NNN

Business Context and Reporting Period

Company: National Retail Properties, Inc. (NNN REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: NNN is a fully integrated Real Estate Investment Trust (REIT) operating in two primary segments: Investment Assets (single-tenant retail properties leased under long-term net leases) and Inventory Assets (properties held for resale). As of September 30, 2007, the company owned 876 Investment Properties with approximately 10.4 million square feet of gross leasable area, with an occupancy rate of 98%.

Key Financial Metrics

Note: Q3 2006 and 9-month 2006 comparative balance sheet data is not provided in the text. Net earnings include significant gains from discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Revenues from continuing operations increased 36.2% in Q3 2007 and 31.0% for the nine months ended September 30, 2007, compared to the prior year. This growth is primarily driven by the acquisition of 193 Investment Properties during the first nine months of 2007.
• Earnings Volatility: While Q3 2007 net earnings ($47.4M) significantly exceeded Q3 2006 ($21.5M), the nine-month 2007 net earnings ($122.7M) were slightly lower than the nine-month 2006 figure ($125.1M). This is largely due to a decrease in gains from discontinued operations in 2007 compared to 2006.
• Impairment Reduction: Impairment charges related to mortgage residual interests decreased significantly to $0.6 million in Q3 2007 from $6.1 million in Q3 2006, and $0.6 million for the nine months of 2007 compared to $8.8 million in 2006.
• Debt Structure: Total debt increased to $1.01 billion from $777 million at year-end 2006. This includes the issuance of $250 million in 6.875% Notes due 2017 in September 2007.

Guidance, Outlook, and Risks

• Capital Markets Activity: In September 2007, the company issued $250 million of 6.875% Notes due 2017. In October 2007 (subsequent event), the company issued 4 million shares of common stock for net proceeds of $99.2 million and exercised an accordion feature to increase its revolving credit facility capacity from $300 million to $400 million.
• Dividends: The company declared a common stock dividend of $0.355 per share in October 2007. For the nine months ended September 30, 2007, dividends paid to common shareholders totaled $67.5 million.
• Market Risks: The company is exposed to interest rate risk through its variable-rate credit facility. A hypothetical 1% increase in interest rates would increase interest expense by less than 3% for the nine months ended September 30, 2007. The company also faces market risk regarding the valuation of mortgage residual interests, which are sensitive to prepayment speeds and discount rates.
• Unusual Items: The financial results are heavily influenced by "Discontinued Operations," which included gains on the disposition of Investment Properties ($22.5M in Q3 2007) and Inventory Properties ($2.8M in Q3 2007).

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Earnings excluding the significant one-time gains from property dispositions classified as discontinued operations.
• Debt Maturity Profile: Review the contractual obligations table to assess the concentration of debt maturities, noting $113.2 million due in 2008 and $21.8 million in 2009.
• Mortgage Residual Valuation: Confirm the assumptions used for the fair value of mortgage residual interests, specifically the increase in the discount rate from 17% to 25% and its impact on future impairment charges.
• Construction Commitments: Assess the $76.8 million in unfunded construction commitments for the Investment Portfolio and $43.3 million for the Inventory Portfolio as of September 30, 2007.
• REIT Compliance: Monitor the company's ability to maintain REIT status by distributing 100% of taxable income, particularly given the mix of taxable REIT subsidiary (TRS) income and REIT income.