News Column

NATIONAL RETAIL PROPERTIES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 1, 2014

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, 2013. The terms "NNN" and the "Company" refer to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the "TRS."



Forward-Looking Statements

The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). 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. Certain factors that could cause actual results or events to differ materially from those NNN anticipates or projects include, but are not limited to, the following:



Financial and economic conditions may have an adverse impact on NNN, its

tenants, and commercial real estate in general;

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

at all;

Loss of revenues from tenants would reduce NNN's cash flow;

A significant portion of the source of NNN's Property Portfolio annual

base rent is heavily concentrated in specific industry classifications,

tenants and in specific geographic locations;

Owning real estate and indirect interests in real estate carries inherent

risk;

NNN's real estate investments are illiquid;

Costs of complying with changes in governmental laws and regulations may

adversely affect NNN's results of operations; NNN may be subject to known or unknown environmental liabilities and hazardous materials on properties owned by NNN;



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

strategies;

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

strategy;

A change in the assumptions used to determine the value of commercial

mortgage residual interests could adversely affect NNN's financial position; NNN may suffer a loss in the event of a default or bankruptcy of a borrower or a tenant;



Certain provisions of NNN's leases or loan agreements may be unenforceable;

Property ownership through joint ventures and partnerships could limit

NNN's control of those investments;

Competition from numerous other REITs, commercial developers, real estate

limited partnerships and other investors may impede NNN's ability to grow;

NNN's loss of key management personnel could adversely affect performance

and the value of its common stock; Uninsured losses may adversely affect NNN's operating results and asset values; Acts of violence, terrorist attacks or war may adversely affect the markets in which NNN operates and NNN's results of operations; Vacant properties or bankrupt tenants could adversely affect NNN's business or financial condition;



The amount of debt NNN has and the restrictions imposed by that debt could

adversely affect NNN's business and financial condition;

NNN is obligated to comply with financial and other covenants in its debt

instruments that could restrict its operating activities, and the failure

to comply with such covenants could result in defaults that accelerate the

payment of such debt;

The market value of NNN's equity and debt securities is subject to various

factors that may cause significant fluctuations or volatility;

NNN's failure to qualify as a real estate investment trust for federal

income tax purposes could result in significant tax liability;

Even if NNN remains qualified as a REIT, NNN faces other tax liabilities

that reduce operating results and cash flow;

Adverse legislative or regulatory tax changes could reduce NNN's earnings,

cash flow and market price of NNN's common stock;

Compliance with REIT requirements, including distribution requirements,

may limit NNN's flexibility and negatively affect NNN's operating decisions;



Changes in accounting pronouncements could adversely impact NNN's or NNN's

tenants' reported financial performance; 20

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NNN's failure to maintain effective internal control over financial

reporting could have a material adverse effect on its business, operating

results and share price;

NNN's ability to pay dividends in the future is subject to many factors;

Cybersecurity risks and cyber incidents could adversely affect NNN's

business and disrupt operations and expose NNN to liabilities to tenants,

employees, and other third parties; and Future investments in international markets could subject NNN to additional risks. Additional information related to these risks and uncertainties are included in Item 1A. Risk Factors of NNN's Annual Report on Form 10-K for the year ended December 31, 2013, and 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, a Maryland corporation, is a fully integrated real estate investment trust ("REIT") formed in 1984. NNN's assets include: real estate, mortgages and notes receivable, and commercial mortgage residual interests (the "Residuals"). NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment ("Properties" or "Property Portfolio"). As of March 31, 2014, NNN owned 1,903 Properties, with an aggregate gross leasable area of approximately 20,632,000 square feet, located in 47 states. Approximately 98 percent of the Properties in the Property Portfolio were leased as of March 31, 2014. NNN's management team focuses on certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN include items such as: the composition of the Property Portfolio (such as tenant, geographic and line of trade diversification), the occupancy rate of the Property Portfolio, certain financial performance ratios and profitability measures, 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 Property Portfolio is geographically concentrated in the south and southeast United States, which are regions of historically above-average population growth. Given these concentrations, any financial hardship within these sectors or geographic locations, respectively, could have a material adverse effect on the financial condition and operating performance of NNN. 21 -------------------------------------------------------------------------------- Results of Operations Property Analysis General. The following table summarizes NNN's Property Portfolio: March 31, 2014 December 31, 2013 March 31, 2013 Properties Owned: Number 1,903 1,860 1,636 Total gross leasable area (square feet) 20,632,000 20,402,000



19,267,000

Properties:

Leased and unimproved land 1,868 1,827 1,600 Percent of Properties - leased and unimproved land 98 % 98 % 98 % Weighted average remaining lease term (years) 12 12 12 Total gross leasable area (square feet) - leased 20,079,000 19,872,000 18,629,000



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

% of Annual Base Rent (1) Lines of Trade March 31, 2014 December 31, 2013 March 31, 2013 1. Convenience stores 19.6 % 19.7 % 19.8 % 2. Restaurants - full service 9.5 % 9.7 % 10.7 % 3. Automotive service 7.5 % 7.6 % 7.7 % 4. Restaurants - limited service 6.0 % 5.5 % 5.2 % 5. Automotive parts 5.1 % 5.1 % 5.5 % 6. Theaters 4.5 % 4.5 % 4.8 % 7. Health and fitness 4.2 % 4.3 % 3.6 % 8. Bank 4.1 % 4.1 % 0.2 % 9. Sporting goods 3.7 % 3.7 % 4.0 %



10. Recreational vehicle dealers,

parts and accessories 3.3 % 3.2 % 2.9 % Other 32.5 % 32.6 % 35.6 % 100.0 % 100.0 % 100.0 %



(1) Based on annualized base rent for all leases in place for each respective period.

Property Acquisitions. The following table summarizes the Property acquisitions (dollars in thousands): Quarter Ended March 31, 2014 2013 Acquisitions: Number of Properties 47 17



Gross leasable area (square feet) 309,000 162,000 Initial cash yield

7.7 % 8.7 %



Total dollars invested(1) $ 94,041$ 42,588

(1) Includes dollars invested in projects under construction or tenant improvements for each respective year. NNN typically funds property acquisitions either through available cash, borrowings under its unsecured revolving Credit Facility (see "Debt - Line of Credit Payable") or by issuing its debt or equity securities in the capital markets. 22 -------------------------------------------------------------------------------- Property Dispositions. The following table summarizes the Properties sold by NNN (dollars in thousands): Quarter Ended March 31, 2014 2013 Number of properties 4 2 Gross leasable area (square feet) 84,000 21,000 Net sales proceeds $ 11,245$ 3,569 Net gain, net of income tax expense $ 1,765$ 505 NNN typically uses the proceeds from property sales either to pay down the Credit Facility or reinvest in real estate. Analysis of Revenue From Continuing Operations General. During the quarter ended March 31, 2014, rental income increased primarily due to an increase in rental income from property acquisitions (See "Results of Operations - Property Analysis - Property Acquisitions"). NNN anticipates increases in rental income will continue to come from additional property acquisitions and increases in rents pursuant to lease terms. The following summarizes NNN's revenues from continuing operations (dollars in thousands): Quarter Ended March 31, Percent of Total Percent Increase 2014 2013 (Decrease) 2014 2013 Rental Income(1) $ 99,588$ 88,476 12.6% 95.7 % 95.7 % Real estate expense reimbursement from tenants 3,232 2,998 7.8% 3.1 % 3.2 % Interest and other income from real estate transactions 792 384 106.3% 0.8 % 0.4 % Interest income on commercial mortgage residual interests 452 606



(25.4)% 0.4 % 0.7 % Total revenues from continuing operations $ 104,064$ 92,464 12.5% 100.0 % 100.0 %

(1) Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations ("Rental Income"). Quarter Ended March 31, 2014 versus Quarter Ended March 31, 2013 Rental Income. Rental Income increased in amount but was unchanged as a percent of the total revenues from continuing operations for the quarter ended March 31, 2014, as compared to the same period in 2013. The increase for the quarter ended March 31, 2014, is primarily due to the acquisition of 47 properties with aggregate gross leasable area of approximately 309,000 square feet during the quarter ended March 31, 2014 and 275 properties with aggregate gross leasable area of approximately 1,652,000 square feet during 2013. 23 -------------------------------------------------------------------------------- Analysis of Expenses from Continuing Operations General. Operating expenses from continuing operations increased for the quarter ended March 31, 2014, primarily due to an increase in depreciation expense from certain properties acquired in 2013. The following table summarizes NNN's expenses from continuing operations for the quarters ended March 31 (dollars in thousands): Percentage of Percent Revenues from Increase



Percentage of Total Continuing Operations

2014 2013 (Decrease) 2014 2013 2014 2013



General and administrative $ 8,915$ 8,264 7.9% 21.3

% 21.3 % 8.6 % 8.9 % Real estate 4,340 3,964 9.5% 10.4 % 10.2 % 4.2 % 4.3 % Depreciation and amortization 28,012 23,716 18.1% 67.0 % 61.1 % 26.9 % 25.6 % Impairment - commercial mortgage residual interests valuation 158 - N/C (1) 0.4 % - 0.2 % - Impairment charges 396 2,851 (86.1)% 0.9 % 7.4 % 0.4 % 3.1 % Total operating expenses $ 41,821$ 38,795 7.8% 100.0



% 100.0 % 40.3 % 41.9 %

Interest and other income $ (63 )$ (334 ) (81.1)% (0.3 )% (1.5 )% (0.1 )% (0.4 )% Interest expense

20,278 21,960 (7.7)% 100.3 % 101.5 % 19.5 % 23.7 % Total other expenses $ 20,215$ 21,626 (6.5)% 100.0



% 100.0 % 19.4 % 23.3 %

(1) Not Calculable ("N/C") Quarter Ended March 31, 2014 versus Quarter Ended March 31, 2013 General and Administrative Expenses. General and administrative expenses increased in amount for the quarter ended March 31, 2014, as compared to the same period in 2013, but decreased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase in general and administrative expenses for the quarter ended March 31, 2014, is primarily attributable to increases in real estate acquisition costs and incentive compensation. Real Estate. Real estate expenses increased in amount for the quarter ended March 31, 2014, as compared to the same period in 2013, but remained relatively flat as a percentage of total operating expenses and as a percentage of revenues from continuing operations. The increase is primarily due to the increase in tenant reimbursable expenses from certain properties and an increase in real estate expenses incurred on vacant properties. Depreciation and Amortization. Depreciation and amortization expenses increased in amount and as a percentage of total operating expenses and increased as a percentage of revenues from continuing operations for the quarter ended March 31, 2014, as compared to the quarter ended March 31, 2013. The increase is primarily due to the acquisition of 47 properties with an aggregate gross leasable area of approximately 309,000 square feet in 2014 and 275 properties with an aggregate gross leasable area of approximately 1,652,000 square feet during 2013. Impairment Charges. NNN reviews long-lived assets for impairment whenever certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Events or circumstances that may occur include changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, and the ability to sell properties at an attractive price. Management evaluates whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. NNN recorded $396,000 and $2,851,000 of real estate impairments during the quarters ended March 31, 2014 and 2013, respectively. Interest Expense. Interest expense decreased for the quarter ended March 31, 2014, as compared to the same period in 2013. The following represents the primary changes in debt that have impacted interest expense: (i) the issuance in April 2013 of $350,000,000 principal amount of notes payable with a maturity of April 2023, and stated interest rate of 3.300%; (ii) the settlement of $223,035,000 principal amount of 5.125% convertible notes payable in 2013; and 24

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(iii) a $54,687,000 decrease in the weighted average debt outstanding on

the credit facility for the quarter ended March 31, 2014 as compared to the quarter ended March 31, 2013, and a slightly lower weighted average interest rate for the quarter ended March 31, 2014, as compared to the same period in 2013. Discontinued Operations Earnings. Effective January 1, 2014, NNN has early adopted ASU 2014-08. Under ASU 2014-08, only disposals representing a strategic shift in operations are to be presented as discontinued operations. This requires the Company to continue to classify any property disposal or property classified as held for sale as of December 31, 2013 as discontinued operations prospectively. Therefore, the revenues and expenses related to these properties are presented as discontinued operations as of March 31, 2014. The Company did not classify any additional properties as discontinued operations subsequent to December 31, 2013. The following table summarizes the earnings (loss) from discontinued operations for the quarters ended March 31 (dollars in thousands): 2014 2013 # of Sold # of Sold Properties Gain Earnings Properties Gain Earnings Properties 2 $ 9$ (36 ) 2 $ 505$ 1,026 NNN periodically sells Properties and may reinvest the sales proceeds to purchase additional properties. NNN evaluates its ability to pay dividends to stockholders by considering the combined effect of income from continuing and discontinued operations.



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 (in thousands): Quarter Ended March 31, 2014 2013 Cash and cash equivalents: Provided by operating activities $ 78,604$ 68,823 Used in investing activities (81,692 ) (46,552 )



Provided by (used in) financing activities 7,529 (20,905 ) Increase

4,441 1,366 Net cash at beginning of period 1,485 2,076 Net cash at end of period $ 5,926$ 3,442 Cash provided by operating activities represents cash received primarily from rental income from tenants, proceeds from the disposition of certain properties and interest income less cash used for general and administrative expenses, interest expense and acquisition of certain properties. NNN's cash flow from operating activities, net of cash used in and provided by the acquisition and disposition of certain properties, has been sufficient to pay the distributions for each period presented. NNN uses proceeds from its Credit Facility to fund the acquisition of its properties. The change in cash provided by operations for the quarters ended March 31, 2014 and 2013, is primarily the result of changes in revenues and expenses as discussed in "Results of Operations." Cash generated from operations is expected to fluctuate in the future. Changes in cash for investing activities are primarily attributable to the acquisitions and dispositions of Properties. NNN's financing activities for the quarter ended March 31, 2014, included the following significant transactions: $45,100,000 in net proceeds from NNN's Credit Facility, $6,107,000 in net proceeds from the issuance of 184,503 shares of common stock in connection with the Dividend Reinvestment and Stock Purchase Plan ("DRIP"), 25

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$15,080,000 in net proceeds from the issuance of 432,000 shares of common stock in connection with the at-the-market ("ATM") equity program,



$49,273,000 in dividends paid to common stockholders,

$4,762,000 in dividends paid to holders of the depositary shares of NNN's Series D Preferred Stock, and $4,097,000 in dividends paid to holders of the depositary shares of NNN's Series E Preferred Stock. Contractual Obligations and Commercial Commitments. NNN has agreed to fund construction commitments on certain of its leased Properties. The improvements are estimated to be completed within 12 months. These construction commitments, as of March 31, 2014, are outlined in the table below (dollars in thousands): Number of properties 28 Total commitment(1) $ 97,317 Amount funded $ 50,442 Remaining commitment $ 46,875



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

As of March 31, 2014, 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, 2013. 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 Properties are leased under long-term net leases, which require the tenant to pay all property taxes and assessments, substantially maintain the interior and exterior of the property and carry property and liability insurance coverage. Therefore, management anticipates that capital demands to meet obligations with respect to these Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain of NNN's Properties are subject to leases under which NNN retains responsibility for specific costs and expenses associated with the Property. Management anticipates that the costs associated with NNN's vacant Properties or those Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under its credit facility or use other sources of capital in the event of unforeseen significant capital expenditures. The lost revenues and increased property expenses resulting from vacant properties or uncollectibility of lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is unable to re-lease the Properties at comparable rental rates and in a timely manner. As of March 31, 2014, NNN owned 35 vacant, un-leased Properties which accounted for approximately two percent of total Properties held in NNN's Property Portfolio. NNN generally monitors the financial performance of its significant tenants on an ongoing basis. Dividends. NNN has made an election to be taxed as a REIT under Sections 856 through 860 of the Code, as amended, and related regulations and intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes. NNN generally will not be subject to federal income tax on income that it distributes to its stockholders, provided that it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. If NNN fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially adversely affect NNN's income and ability to pay dividends. 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. 26 --------------------------------------------------------------------------------



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, 2014 2013



Series D preferred stock (1):

Dividends $ 4,762$ 4,762 Per share 0.414063 0.414063



Series E preferred stock (1):

Dividends 4,097 - Per share 0.356250 - Common stock: Dividends 49,273 44,321 Per share 0.405 0.395



(1) The Series D and E preferred stock have no maturity date and will remain outstanding unless redeemed.

In April 2014, NNN declared a dividend of $0.405 per share which is payable in May 2014 to its common stockholders of record as of April 30, 2014.

Capital Resources Generally, cash needs for property acquisitions, mortgages and notes receivable investments, debt payments, 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 operating expenses and dividends have generally been funded by internally generated funds. If available, future sources of capital include proceeds from the public or private offering of NNN's debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations.



Debt

The following is a summary of NNN's total outstanding debt as of (dollars in thousands): Percentage of Percentage of March 31, 2014 Total December 31, 2013 Total Line of credit payable $ 91,500 5.7% $ 46,400 3.0% Mortgages payable 9,181 0.6% 9,475 0.6% Notes payable 1,514,486 93.7% 1,514,184 96.4% Total outstanding debt $ 1,615,167 100.0% $ 1,570,059 100.0% Indebtedness. NNN expects to use indebtedness primarily for property acquisitions and development of single-tenant retail properties, either directly or through investment interests, and mortgage and note receivables. Line of Credit Payable. NNN's $500,000,000 revolving credit facility (the "Credit Facility") had a weighted average outstanding balance of $72,511,000 and a weighted average interest rate of 1.2% during the quarter ended March 31, 2014. The Credit Facility matures October 2016, unless the Company exercises its option to extend maturity to October 2017. The Credit Facility bears interest at LIBOR plus 107.5 basis points; however, such interest rate may change pursuant to a tiered interest rate structure based on NNN's debt rating. The Credit Facility also includes an accordion feature to increase the facility size up to $1,000,000,000, subject to lender approval. As of March 31, 2014, $91,500,000 was outstanding and $408,500,000 was available for future borrowings, under the Credit Facility. 27 -------------------------------------------------------------------------------- Notes Payable - Convertible. NNN recorded the following interest expense related to the 5.125% convertible senior notes due 2028 (the "2028 Notes") during the quarter ended March 31, 2013. No interest expense was recorded during the quarter ended March 31, 2014 (dollars in thousands): Contractual interest expense $ 2,858 Noncash interest charges 1,122 Amortization of debt costs 305 Total interest expense $ 4,285 There was no interest expense related to the 3.950% convertible senior notes due 2026 ("the 2026 Notes") recorded during the quarters ended March 31, 2014 and 2013. As of December 31, 2012, $15,537,000 aggregate principal amount of 2026 Notes was outstanding. In January 2013, the Company paid approximately $20,702,000 in aggregate settlement value for the $15,537,000 of outstanding 2026 notes. The difference between the amount paid and the principal amount of the settled notes of $5,028,000 was recognized as a decrease to additional paid-in capital and $137,000 was recorded as interest expense. As of December 31, 2012, $223,035,000 aggregate principal amount of 2028 Notes was outstanding. In June 2013, NNN called all of the outstanding 2028 Notes for redemption on July 11, 2013. On July 11, 2013, $130,000 principal amount of the 2028 Notes was settled at par plus accrued interest. The holders of the remaining balance of $222,905,000 principal amount of 2028 Notes elected to convert into cash and shares of the Company's common stock in accordance with the conversion formula which is based on the average daily closing price of NNN's common stock price over a period of 20 days commencing after receipt of a note holder's conversion notice. In 2013, the Company issued 2,407,911 shares of common stock and paid approximately $226,427,000 in aggregate settlement value for the $223,035,000 aggregate principal amount of 2028 Notes outstanding. The difference between the amount paid and the principal amount of the settled notes of $3,197,000 was recognized as a decrease to additional paid-in capital and $195,000 was recorded as interest expense. Notes Payable. In April 2013, NNN filed a prospectus supplement to the prospectus contained in its February 2012 shelf registration statement and issued an aggregate $350,000,000 principal amount of 3.300% Notes due April 2023 (the "2023 Notes"). The 2023 Notes were sold at a discount with an aggregate purchase price of $347,406,000 with interest payable semi-annually commencing on October 15, 2013. The discount of $2,594,000 is being amortized to interest expense over the term of the note using the effective interest method. The effective interest rate for the 2023 Notes after accounting for note discount is 3.388%. NNN previously entered into four forward starting swaps with an aggregate notional amount of $240,000,000. Upon issuance of the 2023 Notes, NNN terminated the forward starting swaps resulting in a liability of $3,156,000, of which $3,141,000 was deferred in other comprehensive income. The deferred liability is being amortized over the term of the 2023 Notes using the effective interest method. The 2023 Notes are senior unsecured obligations of NNN and are subordinated to all secured indebtedness and to the indebtedness and other liabilities of NNN's subsidiaries. Additionally, the 2023 Notes are redeemable at NNN's option, in whole or part anytime, for an amount equal to (i) the sum of the outstanding principal balance of the notes being redeemed plus accrued interest thereon to the redemption date, and (ii) the make whole amount, if any, as defined in the supplemental indenture dated April 9, 2013, relating to the 2023 Notes. NNN received approximately $344,266,000 of proceeds in connection with the issuance of the 2023 Notes, net of debt issuance costs totaling $3,140,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. 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 2012, NNN filed a shelf registration statement with the Securities and Exchange Commission (the "Commission") which was automatically effective and permits the issuance by NNN of an indeterminate amount of debt and equity securities. A description of NNN's outstanding series of publicly held notes is found under "Debt - Notes Payable" above. 5.700% Series E Cumulative Redeemable Preferred Stock. In May 2013, NNN closed an underwritten public offering of 11,500,000 depositary shares (including 1,500,000 depositary shares issued in connection with the underwriters' over- 28 -------------------------------------------------------------------------------- allotment), each representing a 1/100th interest in a share of Series E Preferred Stock, and received gross proceeds of $287,500,000. In connection with this offering, the Company incurred stock issuance costs of approximately $9,856,000, consisting primarily of underwriting commissions and fees, rating agency fees, legal and accounting fees and printing expenses. The Company used the net proceeds from the offering for general corporate purposes and funding property acquisitions. Holders of the Series E depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 5.700% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.425 per depositary share). The Series E Preferred Stock underlying the depositary shares ranks senior to NNN's common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of NNN. The Series E Preferred Stock has no maturity date and will remain outstanding unless redeemed. NNN may redeem the Series E Preferred Stock underlying the depositary shares on or after May 30, 2018, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated and unpaid dividends. In addition, upon a change of control, as defined in the articles supplementary fixing the rights and preferences of the Series E Preferred Stock, NNN may redeem the Series E Preferred Stock underlying the depositary shares at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated and unpaid dividends, and in limited circumstances the holders of depositary shares may convert some or all of their Series E Preferred Stock into shares of NNN's common stock at conversion rates provided in the related articles supplementary. As of May 1, 2014, the Series E Preferred Stock was not redeemable or convertible. Common Stock Issuances. In May 2012, NNN established an at-the-market equity program ("2012 ATM") which allowed NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through May 2015. The following table outlines the common stock issuances pursuant to the 2012 ATM during the quarter ended March 31, 2013 (dollars in thousands, except per share data): Shares of common stock 4,616,542 Average price per share (net) $ 32.56 Net proceeds $ 150,327



Stock issuance costs (1) $ 2,129

(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. No shares were issued under the 2012 ATM during the quarter ended March 31, 2014. In March 2013, NNN established a second ATM equity program ("2013 ATM") which allows NNN to sell up to an aggregate of 9,000,000 shares of common stock from time to time through March 2015. The following table outlines the common stock issuances pursuant to the 2013 ATM during the quarter ended March 31, 2014 (dollars in thousands, except per share data): Shares of common stock 432,000 Average price per share (net) $ 34.91 Net proceeds $ 15,080



Stock issuance costs (1) $ 265

(1) Stock issuance costs consist primarily of underwriters' fees and commissions, and legal and accounting fees. NNN incurred $135,000 of stock issuance costs related to the 2013 ATM consisting primarily of legal and accounting fees during the quarter ended March 31, 2013. No shares were issued under the 2013 ATM during the quarter ended March 31, 2013. In February 2012, NNN filed a shelf registration statement which was automatically effective with the Commission for its DRIP, which permits the issuance by NNN of up to 16,000,000 shares of common stock. NNN's DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in NNN's common stock. The following outlines the common stock issuances pursuant to NNN's DRIP (dollars in thousands): Quarter Ended March 31, 2014 2013 Shares of common stock 184,503 424,995 Net proceeds $ 6,107$ 13,822 29

-------------------------------------------------------------------------------- Commercial Mortgage Residual Interests NNN holds the 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. 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 comprehensive income (dollars in thousands): Quarter Ended March 31, 2014 2013 Unrealized gains $ 684$ 869 Other than temporary valuation impairment 158 -



Recent Accounting Pronouncements

Refer to Note 1 to the March 31, 2014, Condensed Consolidated Financial Statements.

30



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