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NNN REIT, INC. - Annual Report: 2010 (Form 10-K)

Form 10-K
Table of Contents

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, 2010

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

(State or other jurisdiction of

incorporation or organization)

 

56-1431377

(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:

Common Stock, $0.01 par value

7.375% Series C Preferred Stock, $0.01 par value

 

Name of exchange on which registered:

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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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.  x

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 “large accelerated filer,” “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, 2010 was $1,766,742,768.

The number of shares of common stock outstanding as of February 15, 2011 was 83,759,282.

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 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the “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.


Table of Contents

TABLE OF CONTENTS

 

         PAGE      
REFERENCE
 
Part I     

Item 1.

 

Business

     1   

Item 1A.

 

Risk Factors

     8   

Item 1B.

 

Unresolved Staff Comments

     18   

Item 2.

 

Properties

     18   

Item 3.

 

Legal Proceedings

     18   

Item 4.

 

[Removed and Reserved]

     18   
Part II     

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     19   

Item 6.

 

Selected Financial Data

     21   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 8.

 

Financial Statements and Supplementary Data

     44   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     82   

Item 9A.

 

Controls and Procedures

     82   

Item 9B.

 

Other Information

     84   
Part III     

Item 10.

 

Directors, Executive Officers and Corporate Governance

     85   

Item 11.

 

Executive Compensation

     85   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     85   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     85   

Item 14.

 

Principal Accountant Fees and Services

     85   
Part IV     

Item 15.

 

Exhibits and Financial Statement Schedules

     86   

Signatures

     92   


Table of Contents

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 all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as 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 (the “Exchange Act”). Also, when NNN uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, NNN is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, NNN’s actual results could differ materially from those set forth in the forward-looking statements. 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 real estate investment trust (“REIT”) formed in 1984. NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, mortgages and notes receivable, and commercial mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”).

Real Estate Assets

NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Investment Properties” or “Investment Portfolio”). As of December 31, 2010, NNN owned 1,195 Investment Properties (including 11 properties with retail operations that NNN operates), with an aggregate leasable area of 12,972,000 square feet, located in 46 states. Approximately 97 percent of total properties in NNN’s Investment Portfolio were leased or operated as of December 31, 2010.

The Inventory Assets typically represent direct and indirect investment interests in real estate assets acquired or developed primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2010, NNN owned 17 Inventory Properties.

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.

 

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Employees

As of January 31, 2011, NNN employed 58 full-time associates including executive and administrative personnel.

Other Information

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 (the “Commission”) can be downloaded free of charge.

The common shares of National Retail Properties, Inc. are traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “NNN.” The depositary shares, each representing 1/100th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series C Preferred Stock”), of NNN are traded on the NYSE under the ticker symbol “NNNPRC.”

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 well located for its tenants’ lines of trade within each local market. Management believes that these types of properties, generally pursuant to triple-net leases, provide attractive opportunities for a stable current return and the potential for increased 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, repairs and maintenance and capital expenditures. Initial lease terms are generally 15 to 20 years.

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 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 (including but not limited to tenant, geographic and line of trade diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios, profitability measures, industry trends and performance of competitors compared to that of NNN.

The operating strategies employed by NNN have allowed it to increase the annual dividend (paid quarterly) per common share for 21 consecutive years.

 

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Investment in Real Estate or Interests in Real Estate

NNN’s management believes that single tenant, freestanding net lease retail properties will continue to be attractive investment opportunities and that NNN is well suited to take advantage of these opportunities because of its experience in accessing 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, market rents, 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,

 

   

the property level operating history,

 

   

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 Investment Properties 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 personal property, (iv) loans secured by membership interests, or (v) 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.

 

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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, 2010, $161,000,000 was outstanding and $239,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $647,000.

For the year ended December 31, 2010, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 40 percent and the secured indebtedness to total gross assets was approximately two percent. The total debt to total market capitalization was approximately 34 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 Operations – 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.

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 issuers 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 Portfolio

As of December 31, 2010, NNN owned 1,195 Investment Properties with an aggregate gross leasable area of 12,972,000 square feet, located in 46 states. Approximately 97 percent of total properties in the Investment Portfolio were leased or operated by NNN as of December 31, 2010.

The following table summarizes NNN’s Investment Properties as of December 31, 2010 (in thousands):

 

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

Land

     2,223         5         101       $ 8,882       $ 5       $ 974   

Building

     135         1         11         19,917         44         1,435   

(1)     Approximate square feet.

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

        

        

In connection with the development of 28 Investment Properties, NNN has agreed to fund construction commitments (including construction, land costs and tenant improvements) of $68,746,000. As of December 31, 2010, NNN had funded $50,196,000 of these commitments, with $18,550,000 remaining to be funded.

 

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As of December 31, 2010, NNN did not have any tenant that accounted 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, 2010, the weighted average remaining lease term was approximately 12 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 $6,000 to $1,876,000 (average of $199,000). Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index (“CPI”), and/or, to a lesser extent, increases in the tenant’s sales volume.

Generally, the Investment Property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions provided under the initial lease. 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.

The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Investment Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2010:

 

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

2011        

       1.5%           18           260,000           2017           3.9%           28           682,000   

2012        

       3.1%           35           520,000           2018           2.6%           24           345,000   

2013        

       4.4%           40           839,000           2019           4.0%           41           618,000   

2014        

       4.4%           42           577,000           2020           4.0%           83           694,000   

2015        

       4.5%           72           1,011,000           Thereafter           65.4%           745           6,167,000   

2016        

       2.2%           19           407,000                       

(1)     Based on annualized base rent for all leases in place as of December 31, 2010.

(2)     Approximate square feet.

        

        

 

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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

   2010      2009      2008  

1.

   Convenience Stores      23.7%         26.7%         25.7%   

2.

   Restaurants – Full Service      10.1%         9.2%         8.7%   

3.

   Automotive Parts      7.8%         6.8%         5.1%   

4.

   Theaters      5.7%         6.3%         6.1%   

5.

   Automotive Service      5.3%         5.7%         8.9%   

6.

   Sporting Goods      4.5%         3.2%         3.3%   

7.

   Restaurants – Limited Service      4.1%         3.5%         3.3%   

8.

   Drug Stores      4.0%         4.1%         4.0%   

9.

   Books      3.8%         4.1%         4.0%   

10.

   Grocery      2.7%         2.9%         2.6%   
   Other      28.3%         27.5%         28.3%   
                             
        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.

          

The following table shows the top 10 states in which NNN’s Investment Properties are located as of December 31, 2010:

 

    

State

   # of
Properties
     % of
Annual
Base Rent(1)
 

1.

   Texas      220         18.7%   

2.

   Florida      93         10.0%   

3.

   Illinois      47         6.7%   

4.

   North Carolina      73         6.2%   

5.

   Georgia      60         5.0%   

6.

   Indiana      39         4.4%   

7.

   Ohio      38         4.1%   

8.

   Pennsylvania      84         3.9%   

9.

   Tennessee      33         2.9%   

10.

   Missouri      28         2.9%   
   Other      480         35.2%   
                    
        1,195         100.0%   
                    

(1)      Based on annualized base rent for all leases in place as of December 31, 2010.

 

          

Mortgages and Notes Receivable

Mortgages are secured by real estate, real estate securities or other assets and include structured finance investments which are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):

 

     2010     2009  

Mortgages and notes receivable

   $ 29,750      $ 41,707   

Accrued interest receivables, net of reserves

     644        269   

Unamortized discount

     (63     -   
                
   $ 30,331      $ 41,976   
                

 

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Commercial Mortgage Residual Interests

Orange Avenue Mortgage Investments, Inc. (“OAMI”), a wholly 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 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 $15,915,000 and $20,153,000 at December 31, 2010 and 2009, respectively.

For more information regarding NNN’s Investment Portfolio, see Note 23 of NNN’s Consolidated Financial Statements.

Inventory Portfolio

NNN’s Inventory Portfolio, which is owned by the TRS, 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, 2010, the Inventory Portfolio consisted of 10 completed development projects and seven land parcels.

The following table summarizes the completed Inventory Portfolio as of December 31, 2010 (in thousands):

 

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

Land

     527         17         106       $ 2,248       $ 108       $ 953   

Building

     42         4         12         7,159         341         1,849   

(1)     Approximate square feet.

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

        

        

For more information regarding NNN’s Inventory Portfolio, see Note 23 of NNN’s Consolidated Financial Statements.

Governmental Regulations Affecting Properties

Property Environmental Considerations.  Subject to a determination of the level of risk and potential cost of remediation, NNN may acquire a property where some level of contamination may exist. 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 or the improper disposal of hazardous substances emanating from 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 some level of contamination may exist, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, and/or (iii) agree to other arrangements deemed appropriate by NNN, including, under certain circumstances, the purchase of environmental insurance to address environmental conditions at the property.

As of February 15, 2011, NNN has 59 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.

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 and similar state and local laws and regulations (collectively, 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, 2011, NNN has not

 

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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 position 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. NNN’s leases generally require each tenant to undertake 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.

Current financial and economic conditions may have an adverse impact on NNN, its tenants, and commercial real estate in general.

Current financial and economic conditions continue to be challenging and volatile and any worsening of such conditions, including any disruption in the capital markets, could adversely affect NNN’s business and results of operations and the financial condition of NNN’s tenants, developers, borrowers, lenders or the institutions that hold NNN’s cash balances and short-term investments, which may expose NNN to increased risks of default by these parties.

There can be no assurance that actions of the United States Government, Federal Reserve or other government and regulatory bodies intended to stabilize the economy or financial markets will achieve their intended effect. Additionally, some of these actions may adversely affect financial institutions, capital providers, retailers, consumers or NNN’s financial condition, results of operations or the trading price of NNN’s shares.

Potential consequences of the current financial and economic conditions include:

 

   

the financial condition of NNN’s tenants operating in the retail industry may be adversely affected, which may result in tenant defaults under the leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

 

   

the ability to borrow on terms and conditions that NNN finds acceptable may be limited or unavailable, which could reduce NNN’s ability to pursue acquisition and development opportunities and refinance existing debt, reduce NNN’s returns from acquisition and development activities, reduce NNN’s ability to make cash distributions to its shareholders and increase NNN’s future interest expense;

 

   

reduced values of NNN’s properties which may limit NNN’s ability to dispose of assets at attractive prices and may reduce the availability of buyer financing;

 

   

the value and liquidity of NNN’s short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold NNN’s cash deposits or the institutions or assets in which NNN has made short-term investments, the dislocation of the markets for NNN’s short-term investments, increased volatility in market rates for such investments or other factors; and

 

   

one or more lenders under the Credit Facility could fail and NNN may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.

 

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NNN may be unable to obtain debt or equity capital on favorable terms, if at all.

NNN may be unable to obtain capital on favorable terms, if at all, to further its business objectives or meet its existing obligations. Nearly all of NNN’s debt, including the Credit Facility, is subject to balloon principal payments due at maturity. These maturities range between 2011 and 2017. The ability of NNN to make these scheduled principal payments may be adversely impacted by NNN’s inability to extend or refinance the Credit Facility, the inability to dispose of assets at an attractive price or the inability to obtain additional debt or equity capital. Capital that may be available may be materially more expensive or available under terms that are materially more restrictive than NNN’s existing capital which would have an adverse impact on NNN’s business, financial condition or results of operations.

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

NNN’s five largest tenants accounted for an aggregate of approximately 29 percent of NNN’s annual base rent as of December 31, 2010. The default, financial distress, bankruptcy or liquidation of one or more of NNN’s tenants could cause substantial vacancies among NNN’s Investment Portfolio. Vacancies reduce NNN’s revenues, increase property expenses and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, the tenant may choose not to renew the lease and/or NNN may not be able to re-lease the vacant property at a comparable lease rate or without incurring additional expenditures in connection with such renewal or re-leasing.

A significant portion of the source of NNN’s Investment Portfolio annual base rent is heavily concentrated in specific industry classifications, tenants and in specific geographic locations.

As of December 31, 2010, approximately,

 

   

53 percent of NNN’s Investment Portfolio annual base rent is generated from five retail lines of trade, including convenience stores (24 percent) and full-service restaurants (10 percent),

 

   

29 percent of NNN’s Investment Portfolio annual base rent is generated from five tenants, including The Pantry, Inc. (eight percent) and Susser Holdings Corp. (eight percent),

 

   

47 percent of NNN’s Investment Portfolio annual base rent is generated from five states, including Texas (19 percent) and Florida (10 percent).

Any financial hardship and/or economic changes in these lines of trade, tenants or states could have an adverse effect on NNN’s results of operations.

Owning real estate and indirect interests in real estate carries inherent risks.

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,

 

   

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

 

   

adverse changes in local real estate market conditions, such as an oversupply of space, reduction in demand for space, intense competition for tenants, or a geographic shift in the market away from NNN’s properties,

 

   

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

 

   

changes in zoning, regulatory restrictions, or tax laws, and

 

   

changes in interest rates or availability of financing.

 

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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 earnings and could have an adverse effect on NNN’s financial condition.

Costs of complying with changes in governmental laws and regulations may adversely affect NNN’s results of operations.

NNN cannot predict what other laws or regulations will be enacted in the future, how future laws or regulations will be administered or interpreted, or how future laws or regulations will affect NNN’s properties, including, but not limited to environmental laws and regulations. Compliance with new laws or regulations, or stricter interpretation of existing laws, may require NNN, its retail tenants, or consumers to incur significant expenditures or impose significant liability and could cause a material adverse effect on NNN’s results of operation.

NNN may be subject to known or unknown environmental liabilities and hazardous materials on properties owned by NNN.

There may be known or unknown environmental liabilities associated with properties owned or acquired in the future by NNN. Certain particular uses of some properties may also have a heightened risk of environmental liability because of the hazardous materials used in performing services on those properties, such as convenience stores with underground petroleum storage tanks or auto parts and auto service businesses using lube, paint and machine solvents. Some of NNN’s properties may contain asbestos or asbestos-containing materials, or may contain or may develop mold or other bio-contaminants. Asbestos-containing materials must be handled, managed and removed in accordance with applicable governmental laws, rules and regulations. Mold and other bio-contaminants can produce airborne toxins, may cause a variety of health issues in individuals and must be remediated in accordance with applicable governmental laws, rules and regulations.

As part of its due diligence process, NNN generally obtains an environmental site assessment for each property it acquires. In cases where NNN intends to acquire real estate where some level of contamination may exist, NNN generally requires the seller or tenant to (i) remediate the contamination in accordance with applicable laws, rules and regulations, (ii) indemnify NNN for environmental liabilities, and/or (iii) agree to other arrangements deemed appropriate by NNN, including, under certain circumstances, the purchase of environmental insurance. Although sellers or tenants may be contractually responsible for remediating hazardous materials on a property and may be responsible for indemnifying NNN for any liability resulting from the use of a property and for any failure to comply with any applicable environmental laws, rules or regulations, NNN has no assurance that sellers or tenants shall be able to meet their remediation and indemnity obligations to NNN. A tenant or seller may not have the financial ability to meet its remediation and indemnity obligations to NNN when needed. Furthermore, NNN may have strict liability to governmental agencies or third parties as a result of the existence of hazardous materials on properties, whether or not NNN knew about or caused such hazardous materials to exist.

As of February 15, 2011 NNN has 59 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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If NNN is responsible for hazardous materials located on its properties, NNN’s liability may include investigation and remediation costs, property damage to third parties, personal injury to third parties, and governmental fines and penalties. Furthermore, the presence of hazardous materials on a property may adversely impact the property value or NNN’s ability to sell the property. Significant environmental liability could impact NNN’s results of operations, ability to make distributions to shareholders, and its ability to meet its debt obligations.

In order to mitigate exposure to environmental liability, NNN has an environmental insurance policy on certain of its convenience store and travel plaza properties which expires in August 2013. However, the policy is subject to exclusions and limitations and does not cover all of the properties owned by NNN, and for those properties covered under the policy, insurance may not fully compensate NNN for any environmental liability. NNN has no assurance that the insurer on its environmental insurance policy will be able to meet its obligations under the policy. NNN may not desire to renew the environmental insurance policy in place upon expiration or a replacement policy may not be available at a reasonable cost, if at all.

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

NNN may not 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 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 or repay 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, 2010, the Residuals had a carrying value of $15,915,000. The value of these Residuals is based on assumptions made by NNN to determine their value. These assumptions include 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.

 

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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 or any 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, 2010, mortgages and notes receivables had an outstanding principal balance of $29,750,000. 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, if any, 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.

Certain provisions of NNN’s 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 such 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 or lessee. 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 or partnership investments include impasses on decisions because in some instances no single co-venturer or partner has full control over the joint venture or partnership, respectively, or the co-venturer or partner may become insolvent, bankrupt or otherwise unable to contribute to the joint venture or partnership, respectively. Further, disputes may develop with a co-venturer or partner over decisions affecting the property, joint venture or partnership that may result in litigation, arbitration or some other form of dispute resolution.

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 or realize its investment strategy, which could have an adverse effect on its results of operations.

 

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Operating losses from retail operations on certain Investment Properties may adversely impact NNN’s results of operations.

In June 2009, NNN acquired the operations of the auto service business which was operated on certain Investment Properties. A third party manages and staffs these operations on behalf of NNN. The results of business operations from these properties are subject to the typical execution risks inherent with many retail operations including: merchandising, pricing, customer service, competition, consumer preferences and behavior, safety, compliance with various federal, state and local laws, ordinances and regulations, environmental contamination, unfavorable weather conditions, or other trends in the markets they serve. These factors could negatively impact NNN’s results of operations from these certain Investment Properties.

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

NNN’s properties are generally covered by comprehensive liability, fire, and extended insurance 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, thereby 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 or other acts of violence may negatively affect NNN’s operations. There can be no assurance that there will not be terrorist attacks against businesses within the United States. These attacks may directly impact NNN’s physical facilities or the businesses or the financial condition of its tenants, developers, borrowers, lenders or financial institutions with which NNN has a relationship. The United States is engaged in armed conflict, which could have an impact on these parties. 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 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 an adverse impact on NNN’s financial condition or results of operations.

Vacant properties or bankrupt tenants could adversely affect NNN’s business or financial condition.

As of December 31, 2010, NNN owned 37 vacant, un-leased Investment Properties, which accounted for approximately three percent of total Investment Properties held in NNN’s Investment Portfolio. 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. As of January 31, 2011, approximately one percent of the total gross leasable area of NNN’s Investment Portfolio was leased to four tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code and have the right to reject or affirm their lease with NNN.

 

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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, 2010, NNN had total mortgage debt outstanding of approximately $24,269,000, total unsecured notes payable of $948,416,000 and $161,000,000 outstanding on the unsecured 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 cash dividends to its stockholders. In addition, increased leverage could increase the risk that NNN may default on its debt obligations.

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 in cash 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.

NNN’s ability to make scheduled payments of principal or interest on its debt, or to retire or refinance such debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, competition, and 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 stockholders that any such refinancing, sale of assets or additional financing would be possible or, if possible, on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable or would not result in a material decline in earnings.

 

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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 such debt.

As of December 31, 2010, NNN had approximately $1,133, 685,000 of outstanding indebtedness, of which approximately $24,269,000 was secured indebtedness. 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,

 

   

enter into transactions with certain affiliates,

 

   

create certain liens,

 

   

consolidate, merge or sell NNN’s assets, and

 

   

pre-pay debt.

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 its debt covenants, 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:

 

   

limit certain leverage ratios,

 

   

maintain certain minimum interest and debt service coverage ratios, and

 

   

limit investments in certain types of assets.

NNN’s failure to comply with certain of its debt covenants could result in defaults that accelerate the payment under such debt and limit the dividends paid to NNN’s common and preferred stockholders which would likely have a material adverse impact on NNN’s financial condition and results of operations. In addition, these defaults could impair its access to the debt and equity markets.

 

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The market value of NNN’s equity and debt securities is subject to various factors that may cause significant fluctuations or volatility.

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/or may be unrelated to NNN’s financial condition, operating performance or prospects that may cause significant fluctuations or volatility in such prices. These factors, among others, include:

 

   

general economic and financial market conditions including the weak economic environment,

 

   

level and trend of interest rates,

 

   

NNN’s ability to access the capital markets to raise additional capital,

 

   

the issuance of additional equity or debt securities,

 

   

changes in NNN’s funds from operations or earnings estimates,

 

   

changes in NNN’s debt ratings or analyst ratings,

 

   

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 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 provisions of the Internal Revenue Code of 1986, as amended (the “Code”) 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 or avoid significant tax liability.

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 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 NNN’s earnings, cash flow and market price of NNN’s 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 2012). 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 NNN’s common stock.

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 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, 2010, 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.

Changes in accounting pronouncements could adversely impact NNN’s or NNN’s tenants’ 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 or their interpretation and application of these standards that govern the preparation of NNN’s 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. Similarly, these changes could have a material impact on NNN’s tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate.

NNN’s failure to maintain effective internal control over financial reporting could have a material adverse effect on its business, operating results and share price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of the Company’s internal control over financial reporting. If NNN fails to maintain the adequacy of its internal control over financial reporting, as such standards may be modified, supplemented or amended from time to time, NNN may not be able to ensure that it can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal control over financial reporting, particularly those related to revenue recognition, are necessary for NNN to produce reliable financial reports and to maintain its qualification as a REIT and are important in helping to prevent financial fraud. If NNN cannot provide reliable financial reports or prevent fraud, its business and operating results could be harmed, REIT qualification could be jeopardized, investors could lose confidence in the Company’s reported financial information, and the trading price of NNN’s shares could drop significantly.

 

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NNN’s ability to pay dividends in the future is subject to many factors.

NNN’s ability to pay dividends may be impaired if any of the risks described in this section were to occur. In addition, payment of NNN’s dividends depends upon NNN’s earnings, financial condition, maintenance of NNN’s REIT status and other factors as NNN’s Board of Directors may deem relevant from time to time.

Item 1B.  Unresolved Staff Comments

None.

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 are 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.  [Removed and Reserved]

 

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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, 2005 and ending December 31, 2010. The graph assumes an investment of $100 on December 31, 2005.

Comparison to Five-Year Cumulative Total Return

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.

 

2010

   First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
     Year  

High

   $ 23.73       $ 24.59       $ 25.94       $ 28.11       $ 28.11   

Low

     19.19         20.50         20.82         24.85         19.19   

Close

     22.83         21.44         25.11         26.50         26.50   

Dividends paid per share

     0.375         0.375         0.380         0.380         1.510   

2009

                                  

High

   $ 17.52       $ 19.48       $ 22.80       $ 21.59       $ 22.80   

Low

     12.26         14.95         15.85         18.87         12.26   

Close

     15.84         17.35         21.47         21.22         21.22   

Dividends paid per share

     0.375         0.375         0.375         0.375         1.500   

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

 

     2010      2009  

Ordinary dividends

   $ 1.072446         71.0229%       $ 1.495182         99.6788%   

Qualified dividends

     0.081661         5.4080%         -         -   

Capital gain

     0.000861         0.0570%         0.003051         0.2034%   

Unrecaptured Section 1250 gain

     0.000498         0.0330%         0.001767         0.1178%   

Nontaxable distributions

     0.354534         23.4791%         -         -   
                                   
   $ 1.510000         100.0000%       $ 1.500000         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 Code and such other factors as the Board of Directors deems relevant.

In February 2011, NNN paid dividends to its stockholders of $31,678,000 or $0.38 per share of common stock.

On January 31, 2011, there were 1,848 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)

 

        2010             2009             2008             2007             2006      

Gross revenues(1)

  $ 237,062      $ 243,932      $ 247,352      $ 208,629      $ 180,877   

Earnings from continuing operations

    71,202        56,129        97,858        76,642        58,739   

Earnings including noncontrolling interests

    73,353        56,399        119,971        155,743        184,422   

Net earnings attributable to NNN

    72,997        54,810        117,153        154,599        181,800   

Total assets

    2,713,575        2,590,962        2,649,471        2,539,673        1,917,516   

Total debt

    1,133,685        987,346        1,027,391        1,049,154        890,127   

Total stockholders’ equity

    1,527,483        1,564,240        1,566,860        1,417,647        1,109,479   

Cash dividends declared to:

         

Common stockholders

    125,391        120,256        110,107        92,989        76,035   

Series A preferred stockholders

    -        -        -        -        4,376   

Series B convertible preferred stockholders

    -        -        -        -        419   

Series C preferred stockholders

    6,785        6,785        6,785        6,785        923   

Weighted average common shares:

         

Basic

    82,715,645        79,846,258        74,249,137        66,152,437        57,428,063   

Diluted

    82,849,362        79,953,499        74,344,231        66,263,980        57,965,508   

Per share information:

         

Earnings from continuing operations:

         

Basic

  $ 0.77      $ 0.60      $ 1.22      $ 1.05      $ 0.88   

Diluted

    0.77        0.60        1.22        1.05        0.88   

Net earnings:

         

Basic

    0.80        0.60        1.48        2.23        3.05   

Diluted

    0.80        0.60        1.48        2.22        3.03   

Cash dividends declared to:

         

Common stockholders

    1.51        1.50        1.48        1.40        1.32   

Series A preferred stockholders

    -        -        -        -        2.45625   

Series B convertible preferred stockholders

    -        -        -        -        41.875   

Series C preferred depositary stockholders

    1.84375        1.84375        1.84375        1.84375        0.250955   

Other data:

         

Cash flows provided by (used in):

         

Operating activities

  $ 187,914      $ 149,502      $ 237,459      $ 130,147      $ 1,676   

Investing activities

    (220,260     (28,063     (256,304     (536,717     (90,099

Financing activities

    19,169        (108,840     (6,028     432,394        81,864   

Funds from operations – diluted(2)

    108,328        89,506        132,996        110,589        86,749   

 

  (1) Gross revenues include revenues from NNN’s continuing and discontinued operations. In accordance with FASB guidance on Accounting for the Impairment or Disposal of Long-Lived Assets, NNN has classified the revenues related to (i) all Investment Properties that were sold and leasehold interest which expired, (ii) all Inventory Properties which generated revenues prior to disposition, and (iii) all Investment and Inventory Properties which generated revenue and were held for sale at December 31, 2010, as discontinued operations.

 

  (2) The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“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 generally accepted accounting principles (“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 certain assets and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures.

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

 

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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 both of its financial segments; investment assets and inventory assets. 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:

 

    2010     2009     2008     2007     2006  

Reconciliation of funds from operations:

         

Net earnings attributable to NNN’s stockholders

  $ 72,997      $ 54,810      $ 117,153      $ 154,599      $ 181,800   

Real estate depreciation and amortization:

         

Continuing operations

    43,464        42,838        40,336        28,632        19,099   

Discontinued operations

    186        1,438        1,454        1,750        3,320   

Partnership/joint venture real estate depreciation

    178        178        177        31        463   

Partnership gain on sale of asset

    -        -        -        -        (262

Gain on disposition of equity investment

    -        -        -        -        (11,373

Gain on disposition of investment assets

    (1,134     (2,392     (9,980     (56,625     (91,332

Gain on disposition of inventory assets

    (578     (581     (9,359     (11,013     (9,667
                                       

FFO

    115,113        96,291        139,781        117,374        92,048   

Series A preferred stock dividends(1)

    -        -        -        -        (4,376

Series B convertible preferred stock dividends(1)

    -        -        -        -        (419

Series C preferred stock dividends

    (6,785     (6,785     (6,785     (6,785     (923
                                       

FFO available to common stockholders – basic

    108,328        89,506        132,996        110,589        86,330   

Series B convertible preferred stock dividends, if dilutive

    -        -        -        -        419   
                                       

FFO available to common stockholders – diluted

  $ 108,328      $ 89,506      $ 132,996      $ 110,589      $ 86,749   
                                       

 

  (1)

The Series A and Series B preferred stock 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 Operations.”

 

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.”

The term “NNN” or the “Company” refers to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.”

Overview

NNN, a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, mortgages and notes receivable, and commercial mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Investment Properties” or “Investment Portfolio”). The Inventory Assets typically represent direct and indirect investment interests in real estate assets acquired or developed primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”).

As of December 31, 2010, NNN owned 1,195 Investment Properties (including 11 properties with retail operations that NNN operates), with an aggregate gross leasable area of approximately 12,972,000 square feet, located in 46 states. Approximately 97 percent of total properties in NNN’s Investment Portfolio was leased or operated as of December 31, 2010. As of December 31, 2010, NNN owned 17 Inventory 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 (such as tenant, geographic and line of trade diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios and profitability measures, and industry trends and performance compared to that of NNN.

NNN continues to maintain its diversification by tenant, geography and tenant’s line of trade. NNN’s highest lines of trade concentrations are the convenience store and restaurant (including full and limited service) sectors. These sectors represent a large part of the freestanding retail property marketplace and NNN’s management believes these sectors present attractive investment opportunities. NNN’s Investment Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic locations, respectively, could have a material adverse effect on the financial condition and operating performance of NNN.

As of year end December 31, 2010, 2009 and 2008, Investment Properties have remained at least 96 percent leased. The Investment Portfolio’s average remaining lease term of 12 years has remained fairly constant over the past three years which, coupled with its net lease structure, provides enhanced probability of maintaining occupancy and operating earnings.

The weak economic environment during the past three years has made it more difficult and more expensive to obtain debt and equity capital, and has reduced the pace of investments in new acquisitions or developments as well as the volume of dispositions. Additionally, the weak economic and retail environment has resulted in more retailers filing for bankruptcy and has made it more difficult to lease properties, which may have an adverse impact on NNN’s occupancy.

 

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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.  In accordance with the FASB guidance on business combinations, the fair value of the real estate acquired with in-place leases 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, generally 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 rental revenue varies 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.

Real Estate  –  Inventory Portfolio.  The TRS acquires and/or develops and owns properties primarily for the purpose of selling the real estate. 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 also 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 and is recorded at the lower of cost or fair value.

Impairment  –  Real Estate.  Based upon the events or changes in certain circumstances, management periodically assesses its Investment Properties for possible impairment indicating that the carrying value

 

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of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market condition or the ability of NNN to re-lease or sell properties that are vacant or become vacant. 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.

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 Orange Avenue Mortgage Investments, Inc. (“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. In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, OAMI, for $1,603,000 pursuant to which OAMI became a wholly owned subsidiary of NNN. NNN accounted for the transaction as an equity transaction in accordance with the FASB guidance on consolidation.

Revenue Recognition.  Rental revenues for non-development real estate assets are recognized when earned in accordance with the FASB guidance on 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.

New Accounting Pronouncements.  Refer to Note 1 to the December 31, 2010, Consolidated Financial Statements.

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 recoverability of the income tax benefit, the collectibility of receivables from tenants, including accrued rental income and capitalized overhead relating to development projects. Actual results could differ from those estimates.

Results of Operations

Property Analysis – Investment Portfolio

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

 

     2010      2009      2008  

Investment Properties Owned:

        

Number

     1,195         1,015         1,005   

Total gross leasable area (square feet)

     12,972,000         11,373,000         11,251,000   

Investment Properties:

        

Leased

     1,147         966         972   

Operated

     11         12         -   

Percent of Investment Properties – leased and operated

     97%         96%         97%   

Weighted average remaining lease term (years)

     12         12         13   

Total gross leasable area (square feet) – leased and operated

     12,215,000         10,508,000         10,728,000   

 

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The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Investment Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2010:

 

    

% of
Annual
Base Rent
(1)

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

2011

     1.5%         18         260,000         2017         3.9%         28         682,000   

2012

     3.1%         35         520,000         2018         2.6%         24         345,000   

2013

     4.4%         40         839,000         2019         4.0%         41         618,000   

2014

     4.4%         42         577,000         2020         4.0%         83         694,000   

2015

     4.5%         72         1,011,000         Thereafter         65.4%         745         6,167,000   

2016

     2.2%         19         407,000               

(1)     Based on the annualized base rent for all leases in place as of December 31, 2010.

(2)     Approximate square feet.

        

        

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

 

      

Lines of Trade

           2010                      2009                      2008          
  1.       Convenience Stores      23.7%         26.7%         25.7%   
  2.       Restaurants – Full Service      10.1%         9.2%         8.7%   
  3.       Automotive Parts      7.8%         6.8%         5.1%   
  4.       Theaters      5.7%         6.3%         6.1%   
  5.       Automotive Service      5.3%         5.7%         8.9%   
  6.       Sporting Goods      4.5%         3.2%         3.3%   
  7.       Restaurants – Limited Service      4.1%         3.5%         3.3%   
  8.       Drug Stores      4.0%         4.1%         4.0%   
  9.       Books      3.8%         4.1%         4.0%   
  10.       Grocery      2.7%         2.9%         2.6%   
   Other      28.3%         27.5%         28.3%   
                             
         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.

        

The following table shows the top 10 states in which NNN’s Investment Properties are located in as of December 31, 2010:

 

    

State

   # of
    Properties     
   %
of Annual

Base Rent(1)
 

  1.

   Texas    220      18.7%   

  2.

   Florida    93      10.0%   

  3.

   Illinois    47      6.7%   

  4.

   North Carolina    73      6.2%   

  5.

   Georgia    60      5.0%   

  6.

   Indiana    39      4.4%   

  7.

   Ohio    38      4.1%   

  8.

   Pennsylvania    84      3.9%   

  9.

   Tennessee    33      2.9%   

10.

   Missouri    28      2.9%   
   Other    480      35.2%   
                
      1,195      100.0%   
                

(1)     Based on annualized base rent for all leases in place as of December 31, 2010.

          

 

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

 

     2010      2009      2008  

Acquisitions:

        

Number of Investment Properties

     194         8         109   

Gross leasable area (square feet)

     1,700,000         290,000         868,000   

Total dollars invested(1)

   $       256,077       $       36,335       $       355,107   

(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):

 

    2010      2009      2008  

Number of properties

    14         9         19   

Gross leasable area (square feet)

        100,000             234,000             290,000   

Net sales proceeds

  $ 15,980       $ 15,621       $ 59,796   

Net gain

  $ 1,134       $ 2,392       $ 9,980   

NNN typically uses the proceeds from property sales either to pay down the outstanding indebtedness of NNN’s revolving credit facility (the “Credit Facility”) or reinvest in real estate.

Property Analysis – Inventory Portfolio

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

 

    2010      2009      2008  

Completed Inventory Properties

    10         13         24   

Properties under construction

    -         -         1   

Land parcels

    7         6         7   
                         

Total Inventory Properties

    17         19         32   
                         

NNN transferred 11 properties from the Inventory Portfolio to the Investment Portfolio in December 2009.

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):

 

    2010      2009      2008  

Number of properties acquired

    -         2         7   

Total dollars invested(1)

  $ 493       $ 2,633       $ 29,539   

(1)     Includes dollars invested in projects under construction or tenant improvements for each respective year.

         

 

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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):

 

     2010     2009     2008  
     # of
Properties
     Gain     # of
Properties
     Gain     # of
Properties
     Gain  

Continuing operations

     2       $ 641        2       $ 37        1       $ 21   

Noncontrolling interest

        (320        (14        (10
                                 

Total continuing operations attributable to NNN

        321           23           11   
                                 

Discontinued operations

     2         300        2         558        24         12,644   

Noncontrolling interest

        (43        -           (3,297
                                 

Total discontinued operations attributable to NNN

        257           558           9,347   
                                                   
                 4       $     578                    4       $     581                25       $ 9,358   
                                                   

Revenue from Continuing Operations Analysis

General.  During the year ended December 31, 2010, 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 increases in rental income will continue to come from additional property acquisitions and increases in rents pursuant to lease terms.

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

 

    2010     2009     2008     Percent of Total     2010
Versus
2009
Percent

Increase
(Decrease)
    2009
Versus
2008
Percent

Increase
(Decrease)
 
           
        2010     2009     2008      

Rental Income(1)

  $ 215,132      $ 213,666      $ 209,541        93.9%        92.6%        92.3%        0.7%        2.0%   

Real estate expense reimbursement from tenants

    7,438        8,361        6,980        3.3%        3.6%        3.1%        (11.0 )%      19.8%   

Interest and other income from real estate transactions

    3,026        4,535        5,807        1.3%        2.0%        2.6%        (33.3 )%      (21.9 )% 

Interest income on commercial mortgage residual interests

    3,460        4,252        4,636        1.5%        1.8%        2.0%        (18.6 )%      (8.3 )% 
                                                   

Total revenues from continuing operations

  $ 229,056      $ 230,814      $ 226,964        100.0%        100.0%        100.0%        (0.8 )%      1.7%   
                                                   

(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 revenues generated from NNN’s Inventory Assets are typically classified as discontinued operations.

Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009.

Rental Income.  Rental Income remained relatively stable in amount and as a percent of the total revenues from continuing operations for the year ended December 31, 2010 as compared to 2009.

Real Estate Expense Reimbursement from Tenants.  Real estate expense reimbursements from tenants decreased for the year ended December 31, 2010, as compared to 2009 but remained fairly consistent as a percentage of total revenues from continuing operations. The decrease is primarily attributable to the increase in reimbursed tax assessments in 2009 as compared to 2010.

Interest and Other Income from Real Estate Transactions.  Interest and other income from real estate transactions decreased for the year ended December 31, 2010, as compared to 2009, primarily due to a lower weighted average principal balance and a lower weighted average interest rate on NNN’s mortgages receivable and structured finance investments during the year ended December 31, 2010. For the years ended December 31, 2010 and 2009, the weighted average outstanding principal balance and interest rates on NNN’s mortgages receivable and structured finance investments was $31,925,000 at 9.04% and $38,968,000 at 9.50%, respectively. The decrease was also due to two defaulted loans at December 31, 2010.

Interest Income on Commercial Mortgage Residual Interests.  Interest income on commercial mortgage residual interests (“Residuals”) decreased for the year ended December 31, 2010, as compared to December 31, 2009, but remained fairly stable as a percent of total revenue from continuing operations. The decrease in interest income on Residuals is primarily the result of declining loan balances from prepayments and scheduled loan amortization.

Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008.

Rental Income.  Rental Income increased for the year ended December 31, 2009, as compared to 2008, due to a full year of Rental Income from the 109 Investment Properties with an aggregate gross leasable area of 868,000 square feet which were acquired during 2008. Additionally, eight Investment Properties were acquired in 2009 with an aggregate gross leasable area of 290,000 square feet. In addition, NNN recorded $5,072,000 as compared to $2,671,000 in lease termination fees and rent settlement fees during the years ended December 31, 2009 and 2008, respectively.

Real Estate Expense Reimbursement from Tenants.  Real estate expense reimbursements from tenants increased for the year ended December 31, 2009, as compared to 2008. The increase is attributable to the reimbursements from certain properties acquired in 2008 as well as reimbursements resulting from the re-leasing of existing vacancies.

Interest and Other Income from Real Estate Transactions.  Interest and other income from real estate transactions decreased for the year ended December 31, 2009, as compared to 2008, primarily due to a lower weighted average principal balance on NNN’s mortgages receivable and structured finance investments during the year ended December 31, 2009. For the years ended December 31, 2009 and 2008, the weighted average outstanding principal balance on NNN’s mortgages receivable and structured finance investments was $38,968,000 and $57,475,000, respectively.

Interest Income on Commercial Mortgage Residual Interests.  Interest income on Residuals decreased for the year ended December 31, 2009, as compared to December 31, 2008 but remained stable as a percent of total revenue from continuing operations. The decrease in interest income on Residuals is primarily the

 

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result of the increase in the loan delinquencies and asset amortization, which is partially offset by a decrease in loan prepayments.

Analysis of Expenses from Continuing Operations

General.  During 2010, operating expenses from continuing operations decreased primarily due to lower impairment losses and other charges recorded during the year ended December 31, 2010, as compared to the same period in 2009. The following summarizes NNN’s expenses from continuing operations (dollars in thousands):

 

     2010     2009     2008  

General and administrative

   $ 22,778      $ 21,773      $ 24,875   

Real estate

     13,534        13,642        10,152   

Depreciation and amortization

     48,328        46,539        43,668   

Impairment losses and other charges

     7,458        36,080        1,234   

Impairment – commercial mortgage residual interests valuation

     3,995        498        758   

Restructuring costs

     -        731        -   
                        

Total operating expenses

   $ 96,093      $ 119,263      $ 80,687   
                        

Interest and other income

   $ (1,513   $ (1,371   $ (3,748

Interest expense

     65,179        62,151        63,964   

Loss on interest rate hedge

     -        -        804   
                        

Total other expenses (revenues)

   $     63,666      $     60,780      $     61,020   
                        

 

    Percentage of Total
Operating Expenses
    Percentage of
Revenues from
Continuing Operations
    2010
Versus
2009
Percent
Increase

(Decrease)
    2009
Versus
2008
Percent
Increase

(Decrease)
 
    2010     2009     2008     2010     2009     2008      

General and administrative

    23.7%        18.3%        30.8%        9.9%        9.4%        11.0%        4.6%        (12.5)%   

Real estate

    14.1%        11.4%        12.6%        5.9%        5.9%        4.5%        (0.8)%        34.4%   

Depreciation and amortization

    50.2%        39.0%        54.1%        21.1%        20.2%        19.2%        3.8%        6.6%   

Impairment losses and other charges

    7.8%        30.3%        1.5%        3.3%        15.6%        0.5%        (79.3)%        2,823.8%   

Impairment – commercial mortgage residual interests valuation adjustment

    4.2%        0.4%        1.0%        1.7%        0.2%        0.3%        702.2%        (34.3)%   

Restructuring costs

    -        0.6%        -        -        0.3%        -        (100.0)%        N/C (1) 
                                                   

Total operating expenses

    100.0%        100.0%        100.0%        41.9%        51.6%        35.5%        (19.4)%        47.8%   
                                                   

Interest and other income

    (2.4)%        (2.3)%        (6.1)%        (0.7)%        (0.6)%        (1.7)%        10.4%        (63.4)%   

Interest expense

    102.4%        102.3%        104.8%        28.5%        26.9%        28.2%        4.9%        (2.8)%   

Loss on interest rate hedge

    -        -        1.3%        -        -        0.4%        -        (100.0)%   
                                                   

Total other expenses (revenues)

    100.0%        100.0%        100.0%        27.8%        26.3%        26.9%        4.7%        (0.4)%   
                                                   

(1)     Not calculable (“N/C”)

        

Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009.

General and Administrative Expenses.  General and administrative expenses increased for the year ended December 31, 2010, as compared to the same period in 2009 and increased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase in general and administrative expenses for the year ended December 31, 2010, is primarily attributable to an increase in noncash long-term incentive compensation. This increase is partially offset by a decrease in lost pursuit costs and capitalized overhead.

 

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Real Estate.  Real estate expenses increased as a percentage of total operating expenses, but remained stable as a percentage of revenues from continuing operations for the year ended December 31, 2010, as compared to the same period in 2009.

Depreciation and Amortization.  Depreciation and amortization expenses increased as a percentage of total operating expenses but remained fairly stable as a percentage of revenues from continuing operations for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The dollar increase is primarily a result of an increase in the amortization of loan costs associated with a credit agreement NNN entered into in November 2009.

Impairment Losses and Other Charges.  Based upon the events or changes in certain circumstances, management periodically assesses its Investment Properties for possible impairment indicating that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN determines a possible impairment by comparing the estimated 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. The decrease in impairment losses and other charges is primarily due to real estate impairments of $28,884,000 recorded in 2009, as compared to zero in 2010.

Impairment  –  Commercial Mortgage Residual Interests Valuation.  In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2010 and 2009, NNN recorded an other than temporary valuation adjustment of $3,995,000 and $498,000, respectively, as a reduction of earnings from operations.

Restructuring Costs.  During the year ended December 31, 2009, NNN recorded restructuring costs of $731,000 in connection with a workforce reduction. No such costs were incurred during 2010.

Interest Expense.  Interest expense increased for the year ended December 31, 2010, as compared to the same period in 2009, and increased as a percentage of revenues from continuing operations but remained relatively stable as a percentage of total operating expenses.

The following represents the primary changes in debt that have impacted interest expense:

 

  (i) the repurchase of $11,000,000 of convertible notes payable due June 2028 with an effective interest rate of 7.192% in 2009,

 

  (ii) the repurchase of $8,800,000 of convertible notes payable due September 2026 with an effective interest rate of 5.840% in 2009,

 

  (iii) the payoff of the $20,000,000 8.5% notes payable in September 2010,

 

  (iv) the increase of $7,037,000 in the weighted average debt outstanding on the Credit Facility for year ended December 31, 2010, as compared to the same period in 2009,

 

  (v) the increase in the weighted average interest rate on the Credit Facility from 1.19% during the year ended December 31, 2009, to 3.80% during the year ended December 31, 2010,

 

  (vi) the decrease of $626,000 in capitalized interest expense for the year ended December 31, 2010, as compared to the same period in 2009, and

 

  (vii) the increase of $850,000 in amortization of loan commitment fees related to the Credit Facility entered into November 2009.

 

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Comparison of Year End December 31, 2009 to Year Ended December 31, 2008.

General and Administrative Expenses.  General and administrative expenses decreased for the year ended December 31, 2009, as compared to the same period in 2008 and decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The decrease in general and administrative expenses for the year ended December 31, 2009, is primarily attributable to a decrease in compensation of personnel and a decrease in lost pursuit costs.

Real Estate.  Real estate expenses remained fairly stable as a percentage of total operating expenses, but increased as a percentage of revenues from continuing operations for the year ended December 31, 2009, as compared to the same period in 2008. The increase in real estate expenses for the year ended December 31, 2009, is primarily attributable to an increase in tenant reimbursable real estate expenses from 2008 acquisitions as well as an increase in expenses related to un-leased properties.

Depreciation and Amortization.  Depreciation and amortization expenses decreased as a percentage of total operating expenses and increased as a percentage of revenues from continuing operations for the year ended December 31, 2009, as compared to the year ended December 31, 2008. The dollar increase is primarily a result of depreciation recognized on the 109 Investment Properties with an aggregate gross leasable area of 868,000 square feet acquired in 2008. This increase is partially offset by the additional amortization in connection with the termination of certain leases during 2008.

Impairment Losses and Other Charges.  Based upon the events or changes in certain circumstances, management periodically assesses its Investment Properties for possible impairment indicating that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive return. Generally, NNN calculates a possible impairment by comparing the estimated 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. As a result of the Company’s review of long-lived assets for impairments, for the years ended December 31, 2009, and 2008, NNN recorded real estate impairments totaling $28,884,000 and $1,234,000, respectively. In addition, during the year ended December 31, 2009, NNN recognized a loss on a note receivable foreclosure of $7,196,000.

Impairment – Commercial Mortgage Residual Interests Valuation.  In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2009 and 2008, NNN recorded an other than temporary valuation adjustment of $498,000 and $758,000 respectively, as a reduction of earnings from operations.

Restructuring Costs.  During the year ended December 31, 2009, NNN recorded restructuring costs of $731,000 in connection with a workforce reduction. No such costs were incurred during 2008.

Interest Expense.  Interest expense decreased for the year ended December 31, 2009, as compared to the same period in 2008, and decreased as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The decrease in interest expense is primarily attributable to a decrease of $99,907,000 in weighted average long-term debt outstanding.

The following represents the primary changes in debt that have impacted interest expense:

 

  (i) repurchase of $11,000,000 of convertible notes payable due June 2028 with an effective interest rate of 7.192% in 2009,

 

  (ii) repurchase of $8,800,000 of convertible notes payable due September 2026 with an effective interest rate of 5.840% in 2009,

 

  (iii) issuance of $234,035,000 of convertible notes payable due June 2028, with an effective interest rate of 7.192% in March 2008,

 

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  (iv) payoff of the $100,000,000 7.125% notes payable in March 2008,

 

  (v) payoff of the $12,000,000 10.00% secured note payable in February 2008,

 

  (vi) the decrease of $78,860,000 in the weighted average debt outstanding on the Credit Facility for year ended December 31, 2009, as compared to 2008, and

 

  (vii) the decrease in weighted average interest rate on the Credit Facility from 3.83% during the year ended December 31, 2008, to 1.19% during the year ended December 31, 2009.

Discontinued Operations

Earnings (Loss)

NNN classified as discontinued operations the revenues and expenses related to its Investment Properties that were sold, its leasehold interests that expired or were terminated and any Investment Properties that were held for sale at December 31, 2010. NNN also classified as discontinued operations the revenues and expenses of its Inventory Properties that 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):

 

    2010     2009     2008  
  # of Sold
Properties
    Gain     Earnings/
(Loss)
    # of Sold
Properties
    Gain     Earnings/
(Loss)
    # of Sold
Properties
    Gain     Earnings/
(Loss)
 

Investment Assets

    14      $ 1,134      $ 1,859        9      $ 2,392      $ 1,776        19      $ 9,980      $ 12,914   

Inventory Assets

    2        300        292        2        558        (1,506     24        12,644        9,199   

Noncontrolling interests

    -        -        11        -        -        (166     -        -        (2,722
                                                                       
                16      $   1,434      $   2,162                    11      $   2,950      $ 104                    43      $   22,624      $   19,391   
                                                                       

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

Impairment Losses and Other Charges.  NNN periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant. Generally, NNN calculates a possible impairment by comparing the estimated 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 years ended December 31, 2009, and 2008, NNN recognized real estate impairments on discontinued operations of $5,630,000, and $4,426,000, respectively. During the year ended December 31, 2010, NNN did not recognize any real estate impairments on discontinued operations.

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, to a lesser extent, 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.

 

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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 cash dividends; (ii) property acquisitions and development; (iii) origination of mortgages and notes receivable; (iv) capital expenditures; (v) payment of principal and interest on its outstanding indebtedness; and (vi) other investments.

NNN expects to meet these requirements (other than amounts required for additional property investments, mortgages and notes receivable) through cash provided from operations and NNN’s Credit Facility. NNN utilizes the Credit Facility to meet its short-term working capital requirements. As of December 31, 2010, $161,000,000 was outstanding and $239,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $647,000. NNN anticipates that any additional investments in properties, mortgages and notes receivables during the next 12 months will be funded by the Credit Facility, cash provided from operations, the issuance of long-term debt or the issuance of common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. 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.

Cash and Cash Equivalents.  The table below summarizes NNN’s cash flows for each of the years ended December 31 (in thousands):

 

     2010     2009      2008  

Cash and cash equivalents:

       

Provided by operating activities

   $ 187,914      $ 149,502       $ 237,459   

Used in investing activities

         (220,260)            (28,063)             (256,304)   

Provided by (used in) financing activities

     19,169            (108,840)         (6,028
                         

Increase (decrease)

     (13,177     12,599         (24,873

Net cash at beginning of period

     15,225        2,626         27,499   
                         

Net cash at end of period

   $     2,048      $     15,225       $     2,626   
                         

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 cash used for general and administrative expenses, interest expense and acquisition of its 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, 2010, 2009 and 2008, 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, 2010, included the following significant transactions:

 

   

$125,391,000 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,

 

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$17,631,000 in net proceeds from the issuance of 793,759 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”), and

 

   

$161,000,000 in net proceeds from NNN’s Credit Facility,

 

   

$6,453,000 in repayments of mortgages, and

 

   

$20,000,000 in repayment of notes payable.

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 Credit Facility. As of December 31, 2010, $161,000,000 was outstanding and $239,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $647,000.

For the year ended December 31, 2010, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 40 percent and the secured indebtedness to total gross assets was approximately two percent. The total debt to total market capitalization was approximately 34 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, 2010. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2010.

 

     Expected Maturity Date (dollars in thousands)  
     Total      2011     2012      2013     2014      2015      Thereafter  

Long-term debt(1)

   $ 986,004       $ 139,798 (3)    $ 69,290       $ 223,898 (3)    $ 150,881       $ 150,917       $ 251,220   

Credit Facility

     161,000         -        161,000         -        -         -         -   

Operating lease

     3,666         917        945         973        831         -         -   
                                                            

Total contractual cash obligations(2)

   $ 1,150,670       $ 140,715      $ 231,235       $ 224,871      $ 151,712       $ 150,917       $ 251,220   
                                                            

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

(2)     Excludes $7,342 of accrued interest payable.

(3)     Maturity dates are based on put option dates under NNN’s convertible notes.

         

        

        

 

In addition to the contractual obligations outlined above, in connection with the development of 28 Investment Properties, NNN has agreed to fund construction commitments (including construction, land costs and tenant improvements) of $68,746,000. As of December 31, 2010, NNN had funded $50,196,000 of this commitment, with $18,550,000 remaining to be funded. As of December 31, 2010, NNN did not have any funding commitments relating to the development of Inventory Properties.

As of December 31, 2010, NNN had outstanding letters of credit totaling $647,000 under its Credit Facility.

 

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As of December 31, 2010, NNN did not have any other material 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 issued preferred stock with cumulative preferential cash distributions, as described below under “Dividends.”

Management anticipates satisfying these obligations with a combination of NNN’s cash provided from operations, current capital resources on hand, its Credit Facility, debt or equity financings and asset dispositions.

Generally the Investment Properties are leased under long-term net leases. 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 its 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 vacant properties or uncollectibility of lease revenues 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 December 31, 2010, NNN owned 37 vacant, un-leased Investment Properties which accounted for approximately three percent of total Investment Properties held in NNN’s Investment Portfolio. Additionally, as of January 31, 2011, approximately one percent of the total gross leasable area of NNN’s Investment Portfolio was leased to four tenants that 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.

In February 2011, one of NNN’s tenants, Borders Group, Inc. (“Borders”), which leased five Investment Properties from NNN, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In February 2011, Borders moved to reject three leases with NNN and retains the right to reject the remaining two leases with NNN.

In February 2011, one of NNN’s tenants, Robb & Stucky, LTD, which leases 1 Investment Property from NNN, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code and retains the right to reject its lease with NNN.

On April 20, 2009, one of NNN’s tenants, Titlemax Holdings, LLC and its affiliated companies (“Titlemax”), which leased 30 Investment Properties from NNN, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In January 2010, Titlemax assumed all of its leases with NNN. In April 2010, Titlemax’s plan of reorganization was approved by the U.S. Bankruptcy Court and Titlemax exited bankruptcy. Titlemax’s Chapter 11 filing did not have an effect on NNN’s operations or financial position.

In June 2010, one of NNN’s tenants, Majestic Liquor Stores, Inc. (“Majestic”), which leased 13 Investment Properties from NNN, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In addition, in June 2010, the principals of Majestic, (the “Majestic Principals”), which are the borrowers on a loan from NNN secured by one Majestic property, filed a petition of reorganization under Chapter 11 of the U.S. Bankruptcy Code. In June 2010, Majestic elected to reject the leases of four properties owned by NNN and the one property securing the loan to the Majestic Principals. In November 2010 NNN foreclosed on the property securing the loan to the Majestic Principals. In addition, during the year ended December 31, 2010, NNN recorded a $5,625,000 charge in connection with the loan to the Majestic Principals. In December 2010, Majestic assumed all 9 of the remaining leases with NNN. Also in December 2010

 

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Majestic and Majestic Principals plan of reorganization was approved by the U.S. Bankruptcy court and Majestic and the Majestic Principals exited bankruptcy.

Dividends.  NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Code, as amended, and related regulations and intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. 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 adversely affect NNN’s income and ability to pay dividends.

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, 2010, 2009 and 2008, NNN declared and paid dividends to its common stockholders of $125,391,000, $120,256,000 and $110,107,000, respectively, or $1.51, $1.50 and $1.48 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:

 

    2010     2009     2008  

Ordinary dividends

  $ 1.072446        71.0229%      $ 1.495182        99.6788%      $ 1.480000        100.0000%   

Qualified dividends

    0.081661        5.4080%        -        -        -        -   

Capital gain

    0.000861        0.0570%        0.003051        0.2034%        -        -   

Unrecaptured Section 1250 Gain

    0.000498        0.0330%        0.001767        0.1178%        -        -   

Nontaxable distributions

    0.354534        23.4791%        -        -        -        -   
                                               
  $     1.510000        100.0000%      $     1.500000        100.0000%      $     1.480000        100.0000%   
                                               

In February 2011, NNN paid dividends to its common stockholders of $31,678,000, or $0.38 per share of common stock.

Holders of NNN’s preferred stock issuance 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.

NNN declared and paid dividends to its Series C Preferred stockholders of $6,785,000 or $1.84375 per depository share during each of the years ended December 31, 2010, 2009 and 2008. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed.

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

 

    2010     2009     2008  

Ordinary dividends

  $ 1.703170        92.3753%      $ 1.837828        99.6788%      $ 1.843750        100.0000%   

Qualified dividends

    0.140580        7.6247%        -        -        -        -   

Capital gain

    -        -        0.003750        0.2034%        -        -   

Unrecaptured Section 1250 Gain

    -        -        0.002172        0.1178%        -        -   
                                               
  $     1.843750        100.0000%      $     1.843750        100.0000%      $     1.843750        100.0000%   
                                               

 

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Capital Resources

Generally, cash needs for property acquisitions, mortgages and notes receivable investments, debt payments, dividends, 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, by internally generated funds. Cash needs for other items have been met from operations. If available, 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):

 

     2010      Percentage of
Total
     2009      Percentage of
Total
 

Line of credit payable

   $ 161,000         14.2%       $ -         -   

Mortgages payable

     24,269         2.2%         25,290         2.6%   

Notes payable – convertible

     349,534         30.8%         343,380         34.8%   

Notes payable

     598,882         52.8%         618,676         62.6%   
                                   

Total outstanding debt

   $         1,133,685                 100.0%       $         987,346                 100.0%   
                                   

Indebtedness.  NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests, and mortgages and notes receivable.

Line of Credit Payable.    NNN’s $400,000,000 revolving Credit Facility had a weighted average outstanding balance of $17,861,000 and a weighted average interest rate of 3.8% during the year ended December 31, 2010. In November 2009, NNN entered into a credit agreement for a new $400,000,000 credit facility, replacing the former revolving credit facility (as the context requires, the previous and new revolving credit facility, the “Credit Facility”). The Credit Facility matures November 2012, with an option to extend maturity to November 2013. The Credit Facility bears interest at LIBOR plus 280 basis points with a 1.0% LIBOR floor; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN’s debt credit rating. The Credit Facility also includes an accordion feature for NNN to increase, at its option, the facility size up to $500,000,000. As of December 31, 2010, $161,000,000 was outstanding, and $239,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $647,000.

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) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment limitations. At December 31, 2010, NNN was in compliance with those covenants. In the event that NNN violates any of these restrictive financial covenants, it could cause the indebtedness under the Credit Facility to be accelerated and may impair NNN’s access to the debt and equity markets and limit NNN’s ability to pay dividends to its common and preferred stockholders, each of which would likely have a material adverse impact on NNN’s financial condition and results of operations.

 

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

 

Entered

   Balance      Interest
Rate
    Maturity(3)      Carrying
Value of
Encumbered
Asset(s)(1)
     Outstanding Principal
Balance at December 31,
 
              2010      2009  

December 2001(2)

     623         9.00     April 2014       $ 734       $ 215       $ 267   

December 2001(2)

     698         9.00     April 2019         1,186         364         392   

December 2001(2)

     485         9.00     April 2019         1,152         187         201   

June 2002

         21,000         6.90     July 2012         24,051         18,841         19,170   

February 2004(2)

     6,952         6.90     January 2017         11,522         4,038         4,554   

March 2005(2)

     1,015         8.14     September 2016         1,322         624         706   
                                  
           $         39,967       $         24,269       $         25,290   
                                  

 

  (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, 2010.

  (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)

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

Notes Payable – Convertible.  Each of NNN’s outstanding series of convertible notes are summarized in the table below (dollars in thousands, except conversion price):

 

Terms

   2026
Notes(1)(2)(4)
    2028
Notes(2)(5)(6)
 

Issue Date

     September 2006        March 2008   

Net Proceeds

   $ 168,650      $ 228,576   

Stated Interest Rate(8)

     3.950%        5.125%   

Debt Issuance Costs

   $ 3,850 (3)    $ 5,459 (7) 

Earliest Conversion Date

             September 2025                June 2027   

Earliest Put Option Date

     September 2011        June 2013   

Maturity Date

     September 2026        June 2028   

Original Principal

   $ 172,500      $ 234,035   

Repurchases

     (33,800     (11,000
                

Outstanding principal balance at December 31, 2010

   $ 138,700      $ 223,035   
                

 

  (1)

NNN repurchased $8,800 and $25,000 in 2009 and 2008, respectively, for a purchase price of $6,994 and $19,188, respectively, resulting in a gain of $1,565 and $4,961, respectively.

  (2)

Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method.

  (3)

Includes $463 of note costs which were written off in connection with the repurchase of $33,800 of the 2026 Notes.

  (4)

The conversion rate per $1 principal amount was 41.9803 shares of NNN’s common stock, which is equivalent to a conversion price of $23.8207 per share of common stock.

  (5)

The conversion rate per $1 principal amount was 39.3620 shares of NNN’s common stock, which is equivalent to a conversion price of $25.4052 per share of common stock.

  (6)

NNN repurchased $11,000 in 2009 for a purchase price of $8,588 resulting in a gain of $1,867.

  (7)

Includes $219 of note costs which were written off in connection with the repurchase of $11,000 of the 2028 Notes, respectively.

  (8)

With the adoption of the new accounting guidance on convertible debt securities, the effective interest rate for the 2026 Notes and the 2028 Notes are 5.840% and 7.192%, respectively.

Each series of convertible notes represents senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of the Company. Each note is 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 and unpaid interest thereon through but not including the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.

 

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The carrying amounts of the Company’s debt and equity balances are summarized in the table below as of December 31, (dollars in thousands):

 

      2010     2009  

Carrying value of equity component

   $ (33,873   $ (33,873

Principal amount of convertible debt

     361,735        361,735   

Remaining unamortized debt discount

     (12,201     (18,355
                

Net carrying value of convertible debt

   $ 315,661      $ 309,507   
                

As of December 31, 2010, the remaining amortization periods for the debt discount were approximately nine months and 18 months for the 2026 Notes and the 2028 Notes, respectively.

The adjusted effective interest rates for the liability components of the 2026 Notes and the 2028 Notes were 5.840% and 7.192%, respectively. The Company recorded noncash interest-related charges of $6,154,000, $5,809,000 and $5,481,000 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company recorded contractual interest expense of $16,909,000, $17,046,000 and $16,548,000 for the years ended December 31, 2010, 2009 and 2008, respectively, relating to the 2026 Notes and 2028 Notes.

The if-converted values that exceed the principal amount as of December 31, 2010, are $15,601,000 and $9,611,000 for the 2026 Notes and the 2028 Notes, respectively. As of December 31, 2009, the if-converted amount did not exceed the value of the principal amount.

Notes Payable.  Each of NNN’s outstanding series of 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)
     Maturity
Date

2012(1)

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

2014(1)(2)(5)

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

2015(1)

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

2017(1)(6)

   September 2007      250,000         877         249,123         6.875%         6.924%       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 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 and unpaid interest thereon through the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.

In connection with the note and convertible note offerings, NNN incurred debt issuance costs totaling $5,226,000 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 indentures, pursuant to which NNN’s notes and convertible 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, 2010, NNN was in compliance with those covenants.

 

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NNN’s failure to comply with certain of its debt covenants could result in defaults that accelerate the payment under such debt and limit the dividends paid to NNN’s common and preferred stockholders which would likely have a material adverse impact on NNN’s financial condition and results of operations. In addition, these defaults could impair its access to the debt and equity markets.

In September 2010, NNN repaid the 8.500% $20,000,000 notes that were due in September 2010.

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 June 2008, NNN’s debt rating was upgraded by Moody’s Investor Service. In February 2009, NNN filed a shelf registration statement with the Securities and Exchange Commission (the “Commission”) which was automatically effective and 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 3,680,000 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 $92,000,000. 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. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed. 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.

Common Stock Issuances.  In October 2008, NNN issued 3,450,000 shares of common stock in a registered, underwritten public offering at a price of $23.05 per share and received net proceeds of $75,958,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $3,565,000 consisting primarily of underwriters’ fees and commissions, legal and accounting fees. NNN used the net proceeds to repay borrowings under the Credit Facility and to acquire Investment Properties.

Dividend Reinvestment and Stock Purchase Plan.  In June 2009, NNN filed a shelf registration statement which was automatically effective, with the Commission for its DRIP, which permits the issuance by NNN of 16,000,000 shares of common stock. NNN’s 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:

 

      2010      2009      2008  

Shares of common stock

     793,759         3,766,452         2,146,640   

Net proceeds

   $ 17,623,000       $ 67,354,000       $ 47,372,000   

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

 

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Mortgages and Notes Receivable.

Mortgages are secured by real estate, real estate securities or other assets. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):

 

      2010     2009  

Mortgages and notes receivable

   $ 29,750      $ 41,707   

Accrued interest receivable, net of reserves

     644        269   

Unamortized discount

     (63     -   
                
   $ 30,331      $ 41,976   
                

Commercial Mortgage Residual Interests.

In connection with the independent valuations of the Residuals’ fair value, NNN adjusted the carrying value of the Residuals to reflect such fair value as of December 31, 2010. Due to changes in market conditions relating to residual assets, the independent valuation changed several valuation assumptions. The following table summarizes the changes to the key assumptions used in determining the value of the Residuals as of December 31:

 

      2010      2009  

Discount rate

     25%         25%   

Average life equivalent CPR speeds range

     4.35% to 20.37% CPR         14.5% to 20.7% CPR   

Foreclosures:

     

Frequency curve default model

     0.1% - 15.0% range         6% average rate   

Loss severity of loans in foreclosure

     20%         20%   

Yield:

     

LIBOR

     Forward 3-month curve         Forward 3-month curve   

Prime

     Forward curve         Forward curve   

The following table summarizes the recognition of unrealized gains and/or losses recorded as other comprehensive income as well as other than temporary valuation impairment as of December 31 (dollars in thousands):

 

      2010      2009      2008  

Unrealized gains

   $ 1,273       $ -       $ 2,009   

Unrealized losses

     -         1,640         -   

Other than temporary valuation impairment

     3,995         498         758   

Business Combination.

In connection with the default of a note receivable and certain lease agreements between NNN and one of its tenants, in June 2009, NNN acquired the operations of the auto service business which was operated on 12 Investment Properties. The note foreclosure resulted in a loss of $7,816,000. NNN recorded the value of the assets received at fair value. No liabilities were assumed. The fair value of the assets resulted in goodwill of $3,400,000. In connection with the review of goodwill for impairment, NNN recognized a noncash impairment charge of $1,900,000.

 

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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

NNN is exposed to interest rate risk primarily as a result of its variable rate Credit Facility and its fixed rate debt which is used to finance NNN’s development and acquisition activities, as well as 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, 2010, 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, 2010 and 2009. The table presents principal payments and related interest rates by year for debt obligations outstanding as of December 31, 2010. The variable interest rates shown represent weighted average rate for the Credit Facility for the year ended December 31, 2010. The table incorporates only those debt obligations that existed as of December 31, 2010, and 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 by less than one percent for the year ended December 31, 2010.

 

Debt Obligations (dollars in thousands)

 
     Variable Rate Debt     Fixed Rate Debt  
     Credit Facility     Mortgages     Unsecured Debt(1)  
     Debt
Obligation
    Weighted
Average
Interest Rate
    Debt
Obligation
    Weighted
Average
Interest Rate
    Debt
Obligation
    Effective
Interest
Rate
 

2011

    $              -        -        $    1,098        7.20%        $   136,857        5.84%   

2012

    161,000        3.80%        19,290        6.92%        49,945        7.83%   

2013

    -        -        863        7.35%        212,677        7.19%   

2014

    -        -        881        7.27%        149,817        5.91%   

2015

    -        -        917        7.22%        149,777        6.19%   

Thereafter

    -        -        1,220        7.47%        249,343        6.92%   
                             

Total

    $  161,000        3.80%        $  24,269        7.00%        $   948,416        6.60%   
                             

Fair Value:

           

December 31, 2010

    $  161,000          $  24,269          $1,044,621     
                             

December 31, 2009

    $              -          $  25,290          $   987,275     
                             

(1)     Includes NNN’s notes payable and convertible notes payable, each net of unamortized discounts. NNN uses Bloomberg to determine the fair value.

         

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 based upon an independent valuation, had a carrying value of $15,915,000 and $20,153,000 as of December 31, 2010 and 2009, 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 Stockholders of National Retail Properties, Inc. and Subsidiaries

We have audited National Retail Properties, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2010, 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. and Subsidiaries’ 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 Management’s 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 operating 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. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, 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. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated February 24, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Miami, Florida

February 24, 2011

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of National Retail Properties, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of National Retail Properties, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedules listed in the index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statements schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Retail Property Inc.’s internal control over financial reporting as of December 31, 2010, 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 24, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Miami, Florida

February 24, 2011

 

45


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

ASSETS

   December 31,
2010
     December 31,
2009
 

Real estate, Investment Portfolio:

     

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

   $         2,519,950       $         2,328,576   

Accounted for using the direct financing method

     29,773         31,317   

Real estate, Inventory Portfolio, held for sale

     32,076         72,423   

Investment in unconsolidated affiliate

     4,515         4,703   

Mortgages, notes and accrued interest receivable, net of allowance

     30,331         41,976   

Commercial mortgage residual interests

     15,915         20,153   

Cash and cash equivalents

     2,048         15,225   

Receivables, net of allowance of $1,750 and $583, respectively

     3,403         1,946   

Accrued rental income, net of allowance of $3,609 and $2,875, respectively

     25,535         25,745   

Debt costs, net of accumulated amortization of $11,198 and $6,870, respectively

     9,366         13,884   

Other assets

     40,663         35,014   
                 

Total assets

   $ 2,713,575       $ 2,590,962   
                 

LIABILITIES AND EQUITY

     

Liabilities:

     

Line of credit payable

   $ 161,000       $ -   

Mortgages payable

     24,269         25,290   

Notes payable – convertible, net of unamortized discount of $12,201 and $18,355, respectively

     349,534         343,380   

Notes payable, net of unamortized discount of $1,118 and $1,324, respectively

     598,882         618,676   

Accrued interest payable

     7,342         7,471   

Other liabilities

     43,774         29,283   
                 

Total liabilities

     1,184,801         1,024,100   
                 

Commitments and contingencies (Note 26)

     

Equity:

     

Stockholders’ equity:

     

Preferred stock, $0.01 par value. Authorized 15,000,000 shares

     

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; 83,613,289 and 82,427,560 shares issued and outstanding, respectively

     838         825   

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

     -         -   

Capital in excess of par value

     1,429,750         1,408,491   

Retained earnings

     3,234         62,413   

Accumulated other comprehensive income

     1,661         511   
                 

Total stockholders’ equity of NNN

     1,527,483         1,564,240   

Noncontrolling interests

     1,291         2,622   
                 

Total equity

     1,528,774         1,566,862   
                 

Total liabilities and equity

   $ 2,713,575       $ 2,590,962   
                 

See accompanying notes to consolidated financial statements.

 

46


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands, except per share data)

 

     Year Ended December 31,  
      2010     2009     2008  

Revenues:

      

Rental income from operating leases

   $ 211,172      $ 209,256      $ 205,334   

Earned income from direct financing leases

     3,001        3,070        3,103   

Percentage rent

     959        1,340        1,104   

Real estate expense reimbursement from tenants

     7,438        8,361        6,980   

Interest and other income from real estate transactions

     3,026        4,535        5,807   

Interest income on commercial mortgage residual interests

     3,460        4,252        4,636   
                        
     229,056        230,814        226,964   
                        

Disposition of real estate, Inventory Portfolio:

      

Gross proceeds

     5,600        953        4,900   

Costs

     (4,959     (916     (4,879
                        

Gain

     641        37        21   
                        

Retail operations:

      

Revenues

     32,958        15,595        -   

Operating expenses

     (31,647     (15,176     -   
                        

Net

     1,311        419        -   
                        

Operating expenses:

      

General and administrative

     22,778        21,773        24,875   

Real estate

     13,534        13,642        10,152   

Depreciation and amortization

     48,328        46,539        43,668   

Impairment losses and other charges

     7,458        36,080        1,234   

Impairment – commercial mortgage residual interests valuation adjustment

     3,995        498        758   

Restructuring costs

     -        731        -   
                        
     96,093        119,263        80,687   
                        

Earnings from operations

     134,915        112,007        146,298   
                        

Other expenses (revenues):

      

Interest and other income

     (1,513     (1,371     (3,748

Interest expense

     65,179        62,151        63,964   

Loss on interest rate hedge

     -        -        804   
                        
     63,666        60,780        61,020   
                        

Earnings from continuing operations before income tax benefit (expense), equity in earnings of unconsolidated affiliate and gain on extinguishment of debt

     71,249        51,227        85,278   

Income tax benefit (expense)

     (475     1,049        7,255   

Equity in earnings of unconsolidated affiliate

     428        421        364   

Gain on extinguishment of debt

     -        3,432        4,961   
                        

Earnings from continuing operations

     71,202        56,129        97,858   

Earnings (loss) from discontinued operations (Note 18):

      

Real estate, Investment Portfolio, net of income tax expense

     1,859        1,776        12,914   

Real estate, Inventory Portfolio, net of income tax expense

     292        (1,506     9,199   
                        
     2,151        270        22,113   
                        

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED

(dollars in thousands, except per share data)

 

     Year Ended December 31,  
      2010     2009     2008  

Earnings including noncontrolling interests

   $ 73,353      $ 56,399      $ 119,971   

Loss (earnings) attributable to noncontrolling interests:

      

Continuing operations

     (367     (1,423     (96

Discontinued operations

     11        (166     (2,722
                        
     (356     (1,589     (2,818
                        

Net earnings attributable to NNN

     72,997        54,810        117,153   

Other comprehensive income (loss)

     1,150        (1,903     1,688   
                        

Total comprehensive income

   $ 74,147      $ 52,907      $ 118,841   
                        

Net earnings attributable to NNN

   $ 72,997      $ 54,810      $ 117,153   

Series C preferred stock dividends

     (6,785     (6,785     (6,785
                        

Net earnings attributable to common stockholders

   $ 66,212      $ 48,025      $ 110,368   
                        

Net earnings per share of common stock:

      

Basic:

      

Continuing operations

   $ 0.77      $ 0.60      $ 1.22   

Discontinued operations

     0.03        -        0.26   
                        

Net earnings

   $ 0.80      $ 0.60      $ 1.48   
                        

Diluted:

      

Continuing operations

   $ 0.77      $ 0.60      $ 1.22   

Discontinued operations

     0.03        -        0.26   
                        

Net earnings

   $ 0.80      $ 0.60      $ 1.48   
                        

Weighted average number of common shares outstanding:

      

Basic

     82,715,645        79,846,258        74,249,137   
                        

Diluted

     82,849,362        79,953,499        74,344,231   
                        

See accompanying notes to consolidated financial statements.

 

48


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

Years Ended December 31, 2010, 2009 and 2008

(dollars in thousands, except per share data)

 

     Series C
Preferred
Stock
    Common
Stock
    Capital in
  Excess of  

Par Value
    Retained
Earnings
    Accumulated
Other
    Comprehensive  
Income
    Total
  Stockholders’  
Equity
      Noncontrolling  
Interests
    Total
Equity
 

Balances at December 31, 2007

  $         92,000      $         725      $         1,189,564      $         134,383      $                   975      $         1,417,647      $                   2,956      $         1,420,603   

Net earnings

    -        -        -        117,153        -        117,153        2,818        119,971   

Dividends declared and paid:

               

$1.84375 per depositary share of Series C preferred stock

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

$1.48 per share of common stock

    -        4        8,472        (110,107     -        (101,631     -        (101,631

Issuance of common stock:

               

3,523,285 shares

    -        35        80,633        -        -        80,668        -        80,668   

1,753,201 shares – discounted stock purchase program

    -        18        38,878        -        -        38,896        -        38,896   

Issuance of 217,397 shares of restricted common stock

    -        2        (2     -        -        -        -        -   

Stock issuance costs

    -        -        (3,582     -        -        (3,582     -        (3,582

Equity component of convertible debt

    -        -        20,467        -        -        20,467        -        20,467   

Amortization of deferred compensation

    -        -        2,588        -        -        2,588        -        2,588   

Interest rate hedge termination

    -        -        -        -        (162     (162     -        (162

Amortization of interest rate hedges

    -        -        -        -        (109     (109     -        (109

Unrealized gain – commercial mortgage residual interests

    -        -        -        -        1,760        1,760        249        2,009   

Stock value adjustment

    -        -        -        -        (50     (50     -        (50

Contributions from noncontrolling interests

    -        -        -        -        -        -        41        41   

Distributions to noncontrolling interests

    -        -        -        -          -        (5,483     (5,483

Other

    -        -        -        -        -        -        1,505        1,505   
                                                               

Balances at December 31, 2008

  $ 92,000      $ 784      $ 1,337,018      $ 134,644      $ 2,414      $ 1,566,860      $ 2,086      $ 1,568,946   
                                                               

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED

Years Ended December 31, 2010, 2009 and 2008

(dollars in thousands, except per share data)

 

     Series C
Preferred
Stock
    Common
Stock
    Capital in
  Excess of  

Par Value
    Retained
Earnings
    Accumulated
Other
    Comprehensive  
Income
    Total
  Stockholders’  
Equity
      Noncontrolling  
Interests
    Total
Equity
 

Balances at December 31, 2008

  $ 92,000      $ 784      $ 1,337,018      $ 134,644      $ 2,414      $ 1,566,860      $ 2,086      $ 1,568,946   

Net earnings

    -        -        -        54,810        -        54,810        1,589        56,399   

Dividends declared and paid:

               

$1.84375 per depositary share of Series C preferred stock

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

$1.50 per share of common stock

    -        1        1,797        (120,256     -        (118,458     -        (118,458

Issuance of common stock:

               

99,738 shares

    -        1        1,435        -        -        1,436        -        1,436   

3,664,182 shares – discounted stock purchase program

    -        36        65,519        -        -        65,555        -        65,555   

Issuance of 262,546 shares of restricted common stock

    -        3        (3     -        -        -        -        -   

Stock issuance costs

    -        -        (113     -        -        (113     -        (113

Equity component of extinguishment of convertible debt

    -        -        (795     -        -        (795     -        (795

Amortization of deferred compensation

    -        -        3,443        -        -        3,443        -        3,443   

Amortization of interest rate hedges

    -        -        -        -        (159     (159     -        (159

Unrealized loss – commercial mortgage residual interests

    -        -        -        -        (1,744     (1,744     104        (1,640

Contributions from noncontrolling interests

    -        -        -        -        -        -        152        152   

Distributions to noncontrolling interests

    -        -        -        -        -        -        (552     (552

Other

    -        -        190        -        -        190        (757     (567
                                                               

Balances at December 31, 2009

  $         92,000      $         825      $         1,408,491      $         62,413      $                   511      $         1,564,240      $                   2,622      $         1,566,862   
                                                               

 

See accompanying notes to consolidated financial statements.

 

50


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED

Years Ended December 31, 2010, 2009 and 2008

(dollars in thousands, except per share data)

 

     Series C
Preferred
Stock
    Common
Stock
    Capital in
  Excess of  

Par Value
    Retained
Earnings
    Accumulated Other
    Comprehensive  
Income
    Total
  Stockholders’  
Equity
      Noncontrolling  
Interests
    Total
Equity
 

Balances at December 31, 2009

  $ 92,000      $ 825      $ 1,408,491      $ 62,413      $ 511      $ 1,564,240      $ 2,622      $ 1,566,862   

Net earnings

    -        -        -        72,997        -        72,997        356        73,353   

Dividends declared and paid:

               

$1.84375 per depositary share of Series C preferred stock

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

$1.51 per share of common stock

    -        3        7,350        (125,391     -        (118,038     -        (118,038

Issuance of common stock:

            -         

39,872 shares

    -        1        697        -        -        698        -        698   

491,705 shares – discounted stock purchase program

    -        5        10,272        -        -        10,277        -        10,277   

Issuance of 377,164 shares of restricted common stock

    -        4        (4     -        -        -        -        -   

Stock issuance costs

    -        -        (1     -        -        (1     -        (1

Performance incentive plan

    -        -        (1,634     -        -        (1,634     -        (1,634

Amortization of deferred compensation

    -        -        5,119        -        -        5,119        -        5,119   

Amortization of interest rate hedges

    -        -        -        -        (165     (165     -        (165

Unrealized gain – commercial mortgage residual interests

    -        -        -        -        1,272        1,272        (26     1,246   

Contributions from noncontrolling interests

    -        -        -        -        -        -        43        43   

Distributions to noncontrolling interests

    -        -        -        -        -        -        (861     (861

Purchase of noncontrolling interest

    -        -        (404     -        -        (404     (1,199     (1,603

Other

    -        -        (136     -        43        (93     356        263   
                                                               

Balances at December 31, 2010

  $         92,000      $         838      $         1,429,750      $         3,234      $                         1,661      $         1,527,483      $                   1,291      $   1,528,774   
                                                               

See accompanying notes to consolidated financial statements.

 

51


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

     Year Ended December 31,  
     2010     2009     2008  

Cash flows from operating activities:

      

Earnings including noncontrolling interests

   $ 73,353      $ 56,399      $ 119,971   

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

      

Performance incentive plan expense

     5,756        4,172        3,299   

Stock options expense – tax effect

     122        190        -   

Depreciation and amortization

     49,084        48,485        45,347   

Impairment losses and other charges

     7,458        41,710        5,660   

Impairment – commercial mortgage residual interests valuation

     3,995        498        758   

Amortization of notes payable discount

     6,360        6,006        5,670   

Amortization of deferred interest rate hedges

     (166     (159     (162

Equity in earnings of unconsolidated affiliates

     (428     (421     (364

Distributions received from unconsolidated affiliates

     578        607        439   

Gain on disposition of real estate, Investment Portfolio

     (1,134     (2,392     (9,980

Gain on extinguishment of debt

     -        (3,432     (4,961

Gain on disposition of real estate, Inventory Portfolio

     (941     (595     (12,665

Deferred income taxes

     (2,544     (16,649     (5,593

Income tax valuation allowance

     3,121        14,900        -   

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

      

Additions to real estate, Inventory Portfolio

     (478     (2,457     (33,745

Proceeds from disposition of real estate, Inventory Portfolio

     42,817        6,276        128,785   

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

     1,544        1,378        1,195   

Decrease (increase) in work in process

     (755     (786     47   

Increase in mortgages, notes and accrued interest receivable

     (467     (10     (217

Decrease (increase) in receivables

     (219     941        243   

Decrease (increase) in commercial mortgage residual interests

     1,516        (291     -   

Decrease (increase) in accrued rental income

     124        (2,061     (978

Decrease (increase) in other assets

     (53     (172     951   

Decrease in accrued interest payable

     (129     (137     (3,635

Decrease in other liabilities

     (431     (2,930     (1,463

Increase (decrease) in current tax liability

     (169     432        (1,143
                        

Net cash provided by operating activities

     187,914        149,502        237,459   
                        

Cash flows from investing activities:

      

Proceeds from the disposition of real estate, Investment Portfolio

     10,312        14,588        60,027   

Additions to real estate, Investment Portfolio:

      

Accounted for using the operating method

     (230,928     (44,433     (352,618

Investment in unconsolidated affiliate

     -        -        (901

Increase in mortgages and notes receivable

     (8,564     (959     (29,934

Principal payments on mortgages and notes receivable

     13,818        4,009        64,589   

Cash received from commercial mortgage residual interests

     -        -        3,591   

Payment of lease costs

     (1,324     (451     (922

Other

     (3,574     (817     (136
                        

Net cash used in investing activities

     (220,260     (28,063     (256,304
                        

 

See accompanying notes to consolidated financial statements.

 

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NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(dollars in thousands)

 

     Year Ended December 31,  
     2010     2009     2008  

Cash flows from financing activities:

      

Proceeds from line of credit payable

   $ 278,900      $ 132,400      $ 516,000   

Repayment of line of credit payable

     (117,900     (158,900     (619,300

Repayment of mortgages payable

     (6,453     (1,000     (1,190

Proceeds from notes payable – convertible

     -        -        234,035   

Repurchase of notes payable – convertible – debt component

     -        (14,785     (18,420

Repurchase of notes payable – convertible – equity component

     -        (795     (768

Repayment of notes payable – secured

     -        -        (12,000

Repayment of notes payable

     (20,000     -        (100,000

Payment of debt costs

     (75     (6,275     (5,813

Proceeds from issuance of common stock

     17,692        68,060        127,328   

Payment of Series C preferred stock dividends

     (6,785     (6,785     (6,785

Payment of common stock dividends

     (125,391     (120,256     (110,107

Noncontrolling interest distributions

     (861     (552     (5,483

Noncontrolling interest contributions

     43        152        41   

Stock issuance costs

     (1     (104     (3,566
                        

Net cash provided by (used in) financing activities

     19,169        (108,840     (6,028
                        

Net increase (decrease) in cash and cash equivalents

     (13,177     12,599        (24,873

Cash and cash equivalents at beginning of year

     15,225        2,626        27,499   
                        

Cash and cash equivalents at end of year

   $ 2,048      $ 15,225      $ 2,626   
                        

Supplemental disclosure of cash flow information:

      

    Interest paid, net of amount capitalized

   $ 62,386      $ 61,475      $ 69,395   
                        

    Taxes paid (received)

   $ 472      $ (63   $ 3,441   
                        

Supplemental disclosure of noncash investing and financing activities:

      

Issued 392,474, 262,546 and 225,517 shares of restricted and unrestricted common stock in 2010, 2009 and 2008, respectively, pursuant to NNN’s performance incentive plan

   $ 6,889      $ 4,290      $ 3,796   
                        

Issued 10,092, 6,594 and 12,766 shares of common stock in 2010, 2009 and 2008, respectively, to directors pursuant to NNN’s performance incentive plan

   $ 236      $ 118      $ 262   
                        

Issued 25,066, 41,604 and 26,879 shares of common stock in 2010, 2009 and 2008, respectively, pursuant to NNN’s Deferred Director Fee Plan

   $ 401      $ 611      $ 449   
                        

Surrender of 2,520 shares of restricted common stock in 2008

   $ -      $ -      $ 58   
                        

Change in other comprehensive income

   $ 1,150      $ (1,903   $ 1,439   
                        

Change in lease classification (direct financing lease to operating lease)

   $ -      $ -      $ 300   
                        

Transfer of real estate from Inventory Portfolio to Investment Portfolio

   $ -      $ 16,058      $ 29,948   
                        

Note and mortgage receivable accepted in connection with real estate transactions

   $ 5,950      $ 1,550      $ 24,245   
                        

Mortgages payable assumed in connection with real estate transactions

   $ 5,432      $ -      $ -   
                        

Real estate acquired in connection with mortgage receivable foreclosure

   $ 6,250      $ 4,240      $ 2,497   
                        

Assets received in note receivable foreclosure

   $ -      $ 5,527      $ -   
                        

Note receivable foreclosures

   $ -      $ (17,013   $ -   
                        

 

 

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, 2010, 2009 and 2008

Note 1 – Organization and Summary of Significant Accounting Policies:

Organization and Nature of Business – National Retail Properties, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The term “NNN” or the “Company” refers to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable REIT subsidiaries. These taxable subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.”

NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets, mortgages and notes receivable and commercial mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment (“Investment Properties” or “Investment Portfolio”).

 

     December 31, 2010  

Investment Portfolio:

  

Total properties (including retail operations)

     1,195   

Gross leasable area (square feet)

     12,972,000   

States

     46   

The Inventory Assets typically represent direct and indirect investment interests in real estate assets acquired or developed primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2010, NNN owned 17 Inventory Properties.

Principles of Consolidation – NNN’s consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates, including transactions whereby NNN has been determined to be the primary beneficiary in accordance with the Financial Accounting Standards Board (“FASB”) guidance included in Consolidation. 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.

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

 

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balances and transactions and records a noncontrolling interest for its other partners’ ownership percentage. The following table summarizes each of the investments as of December 31, 2010:

 

Date of Agreement

  

Entity Name

   TRS’
    Ownership  %    
 

November 2002

   WG Grand Prairie TX, LLC      60%   

February 2003

   Gator Pearson, LLC      50%   

February 2006

   CNLRS BEP, L.P.      50%   

September 2006

   NNN Harrison Crossing, L.P.      50%   

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

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 – In accordance with the FASB guidance on business combinations, the fair value of the real estate acquired with in-place leases 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 fair values of these assets. The as-if-vacant fair value of a property is provided to management by a qualified appraiser.

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 term of the lease, including the probability of renewal periods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases unless the Company believes that it is likely that the tenant would renew the option whereby the Company would amortize the value attributable to the renewal over the renewal period. 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.

 

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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.

Real Estate – Inventory Portfolio – The TRS acquires and/or develops and owns properties primarily for the purpose of selling the real estate. 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 and is recorded at the lower of cost or fair value. In accordance with the FASB guidance included in Real Estate, the TRS classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated.

Impairment – Real Estate – Based upon events or changes in certain circumstances, management periodically assesses its Investment Properties for possible impairment indicating that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market condition and the ability of NNN to re-lease or sell properties that are currently vacant or become vacant. 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 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 FASB guidance included in 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.

 

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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 an Unconsolidated Affiliate – NNN accounts for its investment in an unconsolidated affiliate under the equity method of accounting.

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 Orange Avenue Mortgage Investments, Inc. (“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.

In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, OAMI, for $1,603,000, pursuant to which OAMI became a wholly owned subsidiary of NNN. NNN accounted for the transaction as an equity transaction in accordance with the FASB guidance on consolidation.

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.

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.

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.

Goodwill – Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the assets acquired and the liabilities assumed. In accordance with the FASB guidance included in Goodwill, NNN performs impairment testing on goodwill by comparing fair value to carrying amount annually.

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.

 

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Revenue Recognition – Rental revenues for non-development real estate assets are recognized when earned in accordance with the FASB guidance included in 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 – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. Effective January 1, 2009, the guidance requires classification of the Company’s unvested restricted share units which contain rights to receive nonforfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method for the years ended December 31 (dollars in thousands):

 

     2010     2009     2008  

Basic and Diluted Earnings:

      

Net earnings attributable to NNN

   $ 72,997      $ 54,810      $ 117,153   

Less: Series C preferred stock dividends

     (6,785     (6,785     (6,785
                        

Net earnings available to NNN’s common stockholders

     66,212        48,025        110,368   

Less: Earnings attributable to unvested restricted shares

     (299     (290     (485
                        

Net earnings used in basic earnings per share

     65,913        47,735        109,883   

Reallocated undistributed income (loss)

     -        (1     -   
                        

Net earnings used in diluted earnings per share

   $ 65,913      $ 47,734      $ 109,883   
                        

Basic and Diluted Weighted Average Shares Outstanding:

      

Weighted average number of shares outstanding

     83,320,921        80,486,215        74,732,844   

Less: Unvested restricted stock

     (605,276     (639,957     (483,707
                        

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

     82,715,645        79,846,258        74,249,137   

Effects of dilutive securities:

      

Common stock options

     3,814        9,037        35,900   

Directors’ deferred fee plan

     129,903        98,204        59,194   
                        

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

     82,849,362        79,953,499        74,344,231   
                        

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 FASB guidance included in Equity – Based Payments to Non-Employees, 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 the FASB guidance, NNN estimates the fair value of restricted stock and stock option grants at the date of grant and amortizes those amounts into expense on a straight line basis or amount vested, if greater, over the appropriate vesting period.

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 (the “Code”), and related regulations. NNN generally will not be subject to federal income taxes on amounts distributed to stockholders,

 

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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, 2010, 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 taxable REIT subsidiary is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of NNN which occur within its TRS entities are subject to federal and state income taxes (See Note 17). 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 the FASB guidance included in 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.

Fair Value Measurement – NNN’s estimates of fair value of financial and non-financial assets and liabilities based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:

 

   

Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.

New Accounting Pronouncements – In June 2009, FASB issued revised guidance on the accounting for variable interest entities. The revised guidance reflects the elimination of the concept of a qualifying special-purpose entity. The guidance also replaces the quantitative-based risks and rewards calculation of the previous guidance for determining which company, if any, has a controlling financial interest in a variable interest entity with an approach that is primarily qualitative. The new guidance requires ongoing assessments of whether an enterprise is the primary beneficiary of the variable interest entity as well as additional disclosures. The guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.

 

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The adoption of the standard did not have a significant impact on NNN’s financial position or results of operations.

In January 2010, the FASB issued Fair Value Measurements and Disclosures, Improving Disclosures about Fair Value Measurements. This update requires new disclosures for transfers in and out of Level 1 and 2, as well as disclosure about the valuation techniques and inputs used to measure fair value for Level 1 and 2. In addition, activity in Level 3 should present separately information about purchases, sales, issuances and settlements on a gross basis (rather than as one net number). A reporting entity should provide fair value measurements disclosures for each class of assets and liabilities. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the standard did not have a significant impact on NNN’s financial position or results of operations.

In February 2010, the FASB issued Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements. An entity that files Exchange Act reports with the Securities and Exchange Commission (“Commission”) is required to evaluate subsequent events through the date that the financial statements are issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and requirements of the Commission. The scope of the reissuance disclosure requirements is refined to include revised financial statements only. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of accounting principles generally accepted in the United States of America. All of the amendments in this are effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of the standard did not have an impact on NNN’s financial position or results of operations.

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.

Reclassification – Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2010 presentation.

Note 2 – Real Estate – Investment Portfolio:

Leases – The following outlines key information for NNN’s Investment Property leases at December 31, 2010:

 

Lease classification:

  

Operating

     1,159   

Direct financing

     16   

Building portion – direct financing / land portion – operating

     7   

Weighted average remaining lease term

     12 Years   

The 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

 

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Investment Properties are subject to leases under which NNN retains responsibility for certain costs and expenses of the property. 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, including rent increases, consistent with the initial lease term.

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):

 

     2010     2009  

Land and improvements

   $ 1,122,243      $ 1,054,889   

Buildings and improvements

     1,592,752        1,450,348   

Leasehold interests

     1,290        1,290   
                
     2,716,285        2,506,527   

Less accumulated depreciation and amortization

     (222,921     (183,948
                
     2,493,364        2,322,579   

Work in progress

     26,586        5,997   
                
   $ 2,519,950      $ 2,328,576   
                

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, 2010, 2009 and 2008, NNN recognized collectively in continuing and discontinued operations, $(93,000), $2,102,000 and $1,020,000, respectively, of such income, net of reserves. At December 31, 2010 and 2009, the balance of accrued rental income, net of allowances of $3,609,000 and $2,875,000, respectively, was $25,535,000 and $25,745,000, respectively.

As of December 31, 2010, in connection with the development of Investment Properties, NNN has the following funding commitments (dollars in thousands):

 

     # of
Properties
     Total
Commitment
(1)
     Amount
Funded
     Remaining
Commitment
 

Investment Portfolio

     28       $     68,746       $     50,196       $     18,550   
                                   

(1)     Includes land and construction costs.

         

The following is a schedule of future minimum lease payments to be received on noncancellable operating leases at December 31, 2010 (dollars in thousands):

 

2011

   $ 225,328   

2012

     222,547   

2013

     214,526   

2014

     204,970   

2015

     196,748   

Thereafter

     1,641,387   
        
   $     2,705,506   
        

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 CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales.

 

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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):

 

     2010     2009  

Minimum lease payments to be received

   $ 37,699      $ 42,244   

Estimated unguaranteed residual values

     12,297        12,297   

Less unearned income

     (20,223     (23,224
                

Net investment in direct financing leases

   $     29,773      $     31,317   
                

The following is a schedule of future minimum lease payments to be received on direct financing leases held for investment at December 31, 2010 (dollars in thousands):

 

2011

   $ 4,531   

2012

     4,558   

2013

     4,508   

2014

     3,750   

2015

     3,457   

Thereafter

     16,895   
        
   $     37,699   
        

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 – Investment Portfolio – Accounted for Using the Operating Method).

Note 3 – Real Estate – Inventory Portfolio:

As of December 31, 2010, the TRS owned 17 Inventory Properties: 10 completed inventory and seven land parcels. As of December 31, 2009, the TRS owned 19 Inventory Properties: 13 completed inventory and six land parcels. The real estate Inventory Portfolio consisted of the following at December 31 (dollars in thousands):

 

     2010     2009  

Inventory:

    

Land

   $ 19,734      $ 37,088   

Building

     18,487        47,684   
                
     38,221        84,772   

Less impairment

     (6,145     (12,349
                
   $     32,076      $     72,423   
                

 

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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):

 

     2010     2009     2008  
     # of
Properties
     Gain     # of
Properties
     Gain     # of
Properties
     Gain  

Continuing operations

     2       $ 641        2       $ 37        1       $ 21   

Noncontrolling interest

        (320        (14        (10
                                 

Total continuing operations attributable to NNN

        321           23           11   
                                 

Discontinued operations

     2         300        2         558        24         12,644   

Noncontrolling interest

        (43        -           (3,297
                                 

Total discontinued operations attributable to NNN

        257           558           9,347   
                                                   
     4       $     578        4       $     581        25       $     9,358   
                                                   

Note 4 – Impairments – Real Estate:

Management periodically assesses its real estate for possible impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset, including accrued rental income, may not be recoverable through operations. Events or circumstances that may occur include significant changes in real estate market conditions and the ability of NNN to re-lease or sell properties that are vacant or become vacant. Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. As a result of the Company’s review of long lived assets, including identifiable intangible assets, NNN recognized the following real estate impairments for the years ended December 31 (dollars in thousands):

 

     2010      2009      2008  

Continuing operations

   $ -       $ 28,884       $ 1,234   

Discontinued operations

     -         5,630         4,426   
                          
   $             -       $     34,514       $     5,660   
                          

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

Note 5 – Business Combinations:

In connection with the default of a note receivable and certain lease agreements between NNN and one of its tenants, in June 2009, NNN acquired the operations of the auto service business which was operated on 12 Investment Properties. The note foreclosure resulted in a loss of $7,816,000. NNN recorded the value of the assets received at fair value. No liabilities were assumed. The fair value of the assets resulted in goodwill of $3,400,000. In connection with the annual review of goodwill for impairment, NNN recognized a noncash impairment charge of $1,900,000 included in Impairment losses and other charges in the Consolidated Statement of Earnings during the year ended December 31, 2010.

 

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Note 6 – Mortgages, Notes and Accrued Interest Receivable:

Mortgages are secured by real estate, real estate securities or other assets. Structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate. Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):

 

     2010     2009  

Mortgages and notes receivable

   $ 29,750      $ 41,707   

Accrued interest receivables, net of reserves

     644        269   

Unamortized discount

     (63     -   
                
   $     30,331      $     41,976   
                

In connection with the evaluation of the collectibility of its mortgages and notes receivable, during the year ended December 31, 2010, NNN recorded a valuation reserve of $5,625,000.

Note 7 – 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)     Effective July 1, 2010, NNN owns 100 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 adjusted several valuation assumptions related to prepayment speeds and default curves during 2010.

The following table summarizes the recognition of unrealized gains and/or losses recorded as other comprehensive income as well as other than temporary valuation impairment as of December 31 (dollars in thousands):

 

     2010      2009      2008  

Unrealized gains

   $     1,272       $         -       $     2,009   

Unrealized losses

     -             1,640         -   

Other than temporary valuation impairment

     3,995         498         758   

 

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The following table summarizes the changes to the key assumptions used in determining the value of the Residuals as of December 31:

 

     2010      2009  

Discount rate

     25%         25%   

Average life equivalent CPR speeds range

     4.35% to 20.37% CPR         14.5% to 20.7% CPR   

Foreclosures:

     

    Frequency curve default model

     0.1% - 15.0% range         6% average rate   

    Loss severity of loans in foreclosure

     20%         20%   

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, 2010 (dollars in thousands):

 

     Residuals  

Carrying amount of retained interests

   $     15,915   

Discount rate assumption:

  

    Fair value at 27% discount rate

   $ 15,261   

    Fair value at 30% discount rate

   $ 14,357   

Prepayment speed assumption:

  

    Fair value of 1% increases above the CPR Index

   $ 15,910   

    Fair value of 2% increases above the CPR Index

   $ 15,909   

Expected credit losses:

  

    Fair value 2% adverse change

   $ 15,658   

    Fair value 3% adverse change

   $ 15,503   

Yield Assumptions:

  

    Fair value of Prime/LIBOR spread contracting 25 basis points

   $ 16,262   

    Fair value of Prime/LIBOR spread contracting 50 basis points

   $ 16,623   

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on 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 8 – Line of Credit Payable:

NNN’s $400,000,000 revolving credit facility had a weighted average outstanding balance of $17,861,000 and a weighted average interest rate of 3.8% during the year ended December 31, 2010. In November 2009, NNN entered into a credit agreement for a new $400,000,000 revolving credit facility, replacing the existing revolving credit facility (as the context requires, the previous and new revolving credit facility, the “Credit Facility”). The Credit Facility matures November 2012, with an option to extend maturity to November 2013. The Credit Facility bears interest at LIBOR plus 280 basis points with a 1.0% LIBOR floor; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN’s debt rating. The Credit Facility also includes an accordion feature for NNN to increase, at its option, the facility size up to $500,000,000. As of December 31, 2010, $161,000,000 was outstanding, and $239,000,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $647,000.

 

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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, 2010, NNN was in compliance with those covenants.

Note 9 – Mortgages Payable:

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

 

Entered

   Initial
Balance
     Interest
Rate
     Maturity (3)      Carrying
Value of
Encumbered
Asset(s) (1)
     Outstanding Principal
Balance at December
 
               31, 2010      2009  

December 2001 (2)

   $ 623         9.00%         April 2014       $ 734       $ 215       $ 267   

December 2001 (2)

     698         9.00%         April 2019         1,186         364         392   

December 2001 (2)

     485         9.00%         April 2019         1,152         187         201   

June 2002

     21,000         6.90%         July 2012         24,051         18,841         19,170   

February 2004 (2)

     6,952         6.90%         January 2017         11,522         4,038         4,554   

March 2005 (2)

     1,015         8.14%         September 2016         1,322         624         706   
                                   
            $     39,967       $     24,269       $     $25,290   
                                   

 

  (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, 2010.

  (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)

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

The following is a schedule of the annual maturities of NNN’s mortgages payable at December 31, 2010 (dollars in thousands):

 

2011

   $ 1,098   

2012

     19,290   

2013

     863   

2014

     881   

2015

     917   

Thereafter

     1,220   
        
   $ 24,269   
        

 

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Note 10 – Notes Payable – Convertible:

Each of NNN’s outstanding series of convertible notes are summarized in the table below (dollars in thousands, except conversion price):

 

Terms

   2026
Notes(1)(2)(4)
    2028
Notes(2)(5)(6)
 

Issue Date

     September 2006        March 2008   

Net Proceeds

   $ 168,650      $ 228,576   

Stated Interest Rate

     3.950%        5.125%   

Debt Issuance Costs

   $ 3,850 (3)    $ 5,457 (7) 

Earliest Conversion Date

     September 2025        June 2027   

Earliest Put Option Date

     September 2011        June 2013   

Maturity Date

     September 2026        June 2028   

Original Principal

   $ 172,500      $ 234,035   

Repurchases

     (33,800     (11,000
                

Outstanding principal balance at December 31, 2010

   $ 138,700      $ 223,035   
                

 

  (1)

NNN repurchased $8,800 and $25,000 in 2009 and 2008, respectively, for a purchase price of $6,994 and $19,188, respectively, resulting in a gain of $1,565 and $4,961, respectively.

  (2)

Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method.

  (3)

Includes $463 of note costs which were written off in connection with the repurchase of $33,800 of the 2026 Notes.

  (4)

The conversion rate per $1 principal amount was 41.9803 shares of NNN’s common stock, which is equivalent to a conversion price of $23.8207 per share of common stock.

  (5)

The conversion rate per $1 principal amount was 39.3620 shares of NNN’s common stock, which is equivalent to a conversion price of $25.4052 per share of common stock.

  (6)

NNN repurchased $11,000 in 2009 for a purchase price of $8,588 resulting in a gain of $1,867.

  (7)

Includes $219 of note costs which were written off in connection with the repurchase of $11,000 of the 2028 Notes, respectively.

  (8)

With the adoption of the new accounting guidance on convertible debt securities, the effective interest rate for the 2026 Notes and the 2028 Notes are 5.840% and 7.192%, respectively.

Each series of convertible notes represents senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of the Company. Each note is 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 and unpaid interest thereon through but not including the redemption date and (ii) the make whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.

The carrying amounts of the Company’s debt and equity balances are summarized in the table below as of December 31 (dollars in thousands):

 

     2010     2009  

Carrying value of equity component

   $ (33,873   $ (33,873

Principal amount of convertible debt

     361,735        361,735   

Remaining unamortized debt discount

     (12,201     (18,355
                

Net carrying value of convertible debt

   $     315,661      $     309,507   
                

As of December 31, 2010, the remaining amortization periods for the debt discount were approximately nine months and 18 months for the 2026 Notes and the 2028 Notes, respectively.

The adjusted effective interest rates for the liability components of the 2026 Notes and the 2028 Notes were 5.840% and 7.192%, respectively. The Company recorded noncash interest charges of $6,154,000, $5,809,000 and $5,481,000 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company recorded contractual interest expense of $16,909,000,

 

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$17,046,000 and $16,548,000 for the years ended December 31, 2010, 2009 and 2008, respectively, relating to the 2026 Notes and 2028 Notes.

The if-converted values which exceed the principal amount as of December 31, 2010, are $15,601,000 and $9,611,000 for the 2026 Notes and the 2028 Notes, respectively. As of December 31, 2009, the if-converted amount did not exceed the value of the principal amount.

Note 11 – Notes Payable:

Each of NNN’s outstanding series of 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)
    

Maturity

Date

        

2012(1)

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

2014(1)(2)(5)

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

2015(1)

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

2017(1)(6)

   September 2007      250,000         877         249,123         6.875%         6.924%       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 and unpaid interest thereon through the redemption date and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.

In connection with the debt offerings, NNN incurred debt issuance costs totaling $5,226,000 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 September 2010, NNN repaid the $20,000,000 8.5% notes payable that were due in September 2010.

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, 2010, NNN was in compliance with those covenants.

 

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Note 12 – Preferred Stock:

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 3,680,000 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 $92,000,000. 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. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed. 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 13 – Common Stock:

In October 2008, NNN filed a prospectus supplement to the prospectus contained in its February 2006 shelf registration statement and issued 3,450,000 shares (including 450,000 shares in connection with the underwriters’ over allotment) of common stock at a price of $23.05 per share and received net proceeds of $75,958,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $3,565,000, consisting primarily of underwriters’ fees and commissions, and legal and accounting fees and printing expenses.

In February 2009, NNN filed a shelf registration statement with the Commission which permits the issuance by NNN of an indeterminate amount of debt and equity securities.

Dividend Reinvestment and Stock Purchase Plan. In June 2009, NNN filed a shelf registration statement with the Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”) which permits the issuance by NNN of 16,000,000 shares of common stock. The following outlines the common stock issuances pursuant to the DRIP for the years ended December 31:

 

     2010      2009      2008  

Shares of common stock

     793,759         3,766,452         2,146,640   

Net proceeds

   $     17,623,000       $     67,354,000       $     47,372,000   

Note 14 – 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 Code. NNN matches 60 percent of the participants’ contributions 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, 2010, 2009 and 2008 totaled $297,000, $302,000 and $385,000, respectively.

 

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Note 15 – Dividends:

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

 

        2010             2009             2008      

Ordinary dividends

  $ 1.072446      $ 1.495182      $ 1.480000   

Qualified dividends

    0.081661        -        -   

Capital gain

    0.000861        0.003051        -   

Unrecaptured Section 1250 Gain

    0.000498        0.001767        -   

Nontaxable distributions

    0.354534        -        -   
                       
  $     1.510000      $     1.500000      $     1.480000   
                       

During the years ended December 31, 2010, 2009 and 2008, NNN declared and paid dividends to its common shareholders of $125,391,000, $120,256,000 and $110,107,000, respectively, or $1.51, $1.50 and $1.48 per share, respectively, of common stock.

On January 14, 2011, NNN declared a dividend of $0.38 per share, which is payable February 15, 2011 to its common stockholders of record as of January 31, 2011.

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

 

        2010             2009             2008      

Ordinary dividends

  $ 1.703170      $ 1.837828      $ 1.843750   

Qualified dividends

    0.140580        -        -   

Capital gain

    -        0.003750        -   

Unrecaptured Section 1250 Gain

    -        0.002172        -   
                       
  $ 1.843750      $ 1.843750      $ 1.843750   
                       

NNN declared and paid dividends to its Series C Preferred stockholders of $6,785,000 or $1.84375 per depository share during each of the years ended December 31, 2010, 2009 and 2008. The Series C Preferred Stock has no maturity date and will remain outstanding unless redeemed.

Note 16 – Restructuring Costs:

During the year ended December 31, 2009, NNN recorded restructuring costs of $731,000, related to the reduction of its workforce in January 2009.

Note 17 – Income Taxes:

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, 2010, 2009 and 2008, and the statutory rates relate to state taxes and nondeductible expenses.

For income tax purposes, NNN has taxable REIT subsidiaries in which certain real estate activities are conducted. In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, OAMI, pursuant to which OAMI became a wholly owned subsidiary of NNN. OAMI has remaining tax liabilities relating to the built-in gain of its assets.

In June 2009, NNN incurred a new deferred income tax item as a result of NNN acquiring the operations of 12 auto service businesses. See Note 5 – Business Combinations. The new deferred tax item is goodwill. The amount of the tax deductible goodwill is approximately $11,216,000. It is

 

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amortized for tax purposes using a straight-line method, over 15 years, beginning with the month incurred.

The components of the net income tax asset consist of the following at December 31 (dollars in thousands):

 

     2010     2009  

Temporary differences:

    

    Built-in gain

   $ (4,068   $ (4,731

    Depreciation

     (772     (385

    Cost basis

     256        1,796   

    Deferred income

     230        464   

    Other

     56        (268

    Reserves

     13,160        10,892   

    Goodwill

     3,239        2,801   

    Excess interest expense carryforward

     5,678        5,678   

    Net operating loss carryforward

     5,398        4,484   
                

Net deferred income tax asset

     23,177        20,731   

    Valuation allowance

     (18,021     (14,900
                

Total deferred income tax asset

   $ 5,156      $ 5,831   
                

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 begin to expire in 2027. Based upon the level of historical taxable income, projections for future taxable income, and tax strategies available to NNN over the periods in which the deferred tax assets are deductible, management believes, with the exception of certain impairments and losses, it is more likely than not that NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2010. NNN believes it is more likely than not that the benefit from certain impairment charges and losses will not be realized. In recognition of this risk, NNN has provided a valuation allowance of $18,021,000 on the deferred tax assets relating to the impairments and losses. The income tax benefit consists of the following components for the years ended December 31 (as adjusted) (dollars in thousands):

 

     2010     2009     2008  

Net earnings before income taxes

   $     74,097      $     53,930      $     113,859   

Provision for income tax benefit (expense):

      

Current:

      

Federal

     (254     (419     (1,936

State and local

     (48     (79     (364

Deferred:

      

Federal

     (744     1,110        4,539   

State and local

     (54     268        1,055   
                        

Total benefit (expense) for income taxes

     (1,100     880        3,294   
                        

Net earnings attributable to NNN’s stockholders

   $ 72,997      $ 54,810      $ 117,153   
                        

In June 2006, the FASB issued additional guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements included in 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

 

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return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

NNN, in accordance with FASB guidance included in Income Taxes, 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 the FASB guidance. In addition, NNN did not record a cumulative effect adjustment related to the adoption of the FASB guidance.

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 2007 through 2010. NNN also files in many states with varying open years under statute.

Note 18 – Earnings from Discontinued Operations:

Real Estate – Investment Portfolio – NNN classified the revenues and expenses related to (i) all Investment Properties that were sold and leasehold interests which expired, and (ii) all Investment Properties that were held for sale as of December 31, 2010, 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):

 

     2010     2009     2008  

Revenues:

      

Rental income from operating leases

   $     1,181      $     4,786      $     5,655   

Earned income from direct financing leases

     -        -        100   

Percentage rent

     -        -        25   

Real estate expense reimbursement from tenants

     48        208        208   

Interest and other income from real estate transactions

     21        118        429   

Interest and other income from non-real estate transactions

     -        5        2   
                        
     1,250        5,117        6,419   
                        

Operating expenses:

      

General and administrative

     16        7        (71

Real estate

     309        784        374   

Depreciation and amortization

     186        1,438        1,454   

Impairment losses and other charges

     -        3,536        1,730   
                        
     511        5,765        3,487   
                        

Earnings (loss) before gain on disposition of real estate and income tax benefit (expense)

     739        (648     2,932   

Gain on disposition of real estate

     1,134        2,392        9,980   

Income tax benefit (expense)

     (14     32        2   
                        

Earnings from discontinued operations attributable to NNN

   $ 1,859      $ 1,776      $ 12,914   
                        

 

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Real Estate – Inventory Portfolio – NNN has classified as discontinued operations the revenues and expenses related to (i) Inventory Properties which generated rental revenues prior to disposition, and (ii) Inventory Properties which generated rental revenues and were held for sale as of December 31, 2010. 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):

 

     2010     2009     2008  

Revenues:

      

Rental income from operating leases

   $ 3,369      $ 4,975      $ 8,646   

Percentage rent

     -        -        139   

Real estate expense reimbursement from tenants

     1,358        1,513        867   

Interest and other from real estate transactions

     513        141        561   
                        
     5,240        6,629        10,213   
                        

Disposition of real estate:

      

Gross proceeds

     37,470        5,402        151,713   

Costs

     (37,170     (4,844)            (139,069)   
                        

Gain

     300        558        12,644   
                        

Operating expenses:

      

General and administrative

     71        116        22   

Real estate

     1,755        2,169        1,468   

Depreciation and amortization

     159        323        226   

Impairment losses and other charges

     -        2,094        2,696   
                        
     1,985        4,702        4,412   
                        

Other expenses (revenues):

      

Interest and other income

     (3     -        (8

Interest expense

     2,655        3,790        5,291   
                        
     2,652        3,790        5,283   
                        

Earnings (loss) before income tax expense

     903        (1,305     13,162   

Income tax expense

     (611     (201     (3,963
                        

Earnings (loss) from discontinued operations including noncontrolling interests

     292        (1,506     9,199   

Loss (earnings) attributable to noncontrolling interests

     11        (166     (2,722
                        

Earnings (loss) from discontinued operations attributable to NNN

   $ 303      $ (1,672   $ 6,477   
                        

Note 19 – Derivatives:

In accordance with the guidance on derivatives and hedging, NNN records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

NNN’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, NNN primarily uses treasury locks, forward swaps (“forward hedges”) and interest rate swaps as part of its cash flow hedging strategy. Treasury locks and forward starting swaps are used to hedge forecasted debt issuances. Treasury locks designated as cash flow hedges lock in the yield/price of a treasury security. Forward swaps also lock the associated swap spread. Interest rate swaps

 

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designated as cash flow hedges hedging the variable cash flows associated with floating rate debt 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.

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 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.

In February 2008, NNN terminated its interest rate hedge with a notional amount of $100,000,000 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 hedge when terminated was a liability of $804,000, which NNN recorded as a loss on interest rate hedge.

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.

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, 2010, $715,000 remains in other comprehensive income related to the effective portion of NNN’s previous interest rate hedges. During the year ended December 31, 2010, 2009 and 2008, NNN reclassed $165,000, $159,000 and $162,000, respectively, out of other comprehensive income as a reduction to interest expense. Over the next 12 months, NNN estimates that an additional $172,000 will be reclassified as a reduction in 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.

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, 2010.

 

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Note 20 – Performance Incentive Plan:

In June 2007, NNN filed a registration statement on Form S-8 with the 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 replaced 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  
     2010     2009     2008  

Outstanding, January 1

     12,154        77,004        118,804   

Options granted

     -        -        -   

Options exercised

     (4,654     (51,500     (28,000

Options surrendered

     -        (13,350     (13,800
                        

Outstanding, December 31

     7,500        12,154        77,004   
                        

Exercisable, December 31

     7,500        12,154        77,004   
                        

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

 

     2010      2009      2008  

Outstanding, January 1

   $     13.72       $     14.00       $     13.64   

Granted during the year

     -         -         -   

Exercised during the year

     13.08         13.72         11.17   

Outstanding, December 31

     14.11         13.72         14.00   

Exercisable, December 31

     14.11         13.72         14.00   

The following summarizes the outstanding options and the exercisable options at December 31, 2010:

 

    Total  

Outstanding options:

 

Number of shares

    7,500   

Weighted-average exercise price

  $ 14.11   

Weighted-average remaining contractual life in years

    1.8   

Exercisable options:

 

Number of shares

    7,500   

Weighted-average exercise price

  $         14.11   

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, 2010, the intrinsic value of options outstanding was $93,000. All options outstanding at December 31, 2010, were exercisable. During the years ended December 31, 2010, 2009 and 2008, NNN received proceeds totaling $61,000, $707,000 and $313,000, 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 years ended December 31, 2010, 2009 and 2008, was $43,000, $240,000 and $327,000, respectively.

 

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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, 2010, of such grants.

 

     Number
of
Shares
    Weighted
Average
Share Price
 

Non-vested restricted shares, January 1

     668,010      $         16.95   

Restricted shares granted

     392,474        21.38   

Restricted shares vested

     (142,637     19.80   

Restricted shares forfeited

     (15,310     11.23   
          

Non-vested restricted shares, December 31

     902,537      $ 18.52   
          

During the year ended December 31, 2010 and 2008, a total of 15,310 and 2,520, respectively, of restricted shares were forfeited. No shares were forfeited in 2009.

Compensation expense for the restricted stock which is not contingent upon NNN’s 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.

During the year ended December 31, 2008, NNN granted 81,330 performance based shares with a weighted average grant price of $8.00 to certain executive officers of NNN. The compensation expense for the grant is based upon fair market value of the grant calculated by a third party using a lattice model with the following assumptions: (i) risk free rate of 3.48%, (ii) a dividend rate of 6.50%, (iii) a term of five years, and (iv) a volatility of 19.89%. Volatility is based upon the historical volatility of NNN’s stock and other factors. The vesting of these shares is contingent upon the achievement of certain performance goals by January 1, 2013.

During the year ended December 31, 2010, NNN granted 91,000 performance based shares subject to its earnings based growth after a three year period relative to its peers. The shares were granted to certain executive officers and had weighted average grant price of $23.12 per share. Once the performance criteria are met and the actual number of shares earned is determined, the shares vest immediately. NNN considers the likelihood of meeting the performance criteria based upon management’s estimates and analysis of future earnings based growth relative to its peers from which it determines the amounts to be recognized. Compensation expense is recognized over the requisite service period.

The following summarizes other grants made during the year ended December 31, 2010, pursuant to the 2007 Plan.

 

    Shares      Weighted
Average
  Share Price  
 

Other share grants under the 2007 Plan:

    

Directors’ fees

    10,092       $           23.38   

Deferred Directors’ fees

    25,066         23.54   
          
    35,158       $ 23.50   
          

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

    4,860,190      
          

 

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The total compensation cost for share-based payments for the years ended December 31, 2010, 2009 and 2008, totaled $5,310,000, $4,172,000 and $3,341,000, respectively, of such compensation expense. At December 31, 2010, NNN had $9,366,000 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 2.5 years.

Note 21 – 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, mortgages, notes and other receivables, mortgages payable and other liabilities at December 31, 2010 and 2009, approximate fair value based upon current market prices of similar issues. At December 31, 2010 and 2009, the carrying value and fair value of NNN’s notes payable and convertible notes payable, collectively, was $1,044,621,000 and $987,275,000, respectively, based upon the quoted market price.

Note 22 – Quarterly Financial Data (unaudited):

The following table outlines NNN’s quarterly financial data (dollars in thousands, except per share data):

 

2010

  First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Revenues as originally reported

  $     56,626      $     56,496      $     56,656      $     59,440   

Reclassified to discontinued operations

    (101     (54     (7     -   
                               

Adjusted revenue

  $ 56,525      $ 56,442      $ 56,649      $ 59,440   
                               

Net earnings attributable to NNN’s stockholders

  $ 16,365      $ 21,207      $ 21,210      $ 14,215   
                               

Net earnings per share (1):

       

Basic

  $ 0.18      $ 0.23      $ 0.23      $ 0.15   

Diluted

    0.18        0.23        0.23        0.15   

2009

                       

Revenues as originally reported

  $ 57,963      $ 58,681      $ 57,035      $ 57,750   

Reclassified to discontinued operations

    114        (546     59        (242
                               

Adjusted revenue

  $ 58,077      $ 58,135      $ 57,094      $ 57,508   
                               

Net earnings (loss) attributable to NNN’s stockholders

  $ 26,804      $ 18,090      $ 22,443      $ (12,527
                               

Net earnings (loss) per share (1):

       

Basic

  $ 0.32      $ 0.21      $ 0.26      $ (0.18

Diluted

    0.32        0.20        0.26        (0.17

(1)     Calculated independently for each period and consequently, the sum of the quarters may differ from the annual amount.

         

 

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Note 23 – 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, 2010, 2009 and 2008 (as adjusted) (dollars in thousands):

 

2010

       Investment    
Assets
        Inventory    
Assets
        Eliminations    
(Intercompany)
        Consolidated    
Totals
 

External revenues

   $ 223,870      $ (40   $ -      $ 223,830   

Intersegment revenues

     671        534        (1,205     -   

Interest revenue

     3,231        48        -        3,279   

Interest revenue on Residuals

     3,460        -        -        3,460   

Gain on the disposition of real estate, Inventory Portfolio

     -        426        215        641   

Retail operations, net

     1,311        -        -        1,311   

Interest expense

     67,834        (1,450     (1,205     65,179   

Depreciation and amortization

     48,320        8        -        48,328   

Operating expenses

     31,983        4,329        -        36,312   

Impairment losses and other charges

     7,458        260        (260     7,458   

Impairment – commercial mortgage residual interests valuation adjustment

     3,995        -        -        3,995   

Equity in earnings of unconsolidated affiliate

     (372     -        800        428   

Income tax benefit (expense)

     (1,434     959        -        (475
                                

Earnings (loss) from continuing operations

     71,147        (1,220     1,275        71,202   

Earnings from discontinued operations, net of income tax expense

     1,859        292        -        2,151   
                                

Earnings (loss) including noncontrolling interests

     73,006        (928     1,275        73,353   

Earnings attributable to noncontrolling interests from continuing operations

     (9     (358     -        (367

Earnings attributable to noncontrolling interests from discontinued operations

     -        11        -        11   
                                

Net earnings (loss) attributable to NNN

   $ 72,997      $ (1,275   $ 1,275      $ 72,997   
                                

Assets

   $         2,846,036      $         38,997      $             (171,458   $           2,713,575   
                                

Additions to long-lived assets:

        

Real estate

   $ 230,928      $ 478      $ -      $ 231,406   
                                

 

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2009

       Investment    
Assets
        Inventory    
Assets
        Eliminations    
(Intercompany)
        Consolidated    
Totals
 

External revenues

   $ 223,262      $ 194      $ -      $ 223,456   

Intersegment revenues

     3,035        1,042        (4,077     -   

Interest revenue

     4,447        30        -        4,477   

Interest revenue Residuals

     4,252        -        -        4,252   

Gain on the disposition of real estate, Inventory Portfolio

     -        5        32        37   

Retail operations, net

     419        -        -        419   

Interest expense

     66,018        188        (4,055     62,151   

Depreciation and amortization

     46,529        10        -        46,539   

Operating expenses

     30,335        5,080        -        35,415   

Impairment losses and other charges

     29,367        6,713        -        36,080   

Impairments – commercial mortgage residual interests valuation adjustment

     498        -        -        498   

Restructuring costs

     731        -        -        731   

Equity in earnings of
unconsolidated affiliates

     (12,280     -        12,701        421   

Gain on extinguishment of debt

     3,432        -        -        3,432   

Income tax benefit

     462        587        -        1,049   
                                

Earnings (loss) from continuing operations

     53,551        (10,133     12,711        56,129   

Earnings (loss) from discontinued operations, net of income tax expense

     1,776        (1,506     -        270   
                                

Earnings (loss) including noncontrolling interests

     55,327        (11,639     12,711        56,399   

Loss (earnings) attributable to noncontrolling interests from continuing operations

     (517     (906     -        (1,423

Earnings attributable to noncontrolling interests from discontinued operations

     -        (166     -        (166
                                

Net earnings (loss) attributable to NNN

   $ 54,810      $ (12,711   $ 12,711      $ 54,810   
                                

Assets

   $         2,588,408      $         237,715      $             (235,161   $           2,590,962   
                                

Additions to long-lived assets:

        

Real estate

   $ 44,433      $ 2,457      $ -      $ 46,890   
                                

 

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2008

       Investment    
Assets
        Inventory    
Assets
        Eliminations    
(Intercompany)
        Consolidated    
Totals
 

External revenues

   $ 217,682      $ 204      $ -      $ 217,886   

Intersegment revenues

     12,727        606        (13,333     -   

Interest revenue

     8,190        -        -        8,190   

Interest revenue on Residuals

     4,636        -        -        4,636   

Gain on the disposition of real estate, Inventory Portfolio

     -        (308     329        21   

Interest expense

     69,763        7,442        (13,241     63,964   

Depreciation and amortization

     43,626        42        -        43,668   

Operating expenses

     25,489        9,538        -        35,027   

Impairment losses and other charges

     1,234        -        -        1,234   

Impairments – commercial mortgage residual interests valuation adjustment

     758        -        -        758   

Equity in earnings of unconsolidated affiliates

     (2,785     -        3,149        364   

Loss on derivative instrument

     (804     -        -        (804

Gain on extinguishment of debt

     4,961        -        -        4,961   

Income tax benefit

     1,329        5,926        -        7,255   
                                

Earnings (loss) from continuing operations

     105,066        (10,594     3,386        97,858   

Earnings from discontinued operations, net of income tax expense

     12,914        9,199        -        22,113   
                                

Earnings including noncontrolling interests

     117,980        (1,395     3,386        119,971   

Loss (earnings) attributable to noncontrolling interests from continuing operations

     (827     731        -        (96

Earnings attributable to noncontrolling interests from discontinued operations

     -        (2,722     -        (2,722
                                

Net earnings (loss) attributable to NNN

   $ 117,153      $ (3,386   $ 3,386      $ 117,153   
                                

Assets

   $         2,650,040      $         128,916      $             (129,485   $           2,649,471   
                                

Additions to long-lived assets:

        

Real estate

   $ 352,618      $ 33,745      $ -      $ 386,363   
                                

 

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Note 24 – Fair Value Measurements:

NNN currently values its Residuals based upon an independent valuation which provides a discounted cash flow analysis based upon prepayment speeds, expected loan losses and yield curves. These valuation inputs are generally considered unobservable; therefore, the Residuals are considered Level 3 financial assets. The table below presents a reconciliation of the Residuals during the year ended December 31, 2010 (dollars in thousands):

 

Balance at beginning of period

   $ 20,153   

Total gains (losses) – realized/unrealized:

  

Included in earnings

     (3,995

Included in other comprehensive income

     1,272   

Interest income on Residuals

     3,460   

Cash received from Residuals

     (4,975

Purchases, sales, issuances and settlements, net

     -   

Transfers in and/or out of Level 3

     -   
        

Balance at end of period

   $     15,915   
        

Changes in gains (losses) included in earnings attributable to a change in unrealized gains (losses) relating to assets still held at the end of period

   $ (133
        

Note 25 – Major Tenants:

As of December 31, 2010, NNN did not have any tenant that accounted for ten percent or more of its rental and earned income.

Note 26 – Commitments and Contingencies:

As of December 31, 2010, NNN had letters of credit totaling $647,000 outstanding under its Credit Facility.

In the ordinary course of its business, NNN is a party to various other legal actions which management believes are 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.

Note 27 – Subsequent Events:

NNN reviewed all subsequent events and transactions that have occurred after December 31, 2010, the date of the consolidated balance sheet. There were no subsequent events or transactions.

 

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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, 2010, 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 Securities and Exchange Commission (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 stockholders 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, 2010, 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, 2010, NNN’s internal control over financial reporting was effective.

Attestation Report of the Registered Public Accounting Firm.

Ernst & Young LLP, NNN’s independent registered public accounting firm, audited the financial statements included in this Annual Report on Form 10-K and has issued an attestation report on NNN’s 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, 2010, 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.

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

 

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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 Relationships and Related 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 “Proposal II: Proposal to Ratify Independent Registered Public Accounting Firm,” and the information in such sections are 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)    FinancialStatements       
   Reports of Independent Registered Public Accounting Firm      44   
   Consolidated Balance Sheets as of December 31, 2010 and 2009      46   
   Consolidated Statements of Earnings for the years ended December 31, 2010, 2009 and 2008      47   
   Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008      49   
   Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008      52   
   Notes to Consolidated Financial Statements      54   
(2)   

FinancialStatement Schedules

  
   Schedule III – Real Estate and Accumulated Depreciation and Amortization and Notes as of December 31, 2010   
   Schedule IV – Mortgage Loans on Real Estate and Notes as of December 31, 2010   

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 Bylaws
  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 and filed with the Securities and Exchange Commission on 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 Registration Statement on Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

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  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 and filed with the Securities and Exchange Commission on May 1, 2006, and incorporated herein by reference; second amendment filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2007, 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 filed with the Securities and Exchange Commission 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 Registration Statement on 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. 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 and filed with the Securities and Exchange Commission on September 20, 2000, and incorporated herein by reference).

 

  4.4 Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 20, 2000, and incorporated herein by reference).

 

  4.5 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 and filed with the Securities and Exchange Commission on June 4, 2002, and incorporated herein by reference).

 

  4.6 Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on June 4, 2002, and incorporated herein by reference).

 

  4.7 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 filed with the Securities and Exchange Commission on June 18, 2004, and incorporated herein by reference).

 

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  4.8 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 filed with the Securities and Exchange Commission on June 18, 2004, and incorporated herein by reference).

 

  4.9 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 filed with the Securities and Exchange Commission on November 17, 2005, and incorporated herein by reference).

 

  4.10 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 filed with the Securities and Exchange Commission on November 17, 2005, and incorporated herein by reference).

 

  4.11 Seventh Supplemental Indenture, dated as of September 13, 2006, between National Retail Properties, Inc. and U.S. Bank National Association relating to 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006 and filed with the Securities and Exchange Commission on September 13, 2006, and incorporated herein by reference).

 

  4.12 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 filed with the Securities and Exchange Commission on September 13, 2006, and incorporated herein by reference).

 

  4.13 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 Registration Statement on Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

  4.14 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 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference).

 

  4.15 Form of Supplemental Indenture No. 8 between National Retail Properties, Inc. and U.S. Bank National Association relating to 6.875% Notes due 2017 (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 4, 2007, and incorporated herein by reference).

 

  4.16 Form of 6.875% Notes due 2017 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 4, 2007, and incorporated herein by reference).

 

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  4.17 Form of Ninth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.1 to Registrants’ Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference).

 

  4.18 Form of 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference).

 

  10. Material Contracts

 

  10.1 2007 Performance Incentive Plan (filed as Annex A to the Registrant’s 2007 Annual Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 3, 2007, 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).

 

  10.3 Employment Agreement dated as of December 1, 2008, between the Registrant and Craig Macnab (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.4 Employment Agreement dated as of December 1, 2008, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.5 Employment Agreement dated as of December 1, 2008, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.6 Employment Agreement dated as of December 1, 2008, between the Registrant and Paul E. Bayer (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.7 Employment Agreement dated as of December 1, 2008, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

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  10.8 Form of Indemnification Agreement (as entered into between the Registrant and each of its directors and executive officers) (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on June 12, 2009, and incorporated herein by reference).

 

  10.9 Credit Agreement, dated as of November 3, 2009, by and among the Registrant, certain lenders and Wells Fargo Bank, National Association, as the Administrative Agent (filed as Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2010, and incorporated herein by reference).

 

  10.10 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Craig Macnab (filed herewith).

 

  10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Julian E. Whitehurst (filed herewith).

 

  10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Kevin B. Habicht (filed herewith).

 

  10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Paul E. Bayer (filed herewith).

 

  10.14 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and 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 24, 2011 (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).

 

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  32. Section 906 Certifications

 

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

 

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

 

  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).

 

  101. Interactive Data File

 

  101.1 The following materials from National Retail Properties, Inc. Annual Report on Form 10-K for the period ended December 31, 2010, formatted in Extensible Business Reporting Language: (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed consolidated statements of cash flows, and (iv) notes to condensed consolidated financial statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 (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 24th day of February, 2011.

 

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.

 

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POWER OF ATTORNEY

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 (Principal Executive Officer)
  February 24, 2011

/s/ Ted B. Lanier

Ted B. Lanier

   Lead Director   February 24, 2011

/s/ Don DeFosset

Don DeFosset

   Director   February 24, 2011

/s/ David M. Fick

David M. Fick

   Director   February 24, 2011

/s/ Dennis E. Gershenson

Dennis E. Gershenson

   Director   February 24, 2011

/s/ Richard B. Jennings

Richard B. Jennings

   Director   February 24, 2011

/s/ Robert C. Legler

Robert C. Legler

   Director   February 24, 2011

/s/ Robert Martinez

Robert Martinez

   Director   February 24, 2011

/s/ Kevin B. Habicht

Kevin B. Habicht

   Director, Chief Financial Officer
(Principal Financial and Accounting Officer),
Executive Vice President, Assistant Secretary and Treasurer
  February 24, 2011

 

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Exhibit Index

 

3. Articles of Incorporation and Bylaws

 

  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 and filed with the Securities and Exchange Commission on 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 Registration Statement on 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 and filed with the Securities and Exchange Commission on May 1, 2006, and incorporated herein by reference; second amendment filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2007, 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 filed with the Securities and Exchange Commission 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 Registration Statement on 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. 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 and filed with the Securities and Exchange Commission on September 20, 2000, and incorporated herein by reference).

 

  4.4 Form of 8.5% Notes due 2010 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 20, 2000, and incorporated herein by reference).

 

  4.5

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 and filed with the

 

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Securities and Exchange Commission on June 4, 2002, and incorporated herein by reference).

 

  4.6 Form of 7.75% Notes due 2012 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on June 4, 2002, and incorporated herein by reference).

 

  4.7 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 filed with the Securities and Exchange Commission on June 18, 2004, and incorporated herein by reference).

 

  4.8 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 filed with the Securities and Exchange Commission on June 18, 2004, and incorporated herein by reference).

 

  4.9 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 filed with the Securities and Exchange Commission on November 17, 2005, and incorporated herein by reference).

 

  4.10 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 filed with the Securities and Exchange Commission on November 17, 2005, and incorporated herein by reference).

 

  4.11 Seventh Supplemental Indenture, dated as of September 13, 2006, between National Retail Properties, Inc. and U.S. Bank National Association relating to 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 7, 2006 and filed with the Securities and Exchange Commission on September 13, 2006, and incorporated herein by reference).

 

  4.12 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 filed with the Securities and Exchange Commission on September 13, 2006, and incorporated herein by reference).

 

  4.13 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 Registration Statement on Form 8-A dated October 11, 2006 and filed with the Securities and Exchange Commission on October 12, 2006, and incorporated herein by reference).

 

  4.14

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 Quarterly Report on Form 10-Q filed

 

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with the Securities and Exchange Commission on November 6, 2006, and incorporated herein by reference).

 

  4.15 Form of Supplemental Indenture No. 8 between National Retail Properties, Inc. and U.S. Bank National Association relating to 6.875% Notes due 2017 (filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 4, 2007, and incorporated herein by reference).

 

  4.16 Form of 6.875% Notes due 2017 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on September 4, 2007, and incorporated herein by reference).

 

  4.17 Form of Ninth Supplemental Indenture between National Retail Properties, Inc. and U.S. Bank National Association relating to 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.1 to Registrants’ Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference).

 

  4.18 Form of 5.125% Convertible Senior Notes due 2028 (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated February 27, 2008 and filed with the Securities and Exchange Commission on March 4, 2008, and incorporated herein by reference).

 

10. Material Contracts

 

  10.1 2007 Performance Incentive Plan (filed as Annex A to the Registrant’s 2007 Annual Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 3, 2007, 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005, and incorporated herein by reference).

 

  10.3 Employment Agreement dated as of December 1, 2008, between the Registrant and Craig Macnab (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.4 Employment Agreement dated as of December 1, 2008, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.5 Employment Agreement dated as of December 1, 2008, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

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  10.6 Employment Agreement dated as of December 1, 2008, between the Registrant and Paul E. Bayer (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.7 Employment Agreement dated as of December 1, 2008, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2008, and incorporated herein by reference).

 

  10.8 Form of Indemnification Agreement (as entered into between the Registrant and each of its directors and executive officers) (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on June 12, 2009, and incorporated herein by reference).

 

  10.9 Credit Agreement, dated as of November 3, 2009, by and among the Registrant, certain lenders and Wells Fargo Bank, National Association, as the Administrative Agent (filed as Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2010, and incorporated herein by reference).

 

  10.10 Amendment to Employment Agreement, dated as of November 8, 2010, between the Registrant and Craig Macnab (filed herewith).

 

  10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Julian E. Whitehurst (filed herewith).

 

  10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Kevin B. Habicht (filed herewith).

 

  10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Paul E. Bayer (filed herewith).

 

  10.14 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and 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 24, 2011 (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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  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).

 

101. Interactive Data File

 

  101.1 The following materials from National Retail Properties, Inc. Annual Report on Form 10-K for the period ended December 31, 2010, formatted in Extensible Business Reporting Language: (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of earnings, (iii) condensed consolidated statements of cash flows, and (iv) notes to condensed consolidated financial statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 (filed herewith).

 

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NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2010

(Dollars in thousands)

 

                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Real Estate Held for Investment the Company has Invested in Under Operating Leases:

      

                     

7-Eleven:

                       

Land O’ Lakes, FL

    —          1,077        817        —          —          1,077        817        1,894        244        1999        10/98  (g)      40 years   

Tampa, FL

    —          1,081        917        —          —          1,070        917        1,987        270        1999        12/98  (g)      40 years   

A.C. Moore Arts & Crafts, Inc.:

                       

Dover, NJ

    —          1,138        3,238        —          —          1,138        3,238        4,376        982        1995        11/98        40 years   

Academy:

                       

Beaumont, TX

    —          1,424        2,449        —          —          1,424        2,449        3,873        722        1992        03/99        40 years   

Houston, TX

    —          2,311        1,628        —          —          2,311        1,628        3,939        480        1976        03/99        40 years   

Pasadena, TX

    —          900        2,181        —          —          900        2,181        3,081        643        1994        03/99        40 years   

Franklin, TN

    —          1,807        2,108        —          —          1,807        2,108        3,915        389        1999        06/05        30 years   

Ace Hardware and Lighting:

                       

Bourbonnais, IL

    —          298        1,329        —          —          298        1,329        1,627        335        1997        11/98        37 years   

Advance Auto Parts:

                       

Miami, FL

    —          867        —          1,035        —          867        1,035        1,902        143        2005        12/04  (g)      40 years   

All Star Sports:

                       

Wichita, KS

    —          3,275        1,631        —          —          3,275        1,631        4,906        148        1988        05/07        40 years   

Wichita, KS

    —          1,551        965        —          —          1,551        965        2,516        87        1987        05/07        40 years   

Amazing Jake’s:

                       

Plano, TX

    —          5,705        17,049        —          —          5,705        17,049        22,754        1,198        1982        07/08        35 years   

AMC Theatre:

                       

Bloomington, IN

    —          2,338        4,000        —          —          2,338        4,000        6,338        527        1987        09/07        25 years   

Brighton, CO

    —          1,070        5,491        —          —          1,070        5,491        6,561        452        2005        09/07        40 years   

Castle Rock, CO

    —          2,905        5,002        —          —          2,905        5,002        7,907        412        2005        09/07        40 years   

Evansville, IN

    —          1,300        4,269        —          —          1,300        4,269        5,569        401        1999        09/07        35 years   

Galesburg, IL

    —          1,205        2,441        —          —          1,205        2,441        3,646        201        2003        09/07        40 years   

Machesney Park, IL

    —          3,018        8,770        —          —          3,018        8,770        11,788        722        2005        09/07        40 years   

Michigan City, IN

    —          1,996        8,422        —          —          1,996        8,422        10,418        693        2005        09/07        40 years   

Muncie, IN

    —          1,243        5,512        —          —          1,243        5,512        6,755        454        2005        09/07        40 years   

Naperville, IL

    —          6,141        11,624        —          —          6,141        11,624        17,765        957        2006        09/07        40 years   

New Lenox, IL

    —          6,778        10,980        —          —          6,778        10,980        17,758        904        2004        09/07        40 years   

Chicago, IL

    —          7,257        10,955        —          —          7,257        10,955        18,212        810        2007        01/08        40 years   

Johnson Creek, WI

    —          1,433        3,932        —          —          1,433        3,932        5,365        332        1997        01/08        35 years   

Lake Delton, WI

    —          2,063        8,366        —          —          2,063        8,366        10,429        707        1999        01/08        35 years   

Quincy, IL

    —          1,297        2,850        —          —          1,297        2,850        4,147        241        1982        01/08        35 years   

Schererville, IN

    —          6,619        14,225        —          —          6,619        14,225        20,844        1,403        1996        01/08        30 years   

American Payday Loans:

                       

Des Moines, IA

    —          108        379        —          —          108        379        487        53        1979        06/05        40 years   

AmerUs Group Warehouse:

                       

Des Moines, IA

    —          28        85        —          —          28        85        113        47        1949        06/05        10 years   

Amoco:

                       

Miami, FL

    —          969        —          —          —          969        (i     969        (i     (i     05/03        (i

Sunrise, FL

    —          949        —          —          —          949        (i     949        (i     (i     06/03        (i

Amscot:

                       

Tampa, FL

    —          1,160        352        —          —          1,160        352        1,512        46        1981        10/05        40 years   

Orlando, FL

    —          764        —          866        —          764        866        1,630        100        2006        12/05        40 years   

Orlando, FL

    —          664        1,011        —          —          664        1,011        1,675        106        2006        12/05        40 years   

Orlando, FL

    —          358        —          922        —          358        922        1,280        103        2006        02/06  (g)      40 years   

Orlando, FL

    —          546        —          938        —          546        938        1,484        103        2006        02/06  (g)      40 years   

Clearwater, FL

    —          456        332        —          —          456        332        788        36        1967        09/06  (g)      40 years   

See accompanying report of independent registered public accounting firm.

 

F - 1


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at  Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Anna’s Linens:

                       

Harlingen, TX

    —          317        756        —          —          317        756        1,073        212        1999        11/98  (f)      40 years   

Applebee’s:

                       

Ballwin, MO

    —          1,496        1,404        —          —          1,496        1,404        2,900        317        1995        12/01        40 years   

Cincinnati, OH

    —          312        898        —          —          312        898        1,210        11        2002        08/10        30 years   

Crestview Hills, KY

    —          1,069        1,367        —          —          1,069        1,367        2,436        21        1993        08/10        25 years   

Danville, KY

    —          641        1,645        —          —          641        1,645        2,286        21        2003        08/10        30 years   

Florence, KY

    —          1,075        1,488        —          —          1,075        1,488        2,563        22        1988        08/10        25 years   

Frankfort, KY

    —          862        1,610        —          —          862        1,610        2,472        20        1993        08/10        30 years   

Georgetown, KY

    —          809        1,437        —          —          809        1,437        2,246        18        2001        08/10        30 years   

Hilliard, OH

    —          808        1,846        —          —          808        1,846        2,654        23        1998        08/10        30 years   

Mason, OH

    —          545        941        —          —          545        941        1,486        12        1997        08/10        30 years   

Maysville, KY

    —          513        1,387        —          —          513        1,387        1,900        15        2005        08/10        35 years   

Nicholasville, KY

    —          454        1,077        —          —          454        1,077        1,531        13        2000        08/10        30 years   

Troy, OH

    —          645        862        —          —          645        862        1,507        13        1996        08/10        25 years   

Grove City, OH

    —          511        1,415        —          —          511        1,415        1,926        10        1990        10/10        30 years   

Kettering, OH

    —          359        1,043        —          —          359        1,043        1,402        6        2005        10/10        35 years   

Mesa, AZ

    —          748        1,734        —          —          748        1,734        2,482        12        1998        10/10        30 years   

Mesa, AZ

    —          974        1,514        —          —          974        1,514        2,488        11        1992        10/10        30 years   

Mt. Sterling, KY

    —          510        1,392        —          —          510        1,392        1,902        8        2000        10/10        35 years   

Phoenix, AZ

    —          458        1,099        —          —          458        1,099        1,557        7        2004        10/10        35 years   

Phoenix, AZ

    —          781        1,456        —          —          781        1,456        2,237        10        1995        10/10        30 years   

Arby’s:

                       

Colorado Springs, CO

    —          206        534        —          —          206        534        740        121        1998        12/01        40 years   

Thomson, GA

    —          268        504        —          —          268        504        772        114        1997        12/01        40 years   

Washington Courthouse, OH

    —          157        546        —          —          157        546        703        123        1998        12/01        40 years   

Whitmore Lake, MI

    —          171        469        —          —          171        469        640        106        1993        12/01        40 years   

Arizona Oil:

                       

Casa Grande, AZ

    —          2,340        1,894        —          —          2,340        1,894        4,234        142        1993        05/08        35 years   

Gilbert, AZ

    —          1,317        1,304        —          —          1,317        1,304        2,621        98        1996        05/08        35 years   

Glendale, AZ

    —          1,817        2,415        —          —          1,817        2,415        4,232        158        2001        05/08        40 years   

Mesa, AZ

    —          2,219        2,140        —          —          2,219        2,140        4,359        140        2000        05/08        40 years   

Mesa, AZ

    —          1,332        1,367        —          —          1,332        1,367        2,699        120        1986        05/08        30 years   

Miami, AZ

    —          762        2,148        —          —          762        2,148        2,910        161        1998        05/08        35 years   

Peoria, AZ

    —          860        1,117        —          —          860        1,117        1,977        98        1987        05/08        30 years   

Prescott, AZ

    —          1,266        1,261        —          —          1,266        1,261        2,527        95        1997        05/08        35 years   

Scottsdale, AZ

    —          1,529        1,373        —          —          1,529        1,373        2,902        103        1999        05/08        35 years   

Sedona, AZ

    —          1,281        1,324        —          —          1,281        1,324        2,605        87        2000        05/08        40 years   

Tucson, AZ

    —          1,105        1,336        —          —          1,105        1,336        2,441        100        1992        05/08        35 years   

Tucson, AZ

    —          1,457        1,619        —          —          1,457        1,619        3,076        121        1995        05/08        35 years   

Tucson, AZ

    —          1,223        1,911        —          —          1,223        1,911        3,134        143        1996        05/08        35 years   

Tucson, AZ

    —          1,083        1,599        —          —          1,083        1,599        2,682        120        1992        05/08        35 years   

Ashley Furniture:

                       

Altamonte Springs, FL

    —          2,906        4,877        315        —          2,906        5,192        8,098        1,695        1997        09/97        40 years   

Louisville, KY

    —          1,667        4,989        —          —          1,667        4,989        6,656        722        2005        03/05        40 years   

AT&T:

                       

Cincinnati, OH

    —          297        443        331        —          297        774        1,071        133        1999        06/98  (f)      40 years   

Babies “R” Us:

                       

Arlington, TX

    —          831        2,612        —          —          831        2,612        3,443        947        1996        06/96        40 years   

Independence, MO

    —          1,679        2,302        115        —          1,679        2,417        4,096        532        1996        12/01        40 years   

Barnes & Noble:

                       

Brandon, FL

    —          1,476        1,527        —          —          1,476        1,527        3,003        610        1995        08/94  (f)      40 years   

Glendale, CO

    —          3,245        2,722        —          —          3,245        2,722        5,967        1,106        1994        09/94        40 years   

Houston, TX

    —          3,308        2,396        —          —          3,308        2,396        5,704        913        1995        10/94  (f)      40 years   

Plantation, FL

    4,596  (p)      3,616        —          —          —          3,616        (c     3,616        (c     1996        05/95  (f)      (c

Freehold, NJ (n)

    —          2,917        2,261        —          —          2,917        2,261        5,178        843        1995        01/96        40 years   

Dayton, OH

    —          1,413        3,325        —          —          1,413        3,325        4,738        1,110        1996        05/97        40 years   

Redding, CA

    —          497        1,626        —          —          497        1,626        2,123        550        1997        06/97        40 years   

Memphis, TN

    —          1,574        2,242        —          —          1,574        2,242        3,816        388        1997        09/97        40 years   

Marlton, NJ

    —          2,831        4,319        —          —          2,709        4,319        7,028        1,309        1995        11/98        40 years   

Bealls:

                       

Sarasota, FL

    —          1,078        1,795        —          —          1,078        1,795        2,873        325        1996        09/97        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 2


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Beautiful America Dry Cleaners:

                       

Orlando, FL

    47  (o)      40        111        —          —          40        111        151        19        2001        02/04        40 years   

Bed Bath & Beyond:

                       

Richmond, VA

    2,634  (p)      1,184        2,843        179        —          1,184        3,021        4,205        613        1997        06/98        40 years   

Glendale, AZ

    —          1,082        —          2,758        —          1,082        2,758        3,840        790        1999        12/98  (g)      40 years   

Midland, MI

    —          231        —          2,702        —          231        2,702        2,933        279        2006        07/03        40 years   

Best Buy:

                       

Brandon, FL

    —          2,985        2,772        —          —          2,985        2,772        5,757        962        1996        02/97        40 years   

Cuyahoga Falls, OH

    —          3,709        2,359        —          —          3,709        2,359        6,068        799        1970        06/97        40 years   

Rockville, MD

    —          6,233        3,419        —          —          6,233        3,419        9,652        1,150        1995        07/97        40 years   

Fairfax, VA

    —          3,052        3,218        —          —          3,052        3,218        6,270        1,076        1995        08/97        40 years   

St. Petersburg, FL

    4,204  (p)      4,032        2,611        —          —          4,032        2,611        6,643        640        1997        09/97        35 years   

Pittsburg, PA

    —          2,331        2,293        —          —          2,331        2,293        4,624        719        1997        06/98        40 years   

Denver, CO

    —          8,882        4,373        —          —          8,882        4,373        13,255        1,043        1991        06/01        40 years   

Best Smoke & Gas:

                       

Abbottstown, PA

    —          55        200        —          —          55        200        255        25        2000        01/06        40 years   

Billy Bob’s:

                       

Gresham, OR

    —          817        108        —          —          817        108        925        24        1993        12/01        40 years   

BJ’s Wholesale Club:

                       

Orlando, FL

    3,762  (o)      3,271        8,627        367        —          3,271        8,993        12,264        1,539        2001        02/04        40 years   

Black Fox Beauty Supply:

                       

Corpus Christi, TX

    —          116        137        195        —          125        332        457        69        1967        11/93        40 years   

Blockbuster Video:

                       

Conyers, GA

    —          320        556        —          —          320        556        876        188        1997        06/97        40 years   

Alice, TX

    —          318        578        —          —          318        578        896        131        1995        12/01        40 years   

Gainesville, GA

    —          295        612        —          —          295        612        907        138        1997        12/01        40 years   

Glasgow, KY

    —          303        561        —          —          303        561        864        127        1997        12/01        40 years   

Kingsville, TX

    —          499        458        30        —          499        487        986        106        1995        12/01        40 years   

Mobile, AL

    —          491        498        —          —          491        498        989        113        1997        12/01        40 years   

Mobile, AL

    —          843        562        —          —          843        562        1,405        127        1997        12/01        40 years   

BMW:

                       

Duluth, GA

    —          4,434        4,080        6,559        —          4,504        10,639        15,143        1,435        1984        12/01        40 years   

Borders:

                       

Wilmington, DE

    —          3,031        6,062        —          —          2,994        6,062        9,056        2,429        1994        12/94        40 years   

Richmond, VA

    —          2,177        2,600        —          —          2,177        2,600        4,777        1,011        1995        06/95        40 years   

Ft. Lauderdale, FL

    4,428  (p)      3,165        3,319        —          —          3,165        3,319        6,484        863        1995        02/96        33 years   

Bangor, ME

    —          1,547        2,487        —          —          1,547        2,487        4,034        903        1996        06/96        40 years   

Altamonte Springs, FL

    —          1,947        —          —          —          1,947        (c     1,947        (c     1997        09/97        (c

Borough of Abbottstown:

                       

Abbottstown, PA

    —          55        200        —          —          55        200        255        25        2000        01/06        40 years   

Boston Market:

                       

Burton, MI

    —          620        707        —          —          620        707        1,327        160        1997        12/01        40 years   

Geneva, IL

    —          1,125        1,037        —          —          1,125        893        2,018        204        1996        12/01        40 years   

N. Olmsted, OH

    —          602        461        —          —          602        389        991        89        1996        12/01        40 years   

Novi, MI

    —          836        651        —          —          836        298        1,134        72        1995        12/01        40 years   

Orland Park, IL

    —          562        556        —          —          562        377        939        88        1995        12/01        40 years   

Warren, OH

    —          562        468        —          —          562        468        1,030        106        1997        12/01        40 years   

Buccaneer Car Wash:

                       

Tampa, FL

    —          541        829        —          —          541        829        1,370        23        1978        04/10        25 years   

Buck’s:

                       

St. Louis, MO

    —          776        —          3,822        —          776        3,822        4,598        163        2009        12/07  (m)      40 years   

Buffalo Wild Wings:

                       

Michigan City, IN

    —          163        492        —          —          163        492        655        111        1996        12/01        40 years   

Bugaboo Creek:

                       

Rochester, NY

    —          792        1,535        —          —          792        1,535        2,327        136        1995        06/07        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 3


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at  Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Burger King:

                       

Colonial Heights, VA

    —          662        610        —          —          662        610        1,272        138        1997        12/01        40 years   

Camping World:

                       

Vacaville, CA

    —          2,467        6,575        —          —          2,467        6,575        9,042        86        2008        07/10        35 years   

North Little Rock, AR

    —          1,198        3,348        —          —          1,198        3,348        4,546        28        2007        09/10        35 years   

Strafford, MO

    —          1,278        3,694        —          —          1,278        3,694        4,972        31        2007        09/10        35 years   

Carl’s Jr.:

                       

Spokane, WA

    —          471        530        —          —          471        530        1,001        120        1996        12/01        40 years   

Chandler, AZ

    —          729        644        —          —          729        644        1,373        178        1984        06/05        20 years   

Tucson, AZ

    —          681        536        103        —          681        639        1,320        344        1988        06/05        10 years   

CarQuest:

                       

Abbeville, LA

    —          23        148        —          —          23        148        171        —          1970        12/10        20 years   

Abbotsford, WI

    —          56        163        —          —          56        163        219        —          1984        12/10        25 years   

Aberdeen, SD (n)

    —          71        329        —          —          71        329        400        1        1961        12/10        20 years   

Addison, IL

    —          76        314        —          —          76        314        390        1        1971        12/10        25 years   

Alsip, IL

    —          57        323        —          —          57        323        380        1        1972        12/10        20 years   

Anaconda, MT

    —          35        307        —          —          35        307        342        1        1965        12/10        20 years   

Ann Arbor, MI

    —          25        241        —          —          25        241        266        1        1970        12/10        20 years   

Antigo, WI

    —          96        294        —          —          96        294        390        —          1998        12/10        30 years   

Appleton, WI (n)

    —          85        438        —          —          85        438        523        1        1995        12/10        30 years   

Arden, NC

    —          42        281        —          —          42        281        323        —          1989        12/10        25 years   

Baker, MT

    —          12        140        —          —          12        140        152        —          1965        12/10        20 years   

Bakersfield, CA

    —          77        484        —          —          77        484        561        1        1945        12/10        20 years   

Bangor, ME

    —          51        339        —          —          51        339        390        1        1985        12/10        25 years   

Bangor, ME (n)

    —          53        356        —          —          53        356        409        1        1945        12/10        15 years   

Bartlett, TN

    —          40        293        —          —          40        293        333        —          1989        12/10        25 years   

Bay City, MI

    —          14        100        —          —          14        100        114        —          1942        12/10        15 years   

Bay City, MI

    —          41        282        —          —          41        282        323        —          1989        12/10        25 years   

Bay City, MI

    —          106        521        —          —          106        521        627        1        1920        12/10        15 years   

Bellevue, NE

    —          29        142        —          —          29        142        171        —          1965        12/10        20 years   

Bend, OR

    —          125        245        —          —          125        245        370        1        1935        12/10        15 years   

Biddeford, ME

    —          60        320        —          —          60        320        380        1        1968        12/10        20 years   

Billings, MT

    —          31        188        —          —          31        188        219        —          1970        12/10        25 years   

Bismarck, ND

    —          25        136        —          —          25        136        161        —          1985        12/10        25 years   

Bozeman, MT

    —          28        257        —          —          28        257        285        1        1964        12/10        20 years   

Brunswick, ME

    —          41        254        —          —          41        254        295        —          1985        12/10        25 years   

Bucksport, ME

    —          19        114        —          —          19        114        133        —          1976        12/10        20 years   

Burlington, NC

    —          47        229        —          —          47        229        276        —          1994        12/10        30 years   

Carol Stream, IL

    —          103        515        —          —          103        515        618        1        1960        12/10        20 years   

Chicago, IL

    —          83        383        —          —          83        383        466        1        1987        12/10        25 years   

Chippewa Falls, WI

    —          33        328        —          —          33        328        361        —          1996        12/10        30 years   

Cody, WY (n)

    —          146        253        —          —          146        253        399        —          1999        12/10        30 years   

Colstrip, MT

    —          39        275        —          —          39        275        314        —          1981        12/10        25 years   

Connersville, IN

    —          28        171        —          —          28        171        199        —          1920        12/10        15 years   

Corapolis, PA (n)

    —          74        316        —          —          74        316        390        1        1980        12/10        20 years   

Cut Bank, MT

    —          9        115        —          —          9        115        124        —          1937        12/10        20 years   

Devils Lake, ND

    —          38        276        —          —          38        276        314        —          1999        12/10        30 years   

Dillon, MT

    —          24        204        —          —          24        204        228        —          1973        12/10        20 years   

Dodge City, KS (n)

    —          43        166        —          —          43        166        209        —          1948        12/10        15 years   

Eau Claire, WI

    —          33        204        —          —          33        204        237        —          1956        12/10        20 years   

Elgin, IL

    —          88        311        —          —          88        311        399        1        1965        12/10        20 years   

Enterprise, AL

    —          25        184        —          —          25        184        209        —          1988        12/10        25 years   

Escanaba, MI

    —          40        283        —          —          40        283        323        —          1982        12/10        25 years   

Evansville, IN

    —          60        301        —          —          60        301        361        1        1980        12/10        25 years   

Fairbanks, AK

    —          292        545        —          —          292        545        837        1        2003        12/10        35 years   

Gainesville, FL (n)

    —          47        362        —          —          47        362        409        1        1957        12/10        15 years   

Glasgow, MT

    —          48        275        —          —          48        275        323        1        1972        12/10        20 years   

Great Falls, MT

    —          17        173        —          —          17        173        190        —          1967        12/10        20 years   

Greenville, OH

    —          63        193        —          —          63        193        256        1        1910        12/10        15 years   

Hamilton, MT

    —          24        242        —          —          24        242        266        —          1991        12/10        25 years   

Harlem, MT

    —          17        116        —          —          17        116        133        —          1983        12/10        25 years   

Havre, MT

    —          22        311        —          —          22        311        333        1        1964        12/10        20 years   

Hayward, WI

    —          57        333        —          —          57        333        390        1        1980        12/10        25 years   

Helena, MT

    —          31        282        —          —          31        282        313        —          1987        12/10        25 years   

Houlton, ME

    —          38        219        —          —          38        219        257        1        1915        12/10        10 years   

Irving, TX

    —          182        208        —          —          182        208        390        —          1984        12/10        20 years   

Kalispell, MT (n)

    —          59        645        —          —          59        645        704        1        1998        12/10        30 years   

Kennedale, TX

    —          88        283        —          —          88        283        371        1        1959        12/10        20 years   

Lafayette, LA

    —          51        357        —          —          51        357        408        —          1996        12/10        30 years   

Laurel, MS

    —          74        202        —          —          74        202        276        1        1959        12/10        15 years   

See accompanying report of independent registered public accounting firm.

 

F - 4


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at  Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Lewistown, MT

    —          19        180        —          —          19        180        199        —          1964        12/10        25 years   

Libby, MT

    —          33        262        —          —          33        262        295        1        1965        12/10        20 years   

Livingston, MT

    —          34        261        —          —          34        261        295        1        1976        12/10        20 years   

Lufkin, TX (n)

    —          94        229        —          —          94        229        323        —          1986        12/10        20 years   

Madison, TN

    —          78        179        —          —          78        179        257        —          1988        12/10        25 years   

Madison, WI

    —          57        409        —          —          57        409        466        1        1973        12/10        25 years   

Malta, MT

    —          19        181        —          —          19        181        200        —          1976        12/10        25 years   

Marshfield, WI

    —          60        282        —          —          60        282        342        1        1940        12/10        20 years   

Medford, WI

    —          37        229        —          —          37        229        266        —          1988        12/10        25 years   

Memphis, TN

    —          38        199        —          —          38        199        237        —          1987        12/10        25 years   

Metamora, IL

    —          69        292        —          —          69        292        361        —          1996        12/10        30 years   

Midland, MI

    —          44        336        —          —          44        336        380        —          1986        12/10        30 years   

Midland, TX

    —          36        212        —          —          36        212        248        1        1960        12/10        15 years   

Montello, WI

    —          26        173        —          —          26        173        199        —          1997        12/10        30 years   

Muskegon, MI

    —          38        257        —          —          38        257        295        —          1990        12/10        30 years   

Neillsville, WI

    —          26        145        —          —          26        145        171        —          1979        12/10        25 years   

Nicholasville, KY

    —          54        241        —          —          54        241        295        —          1988        12/10        25 years   

Ocala, FL

    —          78        416        —          —          78        416        494        1        1971        12/10        15 years   

Olathe, KS

    —          78        235        —          —          78        235        313        1        1950        12/10        15 years   

Oshkosh, WI

    —          99        224        —          —          99        224        323        —          1999        12/10        30 years   

Overland, MO

    —          68        370        —          —          68        370        438        1        1961        12/10        20 years   

Owosso, MI

    —          50        264        —          —          50        264        314        —          1986        12/10        25 years   

Pearl, MS

    —          43        195        —          —          43        195        238        —          1989        12/10        30 years   

Phillips, WI

    —          23        177        —          —          23        177        200        —          1992        12/10        30 years   

Powell, WY

    —          37        182        —          —          37        182        219        —          1978        12/10        25 years   

Rhinelander, WI

    —          28        115        —          —          28        115        143        —          1958        12/10        20 years   

River Falls, WI

    —          42        234        —          —          42        234        276        —          1976        12/10        20 years   

Riverton, WY

    —          99        300        —          —          99        300        399        1        1978        12/10        25 years   

Rockford, IL

    —          61        376        —          —          61        376        437        1        1962        12/10        25 years   

Roundup, MT

    —          23        205        —          —          23        205        228        —          1972        12/10        20 years   

Schofield, WI

    —          41        425        —          —          41        425        466        1        1968        12/10        20 years   

Sheboygan, WI

    —          77        370        —          —          77        370        447        —          2007        12/10        35 years   

Shelby, MT

    —          20        208        —          —          20        208        228        —          1976        12/10        20 years   

Shelbyville, KY

    —          52        224        —          —          52        224        276        —          1982        12/10        25 years   

Sidney, MT (n)

    —          42        395        —          —          42        395        437        1        1962        12/10        20 years   

Spartanburg, SC

    —          53        252        —          —          53        252        305        —          1972        12/10        25 years   

Spokane, WA

    —          66        201        —          —          66        201        267        —          1965        12/10        20 years   

Spokane, WA

    —          93        373        —          —          93        373        466        1        1972        12/10        20 years   

St. Peter, MN

    —          17        259        —          —          17        259        276        —          1999        12/10        30 years   

Stayton, OR

    —          88        312        —          —          88        312        400        —          1994        12/10        30 years   

Stevens Point, WI (n)

    —          61        405        —          —          61        405        466        1        1975        12/10        25 years   

Sulphur, LA

    —          31        216        —          —          31        216        247        —          1984        12/10        20 years   

Thornton, CO

    —          414        536        —          —          414        536        950        1        1996        12/10        30 years   

Troy, AL

    —          15        52        —          —          15        52        67        —          1966        12/10        15 years   

Wasilla, AK

    —          227        504        —          —          227        504        731        1        2002        12/10        35 years   

Wausau, WI

    —          52        300        —          —          52        300        352        —          1989        12/10        25 years   

Wautoma, WI

    —          18        106        —          —          18        106        124        —          1959        12/10        20 years   

Waynesboro, MS

    —          15        71        —          —          15        71        86        —          1962        12/10        15 years   

West Columbia, SC

    —          41        159        —          —          41        159        200        —          1962        12/10        20 years   

West Memphis, AR

    —          58        294        —          —          58        294        352        —          1987        12/10        25 years   

Whitefish, MT

    —          30        227        —          —          30        227        257        —          1993        12/10        30 years   

Williston, ND

    —          35        297        —          —          35        297        332        —          1999        12/10        30 years   

Windom, MN

    —          5        137        —          —          5        137        142        —          1950        12/10        20 years   

Wisconsin Rapids, WI

    —          41        215        —          —          41        215        256        —          1975        12/10        20 years   

Yakima, WA

    —          50        321        —          —          50        321        371        1        1965        12/10        20 years   

Carvers:

                       

Centerville, OH

    —          851        1,059        —          —          851        1,059        1,910        239        1986        12/01        40 years   

Certified Auto Sales:

                       

Albuquerque, NM

    —          1,113        —          1,419        —          1,113        1,419        2,532        194        2005        04/04  (f)      40 years   

Champps:

                       

Alpharetta, GA

    —          3,033        1,642        —          —          3,033        1,642        4,675        371        1999        12/01        40 years   

Irving, TX

    —          1,760        1,724        —          —          1,760        1,724        3,484        390        2000        12/01        40 years   

Char-Hut:

                       

Sunrise, FL

    —          287        424        —          —          287        424        711        70        1979        05/04        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 5


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at  Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Checkers:

                       

Orlando, FL

    —          257        —          —          —          257        (c     257        (c     1988        07/92        (c

Cheddar’s Cafe:

                       

Baytown, TX

    —          858        2,251        —          —          858        2,251        3,109        2        2010        12/10        40 years   

Chili’s:

                       

Camden, SC

    —          627        1,888        —          —          627        1,888        2,515        250        2005        09/05        40 years   

Milledgeville, GA

    —          516        1,997        —          —          516        1,997        2,513        264        2005        09/05        40 years   

Sumter, SC

    —          800        1,717        —          —          800        1,717        2,517        216        2004        12/05        40 years   

Hinesville, GA

    —          921        1,898        —          —          921        1,898        2,819        184        2006        02/07        40 years   

Albany, GA

    —          615        —          1,984        —          615        1,984        2,599        159        2007        06/07  (m)      40 years   

Statesboro, GA

    —          703        —          1,888        —          703        1,888        2,591        147        2007        06/07  (m)      40 years   

Florence, SC

    —          889        1,715        —          —          889        1,715        2,604        152        2007        06/07        40 years   

Valdosta, GA

    —          716        —          1,871        —          716        1,871        2,587        142        2007        07/07  (m)      40 years   

Tifton, GA

    —          454        1,550        —          —          454        1,550        2,004        86        2008        06/08  (m)      40 years   

Evans, GA

    —          700        —          1,511        —          700        1,511        2,211        71        2009        10/08  (m)      40 years   

Jefferson City, MO

    —          305        898        —          —          305        898        1,203        27        2003        12/09        35 years   

Merriam, KS

    —          853        981        —          —          853        981        1,834        34        1998        12/09        30 years   

Wichita, KS

    —          420        623        —          —          420        623        1,043        22        1995        12/09        30 years   

China 1:

                       

Cohoes, NY

    —          16        87        6        —          16        93        109        14        1994        09/04        40 years   

China Wok:

                       

Carlisle, PA

    —          90        107        —          —          90        107        197        13        1988        01/06        40 years   

Cinemark:

                       

Draper, UT

    —          1,523        —          —          —          1,523        (e     1,523        (e     (e     08/10  (m)      (e

Claim Jumper:

                       

Roseville, CA

    —          1,557        2,014        —          —          1,557        2,014        3,571        455        2000        12/01        40 years   

Tempe, AZ

    —          2,531        2,921        —          —          2,531        2,921        5,452        660        2000        12/01        40 years   

Continental Rental:

                       

Lapeer, MI

    —          88        633        —          —          88        633        721        53        2007        10/05        40 years   

Cool Crest:

                       

Independence, MO

    —          1,838        1,534        —          —          1,838        1,534        3,372        139        1988        05/07        40 years   

CORA Rehabilitation Clinics:

                       

Orlando, FL

    93  (o)      80        221        —          —          80        221        301        38        2001        02/04        40 years   

CVS:

                       

San Antonio, TX

    —          441        —          —          —          441        (c     441        (c     1993        12/93        (c

Lafayette, LA

    —          968        —          —          —          968        (c     968        (c     1995        01/96        (c

Midwest City, OK

    —          673        1,103        —          —          673        1,103        1,776        409        1996        03/96        40 years   

Pantego, TX

    —          1,016        1,449        —          —          1,016        1,449        2,465        491        1997        06/97        40 years   

Flower Mound, TX

    —          932        881        —          —          831        881        1,712        152        1996        09/97        40 years   

Arlington, TX

    —          2,079        —          1,397        —          2,079        1,397        3,476        432        1998        11/97  (g)      40 years   

Leavenworth, KS

    —          726        —          1,331        —          726        1,331        2,057        417        1998        11/97  (g)      40 years   

Lewisville, TX

    —          789        —          1,335        —          789        1,335        2,124        410        1998        04/98  (g)      40 years   

Forest Hill, TX

    —          692        —          1,175        —          692        1,175        1,867        363        1998        04/98  (g)      40 years   

Garland, TX

    —          1,477        —          1,400        —          1,477        1,400        2,877        424        1998        06/98  (g)      40 years   

Oklahoma City, OK

    —          1,581        —          1,471        —          1,581        1,471        3,052        440        1999        08/98  (g)      40 years   

Dallas, TX

    —          2,618        —          2,571        —          2,618        2,571        5,189        463        2003        06/99        40 years   

Gladstone, MO

    —          1,851        —          1,740        —          1,851        1,740        3,591        451        2000        12/99  (g)      40 years   

Dave & Buster’s:

                       

Hilliard, OH

    —          934        4,689        —          —          934        4,689        5,623        484        1998        11/06        40 years   

Tulsa, OK

    —          1,862        —          2,105        —          1,862        2,105        3,967        103        2009        04/08  (m)      40 years   

Wauwatosa, WI

    —          5,694        —          5,638        —          5,694        5,638        11,332        112        2010        12/08  (m)      40 years   

Orlando, FL

    —          8,114        —          —          —          8,114        (e     8,114        (e     (e     06/10  (m)      (e

Denny’s:

                       

Columbus, TX (n)

    —          428        817        —          —          428        817        1,245        185        1997        12/01        40 years   

Alexandria, VA

    —          604        196        —          —          604        196        800        42        1981        09/06        20 years   

Amarillo, TX

    —          590        632        —          —          590        632        1,222        136        1982        09/06        20 years   

Arlington Heights, IL

    —          470        228        —          —          470        228        698        49        1977        09/06        20 years   

Austintown, OH

    —          466        397        —          —          466        397        863        85        1980        09/06        20 years   

Boardman Township, OH

    —          497        258        —          —          497        258        755        55        1977        09/06        20 years   

See accompanying report of independent registered public accounting firm.

 

F - 6


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at  Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Campbell, CA

    —          460        238        —          —          460        238        698        51        1976        09/06        20 years   

Carson, CA

    —          1,246        157        —          —          1,246        157        1,403        34        1975        09/06        20 years   

Chehalis, WA

    —          415        287        —          —          415        287        702        62        1977        09/06        20 years   

Chubbuck, ID

    —          350        394        —          —          344        394        738        85        1983        09/06        20 years   

Clackamas, OR

    —          468        407        —          —          468        407        875        87        1993        09/06        20 years   

Collinsville, IL

    —          676        283        —          —          676        283        959        61        1979        09/06        20 years   

Colorado Springs, CO

    —          585        390        —          —          585        390        975        84        1978        09/06        20 years   

Colorado Springs, CO

    —          321        377        —          —          321        377        698        81        1984        09/06        20 years   

Corpus Christi, TX

    —          345        776        300        —          345        1,076        1,421        192        1980        09/06        20 years   

Dallas, TX

    —          497        150        —          —          497        150        647        32        1979        09/06        20 years   

Enfield, CT

    —          684        229        —          —          684        229        913        49        1976        09/06        20 years   

Fairfax, VA

    —          768        683        —          —          768        683        1,451        147        1979        09/06        20 years   

Federal Way, WA

    —          543        193        —          —          543        193        736        41        1977        09/06        20 years   

Florissant, MO

    —          443        238        —          —          443        238        681        51        1977        09/06        20 years   

Ft. Worth, TX

    —          392        314        —          —          392        314        706        67        1974        09/06        20 years   

Hermitage, PA

    —          321        420        —          —          321        420        741        90        1980        09/06        20 years   

Hialeah, FL

    —          432        175        —          —          432        175        607        38        1978        09/06        20 years   

Houston, TX

    —          504        348        —          —          504        348        852        75        1976        09/06        20 years   

Indianapolis, IN

    —          310        590        —          —          310        590        900        127        1981        09/06        20 years   

Indianapolis, IN

    —          326        511        —          —          326        511        837        110        1978        09/06        20 years   

Indianapolis, IN

    —          358        767        —          —          358        767        1,125        165        1978        09/06        20 years   

Indianapolis, IN

    —          231        511        —          —          231        511        742        110        1974        09/06        20 years   

Kernersville, NC

    —          407        557        —          —          407        557        964        120        2000        09/06        20 years   

Lafayette, IN

    —          424        773        —          —          416        773        1,189        166        1978        09/06        20 years   

Laurel, MD

    —          528        379        —          —          528        379        907        81        1976        09/06        20 years   

Little Rock, AR

    —          672        77        —          —          672        77        749        16        1979        09/06        20 years   

Little Rock, AR

    —          703        180        —          —          703        180        883        39        1979        09/06        20 years   

Maplewood, MN

    —          630        271        —          —          630        271        901        58        1983        09/06        20 years   

Merriville, IN

    —          368        813        —          —          368        813        1,181        174        1976        09/06        20 years   

Middleburg Heights, OH

    —          497        260        —          —          497        260        757        56        1976        09/06        20 years   

N. Miami, FL

    —          855        151        —          —          855        151        1,006        32        1977        09/06        20 years   

Nampa, ID

    —          357        729        —          —          357        729        1,086        156        1979        09/06        20 years   

North Richland Hills, TX

    —          500        130        —          —          500        130        630        28        1970        09/06        20 years   

Novi, MI

    —          545        305        —          —          545        305        850        66        1979        09/06        20 years   

Omaha, NE

    —          496        314        —          —          496        314        810        67        1994        09/06        20 years   

Pompano Beach, FL

    —          436        394        —          —          436        394        830        84        1976        09/06        20 years   

Portland, OR

    —          764        161        —          —          764        161        925        35        1977        09/06        20 years   

Provo, UT

    —          519        216        —          —          519        216        735        46        1978        09/06        20 years   

Pueblo, CO

    —          475        302        —          —          475        302        777        65        1980        09/06        20 years   

Raleigh, NC

    —          1,094        482        —          —          1,094        482        1,576        103        1984        09/06        20 years   

Southfield, MI

    —          401        330        —          —          401        330        731        71        1980        09/06        20 years   

St. Louis, MO

    —          520        266        —          —          520        266        786        57        1973        09/06        20 years   

Sugarland, TX

    —          315        334        —          —          315        334        649        72        1997        09/06        20 years   

Tacoma, WA

    —          580        201        —          —          580        201        781        43        1984        09/06        20 years   

Tucson, AZ

    —          922        290        —          —          922        290        1,212        62        1979        09/06        20 years   

Wethersfield, CT

    —          884        176        —          —          884        176        1,060        38        1978        09/06        20 years   

Worcester, MA

    —          383        493        —          —          383        493        876        106        1978        09/06        20 years   

Boise, ID

    —          514        477        —          —          514        477        991        96        1983        12/06        20 years   

St. Louis, MO

    —          635        303        —          —          635        303        938        60        1980        01/07        20 years   

Virginia Gardens, FL

    —          793        133        —          —          793        133        926        26        1977        01/07        20 years   

Dick’s Sporting Goods:

                       

Taylor, MI

    —          1,920        3,527        —          —          1,920        3,527        5,447        1,260        1996        08/96        40 years   

White Marsh, MD

    —          2,681        3,917        —          —          2,681        3,917        6,598        1,400        1996        08/96        40 years   

Dimitri’s Family Restaurant:

                       

Indianapolis, IN

    —          223        483        —          —          223        483        706        104        1979        09/06        20 years   

Dollar General:

                       

Memphis, TN

    —          266        1,136        46        —          266        1,182        1,448        329        1998        12/97        40 years   

High Springs, FL

    —          432        —          —          —          432        (e     432        (e     (e     07/10  (m)      (e

Inverness, FL

    —          459        —          —          —          459        (e     459        (e     (e     08/10  (m)      (e

Cocoa, FL

    —          406        —          —          —          406        (e     406        (e     (e     08/10  (m)      (e

Palm Bay, FL

    —          355        —          —          —          355        (e     355        (e     (e     08/10  (m)      (e

Deland, FL

    —          585        —          —          —          585        (e     585        (e     (e     11/10  (m)      (e

Seffner, FL

    —          659        —          —          —          659        (e     659        (e     (e     12/10  (m)      (e

Dollar Tree:

                       

Garland, TX

    —          239        626        —          —          239        626        865        149        1994        02/94        40 years   

Copperas Cove, TX

    —          242        512        194        —          242        706        948        200        1972        11/98        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 7


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at  Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Donato’s:

                       

Medina, OH

    —          405        464        —          —          405        464        869        105        1996        12/01        40 years   

Dr. Clean Dry Cleaners:

                       

Monticello, NY

    —          20        72        —          —          20        72        92        10        1996        03/05        40 years   

Easyhome:

                       

Cohoes, NY

    —          64        348        242        —          64        590        654        69        1994        09/04        40 years   

Ecotech Institute:

                       

Aurora, CO

    —          5,076        13,874        6,043        —          5,076        19,917        24,993        1,294        1986        04/07        40 years   

El Tapatio Grill:

                       

Hammond, LA

    —          248        814        62        —          248        627        875        156        1997        12/01        40 years   

Enterprise Rent-A-Car:

                       

Wilmington, NC

    —          218        327        33        —          218        360        578        76        1981        12/01        40 years   

Express Oil Change:

                       

Birmingham, AL

    —          470        695        —          —          470        695        1,165        49        2008        02/08  (f)      40 years   

Florence, AL

    —          110        381        —          —          110        381        491        37        1987        02/08        30 years   

Helena, AL

    —          363        628        —          —          363        628        991        45        1998        02/08        40 years   

Muscle Shoals, AL

    —          168        624        —          —          168        624        792        60        1985        02/08        30 years   

Opelika, AL

    —          547        680        —          —          547        680        1,227        49        2006        02/08        40 years   

Cordova, TN

    —          639        785        —          —          639        785        1,424        40        2000        12/08        40 years   

Horn Lake, MS

    —          326        611        —          —          326        611        937        36        1998        12/08        35 years   

Lakeland, TN

    —          186        489        —          —          186        489        675        25        2000        12/08        40 years   

Memphis, TN

    —          402        721        —          —          402        721        1,123        37        2001        12/08        40 years   

Fallas Paredes:

                       

Arlington, TX

    —          318        1,680        242        —          318        1,923        2,241        623        1996        06/96        38 years   

Family Dollar:

                       

Albany, NY (n)

    —          34        824        —          —          34        824        858        130        1992        09/04        40 years   

Cohoes, NY

    —          94        507        33        —          94        540        634        80        1994        09/04        40 years   

Hudson Falls, NY

    —          51        380        —          —          51        380        431        60        1993        09/04        40 years   

Monticello, NY

    —          96        352        —          —          96        352        448        51        1996        03/05        40 years   

Famous Footwear:

                       

Lapeer, MI

    —          163        835        —          —          163        835        998        69        2007        10/05        40 years   

Fantastic Sams:

                       

Eden Prairie, MN

    —          65        181        81        —          65        261        326        56        1997        12/01        40 years   

Fazoli’s:

                       

Bay City, MI

    —          647        634        —          —          647        634        1,281        143        1997        12/01        40 years   

Ferguson:

                       

Destin, FL

    —          554        1,012        253        —          554        1,265        1,819        111        2006        03/07        40 years   

First Watch Restaurant:

                       

Tulsa, OK

    —          325        314        34        —          325        382        707        68        1978        09/06        20 years   

Flash Markets:

                       

Lebanon, TN

    —          582        —          2,063        —          582        2,063        2,645        148        2007        03/07        40 years   

Food 4 Less:

                       

Chula Vista, CA

    —          3,569        —          —          —          3,569        (c     3,569        (c     1995        11/98        (c

Food Fast:

                       

Bossier City, LA

    —          883        658        —          —          883        658        1,541        155        1975        06/07        15 years   

Brownsboro, TX

    —          328        385        —          —          328        385        713        45        1990        06/07        30 years   

Flint, TX

    —          272        411        —          —          272        411        683        58        1985        06/07        25 years   

Forney, TX

    —          545        707        —          —          545        707        1,252        83        1989        06/07        30 years   

Forney, TX

    —          473        654        —          —          473        654        1,127        77        1990        06/07        30 years   

Gun Barrel City, TX

    —          242        467        —          —          242        467        709        66        1988        06/07        25 years   

Gun Barrel City, TX

    —          270        386        —          —          270        386        656        55        1986        06/07        25 years   

Jacksonville, TX

    —          660        632        —          —          660        632        1,292        149        1976        06/07        15 years   

Kemp, TX

    —          581        505        —          —          581        505        1,086        72        1986        06/07        25 years   

Longview, TX

    —          403        572        —          —          403        572        975        81        1985        06/07        25 years   

Longview, TX

    —          426        382        —          —          426        382        808        54        1984        06/07        25 years   

See accompanying report of independent registered public accounting firm.

 

F - 8


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Longview, TX

    —          360        535        —          —          360        535        895        76        1983        06/07        25 years   

Longview, TX

    —          178        236        —          —          178        236        414        42        1977        06/07        20 years   

Longview, TX

    —          252        304        —          —          252        304        556        43        1983        06/07        25 years   

Longview, TX

    —          271        431        —          —          271        431        702        51        1990        06/07        30 years   

Mabank, TX

    —          229        494        —          —          229        494        723        70        1986        06/07        25 years   

Mt. Vernon, TX

    —          292        666        —          —          292        666        958        94        1990        06/07        25 years   

Shreveport, LA

    —          361        250        —          —          361        250        611        59        1969        06/07        15 years   

Tyler, TX

    —          302        455        —          —          302        455        757        81        1981        06/07        20 years   

Tyler, TX

    —          316        545        —          —          316        545        861        64        1989        06/07        30 years   

Tyler, TX

    —          258        419        —          —          258        419        677        74        1978        06/07        20 years   

Tyler, TX

    —          542        403        —          —          481        403        884        57        1984        06/07        25 years   

Tyler, TX

    —          323        283        —          —          323        283        606        50        1978        06/07        20 years   

Tyler, TX

    —          488        831        —          —          488        831        1,319        147        1980        06/07        20 years   

Tyler, TX

    —          256        542        —          —          256        542        798        96        1980        06/07        20 years   

Tyler, TX

    —          742        546        —          —          742        546        1,288        77        1985        06/07        25 years   

Tyler, TX

    —          188        329        —          —          188        329        517        47        1984        06/07        25 years   

Fresenius Medical Care:

                       

Houston, TX

    —          422        1,915        —          —          460        1,915        2,375        241        1995        08/06        40 years   

Fresh Market:

                       

Gainesville, FL

    —          317        1,248        656        —          317        1,904        2,221        287        1982        03/99        40 years   

Fuel-On:

                       

Bloomsburg, PA

    —          541        146        —          —          541        146        687        39        1967        08/05        20 years   

Dallas, PA

    —          677        1,091        —          —          677        1,091        1,768        293        1995        08/05        20 years   

Emporium, PA

    —          380        569        —          —          380        569        949        153        1996        08/05        20 years   

Hazleton, PA

    —          2,529        728        —          —          2,529        728        3,257        196        2001        08/05        20 years   

Johnsonburg, PA

    —          781        504        —          —          781        504        1,285        135        1978        08/05        20 years   

Kane, PA

    —          478        592        —          —          356        —          356        —          1984        08/05        20 years   

Luzerne, PA

    —          171        415        —          —          171        415        586        112        1989        08/05        20 years   

Ridgway, PA

    —          382        259        —          —          382        259        641        70        1975        08/05        20 years   

St. Mary’s, PA

    —          274        261        —          —          274        261        535        70        1979        08/05        20 years   

White Haven, PA

    —          486        867        —          —          486        867        1,353        233        1990        08/05        20 years   

Yeagertown, PA

    —          142        180        —          —          142        180        322        48        1977        08/05        20 years   

Carlisle, PA

    —          170        202        —          —          170        202        372        25        1988        01/06        40 years   

Clairton, PA

    —          215        701        —          —          215        701        916        139        1986        01/06        25 years   

Danville, PA

    —          180        359        —          —          180        359        539        45        1988        01/06        40 years   

Houtzdale, PA

    —          541        500        —          —          356        —          356        —          1977        01/06        15 years   

Minersville, PA

    —          680        582        —          —          680        582        1,262        72        1974        01/06        40 years   

Pittsburgh, PA

    —          905        1,346        —          —          905        1,346        2,251        167        1967        01/06        40 years   

Summerville, PA

    —          93        272        —          —          93        272        365        34        1988        01/06        40 years   

Zelienople, PA

    —          160        437        —          —          160        437        597        54        1988        01/06        40 years   

Furr’s Family Dining:

                       

Las Cruces, NM

    —          947        —          2,182        —          947        2,182        3,129        234        2006        01/06  (m)      40 years   

Tucson, AZ

    —          1,116        —          —          —          1,116        (e     1,116        (e     (e     07/06        (e

Moore, OK

    —          939        —          2,429        —          939        2,429        3,368        195        2007        03/07  (m)      40 years   

Arlington, TX

    —          1,061        —          —          —          1,061        (e     1,061        (e     (e     04/10  (m)      (e

Gander Mountain:

                       

Amarillo, TX

    —          1,514        5,781        —          —          1,514        5,781        7,295        885        2004        11/04        40 years   

DeForest, WI

    —          2,798        10,953        —          —          2,798        10,953        13,751        91        2008        09/10        35 years   

Springfield, IL

    —          1,717        7,622        —          —          1,717        7,622        9,339        64        2009        09/10        35 years   

Onalaska, WI

    —          1,963        —          —          —          1,963        (e     1,963        (e     (e     10/10  (m)      (e

Ocala, FL

    —          3,315        8,908        —          —          3,315        8,908        12,223        53        2008        10/10        35 years   

Gate Petroleum:

                       

Concord, NC

    —          852        1,201        —          —          852        1,201        2,053        166        2001        06/05        40 years   

Rocky Mount, NC

    —          259        1,164        —          —          259        1,164        1,423        161        2000        06/05        40 years   

Gen-X Clothing:

                       

Federal Way, WA

    —          2,037        1,662        257        —          2,037        1,919        3,956        567        1994        06/98        40 years   

Golden Corral:

                       

Lake Placid, FL

    —          115        305        54        —          115        359        474        246        1985        05/85        35 years   

Brandon, FL

    —          1,188        1,339        —          —          1,188        1,339        2,527        303        1998        12/01        40 years   

Dallas, TX

    —          1,138        1,025        —          —          1,138        1,025        2,163        232        1994        12/01        40 years   

Temple Terrace, FL

    —          1,330        1,391        —          —          1,330        1,391        2,721        314        1997        12/01        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 9


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Goodyear Truck & Tire:

                       

Park City, KS

    —          214        687        —          —          214        687        901        190        1989        06/05        20 years   

Anthony, TX

    —          (l     1,242        —          —          (l     1,242        1,242        107        2007        02/07        40 years   

Great Clips:

                       

Lapeer, MI

    —          27        194        —          —          27        194        221        16        2007        10/05        40 years   

Green Light Convenience:

                       

Moosic, PA

    —          323        309        —          —          323        309        632        83        1980        08/05        20 years   

Guitar Center:

                       

Roseville, MN

    —          1,599        1,419        —          —          1,599        1,419        3,018        179        1994        08/06        40 years   

GymKix:

                       

Copperas Cove, TX

    —          204        432        171        —          204        603        807        170        1972        11/98        40 years   

H&R Block:

                       

Swansea, IL

    —          46        132        69        —          46        201        247        45        1997        12/01        40 years   

Hastings:

                       

Nacogdoches, TX

    —          397        1,257        —          —          397        1,257        1,654        381        1997        11/98        40 years   

Havertys Furniture:

                       

Clearwater, FL

    —          1,184        2,526        44        —          1,184        2,570        3,754        1,125        1992        05/93        40 years   

Orlando, FL

    —          820        2,441        6        —          820        2,448        3,268        1,001        1992        05/93        40 years   

Pensacola, FL

    —          633        1,595        —          —          603        1,595        2,198        579        1994        06/96        40 years   

Bowie, MD

    —          1,966        4,221        —          —          1,966        4,221        6,187        1,256        1997        12/97        39 years   

Health Source Chiropractic:

                       

Houston, TX

    —          112        509        —          —          112        509        621        65        1995        08/06        40 years   

Healthy Pet:

                       

Suwanee, GA

    —          175        1,038        —          —          175        1,038        1,213        105        1997        12/06        40 years   

Colonial Heights, VA

    —          160        746        —          —          160        746        906        74        1996        01/07        40 years   

Heilig-Meyers/The Room Store:

                       

Baltimore, MD

    —          470        813        —          —          470        813        1,283        246        1968        11/98        40 years   

Glen Burnie, MD

    —          632        932        —          —          632        932        1,564        282        1968        11/98        40 years   

Hog Pit:

                       

Tucson, AZ

    —          827        305        18        —          845        305        1,150        79        1974        12/01        40 years   

Hollywood Feed:

                       

Ridgeland, MS

    —          343        411        362        —          343        773        1,116        53        1997        08/06        40 years   

Home Decor:

                       

Memphis, TN

    —          549        540        364        —          549        904        1,453        247        1998        12/97        40 years   

Home Depot:

                       

Sunrise, FL

    —          5,149        —          —          —          5,149        (i     5,149        (i     (i     05/03        (i

HomeGoods:

                       

Fairfax, VA

    —          971        756        1,585        —          971        2,341        3,312        552        1995        12/95        40 years   

Hooters:

                       

Tampa, FL

    —          784        505        —          —          784        505        1,289        114        1993        12/01        40 years   

Humana:

                       

Sunrise, FL

    —          800        253        —          —          800        253        1,053        42        1984        05/04        40 years   

Hy-Vee:

                       

St. Joseph, MO

    —          1,580        2,849        —          —          1,580        2,849        4,429        591        1991        09/02        40 years   

Int’l House of Pancakes:

                       

Midwest City, OK

    —          407        —          —          —          407        (i     407        (i     (i     11/00        (i

Ankeny, IA

    —          693        515        —          —          693        515        1,208        95        2002        06/05        30 years   

J & J Insurance:

                       

Hollywood, FL

    —          195        44        18        —          119        —          119        —          1960        12/05        15 years   

See accompanying report of independent registered public accounting firm.

 

F - 10


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Jack in the Box:

                       

Plano, TX

    —          1,055        1,237        —          —          1,055        1,237        2,292        171        2001        06/05        40 years   

Jacobson Industrial:

                       

Des Moines, IA

    —          61        112        —          —          61        112        173        31        1973        06/05        20 years   

Jared Jewelers:

                       

Richmond, VA

    —          955        1,336        —          —          955        1,336        2,291        302        1998        12/01        40 years   

Brandon, FL

    —          1,197        1,182        —          —          1,197        1,182        2,379        255        2001        05/02        40 years   

Lithonia, GA

    —          1,271        1,216        —          —          1,271        1,216        2,487        262        2001        05/02        40 years   

Houston, TX

    —          1,676        1,440        —          —          1,676        1,440        3,116        289        1999        12/02        40 years   

Jazzercise Fitness Center:

                       

Orlando, FL

    42  (o)      37        101        —          —          37        101        138        18        2001        02/04        40 years   

Jin’s Asian Cafe:

                       

Sealy, TX

    —          67        74        —          —          67        74        141        22        1982        03/99        40 years   

Jo-Ann etc:

                       

Corpus Christi, TX

    —          818        896        12        —          818        909        1,727        389        1967        11/93        40 years   

St. Peters, MO

    —          1,741        5,406        —          —          1,741        5,406        7,147        738        2005        06/05  (g)      40 years   

Johnny Carino’s:

                       

Lewisville, TX

    —          1,370        1,019        —          —          1,370        1,019        2,389        230        1994        12/01        40 years   

Lubbock, TX

    —          1,007        1,206        —          —          1,007        1,206        2,213        272        1995        12/01        40 years   

S. Beaumont, TX

    —          439        1,363        —          —          439        1,363        1,802        308        2000        12/01        40 years   

Kangaroo Express:

                       

Carthage, NC

    —          485        354        —          —          485        354        839        39        1989        08/06        40 years   

Sanford, NC

    —          1,638        1,371        —          —          1,638        1,371        3,009        150        2003        08/06        40 years   

Sanford, NC

    —          666        661        —          —          666        661        1,327        72        2000        08/06        40 years   

Siler City, NC

    —          586        645        —          —          586        645        1,231        71        1998        08/06        40 years   

West End, NC

    —          426        516        —          —          426        516        942        56        1999        08/06        40 years   

Belleview, FL

    —          471        1,451        —          —          471        1,451        1,922        159        2006        08/06        40 years   

Jacksonville, FL

    —          683        1,362        —          —          683        1,362        2,045        149        1969        08/06        40 years   

Jacksonville, FL

    —          807        1,239        —          —          807        1,239        2,046        136        1975        08/06        40 years   

Destin, FL

    —          1,366        1,192        —          —          1,366        1,192        2,558        128        2000        09/06        40 years   

Niceville, FL (n)

    —          1,434        1,124        —          —          1,434        1,124        2,558        121        2000        09/06        40 years   

Kill Devil Hills, NC

    —          490        741        —          —          490        741        1,231        78        1995        10/06        40 years   

Kill Devil Hills, NC

    —          679        552        —          —          679        552        1,231        58        1990        10/06        40 years   

Interlachen, FL

    —          519        1,500        —          —          519        1,500        2,019        105        2007        10/06        40 years   

Clarksville, TN

    —          276        955        —          —          276        955        1,231        96        1999        12/06        40 years   

Clarksville, TN

    —          521        710        —          —          521        710        1,231        72        1999        12/06        40 years   

Gallatin, TN

    —          474        757        —          —          474        757        1,231        76        1999        12/06        40 years   

Midland City, AL

    —          729        2,538        —          —          729        2,538        3,267        256        2006        12/06        40 years   

Naples, FL

    —          3,195        1,403        —          —          3,195        1,403        4,598        142        2001        12/06        40 years   

Oxford, MS

    —          440        1,097        —          —          440        1,097        1,537        111        1998        12/06        40 years   

Columbiana, AL

    —          771        989        —          —          771        989        1,760        98        1982        01/07        40 years   

Naples, FL

    —          3,162        1,597        —          —          3,162        1,597        4,759        155        1995        02/07        40 years   

Longs, SC

    —          745        758        —          —          745        758        1,503        72        2001        03/07        40 years   

Kentwood, LA

    —          985        891        —          —          985        891        1,876        84        2001        03/07        40 years   

Dothan, AL

    —          774        1,886        —          —          774        1,886        2,660        179        2007        03/07        40 years   

Naples, FL

    —          2,412        1,589        —          —          2,412        1,589        4,001        144        2000        05/07        40 years   

Montgomery, AL

    —          666        1,185        —          —          666        1,185        1,851        105        1998        06/07        40 years   

Cary, NC

    —          1,314        2,125        —          —          1,314        2,125        3,439        179        2007        08/07        40 years   

Kash n’ Karry:

                       

Seffner, FL

    —          322        1,222        —          —          322        1,222        1,544        220        1983        03/99        40 years   

Keg Steakhouse:

                       

Lynnwood, WA

    —          1,256        649        —          —          1,256        649        1,905        147        1992        12/01        40 years   

Tacoma, WA

    —          527        795        —          —          527        795        1,322        180        1981        12/01        40 years   

KFC:

                       

Fenton, MO

    —          307        496        —          —          307        496        803        279        1985        07/92        33 years   

Erie, PA

    —          517        496        —          —          517        496        1,013        112        1996        12/01        40 years   

Marysville, WA

    —          647        546        —          —          647        546        1,193        123        1996        12/01        40 years   

Evansville, IN

    —          370        767        —          —          370        767        1,137        89        2004        05/06        40 years   

Kohl’s:

                       

Florence, AL

    —          818        1,047        —          —          818        1,047        1,865        111        2006        06/04        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 11


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Kum & Go:

                       

Omaha, NE

    —          393        214        —          —          393        214        607        59        1979        06/05        20 years   

Kwik Pik:

                       

Bradford, PA

    —          184        762        —          —          184        762        946        205        1983        08/05        20 years   

Coraopolis, PA (n)

    —          476        347        —          —          476        347        823        93        1983        08/05        20 years   

St Clair, PA

    —          212        475        —          —          212        475        687        128        1984        08/05        20 years   

Beech Creek, PA

    —          477        613        —          —          477        613        1,090        76        1988        01/06        40 years   

Canisteo, NY

    —          142        485        —          —          142        485        627        60        1983        01/06        40 years   

Curwensville, PA

    —          226        608        —          —          226        608        834        75        1983        01/06        40 years   

Ellwood City, PA

    —          196        526        —          —          196        526        722        65        1987        01/06        40 years   

Hastings, PA

    —          199        455        —          —          199        455        654        56        1989        01/06        40 years   

Jersey Shore, PA

    —          515        381        —          —          515        381        896        47        1960        01/06        40 years   

Leeper, PA

    —          286        644        —          —          286        644        930        80        1987        01/06        40 years   

Lewisberry, PA

    —          412        534        —          —          412        534        946        66        1988        01/06        40 years   

Mercersburg, PA

    —          672        746        —          —          672        746        1,418        93        1988        01/06        40 years   

New Florence, PA

    —          298        812        —          —          298        812        1,110        101        1989        01/06        40 years   

Newstead, NY

    —          255        835        —          —          255        835        1,090        104        1990        01/06        40 years   

Philipsburg, PA

    —          428        269        —          —          428        269        697        33        1978        01/06        40 years   

Plainfield, PA

    —          244        383        —          —          244        383        627        47        1988        01/06        40 years   

Reynoldsville, PA

    —          113        328        —          —          113        328        441        41        1983        01/06        40 years   

Port Royal, PA

    —          238        635        —          —          238        635        873        142        1989        07/06        20 years   

LA Fitness:

                       

Centerville, OH

    —          2,700        —          8,572        —          2,700        8,572        11,272        330        2009        06/08  (m)      40 years   

Warren, MI

    —          2,360        6,674        —          —          2,360        6,674        9,034        299        2009        07/08  (m)      40 years   

Cincinnati, OH

    —          5,145        —          9,011        —          5,145        9,011        14,156        347        2009        08/08  (m)      40 years   

Lawrence, IN

    —          1,604        5,867        —          —          1,604        5,867        7,471        55        2010        01/10  (m)      40 years   

Laveen, AZ

    —          1,665        —          —          —          1,665        (e     1,665        (e     (e     02/10  (m)      (e

Kennesaw, GA

    —          3,653        —          —          —          3,653        (e     3,653        (e     (e     07/10  (m)      (e

Las Margaritas:

                       

Indianapolis, IN

    —          640        1,107        —          —          640        1,107        1,747        239        1996        12/01        40 years   

Lil’ Champ:

                       

Gainesville, FL

    —          900        —          1,800        —          900        1,800        2,700        171        2006        07/05  (m)      40 years   

Jacksonville, FL

    —          2,225        3,265        —          —          2,225        3,265        5,490        211        2006        08/05        40 years   

Ocala, FL

    —          846        —          1,564        —          846        1,564        2,410        138        2006        02/06  (m)      40 years   

Logan’s Roadhouse:

                       

Alexandria, LA

    —          1,218        3,049        —          —          1,218        3,049        4,267        314        1998        11/06        40 years   

Beckley, WV

    —          1,396        2,405        —          —          1,396        2,405        3,801        248        2006        11/06        40 years   

Cookeville, TN

    —          1,262        2,271        —          —          1,262        2,271        3,533        234        1997        11/06        40 years   

Fort Wayne, IN

    —          1,274        2,110        —          —          1,172        2,110        3,282        218        2003        11/06        40 years   

Greenwood, IN

    —          1,341        2,105        —          —          1,341        2,105        3,446        217        2000        11/06        40 years   

Hurst, TX

    —          1,858        1,916        —          —          1,858        1,916        3,774        198        1999        11/06        40 years   

Jackson, TN

    —          1,200        2,246        —          —          1,200        2,246        3,446        232        1994        11/06        40 years   

Lake Charles, LA

    —          1,285        2,202        —          —          1,285        2,202        3,487        227        1998        11/06        40 years   

McAllen, TX

    —          1,608        2,178        —          —          1,608        2,178        3,786        225        2005        11/06        40 years   

Opelika, AL

    —          1,028        1,753        —          —          1,028        1,753        2,781        181        2005        11/06        40 years   

Roanoke, VA

    —          2,302        1,947        —          —          2,302        1,947        4,249        201        1998        11/06        40 years   

San Marcos, TX

    —          837        1,453        —          —          837        1,453        2,290        150        2000        11/06        40 years   

Sanford, FL

    —          1,678        1,730        —          —          1,678        1,730        3,408        178        1999        11/06        40 years   

Smyrna, TN

    —          1,335        2,047        —          —          1,335        2,047        3,382        211        2002        11/06        40 years   

Warner Robins, GA

    —          905        1,534        —          —          905        1,534        2,439        158        2004        11/06        40 years   

Franklin, TN

    —          2,519        1,705        —          —          2,519        1,705        4,224        172        1995        12/06        40 years   

Southhaven, MS

    —          1,298        1,338        —          —          1,298        1,338        2,636        135        2005        12/06        40 years   

Columbus, MS

    —          707        —          —          —          707        (e     707        (e     (e     11/10  (m)      (e

Lancaster, TX

    —          987        —          —          —          987        (e     987        (e     (e     12/10  (m)      (e

Lowe’s:

                       

Memphis, TN

    —          3,215        9,170        24        —          3,215        9,194        12,409        1,960        2001        06/02        40 years   

M & T Bank:

                       

Carlisle, PA

    —          87        103        —          —          87        103        190        13        1988        01/06        40 years   

Magic China Café:

                       

Orlando, FL

    47  (o)      40        111        —          —          40        111        151        19        2001        02/04        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 12


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Magic Mountain:

                       

Columbus, OH

    —          5,380        2,693        —          —          5,380        2,693        8,073        238        1990        06/07        40 years   

Columbus, OH

    —          2,076        1,906        —          —          2,076        1,906        3,982        169        1990        06/07        40 years   

Majestic Liquors:

                       

Coffee City, TX

    —          1,330        3,858        —          —          1,330        3,858        5,188        567        1996        02/05        40 years   

Ft. Worth, TX

    —          988        2,368        —          —          988        2,368        3,356        348        1997        02/05        40 years   

Ft. Worth, TX

    —          1,652        2,018        —          —          1,652        2,018        3,670        296        2000        02/05        40 years   

Ft. Worth, TX

    —          2,505        2,138        —          —          2,505        2,138        4,643        314        1988        02/05        40 years   

Ft. Worth, TX

    —          611        1,609        —          —          579        1,609        2,188        236        1974        02/05        40 years   

Hudson Oaks, TX

    —          361        1,029        —          —          361        1,029        1,390        151        1993        02/05        40 years   

Granbury, TX

    —          786        1,234        —          —          786        1,234        2,020        148        2006        05/05  (g)      40 years   

Azle, TX

    —          648        859        —          —          648        859        1,507        76        1970        06/07        40 years   

Ft. Worth, TX

    —          575        933        —          —          575        933        1,508        83        1982        06/07        40 years   

Mattress Firm:

                       

Baton Rouge, LA

    —          609        914        —          —          609        914        1,523        343        1995        12/95        40 years   

MC Sports:

                       

Lapeer, MI

    —          408        2,086        —          —          408        2,086        2,494        172        2007        10/05        40 years   

Merchant’s Tires:

                       

Hampton, VA

    —          180        427        —          —          180        427        607        62        1986        03/05        40 years   

Newport News, VA

    —          234        259        —          —          234        259        493        38        1986        03/05        40 years   

Norfolk, VA

    —          398        508        —          —          398        508        906        74        1986        03/05        40 years   

Rockville, MD

    —          1,030        306        —          —          1,030        306        1,336        44        1974        03/05        40 years   

Washington, DC

    —          624        578        —          —          624        578        1,202        84        1983        03/05        40 years   

Mi Pueblo Foods:

                       

Palo Alto, CA

    —          2,272        3,405        28        —          2,272        3,433        5,705        1,004        1998        12/98  (f)      40 years   

Michaels:

                       

Fairfax, VA

    —          992        773        1,369        —          992        2,141        3,133        527        1995        12/95        40 years   

Grapevine, TX (n)

    —          1,018        2,067        —          —          1,018        2,067        3,085        648        1998        06/98        40 years   

Plymouth Meeting, PA

    —          2,911        2,595        —          —          2,911        2,595        5,506        696        1999        10/98  (g)      40 years   

Michael’s Family Restaurant:

                       

Sherman, TX

    —          233        126        24        —          233        150        383        29        1969        09/06        20 years   

Mister Car Wash:

                       

Anoka, MN

    —          212        214        —          —          212        214        426        53        1968        04/07        15 years   

Brooklyn Park, MN

    —          438        778        —          —          438        778        1,216        115        1985        04/07        25 years   

Cedar Rapids, IA

    —          391        816        —          —          391        816        1,207        121        1989        04/07        25 years   

Clive, IA

    —          1,141        935        —          —          1,141        935        2,076        173        1983        04/07        20 years   

Cottage Grove, MN

    —          274        485        —          —          274        485        759        72        1992        04/07        25 years   

Des Moines, IA

    —          249        596        —          —          249        596        845        74        1990        04/07        30 years   

Des Moines, IA

    —          213        476        —          —          213        476        689        88        1964        04/07        20 years   

Eden Prairie, MN

    —          865        751        —          —          865        751        1,616        139        1984        04/07        20 years   

Edina, MN

    —          894        687        —          —          894        687        1,581        127        1985        04/07        20 years   

Houston, TX

    —          1,846        1,592        —          —          1,846        1,592        3,438        236        1983        04/07        25 years   

Houston, TX

    —          624        1,108        —          —          624        1,108        1,732        137        1988        04/07        30 years   

Houston, TX

    —          5,126        1,267        —          —          5,126        1,267        6,393        134        1995        04/07        35 years   

Houston, TX

    —          796        678        —          —          796        678        1,474        101        1986        04/07        25 years   

Houston, TX

    —          1,347        1,702        —          —          1,347        1,702        3,049        210        1984        04/07        30 years   

Houston, TX

    —          1,960        1,145        —          —          1,960        1,145        3,105        170        1983        04/07        25 years   

Houston, TX

    —          3,193        1,305        —          —          3,193        1,305        4,498        138        1995        04/07        35 years   

Houston, TX

    —          288        466        —          —          288        466        754        115        1970        04/07        15 years   

Houston, TX

    —          2,260        1,806        —          —          2,260        1,806        4,066        268        1975        04/07        25 years   

Humble, TX

    —          1,204        1,517        —          —          1,204        1,517        2,721        161        1993        04/07        35 years   

Plymouth, MN

    —          827        182        —          —          827        182        1,009        67        1955        04/07        10 years   

Roseville, MN

    —          861        564        —          —          861        564        1,425        104        1963        04/07        20 years   

Spokane, WA

    —          214        580        —          —          214        580        794        72        1990        04/07        30 years   

Spokane, WA

    —          1,253        1,146        —          —          1,253        1,146        2,399        121        1997        04/07        35 years   

St. Cloud, MN (n)

    —          243        391        —          —          243        391        634        73        1986        04/07        20 years   

Stillwater, MN

    —          289        214        —          —          289        214        503        53        1971        04/07        15 years   

Sugarland, TX

    —          3,789        1,972        —          —          3,789        1,972        5,761        209        1995        04/07        35 years   

West St Paul, MN

    —          836        236        —          —          836        236        1,072        44        1972        04/07        20 years   

Rochester, MN

    —          319        451        —          —          319        451        770        36        1994        10/07        40 years   

Rochester, MN

    —          1,055        2,327        —          —          1,055        2,327        3,382        187        2003        10/07        40 years   

Birmingham, AL

    —          2,378        2,145        —          —          2,378        2,145        4,523        223        1985        11/07        30 years   

Clearwater, FL

    —          825        765        —          —          825        765        1,590        96        1969        11/07        25 years   

See accompanying report of independent registered public accounting firm.

 

F - 13


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Mesquite, TX

    —          1,596        2,201        —          —          1,596        2,201        3,797        275        1987        11/07        25 years   

Seminole, FL

    —          2,166        1,496        —          —          2,166        1,496        3,662        156        1985        11/07        30 years   

Tampa, FL

    —          2,993        1,669        —          —          2,993        1,669        4,662        209        1969        11/07        25 years   

Vestavia Hills, AL

    —          1,009        956        —          —          1,009        956        1,965        119        1967        11/07        25 years   

El Paso, TX

    —          1,424        1,306        —          —          1,424        1,306        2,730        132        1986        12/07        30 years   

El Paso, TX

    —          988        1,046        —          —          988        1,046        2,034        80        1998        12/07        40 years   

El Paso, TX

    —          1,399        1,468        —          —          1,399        1,468        2,867        112        1991        12/07        40 years   

El Paso, TX

    —          664        824        —          —          664        824        1,488        63        1991        12/07        40 years   

El Paso, TX

    —          1,807        2,287        —          —          1,807        2,287        4,094        175        1983        12/07        40 years   

Muchas Gracias Mexican Restaurant:

                       

Salem, OR

    —          556        736        —          —          556        736        1,292        166        1996        12/01        40 years   

My Big Fat Greek Restaurant:

                       

Tucson, AZ

    —          996        2,742        —          —          996        2,742        3,738        226        2007        12/06  (m)      40 years   

Olathe, KS

    —          525        731        —          —          525        731        1,256        6        2005        09/10        35 years   

Nitlantika:

                       

Hollywood, FL

    —          383        88        37        —          234        —          234        —          1960        12/05        15 years   

Office Depot:

                       

Arlington, TX

    —          596        1,411        —          —          596        1,411        2,007        597        1994        01/94        40 years   

Richmond, VA

    —          889        1,948        —          —          889        1,948        2,837        710        1996        05/96        40 years   

Hartsdale, NY

    —          4,509        2,454        —          —          4,509        2,454        6,963        408        1996        09/97        40 years   

Gastonia, NC

    —          1,554        2,367        —          —          1,554        2,367        3,921        357        2004        12/04        40 years   

OfficeMax:

                       

Cincinnati, OH

    —          543        1,575        —          —          543        1,575        2,118        649        1994        07/94        40 years   

Evanston, IL

    —          1,868        1,758        —          —          1,868        1,758        3,626        684        1995        06/95        40 years   

Altamonte Springs, FL

    —          1,690        3,050        —          —          1,690        3,050        4,740        1,135        1995        01/96        40 years   

Cutler Bay, FL

    —          989        1,479        —          —          989        1,479        2,468        536        1995        06/96        40 years   

Sacramento, CA

    —          1,144        2,961        —          —          1,144        2,961        4,105        1,037        1996        12/96        40 years   

Salinas, CA

    —          1,353        1,829        —          —          1,353        1,829        3,182        635        1995        02/97        40 years   

Redding, CA

    —          667        2,182        —          —          667        2,182        2,849        739        1997        06/97        40 years   

Kelso, WA

    —          868        —          1,806        —          868        1,806        2,674        585        1998        09/97  (g)      40 years   

Lynchburg, VA

    —          562        —          1,851        —          562        1,851        2,413        569        1998        02/98  (m)      40 years   

Leesburg, FL

    —          640        —          1,929        —          640        1,929        2,569        581        1998        08/98  (m)      40 years   

Tigard, OR

    —          1,540        2,247        —          —          1,540        2,247        3,787        681        1995        11/98        40 years   

Griffin, GA

    —          685        —          1,802        —          685        1,802        2,487        527        1999        11/98  (g)      40 years   

Old River Cabinets:

                       

Fairfax, VA

    —          194        365        29        —          194        394        588        73        1995        12/95        40 years   

Orlando Metro Gymnastics:

                       

Orlando, FL

    —          428        1,345        —          —          428        1,345        1,773        200        2003        01/05        40 years   

Palais Royale:

                       

Sealy, TX

    —          457        504        1,634        —          462        2,134        2,596        259        1982        03/99        40 years   

Pantry I Petroleum:

                       

Avis, PA

    —          392        326        —          —          392        326        718        88        1976        08/05        20 years   

Howard, PA

    —          136        375        —          —          136        375        511        46        1987        01/06        40 years   

Patriot Fuels:

                       

Vinita, OK

    —          72        368        —          —          72        368        440        24        1972        07/09        20 years   

Pennstar Bank:

                       

Dallas, PA

    —          214        345        —          —          214        345        559        93        1995        08/05        20 years   

Pep Boys:

                       

Chicago, IL

    —          1,077        3,756        —          —          1,077        3,756        4,833        335        1993        11/07        35 years   

Cicero, IL

    —          1,341        3,760        —          —          1,341        3,760        5,101        336        1993        11/07        35 years   

Cornwell Heights, PA

    —          2,058        3,102        —          —          2,058        3,102        5,160        388        1972        11/07        25 years   

East Brunswick, NJ

    —          2,449        5,026        —          —          2,449        5,026        7,475        524        1987        11/07        30 years   

Guayama, PR

    —          1,729        2,732        —          —          1,729        2,131        3,860        70        1998        11/07        33 years   

Jacksonville, FL

    —          810        2,331        —          —          810        2,331        3,141        208        1989        11/07        35 years   

Joliet, IL

    —          1,506        3,727        —          —          1,506        3,727        5,233        333        1993        11/07        35 years   

Lansing, IL

    —          869        3,440        —          —          869        3,440        4,309        307        1993        11/07        35 years   

Las Vegas, NV

    —          1,917        2,530        —          —          1,917        2,530        4,447        226        1989        11/07        35 years   

Marietta, GA

    —          1,311        3,556        —          —          1,311        3,556        4,867        370        1987        11/07        30 years   

Marlton, NJ

    —          1,608        4,142        —          —          1,608        4,142        5,750        431        1983        11/07        30 years   

Philadelphia, PA

    —          1,300        3,830        —          —          1,300        3,830        5,130        342        1995        11/07        35 years   

Quakertown, PA

    —          1,129        3,252        —          —          1,129        3,252        4,381        290        1995        11/07        35 years   

Reading, PA

    —          1,189        3,367        —          —          1,189        2,819        4,008        109        1989        11/07        28 years   

See accompanying report of independent registered public accounting firm.

 

F - 14


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Roswell, GA

    —          931        2,732        —          —          931        2,732        3,663        285        2007        11/07        30 years   

Turnersville, NJ

    —          990        3,494        —          —          990        3,494        4,484        364        1986        11/07        30 years   

Houston, TX

    —          734        3,028        —          —          734        3,028        3,762        71        1994        04/10        30 years   

Perkins Restaurant:

                       

Des Moines, IA

    —          226        203        —          —          226        203        429        113        1976        06/05        10 years   

Des Moines, IA

    —          270        218        —          —          270        218        488        121        1977        06/05        10 years   

Des Moines, IA

    —          256        136        —          —          256        136        392        75        1976        06/05        10 years   

Newton, IA

    —          354        402        —          —          354        402        756        223        1979        06/05        10 years   

Urbandale, IA

    —          377        581        —          —          377        581        958        161        1979        06/05        20 years   

Pet Paradise:

                       

Houston, TX

    —          417        2,306        —          —          417        2,306        2,723        161        2008        03/08        40 years   

Bunnell, FL

    —          316        881        —          —          316        881        1,197        60        1997        04/08        40 years   

Houston, TX

    —          535        —          3,426        —          535        3,426        3,961        146        2009        09/08  (m)      40 years   

Charlotte, NC

    —          825        —          3,231        —          825        3,231        4,056        118        2009        11/08  (m)      40 years   

Davie, FL

    —          1,138        1,069        —          —          1,138        1,069        2,207        62        2003        12/08        35 years   

Petco:

                       

Grand Forks, ND

    —          307        910        —          —          307        910        1,217        297        1996        12/97        40 years   

Petro Express:

                       

Charlotte, NC

    —          1,025        1,605        —          —          1,025        1,605        2,630        198        1986        04/07        30 years   

Belmont, NC

    —          1,508        1,622        —          —          1,508        1,622        3,130        172        2001        04/07        35 years   

Charlotte, NC

    —          1,697        2,419        —          —          1,697        2,419        4,116        224        2005        04/07        40 years   

Charlotte, NC

    —          1,258        1,560        —          —          1,258        1,560        2,818        145        2004        04/07        40 years   

Charlotte, NC

    —          1,810        2,570        —          —          1,810        2,570        4,380        238        2004        04/07        40 years   

Charlotte, NC

    —          1,030        1,725        —          —          1,030        1,725        2,755        213        1983        04/07        30 years   

Charlotte, NC

    —          1,037        1,468        —          —          1,037        1,468        2,505        155        1997        04/07        35 years   

Charlotte, NC

    —          2,316        2,064        —          —          2,316        2,064        4,380        219        1996        04/07        35 years   

Charlotte, NC

    —          1,291        1,839        —          —          1,291        1,839        3,130        227        1988        04/07        30 years   

Charlotte, NC

    —          1,340        1,790        —          —          1,340        1,790        3,130        190        1998        04/07        35 years   

Charlotte, NC

    —          1,458        2,047        —          —          1,458        2,047        3,505        253        1987        04/07        30 years   

Charlotte, NC

    —          1,323        870        —          —          1,323        870        2,193        108        1982        04/07        30 years   

Charlotte, NC

    —          507        698        —          —          507        698        1,205        129        1967        04/07        20 years   

Charlotte, NC

    —          629        876        —          —          629        876        1,505        108        1986        04/07        30 years   

Charlotte, NC

    —          429        425        —          —          429        425        854        53        1983        04/07        30 years   

Charlotte, NC

    —          1,778        1,977        —          —          1,778        1,977        3,755        244        1992        04/07        30 years   

Charlotte, NC

    —          2,165        1,965        —          —          2,165        1,965        4,130        208        1997        04/07        35 years   

Charlotte, NC

    —          2,784        3,720        —          —          2,784        3,720        6,504        394        1998        04/07        35 years   

Charlotte, NC

    —          1,532        1,973        —          —          1,532        1,973        3,505        209        1998        04/07        35 years   

Charlotte, NC

    —          1,293        1,837        —          —          1,293        1,837        3,130        227        1987        04/07        30 years   

Concord, NC

    —          2,144        1,986        —          —          2,144        1,986        4,130        210        2000        04/07        35 years   

Concord, NC

    —          1,828        1,677        —          —          1,828        1,677        3,505        178        2002        04/07        35 years   

Conover, NC

    —          917        1,275        —          —          917        1,275        2,192        135        1999        04/07        35 years   

Cornelius, NC

    —          1,653        2,664        —          —          1,653        2,664        4,317        282        2000        04/07        35 years   

Denver, NC

    —          2,317        1,750        —          —          2,317        1,750        4,067        185        1999        04/07        35 years   

Fort Mill, SC

    —          1,883        1,559        —          —          1,883        1,559        3,442        193        1988        04/07        30 years   

Fort Mill, SC

    —          3,825        2,554        —          —          3,825        2,554        6,379        271        1998        04/07        35 years   

Gastonia, NC

    —          745        760        —          —          745        760        1,505        70        2003        04/07        40 years   

Gastonia, NC

    —          1,070        1,185        —          —          1,070        1,185        2,255        126        1990        04/07        35 years   

Gastonia, NC

    —          965        1,228        —          —          965        1,228        2,193        130        2001        04/07        35 years   

Gastonia, NC

    —          335        545        —          —          335        545        880        50        2000        04/07        40 years   

Hickory, NC

    —          1,975        1,530        —          —          1,975        1,530        3,505        162        2002        04/07        35 years   

Kings
Mountain,

   

                     

NC

    —          1,210        982        —          —          1,210        982        2,192        104        1988        04/07        35 years   

Lake Wylie, SC

    —          1,972        1,283        —          —          1,972        1,283        3,255        136        2003        04/07        35 years   

Lake Wylie, SC

    —          1,381        2,061        —          —          1,381        2,061        3,442        218        1998        04/07        35 years   

Lincolnton, NC

    —          723        532        —          —          723        532        1,255        66        1989        04/07        30 years   

Lincolnton, NC

    —          2,359        1,771        —          —          2,359        1,771        4,130        188        2000        04/07        35 years   

Matthews, NC

    —          1,197        1,746        —          —          1,197        1,746        2,943        216        1987        04/07        30 years   

Mineral Springs, NC

    —          678        577        —          —          678        577        1,255        54        2002        04/07        40 years   

Monroe, NC

    —          709        796        —          —          709        796        1,505        84        1999        04/07        35 years   

Monroe, NC

    —          421        834        —          —          421        834        1,255        88        1997        04/07        35 years   

Monroe, NC

    —          857        1,023        —          —          857        1,023        1,880        95        2004        04/07        40 years   

Rock Hill, SC

    —          778        727        —          —          778        727        1,505        90        1990        04/07        30 years   

Rock Hill, SC

    —          2,119        1,886        —          —          2,119        1,886        4,005        200        1998        04/07        35 years   

Rock Hill, SC

    —          3,095        1,910        —          —          3,095        1,910        5,005        202        1999        04/07        35 years   

Statesville, NC

    —          1,886        2,182        —          —          1,886        2,182        4,068        231        1999        04/07        35 years   

Thomasville, NC

    —          994        1,761        —          —          994        1,761        2,755        187        2000        04/07        35 years   

Waxhaw, NC

    —          508        747        —          —          508        747        1,255        69        2002        04/07        40 years   

York, SC

    —          2,306        1,449        —          —          2,306        1,449        3,755        154        1999        04/07        35 years   

Charlotte, NC

    —          1,231        1,214        —          —          1,231        1,214        2,445        110        1997        05/07        40 years   

Charlotte, NC

    —          1,849        2,280        —          —          1,849        2,280        4,129        207        2005        05/07        40 years   

Rock Hill, SC

    —          3,108        2,146        —          —          3,108        2,146        5,254        194        1999        05/07        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 15


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

PetSmart:

                       

Chicago, IL

    —          2,724        3,566        —          —          2,724        3,566        6,290        1,096        1998        09/98        40 years   

Pier I Imports:

                       

Anchorage, AK

    —          928        1,663        —          —          928        1,663        2,591        617        1995        02/96        40 years   

Memphis, TN

    —          713        822        —          —          713        822        1,535        278        1997        09/96  (f)      40 years   

Sanford, FL

    —          738        803        —          —          738        803        1,541        257        1998        06/97  (f)      40 years   

Valdosta, GA

    —          391        806        —          —          391        806        1,197        224        1999        01/99  (f)      40 years   

Pizza Hut:

                       

Monroeville, AL

    —          547        44        —          —          547        44        591        10        1976        12/01        40 years   

Popeye’s:

                       

Snellville, GA

    —          642        437        —          —          642        437        1,079        99        1995        12/01        40 years   

Pro Tip Nails & Spa:

                       

Orlando, FL

    47  (o)      40        111        —          —          40        111        151        —          2001        02/04        40 years   

Pull-A-Part:

                       

Augusta, GA

    —          1,414        —          1,451        —          1,414        1,451        2,865        128        2007        08/06  (m)      40 years   

Birmingham, AL

    —          1,165        2,090        —          —          1,165        2,090        3,255        229        1964        08/06        40 years   

Charlotte, NC

    —          2,913        1,724        —          —          2,913        1,724        4,637        189        2006        08/06        40 years   

Conley, GA

    —          1,686        1,387        —          —          1,686        1,387        3,073        152        1999        08/06        40 years   

Harvey, LA

    —          1,887        —          4,326        —          1,887        4,326        6,213        266        2008        08/06  (m)      40 years   

Knoxville, TN

    —          961        2,384        —          —          961        2,384        3,345        206        2007        08/06  (m)      40 years   

Louisville, KY

    —          3,206        1,532        —          —          3,206        1,532        4,738        168        2006        08/06        40 years   

Nashville, TN

    —          2,164        1,414        —          —          2,164        1,414        3,578        155        2006        08/06        40 years   

Norcross, GA

    —          1,831        1,040        —          —          1,831        1,040        2,871        114        1998        08/06        40 years   

Cleveland, OH

    —          4,556        —          2,096        —          4,556        2,096        6,652        164        2007        08/06  (m)      40 years   

Lafayette, LA

    —          1,036        —          2,226        —          1,036        2,226        3,262        169        2007        08/06  (m)      40 years   

Montgomery, AL

    —          934        —          2,013        —          934        2,013        2,947        157        2007        11/06  (m)      40 years   

Jackson, MS

    —          1,315        2,471        —          —          1,315        2,471        3,786        162        2008        12/06  (m)      40 years   

Baton Rouge, LA

    —          893        —          3,256        —          893        3,256        4,149        146        2009        01/07  (m)      40 years   

Memphis, TN

    —          1,779        —          2,964        —          1,779        2,964        4,743        195        2008        05/07  (m)      40 years   

Mobile, AL

    —          550        —          2,772        —          550        2,772        3,322        136        2009        06/07  (m)      40 years   

Winston-Salem, NC

    —          846        —          2,449        —          846        2,449        3,295        125        2009        08/07  (m)      40 years   

Lithonia, GA

    —          2,410        —          2,345        —          2,410        2,345        4,755        115        2009        08/07  (m)      40 years   

Columbia, SC

    —          935        2,178        —          —          935        2,178        3,113        107        2009        09/07  (m)      40 years   

Akron, OH

    —          1,065        —          1,869        —          1,065        1,869        2,934        53        2009        10/08  (m)      40 years   

QuikTrip:

                       

Alpharetta, GA

    —          1,048        607        —          —          1,048        607        1,655        84        1996        06/05        40 years   

Clive, IA

    —          623        557        —          —          623        557        1,180        103        1994        06/05        30 years   

Des Moines, IA

    —          379        455        —          —          379        455        834        84        1990        06/05        30 years   

Des Moines, IA

    —          259        792        —          —          259        792        1,051        146        1996        06/05        30 years   

Gainesville, GA

    —          592        913        —          —          592        913        1,505        169        1989        06/05        30 years   

Herculaneum, MO

    —          856        1,613        —          —          856        1,613        2,469        298        1991        06/05        30 years   

Johnston, IA

    —          394        385        —          —          394        385        779        71        1991        06/05        30 years   

Lee’s Summit, MO

    —          374        1,224        —          —          374        1,224        1,598        170        1999        06/05        40 years   

Norcross, GA

    —          844        297        —          —          839        297        1,136        55        1994        06/05        30 years   

Norcross, GA

    —          948        294        —          —          948        294        1,242        54        1989        06/05        30 years   

Norcross, GA

    —          966        202        —          —          966        202        1,168        37        1993        06/05        30 years   

Olathe, KS

    —          793        1,392        —          —          793        1,392        2,185        193        1999        06/05        40 years   

Tulsa, OK

    —          1,225        650        —          —          1,225        650        1,875        120        1990        06/05        30 years   

Urbandale, IA

    —          340        764        —          —          340        764        1,104        106        1993        06/05        40 years   

Wichita, KS

    —          118        454        —          —          113        454        567        84        1989        06/05        30 years   

Wichita, KS

    —          127        543        —          —          127        543        670        100        1990        06/05        30 years   

Woodstock, GA

    —          488        1,042        —          —          488        1,042        1,530        144        1997        06/05        40 years   

Qwest Corporation Service Center:

                       

Cedar Rapids, IA

    —          184        629        —          —          184        629        813        174        1976        06/05        20 years   

Decorah, IA

    —          72        272        —          —          72        272        344        151        1974        06/05        10 years   

Rallys:

                       

Toledo, OH

    —          126        320        —          —          126        320        446        153        1989        07/92        39 years   

See accompanying report of independent registered public accounting firm.

 

F - 16


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

RBC Bank:

                       

Altamonte Springs, FL

    —          1,316        2,014        —          —          1,316        2,014        3,330        36        2007        05/10        35 years   

REB Oil:

                       

Deerfield Beach, FL

    —          770        274        —          —          770        274        1,044        35        1980        12/05        40 years   

Lake Placid, FL

    —          2,532        1,157        491        —          2,532        1,648        4,180        188        1990        12/05        40 years   

Regal Theatre:

                       

Bolingbrook, IL

    —          2,937        3,032        —          —          2,937        3,032        5,969        333        1994        09/07        30 years   

Reliable Life Insurance:

                       

St. Louis, MO

    —          2,078        13,762        —          —          2,076        13,762        15,838        2,224        1975        05/04        40 years   

Retail Operations (h):

  

                     

Bakersfield, CA

    —          3,664        3,709        —          —          3,664        3,709        7,373        296        1994        03/08        35 years   

Bakersfield, CA

    —          3,363        3,288        —          —          3,363        3,288        6,651        230        2002        03/08        40 years   

Bakersfield, CA

    —          2,043        3,520        —          —          2,043        680        2,723        212        1988        03/08        30 years   

Bakersfield, CA

    —          2,564        4,465        2,093        —          2,564        6,558        9,122        416        1988        03/08        30 years   

Bakersfield, CA

    —          2,099        2,011        —          —          1,759        —          1,759        93        1990        03/08        35 years   

Bakersfield, CA

    —          3,346        6,016        —          —          3,346        6,016        9,362        477        1998        03/08        35 years   

Bakersfield, CA

    —          3,303        3,845        —          —          1,978        —          1,978        268        1975        03/08        25 years   

Bakersfield, CA

    —          2,798        5,260        —          —          2,044        —          2,044        263        1997        03/08        35 years   

San Fernando, CA

    —          6,630        2,706        —          —          6,630        2,706        9,336        257        1988        03/08        30 years   

Ventura, CA

    —          6,253        4,560        207        —          6,253        4,767        11,020        367        1994        03/08        35 years   

Ventura, CA

    —          5,590        4,431        94        —          5,590        4,526        10,116        311        2001        03/08        40 years   

Rite Aid:

                       

Douglasville, GA

    —          413        995        —          —          413        995        1,408        371        1996        01/96        40 years   

Conyers, GA

    —          575        999        —          —          575        999        1,574        338        1997        06/97        40 years   

Augusta, GA

    —          569        1,327        —          —          502        1,327        1,829        433        1997        12/97        40 years   

Riverdale, GA

    —          1,089        1,707        —          —          1,089        1,707        2,796        557        1997        12/97        40 years   

Warner Robins, GA

    —          707        —          1,227        —          707        1,227        1,934        367        1999        03/98  (g)      40 years   

Mobile, AL

    —          1,137        1,694        —          —          1,137        1,694        2,831        383        2000        12/01        40 years   

Orange Beach, AL

    —          1,410        1,996        —          —          1,410        1,996        3,406        451        2000        12/01        40 years   

Norfolk, VA

    —          2,742        1,797        —          —          2,742        1,797        4,539        399        2001        02/02        40 years   

Thorndale, PA

    —          2,261        2,472        —          —          2,261        2,472        4,733        548        2001        02/02        40 years   

West Mifflin, PA

    —          1,402        2,044        —          —          1,402        2,044        3,446        453        1999        02/02        40 years   

Albany, NY

    —          25        867        —          —          25        867        892        136        1994        09/04        40 years   

Saratoga Springs, NY

    —          762        591        30        —          762        621        1,383        93        1993        09/04        40 years   

Monticello, NY

    624        664        769        —          —          664        769        1,433        111        1996        03/05        40 years   

Rite Rug:

                       

Columbus, OH

    —          1,596        934        13        —          1,605        939        2,544        144        1970        11/04        40 years   

Road Ranger:

                       

Springfield, IL

    —          705        1,500        —          —          705        1,500        2,205        170        1997        06/06        40 years   

Belvidere, IL

    —          748        1,256        —          —          1,098        1,256        2,354        143        1997        06/06        40 years   

Brazil, IN

    —          2,199        907        —          —          2,199        907        3,106        103        1990        06/06        40 years   

Cherry Valley, IL

    —          1,409        1,897        —          —          1,409        1,897        3,306        215        1991        06/06        40 years   

Cottage Grove, WI

    —          2,175        1,733        —          —          2,175        1,733        3,908        197        1990        06/06        40 years   

Decatur, IL

    —          815        1,314        —          —          815        1,314        2,129        149        2002        06/06        40 years   

Dekalb, IL

    —          747        1,658        —          —          747        1,658        2,405        188        2000        06/06        40 years   

Elk Run Heights, IA

    —          1,538        2,470        —          —          1,538        2,470        4,008        280        1989        06/06        40 years   

Lake Station, IN

    —          3,172        1,112        —          —          3,172        1,112        4,284        126        1987        06/06        40 years   

Mendota, IL

    —          959        1,296        —          —          1,214        1,296        2,510        147        1996        06/06        40 years   

Oakdale, WI

    —          1,844        1,663        —          —          1,844        1,663        3,507        189        1998        06/06        40 years   

Rockford, IL

    —          1,094        1,662        —          —          1,094        1,662        2,756        189        1996        06/06        40 years   

Rockford, IL

    —          623        1,331        —          —          623        1,331        1,954        151        2000        06/06        40 years   

Springfield, IL

    —          1,795        1,863        —          —          1,795        1,863        3,658        211        1978        06/06        40 years   

Champaign, IL

    —          3,241        2,008        —          —          3,241        2,008        5,249        194        2006        02/07        40 years   

DeKalb, IL

    —          505        1,503        —          —          505        1,503        2,008        146        2004        02/07        40 years   

Fenton, MO

    —          2,584        2,622        —          —          2,584        2,622        5,206        254        2007        02/07        40 years   

Hampshire, IL

    —          1,307        1,501        1,629        —          1,307        3,130        4,437        272        1988        02/07  (f)      40 years   

Princeton, IL (n)

    —          1,141        3,066        —          —          1,141        3,066        4,207        297        2003        02/07        40 years   

South Beloit, IL

    —          3,824        2,309        —          —          3,824        2,309        6,133        224        2002        02/07        40 years   

Cedar Rapids, IA

    —          1,025        984        —          —          1,025        984        2,009        93        1990        03/07        40 years   

Marion, IA

    —          737        1,071        —          —          737        1,071        1,808        102        1974        03/07        40 years   

Okawville, IL

    —          930        1,147        —          —          930        1,147        2,077        97        1997        08/07        40 years   

Dubuque, IA

    —          561        1,941        —          —          561        1,941        2,502        160        2000        09/07        40 years   

Belvidere, IL

    —          521        1,053        —          —          521        1,053        1,574        82        2008        09/07  (f)      40 years   

South Beloit, IL

    —          1,182        1,324        —          —          1,182        1,324        2,506        103        2008        09/07  (f)      40 years   

See accompanying report of independent registered public accounting firm.

 

F - 17


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Alexandria, KY

    —          624        1,306        —          —          624        1,306        1,930        101        1993        04/08        35 years   

Covington, KY

    —          486        1,420        —          —          486        1,420        1,906        110        1996        04/08        35 years   

Dry Ridge, KY

    —          892        1,946        —          —          892        1,946        2,838        176        1973        04/08        30 years   

Florence, KY

    —          615        1,242        —          —          615        1,242        1,857        96        1990        04/08        35 years   

Florence, KY

    —          741        1,272        —          —          741        1,272        2,013        98        1994        04/08        35 years   

Florence, KY

    —          884        1,557        —          —          884        1,557        2,441        121        1995        04/08        35 years   

Hebron, KY

    —          1,522        2,984        —          —          1,522        2,984        4,506        231        1996        04/08        35 years   

Wilder, KY

    —          954        1,902        —          —          954        1,902        2,856        147        1994        04/08        35 years   

Robb & Stucky:

                       

Ft. Myers, FL

    —          2,188        6,225        —          —          2,188        6,225        8,413        2,052        1997        12/97        40 years   

Roger & Marv’s:

                       

Kenosha, WI

    —          1,918        3,431        —          —          1,918        3,431        5,349        1,186        1992        02/97        40 years   

Roni Deutch Tax Services:

                       

Hollywood, FL

    —          203        46        19        —          124        —          124        —          1960        12/05        15 years   

Ross Dress for Less:

                       

Coral Gables, FL

    —          1,782        1,661        —          —          1,782        1,661        3,443        557        1994        06/96        38 years   

Lodi, CA

    —          614        1,415        —          —          614        1,415        2,029        255        1984        03/99        40 years   

Rue 21:

                       

Lapeer, MI

    —          126        645        —          —          126        645        771        53        2007        10/05        40 years   

Sally Beauty Supply:

                       

Lapeer, MI

    —          33        167        —          —          33        167        200        14        2007        10/05        40 years   

Saltgrass Steakhouse:

                       

Beaumont, TX

    —          553        —          —          —          553        (e     553        (e     (e     09/10  (m)      (e

Schlotzsky’s Deli:

                       

Phoenix, AZ

    —          706        315        —          —          706        315        1,021        71        1995        12/01        40 years   

Scottsdale, AZ

    —          717        311        —          —          717        311        1,028        70        1995        12/01        40 years   

Season’s 52:

                       

Schaumburg, IL

    —          2,065        1,311        —          —          2,065        1,311        3,376        296        1998        12/01        40 years   

Shek’s Chinese Express:

                       

Eden Prairie, MN

    —          65        261        —          —          65        261        326        56        1997        12/01        40 years   

Shoes on a Shoestring:

                       

Albuquerque, NM

    —          1,442        2,335        —          —          1,442        2,335        3,777        791        1997        06/97        40 years   

Shop’ n Save:

                       

Homestead, PA

    —          1,139        —          2,158  (j)      —          1,139        2,158        3,297        374        1994        02/97        31 years   

Shop-a-Snak:

                       

Bessemer, AL

    —          564        742        —          —          564        742        1,306        86        2002        05/06        40 years   

Chelsea, AL

    —          391        628        —          —          391        628        1,019        73        1981        05/06        40 years   

Jasper, AL

    —          551        747        —          —          551        747        1,298        86        1998        05/06        40 years   

Birmingham, AL

    —          490        769        —          —          490        769        1,259        89        1992        05/06        40 years   

Birmingham, AL

    —          361        744        —          —          361        744        1,105        86        1989        05/06        40 years   

Birmingham, AL

    —          446        672        —          —          446        672        1,118        78        1989        05/06        40 years   

Birmingham, AL

    —          439        704        —          —          439        704        1,143        81        1989        05/06        40 years   

Homewood, AL

    —          468        657        —          —          468        657        1,125        76        1990        05/06        40 years   

Hoover, AL

    —          764        1,157        —          —          663        1,157        1,820        134        2005        05/06        40 years   

Hoover, AL

    —          713        865        —          —          713        865        1,578        100        1998        05/06        40 years   

Trussville, AL

    —          272        542        —          —          272        542        814        63        1992        05/06        40 years   

Tuscaloosa, AL

    —          525        463        —          —          525        463        988        54        1991        05/06        40 years   

Tuscaloosa, AL

    —          386        733        —          —          386        733        1,119        85        1991        05/06        40 years   

Tuscaloosa, AL

    —          432        559        —          —          432        559        991        65        1991        05/06        40 years   

SOAKS Express Wash:

                       

Ankeny, IA

    —          662        —          —          —          662        (e     662        (e     (e     06/05        (e

Sonic Automotive:

                       

Charlotte, NC

    —          3,619        4,854        —          —          3,619        4,854        8,473        440        1996        05/07        40 years   

Spec’s Liquor and Fine Foods:

                       

Corpus Christi, TX

    —          777        918        520        —          768        1,438        2,206        407        1967        11/93        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 18


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Spencer’s Air Conditioning & Appliance:

                       

Glendale, AZ

    —          342        982        —          —          342        982        1,324        281        1999        12/98  (g)      40 years   

Sports Authority:

                       

Tampa, FL

    —          2,128        1,522        —          —          2,128        1,522        3,650        552        1994        06/96        40 years   

Sarasota, FL

    —          1,428        1,703        —          —          1,428        1,703        3,131        294        1988        09/97        40 years   

Memphis, TN (n)

    —          820        —          2,598        —          820        2,598        3,418        786        1998        12/97  (g)      40 years   

Little Rock, AR

    —          3,113        2,660        —          —          3,113        2,660        5,773        817        1997        09/98        40 years   

Iselin, NJ

    —          3,750        5,983        —          —          3,750        5,983        9,733        1,190        1994        01/03        40 years   

Stone Mountain Chevrolet:

                       

Lilburn, GA

    —          3,027        4,685        —          —          3,027        4,685        7,712        747        2004        08/04        40 years   

Stop N Go:

                       

Grand Prairie, TX

    —          421        685        —          —          421        685        1,106        155        1986        12/01        40 years   

Kennedale, TX

    —          400        692        —          —          391        692        1,083        156        1985        12/01        40 years   

Stripes:

                       

Laredo, TX

    —          841        739        —          —          841        739        1,580        93        2001        12/05        40 years   

Brownsville, TX

    —          1,843        1,419        —          —          1,843        1,419        3,262        179        2000        12/05        40 years   

Brownsville, TX

    —          1,039        1,145        —          —          1,039        1,145        2,184        144        2004        12/05        40 years   

Brownsville, TX

    —          2,530        1,125        —          —          2,530        1,125        3,655        142        1990        12/05        40 years   

Brownsville, TX

    —          1,182        1,105        —          —          1,182        1,105        2,287        139        2000        12/05        40 years   

Brownsville, TX

    —          2,915        1,800        —          —          2,915        1,800        4,715        227        2000        12/05        40 years   

Brownsville, TX

    —          1,392        1,444        —          —          1,392        1,444        2,836        182        2005        12/05        40 years   

Brownsville, TX

    —          933        699        —          —          933        699        1,632        88        1999        12/05        40 years   

Brownsville, TX

    —          1,015        1,308        —          —          1,015        1,308        2,323        165        2003        12/05        40 years   

Brownsville, TX

    —          2,033        1,288        —          —          2,033        1,288        3,321        162        1995        12/05        40 years   

Brownsville, TX

    —          1,279        1,015        —          —          1,279        1,015        2,294        128        1990        12/05        40 years   

Brownsville, TX

    —          2,417        1,828        —          —          2,417        1,828        4,245        230        2000        12/05        40 years   

Corpus Christi, TX

    —          703        1,037        —          —          703        1,037        1,740        131        1986        12/05        40 years   

Corpus Christi, TX

    —          1,308        2,151        —          —          1,308        2,151        3,459        271        1995        12/05        40 years   

Corpus Christi, TX

    —          1,400        1,531        —          —          1,400        1,531        2,931        193        1984        12/05        40 years   

Corpus Christi, TX

    —          853        1,416        —          —          853        1,416        2,269        179        2005        12/05        40 years   

Corpus Christi, TX

    —          1,385        1,419        —          —          1,385        1,419        2,804        179        1982        12/05        40 years   

Donna, TX

    —          1,004        1,127        —          —          1,004        1,127        2,131        142        1995        12/05        40 years   

Edinburg, TX

    —          1,317        1,624        —          —          1,317        1,624        2,941        205        1999        12/05        40 years   

Edinburg, TX

    —          970        1,286        —          —          970        1,286        2,256        162        2003        12/05        40 years   

Falfurias, TX

    —          4,244        4,458        —          —          4,213        4,458        8,671        562        2002        12/05        40 years   

Freer, TX

    —          1,151        1,158        —          —          1,151        1,158        2,309        146        1984        12/05        40 years   

George West, TX

    —          1,243        695        —          —          1,243        695        1,938        88        1996        12/05        40 years   

Harlingen, TX

    —          755        601        —          —          755        601        1,356        76        1987        12/05        40 years   

Harlingen, TX

    —          754        1,152        —          —          754        1,152        1,906        145        1999        12/05        40 years   

Harlingen, TX

    —          906        953        —          —          906        953        1,859        120        1991        12/05        40 years   

La Feria, TX

    —          900        1,347        —          —          900        1,347        2,247        170        1988        12/05        40 years   

Laredo, TX

    —          736        670        —          —          736        670        1,406        84        1984        12/05        40 years   

Laredo, TX

    —          675        533        —          —          675        533        1,208        67        1993        12/05        40 years   

Laredo, TX

    —          1,553        1,775        —          —          1,553        1,775        3,328        224        2000        12/05        40 years   

Laredo, TX

    —          459        460        —          —          459        460        919        58        1983        12/05        40 years   

Laredo, TX

    —          1,495        1,400        —          —          1,495        1,400        2,895        177        1993        12/05        40 years   

Lawton, OK

    —          697        964        —          —          697        964        1,661        122        1984        12/05        40 years   

Los Indios, TX

    —          1,387        1,457        —          —          1,387        1,457        2,844        184        2005        12/05        40 years   

McAllen, TX

    —          975        1,030        —          —          975        1,030        2,005        130        2003        12/05        40 years   

McAllen, TX

    —          987        893        —          —          987        893        1,880        113        1999        12/05        40 years   

Mission, TX

    —          1,125        1,213        —          —          1,125        1,213        2,338        153        2003        12/05        40 years   

Mission, TX

    —          880        1,101        —          —          880        1,101        1,981        139        1999        12/05        40 years   

Olmito, TX

    —          3,688        2,880        —          —          3,688        2,880        6,568        363        2002        12/05        40 years   

Pharr, TX

    —          784        805        —          —          784        805        1,589        101        2000        12/05        40 years   

Pharr, TX

    —          2,426        1,881        —          —          2,426        1,881        4,307        237        2003        12/05        40 years   

Pharr, TX

    —          982        1,178        —          —          982        1,178        2,160        148        1988        12/05        40 years   

Port Isabel, TX

    —          2,062        1,299        —          —          2,062        1,299        3,361        164        1994        12/05        40 years   

Portland, TX

    —          656        915        —          —          656        915        1,571        115        1983        12/05        40 years   

Progreso, TX

    —          1,769        1,811        —          —          1,769        1,811        3,580        228        1999        12/05        40 years   

Riviera, TX

    —          2,351        2,158        —          —          2,351        2,158        4,509        272        2005        12/05        40 years   

San Benito, TX

    —          791        1,857        —          —          791        1,857        2,648        234        1994        12/05        40 years   

San Benito, TX

    —          1,103        1,586        —          —          1,103        1,586        2,689        200        2005        12/05        40 years   

San Juan, TX

    —          1,424        1,546        —          —          1,424        1,546        2,970        195        2004        12/05        40 years   

San Juan, TX

    —          1,124        1,172        —          —          1,124        1,172        2,296        148        1996        12/05        40 years   

South Padre Island, TX

    —          1,367        1,389        —          —          1,367        1,389        2,756        175        1988        12/05        40 years   

Wichita Falls, TX

    —          440        751        —          —          440        751        1,191        95        1984        12/05        40 years   

Wichita Falls, TX

    —          905        1,351        —          —          905        1,351        2,256        170        2000        12/05        40 years   

Wichita Falls, TX

    —          484        828        —          —          484        828        1,312        104        1983        12/05        40 years   

Palmview, TX

    —          835        1,372        —          —          835        1,372        2,207        144        2005        10/06        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 19


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Harlingen, TX

    —          638        1,807        —          —          638        1,807        2,445        183        2006        12/06        40 years   

Rio Grande City, TX

    —          1,871        1,612        —          —          1,871        1,612        3,483        163        2006        12/06        40 years   

San Juan, TX

    —          816        1,434        —          —          816        1,434        2,250        145        2006        12/06        40 years   

Zapata, TX

    —          1,333        1,773        —          —          1,333        1,773        3,106        179        2006        12/06        40 years   

Orange Grove, TX

    —          1,767        1,838        —          —          1,767        1,838        3,605        170        2007        04/07        40 years   

Harlingen, TX

    —          408        826        —          —          408        826        1,234        86        1982        11/07        30 years   

Laredo, TX

    —          698        1,169        —          —          698        1,169        1,867        122        1981        11/07        30 years   

Laredo, TX

    —          448        734        —          —          448        734        1,182        77        1981        11/07        30 years   

Laredo, TX

    —          348        1,168        —          —          348        1,168        1,516        122        1983        11/07        30 years   

Laredo, TX

    —          468        728        —          —          468        728        1,196        76        1973        11/07        30 years   

Laredo, TX

    —          584        958        —          —          584        958        1,542        100        1981        11/07        30 years   

San Benito, TX

    —          420        1,135        —          —          420        1,135        1,555        118        1985        11/07        30 years   

Del Rio, TX

    —          1,565        758        —          —          1,565        758        2,323        59        1996        11/07        40 years   

Kerrville, TX

    —          640        1,616        —          —          640        1,616        2,256        126        1996        11/07        40 years   

Monahans, TX

    —          2,628        2,973        —          —          2,628        2,973        5,601        232        1996        11/07        40 years   

Odessa, TX

    —          2,633        3,199        —          —          2,633        3,199        5,832        250        2006        11/07        40 years   

San Angelo, TX

    —          194        471        —          —          194        471        665        37        1998        11/07        40 years   

Pharr, TX

    —          573        1,229        —          —          573        1,229        1,802        93        2000        12/07        40 years   

Harlingen, TX

    —          329        935        —          —          329        935        1,264        92        1980        01/08        30 years   

Harlingen, TX

    —          277        808        —          —          277        808        1,085        80        1983        01/08        30 years   

Laredo, TX

    —          325        816        —          —          325        816        1,141        80        1983        01/08        30 years   

McAllen, TX

    —          643        1,776        —          —          643        1,776        2,419        175        1980        01/08        30 years   

Port Isabel, TX

    —          299        855        —          —          299        855        1,154        84        1983        01/08        30 years   

Brownsville, TX

    —          843        1,429        —          —          843        1,429        2,272        94        2007        05/08        40 years   

Edinburg, TX

    —          834        1,787        —          —          834        1,787        2,621        117        2007        05/08        40 years   

La Villa, TX

    —          710        2,166        —          —          710        2,166        2,876        142        2007        05/08        40 years   

Laredo, TX

    —          879        1,593        —          —          879        1,593        2,472        105        2007        05/08        40 years   

Laredo, TX

    —          1,183        1,934        —          —          1,183        1,934        3,117        127        2007        05/08        40 years   

McAllen, TX

    —          1,270        2,383        —          —          1,270        2,383        3,653        208        1986        05/08        30 years   

Houston, TX

    —          696        1,458        —          —          696        1,458        2,154        74        2008        12/08        40 years   

Lubbock, TX

    —          671        1,612        —          —          671        1,612        2,283        82        2007        12/08        40 years   

Subway:

                       

Eden Prairie, MN

    —          54        150        67        —          54        218        272        47        1997        12/01        40 years   

Albany, NY

    —          3        67        —          —          3        67        70        10        1992        09/04        40 years   

Cohoes, NY

    —          21        116        8        —          21        123        144        18        1994        09/04        40 years   

Sunshine Energy:

                       

Kansas City, MO

    —          517        720        —          —          517        720        1,237        42        1993        07/09        25 years   

Neosho, MO

    —          352        —          —          —          352        (c     352        (c     1992        07/09        (c

Superior Petroleum:

                       

Midway, PA

    —          311        708        —          —          311        708        1,019        117        1990        01/06        30 years   

Supervalu:

                       

Huntington, WV

    —          1,254        761        —          —          1,254        761        2,015        264        1971        02/97        40 years   

Maple Heights, OH

    —          1,035        2,874        —          —          1,035        2,874        3,909        997        1985        02/97        40 years   

Susser:

                       

Corpus Christi, TX

    —          630        3,131        —          —          630        3,131        3,761        923        1983        03/99        40 years   

Swansea Quick Cash:

                       

Swansea, IL

    —          46        132        —          —          46        132        178        30        1997        12/01        40 years   

Taco Bell:

                       

Ocala, FL

    —          275        755        —          —          275        755        1,030        171        2001        12/01        40 years   

Ormond Beach, FL

    —          632        526        —          —          632        526        1,158        119        2001        12/01        40 years   

Phoenix, AZ

    —          594        283        —          —          594        283        877        64        1995        12/01        40 years   

Bedford, IN

    —          797        937        —          —          797        937        1,734        108        1989        05/06        40 years   

Columbus, IN

    —          690        1,213        —          —          690        1,213        1,903        140        2005        05/06        40 years   

Columbus, IN

    —          1,257        2,055        —          —          1,257        2,055        3,312        238        1990        05/06        40 years   

Evansville, IN

    —          524        1,815        —          —          524        1,815        2,339        210        2005        05/06        40 years   

Evansville, IN

    —          221        828        —          —          221        828        1,049        96        2003        05/06        40 years   

Evansville, IN

    —          308        1,301        —          —          308        1,301        1,609        150        2000        05/06        40 years   

Fishers, IN

    —          990        486        —          —          990        486        1,476        56        1998        05/06        40 years   

Greensburg, IN

    —          648        1,079        —          —          648        1,079        1,727        125        1998        05/06        40 years   

Indianapolis, IN

    —          1,032        1,650        —          —          1,032        1,650        2,682        191        2004        05/06        40 years   

Indianapolis, IN

    —          547        703        —          —          547        703        1,250        81        2004        05/06        40 years   

Madisonville, KY

    —          682        1,193        —          —          682        1,193        1,875        138        1999        05/06        40 years   

Ownesboro, KY

    —          639        1,326        —          —          639        1,326        1,965        153        2005        05/06        40 years   

Shelbyville, IN

    —          670        1,756        —          —          670        1,756        2,426        203        1998        05/06        40 years   

Speedway, IN

    —          408        1,426        —          —          408        1,426        1,834        165        2003        05/06        40 years   

Terre Haute, IN

    —          1,037        1,656        —          —          1,037        1,656        2,693        191        2003        05/06        40 years   

Terre Haute, IN

    —          1,314        2,249        —          —          1,314        2,249        3,563        260        2003        05/06        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 20


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Vincennes, IN

    —          502        880        —          —          502        880        1,382        102        2004        05/06        40 years   

Anderson, SC

    —          176        436        —          —          176        436        612        1        2000        12/10        30 years   

Anderson, SC

    —          273        820        —          —          273        820        1,093        1        1989        12/10        25 years   

Asheville, NC

    —          408        732        —          —          408        732        1,140        1        1992        12/10        25 years   

Asheville, NC

    —          252        483        —          —          252        483        735        1        1993        12/10        25 years   

Black Mountain, NC

    —          149        313        —          —          149        313        462        1        1992        12/10        25 years   

Blue Ridge, GA

    —          276        553        —          —          276        553        829        1        1992        12/10        25 years   

Cedartown, GA

    —          353        890        —          —          353        890        1,243        1        1990        12/10        25 years   

Duncan, SC

    —          280        483        —          —          280        483        763        1        1999        12/10        30 years   

Easley, SC (n)

    —          444        818        —          —          444        818        1,262        1        1991        12/10        25 years   

Fort Payne, AL

    —          362        533        —          —          362        533        895        1        1989        12/10        25 years   

Franklin, NC

    —          472        687        —          —          472        687        1,159        1        1992        12/10        25 years   

Gaffney, SC

    —          388        940        —          —          388        940        1,328        1        1998        12/10        30 years   

Greenville, SC

    —          169        330        —          —          169        330        499        1        1990        12/10        25 years   

Greenville, SC

    —          414        810        —          —          414        810        1,224        1        1995        12/10        30 years   

Hendersonville, NC

    —          569        1,163        —          —          569        1,163        1,732        2        1988        12/10        25 years   

Inman, SC

    —          223        502        —          —          223        502        725        1        1999        12/10        30 years   

Lavonia, GA

    —          122        359        —          —          122        359        481        —          1999        12/10        30 years   

Madison, AL

    —          498        886        —          —          498        886        1,384        1        1985        12/10        25 years   

Oneonta, AL

    —          362        881        —          —          362        881        1,243        1        1992        12/10        25 years   

Piedmont, SC

    —          249        702        —          —          249        702        951        1        2000        12/10        30 years   

Pisgah Forest, NC

    —          260        672        —          —          260        672        932        1        1998        12/10        30 years   

Rainsville, AL

    —          411        1,077        —          —          411        1,077        1,488        1        1998        12/10        30 years   

Seneca, SC

    —          304        807        —          —          304        807        1,111        1        1993        12/10        25 years   

Simpsonville, SC

    —          635        1,022        —          —          635        1,022        1,657        2        1991        12/10        25 years   

Spartanburg, SC

    —          239        496        —          —          239        496        735        1        1992        12/10        30 years   

Spartanburg, SC

    —          492        949        —          —          492        949        1,441        1        1993        12/10        30 years   

Sylva, NC

    —          580        786        —          —          580        786        1,366        1        1994        12/10        30 years   

Toccoa, GA

    —          201        600        —          —          201        600        801        1        1993        12/10        30 years   

Waynesville, NC

    —          395        585        —          —          395        585        980        1        1998        12/10        30 years   

Taverna Greek Grill:

                       

Farmington, NM

    —          2,757        730        —          —          2,757        730        3,487        48        2003        12/07  (m)      40 years   

Texas Roadhouse:

                       

Grand Junction, CO

    —          584        920        —          —          584        920        1,504        208        1997        12/01        40 years   

Thornton, CO

    —          599        1,019        —          —          599        1,019        1,618        230        1998        12/01        40 years   

TGI Friday’s:

                       

Corpus Christi, TX

    —          1,210        1,532        —          —          1,210        1,532        2,742        346        1995        12/01        40 years   

Third Federal Savings:

                       

Parma, OH

    —          370        238        1,100        —          370        1,338        1,708        135        1977        09/06        20 years   

Thomasville:

                       

Buford, GA

    —          1,267        2,406        —          —          1,267        2,406        3,673        388        2004        07/04        40 years   

TitleMax:

                       

Aiken, SC

    —          442        646        —          —          442        646        1,088        51        1989        08/08        30 years   

Anniston, AL

    —          160        453        —          —          160        453        613        27        2008        08/08        40 years   

Berkeley, MO

    —          237        282        —          —          237        282        519        33        1961        08/08        20 years   

Cheraw, SC

    —          88        330        —          —          88        330        418        31        1976        08/08        25 years   

Columbia, SC

    —          212        319        —          —          212        319        531        25        1987        08/08        30 years   

Dalton, GA

    —          178        347        —          —          178        347        525        33        1972        08/08        25 years   

Darlington, SC

    —          47        267        —          —          47        267        314        25        1973        08/08        25 years   

Fairfield, AL

    —          133        178        —          —          133        178        311        17        1974        08/08        25 years   

Gadsden, AL

    —          250        389        —          —          250        389        639        23        2007        08/08        40 years   

Hueytown, AL

    —          135        93        —          —          135        93        228        22        1948        08/08        10 years   

Jonesboro, GA

    —          675        292        —          —          675        292        967        28        1970        08/08        25 years   

Lawrenceville, GA

    —          370        332        —          —          370        332        702        26        1986        08/08        30 years   

Lewisburg, TN

    —          70        298        —          —          70        298        368        20        1998        08/08        35 years   

Macon, GA

    —          103        290        —          —          103        290        393        34        1967        08/08        20 years   

Marietta, GA

    —          285        278        —          —          285        278        563        33        1967        08/08        20 years   

Memphis, TN

    —          226        444        —          —          226        444        670        35        1986        08/08        30 years   

Memphis, TN

    —          111        237        —          —          111        237        348        19        1981        08/08        30 years   

Montgomery, AL

    —          96        233        —          —          96        233        329        22        1970        08/08        25 years   

Nashville, TN

    —          268        276        —          —          268        276        544        26        1978        08/08        25 years   

Nashville, TN

    —          256        301        —          —          256        301        557        24        1982        08/08        30 years   

See accompanying report of independent registered public accounting firm.

 

F - 21


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Norcross, GA

    —          599        350        —          —          599        350        949        33        1975        08/08        25 years   

Pulaski, TN

    —          109        361        —          —          109        361        470        29        1986        08/08        30 years   

Riverdale, GA

    —          877        400        —          —          877        400        1,277        38        1978        08/08        25 years   

Snellville, GA

    —          565        396        —          —          565        396        961        38        1977        08/08        25 years   

Springfield, MO

    —          125        230        —          —          125        230        355        22        1979        08/08        25 years   

Springfield, MO

    —          220        400        —          —          220        400        620        38        1979        08/08        25 years   

St. Louis, MO

    —          134        398        —          —          134        398        532        27        1993        08/08        35 years   

St. Louis, MO

    —          244        288        —          —          244        288        532        27        1971        08/08        25 years   

Sylacauga, AL

    —          94        191        —          —          94        191        285        15        1986        08/08        30 years   

Taylors, SC

    —          299        372        —          —          299        372        671        25        1999        08/08        35 years   

Tony’s Tires:

                       

Montgomery, AL

    —          593        1,187        43        —          593        1,229        1,822        150        1998        08/06        40 years   

Top’s:

                       

Lacey, WA

    —          2,777        7,082        —          —          2,777        7,082        9,859        2,457        1992        02/97        40 years   

Tractor Supply Co.:

                       

Aransas Pass, TX

    —          101        1,399        200        —          100        1,599        1,699        428        1983        03/99        40 years   

Tully’s:

                       

Cheektowaga, NY

    —          689        386        —          —          689        386        1,075        87        1994        12/01        40 years   

Ultra Car Wash:

                       

Mobile, AL

    —          1,071        1,086        —          —          1,071        1,086        2,157        92        2005        08/07        40 years   

Lilburn, GA

    —          1,396        1,119        —          —          1,396        1,119        2,515        73        2004        05/08        40 years   

Uni-Mart:

                       

Bear Creek, PA

    —          191        230        —          —          191        230        421        62        1980        08/05        20 years   

Chambersburg, PA

    —          76        197        —          —          76        197        273        53        1990        08/05        20 years   

East Brady, PA

    —          269        583        —          —          269        583        852        157        1987        08/05        20 years   

Pleasant Gap, PA

    —          332        593        —          —          332        593        925        159        1996        08/05        20 years   

Port Vue, PA

    —          824        118        —          —          824        118        942        32        1953        08/05        20 years   

Punxsutawney, PA

    —          253        542        —          —          253        542        795        146        1983        08/05        20 years   

Shamokin, PA

    —          324        506        —          —          324        506        830        136        1956        08/05        20 years   

Shippensburg, PA

    —          204        330        —          —          204        330        534        89        1989        08/05        20 years   

Taylor, PA

    —          181        527        —          —          181        527        708        142        1973        08/05        20 years   

Wilkes-Barre, PA

    —          178        471        —          —          178        471        649        127        1989        08/05        20 years   

Wilkes-Barre, PA

    —          876        1,957        —          —          876        1,957        2,833        526        1998        08/05        20 years   

Wilkes-Barre, PA

    —          171        422        —          —          171        422        593        114        1999        08/05        20 years   

Williamsport, PA

    —          909        122        —          —          909        122        1,031        33        1950        08/05        20 years   

Ashland, PA

    —          355        545        —          —          355        545        900        144        1977        09/05        20 years   

Bear Creek, PA (n)

    —          689        275        —          —          689        275        964        73        1980        09/05        20 years   

Mountaintop, PA

    —          423        616        —          —          423        616        1,039        163        1987        09/05        20 years   

Effort, PA

    —          1,297        1,202        —          —          1,297        1,202        2,499        149        2000        01/06        40 years   

Export, PA

    —          222        215        —          —          222        215        437        27        1988        01/06        40 years   

Hughesville, PA

    —          290        566        —          —          290        566        856        70        1977        01/06        40 years   

McSherrystown, PA

    —          135        365        —          —          135        365        500        45        1988        01/06        40 years   

Milesburg, PA

    —          134        373        —          —          134        373        507        46        1987        01/06        40 years   

Nanticoke, PA

    —          175        482        —          —          175        482        657        60        1988        01/06        40 years   

Nuangola, PA

    —          1,062        1,203        —          —          1,062        1,203        2,265        149        2000        01/06        40 years   

Plains, PA

    —          204        401        —          —          204        401        605        50        1994        01/06        40 years   

Punxsutawney, PA

    —          294        650        —          —          294        650        944        81        1983        01/06        40 years   

Williamsport, PA

    —          295        379        —          —          295        379        674        47        1988        01/06        40 years   

Burnham, PA

    —          265        510        —          —          340        435        775        97        1978        07/06        20 years   

United Rentals:

                       

Carrollton, TX

    —          478        535        —          —          478        535        1,013        81        1981        12/04        40 years   

Cedar Park, TX

    —          535        829        —          —          535        829        1,364        125        1990        12/04        40 years   

Clearwater, FL

    —          1,173        1,811        —          —          1,173        1,811        2,984        273        2001        12/04        40 years   

Fort Collins, CO

    —          2,057        978        —          —          2,057        978        3,035        148        1975        12/04        40 years   

Irving, TX

    —          708        911        —          —          708        911        1,619        138        1984        12/04        40 years   

La Porte, TX

    —          1,115        2,125        —          —          1,115        2,125        3,240        321        2000        12/04        40 years   

Littleton, CO

    —          1,743        1,944        —          —          1,743        1,944        3,687        294        2002        12/04        40 years   

Oklahoma City, OK

    —          744        1,265        —          —          744        1,265        2,009        191        1997        12/04        40 years   

Perrysburg, OH

    —          642        1,119        —          —          642        1,119        1,761        169        1979        12/04        40 years   

Plano, TX

    —          1,030        1,148        —          —          1,030        1,148        2,178        173        1996        12/04        40 years   

Temple, TX

    —          1,160        1,360        —          —          1,160        1,360        2,520        205        1998        12/04        40 years   

Ft. Worth, TX

    —          510        1,128        —          —          510        1,128        1,638        168        1997        01/05        40 years   

Ft. Worth, TX

    —          1,428        —          —          —          1,428        (i     1,428        (i     (i     01/05        (i

Melbourne, FL

    —          747        607        —          —          747        607        1,354        85        1970        05/05        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 22


Table of Contents
                Costs Capitalized                                
          Initial Cost  to
Company
    Subsequent to
Acquisition
    Gross Amount at Which
Carried at Close of Period (a) (b)
                     

Life on Which

Depreciation &

 
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

United Trust Bank:

                       

Bridgeview, IL

    —          673        744        —          —          673        744        1,417        168        1997        12/01        40 years   

Vacant Land:

                       

Florence, AL

    —          1,034        —          —          —          748        (e     748        (e     (e     06/04        (e

Longwood, FL

    —          975        —          —          —          975        (e     975        (e     (e     03/06        (e

Vacant Property:

                       

Arlington, TX

    —          435        2,300        334        —          435        2,634        3,069        845        1996        06/96        38 years   

Sarasota, FL

    —          1,168        1,904        219        —          1,168        2,122        3,290        375        1996        09/97        40 years   

Knoxville, TN

    —          467        735        —          —          467        735        1,202        220        1999        01/98  (f)      40 years   

Aransas Pass, TX

    —          90        1,241        —          —          89        1,241        1,330        366        1983        03/99        40 years   

Corpus Christi, TX

    —          224        2,159        —          —          224        2,159        2,383        636        1983        03/99        40 years   

Sarasota, FL

    —          471        1,344        312        —          471        1,656        2,127        243        1983        03/99        40 years   

Sealy, TX

    —          820        905        —          —          820        905        1,725        267        1982        03/99        40 years   

Winfield, AL

    —          420        1,685        —          —          420        1,685        2,105        497        1983        03/99        40 years   

Augusta, GA

    —          177        674        —          —          177        674        851        152        1998        12/01        40 years   

Chandler, AZ

    —          655        791        —          —          655        791        1,446        182        1997        12/01        40 years   

Cincinnati, OH

    —          282        521        279        —          543        539        1,082        119        1998        12/01        40 years   

Clifton, CO

    —          245        732        —          —          245        732        977        166        1998        12/01        40 years   

Columbus, OH

    —          1,032        1,107        —          —          1,032        1,107        2,139        250        1998        12/01        40 years   

Eden Prairie, MN

    —          76        211        94        —          76        305        381        66        1997        12/01        40 years   

Jacksonville, FL

    —          987        856        —          —          794        —          794        170        1996        12/01        40 years   

Mesa, AZ

    —          153        400        —          —          153        400        553        116        1997        12/01        40 years   

Mesa, AZ

    —          43        113        363        —          43        476        519        32        1997        12/01        40 years   

Montgomery, AL

    —          1,418        1,140        —          —          1,418        1,044        2,462        244        1999        12/01        40 years   

Southfield, MI

    —          405        644        —          —          405        644        1,049        167        1976        12/01        40 years   

Swansea, IL

    —          92        265        —          —          92        265        357        60        1997        12/01        40 years   

Florissant, MO

    —          2,490        2,937        —          —          2,490        2,937        5,427        566        1996        04/03        40 years   

Woodstock, GA

    —          1,937        1,285        —          —          1,891        1,016        2,907        210        1997        05/03        40 years   

Buford, GA

    —          1,925        5,035        —          —          1,925        5,035        6,960        813        2003        07/04        40 years   

Cohoes, NY

    —          27        145        9        —          27        154        181        23        1994        09/04        40 years   

Cohoes, NY

    —          46        246        16        —          46        262        308        39        1994        09/04        40 years   

Hudson Falls, NY

    —          57        780        39        —          57        819        876        126        1990        09/04        40 years   

Ticonderoga, NY

    —          89        689        —          —          89        689        778        108        1993        09/04        40 years   

Gastonia, NC

    —          994        1,513        —          —          994        1,513        2,507        229        2004        12/04        40 years   

Dallas, TX

    —          2,407        2,299        —          —          2,407        2,299        4,706        312        1971        06/05        40 years   

Dallas, TX

    —          1,554        1,229        —          —          1,554        1,229        2,783        170        1982        06/05        40 years   

Olean, NY

    —          40        259        —          —          40        259        299        70        1990        08/05        20 years   

Fairview Heights, IL

    —          1,258        2,623        —          —          1,258        2,623        3,881        342        1980        10/05        40 years   

Lapeer, MI

    —          29        211        —          —          29        211        240        18        2007        10/05        40 years   

Lapeer, MI

    —          100        721        —          —          100        721        821        61        2007        10/05        40 years   

Lafayette, LA

    —          603        1,149        —          —          603        1,149        1,752        145        1999        12/05        40 years   

West Palm Beach, FL

    —          619        161        —          —          619        161        780        35        1984        09/06        20 years   

Hillman, MI

    —          167        823        —          —          167        363        530        64        1952        10/06        40 years   

Lithonia, GA

    —          923        1,276        —          —          923        1,276        2,199        113        2002        06/07        40 years   

Lubbock, TX

    —          2,606        2,898        —          —          2,606        2,898        5,504        251        1983        07/07        40 years   

Lubbock, TX

    —          1,293        1,211        —          —          1,293        1,211        2,504        105        1983        07/07        40 years   

Bakersfield, CA

    —          1,643        1,959        —          —          530        —          530        137        1975        03/08        25 years   

Bellingham, WA

    —          1,237        1,260        —          —          1,237        408        1,645        61        1994        06/08        30 years   

Lubbock, TX

    —          943        957        —          —          943        957        1,900        12        1964        11/10        10 years   

Value City Furniture:

                       

White Marsh, MD

    —          3,762        —          3,006        —          3,762        3,006        6,768        961        1998        10/97  (g)      40 years   

Vitamin Shoppe, The:

                       

Cincinnati, OH

    —          297        443        368        —          297        810        1,107        134        1999        06/98  (f)      40 years   

Walgreens:

                       

Sunrise, FL

    —          1,958        1,401        —          —          1,958        1,401        3,359        267        1994        05/03        40 years   

Tulsa, OK

    —          1,193        3,056        —          —          1,193        3,056        4,249        423        2003        06/05        40 years   

Boise, ID

    —          792        1,875        —          —          792        1,875        2,667        49        2000        03/10        30 years   

Nampa, ID

    —          1,062        2,253        —          —          1,062        2,253        3,315        59        2000        03/10        30 years   

Wendy’s:

                       

Sacramento, CA

    —          586        —          —          —          586        (i     586        (i     (i     02/98        (i

New Kensington, PA

    —          501        333        —          —          501        333        834        75        1980        12/01        40 years   

Whataburger:

                       

Albuquerque, NM

    —          624        419        —          —          624        419        1,043        95        1995        12/01        40 years   

See accompanying report of independent registered public accounting firm.

 

F - 23


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Wherehouse Music:

                       

Homewood, AL

    —          1,032        697        —          —          1,032        697        1,729        158        1997        12/01        40 years   

Independence, MO

    —          503        1,209        —          —          503        1,209        1,712        152        1994        12/05        40 years   

Wingfoot:

                       

Beaverdam, OH

    —          (l     1,521        —          —          (l     1,521        1,521        138        2004        05/07        40 years   

Benton, AR

    —          (l     309        —          —          (l     309        309        27        2001        05/07        40 years   

Bowman, SC

    —          (l     969        —          —          (l     969        969        100        1998        05/07        35 years   

Dalton, GA

    —          (l     1,541        —          —          (l     1,541        1,541        140        2004        05/07        40 years   

Dandridge, TN

    —          (l     1,030        —          —          (l     1,030        1,030        107        1989        05/07        35 years   

Franklin, OH

    —          (l     563        —          —          (l     563        563        58        1998        05/07        35 years   

Gary, IN

    —          (l     1,486        —          —          (l     1,486        1,486        135        2004        05/07        40 years   

Georgetown, KY

    —          (l     679        —          —          (l     679        679        82        1997        05/07        30 years   

Mebane, NC

    —          (l     561        —          —          (l     561        561        58        1998        05/07        35 years   

Piedmont, SC

    —          (l     567        —          —          (l     567        567        59        1999        05/07        35 years   

Port
Wentworth,

   

                     

GA

    —          (l     552        —          —          (l     552        552        57        1998        05/07        35 years   

Valdosta, GA

    —          (l     1,477        —          —          (l     1,477        1,477        134        2004        05/07        40 years   

Temple, GA

    —          (l     1,065        —          —          (l     1,065        1,065        83        2007        06/07        40 years   

Whiteland, IN

    —          (l     1,471        —          —          (l     1,471        1,471        127        2004        07/07        40 years   

Des Moines, IA

    —          (l     816        —          —          (l     816        816        71        1987        07/07        40 years   

Robinson, TX

    —          (l     1,183        —          —          (l     1,183        1,183        92        2007        07/07        40 years   

Kearney, MO

    —          (l     1,269        —          —          (l     1,269        1,269        110        2003        07/07        40 years   

Oklahoma City, OK

    —          (l     1,247        —          —          (l     1,247        1,247        90        2008        08/07        40 years   

Amarillo, TX

    —          (l     1,158        —          —          (l     1,158        1,158        74        2008        02/08        40 years   

Jackson, MS

    —          (l     1,281        —          —          (l     1,281        1,281        79        2008        03/08        40 years   

Glendale, KY

    —          (l     1,066        —          —          (l     1,066        1,066        59        2008        07/08        40 years   

Lebanon, TN

    —          (l     1,331        —          —          (l     1,331        1,331        68        2008        08/08        40 years   

Laredo, TX

    —          (l     1,238        —          —          (l     1,238        1,238        55        2009        11/08  (q)      40 years   

Midland, TX

    —          (l     1,148        —          —          (l     1,148        1,148        13        2010        04/10  (q)      40 years   

Tuscaloosa, AL

    —          (l     8        —          —          (l     8        8        —          (q     08/10  (q)      (q

Kenly, NC

    —          (l     —          —          —          (l     —          —          —          (q     11/10  (q)      (q

Winn-Dixie:

                       

Columbus, GA

    —          1,023        1,875        —          —          1,023        1,875        2,898        350        1984        07/03        40 years   

Wireless Wizard:

                       

Ridgeland, MS

    —          436        523        26        —          436        549        985        66        1997        08/06        40 years   

Your Choice:

                       

Hazleton, PA

    —          670        377        —          —          670        377        1,047        101        1974        08/05        20 years   

Montoursville, PA

    —          158        415        13        —          158        428        586        52        1988        01/06        40 years   

Ziebart:

                       

Maplewood, MN

    —          308        311        —          —          308        311        619        46        1990        02/05        40 years   

Middleburg Heights, OH

    —          199        148        —          —          199        148        347        22        1961        02/05        40 years   

Zio’s Italian Kitchen:

                       

Aurora, CO (n)

    —          1,168        1,105        —          —          1,168        1,105        2,273        210        2000        06/05        30 years   

Leasehold Interests:

                       

Lima, OH

    —          1,290        —          —          —          1,290        (e     1,290        1,055        (e     08/01        (e
                                                                             

SUBTOTAL

    20,524        1,127,836        1,463,619        151,411        —          1,123,517        1,592,756        2,716,273        222,921         
                                                                             

Real Estate Held for Investment the Company has Invested in Under Direct Financing Leases:

      

                     

Barnes & Noble:

                       

Plantation, FL

    —          —          3,498        —          —          —          (c     (c     (c     1996        05/95  (f)      (c

Borders:

                       

Altamonte Springs, FL

    —          —          3,267        —          —          —          (c     (c     (c     1997        09/97        (c

Checkers:

                       

Orlando, FL

    —          —          287        —          —          —          (c     (c     (c     1988        07/92        (c

CVS:

                       

San Antonio, TX

    —          —          744        —          —          —          (c     (c     (c     1993        12/93        (c

Amarillo, TX

    —          159        855        —          —          (d     (d     (d     (d     1994        12/94        (d

Lafayette, LA

    —          —          949        —          —          —          (c     (c     (c     1995        01/96        (c

Oklahoma City, OK

    —          (l     1,365        —          —          (l     (c     (c     (c     1997        06/97        (c

Oklahoma City, OK

    —          (l     1,419        —          —          (l     (c     (c     (c     1997        06/97        (c

See accompanying report of independent registered public accounting firm.

 

F - 24


Table of Contents
                Costs Capitalized                                
          Initial Cost to     Subsequent to    

Gross Amount at Which

                      Life on Which  
          Company     Acquisition     Carried at Close of Period (a) (b)                       Depreciation &  
                Building,                 Building,           Accumulated                 Amortization in  
                Improvements &                       Improvements &           Depreciation                 Latest Income  
    Encumbrances     Land     Leasehold
Interests
    Improvements     Carrying
Costs
    Land     Leasehold
Interests
    Total     and
Amortization
    Date  of
Construction
    Date
Acquired
    Statement is
Computed
 

Denny’s:

                       

Stockton, CA

    —          940        509        —          —          (d     (d     (d     (d     1982        09/06        (d

Food 4 Less:

                       

Chula Vista, CA

    —          —          4,266        —          —          —          (c     (c     (c     1995        11/98        (c

Heilig-Meyers/The Room Store:

                       

York, PA

    —          279        1,110        —          —          (d     (d     (d     (d     1997        11/98        (d

Marlow Heights, MD

    —          416        1,397        —          —          (d     (d     (d     (d     1968        11/98        (d

Jared Jewelers:

                       

Phoenix, AZ

    215  (k)      (l     1,242        —          —          (l     (c     (c     (c     1998        12/01        (c

Toledo, OH

    —          (l     1,458        —          —          (l     (c     (c     (c     1998        12/01        (c

Oviedo, FL

    364  (k)      (l     1,500        —          —          (l     (c     (c     (c     1998        12/01        (c

Lewisville, TX

    187  (k)      (l     1,503        —          —          (l     (c     (c     (c     1998        12/01        (c

Glendale, AZ

    —          (l     1,599        —          —          (l     (c     (c     (c     1998        12/01        (c

Kash n’ Karry:

                       

Valrico, FL

    2,979  (p)      1,235        3,255        —          —          (d     (d     (d     (d     1997        06/02        (d

Rite Aid:

                       

Kennett Square, PA

    —          (l     —          1,984        —          (l     (c     (c     (c     2000        12/00        (c

Arlington, VA

    —          (l     3,201        —          —          (l     (c     (c     (c     2000        02/02        (c

Sunshine Energy:

                       

Altamont, KS

    —          124        142        —          —          (d     (d     (d     (d     1979        07/09        (d

Chouteau, OK

    —          113        301        —          —          (d     (d     (d     (d     1988        07/09        (d

Neosho, MO

    —          —          775        —          —          —          (c     (c     (c     1992        07/09        (c
                                                                             

SUBTOTAL

    3,745        3,266        34,642        1,984        —          —          —          —          —           
                                                                             

Real Estate Held for Sale the Company has Invested in:

    

                     

Our Place:

                       

North Richland Hills, TX

    —          584        180        184        —          596        342        938        —          1989        02/06        —     

Power Center:

                       

Midland, MI

    —          1,085        1,635        —          —          1,085        1,635        2,720        —          2006        05/05  (g)      —     

Elmira, NY

    —          2,248        7,159        —          —          2,248        5,291        7,539        —          2006        08/05  (g)      —     

Topsham, ME

    —          1,885        1,735        —          —          1,885        62        1,947        —          2007        02/06  (g)      —     

Irving, TX

    —          951        1,090        —          —          951        1,063        2,014        —          1987        02/06        —     

Waxahachie, TX

    —          1,249        1,097        —          —          1,249        1,069        2,318        —          1995        02/06        —     

Harlingen, TX

    —          247        807        —          —          247        807        1,054        —          2008        09/06  (g)      —     

Harlingen, TX.

    —          749        1,238        —          —          749        1,238        1,987        —          2008        09/06  (g)      —     

Woodstock, GA

    —          261        701        —          —          261        606        867        —          1997        07/08        —     

Tutor Time:

                       

Elk Grove, CA

    —          1,216        2,786        —          —          1,216        2,741        3,957        —          2009        09/08        —     

Vacant Land:

                       

Grand Prairie, TX

    —          387        —          —          —          108        —          108        (e     (e     12/02        —     

Topsham, ME

    —          1,034        —          —          —          293        —          293        (e     (e     02/06        —     

Rockwall, TX

    —          900        —          —          —          900        —          900        (e     (e     02/06        —     

Fairfield Township, OH

    —          3,201        —          —          —          1,868        —          1,868        (e     (e     08/06        —     

Bonita Springs, FL

    —          112        —          —          —          25        —          25        (e     (e     09/06        —     

Lancaster, OH

    —          2,135        —          —          —          1,339        —          1,339        (e     (e     01/08        —     

Hadley, MA

    —          2,869        —          —          —          2,091        —          2,091        (e     (e     02/08        —     
                                                                             

SUBTOTAL

    —          21,113        18,428        184        —          17,111        14,854        31,965        —           
                                                                             

See accompanying report of independent registered public accounting firm.

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION

December 31, 2010

(dollars in thousands)

 

(a) Transactions in real estate and accumulated depreciation during 2010, 2009, and 2008 are summarized as follows:

 

     2010     2009     2008  

Land, buildings, and leasehold interests:

      

Balance at the beginning of year

   $ 2,584,947      $ 2,605,288      $ 2,415,536   

Acquisitions, completed construction and tenant improvements

     248,438        35,924        410,787   

Disposition of land, buildings, and leasehold interests

     (58,438     (21,751     (215,542

Provision for loss on impairment of real estate

     —          (34,514     (5,493
                        

Balance at the close of year

   $ 2,774,947      $ 2,584,947      $ 2,605,288   
                        

Accumulated depreciation and amortization:

      

Balance at the beginning of year

   $ 183,949      $ 146,289      $ 111,080   

Disposition of land, buildings, and leasehold interests

     (2,071     (3,143     (2,591

Depreciation and amortization expense

     41,043        40,803        37,800   
                        

Balance at the close of year

   $ 222,921      $ 183,949      $ 146,289   
                        

As of December 31, 2010, 2009, and 2008, the detailed real estate schedule excludes work in progress of $26,699, $5,634, and $42,253, respectively, which is included in the above reconciliation.

 

(b) As of December 31, 2010, the leases are treated as either operating or financing leases for federal income tax purposes. As of December 31, 2010, the aggregate cost of the properties owned by NNN that are under operating leases were $2,641,832 and financing leases were $4,178.

 

(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) NNN owns only the land for this property.

 

(f) Date acquired represents acquisition date of land. Pursuant to lease agreement, NNN 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. NNN developed the buildings, generally completing construction within 12 months from the acquisition date of the land.

 

(h) In connection with the default of a note receivable and certain lease agreements between NNN and one of NNN’s tenants, in June of 2009, NNN acquired the operations of the auto service business which was operated on certain Investment Properties.

 

(i) NNN owns only the land for this property, which is subject to a ground lease between NNN 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) NNN owns only the building for this property, which is encumbered by a fixed rate mortgage and security agreement.

 

(l) NNN owns only the building for this property. The land is subject to a ground lease between NNN and an unrelated third party.

 

(m) Date acquired represents acquisition date of land. Pursuant to lease agreement, NNN funds the tenant’s construction draws, final funding occurs generally within 12 months from the acquisition of the land.

 

(n) 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 NNN.

 

(o) Property is encumbered as a part of NNN’s $6,952 long-term, fixed rate mortgage and security agreement.

 

(p) Property is encumbered as a part of NNN’s $21,000 long-term, fixed rate mortgage and security agreement.

 

(q) The land is subject to a ground lease between NNN and an unrelated third party. Pursuant to the lease agreement, NNN funds the tenant’s construction draws, final funding occurs generally within 12 months from the execution of the ground lease.

See accompanying report of independent registered public accounting firm.

 

F - 26


Table of Contents

NATIONAL RETAIL PROPERTIES, INC. AND SUBSIDIARIES

SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

December 31, 2010

(dollars in thousands)

 

Description

   Interest
Rate
    Maturity
Date
     Periodic
Payment
Terms
    Prior
Liens
     Face Amount
of Mortgages
     Carrying
Amount of
Mortgages (f)
    Principal Amount
of Loans Subject
to Delinquent
Principal or
Interest
 

First mortgages on properties:

                 

Paramus, NJ

     9.000     2022         (b     —         $ 6,000       $ 4,971      $ —     

Des Moines, IA

     8.000     2013         (d     —           400         269        —     

Terre Haute, IN

     7.000     2011         (c     —           1,582         1,452        —     

Cleveland, OH

     10.000     2028         (c     —           6,644         6,644        —     

Milford, CT

     8.000     2013         (c     —           1,550         1,550        —     

Hollywood, FL

     6.000     2013         (c     —           450         450        —     

Taylorsville, NC

     9.500     2013         (e     —           352         352        —     

4 properties in FL and GA

     6.250     2014         (c     —           5,500         5,450        —     
                                   
             $ 22,478       $ 21,138   (a)    $ —     
                                   

 

(a) The following shows the changes in the carrying amounts of mortgage loans during the years:

 

     2010     2009     2008  

Balance at beginning of year

   $ 34,707      $ 35,993      $ 49,336   

New mortgage loans

     6,302  (g)      2,259  (g)      17,028  (g) 

Deductions during the year:

      

Collections of principal

     (7,148     (3,545     (27,874

Foreclosures

     (12,723     —          (2,497
                        

Balance at the close of year

   $ 21,138      $ 34,707      $ 35,993   
                        

 

(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) Principal and interest is payable in full on the earlier of (i) specific events as outlined in the loan agreement, or (ii) maturity date.

 

(f) Mortgages held by NNN and its subsidiaries for federal income tax purposes for the years ended December 31, 2010, 2009 and 2008 were $21,138, $34,707, and $35,993, respectively.

 

(g) Mortgages totaling $6,302, $2,259, and $17,028, were accepted in connection with real estate transactions for the year ended December 31, 2010, 2009 and 2008, respectively.

See accompanying report of independent registered public accounting firm.