Edgar Filing: NATIONAL RETAIL PROPERTIES, INC.

Form 10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

¨	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)

Registrant’s telephone number, including area code: (407) 265-7348

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:		Name of exchange on which registered:
Common Stock, $0.01 par value		New York Stock Exchange
7.375% Series C Preferred Stock, $0.01 par value		New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated filer ¨		Non-accelerated filer ¨		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2008 was $72,845,557.

The number of shares of common stock outstanding as of February 24, 2009 was 79,007,637.

DOCUMENTS INCORPORATED BY REFERENCE:

Registrant incorporates by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K portions of National Retail Properties, Inc.’s definitive Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A. The definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

TABLE OF CONTENTS


	PAGE REFERENCE
Part I
	Item 1.	Business	1
	Item 1A.	Risk Factors	8
	Item 1B.	Unresolved Staff Comments	18
	Item 2.	Properties	18
	Item 3.	Legal Proceedings	18
	Item 4.	Submission of Matters to a Vote of Security Holders	18
Part II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
	Item 6.	Selected Financial Data	21
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	45
	Item 8.	Financial Statements and Supplementary Data	46
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	87
	Item 9A.	Controls and Procedures	87
	Item 9B.	Other Information	89
Part III
	Item 10.	Directors, Executive Officers and Corporate Governance	90
	Item 11.	Executive Compensation	90
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	90
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	90
	Item 14.	Principal Accountant Fees and Services	90
Part IV
	Item 15.	Exhibits and Financial Statement Schedules	91
Signatures			96

PART I

Unless the context otherwise requires, references in this Annual Report on Form 10-K to the terms “registrant” or “NNN” or the “Company” refer to National Retail Properties, Inc. and all of its consolidated subsidiaries. NNN has elected to treat certain subsidiaries as taxable real estate investment trust (“REIT”) subsidiaries. These subsidiaries and their majority owned and controlled subsidiaries are collectively referred to as the “TRS.”

Statements contained in this annual report on Form 10-K, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Also, when NNN uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, NNN is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, NNN’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those NNN anticipates or projects are described in Item 1A. “Risk Factors” of this Annual Report on Form 10-K.

Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. NNN undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K.

Item 1. Business

The Company

NNN, a Maryland corporation, is a fully integrated REIT formed in 1984. NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets and mortgages and notes receivable (including structured finance investments) (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). The Inventory Assets are operated in the TRS.

Real Estate Assets

NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). As of December 31, 2008, NNN owned 1,005 Investment Properties, with an aggregate leasable area of 11,251,000 square feet, located in 44 states. Approximately 97 percent of NNN’s Investment Portfolio was leased at December 31, 2008. The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily for the purpose of resale (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2008, the TRS owned 32 Inventory Properties.

Investment in Unconsolidated Affiliate

Crow Holdings. In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns real estate assets leased to convenience store operators from unrelated third parties.

Competition

NNN generally competes with numerous other REITs, commercial developers, real estate limited partnerships and other investors, including but not limited to, insurance companies, pension funds and financial institutions, that own, manage, finance or develop retail and net leased properties.

Employees

As of January 31, 2009, NNN employed 59 full-time associates including executive and administrative personnel.

NNN’s executive offices are located at 450 S. Orange Avenue, Suite 900, Orlando, Florida 32801, and its telephone number is (407) 265-7348. NNN has an Internet website at www.nnnreit.com where NNN’s filings with the Securities and Exchange Commission (the “Commission”) can be downloaded free of charge. The common shares of National Retail Properties, Inc. are traded on the New York Stock Exchange (“NYSE”), under the ticker symbol “NNN.”

Business Strategies and Policies

The following is a discussion of NNN’s operating strategy and certain of its investment, financing and other policies. These strategies and policies have been set by management and/or the Board of Directors and, in general, may be amended or revised from time to time by management and/or the Board of Directors without a vote of NNN’s stockholders.

Operating Strategies

NNN’s strategy is to invest primarily in retail real estate that is typically located along high-traffic commercial corridors near areas of commercial and residential density. Management believes that these types of properties, generally pursuant to triple-net leases, provide attractive opportunities for a stable current return and the potential for increased current returns and capital appreciation. Triple-net leases typically require the tenant to pay property operating expenses such as real estate taxes, assessments and other government charges, insurance, utilities, and repairs and maintenance. Initial lease terms are generally 15 to 20 years.

In some cases, NNN’s investment in real estate is in the form of mortgages, structured finance investments or other loans which may be secured by real estate, a borrower’s pledge of ownership interests in the entity that owns the real estate or other assets. These investments may be subordinated to senior loans secured by other loans encumbering the underlying real estate or assets. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans.

NNN holds investment real estate assets until it determines that the sale of such a property is advantageous in view of NNN’s investment objectives. In deciding whether to sell a real estate investment asset, NNN may consider factors such as potential capital appreciation, net cash flow, tenant credit quality, market lease rates, potential use of sale proceeds and federal income tax considerations.

NNN acquires and/or develops inventory real estate assets primarily for the purpose of resale.

NNN’s management team considers certain key indicators to evaluate the financial condition and operating performance of NNN. The key indicators for NNN may include items such as: the composition of NNN’s Investment Portfolio (including but not limited to tenant, geographic and line of trade diversification), the occupancy rate of NNN’s Investment Portfolio, certain financial performance ratios, profitability measures, industry trends and performance of competitors compared to that of NNN.

The operating strategies employed by NNN have allowed it to increase the annual dividends (paid quarterly) per common share for 19 consecutive years.

Investment in Real Estate or Interests in Real Estate

NNN’s management believes that single tenant, freestanding net lease retail properties will continue to be attractive investment opportunities and that NNN is well suited to take advantage of these opportunities because of its experience in accessing capital markets, ability to underwrite and acquire properties, and because of management’s experience in seeking out, identifying and evaluating potential acquisitions.

In evaluating a particular acquisition, management may consider a variety of factors, including:

•

the location, visibility and accessibility of the property,

•

the geographic area and demographic characteristics of the community, as well as the local real estate market, including potential for growth, market rents, and existing or potential competing properties or retailers,

•

the size of the property,

•

the purchase price,

•

the non-financial terms of the proposed acquisition,

•

the availability of funds or other consideration for the proposed acquisition and the cost thereof,

•

the compatibility of the property with NNN’s existing portfolio,

•

the potential for, and current extent of, any environmental problems,

•

the quality of construction and design and the current physical condition of the property,

•

the financial and other characteristics of the existing tenant,

•

the tenant’s business plan, operating history and management team,

•

the tenant’s industry,

•

the terms of any existing leases, and

•

the rent to be paid by the tenant.

NNN intends to engage in future investment activities in a manner that is consistent with the maintenance of its status as a REIT for federal income tax purposes and that will not make NNN an investment company under the Investment Company Act of 1940, as amended. Equity investments in acquired properties may be subject to existing mortgage financings and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these investments.

Investments in Real Estate Mortgages, Commercial Mortgage Residual Interests, and Securities of or Interests in Persons Engaged in Real Estate Activities

While NNN’s primary business objectives and current portfolio ownership primarily emphasize retail properties, NNN may invest in (i) a wide variety of property types and tenant types, (ii) leases, mortgages, commercial mortgage residual interests and other types of real estate interests, (iii) loans secured by personal property, (iv) loans secured by membership interests, or (v) securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. For example, NNN from time to time has made investments in mortgage loans or held mortgages on properties that NNN has sold and has made structured finance investments and other loans related to properties acquired or sold.

Financing Strategy

NNN’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategies while servicing its debt requirements and providing value to its stockholders. NNN generally utilizes debt and equity security offerings, bank borrowings, the sale of properties, and to a lesser extent, internally generated funds to meet its capital needs.

NNN typically funds its short-term liquidity requirements including investments in additional retail properties with cash from its $400,000,000 unsecured revolving credit facility (“Credit Facility”). As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000.

For the year ended December 31, 2008, NNN’s ratio of total liabilities to total gross assets (before accumulated depreciation) was approximately 40 percent and the secured indebtedness to total gross assets was approximately one percent. The total debt to total market capitalization was approximately 43 percent. Certain financial agreements to which NNN is a party contain covenants that limit NNN’s ability to incur debt under certain circumstances.

NNN anticipates it will be able to obtain additional financing for short-term and long-term liquidity requirements as further described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity.” However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN.

The organizational documents of NNN do not limit the absolute amount or percentage of indebtedness that NNN may incur. Additionally, NNN may change its financing strategy at any time. NNN has not engaged in trading, underwriting or agency distribution or sale of securities of other issues and does not intend to do so.

Strategies and Policy Changes

Any of NNN’s strategies or policies described above may be changed at any time by NNN without notice to or a vote of NNN’s stockholders.

Investment Properties

As of December 31, 2008, NNN owned 1,005 Investment Properties with an aggregate gross leasable area of 11,251,000 square feet, located in 44 states. Approximately 97 percent of the gross leasable area was leased at December 31, 2008. Reference is made to the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of NNN’s Investment Properties and their respective carrying costs.

The following table summarizes NNN’s Investment Properties as of December 31, 2008 (in thousands):


	Size⁽¹⁾			Cost⁽²⁾
	High	Low	Average	High		Low		Average
Land	2,223	7	111	$	8,882	$	25	$	1,097
Building	135	1	12		17,049		44		1,721

⁽¹⁾Approximate square feet. ⁽²⁾Costs vary depending upon size and local demographic factors.

In connection with the development of 21 Investment Properties, NNN has agreed to fund construction commitments (including construction and land costs) of $97,690,000. As of December 31, 2008, NNN has funded $70,451,000 of this commitment, with $27,239,000 remaining to be funded.

As of December 31, 2008, NNN does not have any tenant that accounts for ten percent or more of its rental income.

Leases. Although there are variations in the specific terms of the leases, the following is a summary of the general structure of NNN’s leases. Generally, the leases of the Investment Properties provide for initial terms of 15 to 20 years. As of December 31, 2008, the weighted average remaining lease term was approximately 13 years. The Investment Properties are generally leased under net leases pursuant to which the tenant typically will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. In addition, the majority of NNN’s leases provide that the tenant is responsible for roof and structural repairs. The leases of the Investment Properties provide for annual base rental payments (payable in monthly installments) ranging from $8,000 to $2,160,000 (average of $222,000). Tenant 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 Investment Property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Some of the leases also provide that in the event NNN wishes to sell the Investment Property subject to that lease, NNN first must offer the lessee the right to purchase the Investment Property on the same terms and conditions as any offer which NNN intends to accept for the sale of the Investment Property.

Certain Investment Properties have leases that provide the tenant with a purchase option to acquire the Investment Property from NNN. The purchase price calculations are generally stated in the lease agreement or are based on the current market value at the time of exercise.

The following table summarizes the lease expirations, assuming none of the tenants exercise renewal options, of NNN’s Investment Portfolio for each of the next 10 years and then thereafter in the aggregate as of December 31, 2008:


	% of Annual Base Rent⁽¹⁾	# of Properties	Gross Leasable Area⁽²⁾		% of Annual Base Rent⁽¹⁾	# of Properties	Gross Leasable Area⁽²⁾
2009	1.0%	20	386,000	2015	2.5%	19	463,000
2010	2.8%	40	405,000	2016	1.9%	15	287,000
2011	2.0%	20	333,000	2017	4.4%	26	751,000
2012	3.5%	34	525,000	2018	2.9%	24	418,000
2013	4.5%	38	842,000	Thereafter	70.3%	700	5,795,000
2014	4.2%	36	523,000

⁽¹⁾ Based on annualized base rent for all leases in place as of December 31, 2008. ⁽²⁾ Approximate square feet.

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


		% of Annual Base Rent⁽¹⁾
	Top 10 Lines of Trade	2008	2007	2006
1.	Convenience Stores	25.7%	23.9%	16.3%
2.	Automotive Service	8.9%	5.2%	0.2%
3.	Restaurant – Full Service	8.7%	10.3%	12.1%
4.	Theaters	6.1%	4.2%	-
5.	Automotive Parts	5.1%	4.9%	1.6%
6.	Drug Stores	4.0%	5.0%	8.3%
7.	Books	4.0%	4.4%	5.7%
8.	Restaurants – Limited Service	3.3%	3.7%	4.7%
9.	Sporting Goods	3.3%	3.9%	7.3%
10.	Consumer Electronics	3.2%	4.3%	5.6%
	Other	27.7%	30.2%	38.2%

		100.0%	100.0%	100.0%


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

The following table shows the top 10 states in which NNN’s Investment Properties are located as of December 31, 2008:


	State	# of Properties	% of Annual Base Rent⁽¹⁾
1.	Texas	211	19.9%
2.	Florida	84	9.8%
3.	Illinois	39	6.6%
4.	North Carolina	62	6.1%
5.	California	26	5.2%
6.	Georgia	57	5.1%
7.	Pennsylvania	80	4.2%
8.	Indiana	37	4.2%
9.	Ohio	31	3.1%
10.	Tennessee	30	3.1%
	Other	348	32.7%

		1,005	100.0%


⁽¹⁾Based on annualized base rent for all leases in place as of December 31, 2008.

Mortgages and Notes Receivable

As of December 31, 2008 and 2007, mortgages and notes receivable, excluding structured finance investments, had an aggregate outstanding principal balance of $55,495,000 and $58,556,000, respectively. As of December 31, 2008, the mortgages and notes receivable bear interest rates ranging from 7.00% to 11.50% with maturity dates ranging from January 2009 through October 2028. Mortgages receivable are secured by real estate, real estate securities or other assets.

As of December 31, 2008, and 2007, the outstanding principal balance of the structured finance investments was $4,514,000 and $14,359,000, respectively. As of December 31, 2008, the structured finance investments bear a weighted average interest rate of 11.36% per annum, of which 10.00% is payable monthly and the remaining 1.36% accrues and is due at maturity. The principal balance of each structured finance investment is due in full at maturity in April 2009. The structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate.

Commercial Mortgage Residual Interests

Orange Avenue Mortgage Investments, Inc. (“OAMI”), a majority owned and consolidated subsidiary of NNN, holds the residual interests (“Residuals”) from seven commercial real estate loan securitizations. Each of the Residuals is reported at fair value based upon an independent valuation; unrealized gains or losses are reported as other comprehensive income in stockholders’ equity, and other than temporary losses as a result of a change in timing or amount of estimated cash flows are recorded as an other than temporary valuation impairment. The Residuals had an estimated fair value of $22,000,000 at December 31, 2008.

Inventory Assets

The NNN Inventory Portfolio, which is owned by the TRS, is comprised of two components: land for development (“Development Properties” or “Development Portfolio”) and improved properties (“Exchange Properties” or “Exchange Portfolio”). NNN’s Inventory Portfolio is held with the intent to sell the properties to purchasers who are looking for replacement like-kind exchange property or to other purchasers with different investment objectives. As of December 31, 2008, the TRS owned 19 Development Properties (11 completed, one under construction and seven land parcels) and 13 Exchange Properties. See the Schedule of Real Estate and Accumulated Depreciation and Amortization filed with this report for a listing of the Inventory Properties and their respective carrying costs.

The following table summarizes the 11 completed Development Properties and 13 Exchange Properties as of December 31, 2008 (in thousands):


	Size⁽¹⁾				Cost⁽²⁾
	High	Low	Average		High		Low		Average
Completed Development Properties:
Land	527	15	$	128	$	8,959	$	247	$	1,787
Building	218	1		27		28,803		369		4,244
Exchange Properties:
Land	110	11	$	29	$	1,729	$	121	$	465
Building	23	2		7		3,367		184		970

⁽¹⁾Approximate square feet. ⁽²⁾Costs vary depending upon size and local demographic factors.

Under Construction. In connection with the development of one Inventory Property, NNN has agreed to fund total construction commitments (including construction and land costs) of $4,814,000. As of December 31, 2008, NNN has funded $2,212,000 of this commitment, with $2,602,000 remaining to be funded.

Governmental Regulations Affecting Properties

Property Environmental Considerations. Subject to a determination of the level of risk and potential cost of remediation, NNN may acquire a property where some level of contamination may exist. Investments in real property create a potential for substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property or the improper disposal of hazardous substances emanating from the property, regardless of fault. As a part of its acquisition due diligence process, NNN generally obtains an environmental site assessment for each property. In such cases where NNN intends to acquire real estate where some level of contamination may exist, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, and/or (iii) agree to other arrangements deemed appropriate by NNN, including, under certain circumstances, the purchase of environmental insurance to address environmental conditions at the property.

Americans with Disabilities Act of 1990. The Investment and Inventory Properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”). Investigation of a property may reveal non-compliance with the ADA. The tenants will typically have primary responsibility for complying with the ADA, but NNN may incur costs if the tenant does not comply. As of February 15, 2009, NNN has not been notified by any governmental authority of, nor is NNN’s management aware of, any non-compliance with the ADA that NNN’s management believes would have a material adverse effect on its business, financial position or results of operations.

Other Regulations. State and local fire, life-safety and similar requirements regulate the use of NNN’s Investment and Inventory Properties. The leases generally require that each tenant will have primary responsibility for complying with regulations, but failure to comply could result in fines by governmental authorities, awards of damages to private litigants, or restrictions on the ability to conduct business on such properties.

Item 1A. Risk Factors

Carefully consider the following risks and all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and the notes thereto. If any of the events or developments described below were actually to occur, NNN’s business, financial condition or results of operations could be adversely affected.

The global financial crisis and economic slowdown may have an adverse impact on NNN’s industry, business, its tenants’ business and NNN’s results of operations.

The continuation or worsening of the current credit crisis and global economic crisis could have an adverse effect on the fundamentals of NNN’s business and results of operations, including overall market occupancy and rental rates. These current economic conditions could have a negative effect on the financial condition of NNN’s tenants, developers, borrowers, lenders or on the institutions that hold NNN’s cash balances and short-term investments, which may expose NNN to increased risks of default by these parties.

With this disruption in the economy and capital markets, there can be no assurance NNN will not experience material adverse effects on its business, financial condition, results of operations or real estate values.

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

Potential consequences of the current credit crisis and global economic slowdown include:

•

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

•

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

•

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

•

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

•

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

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

NNN may be unable to obtain capital on favorable terms, if at all, to further its business objectives or meet its existing obligations. Debt and equity capital availability in the real estate market is severely strained. Nearly all of NNN’s debt, including the Credit Facility, is subject to balloon principal payments due at maturity. These maturities begin as soon as May 2010 and extend to October 2017. The ability of NNN to make these scheduled principal payments may be adversely impacted by NNN’s inability to extend or refinance the Credit Facility, the inability to dispose of assets at an attractive

price or the inability to obtain additional debt or equity capital. Capital that may be available may be materially more expensive or available under terms that are materially more restrictive than NNN’s existing capital which would have an adverse impact on NNN’s business, financial condition or results of operations.

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

NNN’s five largest tenants accounted for an aggregate of approximately 28 percent of NNN’s annual base rent as of December 31, 2008. The default, financial distress, bankruptcy or liquidation of one or more of NNN’s tenants could cause substantial vacancies among NNN’s Investment Portfolio. Vacancies reduce NNN’s revenues, increase property expenses and could decrease the ultimate sale value of each such vacant property. Upon the expiration of the leases that are currently in place, the tenant may not be able to renew the lease or, NNN may not be able to re-lease the vacant property at a comparable lease rate or without incurring additional expenditures in connection with such renewal or re-leasing.

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

As of December 31, 2008, an aggregate of approximately 38 percent of NNN’s annual base rent is generated from two retail lines of trade, convenience stores (26 percent) and restaurants (12 percent). In addition, as of December 31, 2008, an aggregate of approximately 30 percent of NNN’s annual base rent is generated from properties in Texas (20 percent) and Florida (10 percent). Any financial hardship and/or changes in these industries or states could have an adverse effect on NNN’s results of operations.

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

NNN’s economic performance and the value of its real estate assets are subject to the risk that if NNN’s properties do not generate revenues sufficient to meet its operating expenses, including debt service, NNN’s cash flow and ability to pay distributions to its shareholders will be adversely affected. As a real estate company, NNN is susceptible to the following real estate industry risks, which are beyond its control:

•

changes in national, regional and local economic conditions and outlook,

•

decreases in consumer spending and retail sales,

•

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

•

adverse changes in local real estate market conditions, such as an oversupply, reduction in demand or intense competition for tenants,

•

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

•

zoning, regulatory restrictions, or change in taxes, and

•

changes in interest rates or availability of financing.

All of these factors could result in decreases in market rental rates and increases in vacancy rates, which could adversely affect NNN’s results of operations.

NNN’s real estate investments are illiquid.

Because real estate investments are relatively illiquid, NNN’s ability to adjust the portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including: (i) debt service (if any), (ii) real estate taxes, and (iii) operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings and could have an adverse effect on NNN’s financial condition.

NNN may be subject to known or unknown environmental liabilities.

Subject to a determination of the level of risk and potential cost of remediation, NNN may acquire a property where some level of contamination may exist. Investments in real property create a potential for substantial environmental liability on the part of the owner of such property from the presence or discharge of hazardous substances on the property or the improper disposal of hazardous substances emanating from the property, regardless of fault. As a part of its acquisition due diligence process, NNN generally obtains an environmental site assessment for each property. In such cases where NNN intends to acquire real estate where some level of contamination may exist, NNN generally requires the seller or tenant to (i) remediate the problem, (ii) indemnify NNN for environmental liabilities, and/or (iii) agree to other arrangements deemed appropriate by NNN, including, under certain circumstances, the purchase of environmental insurance to address environmental conditions at the property.

NNN has 70 Investment Properties currently under some level of environmental remediation. In general, the seller, the tenant or an adjacent land owner is responsible for the cost of the environmental remediation for each of these Investment Properties. In the event of a bankruptcy or other inability on the part of these parties to cover these costs, NNN may have to cover the costs of remediation, fines or other environmental liabilities at these and other properties and may have liability to third parties. NNN may also own properties where required remediation has not begun or adverse environmental conditions have not yet been detected. This may require remediation or otherwise subject NNN to liability including liability to third parties. NNN cannot assure that (i) it will not be required to undertake or pay for removal or remediation of any contamination of the properties currently or previously owned by NNN, (ii) NNN will not be subject to fines by governmental authorities or litigation, (iii) NNN will not be subject to litigation by and liability to third parties, or (iv) the costs of such removal, remediation fines, third party liability, or litigation would not be material.

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

NNN cannot assure that it will be able to implement its investment strategies successfully. Additionally, NNN cannot assure that its property portfolio will expand at all, or if it will expand at any specified rate or to any specified size. In addition, investment in additional real estate assets is subject to a number of risks. Because NNN expects to invest in markets other than the ones in which its current properties are located or properties which may be leased to tenants other than those to which NNN has historically leased properties, NNN will also be subject to the risks associated with investment in new markets or with new tenants that may be relatively unfamiliar to NNN’s management team.

NNN’s development activities are subject to, without limitation, risks relating to the availability and timely receipt of zoning and other regulatory approvals, the cost and timely completion of construction (including risks from factors beyond NNN’s control, such as weather or labor conditions or material

shortages), the risk of finding tenants for the properties and the ability to obtain both construction and permanent financing on favorable terms. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken or provide a tenant the opportunity to terminate a lease. Any of these situations may delay or eliminate proceeds or cash flows NNN expects from these projects, which could have an adverse effect on NNN’s financial condition.

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

NNN may be unable to sell properties targeted for disposition (including its Inventory Properties) due to adverse market conditions. This may adversely affect, among other things, NNN’s ability to sell under favorable terms, execute its operating strategy, achieve target earnings or returns, retire or repay debt or pay dividends.

A change in the assumptions used to determine the value of commercial mortgage residual interests could adversely affect NNN’s financial position.

As of December 31, 2008, the Residuals had a carrying value of $22,000,000. The value of these Residuals is based on discount rate, loan loss, prepayment speed and interest rate assumptions made by NNN to determine their value. If actual experience differs materially from these assumptions, the actual future cash flow could be less than expected and the value of the Residuals, as well as NNN’s earnings, could decline.

NNN may suffer a loss in the event of a default or bankruptcy of a borrower.

If a borrower defaults on a mortgage, structured finance loan or other loan made by NNN, and does not have sufficient assets to satisfy the loan, NNN may suffer a loss of principal and interest. In the event of the bankruptcy of a borrower, NNN may not be able to recover against all or any of the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the balance due on the loan. In addition, certain of NNN’s loans may be subordinate to other debt of a borrower. These investments are typically loans secured by a borrower’s pledge of its ownership interests in the entity that owns the real estate or other assets. These agreements are typically subordinated to senior loans secured by other loans encumbering the underlying real estate or assets. Subordinated positions are generally subject to a higher risk of nonpayment of principal and interest than the more senior loans. As of December 31, 2008, mortgages and notes receivables (including structured finance investments) had an outstanding principal balance of $60,009,000. If a borrower defaults on the debt senior to NNN’s loan, or in the event of the bankruptcy of a borrower, NNN’s loan will be satisfied only after the borrower’s senior creditors’ claims are satisfied. Where debt senior to NNN’s loans exists, the presence of intercreditor arrangements may limit NNN’s ability to amend loan documents, assign the loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy proceedings and litigation can significantly increase the time needed for NNN to acquire underlying collateral, if any, in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.

Certain provisions of NNN’s leases or loan agreements may be unenforceable.

NNN’s rights and obligations with respect to its leases, structured finance loans, mortgage loans or other loans are governed by written agreements. A court could determine that one or more provisions of such an agreement are unenforceable, such as a particular remedy, a loan prepayment provision or a provision governing NNN’s security interest in the underlying collateral of a borrower or lessee. NNN could be adversely impacted if this were to happen with respect to an asset or group of assets.

Property ownership through joint ventures and partnerships could limit NNN’s control of those investments.

Joint ventures or partnerships involve risks not otherwise present for direct investments by NNN. It is possible that NNN’s co-venturers or partners may have different interests or goals than NNN at any time and they may take actions contrary to NNN’s requests, policies or objectives, including NNN’s policy with respect to maintaining its qualification as a REIT. Other risks of joint venture or partnership investments include impasses on decisions because in some instances no single co-venturer or partner has full control over the joint venture or partnership, respectively. Additionally, the co-venturer or partner may become insolvent, bankrupt or otherwise unable to contribute to the joint venture or partnership, respectively.

Competition with numerous other REITs, commercial developers, real estate limited partnerships and other investors may impede NNN’s ability to grow.

NNN may not be in a position or have the opportunity in the future to complete suitable property acquisitions or developments on advantageous terms due to competition for such properties with others engaged in real estate investment activities. NNN’s inability to successfully acquire or develop new properties may affect NNN’s ability to achieve anticipated return on investment or realize its investment strategy, which could have an adverse effect on its results of operations.

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

NNN’s properties are generally covered by comprehensive liability, fire, flood, and extended insurance coverage. NNN believes that the insurance carried on its properties is adequate in accordance with industry standards. There are, however, types of losses (such as from hurricanes, wars or earthquakes) which may be uninsurable, or the cost of insuring against these losses may not be economically justifiable. If an uninsured loss occurs or a loss exceeds policy limits, NNN could lose both its invested capital and anticipated revenues from the property, thereby reducing NNN’s cash flow.

Acts of violence, terrorist attacks or war may affect the markets in which NNN operates and NNN’s results of operations.

Terrorist attacks or other acts of violence may negatively affect NNN’s operations. There can be no assurance that there will not be terrorist attacks against businesses within the United States. These attacks may directly impact NNN’s physical facilities or the businesses or the financial condition of its tenants, developers, borrowers, lenders or financial institutions with which NNN has a relationship. The United States is engaged in armed conflict, which could have an impact on these parties. The consequences of armed conflict are unpredictable, and NNN may not be able to foresee events that could have an adverse effect on its business.

More generally, any of these events or threats of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. They also could result in, or cause a deepening of, economic recession in the United States or abroad. Any of these occurrences could have an adverse impact on NNN’s financial condition or results of operations.

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

As of December 31, 2008, NNN owned 31 vacant, unleased Investment Properties and two vacant land parcels, which accounted for approximately three percent of total Investment Properties. NNN is actively marketing these properties for sale or lease but may not be able to sell or lease these properties on favorable terms or at all. The lost revenues and increased property expenses resulting from the rejection by any bankrupt tenant of any of their respective leases with NNN could have a material adverse effect on the liquidity and results of operations of NNN if NNN is unable to re-lease the Investment Properties at comparable rental rates and in a timely manner. As of December 31, 2008, approximately two percent of the total gross leasable area of NNN’s Investment Portfolio is leased to two tenants that have 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 lease with NNN. NNN anticipates the number of vacancies and bankrupt tenants will increase.

The amount of debt NNN has and the restrictions imposed by that debt could adversely affect NNN’s business and financial condition.

As of December 31, 2008, NNN had total mortgage debt and secured notes payable outstanding of approximately $26,290,000, total unsecured notes payable of $1,000,014,000 and $26,500,000 outstanding on the Credit Facility. NNN’s organizational documents do not limit the level or amount of debt that it may incur. If NNN incurs additional indebtedness and permits a higher degree of leverage, debt service requirements would increase and could adversely affect NNN’s financial condition and results of operations, as well as NNN’s ability to pay principal and interest on the outstanding indebtedness or cash dividends to its stockholders. In addition, increased leverage could increase the risk that NNN may default on its debt obligations. The Credit Facility contains financial covenants that could limit the amount of distributions to NNN’s common and preferred stockholders.

The amount of debt outstanding at any time could have important consequences to NNN’s stockholders. For example, it could:

•

require NNN to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing funds available for operations, real estate investments and other appropriate business opportunities that may arise in the future,

•

increase NNN’s vulnerability to general adverse economic and industry conditions,

•

limit NNN’s ability to obtain any additional financing it may need in the future for working capital, debt refinancing, capital expenditures, real estate investments, development or other general corporate purposes,

•

make it difficult to satisfy NNN’s debt service requirements,

•

limit NNN’s ability to pay dividends in cash on its outstanding common and preferred stock,

•

limit NNN’s flexibility in planning for, or reacting to, changes in its business and the factors that affect the profitability of its business, and

•

limit NNN’s flexibility in conducting its business, which may place NNN at a disadvantage compared to competitors with less debt or debt with less restrictive terms.

NNN’s ability to make scheduled payments of principal or interest on its debt, or to retire or refinance such debt will depend primarily on its future performance, which to a certain extent is subject to the creditworthiness of its tenants, competition, and economic, financial, and other factors beyond its control. There can be no assurance that NNN’s business will continue to generate sufficient cash flow from operations in the future to service its debt or meet its other cash needs. If NNN is unable to generate sufficient cash flow from its business, it may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing to meet its debt obligations and other cash needs.

NNN cannot assure stockholders that any such refinancing, sale of assets or additional financing would be possible or, if possible, on terms and conditions, including but not limited to the interest rate, which NNN would find acceptable or would not result in a material decline in earnings.

NNN is obligated to comply with financial and other covenants in its debt that could restrict its operating activities, and the failure to comply with such covenants could result in defaults that accelerate the payment under such debt.

NNN’s unsecured debt contains various restrictive covenants which include, among others, provisions restricting NNN’s ability to:

•

incur or guarantee additional debt,

•

make certain distributions, investments and other restricted payments, including dividend payments on its outstanding common and preferred stock,

•

limit the ability of restricted subsidiaries to make payments to NNN,

•

enter into transactions with certain affiliates,

•

create certain liens,

•

consolidate, merge or sell NNN’s assets, and

•

pre-pay debt.

NNN’s secured debt generally contains customary covenants, including, among others, provisions:

•

relating to the maintenance of the property securing the debt,

•

restricting its ability to sell, assign or further encumber the properties securing the debt,

•

restricting its ability to incur additional debt,

•

restricting its ability to amend or modify existing leases, and

•

relating to certain prepayment restrictions.

NNN’s ability to meet some of its debt covenants, including covenants related to the condition of the property or payment of real estate taxes, may be dependent on the performance by NNN’s tenants under their leases.

In addition, certain covenants in NNN’s debt, including its Credit Facility, require NNN, among other things, to:

•

limit certain leverage ratios,

•

maintain certain minimum interest and debt service coverage ratios,

•

limit dividends declared and paid to NNN’s common and preferred stockholders, and

•

limit investments in certain types of assets.

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

As with other publicly traded securities, the market price of NNN’s equity and debt securities depends on various factors, which may change from time-to-time and/or may be unrelated to NNN’s financial condition, operating performance or prospects that may cause significant fluctuations or volatility in such prices. These factors include among many:

•

general economic and financial market conditions including the current global economic downturn,

•

level and trend of interest rates,

•

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

•

the issuance of additional equity or debt securities,

•

changes in NNN’s FFO or earnings estimates,

•

changes in NNN’s debt ratings or analyst ratings,

•

NNN’s financial condition and performance,

•

market perception of NNN compared to other REITs, and

•

market perception of REITs compared to other investment sectors.

NNN’s failure to qualify as a real estate investment trust for federal income tax purposes could result in significant tax liability.

NNN intends to operate in a manner that will allow NNN to continue to qualify as a real estate investment trust (“REIT”). NNN believes it has been organized as, and its past and present operations qualify NNN as a REIT. However, the Internal Revenue Service (“IRS”) could successfully assert that NNN is not qualified as such. In addition, NNN may not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within NNN’s control. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for NNN to qualify as a REIT.

If NNN fails to qualify as a REIT, it would not be allowed a deduction for dividends paid to stockholders in computing taxable income and would become subject to federal income tax at regular corporate rates. In this event, NNN could be subject to potentially significant tax liabilities and penalties. Unless entitled to relief under certain statutory provisions, NNN would also be disqualified

from treatment as a REIT for the four taxable years following the year during which the qualification was lost. Even if NNN maintains its REIT status, NNN may be subject to certain federal, state and local taxes on its income and property.

Even if NNN remains qualified as a REIT, NNN may face other tax liabilities that reduce operating results and cash flow.

Even if NNN remains qualified for taxation as a REIT, NNN may be subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease earnings and cash available for distribution to stockholders. In addition, in order to meet the REIT qualification requirements, NNN holds some of its assets through the TRS.

Adverse legislative or regulatory tax changes could reduce NNN’s earnings, cash flow and market price of NNN’s common stock.

At any time, the federal and state income tax laws governing REITs or the administrative interpretations of those laws may change. Any such changes may have retroactive effect, and could adversely affect NNN or its stockholders. For example, legislation enacted in 2003 and extended in 2006 generally reduced the federal income tax rate on most dividends paid by corporations to individual investors to a maximum of 15 percent (through 2010). REIT dividends, with limited exceptions, will not benefit from the rate reduction, because a REIT’s income generally is not subject to corporate level tax. As such, this legislation could cause shares in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs, and could have an adverse effect on the value of NNN’s common stock.

Compliance with REIT requirements, including distribution requirements, may limit NNN’s flexibility and negatively affect NNN’s operating decisions.

To maintain its status as a REIT for U.S. federal income tax purposes, NNN must meet certain requirements on an on-going basis, including requirements regarding its sources of income, the nature and diversification of its assets, the amounts NNN distributes to its stockholders and the ownership of its shares. NNN may also be required to make distributions to its stockholders when it does not have funds readily available for distribution or at times when NNN’s funds are otherwise needed to fund capital expenditures or to fund debt service requirements. NNN generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100 percent of its REIT taxable income and meets certain other requirements for qualifying as a REIT. For each of the years in the three-year period ended December 31, 2008, NNN believes it has qualified as a REIT. Notwithstanding NNN’s qualification for taxation as a REIT, NNN is subject to certain state taxes on its income and real estate.

Changes in accounting pronouncements could adversely impact NNN’s reported financial performance.

Accounting policies and methods are fundamental to how NNN records and reports its financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) and the Commission, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these

standards that govern the preparation of NNN’s financial statements. These changes could have a material impact on NNN’s reported financial condition and results of operations. In some cases, NNN could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements.

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

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

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

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Please refer to Item 1. “Business.”

Item 3. Legal Proceedings

In the ordinary course of its business, NNN is a party to various legal actions that management believes is routine in nature and incidental to the operation of the business of NNN. Management believes that the outcome of these proceedings will not have a material adverse effect upon its operations, financial condition or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of NNN currently is traded on the NYSE under the symbol “NNN.” Set forth below is a line graph comparing the cumulative total stockholder return on NNN’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the FTSE National Association of Real Estate Investment Trusts Equity Index (“NAREIT”) and the S&P 500 Index (“S&P 500”) for the five year period commencing December 31, 2003 and ending December 31, 2008. The graph assumes an investment of $100 on December 31, 2003.

LOGO

For each calendar quarter indicated, the following table reflects respective high, low and closing sales prices for the common stock as quoted by the NYSE and the dividends paid per share in each such period.


2008	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Year
High	$	23.66	$	24.00	$	24.57	$	23.66	$	24.57
Low		19.63		20.75		19.60		10.53		10.53
Close		22.05		20.90		23.95		17.19		17.19

Dividends paid per share		0.355		0.375		0.375		0.375		1.480

2007
High	$	25.950	$	25.450	$	24.580	$	26.150	$	26.150
Low		22.390		21.760		20.200		22.480		20.200
Close		24.190		21.860		24.380		23.380		23.380

Dividends paid per share		0.335		0.355		0.355		0.355		1.400

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


	2008			2007
Ordinary dividends	$	1.480000	100.0000%	$	1.397402	99.8144%
Qualified dividends		-	-		0.000414	0.0296%
Capital gain		-	-		0.002184	0.1560%
Unrecaptured Section 1250 Gain		-	-		-	-

	$	1.480000	100.0000%	$	1.400000	100.0000%

NNN intends to pay regular quarterly dividends to its stockholders, although all future distributions will be declared and paid at the discretion of the board of directors and will depend upon cash generated by operating activities, NNN’s financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as the board of directors deems relevant.

In February 2009, NNN paid dividends to its stockholders of $29,313,000 or $0.375 per share of common stock.

On January 31, 2009, there were 1,593 stockholders of record of common stock.

Item 6. Selected Financial Data

Historical Financial Highlights

(dollars in thousands, except per share data)


	2008			2007			2006			2005			2004
Gross revenues⁽¹⁾	$	247,352		$	208,629		$	180,877		$	151,831		$	133,875
Earnings from continuing operations		103,730			80,906			60,021			47,160			27,571
Net earnings		123,082			157,110			182,505			89,400			64,934
Total assets		2,649,362			2,539,605			1,917,495			1,736,588			1,300,517
Total debt		1,052,804			1,060,070			776,737			861,045			524,241
Total equity		1,542,209			1,407,285			1,096,505			828,087			756,998
Cash dividends declared to:
Common stockholders		110,107			92,989			76,035			69,018			66,272
Series A preferred stock stockholders		-			-			4,376			4,008			4,008
Series B convertible preferred stock stockholders		-			-			419			1,675			1,675
Series C preferred stock stockholders		6,785			6,785			923			-			-
Weighted average common shares:
Basic		74,249,137			66,152,437			57,428,063			52,984,821			51,312,434
Diluted		74,521,909			66,407,530			58,079,875			54,640,143			51,742,518
Per share information:
Earnings from continuing operations:
Basic	$	1.31		$	1.12		$	0.94		$	0.78		$	0.43
Diluted		1.30			1.11			0.94			0.80			0.46
Net earnings:
Basic		1.57			2.27			3.08			1.58			1.15
Diluted		1.56			2.26			3.05			1.56			1.18
Dividends declared to:
Common stockholders		1.48			1.40			1.32			1.30			1.29
Series A preferred stock stockholders		-			-			2.45625			2.25			2.25
Series B convertible preferred stock stockholders		-			-			41.875			167.50			167.50
Series C preferred stock depositary stockholders		1.84375			1.84375			0.250955			-			-
Other data:
Cash flows provided by (used in):
Operating activities	$	236,748		$	129,634		$	1,676		$	19,226		$	85,800
Investing activities		(256,304	)		(536,717	)		(90,099	)		(230,783	)		(69,963	)
Financing activities		(5,317	)		432,907			81,864			217,844			(19,225	)
Funds from operations – diluted⁽²⁾		148,284			124,113			97,121			81,803			73,065



⁽¹⁾ Gross revenues include revenues from NNN’s continuing and discontinued operations. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN has classified the revenues related to (i) all Investment Properties that were sold and leasehold interest which expired, (ii) all Inventory Properties which generated revenues prior to disposition, and (iii) all Investment and Inventory Properties which generated revenue and were held for sale at December 31, 2008, as discontinued operations.
⁽²⁾The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a relative non-GAAP financial measure of performance of a REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is defined by NAREIT and is used by NNN as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of Investment Assets and NNN’s share of these items from NNN’s unconsolidated partnerships and joint ventures.

FFO is generally considered by industry analysts to be the most appropriate measure of operating performance of real estate companies. FFO does not necessarily represent cash provided by operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of NNN’s operating performance or to cash flow as a measure of liquidity or ability to make distributions. Management considers FFO an appropriate measure of operating performance of an equity REIT because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted it as an operating performance measure. NNN’s computation of FFO may differ from the methodology for calculating FFO used by other equity REITs, and therefore, may not be comparable to such other REITs.

NNN has earnings from discontinued operations in each of its segments, investment assets and inventory assets, real estate held for investment and real estate held for sale. All property dispositions from NNN’s investment segment are classified as discontinued operations. In addition, certain properties in NNN’s inventory segment that have generated revenues before disposition are classified as discontinued operations. These inventory properties have not historically been classified as discontinued operations, therefore, prior period comparable consolidated financial statements have been restated to include these properties in its earnings from discontinued operations. These adjustments resulted in a decrease in NNN’s reported total revenues and total and per share earnings from continuing operations and an increase in NNN’s earnings from discontinued operations. However, NNN’s total and per share net earnings available to common stockholders is not affected.

The following table reconciles FFO to their most directly comparable GAAP measure, net earnings for the years ended December 31:


	2008			2007			2006			2005			2004
Reconciliation of funds from operations:
Net earnings	$	123,082		$	157,110		$	182,505		$	89,400		$	64,934
Real estate depreciation and amortization:
Continuing operations		41,357			29,317			19,624			13,712			10,572
Discontinued operations		433			1,065			2,795			6,695			5,143
Partnership/joint venture real estate depreciation		177			31			463			606			622
Partnership gain on sale of asset		-			-			(262	)		-			-
Gain on disposition of equity investment		-			-			(11,373	)		-			-
Gain on disposition of investment assets		(9,980	)		(56,625	)		(91,332	)		(9,816	)		(2,523	)
Extraordinary gain		-			-			-			(14,786	)		-

FFO		155,069			130,898			102,420			85,811			78,748
Series A preferred stock dividends⁽¹⁾		-			-			(4,376	)		(4,008	)		(4,008	)
Series B convertible preferred stock dividends⁽¹⁾		-			-			(419	)		(1,675	)		(1,675	)
Series C preferred stock dividends		(6,785	)		(6,785	)		(923	)		-			-

FFO available to common stockholders – basic		148,284			124,113			96,702			80,128			73,065
Series B convertible preferred stock dividends, if dilutive		-			-			419			1,675			-

FFO available to common stockholders – diluted	$	148,284		$	124,113		$	97,121		$	81,803		$	73,065



⁽¹⁾ The Series A and Series B preferred stock issuances are no longer outstanding.

For a discussion of material events affecting the comparability of the information reflected in the selected financial data, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

The following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, and the forward-looking disclaimer language in italics before Item 1. “Business.”

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

Overview

NNN’s operations are divided into two primary business segments: (i) investment assets, including real estate assets and mortgages and notes receivable (including structured finance investments) (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). The Inventory Assets are operated through the TRS. The TRS, directly and indirectly, through investment interests, primarily owns real estate generally for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). The TRS typically owns two types of properties, property for development (“Development Properties” or “Development Portfolio”) and improved properties (“Exchange Properties” or “Exchange Portfolio”).

As of December 31, 2008, NNN owned 1,005 Investment Properties, with an aggregate leasable area of 11,251,000 square feet, located in 44 states. Approximately 97 percent of total properties in NNN’s Investment Portfolio were leased at December 31, 2008. In addition, as of December 31, 2008, NNN’s Investment Assets included $60,472,000 in mortgages and notes receivable (including accrued interest receivable and structured finance investments) and $22,000,000 of commercial mortgage residual interests. As of December 31, 2008, the TRS owned 19 Development Properties (11 completed, one under construction and seven land parcels) and 13 Exchange 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 and structured finance investments (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 line of trade. NNN’s largest lines of trade concentration are the convenience store and restaurant sectors. These sectors represent a large part of the freestanding retail property marketplace which NNN believes represents an area of attractive investment opportunity. However, any financial hardship within these sectors could have a growing adverse effect on the financial condition and operating performance of NNN. NNN has some geographic concentration in the south and southeast which NNN believes are generally areas of above average population growth.

NNN formed a joint venture with an institutional investor in September 2007, in which NNN owns a 15 percent equity interest. The joint venture owns real estate assets leased to convenience store operators.

During the years ended December 31, 2008, 2007 and 2006, occupancy of the Investment Portfolio has averaged approximately 97 to 98 percent. The Investment Portfolio’s average remaining lease term of 13 years has remained fairly constant over the past three years which, coupled with its net lease structure, provide enhanced probability of maintaining occupancy and operating earnings.

The poor current economic environment has made it more difficult and more expensive to obtain debt and equity capital, which will likely reduce the pace of investments in new acquisitions or developments as well as the volume of dispositions. Additionally, the poor economic and retail environment will result in more retailers filing for bankruptcy, which may have an adverse impact on NNN’s occupancy.

Critical Accounting Policies and Estimates

The preparation of NNN’s consolidated financial statements in conformance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments on assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and judgments; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on NNN’s financial statements. A summary of NNN’s accounting policies and procedures are included in Note 1 of NNN’s consolidated financial statements. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of NNN’s consolidated financial statements.

Real Estate – Investment Portfolio. NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by NNN includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy.

Purchase Accounting for Acquisition of Real Estate Subject to a Lease. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases, and value of tenant relationships, based in each case on their relative fair values.

Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for operating expenses relating to the property, generally including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below:

Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rental revenue varies during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

Direct financing method – Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the property). Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on NNN’s net investment in the leases.

Real Estate – Inventory Portfolio. The TRS acquires and/or develops and owns properties for the purpose of resale. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been, or are currently being, constructed by the TRS. The TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the TRS also includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate held for sale is not depreciated.

Impairment – Real Estate. Management periodically assesses its real estate for possible impairment whenever events or changes in certain circumstances indicate that the carrying value of the asset may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.

Commercial Mortgage Residual Interest at Fair Value. Commercial mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in stockholders’ equity. The commercial mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of Orange Avenue Mortgage Investments, Inc. (“OAMI”). NNN recognizes the excess of all cash flows attributable to the commercial mortgage residual interests estimated at the acquisition/transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Losses are considered other than temporary valuation impairments if and when there has been a change in the timing or amount of estimated cash flows, exclusive of changes in interest rates, that leads to a loss in value. Certain of the commercial mortgage residual interests were pledged as security for a note payable which was repaid in February 2008.

Revenue Recognition. Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 13, “Accounting for Leases,” based on the terms of the lease at the time of acquisition of the leased asset. Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant.

Recent Accounting Pronouncements. Financial Accounting Standards Board (“FASB”) Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) will become effective January 1, 2009, and is required to be applied retrospectively to all presented periods, as applicable. NNN estimates that the adoption of FSP APB 14-1 will result in the recognition of additional non-cash interest expense of approximately $5.5 and $2.6 million for the years ended December 31, 2008 and 2007, respectively, and $6.0 million for the year ending December 31, 2009.

Use of Estimates. Additional critical accounting policies of NNN include management’s estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure

of contingent assets and liabilities to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Additional critical accounting policies include management’s estimates of the useful lives used in calculating depreciation expense relating to real estate assets, the recoverability of the carrying value of long-lived assets, including the commercial mortgage residual interests, the collectibility of receivables from tenants, including accrued rental income, and capitalized overhead relating to development projects. Actual results could differ from those estimates.

Results of Operations

Property Analysis – Investment Portfolio

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


	2008	2007	2006
Investment Properties Owned:
Number	1,005	908	710
Total gross leasable area (square feet)	11,251,000	10,610,000	9,341,000

Investment Properties Leased:
Number	972	892	697
Total gross leasable area (square feet)	10,728,000	10,355,000	9,173,000
Percent of total gross leasable area – leased	97%	98%	98%
Weighted average remaining lease term (years)	13	13	12


	% of Annual Base Rent⁽¹⁾	# of Properties	Gross Leasable Area⁽²⁾		% of Annual Base Rent⁽¹⁾	# of Properties	Gross Leasable Area⁽²⁾
2009	1.0%	20	386,000	2015	2.5%	19	463,000
2010	2.8%	40	405,000	2016	1.9%	15	287,000
2011	2.0%	20	333,000	2017	4.4%	26	751,000
2012	3.5%	34	525,000	2018	2.9%	24	418,000
2013	4.5%	38	842,000	Thereafter	70.3%	700	5,795,000
2014	4.2%	36	523,000

⁽¹⁾ Based on the annualized base rent for all leases in place as of December 31, 2008.
⁽²⁾ Approximate square feet.

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


		% of Annual Base Rent⁽¹⁾
	Top 10 Lines of Trade	2008	2007	2006
1.	Convenience Stores	25.7%	23.9%	16.3%
2.	Automotive Service	8.9%	5.2%	0.2%
3.	Restaurant – Full Service	8.7%	10.3%	12.1%
4.	Theaters	6.1%	4.2%	-
5.	Automotive Parts	5.1%	4.9%	1.6%
6.	Drug Stores	4.0%	5.0%	8.3%
7.	Books	4.0%	4.4%	5.7%
8.	Restaurants – Limited Service	3.3%	3.7%	4.7%
9.	Sporting Goods	3.3%	3.9%	7.3%
10.	Consumer Electronics	3.2%	4.3%	5.6%
	Other	27.7%	30.2%	38.2%

		100.0%	100.0%	100.0%


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

The following table shows the top 10 states in which NNN’s Investment Properties are located in as of December 31, 2008:


	State	# of Properties	% of Annual Base Rent⁽¹⁾
1.	Texas	211	19.9%
2.	Florida	84	9.8%
3.	Illinois	39	6.6%
4.	North Carolina	62	6.1%
5.	California	26	5.2%
6.	Georgia	57	5.1%
7.	Pennsylvania	80	4.2%
8.	Indiana	37	4.2%
9.	Ohio	31	3.1%
10.	Tennessee	30	3.1%
	Other	348	32.7%

		1,005	100.0%


⁽¹⁾Based on annualized base rent for all leases in place as of December 31, 2008.

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


	2008		2007		2006
Acquisitions:
Number of Investment Properties		109		235		213
Gross leasable area (square feet)		868,000		2,205,000		1,130,000
Total dollars invested⁽¹⁾	$	355,107	$	696,682	$	371,898

⁽¹⁾Includes dollars invested on projects under construction for each respective year.

Property Dispositions. The following table summarizes the Investment Properties sold by NNN for each of the years ended December 31 (dollars in thousands):


	2008		2007		2006
Number of properties		19		37		30
Gross leasable area (square feet)		290,000		997,000		1,015,000
Net sales proceeds	$	59,796	$	146,041	$	319,361
Net gain	$	9,980	$	56,625	$	91,332

Property Analysis – Inventory Portfolio

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


	2008	2007	2006
Development Portfolio:
Completed Inventory Properties	11	8	11
Properties under construction	1	9	5
Land parcels	7	6	13

	19	23	29

Exchange Portfolio:
Inventory Properties	13	33	68

Total Inventory Properties	32	56	97

Property Acquisitions. The following table summarizes the property acquisitions and dollars invested in the Inventory Portfolio for each of the years ended December 31 (dollars in thousands):


	2008		2007		2006
Development Portfolio:
Number of properties acquired		3		3		16
Dollars invested⁽¹⁾	$	9,545	$	64,694	$	82,524

Exchange Portfolio:
Number of properties acquired		4		23		77
Dollars invested	$	19,994	$	105,152	$	118,553

Total dollars invested	$	29,539	$	169,846	$	201,077

⁽¹⁾ Includes dollars invested on projects under construction for each respective year.

Property Dispositions. The following table summarizes the number of Inventory Properties sold and the corresponding gain recognized from the disposition of real estate held for sale included in earnings from continuing and discontinued operations for each of the years ended December 31 (dollars in thousands):


	2008			2007			2006
	# of Properties	Gain		# of Properties	Gain		# of Properties	Gain
Development⁽¹⁾	6	$	4,751	13	$	5,125	9	$	5,774
Exchange	19		4,607	58		5,888	55		3,892

	25	$	9,358	71	$	11,013	64	$	9,666


⁽¹⁾ Net of minority interest.

Revenue from Continuing Operations Analysis

General. During the year ended December 31, 2008, NNN’s rental income increased primarily due to the acquisition of Investment Properties (See “Results of Operations – Property Analysis – Investment Portfolio – Property Acquisitions”). NNN anticipates any significant increase in rental income will continue to come primarily from additional property acquisitions.

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


							Percent of Total			2008 Versus 2007 Percent Increase (Decrease)	2007 Versus 2006 Percent Increase (Decrease)
	2008		2007		2006		2008	2007	2006	2008 Versus 2007 Percent Increase (Decrease)	2007 Versus 2006 Percent Increase (Decrease)
Rental Income⁽¹⁾	$	210,402	$	165,471	$	119,327	92.9%	91.5%	88.0%	27.2%	38.7%
Real estate expense reimbursement from tenants		7,126		5,688		4,569	3.2%	3.1%	3.4%	25.3%	24.5%
Interest and other income from real estate transactions		4,352		4,834		4,436	1.9%	2.7%	3.3%	(10.0)%	9.0%
Interest income on commercial mortgage residual interests		4,636		4,882		7,268	2.0%	2.7%	5.3%	(5.0)%	(32.8)%

Total revenues from continuing operations	$	226,516	$	180,875	$	135,600	100.0%	100.0%	100.0%	25.2%	33.4%


⁽¹⁾ Includes rental income from operating leases, earned income from direct financing leases and percentage rent from continuing operations (“Rental Income”).

Revenue from Operations by Source of Income. NNN has identified two primary operating segments, and thus, sources of revenue: (i) earnings from NNN’s Investment Assets, and (ii) earnings from NNN’s Inventory Assets. NNN revenues from continuing operations come primarily from Investment Assets. The following table summarizes the revenues from continuing operations for each of the years ended December 31 (dollars in thousands):


							Percent of Total			2008 Versus 2007 Percent Increase (Decrease)	2007 Versus 2006 Percent Increase (Decrease)
	2008		2007		2006		2008	2007	2006	2008 Versus 2007 Percent Increase (Decrease)	2007 Versus 2006 Percent Increase (Decrease)
Investment Assets	$	213,059	$	164,698	$	119,146	94.1%	91.1%	87.9%	29.4%	38.2%
Inventory Assets		13,457		16,177		16,454	5.9%	8.9%	12.1%	(16.8)%	(1.7)%

Total revenues	$	226,516	$	180,875	$	135,600	100.0%	100.0%	100.0%	25.2%	33.4%

Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007.

Rental Income. Rental Income increased for the year ended December 31, 2008, as compared to the same period in 2007, primarily from the addition of 109 Investment Properties with an aggregate gross leasable area of 868,000 square feet. In addition, the increase in Rental Income is also attributable to a full year of Rental Income from the 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet which were acquired during the year ended December 31, 2007. The Investment Portfolio occupancy rate remained relatively stable during each of the years ended December 31, 2008 and 2007 with an average of approximately 97 percent and 98 percent, respectively.

Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants remained fairly consistent as a percentage of total revenues from continuing operations. The increase for the year ended December 31, 2008, as compared to 2007, was attributable to a full year of reimbursements from certain tenants acquired in 2007 and the reimbursements from newly acquired properties in 2008.

Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions decreased for the year ended December 31, 2008, as compared to 2007, primarily due to a decrease in interest income earned on the structured finance investments. For the years ended December 31, 2008 and 2007, the weighted average outstanding principal balance on NNN’s structured finance investments was $8,614,000 and $16,795,000, respectively.

Interest Income on Commercial Mortgage Residual Interests. Interest income on commercial mortgage residual interests (“Residuals”) for the year ended December 31, 2008, as compared to December 31, 2007, decreased slightly as a result of lower outstanding loan balances. The decrease was partially offset by an increase in interest income due to the increase in the discount rate from 17% to 25% during the third quarter of 2007.

Gain from Disposition of Real Estate, Inventory Portfolio. Inventory Properties typically are operating properties and are classified as discontinued operations. However, the gains on the sale of Inventory Properties which are sold prior to rent commencement are reported in continuing operations. The slight decrease in the gain from the disposition of real estate is solely dependent on respective sales price and cost basis of the Inventory Properties sold.

Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006.

Rental Income. Rental Income increased for the year ended December 31, 2007, as compared to the same period in 2006, primarily from NNN’s acquisition of 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet during the year ended December 31, 2007. The Investment Portfolio occupancy rate remained relatively stable at an average of approximately 98 percent for each of the years ended December 31, 2007 and 2006.

Real Estate Expense Reimbursements from Tenants. Real estate expense reimbursements from tenants remained relatively consistent as a percentage of revenues from continuing operations. The increase for the year ended December 31, 2007, as compared to the year ended December 31, 2006, was attributable to a full year of reimbursement from certain properties acquired in 2006 and the reimbursements from the newly acquired Investment Properties acquired in 2007.

Interest and Other Income from Real Estate Transactions. Interest and other income from real estate transactions increased for the year ended December 31, 2007, as compared to the same period in 2006. This increase is primarily attributable to an increase in interest income on its mortgages and notes receivable. The aggregate principal balance of NNN’s mortgages and notes receivable at December 31, 2007 and 2006 was $51,556,000 and $17,227,000, respectively. The increase in interest income was partially offset by a lower weighted average outstanding principal balance on NNN’s structured finance investments during 2007. NNN recorded interest income on mortgages receivable and structured finance investments of $4,240,000 and $3,966,000 for the years ended December 31, 2007 and 2006, respectively.

Interest Income on Commercial Mortgage Residual Interests. The decrease in interest income on the Residuals for the year ended December 31, 2007, as compared to 2006, is primarily the result of the amortization and pre-payments of the underlying notes.

Gain from Disposition of Real Estate, Inventory Portfolio. Inventory Properties typically are operating properties and are classified as discontinued operations. However, the gains on the sale of Inventory Properties which are sold prior to rent commencement are reported in continuing operations. The decrease in the gain from the disposition of real estate is primarily due to the timing of sales of these Inventory Properties. The following table summarizes the Inventory Property dispositions included in continuing operations for the years ended December 31 (dollars in thousands):


	2007			2006
	# of Properties	Gain		# of Properties	Gain
Gain	2	$	332	6	$	8,000
Minority interest	-		-	-		(3,609	)

Gain, net of minority interest	2	$	332	6	$	4,391

Analysis of Expenses from Continuing Operations

General. During 2008, operating expenses from continuing operations increased primarily as a result of the acquisition of additional properties. Operating expenses from continuing operations decreased as a percentage from NNN’s total revenues from continuing operations due to increased operating efficiencies. The following summarizes NNN’s expenses from continuing operations (dollars in thousands):


	2008			2007			2006
General and administrative	$	24,868		$	23,542		$	24,007
Real estate		10,532			8,102			6,508
Depreciation and amortization		44,743			31,843			21,711
Impairment – real estate		-			416			-
Impairment – commercial mortgage residual interests valuation		758			638			8,779
Restructuring costs		-			-			1,580

Total operating expenses	$	80,901		$	64,541		$	62,585


Interest and other income	$	(3,748	)	$	(4,753	)	$	(3,816	)
Interest expense		58,483			49,286			45,872
Loss on interest rate hedge		804			-			-

Total other expenses (revenues)	$	55,539		$	44,533		$	42,056


	Percentage of Total Operating Expenses			Percentage of Revenues from Continuing Operations			2008 Versus 2007 Percent Increase (Decrease)	2007 Versus 2006 Percent Increase (Decrease)
	2008	2007	2006	2008	2007	2006	2008 Versus 2007 Percent Increase (Decrease)	2007 Versus 2006 Percent Increase (Decrease)
General and administrative	30.8%	36.5%	38.4%	11.0%	13.0%	17.7%	5.6%	(1.9)%
Real estate	13.0%	12.6%	10.4%	4.6%	4.5%	4.8%	30.0%	24.5%
Depreciation and amortization	55.3%	49.3%	34.7%	19.8%	17.6%	16.0%	40.5%	46.7%
Impairment – real estate	-	0.6%	-	-	0.2%	-	(100.0)%	100.0%
Impairment – commercial mortgage residual interests valuation	0.9%	1.0%	14.0%	0.3%	0.4%	6.5%	18.8%	(92.7)%
Restructuring costs	-	-	2.5%	-	-	1.2%	-	-

Total operating expenses	100.0%	100.0%	100.0%	35.7%	35.7%	46.2%	25.3%	3.1%


Interest and other income	(6.7)%	(10.7)%	(9.1)%	(1.7)%	(2.6)%	(2.8)%	(21.1)%	24.6%
Interest expense	105.3%	110.7%	109.1%	25.8%	27.2%	33.8%	18.7%	7.4%
Loss of interest rate hedge	1.4%	-	-	0.4%	-	-	100.0%	-

Total other expenses (revenues)	100.0%	100.0%	100.0%	24.5%	24.6%	31.0%	24.7%	5.9%

Comparison of Year End December 31, 2008 to Year Ended December 31, 2007.

General and Administrative Expenses. General and administrative expenses increased for the year ended December 31, 2008, as compared to the same period in 2007, 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 year ended December 31, 2008, is primarily related to an increase in lost pursuit costs.

Real Estate. Real estate expenses remained fairly stable as a percentage of revenues from continuing operations, but increased slightly as a percentage of total operating expenses for the year ended December 31, 2008, as compared to the same period in 2007. The increase in real estate expenses for the year ended December 31, 2008, is primarily attributable to an increase in tenant reimbursable real estate expenses related to newly acquired Investment Properties as well as an increase in expenses related to vacant properties.

Depreciation and Amortization. Depreciation and amortization expenses increased both as a percentage of total operating expenses and as a percentage of revenues from continuing operations for the year ended December 31, 2008, as compared to the year ended December 31, 2007. The increase is primarily a result of the depreciation recognized on (i) the 109 Investment Properties with an aggregate gross leasable area of 868,000 square feet, acquired in 2008, and (ii) a full year of depreciation and amortization on the 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet which were acquired during the year ended December 31, 2007.

Impairment – Real Estate. NNN reviews long-lived assets for impairment whenever 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 return. Generally, NNN calculates a possible impairment by comparing the estimated future cash flows to the current net book value. Impairments are measured as the amount by which the current book value of the asset exceeds the fair value of the asset. No real estate impairments were recorded during the year ended December 31, 2008. During the year ended December 31, 2007, NNN recorded real estate impairments totaling $416,000.

Impairment – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, during the years ended December 31, 2008 and 2007, NNN recorded an other than temporary valuation adjustment of $758,000 and $638,000, respectively, as a reduction of earnings from operations.

Interest Expense. Interest expense increased for the year ended December 31, 2008, as compared to the same period in 2007, but decreased as a percentage of total operating expense and as a percentage of revenues from continuing operations. The increase in interest expenses is primarily attributable to an increase of $233,201,000 in weighted average long-term debt outstanding. The increase in interest expense was partially offset by an overall decrease in weighted average interest rate for 2008 as compared to 2007.

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

(i)

repurchase of $25,000,000 of convertible notes payable with an effective interest rate of 3.95% in November 2008,

(ii)

issuance of $234,035,000 of convertible notes payable in March 2008, with an effective interest rate of 5.125%, due June 2028,

(iii)

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

(iv)

payoff of the $12,000,000 secured note payable with stated interest rate of 10.00% in February 2008,

(v)

payoff of $26,041,000 10-year financing lease obligation with interest rate of 5.00% in November 2007,

(vi)

payoff of the $10,500,000 10.00% secured note in December 2007,

(vii)

payoff of the $20,800,000 variable rate term note in October 2007,

(viii)

repayment of mortgage in September 2007, with balance of $7,305,000 at December 31, 2006, and an interest rate of 7.37%,

(ix)

issuance of $250,000,000 of notes payable in September 2007, with an effective interest rate of 6.92% due in October 2017,

(x)

decrease of $5,403,000 in the weighted average debt outstanding on the revolving credit facility for the year ended December 31, 2008, as compared to the same period in 2007, and

(xi)

decrease in weighted average interest rate on the revolving credit facility from 6.24% for the period ended December 31, 2007, to 3.83% for the period ended December 31, 2008.

Comparison of Year End December 31, 2007 to Year Ended December 31, 2006.

General and Administrative. General and administrative expenses decreased slightly for the year ended December 31, 2007, as compared to the same period in 2006; however, such expenses remained fairly consistent as a percentage of total operating expense from continuing operations. The decrease in general and administrative expenses for 2007 was primarily attributable to a decrease in expenses related to personnel compensation and a decrease in lost pursuit costs.

Real Estate. Real estate expenses increased for the year ended December 31, 2007, as compared to the year ended December 31, 2006; however, such expenses remained fairly consistent as a percentage of total revenues from continuing operations. The increase in real estate expenses for 2007 as compared to the same period for 2006 is primarily attributable to (i) an increase in tenant reimbursable real estate expenses, and (ii) an increase in certain real estate expenses that were not reimbursable by tenants.

Depreciation and Amortization. Depreciation and amortization expenses increased for the year ended December 31, 2007, as compared to the year ended December 31, 2006. The increase for the year ended December 31, 2007, as compared to the same period in 2006 is attributable to (i) the acquisition of 235 Investment Properties with an aggregate gross leasable area of 2,205,000 square feet in 2007, and (ii) a full year of depreciation and amortization on the 213 Investment Properties with an aggregate gross leasable area of 1,130,000 square feet which were acquired during 2006. The increase in depreciation and amortization was partially offset by the disposition of 37 Investment Properties with an aggregate gross leasable area of 997,000 square feet during the year ended December 31, 2007.

Impairment – Real Estate. NNN reviews long-lived assets for impairment whenever 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 return. Generally, NNN calculates a possible impairment by comparing the future cash flows to the current net book value. Impairments are measured as the amount by which the current book value of the asset exceeds the fair value of the asset. During the year ended December 31, 2007, NNN recorded real estate impairments totaling $416,000. No real estate impairments were recorded during the year ended December 31, 2006.

Impairment – Commercial Mortgage Residual Interests Valuation. In connection with the independent valuations of the Residuals’ fair value, NNN reduced the carrying value of the Residuals to reflect such fair value at December 31, 2007 and 2006. In 2007, due to changes in market conditions relating to residual assets, the independent valuation increased the discount rate from 17% to 25%. Other than temporary valuation adjustments are recorded as a reduction of earnings from operations. For the years ended December 2007 and 2006, NNN recorded an other than temporary impairment of $638,000 and $8,779,000, respectively.

Restructuring Costs. During the year ended December 31, 2006, NNN recorded restructuring costs of $1,580,000, which included severance costs and accelerated vesting of restricted stock in connection with a workforce reduction in April 2006. No such costs were incurred during 2007.

Interest Expense. The increase in interest expense for the year ended December 31, 2007, as compared to the year ended December 31, 2006, is primarily attributable to an increase of $126,164,000 in weighted average long-term debt outstanding. The increase in the weighted average long-term debt was due to the increase in dollars invested in Investment and Inventory Properties. The increase in interest expense was partially offset by an increase of $1,440,000 in the interest capitalized to construction projects in 2007, as well as by a decrease in the overall weighted average interest rate for 2007 as compared to 2006. The following represents the primary changes in debt:

(i)

issuance of $250,000,000 of notes payable in September 2007 with an effective interest rate of 6.92% due in October 2017,

(ii)

payoff of $26,041,000 10-year financing lease obligation with interest rate of 5.00% in November 2007,

(iii)

repayment of mortgage in September 2007 with balance of $7,305,000 at December 31, 2006 and an interest rate of 7.37%,

(iv)

the decrease in the weighted average debt outstanding on the revolving credit facility (decreased by $28,506,000),

(v)

issuance of $172,500,000 of convertible notes payable in September 2006 with an effective interest rate of 3.95% due in September 2026,

(vi)

payoff of the $20,800,000 variable rate term note in October 2007, which was assumed in connection with the acquisition of National Properties Corporation (“NAPE”) in June 2005,

(vii)

repayment of a mortgage in February 2006 with a balance of $18,538,000 at December 31, 2005 with an interest rate of 7.435%, and

(viii)

payoff of the $10,500,000 OAMI secured note payable in December 2007, with a stated interest rate of 10.00%.

Investment in Unconsolidated Affiliates

In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV”) with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns real estate assets leased to convenience store operators from unrelated third parties. NNN owns 15 percent interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interests. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was paid in full in November 2007. For the years ended December 31, 2008 and 2007, NNN recognized equity in earnings of $364,000 and $49,000, respectively, from NNN Crow JV. NNN manages the joint venture pursuant to a management agreement and earned certain fees of $531,000 and $21,000 for the years ended December 31, 2008 and 2007, respectively.

In October 2006, NNN sold its equity investment in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”) for $10,239,000 and recognized a gain of $11,373,000. Plaza owned a 346,000 square foot office building, one floor of which serves as NNN’s headquarters office, and an interest in an adjacent parking garage. In connection with the sale, NNN was released as a guarantor of Plaza’s $14,000,000 unsecured promissory note. During the year ended December 31, 2006, NNN recognized equity in earnings of $122,000 from Plaza. NNN did not recognize earnings from Plaza during the years ended December 31, 2008 and 2007.

Earnings from Discontinued Operations

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” NNN classified as discontinued operations the revenues and expenses related to its Investment Properties that were sold, its leasehold interests that expired and any Investment Properties that were held for sale at December 31, 2008. NNN also classified as discontinued operations the revenues and expenses of its Inventory Properties which generated rental revenues. NNN records discontinued operations by NNN’s identified segments: (i) Investment Assets, and (ii) Inventory Assets. The following table summarizes the earnings from discontinued operations for the years ended December 31 (dollars in thousands):


	2008					2007					2006
	# of Sold Properties	Gain		Earnings		# of Sold Properties	Gain		Earnings		# of Sold Properties	Gain		Earnings
Investment Assets	19	$	9,980	$	12,476	37	$	56,625	$	67,583	30	$	91,332	$	114,298
Inventory Assets, net of minority interest	24		9,337		6,876	69		10,681		8,621	58		5,275		8,186

	43	$	19,317	$	19,352	106	$	67,306	$	76,204	88	$	96,607	$	122,484

NNN occasionally sells Investment Properties and may reinvest the proceeds of the sales to purchase new properties or pay down outstanding indebtedness.

Impact of Inflation

NNN’s leases typically contain provisions to mitigate the adverse impact of inflation on NNN’s results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. During times when inflation is greater than increases in rent, rent increases may not keep up with the rate of inflation.

The Investment Properties are leased to tenants under long-term, net leases which typically require the tenant to pay certain operating expenses of a property, thus, NNN’s exposure to inflation is reduced. Inflation may have an adverse impact on NNN’s tenants.

Liquidity

General. NNN’s demand for funds has been and will continue to be primarily for (i) payment of operating expenses and cash dividends; (ii) property acquisitions and development; (iii) origination of mortgages and notes receivable (including structured finance investments) and capital expenditures; (iv) payment of principal and interest on its outstanding indebtedness; and (v) other investments.

NNN expects to meet these requirements (other than amounts required for additional property investments, mortgages and notes receivables, including structured finance investments) through cash provided from operations and NNN’s $400,000,000 unsecured revolving credit facility (the “Credit Facility”). NNN utilizes the Credit Facility to meet its short-term working capital requirements. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000. NNN anticipates that any additional investments in properties, mortgages and notes receivables and structured finance investments during the next 12 months will be funded by the Credit Facility, cash provided from operations, the issuance of long-term debt or the issuance of common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to NNN.

Below is a summary of NNN’s cash flows for each of the years ended December 31 (in thousands):


	2008			2007			2006
Cash and cash equivalents:
Provided by operating activities	$	236,748		$	129,634		$	1,676
Used in investing activities		(256,304	)		(536,717	)		(90,099	)
Provided by (used in) financing activities		(5,317	)		432,907			81,864

Increase (decrease)		(24,873	)		25,824			(6,559	)
January 1		27,499			1,675			8,234

December 31	$	2,626		$	27,499		$	1,675

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 general and administrative expenses, interest expense and acquisition of Inventory Properties. NNN’s cash flow from operating activities, net of cash used in and provided by the acquisition and disposition of its Inventory Properties, has been sufficient to pay the distributions for each period presented. NNN uses proceeds from its Credit Facility to fund the acquisition of its Inventory Properties. The change in cash

provided by operations for the years ended December 31, 2008, 2007 and 2006, is primarily the result of changes in revenues and expenses as discussed in “Results of Operations.” Cash generated from operations is expected to fluctuate in the future.

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

NNN’s financing activities for the year ended December 31, 2008 included the following significant transactions:

•

$12,000,000 repayment of secured note payable with stated interest rate of 10.0% in February 2008,

•

$100,000,000 repayment of 7.125% notes payable in March 2008,

•

$228,576,000 in net proceeds from issuance of 2028 convertible notes payable,

•

$75,958,000 in net proceeds from the issuance of 3,450,000 shares of common stock in October 2008,

•

$110,107,000 in dividends paid to common stockholders,

•

$6,785,000 in dividends paid to holders of the depositary shares of NNN’s Series C Preferred stock,

•

$103,300,000 in net payments from NNN’s Credit Facility,

•

$47,372,000 in net proceeds from the issuance of 2,146,640 common shares in connection with the Dividend Reinvestment and Stock Purchase Plan (“DRIP”),

•

$19,188,000 in net payments on repurchase of $25,000,000 of 3.95% convertible notes payable due September 2026, and

•

$5,483,000 in minority interests distributions.

Financing Strategy. NNN’s financing objective is to manage its capital structure effectively in order to provide sufficient capital to execute its operating strategy while servicing its debt requirements and providing value to NNN’s stockholders. NNN generally utilizes debt and equity security offerings, bank borrowings, the sale of properties, and to a lesser extent, internally generated funds to meet its capital needs.

NNN typically funds its short-term liquidity requirements including investments in additional Investment Properties with cash from its Credit Facility. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000.

Contractual Obligations and Commercial Commitments. The information in the following table summarizes NNN’s contractual obligations and commercial commitments outstanding as of December 31, 2008. The table presents principal cash flows by year-end of the expected maturity for debt obligations and commercial commitments outstanding as of December 31, 2008.


	Expected Maturity Date (dollars in thousands)
	Total		2009		2010		2011		2012		2013		Thereafter
Long-term debt⁽¹⁾	$	1,027,825	$	1,001	$	21,022	$	148,598	$	69,291	$	234,898	$	553,015
Credit Facility		26,500		-		26,500		-		-		-		-
Operating lease		5,422		865		891		917		945		973		831

Total contractual cash obligations⁽²⁾	$	1,059,747	$	1,866	$	48,413	$	149,515	$	70,236	$	235,871	$	553,846

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

⁽²⁾	Excludes $7,608 of accrued interest payable.

In addition to the contractual obligations outlined above, NNN has agreed to fund construction commitments in connection with the development of additional properties as outlined below (dollars in thousands) as of December 31, 2008:


	# Properties	Total Commitment⁽¹⁾		Amount Funded		Remaining Commitment
Investment Portfolio	21	$	97,690	$	70,451	$	27,239
Inventory Portfolio	1		4,814		2,212		2,602

	22	$	102,504	$	72,663	$	29,841

⁽¹⁾

Including construction and land costs.

As of December 31, 2008, NNN had outstanding letters of credit totaling $1,265,000 under its Credit Facility.

As of December 31, 2008, NNN does not have any other material contractual cash obligations, such as purchase obligations, financing lease obligations or other long-term liabilities other than those reflected in the table. In addition to items reflected in the table, NNN has preferred stock with cumulative preferential cash distributions, as described below under “Dividends.”

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

Many of the Investment Properties are recently constructed and are generally net leased. Therefore, management anticipates that capital demands to meet obligations with respect to these Investment Properties will be modest for the foreseeable future and can be met with funds from operations and working capital. Certain of NNN’s Investment Properties are subject to leases under which NNN retains responsibility for certain costs and expenses associated with the Investment Property. Management anticipates the costs associated with NNN’s vacant Investment Properties or those Investment Properties that become vacant will also be met with funds from operations and working capital. NNN may be required to borrow under its Credit Facility or use other sources of capital in the event of unforeseen significant capital expenditures.

The lost revenues and increased property expenses from vacant properties or uncollectibility of lease revenues could have a material adverse effect on the liquidity and results of operations if NNN is

unable to release the Investment Properties at comparable rental rates and in a timely manner. As of January 31, 2009, NNN owns 34 vacant, unleased Investment Properties and two vacant land parcels which account for approximately four percent of total Investment Properties held in NNN’s Investment Portfolio. Additionally, two percent of the total gross leasable area of NNN’s Investment Portfolio is leased to three tenants that have filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result, these tenants have the right to reject or affirm their leases with NNN.

In May 2008, one of NNN’s tenants, Uni-Mart, Inc. (“Uni-Mart”), which leased 69 Investment Properties and eight Inventory Properties, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In July 2008, Uni-Mart elected to reject the leases of 13 properties owned by NNN with total annual base rent of approximately $786,000. Additionally, in December 2008, Uni-Mart elected to reject an additional three properties. NNN has re-leased nine of the 16 properties as of December 31, 2008, and continues to market for re-lease or sale the remaining properties. In February 2009, Uni-Mart filed a motion to reject the leases of 38 additional properties. However, at NNN’s option, it may assume the in-place subleases to the existing convenience store operators, which approximate current existing rent. During the year ended December 31, 2008, NNN recorded $2,421,000 of income in connection with the Uni-Mart bankruptcy damage claim. NNN does not believe Uni-Mart’s Chapter 11 filing will have a material adverse effect on its operations and financial position.

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. 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 affect NNN’s income and its ability to pay dividends. NNN believes it has been organized as, and its past and present operations qualify NNN as a REIT. Additionally, NNN intends to continue to operate so as to remain qualified as a REIT for federal income tax purposes.

One of NNN’s primary objectives, consistent with its policy of retaining sufficient cash for reserves and working capital purposes and maintaining its status as a REIT, is to distribute a substantial portion of its funds available from operations to its stockholders in the form of dividends. During the years ended December 31, 2008, 2007 and 2006, NNN declared and paid dividends to its common stockholders of $110,107,000, $92,989,000, and $76,035,000, respectively, or $1.48, $1.40 and $1.32 per share, respectively, of common stock.

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


	2008			2007			2006
Ordinary dividends	$	1.480000	100.000%	$	1.397402	99.8144%	$	1.150780	87.1803%
Qualified dividends		-	-		0.000414	0.0296%		-	-
Capital gain		-	-		0.002184	0.1560%		0.150261	11.3834%
Unrecaptured Section 1250 Gain		-	-		-	-		0.018959	1.4363%
Nontaxable distributions		-	-		-	-		-	-

	$	1.480000	100.000%	$	1.400000	100.0000%	$	1.320000	100.0000%

In February 2009, NNN paid dividends to its common stockholders of $29,313,000, or $0.375 per share of common stock.

Holders of each of NNN’s preferred stock issuances are entitled to receive, when and as authorized by the board of directors, cumulative preferential cash distributions based on the stated rate and liquidation preference per annum. The following table outlines each issuance of NNN’s preferred stock (dollars in thousands, except per share data):


Non Voting Preferred Stock Issuance	Shares Outstanding At December 31, 2008	Liquidation Preference (per share)		Fixed Annual Cash Distribution (per share)		Dividends Declared and Paid For the Year Ended December 31,
						2008				2007				2006
						Total		Per Share		Total		Per Share		Total		Per Share
9% Series A⁽¹⁾	-	$	25.00	$	25.00000	$	-	$	-	$	-	$	-	$	4,376	$	2.456250

6.7% Series B Convertible⁽²⁾	-		2,500.00		167.50000		-		-		-		-		419		41.875000

7.375% Series C⁽³⁾	3,680,000		25.00		1.84375		6,785		1.84375		6,785		1.84375		923		0.250955

⁽¹⁾

Effective January 2, 2007, NNN redeemed all 1,781,589 shares of Series A Preferred Stock at their redemption price of $25.00 per share plus all accumulated and unpaid dividends through the redemption date of $0.20625 per share, for an aggregate redemption price of $25.20625. Dividends declared and paid in 2006 include $367 of dividends payable at December 31, 2006, which were paid in 2007.

⁽²⁾	In April 2006, the holder of NNN’s Series B Convertible Preferred Stock elected to convert those 10,000 shares into 1,293,996 shares of common stock.

⁽³⁾	In October 2006, NNN issued 3,680,000 depositary shares, each representing 1/100th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock. See “Capital Resources – Debt and Equity Securities.”

Capital Resources

Generally, cash needs for property acquisitions, mortgages and notes receivable, structured finance investments, 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, from internally generated funds. Cash needs for other items have been met from operations. If available, future sources of capital include proceeds from the public or private offering of NNN’s debt or equity securities, secured or unsecured borrowings from banks or other lenders, proceeds from the sale of properties, as well as undistributed funds from operations.

Debt

The following is a summary of NNN’s total outstanding debt as of December 31 (dollars in thousands):


	2008		Percentage of Total	2007		Percentage of Total
Line of credit payable	$	26,500	2.5%	$	129,800	12.2%
Mortgages payable		26,290	2.5%		27,480	2.6%
Notes payable – secured		—	—		12,000	1.1%
Notes payable – convertible		381,535	36.2%		172,500	16.3%
Notes payable		618,479	58.8%		718,290	67.8%

Total outstanding debt	$	1,052,804	100.0%	$	1,060,070	100.0%

Line of Credit Payable. In October 2007, NNN exercised the $100,000,000 accordion feature of its existing revolving Credit Facility increasing the borrowing capacity to $400,000,000 from $300,000,000. Additionally, in October 2008, NNN exercised the option to extend the maturity date by twelve months from May 2009 to May 2010. The current terms of the Credit Facility provide for (i) a tiered interest rate structure of a maximum of 112.5 basis points above LIBOR (as a result of an upgrade in NNN’s debt rating in June 2008, NNN’s current interest rate is 65 basis points above

LIBOR), (ii) requires NNN to pay a commitment fee based on a tiered rate structure to a maximum of 25 basis points per annum (based upon the debt rating of NNN, the current commitment fee is 20 basis points), (iii) provides for a competitive bid option for up to 50 percent of the facility amount, and (iv) expires on May 8, 2010. The principal balance is due in full upon expiration. As of December 31, 2008, $26,500,000 was outstanding and approximately $373,500,000 was available for future borrowings under the Credit Facility, excluding undrawn letters of credit totaling $1,265,000.

In accordance with the terms of the Credit Facility, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain certain (i) leverage ratios, (ii) debt service coverage, (iii) cash flow coverage, and (iv) investment limitations. At December 31, 2008, NNN was in compliance with those covenants. In the event that NNN violates any of these restrictive financial covenants, its access to the debt or equity markets may become impaired.

Mortgages Payable. In September 2007, upon maturity, NNN repaid the outstanding principal balance on the long-term fixed rate loan which had an original principal balance of $12,000,000, and was secured by a first mortgage on nine Investment Properties. Upon repayment of the loan, the encumbered Investment Properties were released from the mortgage. As of December 31, 2006, the outstanding principal balance was $7,305,000 with an interest rate of 7.37%.

In December 2008, upon maturity, NNN repaid the outstanding principal balance on a self-amortizing mortgage which had an original principal balance of $1,916,000 and was secured by a first mortgage on one Investment Property. Upon repayment of the loan, the encumbered Investment Property was released from the mortgage. As of December 31, 2007, the outstanding principal balance was $263,000 with an interest rate of 8.25%.

Notes Payable – Secured. In February 2008, NNN repaid the outstanding principal amount on its secured note payable. NNN repaid the outstanding balance of the note payable with restricted cash that was released in December 2007. The note had an outstanding principal balance of $12,000,000 at December 31, 2007, a stated interest rate of 10.0% and an original maturity date of June 2008.

In December 2007, NNN repaid the outstanding principal balance of $10,500,000 on one of its secured notes which had an interest rate of 10.00%. NNN repaid the outstanding balance of the note with the restricted cash that was released in December 2007.

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

Convertible

Senior Notes

Issue Date

Original
Principal

Net
Proceeds

Effective
Interest
Rate

Debt
Issuance
Costs

Earliest
Conversion
Date

Earliest Put
Option Date

Maturity
Date

2026^(1)(2)(4)

September 2006

172,500

168,650

3.950%

3,850

⁽³⁾

September 2025

September 2011

September 2026

2028⁽²⁾⁽⁵⁾

March 2008

234,035

228,576

5.125%

5,459

June 2027

June 2013

June 2028

⁽¹⁾	NNN repurchased $25,000 in November 2008 for a purchase price of $19,188.

⁽²⁾	Debt issuance costs include underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. These costs have been deferred and are being amortized over the period to the earliest put option date of the holders using the effective interest method.

⁽³⁾	Includes $356 of note costs which were written off in connection with the repurchase of $25,000 of the 2026 Notes.

⁽⁴⁾	The conversion rate per $1,000 principal amount was 41.2951 shares of NNN’s common stock, which is equivalent to a conversion price of $24.2159 per share of common stock.

⁽⁵⁾	The conversion rate per $1,000 principal amount was 39.3459 shares of NNN’s common stock, which is equivalent to a conversion price of approximately $25.42 per share of common stock.

Each series of convertible notes represents senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of the Company. Each note is redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued and unpaid interest thereon through but not including the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.

Notes Payable. Each of NNN’s outstanding series of non-convertible notes are summarized in the table below (dollars in thousands):


Notes	Issue Date	Principal		Discount⁽³⁾		Net Price		Stated Rate	Effective Rate⁽⁴⁾	Maturity Date
2010⁽¹⁾	September 2000	$	20,000	$	126	$	19,874	8.500%	8.595%	September 2010
2012⁽¹⁾	June 2002		50,000		287		49,713	7.750%	7.833%	June 2012
2014^(1)(2)(5)	June 2004		150,000		440		149,560	6.250%	5.910%	June 2014
2015⁽¹⁾	November 2005		150,000		390		149,610	6.150%	6.185%	December 2015
2017⁽¹⁾⁽⁶⁾	September 2007		250,000		877		249,123	6.875%	6.924%	October 2017

⁽¹⁾	The proceeds from the note issuance were used to pay down outstanding indebtedness of NNN’s Credit Facility.

⁽²⁾	The proceeds from the note issuance were used to repay the obligation of the 2004 Notes.

⁽³⁾	The note discounts are amortized to interest expense over the respective term of each debt obligation using the effective interest method.

⁽⁴⁾	Includes the effects of the discount and interest rate hedge (as applicable).

⁽⁵⁾

NNN entered into a forward starting interest rate swap agreement which fixed a swap rate of 4.61% on a notional amount of $94,000. Upon issuance of the 2014 Notes, NNN terminated the forward starting interest rate swap agreement resulting in a gain of $4,148. The gain has been deferred and is being amortized as an adjustment to interest expense over the term of the 2014 Notes using the effective interest method.

⁽⁶⁾

NNN entered into an interest rate hedge with a notional amount of $100,000. Upon issuance of the 2017 Notes, NNN terminated the interest rate hedge agreement resulting in a loss of $3,228. The loss has been deferred and is being amortized as an adjustment to interest expense over the term of the 2017 Notes using the effective interest method.

Each series of notes represent senior, unsecured obligations of NNN and are subordinated to all secured indebtedness of NNN. The notes are redeemable at the option of NNN, in whole or in part, at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued and unpaid interest thereon through the redemption date, and (ii) the make-whole amount, if any, as defined in the applicable supplemental indenture relating to the notes.

In connection with the note offerings, NNN incurred debt issuance costs totaling $5,459,000 consisting primarily of underwriting discounts and commissions, legal and accounting fees, rating agency fees and printing expenses. Debt issuance costs for all note issuances have been deferred and are being amortized over the term of the respective notes using the effective interest method.

In accordance with the terms of the indenture, pursuant to which NNN’s notes have been issued, NNN is required to meet certain restrictive financial covenants, which, among other things, require NNN to maintain (i) certain leverage ratios, and (ii) certain interest coverage. At December 31, 2008, NNN was in compliance with those covenants. In the event that NNN violates any of the certain restrictive financial covenants, its access to the debt or equity markets may become impaired.

In addition, in connection with the acquisition of NAPE, NNN assumed a $20,800,000 term note payable (“Term Note”). In October 2007, NNN repaid the outstanding principal balance on its $20,800,000 Term Note. The Term Note had a weighted interest rate of 6.62% as of December 2006.

In March 2008, NNN repaid the 7.125% $100,000,000 notes that were due in March 2008.

Debt and Equity Securities

NNN has used, and expects to use in the future, issuances of debt and equity securities primarily to pay down its outstanding indebtedness and to finance investment acquisitions. NNN has maintained investment grade debt ratings from Standard and Poor’s, Moody’s Investor Service and Fitch Ratings on its senior, unsecured debt since 1998. In June 2008, NNN’s debt rating was upgraded by Moody’s Investor Service. Immediately following the filing of this Annual Report on Form 10-K, NNN expects to file a shelf registration statement with the Commission which will be automatically effective and which permits the issuance by NNN of an indeterminate amount of debt and equity securities.

A description of NNN’s outstanding series of publicly held notes is found under “Debt – Notes Payable – Convertible” and “Debt – Notes Payable” above.

7.375% Series C Cumulative Redeemable Preferred Stock. In October 2006, NNN issued 3,200,000 depositary shares, each representing 1/100^th of a share of 7.375% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), and received gross proceeds of $80,000,000. Subsequently, NNN issued an additional 480,000 depositary shares in connection with the underwriters’ over-allotment option and received gross proceeds of $12,000,000. In connection with this offering, NNN incurred stock issuance costs of approximately $3,098,000, consisting primarily of underwriting commissions and fees, legal and accounting fees and printing expenses.

Holders of the depositary shares are entitled to receive, when and as authorized by the Board of Directors, cumulative preferential cash dividends at the rate of 7.375% of the $25.00 liquidation preference per depositary share per annum (equivalent to a fixed annual amount of $1.84375 per depositary share). The Series C Preferred Stock underlying the depositary shares ranks senior to NNN’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of NNN. NNN may redeem the Series C Preferred Stock underlying the depositary shares on or after October 12, 2011, for cash, at a redemption price of $2,500.00 per share (or $25.00 per depositary share), plus all accumulated, accrued and unpaid dividends.

In January 2007, NNN used $44,540,000 of the net proceeds from the offering to redeem the Series A Preferred Stock; and the remainder of the net proceeds were used to repay borrowings under the Credit Facility.

Common Stock Issuances. In March 2007, NNN issued 5,000,000 shares of common stock at a price of $24.70 per share and received net proceeds of $118,020,000. Subsequently, in April 2007, NNN issued an additional 750,000 shares of common stock in connection with the underwriters’ over-allotment option and received net proceeds of $17,730,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $6,217,000 consisting primarily of underwriters’ fees and commissions, legal and accounting fees and printing expenses.

In October 2007, NNN issued 4,000,000 shares of common stock at a price of $25.94 per share and received net proceeds of $99,150,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $4,874,000 consisting primarily of underwriters’ fees and commissions, legal and accounting fees. In October 2007, NNN used a portion of the net proceeds to repay the outstanding principal balance on its term note.

In October 2008, NNN issued 3,450,000 shares of common stock in a registered, underwritten public offering at a price of $23.05 per share and received net proceeds of $75,958,000. In connection with this offering, NNN incurred stock issuance costs totaling approximately $3,565,000 consisting

primarily of underwriters’ fees and commissions, legal and accounting fees. NNN used the net proceeds to repay borrowings under the Credit Facility and to acquire Investment Properties.

Dividend Reinvestment and Stock Purchase Plan. In February 2006, NNN filed a shelf registration statement with the Commission for its Dividend Reinvestment and Stock Purchase Plan (“DRIP”), which permits the issuance by NNN of up to 12,191,394 shares of common stock. The DRIP provides an economical and convenient way for current stockholders and other interested new investors to invest in NNN’s common stock. The following outlines the common stock issuances pursuant to NNN’s DRIP for each of the years ended December 31 (dollars in thousands):


	2008		2007
Shares of common stock		2,146,640		2,645,257
Net proceeds	$	47,372	$	62,980

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

Investment in Unconsolidated Affiliates.

In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV”), with an affiliate of Crow Holdings Realty Partners IV, L.P. NNN Crow JV owns real estate assets leased to convenience store operators from unrelated third parties. NNN owns a 15 percent equity interest in the joint venture which it accounts for under the equity method of accounting. Net income and losses of the joint venture are allocated to the members in accordance with their respective percentage interest. During the year ended December 31, 2007, in accordance with the terms of the joint venture agreement, NNN loaned $2,749,000 to the joint venture at an interest rate of 7.75%. The loan balance was paid in full in November 2007 (see Note 4).

Mortgages and Notes Receivable.

Mortgages and notes receivable consisted of the following at December 31 (dollars in thousands):


	2008			2007
Mortgages and notes receivable	$	55,495		$	58,556
Structured finance investments		4,514			14,359
Accrued interest receivables		387			578
Unamortized premium		84			165

		60,480			73,658
Less loan origination fees, net		(8	)		(100	)
Less allowance		-			(396	)

	$	60,472		$	73,162

Mortgages are secured by real estate, real estate securities or other assets. Structured finance investments are secured by the borrowers’ pledge of their respective membership interests in the entities which own the respective real estate.

Commercial Mortgage Residual Interests.

In connection with the independent valuations of the Residuals’ fair value, NNN adjusted carrying value of the Residuals to reflect such fair value at December 31, 2008. The adjustments in the Residuals’ were recorded as an aggregate other than temporary valuation impairment of $758,000 and $638,000, for the years ended December 31, 2008 and 2007, respectively. NNN recorded $2,009,000 of unrealized gains and $326,000 of unrealized losses as other comprehensive income for the years ended December 31, 2008 and 2007, respectively.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

NNN is exposed to interest changes primarily as a result of its Credit Facility and its long-term, fixed rate debt used to finance NNN’s development and acquisition activities, and for general corporate purposes. NNN’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, NNN borrows at both fixed and variable rates on its long-term debt. As of December 31, 2008, NNN had no outstanding derivatives.

The information in the table below summarizes NNN’s market risks associated with its debt obligations outstanding as of December 31, 2008 and 2007. The table presents principal cash flows and related interest rates by year for debt obligations outstanding as of December 31, 2008. The variable interest rates shown represent the weighted average rates for the Credit Facility at the end of the periods. The table incorporates only those debt obligations that exist as of December 31, 2008, 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 approximately one percent for the year ended December 31, 2008.


	Debt Obligations (dollars in thousands)
	Variable Rate Debt			Fixed Rate Debt
	Credit Facility			Mortgages			Unsecured Debt⁽²⁾
	Debt Obligation		Weighted Average Interest Rate⁽¹⁾	Debt Obligation		Weighted Average Interest Rate	Debt Obligation		Effective Interest Rate
2009	$	-	-	$	1,001	7.02%	$	-	-
2010		26,500	3.83%		1,022	7.02%		19,970	8.60%
2011		-	-		1,098	7.00%		147,500	3.95%
2012		-	-		19,291	6.99%		49,876	7.83%
2013		-	-		863	7.34%		-	-
Thereafter		-	-		3,015	7.33%		782,668	6.05%


Total	$	26,500	3.83%	$	26,290	7.02%	$	1,000,014	5.88%

Fair Value:
December 31, 2008	$	26,500		$	26,290		$	728,757

December 31, 2007⁽³⁾	$	129,800		$	27,480		$	921,507


⁽¹⁾ The Credit Facility interest rate varies based upon a tiered rate structure ranging from 55 to 112.5 basis points above LIBOR based upon NNN’s debt rating. ⁽²⁾ Includes NNN’s notes payable, net of unamortized note discounts, and convertible notes payable. NNN uses Bloomberg to determine the fair value. ⁽³⁾ In February 2008, NNN repaid the outstanding principal balance on its notes payable – secured debt. As of December 31, 2007, the outstanding notes payable – secured debt obligations and the fair value of such was $12,000 with a 10.0% interest rate.

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, had a carrying value of $22,000,000 and $24,340,000 as of December 31, 2008 and December 31, 2007, respectively. Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity. Losses are considered other than temporary and are 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.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

National Retail Properties, Inc. and Subsidiaries

We have audited National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). National Retail Properties, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements’ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, National Retail Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of National Retail Properties, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008, and our report dated February 26, 2009, expressed an unqualified opinion thereon.

LOGO

Miami, Florida

February 26, 2009

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

National Retail Properties, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of National Retail Properties Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Retail Properties, Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Retail Properties, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2009, expressed an unqualified opinion thereon.

LOGO

Miami, Florida

February 26, 2009

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)


ASSETS	December 31, 2008		December 31, 2007
Real estate, Investment Portfolio:
Accounted for using the operating method, net of accumulated depreciation and amortization	$	2,357,894	$	2,055,846
Accounted for using the direct financing method		31,240		37,497
Real estate, Inventory Portfolio, held for sale		101,106		248,611
Investment in unconsolidated affiliate		4,927		4,139
Mortgages, notes and accrued interest receivable, net of allowance		60,472		73,162
Commercial mortgage residual interests		22,000		24,340
Cash and cash equivalents		2,626		27,499
Receivables, net of allowance of $4,003 and $1,582, respectively		3,612		3,818
Accrued rental income, net of allowance of $4,144 and $3,077, respectively		23,972		24,652
Debt costs, net of accumulated amortization of $12,975 and $13,424, respectively		11,233		8,548
Other assets		30,280		31,493

Total assets	$	2,649,362	$	2,539,605

LIABILITIES AND STOCKHOLDERS’ EQUITY

Line of credit payable	$	26,500	$	129,800
Mortgages payable		26,290		27,480
Notes payable – secured		-		12,000
Notes payable – convertible		381,535		172,500
Notes payable, net of unamortized discount of $1,521 and $1,710, respectively		618,479		718,290
Accrued interest payable		7,608		11,243
Other liabilities		45,526		58,673

Total liabilities		1,105,938		1,129,986


Commitments and contingencies (Note 27)

Minority interest		1,215		2,334

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; 78,415,051 and 72,527,729 shares issued and outstanding at December 31, 2008 and 2007, respectively		784		725
Excess stock, $0.01 par value. Authorized 205,000,000 shares; none issued or outstanding		-		-
Capital in excess of par value		1,302,351		1,175,364
Retained earnings (accumulated dividends in excess of net earnings)		143,789		137,599
Accumulated other comprehensive income		3,285		1,597

Total stockholders’ equity		1,542,209		1,407,285

	$	2,649,362	$	2,539,605

See accompanying notes to consolidated financial statements.

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands, except per share data)


	Year Ended December 31,
	2008			2007			2006
Revenues:
Rental income from operating leases	$	206,195		$	160,826		$	115,574
Earned income from direct financing leases		3,103			3,221			3,201
Percentage rent		1,104			1,424			552
Real estate expense reimbursement from tenants		7,126			5,688			4,569
Interest and other income from real estate transactions		4,352			4,834			4,436
Interest income on commercial mortgage residual interests		4,636			4,882			7,268

		226,516			180,875			135,600

Disposition of real estate, Inventory Portfolio:
Gross proceeds		4,900			1,750			36,705
Costs		(4,879	)		(1,418	)		(28,705	)

Gain		21			332			8,000

Operating expenses:
General and administrative		24,868			23,542			24,007
Real estate		10,532			8,102			6,508
Depreciation and amortization		44,743			31,843			21,711
Impairment – real estate, Inventory Portfolio		-			416			-
Impairment – commercial mortgage residual interests valuation		758			638			8,779
Restructuring costs		-			-			1,580

		80,901			64,541			62,585

Earnings from operations		145,636			116,666			81,015

Other expenses (revenues):
Interest and other income		(3,748	)		(4,753	)		(3,816	)
Interest expense		58,483			49,286			45,872
Loss on interest rate hedge		804			-			-

		55,539			44,533			42,056

Earnings from continuing operations before income tax benefit, minority interest, equity in earnings of unconsolidated affiliates, gain on disposition of equity investment and gain on extinguishment of debt		90,097			72,133			38,959

Income tax benefit		7,501			8,536			11,231
Minority interest		304			188			(1,664	)
Equity in earnings of unconsolidated affiliates		364			49			122
Gain on disposition of equity investment		-			-			11,373
Gain on extinguishment of debt		5,464			-			-

Earnings from continuing operations		103,730			80,906			60,021
Earnings from discontinued operations:
Real estate, Investment Portfolio (Note 18)		12,476			67,583			114,298
Real estate, Inventory Portfolio, net of income tax expense and minority interest (Note 18)		6,876			8,621			8,186

		19,352			76,204			122,484

Net earnings		123,082			157,110			182,505
Other comprehensive income		1,688			(3,622	)		5,219

Total comprehensive income	$	124,770		$	153,488		$	187,724

See accompanying notes to consolidated financial statements.

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS – CONTINUED

(dollars in thousands, except per share data)


	Year Ended December 31,
	2008			2007			2006
Net earnings	$	123,082		$	157,110		$	182,505
Series A preferred stock dividends		-			-			(4,376	)
Series B convertible preferred stock dividends		-			-			(419	)
Series C preferred stock dividends		(6,785	)		(6,785	)		(923	)

Net earnings available to common stockholders – basic		116,297			150,325			176,787
Series B convertible preferred stock dividends, if dilutive		-			-			419

Net earnings available to common stockholders – diluted	$	116,297		$	150,325		$	177,206

Net earnings per share of common stock:
Basic:
Continuing operations	$	1.31		$	1.12		$	0.94
Discontinued operations		0.26			1.15			2.14

Net earnings	$	1.57		$	2.27		$	3.08

Diluted:
Continuing operations	$	1.30		$	1.11		$	0.94
Discontinued operations		0.26			1.15			2.11

Net earnings	$	1.56		$	2.26		$	3.05

Weighted average number of common shares outstanding:
Basic		74,249,137			66,152,437			57,428,063

Diluted		74,521,909			66,407,530			58,079,875

See accompanying notes to consolidated financial statements.

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2008, 2007 and 2006

(dollars in thousands, except per share data)


	Series A Preferred Stock		Series B Convertible Preferred Stock			Series C Preferred Stock		Common Stock		Capital in Excess of Par Value			Retained Earnings (Accumulated Dividends in Excess of Net Earnings)			Accumulated Other Comprehensive Income			Total
Balances at December 31, 2005	$	44,540	$	25,000		$	-	$	551	$	778,485		$	(20,489	)	$	-		$	828,087

Net earnings		-		-			-		-		-			182,505			-			182,505
Dividends declared and paid:
$2.25 per share of Series A preferred stock		-		-			-		-		-			(4,376	)		-			(4,376	)
$41.875 per share of Series B convertible preferred stock⁽¹⁾		-		-			-		-		-			(419	)		-			(419	)
$0.250955 per depositary share of Series C preferred stock		-		-			-		-		-			(923	)		-			(923	)
$1.32 per share of common stock		-		-			-		3		7,073			(76,035	)		-			(68,959	)
Conversion of 10,000 shares of Series B convertible preferred stock to 1,293,996 shares of common stock		-		(25,000	)		-		13		24,987			-			-			-
Issuance of 3,680,000 depositary shares of Series C preferred stock		-		-			92,000		-		-			-			-			92,000
Issuance of common stock:
272,184 shares		-		-			-		3		4,654			-			-			4,657
2,715,235 shares – discounted stock purchase program		-		-			-		27		58,632			-			-			58,659
Issuance of 79,500 shares of restricted common stock		-		-			-		1		(1	)		-			-			-
Stock issuance costs		-		-			-		-		(3,111	)		-			-			(3,111	)
Amortization of deferred compensation		-		-			-		-		3,166			-			-			3,166
Treasury lock – gain on interest rate hedge⁽²⁾		-		-			-		-		-			-			3,653			3,653
Amortization of interest rate hedge		-		-			-		-		-			-			(345	)		(345	)
Unrealized gain – commercial mortgage residual interests		-		-			-		-		-			-			1,992			1,992
Stock value adjustment		-		-			-		-		-			-			(81	)		(81	)

Balances at December 31, 2006	$	44,540	$	-		$	92,000	$	598	$	873,885		$	80,263		$	5,219		$	1,096,505

⁽¹⁾	Includes $367 dividends paid in January 2007.

⁽²⁾	Fair value of interest rate hedge net of prior year amortization reclassified from NNN’s unsecured notes payable from the unamortized interest rate hedge gain resulting from the termination of the $94,000 swap in June 2004.

See accompanying notes to consolidated financial statements.

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – CONTINUED

Years Ended December 31, 2008, 2007 and 2006

(dollars in thousands, except per share data)


	Series A Preferred Stock			Series B Convertible Preferred Stock		Series C Preferred Stock		Common Stock		Capital in Excess of Par Value			Retained Earnings (Accumulated Dividends in Excess of Net Earnings)			Accumulated Other Comprehensive Income			Total
Balances at December 31, 2006	$	44,540		$	-	$	92,000	$	598	$	873,885		$	80,263		$	5,219		$	1,096,505

Net earnings		-			-		-		-		-			157,110			-			157,110
Dividends declared and paid:
$1.84375 per depositary share of Series C preferred stock		-			-		-		-		-			(6,785	)		-			(6,785	)
$1.40 per share of common stock		-			-		-		6		13,947			(92,989	)		-			(79,036	)
Redemption of 1,781,589 shares of Series A preferred stock		(44,540	)		-		-		-		-			-			-			(44,540	)
Issuance of common stock:
9,861,323 shares		-			-		-		98		247,643			-			-			247,741
2,054,805 shares – discounted stock purchase program		-			-		-		21		49,006			-			-			49,027
Issuance of 198,119 shares of restricted common stock		-			-		-		2		(2	)		-			-			-
Stock issuance costs		-			-		-		-		(11,206	)		-			-			(11,206	)
Amortization of deferred compensation		-			-		-		-		2,091			-			-			2,091
Interest rate hedge termination		-			-		-		-		-			-			(3,119	)		(3,119	)
Amortization of interest rate hedges		-			-		-		-		-			-			(309	)		(309	)
Unrealized loss – commercial mortgage residual interests		-			-		-		-		-			-			(326	)		(326	)
Stock value adjustment		-			-		-		-		-			-			132			132

Balances at December 31, 2007	$	-		$	-	$	92,000	$	725	$	1,175,364		$	137,599		$	1,597		$	1,407,285

Net earnings		-			-		-		-		-			123,082			-			123,082
Dividends declared and paid:
$1.84375 per depositary share of Series C preferred stock		-			-		-		-		-			(6,785	)		-			(6,785	)
$1.48 per share of common stock		-			-		-		4		8,472			(110,107	)		-			(101,631	)
Issuance of common stock:
3,523,285 shares		-			-		-		35		80,633			-			-			80,668
1,753,201 shares – discounted stock purchase program		-			-		-		18		38,878			-			-			38,896
Issuance of 217,397 shares of restricted common stock		-			-		-		2		(2	)		-			-			-
Stock issuance costs		-			-		-		-		(3,582	)		-			-			(3,582	)
Amortization of deferred compensation		-			-		-		-		2,588			-			-			2,588
Interest rate hedge termination		-			-		-		-		-			-			(162	)		(162	)
Amortization of interest rate hedges		-			-		-		-		-			-			(109	)		(109	)
Unrealized gain – commercial mortgage residual interests		-			-		-		-		-			-			2,009			2,009
Stock value adjustment		-			-		-		-		-			-			(50	)		(50	)

Balances at December 31, 2008	$	-		$	-	$	92,000	$	784	$	1,302,351		$	143,789		$	3,285		$	1,542,209

See accompanying notes to consolidated financial statements.

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


	Year Ended December 31,
	2008			2007			2006
Cash flows from operating activities:
Net earnings	$	123,082		$	157,110		$	182,505
Adjustments to reconcile net earnings to net cash provided by operating activities:
Stock compensation expense		2,588			2,091			3,170
Depreciation and amortization		45,402			32,976			24,524
Impairment – real estate		5,660			1,970			693
Impairment – commercial mortgage residual interests valuation		758			638			8,779
Amortization of notes payable discount		189			164			137
Amortization of deferred interest rate hedges		(162	)		(309	)		(345	)
Equity in earnings of unconsolidated affiliates		(364	)		(49	)		(122	)
Distributions received from unconsolidated affiliates		439			30			864
Minority interests		2,818			1,143			2,622
Gain on disposition of real estate, Investment Portfolio		(9,980	)		(56,625	)		(91,165	)
Gain on disposition of equity investment		-			-			(11,373	)
Gain on extinguishment of debt		(5,464	)		-			-
Gain on disposition of real estate, Inventory Portfolio		(12,665	)		(12,133	)		(13,781	)
Deferred income taxes		(5,593	)		(4,590	)		(8,366	)
Change in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Additions to real estate, Inventory Portfolio		(33,745	)		(165,160	)		(195,956	)
Proceeds from disposition of real estate, Inventory Portfolio		128,785			160,173			101,324
Decrease in real estate leased to others using the direct financing method		1,195			2,130			2,982
Decrease (increase) in work in process		47			(4,217	)		(3,315	)
Decrease (increase) in mortgages, notes and accrued interest receivable		(217	)		(301	)		795
Decrease in receivables		243			3,924			642
Increase in accrued rental income		(978	)		(2,631	)		(5,777	)
Decrease (increase) in other assets		951			3,615			(520	)
Increase (decrease) in accrued interest payable		(3,635	)		5,254			450
Increase (decrease) in other liabilities		(1,463	)		4,510			1,951
Increase (decrease) in current tax liability		(1,143	)		(79	)		958

Net cash provided by operating activities		236,748			129,634			1,676

Cash flows from investing activities:
Proceeds from the disposition of real estate, Investment Portfolio		60,027			136,295			222,778
Proceeds from the disposition of equity investment		-			-			10,239
Additions to real estate, Investment Portfolio:
Accounted for using the operating method		(352,618	)		(677,101	)		(351,100	)
Accounted for using the direct financing method		-			-			(1,449	)
Investment in unconsolidated affiliates		(901	)		(4,156	)		-
Increase in mortgages and notes receivable		(29,934	)		(44,888	)		(18,371	)
Principal payments on mortgages and notes		64,589			19,862			39,075
Cash received from commercial mortgage residual interests		3,591			6,208			16,885
Restricted cash		-			36,587			(6,396	)
Payment of lease costs		(922	)		(2,912	)		(2,790	)
Other		(136	)		(6,612	)		1,030

Net cash used in investing activities		(256,304	)		(536,717	)		(90,099	)

See accompanying notes to consolidated financial statements

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(dollars in thousands)


	Year Ended December 31,
	2008			2007			2006
Cash flows from financing activities:
Proceeds from line of credit payable	$	516,000		$	662,300		$	379,000
Repayment of line of credit payable		(619,300	)		(560,500	)		(513,300	)
Repayment of mortgages payable		(1,190	)		(8,412	)		(20,241	)
Proceeds from notes payable – convertible		234,035			-			172,500
Repayment of notes payable – secured		(12,000	)		(33,300	)		-
Proceeds from notes payable		-			249,122			-
Repayment of notes payable		(100,000	)		-			(3,750	)
Repayment of notes payable – convertible		(19,188	)		-			-
Payment of interest rate hedge		-			(3,228	)		-
Payment of debt costs		(5,813	)		(2,453	)		(3,864	)
Repayment of financing lease obligation		-			(26,007	)		-
Proceeds from issuance of common stock		128,039			310,721			70,392
Proceeds from issuance of preferred stock		-			-			88,902
Redemption of 1,781,589 shares of Series A preferred stock		-			(44,540	)		-
Payment of Series A preferred stock dividends		-			-			(4,376	)
Payment of Series B convertible preferred stock dividends		-			-			(419	)
Payment of Series C preferred stock dividends		(6,785	)		(6,785	)		(923	)
Payment of common stock dividends		(110,107	)		(92,989	)		(76,039	)
Minority interest distributions		(5,483	)		(62	)		(5,817	)
Minority interest contributions		41			155			2
Stock issuance costs		(3,566	)		(11,115	)		(203	)

Net cash provided (used in) by financing activities		(5,317	)		432,907			81,864

Net increase (decrease) in cash and cash equivalents		(24,873	)		25,824			(6,559	)
Cash and cash equivalents at beginning of year		27,499			1,675			8,234

Cash and cash equivalents at end of year	$	2,626		$	27,499		$	1,675


Supplemental disclosure of cash flow information:
Interest paid, net of amount capitalized	$	69,395		$	51,824		$	50,774

Taxes paid	$	3,441		$	1,375		$	1,137

Supplemental disclosure of non-cash investing and financing activities:
Issued 225,517, 211,118 and 79,500 shares of restricted and unrestricted common stock in 2008, 2007 and 2006, respectively, pursuant to NNN’s performance incentive plan	$	3,796		$	4,323		$	1,763

Converted 10,000 shares of Series B convertible preferred stock to 1,293,996 shares of common stock in 2006	$	-		$	-		$	25,000

Issued 12,766, 7,750 and 14,062 shares of common stock in 2008, 2007 and 2006, respectively to directors pursuant to NNN’s performance incentive plan	$	262		$	182		$	307

Issued 26,879, 16,346 and 33,379 shares of common stock in 2008, 2007 and 2006, respectively pursuant to NNN’s Deferred Director Fee Plan	$	449		$	331		$	655

Surrender of 2,520 and 8,600 shares of restricted common stock in 2008 and 2007, respectively	$	58		$	182		$	-

Dividends on unvested restricted stock shares	$	-		$	-		$	4

Change in other comprehensive income	$	1,688		$	(3,622	)	$	5,219

Change in lease classification	$	300		$	-		$	885

Transfer of real estate from Inventory Portfolio to Investment Portfolio	$	29,948		$	14,845		$	12,933

Note and mortgage notes receivable accepted in connection with real estate transactions	$	24,245		$	9,747		$	1,582

Assignment of mortgage payable in connection with the disposition of real estate	$	-		$	-		$	95,000

Interest rate hedge	$	-		$	109		$	-

Real estate acquired in connection with foreclosure	$	2,497		$	-		$	-

See accompanying notes to consolidated financial statements

NATIONAL RETAIL PROPERTIES, INC.

and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2008, 2007 and 2006

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 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 (including structured finance investments) on the consolidated balance sheets and commercial mortgage residual interests (collectively, “Investment Assets”), and (ii) inventory real estate assets (“Inventory Assets”). NNN acquires, owns, invests in, manages and develops properties that are leased primarily to retail tenants under long-term net leases (“Investment Properties” or “Investment Portfolio”). As of December 31, 2008, NNN owned 1,005 Investment Properties, with an aggregate gross leasable area of 11,251,000 square feet, located in 44 states. In addition, as of December 31, 2008, NNN’s Investment Assets included $60,472,000 in mortgages, notes and interest receivable (including structured finance investments) and $22,000,000 in commercial mortgage residual interests. The Inventory Assets are operated through the TRS. The TRS, directly and indirectly, through investment interests, acquires and/or develops real estate primarily for the purpose of selling the real estate (“Inventory Properties” or “Inventory Portfolio”). As of December 31, 2008, the TRS owned 32 Inventory Properties.

Principles of Consolidation – In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). This Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities.

NNN’s consolidated financial statements include the accounts of each of the respective majority owned and controlled affiliates. All significant intercompany account balances and transactions have been eliminated. NNN applies the equity method of accounting to investments in partnerships and joint ventures that are not subject to control by NNN due to the significance of rights held by other parties.

The TRS develops real estate through various joint venture development affiliate agreements. NNN consolidates the joint venture development entities listed in the table below based upon either NNN being the primary beneficiary of the respective variable interest entity or NNN having a controlling interest over the respective entity. NNN eliminates significant intercompany balances and transactions and records a minority interest for its other partners’ ownership percentage. The following table summarizes each of the investments as of December 31, 2008:


Date of Agreement	Entity Name	TRS’ Ownership %
November 2002	WG Grand Prairie TX, LLC	60%
February 2003	Gator Pearson, LLC	50%
February 2004	CNLRS Yosemite Park CO, LLC	50%
September 2004	CNLRS Bismarck ND, LLC	50%
February 2006	CNLRS BEP, L.P.	50%
February 2006	CNLRS Rockwall, L.P.	50%
September 2006	NNN Harrison Crossing, L.P.	50%
September 2006	CNLRS RGI Bonita Springs, LLC	50%

NNN no longer holds an interest in the collective partnership interest of CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (collectively, “Plaza”). In October 2006, NNN sold its equity investment for $10,239,000 (see Note 4).

In September 2007, NNN entered into a joint venture, NNN Retail Properties Fund I LLC (the “NNN Crow JV”) with an affiliate of Crow Holdings Realty Partners IV, LP (see Note 4).

Real Estate – Investment Portfolio – NNN records the acquisition of real estate at cost, including acquisition and closing costs. The cost of properties developed by NNN includes direct and indirect costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy.

Purchase Accounting for Acquisition of Real Estate Subject to a Lease – In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of tenant relationships, based in each case on their relative fair values.

The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on the determination of the relative fair values of these assets. The as-if-vacant fair value of a property is provided to management by a qualified appraiser.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the

corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term.

The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

The value of tenant relationships is reviewed on individual transactions to determine if future value was derived from the acquisition.

Real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. The leases are accounted for using either the operating or the direct financing method. Such methods are described below:

Operating method – Leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis.

Real Estate – Inventory Portfolio – The TRS acquires and/or develops and owns properties for the purpose of selling the real estate. The properties that are classified as held for sale at any given time may consist of properties that have been acquired in the marketplace with the intent to sell and properties that have been, or are currently being, constructed by the TRS. The TRS records the acquisition of the real estate at cost, including the acquisition and closing costs. The cost of the real estate developed by the TRS includes direct and indirect costs of construction, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Real estate held for sale is not depreciated. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the TRS classifies its real estate held for sale as discontinued operations for each property in which rental revenues are generated.

Impairment – Real Estate – Management periodically assesses its real estate for possible impairment whenever events or changes in circumstances indicate that the carrying value of the asset, including accrued rental income, may not be recoverable through operations. Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, with the carrying cost of the individual asset. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value.

Real Estate Dispositions – When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued rental income for operating leases and the net investment for direct financing leases are removed from the accounts and gains and losses from the dispositions are reflected in income. Gains from the disposition of real estate are generally recognized using the full accrual method in accordance with the provisions of SFAS No. 66 “Accounting for Real Estate Sales,” provided that various criteria relating to the terms of the sale and any subsequent involvement by NNN with the real estate sold are met. Lease termination fees are recognized when the related leases are cancelled and NNN no longer has a continuing obligation to provide services to the former tenants.

Valuation of Mortgages, Notes and Accrued Interest – The allowance related to the mortgages, notes and accrued interest is NNN’s best estimate of the amount of probable credit losses. The allowance is determined on an individual note basis in reviewing any payment past due for over 90 days. Any outstanding amounts are written off against the allowance when all possible means of collection have been exhausted.

Investment in Unconsolidated Affiliates – NNN accounts for each of its investments in unconsolidated affiliates under the equity method of accounting (see Note 4).

Commercial Mortgage Residual Interests, at Fair Value – Commercial mortgage residual interests, classified as available for sale, are reported at their market values with unrealized gains and losses reported as other comprehensive income in stockholders’ equity. The commercial mortgage residual interests were acquired in connection with the acquisition of 78.9 percent equity interest of Orange Avenue Mortgage Investments, Inc. (“OAMI”). NNN recognizes the excess of all cash flows attributable to the commercial mortgage residual interests estimated at the acquisition/transaction date over the initial investment (the accretable yield) as interest income over the life of the beneficial interest using the effective yield method. Losses are considered other than temporary valuation impairments if and when there has been a change in the timing or amount of estimated cash flows, exclusive of changes in interest rates, that leads to a loss in value. Certain of the commercial mortgage residual interests were pledged as security for notes payable.

Cash and Cash Equivalents – NNN considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.

Cash accounts maintained on behalf of NNN in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, NNN has not experienced any losses in such accounts.

Valuation of Receivables – NNN estimates of the collectibility of its accounts receivable related to rents, expense reimbursements and other revenues. NNN analyzes accounts receivable and historical bad debt levels, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.

Debt Costs – Debt costs incurred in connection with NNN’s $400,000,000 line of credit and mortgages payable have been deferred and are being amortized over the term of the respective loan commitment using the straight-line method, which approximates the effective interest method. Debt costs incurred in connection with the issuance of NNN’s notes payable have been deferred and are being amortized over the term of the respective debt obligation using the effective interest method.

Revenue Recognition – Rental revenues for non-development real estate assets are recognized when earned in accordance with SFAS 13, “Accounting for Leases,” based on the terms of the lease at the time of acquisition of the leased asset. Rental revenues for properties under construction commence upon completion of construction of the leased asset and delivery of the leased asset to the tenant.

Earnings Per Share – Basic net earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net earnings per common share is computed by dividing net earnings available to common stockholders for the period by the number of common shares that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the periods.

The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the years ended December 31:


	2008		2007		2006
Weighted average number of common shares outstanding	74,732,844		66,519,519		57,698,533
Unvested restricted stock	(483,707	)	(367,082	)	(270,470	)