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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2011

OR

 

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

For the transition period from              to             

Commission File Number 001-11290

 

 

NATIONAL RETAIL PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   56-1431377

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices, including zip code)

(407) 265-7348

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or 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 Exchange Act).    Yes  ¨    No  x

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

85,011,819 shares of common stock, $0.01 par value, outstanding as of April 28, 2011.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

               PAGE
REFERENCE
 
Part I – Financial Information   
   Item 1.    Unaudited Financial Statements:   
      Condensed Consolidated Balance Sheets      3   
      Condensed Consolidated Statements of Earnings      4   
      Condensed Consolidated Statements of Cash Flows      6   
      Notes to Condensed Consolidated Financial Statements      8   
   Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations      18   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      27   
   Item 4.    Controls and Procedures      28   
Part II – Other Information   
   Item 1.    Legal Proceedings      29   
   Item 1A.    Risk Factors      29   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      29   
   Item 3.    Defaults Upon Senior Securities      29   
   Item 4.    [Removed and Reserved]      29   
   Item 5.    Other Information      29   
   Item 6.    Exhibits      29   
Signatures      34   
Exhibit Index      35   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(Unaudited)

 

     March 31,     December 31,  
     2011     2010  
ASSETS     

Real estate, Investment Portfolio:

    

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

   $ 2,560,213      $ 2,519,950   

Accounted for using the direct financing method

     31,107        29,773   

Real estate, Inventory Portfolio, held for sale

     31,230        32,076   

Investment in unconsolidated affiliate

     4,466        4,515   

Mortgages, notes and accrued interest receivable, net of allowance

     29,905        30,331   

Commercial mortgage residual interests

     16,402        15,915   

Cash and cash equivalents

     2,557        2,048   

Receivables, net of allowance of $1,817 and $1,750, respectively

     2,831        3,403   

Accrued rental income, net of allowance of $4,001 and $3,609, respectively

     25,482        25,535   

Debt costs, net of accumulated amortization of $12,372 and $11,198, respectively

     8,192        9,366   

Other assets

     41,312        40,663   
                

Total assets

   $ 2,753,697      $ 2,713,575   
                
LIABILITIES AND EQUITY     

Liabilities:

    

Line of credit payable

   $ 184,200      $ 161,000   

Mortgages payable

     23,997        24,269   

Notes payable – convertible, net of unamortized discount of $10,597 and $12,201, respectively

     351,138        349,534   

Notes payable, net of unamortized discount of $1,068 and $1,118, respectively

     598,932        598,882   

Accrued interest payable

     19,015        7,342   

Other liabilities

     39,544        43,774   
                

Total liabilities

     1,216,826        1,184,801   
                

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; 84,570,503 and 83,613,289 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

     847        838   

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

     —          —     

Capital in excess of par value

     1,448,689        1,429,750   

Retained earnings

     (9,319     3,234   

Accumulated other comprehensive income

     3,322        1,661   
                

Total stockholders’ equity of NNN

     1,535,539        1,527,483   

Noncontrolling interests

     1,332        1,291   
                

Total equity

     1,536,871        1,528,774   
                

Total liabilities and equity

   $ 2,753,697      $ 2,713,575   
                

See accompanying notes to condensed consolidated financial statements

 

3


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands, except per share data)

(unaudited)

 

     Quarter Ended
March 31,
 
     2011     2010  

Revenues:

    

Rental income from operating leases

   $ 57,340      $ 51,919   

Earned income from direct financing leases

     760        764   

Percentage rent

     113        54   

Real estate expense reimbursement from tenants

     2,335        1,758   

Interest and other income from real estate transactions

     637        950   

Interest income on commercial mortgage residual interests

     767        1,049   
                
     61,952        56,494   
                

Retail operations:

    

Revenues

     8,850        6,536   

Operating expenses

     (8,852     (6,669
                

Net

     (2     (133
                

Operating expenses:

    

General and administrative

     6,657        5,581   

Real estate

     3,722        3,472   

Depreciation and amortization

     13,525        11,807   

Impairment – commercial mortgage residual interests valuation adjustment

     129        3,683   
                
     24,033        24,543   
                

Earnings from operations

     37,917        31,818   
                

Other expenses (revenues):

    

Interest and other income

     (342     (252

Interest expense

     17,662        15,989   
                
     17,320        15,737   
                

Earnings from continuing operations before income tax benefit (expense) and equity in earnings of unconsolidated affiliate

     20,597        16,081   

Income tax benefit (expense)

     19        (104

Equity in earnings of unconsolidated affiliate

     109        105   
                

Earnings from continuing operations

     20,725        16,082   

Earnings (loss) from discontinued operations (Note 7):

    

Real estate, Investment Portfolio, net of income tax benefit (expense)

     (4     75   

Real estate, Inventory Portfolio, net of income tax expense

     132        141   
                
     128        216   
                

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED

(dollars in thousands, except per share data)

(unaudited)

 

    

Quarter Ended

March 31,

 
     2011     2010  

Earnings including noncontrolling interests

   $ 20,853      $ 16,298   

Loss (earnings) attributable to noncontrolling interests:

    

Continuing operations

     26        143   

Discontinued operations

     (59     (76
                
     (33     67   
                

Net earnings attributable to NNN

   $ 20,820      $ 16,365   
                

Net earnings attributable to NNN

   $ 20,820      $ 16,365   

Series C preferred stock dividends

     (1,696     (1,696
                

Net earnings available to common stockholders

   $ 19,124      $ 14,669   
                

Net earnings per share of common stock:

    

Basic:

    

Continuing operations

   $ 0.23      $ 0.18   

Discontinued operations

     0.00        0.00   
                

Net earnings

   $ 0.23      $ 0.18   
                

Diluted:

    

Continuing operations

   $ 0.23      $ 0.18   

Discontinued operations

     0.00        0.00   
                

Net earnings

   $ 0.23      $ 0.18   
                

Weighted average number of common shares outstanding:

    

Basic

     83,122,731        82,320,772   
                

Diluted

     83,570,438        82,446,011   
                

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

    

Quarter Ended

March 31,

 
     2011     2010  

Cash flows from operating activities:

    

Earnings including noncontrolling interests

   $ 20,853      $  16,298   

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

    

Performance incentive plan expense

     1,739        1,113   

Stock option expense – tax effect

     —          122   

Depreciation and amortization

     13,670        12,045   

Impairment – commercial mortgage residual interests valuation

     129        3,683   

Amortization of notes payable discount

     1,654        1,552   

Amortization of deferred interest rate hedges

     (43     (42

Equity in earnings of unconsolidated affiliate

     (109     (105

Distributions received from unconsolidated affiliate

     149        143   

Gain on disposition of real estate, Investment Portfolio

     (30     (22

Gain on note receivable and property foreclosures

     —          (16

Gain on disposition of real estate, Inventory Portfolio

     (102     (87

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

    

Additions to real estate, Inventory Portfolio

     (92     (8

Proceeds from disposition of real estate, Inventory Portfolio

     1,058        775   

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

     413        372   

Increase in work in process

     (322     (152

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

     209        (153

Decrease in receivables

     581        766   

Increase in commercial mortgage residual interests

     (556     (15

Decrease (increase) accrued rental income

     53        (270

Decrease in other assets

     502        236   

Increase in accrued interest payable

     11,673        11,015   

Decrease in other liabilities

     (3,132     (734

Increase (decrease) in tax liability

     569        (70
                

Net cash provided by operating activities

     48,866        46,446   
                

Cash flows from investing activities:

    

Proceeds from the disposition of real estate, Investment Portfolio

     773        1,419   

Additions to real estate, Investment Portfolio:

    

Accounted for using the operating method

     (57,512     (6,491

Accounted for using the direct financing method

     (1,747     —     

Increase in mortgages and notes receivable

     (1,245     —     

Principal payments on mortgages and notes

     1,462        291   

Payment of lease costs

     (138     (269

Other

     463        (750
                

Net cash used in investing activities

   $ (57,944   $ (5,800
                

See accompanying notes to condensed consolidated financial statements

 

6


Table of Contents

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(dollars in thousands)

(unaudited)

 

    

Quarter Ended

March 31,

 
     2011     2010  

Cash flows from financing activities:

    

Proceeds from line of credit payable

   $ 129,500      $ —     

Repayment of line of credit payable

     (106,300     —     

Repayment of mortgages payable

     (272     (253

Proceeds from issuance of common stock

     20,025        8,357   

Payment of Series C preferred stock dividends

     (1,696     (1,696

Payment of common stock dividends

     (31,678     (31,026

Noncontrolling interest contributions

     41        —     

Noncontrolling interest distributions

     (33     (10
                

Net cash provided by (used in) financing activities

     9,587        (24,628
                

Net increase in cash and cash equivalents

     509        16,018   

Cash and cash equivalents at beginning of period

     2,048        15,225   
                

Cash and cash equivalents at end of period

   $ 2,557      $ 31,243   
                

Supplemental disclosure of cash flow information:

    

Interest paid, net of amount capitalized

   $ 5,040      $ 4,460   
                

Taxes paid (received)

   $ (541   $ 88   
                

Supplemental disclosure of non-cash investing and financing activities:

    

Issued 139,351 and 392,474 shares of restricted and unrestricted common stock in 2011 and 2010, respectively, pursuant to NNN’s performance incentive plan

   $ 3,407      $ 8,392   
                

Issued 2,391 and 2,949 shares of common stock in 2011 and 2010, respectively, to directors pursuant to NNN’s performance incentive plan

   $ 59      $ 59   
                

Issued 7,115 and 6,823 shares of common stock in 2011 and 2010, respectively, pursuant to NNN’s Deferred Director Fee Plan

   $ 122      $ 93   
                

Change in other comprehensive income

   $ 1,661        149   
                

Mortgage receivable accepted in connection with real estate transactions

   $ —        $ 5,500   
                

Mortgages payable assumed in connection with real estate transactions

   $ —        $ 5,432   
                

See accompanying notes to condensed consolidated financial statements

 

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NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(unaudited)

Note 1 – Organization and Summary of Significant Accounting Policies:

Organization and Nature of Business – National Retail Properties, Inc., a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) formed in 1984. The 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, 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”). NNN’s Investment Portfolio consisted of the following:

 

     March 31, 2011  

Investment Portfolio:

  

Total properties (including retail operations)

     1,223   

Gross leasable area (square feet)

     13,320,000   

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”). NNN owned 16 Inventory Properties at March 31, 2011.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter ended March 31, 2011, may not be indicative of the results that may be expected for the year ending December 31, 2011. Amounts as of December 31, 2010, included in the condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements, included herein, should be read in conjunction with the consolidated financial statements and notes thereto as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations in NNN’s Form 10-K for the year ended December 31, 2010.

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

 

8


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

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 the collectability 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.

Other Comprehensive Income – The components for the change in other comprehensive income consisted of the following (dollars in thousands):

 

     Quarter Ended
March 31,  2011
 

Balance at beginning of period

   $ 1,661   

Amortization of interest rate hedges

     (43

Fair value treasury locks

     1,663   

Unrealized gain – commercial mortgage residual interests

     60   

Stock value adjustment

     (19
        

Balance at end of period

   $ 3,322   
        

NNN’s total comprehensive income consisted of the following (dollars in thousands):

 

    

Quarter Ended

March 31,

 
     2011      2010  

Net earnings

   $ 20,820       $ 16,365   

Other comprehensive income

     1,661         50   
                 

Comprehensive income including noncontrolling interests

     22,481         16,415   

Comprehensive loss attributable to noncontrolling interests

     —           99   
                 

Comprehensive income attributable to NNN

   $ 22,481       $ 16,514   
                 

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

 

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applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.

The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method (dollars in thousands):

 

    

Quarter Ended

March 31,

 
     2011     2010  

Basic and Diluted Earnings:

    

Net earnings attributable to NNN

   $ 20,820      $ 16,365   

Less: Series C preferred stock dividends

     (1,696     (1,696
                

Net earnings available to the Company’s common stockholders

     19,124        14,669   

Less: Earnings attributable to unvested restricted shares

     (134     (84
                

Net earnings used in basic earnings per share

     18,990        14,585   

Reallocated undistributed income

     —          —     
                

Net earnings used in diluted earnings per share

   $ 18,990      $ 14,585   
                

Basic and Diluted Weighted Average Shares Outstanding:

    

Weighted average number of shares outstanding

     83,955,295        82,953,206   

Less: unvested restricted stock

     (832,564     (632,434
                

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

     83,122,731        82,320,772   

Effects of dilutive securities:

    

Common stock options

     3,276        4,392   

Convertible debt

     298,241        —     

Directors’ deferred fee plan

     146,190        120,847   
                

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

     83,570,438        82,446,011   
                

The potential dilutive shares related to certain convertible notes payable were not included in computing earnings per common share for March 31, 2010 because their effects would be antidilutive.

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

 

   

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

 

   

Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are 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.

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

 

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contingent assets and liabilities to prepare these condensed 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 2011 presentation.

Note 2 – Real Estate - Investment Portfolio:

Leases – The following outlines key information for NNN’s Investment Property leases:

 

     March 31, 2011  

Lease classification:

  

Operating

     1,185   

Direct financing

     16   

Building portion – direct financing / land portion – operating

     8   

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 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 tenants 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 (dollars in thousands):

 

     March 31,     December 31,  
     2011     2010  

Land and improvements

   $ 1,136,183      $ 1,122,243   

Buildings and improvements

     1,632,909        1,592,752   

Leasehold interests

     1,290        1,290   
                
     2,770,382        2,716,285   

Less accumulated depreciation and amortization

     (234,461     (222,921
                
     2,535,921        2,493,364   

Work in process

     24,292        26,586   
                
   $ 2,560,213      $ 2,519,950   
                

NNN has remaining funding commitments as follows (dollars in thousands):

 

     March 31, 2011  
     # of
Properties
     Total
Commitment(1)
     Amount
Funded
     Remaining
Commitment
 

Investment Portfolio

     26       $ 67,585       $ 48,498       $ 19,087   
                                   

 

(1)

Includes land and construction costs.

 

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Note 3 – Commercial Mortgage Residual Interests:

In May 2010 and July 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, Orange Avenue Mortgage Investments, Inc. (“OAMI”), for $1,603,000, and 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. OAMI holds the commercial mortgage residual interests (“Residuals”) from seven securitizations. 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 loan performance relating to the Residuals, the independent valuation adjusted certain of the valuation assumptions. The following table summarizes the key assumptions used in determining the value of the Residuals as of:

 

     March 31, 2011     December 31, 2010  

Discount rate

     25     25

Average life equivalent CPR speeds range

     3.26% to 20.13% CPR        4.35% to 20.37% CPR   

Foreclosures:

    

Frequency curve default model

     0.1% - 14.0% range        0.1% - 15.0% range   

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 impairments recorded in condensed consolidated statements of earnings (dollars in thousands):

 

    

Quarter Ended

March 31,

 
     2011      2010  

Unrealized gains

   $ 60       $ 92   

Other than temporary valuation impairment

   $ 129       $ 3,683   

Note 4 – Line of Credit Payable:

NNN’s $400,000,000 revolving credit facility (the “Credit Facility”) had a weighted average outstanding balance of $178,836,000 and a weighted average interest rate of 3.8% during the three months ended March 31, 2011. The Credit Facility matures November 2012, with an option to extend the 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 March 31, 2011, $184,200,000 was outstanding and $215,800,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000.

 

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Note 5 – Stockholders’ Equity:

The following table outlines the dividends declared and paid for each issuance of NNN’s stock (in thousands, except per share data):

 

    

Quarter Ended

March 31,

 
     2011      2010  

Series C preferred stock (1):

     

Dividends

   $ 1,696       $ 1,696   

Per share

     0.4609         0.4609   

Common stock:

     

Dividends

     31,678         31,026   

Per share

     0.380         0.375   

 

(1)

The Series C preferred stock has no maturity date and will remain outstanding unless redeemed.

In April 2011, NNN declared a dividend of $0.380 per share, which is payable in May 2011 to its common stockholders of record as of April 29, 2011.

In June 2009, NNN filed a shelf registration statement with the Securities and Exchange Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”). The following outlines the common stock issuances pursuant to the DRIP (dollars in thousands):

 

    

Quarter Ended

March 31,

 
     2011      2010  

Shares of common stock issued

     818,156         502,892   

Net proceeds

   $ 20,081       $ 10,460   

Note 6 – Income Taxes:

NNN has elected to be taxed as a REIT under the Internal Revenue Code (“Code”), commencing with its taxable year ended December 31, 1984. To qualify as a REIT, NNN must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income to its stockholders. NNN intends to adhere to these requirements and maintain its REIT status. As a REIT, NNN generally will not be subject to corporate level federal income tax on taxable income that it distributes currently to its stockholders. NNN may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income, if any. The provision for federal income taxes in NNN’s consolidated financial statements relates to its TRS operations and any potential taxable built-in gain. NNN did not have significant tax provisions or deferred income tax items during the periods reported hereunder.

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

 

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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 adopting the guidance. 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 as non-operating expenses. The periods that remain open under federal statute are 2007 through 2011. NNN also files in many states with varying open years under statute.

Note 7 – 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 March 31, 2011, as discontinued operations. The following is a summary of the earnings from discontinued operations from the Investment Portfolio (dollars in thousands):

 

    

Quarter Ended

March 31,

 
     2011     2010  

Revenues:

    

Rental income from operating leases

   $ 26      $ 185   

Real estate expense reimbursement from tenants

     3        15   

Interest and other income from real estate transactions

     —          28   
                
     29        228   
                

Operating expenses:

    

General and administrative

     —          14   

Real estate

     55        84   

Depreciation and amortization

     5        79   
                
     60        177   
                

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

     (31     51   

Gain on disposition of real estate

     30        22   

Income tax benefit (expense)

     (3     2   
                

Earnings (loss) from discontinued operations attributable to NNN

   $ (4   $ 75   
                

 

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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 March 31, 2011. The following is a summary of the earnings from discontinued operations from the Inventory Portfolio (dollars in thousands):

 

    

Quarter Ended

March 31,

 
     2011     2010  

Revenues:

    

Rental income from operating leases

   $ 473      $ 1,152   

Real estate expense reimbursement from tenants

     106        987   

Interest and other income from real estate transactions

     14        36   
                
     593        2,175   
                

Disposition of real estate:

    

Gross proceeds

     1,100        802   

Costs

     (998     (715
                

Gain

     102        87   
                

Operating expenses:

    

General and administrative

     4        37   

Real estate

     154        1,041   

Depreciation and amortization

     21        61   
                
     179        1,139   
                

Other expenses:

    

Interest expense

     340        943   
                

Earnings before income tax expense

     176        180   

Income tax expense

     (44     (39
                

Earnings from discontinued operations including noncontrolling interests

     132        141   

Earnings attributable to noncontrolling interests

     (59     (76
                

Earnings from discontinued operations attributable to NNN

   $ 73      $ 65   
                

Note 8 – 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 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

 

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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 March 2011, the Company entered into two treasury locks with a total notional amount of $150,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. The outstanding treasury locks were designated as cash flow hedges, and at March 31, 2011, have a fair value of $1,663,000 included in other assets on the condensed consolidated balance sheet. No hedge ineffectiveness was recognized during the quarter ended March 31, 2011.

As of March 31, 2011, $758,000 remains in other comprehensive income related to the effective portion of NNN’s previous interest rate hedges. During the quarters ended March 31, 2011 and 2010, NNN reclassed $43,000 and $42,000, respectively, out of other comprehensive income as a reduction to interest expense. Over the next 12 months, NNN estimates that an additional $169,000 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.

Note 9 – 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 (dollars in thousands):

 

     Quarter Ended March 31,  
     Investment
Assets
     Inventory
Assets
     Eliminations
(Intercompany)
    Condensed
Consolidated
Totals
 

2011

          

External revenues

   $ 62,252       $ 42       $ —        $ 62,294   

Intersegment revenues

     12         —           (12     —     

Earnings from continuing operations

     20,824         57         (156     20,725   

Earnings including noncontrolling interests

     20,820         189         (156     20,853   

Net earnings attributable to NNN

     20,820         156         (156     20,820   

Total assets

   $ 2,885,922       $ 37,741       $ (169,966   $ 2,753,697   

2010

          

External revenues

   $ 56,704       $ 42       $ —        $ 56,746   

Intersegment revenues

     299         259         (558     —     

Earnings from continuing operations

     16,197         268         (383     16,082   

Earnings including noncontrolling interests

     16,272         409         (383     16,298   

Net earnings attributable to NNN

     16,365         383         (383     16,365   

Total assets

   $ 2,706,011       $ 131,433       $ (235,643   $ 2,601,801   

 

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Note 10 – 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 (dollars in thousands):

 

     Quarter Ended
March 31,  2011
 

Balance at beginning of period

   $ 15,915   

Total gains (losses) – realized/unrealized:

  

Included in earnings

     (129

Included in other comprehensive income

     60   

Interest income on Residuals

     767   

Cash received from Residuals

     (211

Purchases, sales, issuances and settlements, net

     —     

Transfers in and/or out of Level 3

     —     
        

Balance at end of period

   $ 16,402   
        

Losses included in earnings attributable to a change in unrealized losses relating to assets still held at the end of period

   $ —     
        

Note 11 – Fair Value of Financial Instruments:

NNN believes the carrying value of its revolving 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 March 31, 2011, and December 31, 2010, approximates their fair value based upon current market prices for similar issuances. At March 31, 2011 and December 31, 2010, the fair value of NNN’s notes payable and convertible notes payable, collectively, were $1,037,489,000 and $1,044,621,000, respectively, based upon quoted market price.

Note 12 – Subsequent Events:

NNN reviewed all subsequent events and transactions that have occurred after March 31, 2011, the date of the condensed consolidated balance sheet. There were no reportable subsequent events or transactions.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K of National Retail Properties, Inc. for the year ended December 31, 2010. 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 (“REIT”) subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.”

The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the “Exchange Act”). These statements generally are characterized by the use of terms such as “believe,” “expect,” “intend,” “may,” or similar words or expressions. Forward-looking statements are not historical facts or guarantees of future performance and are subject to known and unknown risks, including those risks included in Item 1A. Risk Factors of NNN’s Annual Report on Form 10-K for the year ended December 31, 2010, which may cause NNN’s actual future results to differ materially from expected results. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. NNN undertakes no obligation to update or revise such forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

NNN is a fully integrated REIT. 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 March 31, 2011, NNN owned 1,223 Investment Properties (including 11 properties with retail operations that NNN operates), with an aggregate gross leasable area of approximately 13,320,000 square feet, located in 46 states. Approximately 97 percent of total properties in NNN’s Investment Portfolio were leased or operated as of March 31, 2011. As of March 31, 2011, NNN owned 16 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.

 

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Results of Operations

Property Analysis – Investment Portfolio

General. The following table summarizes NNN’s Investment Portfolio:

 

     March 31,     December 31,     March 31,  
     2011     2010     2010  

Investment Properties Owned:

      

Number

     1,223        1,195        1,014   

Total gross leasable area (square feet)

     13,320,000        12,972,000        11,423,000   

Investment Properties:

      

Leased

     1,174        1,147        965   

Operated

     11        11        12   

Percent of Investment Properties – leased and operated

     97     97     96

Weighted average remaining lease term (years)

     12        12        12   

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

     12,558,000        12,215,000        10,552,000   

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

 

          % of Annual Base Rent (1)  
    

Lines of Trade

   March 31,
2011
    December 31,
2010
    March 31,
2010
 

1.

  

Convenience Stores

     23.3     23.7     26.5

2.

  

Restaurants – Full Service

     10.7     10.1     9.2

3.

  

Automotive Parts

     7.8     7.8     6.7

4.

  

Theaters

     5.6     5.7     6.2

5.

  

Automotive Service

     5.4     5.3     5.6

6.

  

Sporting Goods

     4.4     4.5     3.1

7.

  

Restaurants – Limited Service

     4.1     4.1     3.2

8.

  

Drug Stores

     3.9     4.0     4.4

9.

  

Books

     3.8     3.8     4.1

10.

  

Health and Fitness

     2.7     2.1     1.6
  

Other

     28.3     28.9     29.4
                           
        100.0     100.0     100.0
                           

 

(1) 

Based on the annualized base rent for all leases in place as of the end of the respective period.

Property Acquisitions. The following table summarizes the Investment Property acquisitions (dollars in thousands):

 

     Quarter Ended March 31,  
     2011      2010  

Acquisitions:

     

Number of Investment Properties

     29         4   

Gross leasable area (square feet)

     354,000         64,000   

Total investments (1)

   $ 55,053       $ 12,376   

 

(1) 

Includes investments in projects under construction for each respective period.

 

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Property Dispositions. The following table summarizes the Investment Properties sold by NNN (dollars in thousands):

 

     Quarter Ended March 31,  
     2011      2010  

Number of properties

     1         5   

Gross leasable area (square feet)

     6,000         14,000   

Net sales proceeds

   $ 773       $ 6,777   

Net gain

   $ 30       $ 22   

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.

Revenue from Continuing Operations Analysis

General. During the quarter ended March 31, 2011, NNN’s revenue increased primarily due to the acquisition of Investment Properties during 2010.

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

 

     Quarter Ended March 31,     Percent  
                               Increase  
     2011      2010      2011     2010     (Decrease)  
                   Percent of Total        

Rental income(1)

   $ 58,213       $ 52,737         94.0     93.3     10.4

Real estate expense reimbursement from tenants

     2,335         1,758         3.8     3.1     32.8

Interest and other income from real estate transactions

     637         950         1.0     1.7     (32.9 )% 

Interest income on commercial mortgage residual interests

     767         1,049         1.2     1.9     (26.9 )% 
                                    

Total revenues from continuing operations

   $ 61,952       $ 56,494         100.0     100.0     9.7
                                    

 

(1)

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

Rental Income. Rental income increased for the quarter ended March 31, 2011, as compared to the same period in 2010, but remained consistent as a percent of the total revenues from continuing operations. The increase for the quarter ended March 31, 2011, is primarily due to the acquisition of 194 properties with aggregate gross leasable area of approximately 1,700,000 square feet during 2010.

Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants increased for the quarter ended March 31, 2011, as compared to the same period in 2010, but remained relatively stable as a percentage of total revenues. The increase is primarily attributable to a full year of reimbursements from certain newly acquired Investment Properties in 2010 and timing of real estate tax reimbursements from certain tenants.

Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the quarter ended March 31, 2011, as compared to the quarter ended March 31, 2010, but remained relatively stable as a percentage of total revenues. The decrease is primarily due to the decrease in the average outstanding balance of NNN’s mortgages receivable to $20,790,000 in 2011 from $40,710,000 in 2010.

Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests (“Residuals”) decreased for the quarter ended March 31, 2011, as compared to the same period last year. The decrease in interest income on Residuals is primarily the result of declining loan balances from prepayments and scheduled loan amortization.

 

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Analysis of Expenses from Continuing Operations

General. Operating expenses from continuing operations decreased for the quarter ended March 31, 2011, primarily due to a lower valuation adjustment of the Residuals’ fair value. However, the decrease was partially offset by an increase in incentive compensation. The following table summarizes NNN’s expenses from continuing operations for the quarter ended March 31 (dollars in thousands):

 

                 Percent
Increase
    Percentage of
Total
    Percent of
Revenues from
Continuing
Operations
 
     2011     2010     (Decrease)     2011     2010     2011     2010  

General and administrative

   $ 6,657      $ 5,581        19.2     27.7     22.7     10.7     9.9

Real estate

     3,722        3,472        7.2     15.5     14.2     6.0     6.1

Depreciation and amortization

     13,525        11,807        14.5     56.3     48.1     21.8     20.9

Impairment – commercial mortgage residual valuation adjustment

     129        3,683        (96.4 )%      0.5     15.0     0.2     6.5
                                                  

Total operating expenses

   $ 24,033      $ 24,543        (2.0 )%      100.0     100.0     38.7     43.4
                                                  

Interest and other income

   $ (342   $ (252     35.7     (2.0 )%      (1.6 )%      (0.6 )%      (0.4 )% 

Interest expense

     17,662        15,989        10.4     102.0     101.6     28.5     28.3
                                                  

Total other expenses (revenues)

   $ 17,320      $ 15,737        10.0     100.0     100.0     27.9     27.9
                                                  

General and Administrative Expenses. General and administrative expenses increased for the quarter ended March 31, 2011, as compared to the same period in 2010. The increase in general and administrative expenses for the quarter ended March 31, 2011, is primarily attributable to an increase in executive incentive compensation.

Real Estate. Real estate expenses increased for the quarter ended March 31, 2011, as compared to the same period in 2010, but remained fairly consistent as a percentage of revenues from continuing operations. The increase in real estate expenses for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010, is primarily attributable to an increase in tenant reimbursable expenses from certain newly acquired Investment Properties in 2010.

Depreciation and Amortization. Depreciation and amortization increased for the quarter ended March 31, 2011, as compared to the same period in 2010. The increase for the quarter ended March 31, 2011, is primarily due to the acquisition of 194 properties with aggregate gross leasable area of approximately 1,700,000 square feet during 2010.

Impairment – Commercial Mortgage Residual Interests Valuation Adjustment. In connection with the independent valuations of the Residuals’ fair value during the quarter ended March 31, 2011, NNN recorded an other than temporary valuation adjustment of $129,000 during the quarter ended March 31, 2011 as compared to $3,683,000 recorded during the same period in 2010. The decrease in the valuation adjustment was attributable to the changes effective in 2010 in the valuation assumptions due to the changes in loan performance relating to the Residuals.

Interest Expense. Interest expense increased for the quarter ended March 31, 2011, as compared to the quarter ended March 31, 2010. The following represents the primary changes in debt that have impacted interest expense:

 

  (i) the $178,836,000 increase in the weighted average debt outstanding on the Credit Facility for the quarter ended March 31, 2011, as compared to the same period in 2010,

 

  (ii) the $270,000 increase in capitalized interest expense for the quarter ended March 31, 2011, as compared to the same period in 2010, and

 

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

 

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Earnings from 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 March 31, 2011. 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 quarters ended March 31 (dollars in thousands):

 

     2011     2010  
     # of Sold
Properties
     Gain     Earnings
(Loss)
    # of Sold
Properties
     Gain     Earnings
(Loss)
 

Investment Assets

     1       $ 30      $ (4     5       $ 22      $ 75   

Inventory Assets

     1         102        132        1         87        141   

Noncontrolling interests

     —           (46     (59     —           (42     (76
                                                  
     2       $ 86      $ 69        6       $ 67      $ 140   
                                                  

NNN periodically sells Investment Properties and may reinvest the sale 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.

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.

Cash and Cash Equivalents. The table below summarizes NNN’s cash flows for the quarters ended March 31 (dollars in thousands):

 

     2011     2010  

Cash and cash equivalents:

    

Provided by operating activities

   $ 48,866      $ 46,446   

Used in investing activities

     (57,944     (5,800

Provided by (used in) financing activities

     9,587        (24,628
                

Increase

     509        16,018   

Net cash at beginning of period

     2,048        15,225   
                

Net cash at end of period

   $ 2,557      $ 31,243   
                

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 the acquisition of Inventory Properties. NNN’s cash flow from operating activities, net of the cash used in and provided by the acquisition and disposition of its Inventory Properties, has been sufficient to pay the dividends in each of the periods presented. NNN generally uses proceeds from its Credit Facility to fund the acquisition of its Inventory Properties. The change in cash provided by operations for the quarters ended March 31, 2011 and 2010 is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.”

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

 

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NNN’s financing activities for the quarter ended March 31, 2011, include the following significant transactions:

 

   

$23,200,000 in net proceeds from NNN’s Credit Facility,

 

   

$31,678,000 in dividends paid to common stockholders,

 

   

$1,696,000 in dividends paid to holders of the depositary shares of NNN’s Series C preferred stock, and

 

   

$20,081,000 in net proceeds from the issuance of 818,156 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”).

Contractual Obligations and Commercial Commitments. As of March 31, 2011, NNN has agreed to fund construction commitments in connection with the development of additional properties as outlined in the table below (dollars in thousands):

 

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

Investment Portfolio

     26       $ 67,585       $ 48,498       $ 19,087   
                                   

 

(1)

Includes construction and land costs.

As of March 31, 2011, 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 above and previously disclosed under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in NNN’s Annual Report on Form 10-K for the year ended December 31, 2010. 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, which generally require the tenant to pay all property taxes and assessments, substantially maintain the interior and exterior of the building and carry property and liability insurance coverage. 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 these Investment Properties, NNN’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. However, NNN may be required to borrow under its Credit Facility or use other sources of capital in the event of unforeseen significant capital expenditures.

As of March 31, 2011, NNN owned 38 vacant, un-leased Investment Properties which accounted for approximately three percent of total Investment Properties held in NNN’s Investment Portfolio. 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. Additionally, as of April 28, 2011, approximately one percent of the total gross leasable area of NNN’s Investment Portfolio was leased to five 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.

Dividends. NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations 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

 

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purposes for four years following the year during which qualification is lost. Such an event could materially affect NNN’s income and its ability to pay dividends. NNN believes it has been structured as, and its past and present operations qualify NNN as, a REIT.

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.

The following table outlines the dividends declared and paid for each issuance of NNN’s stock (in thousands, except per share data):

 

    

Quarter Ended

March 31,

 
     2011      2010  

Series C preferred stock (1):

     

Dividends

   $ 1,696       $ 1,696   

Per share

     0.4609         0.4609   

Common stock:

     

Dividends

     31,678         31,026   

Per share

     0.380         0.375   

 

(1)

The Series C preferred stock has no maturity date and will remain outstanding unless redeemed.

In April 2011, NNN declared a dividend of $0.380 per share which is payable in May 2011 to its common stockholders of record as of April 29, 2011.

NNN declared and paid dividends to its Series C preferred stockholders of $1,696,000 or $0.4609 per share during each of the quarters ended March 31, 2011 and 2010, respectively. The Series C preferred stock has no maturity date and will remain outstanding unless redeemed.

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.

 

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Debt

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

 

     March 31,
2011
     Percentage
of Total
    December 31,
2010
     Percentage
of Total
 

Line of credit payable

   $ 184,200         15.9   $ 161,000         14.2

Mortgages payable

     23,997         2.1     24,269         2.2

Notes payable – convertible

     351,138         30.3     349,534         30.8

Notes payable

     598,932         51.7     598,882         52.8
                                  

Total outstanding debt

   $ 1,158,267         100.0   $ 1,133,685         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 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 the facility size up to $500,000,000.

NNN’s $400,000,000 Credit Facility had a weighted average outstanding balance of $178,836,000 and a weighted average interest rate of 3.8% during the three months ended March 31, 2011. As of March 31, 2011, $184,200,000 was outstanding and approximately $215,800,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $57,000.

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

 

Terms

   2026
Notes (1)(3)
    2028
Notes (1)(4)
 

Issue Date

     September 2006        March 2008   

Net Proceeds

   $ 168,650      $ 228,576   

Stated Interest Rate(6)

     3.950     5.125

Debt Issuance Costs

   $ 3,850 (2)    $ 5,459 (5) 

Earliest Conversion Date

     September 2025        June 2027   

Earliest Put Option Date

     September 2011        June 2013   

Maturity Date

     September 2026        June 2028   

Outstanding principal balance at March 31, 2011

   $ 138,700      $ 223,035   

 

(1)

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.

(2)

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

(3)

The conversion rate per $1 principal amount was 42.0575 shares of NNN’s common stock, which is equivalent to a conversion price of $23.7770 per share of common stock.

(4)

The conversion rate per $1 principal amount was 39.3700 shares of NNN’s common stock, which is equivalent to a conversion price of $25.4000 per share of common stock.

(5)

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

(6)

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

 

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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.

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.

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

Dividend Reinvestment and Stock Purchase Plan. In June 2009, NNN filed a shelf registration statement with the Securities and Exchange Commission for the 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 the DRIP (dollars in thousands):

 

     Quarter Ended March 31,  
     2011      2010  

Shares of common stock

     818,156         502,892   

Net proceeds

   $ 20,081       $ 10,460   

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 March 31, 2011. Due to changes in market conditions relating to residual assets, the independent valuation changed certain of the valuation assumptions. The following table summarizes the key assumptions used in determining the value of the Residuals as of:

 

     March 31, 2011     December 31, 2010  

Discount rate

     25     25

Average life equivalent CPR speeds range

     3.26% to 20.13% CPR        4.35% to 20.37% CPR   

Foreclosures:

    

Frequency curve default model

     0.1% - 14.0% range        0.1% - 15.0% range   

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 impairments recorded in condensed consolidated statements of earnings (dollars in thousands):

 

     Quarter Ended March 31,  
     2011      2010  

Unrealized gains

   $ 60       $ 92   

Other than temporary valuation impairment

   $ 129       $ 3,683   

 

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Item 3. 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 are 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 March 31, 2011, NNN has two interest rate hedges with a total notional amount of $150,000,000 to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt.

The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding as of March 31, 2011 and December 31, 2010. The table presents principal payments and related interest rates by year for debt obligations outstanding as of March 31, 2011. The variable interest rates shown represent weighted average rate for the Credit Facility for the three months ended March 31, 2011. The table incorporates only those debt obligations that existed as of March 31, 2011, 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 more than two percent for the quarter ended March 31, 2011.

 

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

   $ —           —        $ 826         7.20   $ 137,489         5.84

2012

     184,200         3.80     19,290         6.92     49,954         7.83

2013

     —           —          863         7.35     213,649         7.19

2014

     —           —          881         7.27     149,830         5.91

2015

     —           —          917         7.22     149,787         6.19

Thereafter

     —           —          1,220         7.47     249,361         6.92
                                 

Total

   $ 184,200         3.80   $ 23,997         7.00   $ 950,070         6.60
                                 

Fair Value:

               

March 31, 2011

   $ 184,200         $ 23,997         $ 1,037,489      
                                 

December 31, 2010

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

 

(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 $16,402,000 and $15,915,000 as of March 31, 2011 and December 31, 2010, 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 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of NNN’s management, including NNN’s Chief Executive Officer and Chief Financial Officer, of the effectiveness as of March 31, 2011 of the design and operation of NNN’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

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

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings. Not applicable.

Item 1A. Risk Factors. There were no material changes in NNN’s risk factors disclosed in Item 1A. Risk Factors of NNN’s Annual Report on Form 10-K for the year ended December 31, 2010

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.

Item 3. Defaults Upon Senior Securities. Not applicable.

Item 4. [Removed and Reserved]

Item  5. Other Information. Not applicable.

Item 6. Exhibits

The following exhibits are filed as a part of this report.

 

  3. Articles of Incorporation and By-laws

 

  3.1 First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated 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).

 

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  4.3 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).

 

  4.4 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).

 

  4.5 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).

 

  4.6 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).

 

  4.7 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).

 

  4.8 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).

 

  4.9 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).

 

  4.10 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).

 

  4.11 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).

 

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  4.12 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).

 

  4.13 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).

 

  4.14 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).

 

  4.15 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).

 

  4.16 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).

 

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  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).

 

  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).

 

  10.09 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 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 5, 2009, and incorporated herein by reference).

 

  10.10 Amendment to Employment Agreement, dated as of November 8, 2010, between the Registrant and Craig Macnab (filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Paul E. Bayer (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

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  10.14 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  31. Section 302 Certifications

 

  31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

  31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

  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).

 

  101. Interactive Data File

 

  101.1 The following materials from National Retail Properties, Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2011, 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 the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED this 5th day of May, 2011.

NATIONAL RETAIL PROPERTIES, INC.

 

By:  

/s/ Craig Macnab

 

Craig Macnab

Chairman of the Board and

Chief Executive Officer

By:  

/s/ Kevin B. Habicht

Kevin B. Habicht

Chief Financial Officer,

Executive Vice President and

Director

 

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Exhibit Index

 

  3. Articles of Incorporation and By-laws

 

  3.1 First Amended and Restated Articles of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated 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. 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).

 

  4.4 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).

 

  4.5

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

 

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

 

  4.6 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).

 

  4.7 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).

 

  4.8 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).

 

  4.9 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).

 

  4.10 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).

 

  4.11 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).

 

  4.12 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).

 

  4.13 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).

 

  4.14 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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  4.15 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).

 

  4.16 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).

 

  10.09 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 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 5, 2009, and incorporated herein by reference).

 

  10.10 Amendment to Employment Agreement, dated as of November 8, 2010, between the Registrant and Craig Macnab (filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.11 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Julian E. Whitehurst (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.12 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Kevin B. Habicht (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.13 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Paul E. Bayer (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  10.14 Amendment to Employment Agreement dated as of November 8, 2010, between the Registrant and Christopher P. Tessitore (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference).

 

  31. Section 302 Certifications

 

  31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

  31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

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  32. Section 906 Certifications

 

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

 

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

 

  101. Interactive Data File

 

  101.1 The following materials from National Retail Properties, Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2011, 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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