owns only the land for this property, which is subject to a ground lease between the Company and the tenant. The tenant funded the improvements on the property.

 

(j) In 2005, there was a lease amendment to this property, resulting in a reclassification from a direct financing lease to an operating lease.

 

(k) Encumbered properties for which the portion of the lease relating to the land is accounted for as an operating lease and the portion of the lease relating to the building is accounted for as a direct financing lease, the total amount of the encumbrance is listed with the land portion of the property.

 

(l) The Company owns only the building for this property. The land is subject to a ground lease between the Company and an unrelated third party.

 

(m) The leasehold interests are amortized over the life of the respective leases which range from 12 years to 12.5 years.

 

(n) The leasehold interest sites were acquired between August 1999 and August 2001.

 

(o) Property is encumbered as a part of the Company’s $6,952 long-term, fixed rate mortgage and security agreement.

 

(p) Property is encumbered as a part of the Company’s $21,000 long-term, fixed rate mortgage and security agreement.

 

(q) Date acquired represents acquisition date of land. Pursuant to lease agreement, the Company funds the tenant’s construction draws, final funding occurs generally within 12 months from the acquisition of the land.

 

(r) The tenant of this property has subleased the property. The tenant continues to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this property to the Company.

See accompanying report of independent registered public accounting firm.

 

F-22


Table of Contents

NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES

SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

December 31, 2007

(dollars in thousands)

 

Description

   Interest
Rate
    Maturity
Date
   Periodic
Payment
Terms
    Prior
Liens
   Face
Amount
of
Mortgages
   Carrying
Amount of
Mortgages (e)
    Principal
Amount of
Loans
Subject to
Delinquent
Principal
or Interest
 

First mortgages on properties:

                 

National City, CA

   11.500 %   2009    (b )   —      $ 2,765    $ 486     $ —    

San Jose, CA

   11.500 %   2009    (b )   —        2,565      536       —    

Bellingham, WA

   7.200 %   2013    (b )   —        2,605      2,497       2,497 (g)

Lake Jackson, TX

   7.500 %   2008    (b )   —        1,875      1,750       —    

Paramus, NJ

   9.000 %   2022    (b )   —        6,000      5,652       —    

Des Moines, IA

   8.000 %   2010    (d )   —        400      361       —    

Terre Haute, IN

   7.000 %   2011    (c )   —        1,582      1,582       —    

Plano, TX

   9.500 %   2008    (c )   —        22,737      11,082       —    

Lubbock, TX

   8.750 %   2009    (c )   —        14,000      11,384       —    

Cleveland, OH

   10.000 %   2028    (c )   —        6,644      4,430       —    

Corpus Christi, TX

   8.375 %   2008    (c )   —        985      985       —    

Corpus Christi, TX

   8.375 %   2008    (c )   —        1,222      1,222       —    

Elsa, TX

   8.375 %   2008    (c )   —        869      869       —    

Keystone Heights, FL

   8.000 %   2009    (c )   —        1,650      1,650       —    

Chattanooga, TN

   8.000 %   2009    (c )   —        1,600      1,600       —    

Lynchburg, VA

   8.000 %   2009    (c )   —        1,600      1,600       —    

Martinsburg, WV

   8.000 %   2009    (c )   —        1,650      1,650       —    
                                 
             $ 70,749    $ 49,336 (a)   $ 2,497  
                                 

 

(a) The following shows the changes in the carrying amounts of mortgage loans during the years:

 

     2007     2006     2005  

Balance at beginning of year

   $ 13,627     $ 19,418     $ 11,528  

New mortgage loans

     39,088 (f)     1,582 (f)     13,150 (f)

Deductions during the year:

      

Collections of principal

     (3,379 )     (7,373 )     (5,260 )
                        

Balance at the close of year

   $ 49,336     $ 13,627     $ 19,418  
                        

 

(b) Principal and interest is payable at level amounts over the life of the loan.

 

(c) Interest only payments are due monthly. Principal is due at maturity.

 

(d) Principal and interest is payable at level amounts over the life of the loan with a principal balloon payment at maturity.

 

(e) Mortgages held by NNN and its subsidiaries for federal income tax purposes for the years ended December 31, 2007, 2006 and 2005 were $49,336, $13,627 and $19,418, respectively.

 

(f) Mortgages totaling $39,088, $1,582 and $13,150 were accepted in connection with real estate transactions for the year ended December 31, 2007, 2006 and 2005, respectively.

 

(g) National Retail Properties, Inc. initiated foreclosure process in February 2008.

See accompanying report of independent registered public accounting firm.

 

F-23