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Organization and Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2021
Accounting Policies [Abstract] |
Organization and Summary of Significant Accounting Policies | 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 terms "NNN" or the "Company" refer to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN's assets primarily include real estate assets. NNN acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment ("Properties", "Property Portfolio", or individually a "Property").
|  | September 30, 2021 |
Property Portfolio: |  |  |
Total properties |  |  | 3,195 |
Gross leasable area (square feet) |  |  | 33,005,000 |
States |  |  | 48 |
Weighted average remaining lease term (years) |  |  | 10.6 |
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 U.S. generally accepted accounting principles. The unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring accruals) 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 and nine months ended September 30, 2021, may not be indicative of the results that may be expected for the year ending December 31, 2021. See "Note 8 – Subsequent Events." Amounts as of December 31, 2020, 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, 2020. COVID-19 Pandemic – During the quarter and nine months ended September 30, 2021, NNN and its tenants continue to be impacted by the novel strain of coronavirus ("COVID-19") pandemic which has resulted in the loss of revenue for certain tenants and challenged their ability to pay rent. NNN has entered into rent deferral lease amendments with certain tenants (See Note 2). 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”) Accounting Standards Codifications ("ASC") guidance included in Consolidation. All significant intercompany account balances and transactions have been eliminated. Real Estate Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of Properties developed or funded by NNN includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. NNN recorded $215,000 and $1,218,000 in capitalized interest during the development period for the nine months ended September 30, 2021 and 2020, respectively, of which $87,000 and $332,000 was recorded during the quarters ended September 30, 2021 and 2020, respectively. Purchase Accounting for Acquisition of Real Estate Subject to a Lease – In accordance with the FASB guidance on business combinations, consideration for the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and, if applicable, to identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases, as applicable, based on their respective fair values. The fair value estimate is sensitive to significant assumptions, such as establishing a range of relevant market assumptions for land, building and rent and where the acquired property falls within that range. These market assumptions for land, building and rent use the most relevant comparable properties for an acquisition. The final range relies upon ranking comparable properties' attributes from most to least similar. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on the determination of their fair values. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease and the renewal option terms if it is probable that the tenant will exercise options. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the Company believes that it is likely that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period. The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off in that period. The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition. Lease Accounting – In accordance with FASB Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)," ("ASC 842"), NNN recorded Right-Of-Use assets and operating lease liabilities as lessee under operating leases. In July 2021, the FASB issued ASU 2021-05, which affects lessors with lease contracts that (i) have variable lease payments that do not depend on a reference index or a rate and (ii) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. NNN has reviewed all existing leases and determined this update has no effect on the current portfolio, but will apply ASU 2021-05 prospectively to leases that commence or are modified in the future. In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. NNN elected to make this policy election for COVID-19 lease concessions, including the rent deferral lease amendments effective during the year ended December 31, 2020 and the quarter and nine months ended September 30, 2021. In accordance with ASC 842, NNN reviews the collectability of its lease payments on an ongoing basis. NNN considers collectability indicators when analyzing accounts receivable (and accrued rent) and historical bad debt levels, tenant credit-worthiness and current economic trends, all of which assists in evaluating the probability of outstanding and future lease payment collections. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected recovery of pre-petition and post-petition bankruptcy claims. At the point NNN deems the collection of lease payments not probable, previously recognized rental revenue and any related accrued rent are reversed and, subsequently, any lease revenue is only recognized when cash receipts are received. As a result of the review of lease payments collectability, no outstanding receivables and related accrued rent were written off during the quarter and nine months ended September 30, 2021, and no tenants were reclassified as cash basis for accounting purposes. NNN includes an allowance for doubtful accounts in rental income on the Consolidated Statements of Income and Comprehensive Income. As of September 30, 2021, approximately six percent of total Properties, and approximately seven percent of aggregate gross leasable area held in the Property Portfolio, was leased to 11 tenants that NNN has determined to recognize revenue on a cash basis. During the nine months ended September 30, 2021 and 2020, NNN recognized $37,999,000 and $930,000, respectively, of rental income from certain tenants for periods following their classification to cash basis for accounting, of which $13,630,000 and $726,000 was recorded during the quarters ended September 30, 2021 and 2020, respectively. Impairment – Real Estate – NNN periodically assesses its long-lived real estate assets for possible impairment whenever certain events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. These indicators include, but are not limited to: changes in real estate market conditions, the ability of NNN to re-lease properties that are currently vacant or become vacant, properties reclassified as held for sale, persistent vacancies greater than one year, and properties leased to tenants in bankruptcy. Management evaluates whether an impairment in carrying value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), and the residual value of the real estate, with the carrying value of the individual asset. The future undiscounted cash flows are primarily driven by estimated future market rents. Future cash flow estimates are sensitive to the assumptions made by management regarding future market rents, which are affected by expectations about future market and economic conditions. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. NNN's Properties are leased primarily to retail tenants under long-term net leases and primarily held for investment. Generally, NNN’s Property leases provide for initial terms of 10 to 20 years, which provide for cash flows over this term. NNN generally intends to hold these assets for the long-term, therefore, a temporary change in cash flows due to COVID-19 alone would not be an indicator of impairment. Credit Losses on Financial Instruments – FASB ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” (“ASC 326”) requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. The guidance requires a lifetime credit loss expected at inception and requires pooling of assets, which share similar risk characteristics. NNN is required to evaluate current economic conditions, as well as, make future expectations of economic conditions. In addition, the measurement of the expected credit loss is over the asset’s contractual term. As of September 30, 2021 and December 31, 2020, NNN had mortgages receivable of $2,117,000 and $2,482,000, respectively, included in other assets on the Condensed Consolidated Balance Sheets, net of $135,000 and $158,000 allowance for credit loss, respectively. NNN measures the allowance for credit loss based on the fair value of the collateral and the historical collectability trend analysis over 15 years. Debt Costs – Line of Credit Payable – Debt costs incurred in connection with NNN's $1,100,000,000 line of credit have been deferred and are being amortized to interest expense over the term of the loan commitment using the straight-line method, which approximates the effective interest method. NNN has recorded debt costs associated with the line of credit as an asset, in debt costs on the Condensed Consolidated Balance Sheets. Debt Costs – Notes Payable – Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized to interest expense over the term of the respective debt obligation using the effective interest method. These costs of $38,145,000 and $31,140,000, as of September 30, 2021 and December 31, 2020, respectively, are included in notes payable on the Condensed Consolidated Balance Sheets net of accumulated amortization of $8,670,000 and $9,317,000, respectively. Earnings Per Share – Earnings per share have been computed pursuant to the FASB guidance included in Earnings Per Share. The guidance requires classification of the Company’s unvested restricted share units, which carry rights to receive nonforfeitable dividends, as participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per common share using the two-class method (dollars in thousands):
|  | Quarter Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Basic and Diluted Earnings: |  |  |  |  |  |  |  |  |  |  |  |
Net earnings attributable to NNN |  | $ | 82,933 |  |  | $ | 56,069 |  |  | $ | 212,543 |  |  | $ | 167,512 |
Less: Series F preferred stock dividends |  |  | (4,485 | ) |  |  | (4,485 | ) |  |  | (13,455 | ) |  |  | (13,455 | )
Net earnings available to NNN’s common stockholders |  |  | 78,448 |  |  |  | 51,584 |  |  |  | 199,088 |  |  |  | 154,057 |
Less: Earnings allocated to unvested restricted shares |  |  | (180 | ) |  |  | (179 | ) |  |  | (509 | ) |  |  | (516 | )
Net earnings used in basic and diluted earnings per share |  | $ | 78,268 |  |  | $ | 51,405 |  |  | $ | 198,579 |  |  | $ | 153,541 |
Basic and Diluted Weighted Average Shares Outstanding: |  |  |  |  |  |  |  |  |  |  |  |
Weighted average number of shares outstanding |  |  | 175,607,905 |  |  |  | 173,596,374 |  |  |  | 175,530,702 |  |  |  | 172,579,042 |
Less: Unvested restricted shares |  |  | (340,725 | ) |  |  | (344,429 | ) |  |  | (323,808 | ) |  |  | (332,730 | )
Less: Unvested contingent restricted shares |  |  | (637,738 | ) |  |  | (570,809 | ) |  |  | (596,868 | ) |  |  | (539,735 | )
Weighted average number of shares outstanding used in basic earnings per share |  |  | 174,629,442 |  |  |  | 172,681,136 |  |  |  | 174,610,026 |  |  |  | 171,706,577 |
Other dilutive securities |  |  | 109,461 |  |  |  | 101,130 |  |  |  | 106,027 |  |  |  | 108,800 |
Weighted average number of shares outstanding used in diluted earnings per share |  |  | 174,738,903 |  |  |  | 172,782,266 |  |  |  | 174,716,053 |  |  |  | 171,815,377 |
Fair Value Measurement – NNN’s estimates of fair value of 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. Accumulated Other Comprehensive Income (Loss) – The following table outlines the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2021, (dollars in thousands):
|  | Gain (Loss) on Cash Flow Hedges(1) |  |
Beginning balance, December 31, 2020 |  | $ | (16,445 | ) |
Other comprehensive income (loss) |  |  | (1,584 | ) |
Reclassifications from accumulated other comprehensive income to net earnings |  |  | 2,494 |  | (2)
Net other comprehensive income (loss) |  |  | 910 |  |
Ending balance, September 30, 2021 |  | $ | (15,535 | ) |
(1) | Additional disclosure is included in Note 6 – Derivatives.
(2) | Recorded in interest expense on the Condensed Consolidated Statements of Income and Comprehensive Income.
Use of Estimates – Additional critical accounting policies of NNN include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities and are required to prepare the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to real estate asset purchase accounting for acquisition of real estate subject to a lease, the recoverability of the carrying value of long-lived assets and management's evaluation of the probability of outstanding and future lease payment collections. Actual results could differ from those estimates.

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