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SPIRIT REALTY CAPITAL, INC. - Quarter Report: 2018 June (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
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
Spirit Realty Capital, Inc.                                     001-36004
Spirit Realty, L.P.                                         333-216815-01
___________________________________________________________
SPIRIT REALTY CAPITAL, INC.
SPIRIT REALTY, L.P.
(Exact name of registrant as specified in its charter)
_______________________________________________
Spirit Realty Capital, Inc.
 
Maryland
 
20-1676382
Spirit Realty, L.P.
 
Delaware
 
20-1127940
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
 
2727 North Harwood Street, Suite 300, Dallas, Texas 75201
 
(972) 476-1900
 
 
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________________________________
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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Spirit Realty Capital, Inc.     Yes  x No   o
Spirit Realty, L.P.     Yes  x No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Spirit Realty Capital, Inc.     Yes  x No   o
Spirit Realty, L.P.     Yes  x No   o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Spirit Realty Capital, Inc.
 Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
Spirit Realty, L.P.
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Spirit Realty Capital, Inc.            o
Spirit Realty, L.P.            o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Spirit Realty Capital, Inc.     Yes  o No  x
Spirit Realty, L.P.     Yes  o No  x
As of August 6, 2018, there were 428,566,702 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.
 



Explanatory Note
This report combines the quarterly reports on Form 10-Q for the three and six months ended June 30, 2018 of Spirit Realty Capital, Inc., a Maryland corporation, and Spirit Realty, L.P., a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or the “Company” refer to Spirit Realty Capital, Inc. together with its consolidated subsidiaries, including Spirit Realty, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Spirit Realty, L.P. together with its consolidated subsidiaries.
Spirit General OP Holdings, LLC ("OP Holdings") is the sole general partner of the Operating Partnership. The Company is a real estate investment trust ("REIT") and the sole member of OP Holdings, as well as the special limited partner of the Operating Partnership. As sole member of the general partner of our Operating Partnership, our Company has the full, exclusive and complete responsibility for our Operating Partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of our Company and Operating Partnership into a single report results in the following benefits:
enhancing investors’ understanding of our Company and Operating Partnership by enabling investors to view the business as a whole, reflective of how management views and operates the business;
eliminating duplicative disclosure and providing a streamlined presentation as a substantial portion of the disclosures apply to both our Company and Operating Partnership; and
creating time and cost efficiencies by preparing one combined report in lieu of two separate reports.
There are a few differences between our Company and Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand these differences in the context of how we operate as an interrelated, consolidated company. Our Company is a REIT, the only material assets of which are the partnership interests in our Operating Partnership. As a result, our Company does not conduct business itself, other than acting as the sole member of the general partner of our Operating Partnership, issuing equity from time to time and guaranteeing certain debt of our Operating Partnership. Our Operating Partnership holds substantially all the assets of our Company. Our Company issued convertible notes and guarantees some of the debt of our Operating Partnership. See Note 4 to the consolidated financial statements included herein for further discussion. Our Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from the issuance of convertible notes and equity issuances by our Company, which are generally contributed to our Operating Partnership in exchange for partnership units of our Operating Partnership, our Operating Partnership generates the capital required by our Company’s business through our Operating Partnership’s operations or our Operating Partnership’s incurrence of indebtedness.
The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our Operating Partnership. The partnership units in our Operating Partnership are accounted for as partners’ capital in our Operating Partnership’s consolidated financial statements. There are no non-controlling interests in the Company or the Operating Partnership.
To help investors understand the significant differences between our Company and our Operating Partnership, this report presents the consolidated financial statements separately for our Company and our Operating Partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our Operating Partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act, and 18 U.S.C. §1350, this report also includes separate “Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our Operating Partnership.




SPIRIT REALTY CAPITAL, INC.
INDEX

Glossary
 
 

 

2


GLOSSARY
Definitions:
 
1031 Exchange
Tax-deferred like-kind exchange of properties held for business or investment purposes, pursuant to Section 1031 of the Code
2017 Tax Legislation
Tax Cuts and Jobs Act
2019 Notes
$402.5 million convertible notes of the Corporation due in 2019
2021 Notes
$345.0 million convertible notes of the Corporation due in 2021
AFFO
Adjusted Funds From Operations
Amended Incentive Award Plan
Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
ASC
Accounting Standards Codification
Asset Management Agreement
Asset Management Agreement between Spirit Realty, L.P. and Spirit MTA REIT dated May 31, 2018
ASU
Accounting Standards Update
ATM Program
At the Market equity distribution program, pursuant to which the Company may offer and sell registered shares of common stock from time to time
CMBS
Commercial Mortgage Backed Securities
Code
Internal Revenue Code of 1986, as amended
Collateral Pools
Pools of collateral assets that are pledged to the indenture trustee for the benefit of the noteholders and secure obligations of issuers under Master Trust 2013 and Master Trust 2014
Company
The Corporation and its consolidated subsidiaries
Contractual Rent
Monthly contractual cash rent and earned income from direct financing leases, excluding percentage rents, from our properties owned fee-simple or ground leased, recognized during the final month of the reporting period, adjusted to exclude amounts received from properties sold during that period and adjusted to include a full month of contractual rent for properties acquired during that period.
Convertible Notes
The 2019 Notes and 2021 Notes, together
Corporation
Spirit Realty Capital, Inc., a Maryland corporation
CPI
Consumer Price Index
Credit Agreement
Revolving credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015, as amended or otherwise modified from time to time
EBITDAre
EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. EBITDAre is defined as net income (loss) (computed in accordance with GAAP), plus interest expense, plus income tax expense (if any), plus depreciation and amortization, plus (minus) losses and gains on the disposition of depreciated property, plus impairment write-downs of depreciated property and investments in unconsolidated real estate ventures, plus adjustments to reflect the Company's share of EBITDAre of unconsolidated real estate ventures.
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FFO
Funds From Operations
Fitch
Fitch Ratings, Inc.
GAAP
Generally Accepted Accounting Principles in the United States
LIBOR
London Interbank Offered Rate
Master Trust 2013
The net-lease mortgage securitization trust established in December 2013
Master Trust 2014
The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014
Master Trust Exchange Costs
Legal, accounting, and financial advisory services costs incurred in connection with the Exchange Offer
Master Trust Notes
Master Trust 2013 and Master Trust 2014 notes, together

3


Definitions:
 
Master Trust Release
Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made or until used for principal reduction
Moody's
Moody's Investor Services
NAREIT
National Association of Real Estate Investment Trusts
OP Holdings
Spirit General OP Holdings, LLC
Operating Partnership
Spirit Realty, L.P., a Delaware limited partnership
Property Management and Servicing Agreement
Second amended and restated agreement governing the management services and special services provided to Master Trust 2014 by Spirit Realty, L.P., dated as of May 20, 2014, as amended, supplemented, amended and restated or otherwise modified
Real Estate Investment Value
The gross acquisition cost, including capitalized transaction costs, plus improvements and less impairments, if any
REIT
Real Estate Investment Trust
Revolving Credit Facility
$800.0 million unsecured credit facility pursuant to the Credit Agreement
S&P
Standard & Poor's Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Senior Unsecured Notes
$300 million aggregate principal amount of senior notes issued in August 2016
Series A Preferred Stock
6,900,000 shares of 6.000% Cumulative Redeemable Preferred Stock issued October 3, 2017, with a liquidation preference of $25.00 per share.
Shopko
Specialty Retail Shops Holding Corp. and certain of its affiliates
SMTA
Spirit MTA REIT, a Maryland real estate investment trust
Spin-Off
Creation of an independent, publicly traded REIT, SMTA, through our contribution of properties leased to Shopko, assets that collateralize Master Trust 2014 and other additional assets to SMTA followed by the distribution by us to our stockholders of all of the common shares of beneficial interest in SMTA.
SubREIT
Spirit MTA SubREIT, a wholly-owned subsidiary of SMTA
Term Loan
$420.0 million senior unsecured term facility pursuant to the Term Loan Agreement
Term Loan Agreement
Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015, as amended or otherwise modified from time to time
TSR
Total Stockholder Return
U.S.
United States
Vacant
Owned properties which are not economically yielding

Unless otherwise indicated or unless the context requires otherwise, all references to the "Company," "Spirit Realty Capital," "we," "us" or "our" refer to the Corporation and its consolidated subsidiaries, including the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references to the "Operating Partnership" refer to Spirit Realty, L.P. and its consolidated subsidiaries.


4


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
Assets



Investments:



Real estate investments:



Land and improvements
$
1,586,288


$
1,598,355

Buildings and improvements
2,971,052


2,989,451

Total real estate investments
4,557,340


4,587,806

Less: accumulated depreciation
(560,600
)

(503,568
)

3,996,740


4,084,238

Loans receivable, net
55,438


78,466

Intangible lease assets, net
287,607


306,252

Real estate assets under direct financing leases, net
24,828


24,865

Real estate assets held for sale, net
18,825


20,469

Net investments
4,383,438


4,514,290

Cash and cash equivalents
9,289


8,792

Deferred costs and other assets, net
107,273


121,949

Investment in Master Trust 2014
33,581

 

Preferred equity investment in SMTA
150,000

 

Goodwill
225,600


225,600

Assets related to SMTA Spin-Off

 
2,392,880

Total assets
$
4,909,181


$
7,263,511

 
 
 
 
Liabilities and stockholders’ equity



Liabilities:



Revolving Credit Facility
$
346,500


$
112,000

Term Loan, net

 

Senior Unsecured Notes, net
295,542

 
295,321

Mortgages and notes payable, net
467,334


589,644

Convertible Notes, net
722,756


715,881

Total debt, net
1,832,132

 
1,712,846

Intangible lease liabilities, net
125,905


130,574

Accounts payable, accrued expenses and other liabilities
121,858


131,642

Liabilities related to SMTA Spin-Off

 
1,968,840

Total liabilities
2,079,895


3,943,902

Commitments and contingencies (see Note 6)





Stockholders’ equity:



Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both June 30, 2018 and December 31, 2017
166,193

 
166,193

Common stock, $0.01 par value, 750,000,000 shares authorized: 428,570,110 and 448,868,269 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
4,286


4,489

Capital in excess of par value
4,986,719


5,193,631

Accumulated deficit
(2,327,912
)

(2,044,704
)
Total stockholders’ equity
2,829,286

 
3,319,609

Total liabilities and stockholders’ equity
$
4,909,181

 
$
7,263,511

See accompanying notes.

5


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Operations and Comprehensive Income
(In Thousands, Except Share and Per Share Data)
(Unaudited)


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rentals
$
95,599

 
$
102,918

 
$
193,238

 
$
204,299

Interest income on loans receivable
294

 
754

 
1,289

 
1,527

Earned income from direct financing leases
465

 
518

 
930

 
1,130

Tenant reimbursement income
2,637

 
4,172

 
6,505

 
7,652

Related party fee income
2,219

 

 
2,219

 

Other income
1,245

 
308

 
1,817

 
559

Total revenues
102,459

 
108,670

 
205,998

 
215,167

Expenses:
 
 
 
 
 
 
 
General and administrative
13,520

 
21,868

 
28,810

 
34,044

Property costs (including reimbursable)
4,806

 
7,780

 
10,357

 
14,013

Real estate acquisition costs
70

 
414

 
117

 
674

Interest
23,548

 
28,051

 
46,601

 
55,857

Depreciation and amortization
39,942

 
43,441

 
80,636

 
87,316

Impairments
1,478

 
10,074

 
4,975

 
37,957

Total expenses
83,364

 
111,628

 
171,496

 
229,861

Income (loss) from continuing operations before other income and income tax expense
19,095

 
(2,958
)
 
34,502

 
(14,694
)
Other income:
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
5,509

 
7

 
27,092

 
(23
)
(Loss) gain on disposition of assets
(860
)
 
6,884

 
391

 
11,897

Preferred dividend income from SMTA
1,250

 

 
1,250

 

Total other income
5,899

 
6,891

 
28,733

 
11,874

Income (loss) from continuing operations before income tax expense
24,994

 
3,933

 
63,235

 
(2,820
)
Income tax expense
(177
)
 
(160
)
 
(340
)
 
(277
)
Income (loss) from continuing operations
24,817

 
3,773

 
62,895

 
(3,097
)
(Loss) income from discontinued operations
(7,653
)
 
19,433

 
(15,013
)
 
39,132

Net income and total comprehensive income
$
17,164

 
$
23,206

 
$
47,882

 
$
36,035

Dividends paid to preferred stockholders
(2,588
)
 

 
(5,176
)
 

Net income attributable to common stockholders
$
14,576

 
$
23,206

 
$
42,706

 
$
36,035

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.01

 
$
0.13

 
$
(0.01
)
Discontinued operations
(0.02
)
 
0.04

 
(0.03
)
 
0.08

Net income per share attributable to common stockholders - basic
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.01

 
$
0.13

 
$
(0.01
)
Discontinued operations
(0.02
)
 
0.04

 
(0.03
)
 
0.08

Net income per share attributable to common stockholders - diluted
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

 
 
 
 
 
 
 
 

6


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Operations and Comprehensive Income
(In Thousands, Except Share and Per Share Data)
(Unaudited)


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
428,134,240

 
479,102,268

 
436,458,588

 
480,845,051

Diluted
429,018,934

 
479,102,268

 
437,016,151

 
480,845,051

 
 
 
 
 
 
 
 
Dividends declared per common share issued
$
0.1800

 
$
0.1800

 
$
0.3600

 
$
0.3600

See accompanying notes.

7


SPIRIT REALTY CAPITAL, INC.
Consolidated Statement of Stockholders’ Equity
(In Thousands, Except Share Data)
(Unaudited)

 
Preferred Stock
 
Common Stock
 
 
 
 
 
Shares
 
Par Value and Capital in Excess of Par Value
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balances, December 31, 2017
6,900,000

 
$
166,193

 
448,868,269

 
$
4,489

 
$
5,193,631

 
$
(2,044,704
)
 
$
3,319,609

Net income

 

 

 

 

 
47,882

 
47,882

Dividends declared on preferred stock

 

 

 

 

 
(5,176
)
 
(5,176
)
Net income available to common stockholders
 
 

 
 
 

 

 
42,706

 
42,706

Dividends declared on common stock

 

 

 

 

 
(155,724
)
 
(155,724
)
Tax withholdings related to net stock settlements

 

 
(202,829
)
 
(2
)
 

 
(1,655
)
 
(1,657
)
Repurchase of common shares

 

 
(21,222,257
)
 
(212
)
 

 
(167,953
)
 
(168,165
)
SMTA dividend distribution

 

 

 

 
(216,005
)
 

 
(216,005
)
Stock-based compensation

 

 
1,126,927

 
11

 
9,093

 
(582
)
 
8,522

Balances, June 30, 2018
6,900,000

 
$
166,193

 
428,570,110

 
$
4,286

 
$
4,986,719

 
$
(2,327,912
)
 
$
2,829,286

See accompanying notes.

8


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
Six Months Ended 
 June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
47,882

 
$
36,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
116,097

 
129,214

Impairments
15,918

 
50,372

Amortization of deferred financing costs
5,552

 
4,823

Amortization of debt discounts
8,252

 
6,304

Stock-based compensation expense
9,104

 
11,438

(Gain) loss on debt extinguishment
(26,729
)
 
22

Gain on dispositions of real estate and other assets
(117
)
 
(31,490
)
Non-cash revenue
(9,765
)
 
(14,275
)
Bad debt expense and other
1,592

 
2,714

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(3,254
)
 
3,337

Accounts payable, accrued expenses and other liabilities
(4,121
)
 
2,893

Net cash provided by operating activities
160,411

 
201,387

Investing activities
 
 
 
Acquisitions of real estate
(18,144
)
 
(218,117
)
Capitalized real estate expenditures
(21,133
)
 
(23,327
)
Investments in notes receivable
(35,450
)
 
(3,000
)
Collections of principal on loans receivable and real estate assets under direct financing leases
22,818

 
2,074

Proceeds from dispositions of real estate and other assets
37,563

 
239,077

Net cash used in investing activities
(14,346
)
 
(3,293
)

9


 
Six Months Ended 
 June 30,
 
2018
 
2017
Financing activities
 
 
 
Borrowings under Revolving Credit Facility
475,500

 
568,200

Repayments under Revolving Credit Facility
(241,000
)
 
(334,200
)
Borrowings under mortgages and notes payable
104,247

 

Repayments under mortgages and notes payable
(164,883
)
 
(26,759
)
Debt extinguishment costs
(2,968
)
 

Deferred financing costs
(1,398
)
 
(192
)
Cash, cash equivalents and restricted cash held by SMTA at Spin-Off
(73,081
)
 

Sale of SubREIT preferred shares
5,000

 

Repurchase of shares of common stock
(169,821
)
 
(203,827
)
Preferred stock dividends paid
(5,176
)
 

Common stock dividends paid
(159,534
)
 
(174,693
)
Net cash used in financing activities
(233,114
)
 
(171,471
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(87,049
)
 
26,623

Cash, cash equivalents and restricted cash, beginning of period
114,707

 
36,900

Cash, cash equivalents and restricted cash, end of period
$
27,658

 
$
63,523

 
 
 
 
Cash paid for interest
$
76,963

 
$
57,065

Cash paid for income taxes
$
754

 
$
749


 
Six Months Ended 
 June 30,
 
2018
 
2017
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Investment in preferred shares
$
150,000

 
$

Non-cash distribution to SMTA, net
142,924

 

Relief of debt through sale or foreclosure of real estate properties
56,119

 
35,528

Reclass of residual value on expired deferred financing lease to operating asset

 
8,613

Net real estate and other collateral assets sold or surrendered to lender
28,271

 
35,008

Accrued interest capitalized to principal (1)
412

 
1,206

Accrued performance share dividend rights
306

 
353

Distributions declared and unpaid
78,381

 
82,422

Accrued deferred financing costs

 
221

Financing provided in connection with disposition of assets
2,888

 

(1) Accrued and overdue interest on certain CMBS notes that have been intentionally placed in default.
See accompanying notes.



10



 
SPIRIT REALTY, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Investments:
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,586,288

 
$
1,598,355

Buildings and improvements
2,971,052

 
2,989,451

Total real estate investments
4,557,340

 
4,587,806

Less: accumulated depreciation
(560,600
)
 
(503,568
)

3,996,740

 
4,084,238

Loans receivable, net
55,438

 
78,466

Intangible lease assets, net
287,607

 
306,252

Real estate assets under direct financing leases, net
24,828

 
24,865

Real estate assets held for sale, net
18,825

 
20,469

Net investments
4,383,438

 
4,514,290

Cash and cash equivalents
9,289

 
8,792

Deferred costs and other assets, net
107,273

 
121,949

Investment in Master Trust 2014
33,581

 

Preferred equity investment in SMTA
150,000

 

Goodwill
225,600

 
225,600

Assets related to SMTA Spin-Off

 
2,392,880

Total assets
$
4,909,181

 
$
7,263,511

Liabilities and partners' capital
 
 
 
Liabilities:
 
 
 
Revolving Credit Facility
$
346,500

 
$
112,000

Term Loan, net

 

Senior Unsecured Notes, net
295,542

 
295,321

Mortgages and notes payable, net
467,334

 
589,644

Notes payable to Spirit Realty Capital, Inc., net
722,756

 
715,881

Total debt, net
1,832,132

 
1,712,846

Intangible lease liabilities, net
125,905

 
130,574

Accounts payable, accrued expenses and other liabilities
121,858

 
131,642

Liabilities related to SMTA Spin-Off

 
1,968,840

Total liabilities
2,079,895

 
3,943,902

Commitments and contingencies (see Note 6)


 


Partners' capital:
 
 
 
Partnership units
 
 
 
General partner's capital: 3,988,218 units issued and outstanding as of both June 30, 2018 and December 31, 2017
23,384

 
24,426

Limited partners' preferred capital: 6,900,000 issued and outstanding as of June 30, 2018 and December 31, 2017
166,193

 
166,193

Limited partners' capital: 424,581,892 and 444,880,051 units issued and outstanding as of June, 2018 and December 31, 2017, respectively
2,639,709

 
3,128,990

Total partners' capital
2,829,286

 
3,319,609

Total liabilities and partners' capital
$
4,909,181

 
$
7,263,511

See accompanying notes.

11


SPIRIT REALTY, L.P.
Consolidated Statements of Operations and Comprehensive Income
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rentals
$
95,599

 
$
102,918

 
$
193,238

 
$
204,299

Interest income on loans receivable
294

 
754

 
1,289

 
1,527

Earned income from direct financing leases
465

 
518

 
930

 
1,130

Tenant reimbursement income
2,637

 
4,172

 
6,505

 
7,652

Related party fee income
2,219

 

 
2,219

 

Other income
1,245

 
308

 
1,817

 
559

Total revenues
102,459

 
108,670

 
205,998

 
215,167

Expenses:
 
 
 
 
 
 
 
General and administrative
13,520

 
21,868

 
28,810

 
34,044

Property costs (including reimbursable)
4,806

 
7,780

 
10,357

 
14,013

Real estate acquisition costs
70

 
414

 
117

 
674

Interest
23,548

 
28,051

 
46,601

 
55,857

Depreciation and amortization
39,942

 
43,441

 
80,636

 
87,316

Impairments
1,478

 
10,074

 
4,975

 
37,957

Total expenses
83,364

 
111,628

 
171,496

 
229,861

Income (loss) from continuing operations before other income and income tax expense
19,095

 
(2,958
)
 
34,502

 
(14,694
)
Other income:
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
5,509

 
7

 
27,092

 
(23
)
(Loss) gain on disposition of assets
(860
)
 
6,884

 
391

 
11,897

Preferred dividend income from SMTA
1,250

 

 
1,250

 

Total other income
5,899

 
6,891

 
28,733

 
11,874

Income (loss) from continuing operations before income tax expense
24,994

 
3,933

 
63,235

 
(2,820
)
Income tax expense
(177
)
 
(160
)
 
(340
)
 
(277
)
Income (loss) from continuing operations
24,817

 
3,773

 
62,895

 
(3,097
)
(Loss) income from discontinued operations
(7,653
)
 
19,433

 
(15,013
)
 
39,132

Net income and total comprehensive income
$
17,164

 
$
23,206

 
$
47,882

 
$
36,035

Preferred distributions
(2,588
)
 

 
(5,176
)
 

Net income after preferred distributions
$
14,576

 
$
23,206

 
$
42,706

 
$
36,035

 
 
 
 
 
 
 
 
Net income attributable to the general partner
 
 
 
 
 
 
 
Continuing operations
$
192

 
$
31

 
$
476

 
$
(28
)
Discontinued operations
(59
)
 
157

 
(114
)
 
325

Net income attributable to the general partner
$
133

 
$
188

 
$
362

 
$
297

 
 
 
 
 
 
 
 
Net income attributable to the limited partners
 
 
 
 
 
 
 
Continuing operations
$
24,625

 
$
3,742

 
$
62,419

 
$
(3,069
)
Discontinued operations
(7,594
)
 
19,276

 
(14,899
)
 
38,807

Net income attributable to the limited partners
$
17,031

 
$
23,018

 
$
47,520

 
$
35,738

 
 
 
 
 
 
 
 

12


SPIRIT REALTY, L.P.
Consolidated Statements of Operations and Comprehensive Income
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net income per partnership unit - basic
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.01

 
$
0.13

 
$
(0.01
)
Discontinued operations
(0.02
)
 
0.04

 
(0.03
)
 
0.08

Net income per partnership unit - basic
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

 
 
 
 
 
 
 
 
Net income per partnership unit - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.01

 
$
0.13

 
$
(0.01
)
Discontinued operations
(0.02
)
 
0.04

 
(0.03
)
 
0.08

Net income per partnership unit - diluted
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

 
 
 
 
 
 
 
 
Weighted average partnership units outstanding:
 
 
 
 
 
 
 
Basic
428,134,240

 
479,102,268

 
436,458,588

 
480,845,051

Diluted
429,018,934

 
479,102,268

 
437,016,151

 
480,845,051

 
 
 
 
 
 
 
 
Distributions declared per partnership unit issued
$
0.1800

 
$
0.1800

 
$
0.3600

 
$
0.3600

See accompanying notes.

13



SPIRIT REALTY, L.P.
Consolidated Statements of Partners' Capital
(In Thousands, Except Unit Data)
(Unaudited)
 
Preferred Units
 
Common Units
 
Total Partnership Capital
 
Limited Partners' Capital (1)
 
General Partner's Capital (2)
 
Limited Partners' Capital (1)
 
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Balances, December 31, 2017
6,900,000

 
$
166,193

 
3,988,218

 
$
24,426

 
444,880,051

 
$
3,128,990

 
$
3,319,609

Net income

 

 

 
362

 

 
47,520

 
47,882

Partnership distributions declared on preferred units

 

 

 

 

 
(5,176
)
 
(5,176
)
Net income after preferred distributions

 

 

 
362

 

 
42,344

 
42,706

Partnership distributions declared on common units

 

 

 
(1,404
)
 

 
(154,320
)
 
(155,724
)
Tax withholdings related to net partnership unit settlements

 

 

 

 
(202,829
)
 
(1,657
)
 
(1,657
)
Repurchase of partnership units

 

 

 

 
(21,222,257
)
 
(168,165
)
 
(168,165
)
SMTA dividend distribution

 

 

 

 

 
(216,005
)
 
(216,005
)
Stock-based compensation

 

 

 

 
1,126,927

 
8,522

 
8,522

Balances, June 30, 2018
6,900,000

 
$
166,193

 
3,988,218

 
$
23,384

 
424,581,892

 
$
2,639,709

 
$
2,829,286

(1) Consists of limited partnership interests held by the Corporation and Spirit Notes Partner, LLC.
(2) Consists of general partnership interests held by OP Holdings.

See accompanying notes.


14



SPIRIT REALTY, L.P.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 
Six Months Ended 
 June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income attributable to partners
$
47,882

 
$
36,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
116,097

 
129,214

Impairments
15,918

 
50,372

Amortization of deferred financing costs
5,552

 
4,823

Amortization of debt discounts
8,252

 
6,304

Stock-based compensation expense
9,104

 
11,438

(Gain) loss on debt extinguishment
(26,729
)
 
22

Gain on dispositions of real estate and other assets
(117
)
 
(31,490
)
Non-cash revenue
(9,765
)
 
(14,275
)
Bad debt expense and other
1,592

 
2,714

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(3,254
)
 
3,337

Accounts payable, accrued expenses and other liabilities
(4,121
)
 
2,893

Net cash provided by operating activities
160,411

 
201,387

Investing activities
 
 
 
Acquisitions of real estate
(18,144
)
 
(218,117
)
Capitalized real estate expenditures
(21,133
)
 
(23,327
)
Investments in notes receivable
(35,450
)
 
(3,000
)
Collections of principal on loans receivable and real estate assets under direct financing leases
22,818

 
2,074

Proceeds from dispositions of real estate and other assets
37,563

 
239,077

Net cash used in investing activities
(14,346
)
 
(3,293
)

15



 
Six Months Ended 
 June 30,
 
2018
 
2017
Financing activities
 
 
 
Borrowings under Revolving Credit Facility
475,500

 
568,200

Repayments under Revolving Credit Facility
(241,000
)
 
(334,200
)
Borrowings under mortgages and notes payable
104,247

 

Repayments under mortgages and notes payable
(164,883
)
 
(26,759
)
Debt extinguishment costs
(2,968
)
 

Deferred financing costs
(1,398
)
 
(192
)
Cash, cash equivalents and restricted cash held by SMTA at Spin-Off
(73,081
)
 

Sale of SubREIT preferred shares
5,000

 

Repurchase of partnership units
(169,821
)
 
(203,827
)
Preferred distributions paid
(5,176
)
 

Common distributions paid
(159,534
)
 
(174,693
)
Net cash used in financing activities
(233,114
)
 
(171,471
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(87,049
)
 
26,623

Cash, cash equivalents and restricted cash, beginning of period
114,707

 
36,900

Cash, cash equivalents and restricted cash, end of period
$
27,658

 
$
63,523

 
 
 
 
Cash paid for interest
$
76,963

 
$
57,065

Cash paid for income taxes
$
754

 
$
749


 
Six Months Ended 
 June 30,
 
2018
 
2017
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Investment in preferred shares
$
150,000

 
$

Non-cash distribution to SMTA, net
142,924

 

Relief of debt through sale or foreclosure of real estate properties
56,119

 
35,528

Reclass of residual value on expired deferred financing lease to operating asset

 
8,613

Net real estate and other collateral assets sold or surrendered to lender
28,271

 
35,008

Accrued interest capitalized to principal (1)
412

 
1,206

Accrued performance share dividend rights
306

 
353

Distributions declared and unpaid
78,381

 
82,422

Accrued deferred financing costs

 
221

Financing provided in connection with disposition of assets
2,888

 

(1) Accrued and overdue interest on certain CMBS notes that have been intentionally placed in default.
See accompanying notes.



16


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
June 30, 2018
(Unaudited)



Note 1. Organization
Company Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate and deliver sustainable and attractive returns for stockholders by primarily investing in and managing a portfolio of single-tenant, operationally essential real estate throughout the U.S. that is generally leased on a long-term, triple-net basis to tenants operating within retail, office, industrial and data center property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.The Company began operations through a predecessor legal entity in 2003.
The Company’s operations are generally carried out through Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC ("OP Holdings"), one of the Company's wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. The Corporation and a wholly-owned subsidiary ("Spirit Notes Partner, LLC") are the only limited partners and together own the remaining 99% of the Operating Partnership.
On May 31, 2018, (the "Distribution Date"), Spirit completed the previously announced spin-off (the "Spin-Off") of the assets that collateralize Master Trust 2014, properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). Beginning in the second quarter of 2018, the historical financial results of SMTA are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2017.
The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. The consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
All expenses incurred by the Company have been allocated to the Operating Partnership in accordance with the Operating Partnership's first amended and restated agreement of limited partnership, which management determined to be a reasonable method of allocation. Therefore, expenses incurred would not be materially different if the Operating Partnership had operated as an unaffiliated entity.
The Company has formed numerous special purpose entities to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of June 30, 2018 and December 31, 2017, net assets totaling $0.91 billion and $2.78 billion, respectively, were held, and net liabilities totaling $0.49 billion and $2.63 billion, respectively, were owed by these encumbered special purpose entities and are included in the accompanying consolidated balance sheets.

17


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Discontinued Operations
A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition. Examples of a strategic shift include disposing of: (i) a separate major line of business, (ii) a separate major geographic area of operations, or (iii) other major parts of the Company. The Company determined that the Spin-Off represented a strategic shift that has a major effect on the Company's results and, therefore, SMTA's operations qualify as discontinued operations. See Note 8 for further discussion on discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Allowance for Doubtful Accounts
The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. If the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made. The Company's reserves for uncollectible amounts totaled $3.7 million and $12.4 million as of June 30, 2018 and December 31, 2017, respectively, against accounts receivable balances of $13.1 million and $27.2 million, respectively. Receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets. Receivables are written off against the reserves for uncollectible amounts when all possible means of collection have been exhausted.
For deferred rental revenues related to the straight-line method of reporting rental revenue, the collectability review includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience. The Company established a reserve for losses of $0.5 million at June 30, 2018 and $1.8 million at December 31, 2017 against deferred rental revenue receivables of $62.8 million and $81.6 million, respectively. Deferred rental revenue receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. No impairment was recorded for the periods presented.

18


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term investments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
 
June 30,
2018
 
December 31,
2017
 
June 30,
2017
Cash and cash equivalents
$
9,289

 
$
8,798

 
$
11,246

Restricted cash:
 
 
 
 
 
Collateral deposits (1)
372

 
1,751

 
1,587

Tenant improvements, repairs, and leasing commissions (2)
9,147

 
8,257

 
10,392

Master Trust Release (3)
7,412

 
85,703

 
34,045

Liquidity reserve (4)

 
5,503

 

Other (5)
1,438

 
4,695

 
6,253

Total cash, cash equivalents and restricted cash
$
27,658

 
$
114,707

 
$
63,523

(1) Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses.
(2) Deposits held as additional collateral support by lenders to fund improvements, repairs and leasing commissions incurred to secure a new tenant.
(3) Proceeds from the sale of assets pledged as collateral under either Master Trust 2013 or Master Trust 2014, which are held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
(4) Liquidity reserve cash was placed on deposit for Master Trust 2014 and is held until there is a cashflow shortfall or upon achieving certain performance criteria, as defined in the agreements governing Master Trust 2014, or a liquidation of Master Trust 2014 occurs.
(5) Funds held in lender controlled accounts released after scheduled debt service requirements are met.
Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of its assets, the amounts distributed to its stockholders and the ownership of Company stock. Management believes the Company has qualified and will continue to qualify as a REIT and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Company qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income. Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes, which are not material.
The Operating Partnership is a partnership for federal income tax purposes. Partnerships are pass-through entities and are not subject to U.S. federal income taxes, therefore no provision has been made for federal income taxes in the accompanying financial statements. Although most states and cities where the Operating Partnership operates follow the U.S. federal income tax treatment, there are certain jurisdictions such as Texas, Tennessee and Ohio that impose income or franchise taxes on a partnership.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
On May 31, 2018, the Company completed the spin-off of Spirit MTA REIT through a distribution of shares in SMTA to the Company’s shareholders.  The distribution resulted in a deemed sale of assets and recognition of taxable gain by the Company, which is entitled to a dividends paid deduction equal to the value of the shares in SMTA that it distributed. The Company believes that its dividends paid deduction for 2018, including the value of the SMTA shares distributed, will equal or exceed its taxable income, including the gain recognized. As a result, the Company does not expect the distribution to result in current tax other than an immaterial amount of state and local tax which has been recognized in the accompanying financial statements.



19


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This new guidance establishes a principles-based approach for accounting for revenue from contracts with customers and is effective for annual reporting periods beginning after December 15, 2017, with early application permitted for annual reporting periods beginning after December 15, 2016. The Company adopted the new revenue recognition standard effective January 1, 2018 under the modified retrospective method, and elected to apply the standard only to contracts that were not completed as of the date of adoption (i.e. January 1, 2018). In evaluating the impact of this new standard, the Company identified that lease contracts covered by Leases (Topic 840) are excluded from the scope of this new guidance. As such, this ASU had no material impact on the Company's reported revenues, results of operations, financial position, cash flows and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. Leases pursuant to which the Company is the lessee primarily consist of its corporate office and equipment leases. The amendments in this ASU are effective for the fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. Under the guidance as currently contemplated, the Company will record certain expenses paid directly by tenants that protect the Company's interests in its properties, such as insurance and real estate taxes, however the FASB has announced it will re-evaluate this requirement. The Company has begun implementation of the ASU and is currently evaluating the overall impact of this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. ASU 2016-13 requires financial assets (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. The Company adopted ASU 2016-15 effective January 1, 2018 and has applied it retrospectively. As a result of adoption, debt prepayment and debt extinguishment costs, previously presented in operating activities, are now presented in financing activities in the consolidated statement of cash flows. There was no impact on the statements of cash flows for the Company for other types of transactions.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This guidance requires entities to include restricted cash and restricted cash equivalents within the cash and cash equivalents balances presented in the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the new guidance is to be applied retrospectively. The Company adopted ASU 2016-18 effective January 1, 2018 and applied it retrospectively. As a result, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.
Note 3. Investments
Real Estate Investments

As of June 30, 2018, the Company's gross investment in real estate properties and loans totaled approximately $4.9 billion, representing investments in 1,512 properties, including 54 properties securing mortgage loans. The gross

20


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
June 30, 2018
(Unaudited)


investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with Texas, at 12.2%, as the only state with a real estate investment value greater than 10% of the real estate investment value of the Company's entire portfolio.

During the six months ended June 30, 2018, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:
 
Number of Properties
 
Dollar Amount of Investments
 
Owned
 
Financed
 
Total
 
Owned
 
Financed
 
Total
 
 
 
 
 
 
 
(In Thousands)
Gross balance, December 31, 2017
2,392

 
88

 
2,480

 
$
7,823,058

 
$
79,967

 
$
7,903,025

Acquisitions/improvements (1)
5

 
2

 
7

 
39,277

 
37,888

 
77,165

Dispositions of real estate (2)(3)(4)
(40
)
 
(6
)
 
(46
)
 
(79,862
)
 

 
(79,862
)
Principal payments and payoffs

 
(28
)
 
(28
)
 

 
(23,299
)
 
(23,299
)
Impairments

 

 

 
(15,918
)
 

 
(15,918
)
Write-off of gross lease intangibles

 

 

 
(47,003
)
 

 
(47,003
)
Loan premium amortization and other

 

 

 
(867
)
 
(1,230
)
 
(2,097
)
Spin-off to SMTA
(899
)
 
(2
)
 
(901
)
 
(2,855,052
)
 
(37,888
)
 
(2,892,940
)
Gross balance, June 30, 2018
1,458

 
54

 
1,512

 
4,863,633

 
55,438

 
4,919,071

Accumulated depreciation and amortization
 
 
 
 
 
 
(661,537
)
 

 
(661,537
)
Other
 
 
 
 
 
 
(1
)
 

 
(1
)
Net balance, June 30, 2018
 
 
 
 
 
 
$
4,202,095

 
$
55,438

 
$
4,257,533

(1) Includes investments of $17.9 million in revenue producing capitalized expenditures, as well as $3.4 million of non-revenue producing capitalized expenditures as of June 30, 2018.
(2) The total accumulated depreciation and amortization associated with dispositions of real estate was $14.3 million as of June 30, 2018.
(3) For the six months ended June 30, 2018, the total (loss) gain on disposal of assets for properties held in use and held for sale was $(2.5) million and $2.7 million, respectively.
(4) Includes six deed-in-lieu properties with a real estate investment of $28.5 million that were transferred to the lender during the six months ended June 30, 2018.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases (including contractual fixed rent increases occurring on or after July 1, 2018) at June 30, 2018 (in thousands):
 
June 30,
2018
Remainder of 2018
$
182,714

2019
362,458

2020
355,473

2021
334,983

2022
311,806

Thereafter
2,222,648

Total future minimum rentals
$
3,770,082

Because lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum rentals do not include any contingent rent based on a percentage of the lessees' gross sales or lease escalations based on future changes in the CPI or other stipulated reference rate.

21


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
June 30, 2018
(Unaudited)


Loans Receivable
The following table details loans receivable, net of premiums and allowance for loan losses (in thousands):
 
June 30,
2018
 
December 31,
2017
Mortgage loans - principal
$
46,830

 
$
69,963

Mortgage loans - premiums, net of amortization
3,390

 
5,038

Allowance for loan losses

 
(389
)
Mortgages loans, net
50,220

 
74,612

Other notes receivable - principal
5,218

 
5,355

Allowance for loan losses

 

Other notes receivable, net
5,218

 
5,355

Total loans receivable, net
$
55,438

 
$
79,967

The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are three other notes receivable included within loans receivable, of which two notes totaling $3.5 million are secured by tenant assets and stock and the remaining note, with a balance of $1.7 million, is unsecured.

On January 16, 2018, the Operating Partnership funded a $35.0 million B-1 Term Loan as part of a syndicated loan and security agreement with Shopko as borrower and several banks as lenders. The B-1 Term Loan bears interest at a rate of 12.00% per annum and matures on June 19, 2020. Principal will be repaid in quarterly installments of $0.6 million commencing on November 1, 2018, while interest will be paid monthly. The loan is secured by Shopko’s assets in its $784 million asset-backed lending facility and is subordinate to other loans made under the syndicated loan and security agreement. The Operating Partnership received a commitment fee equal to 3.00% of the B-1 Term Loan. The B-1 Term Loan was contributed to SMTA in conjunction with the Spin-Off.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
June 30,
2018
 
December 31,
2017
In-place leases
$
368,450

 
$
591,551

Above-market leases
59,478

 
89,640

Less: accumulated amortization
(140,321
)
 
(271,288
)
Intangible lease assets, net
$
287,607

 
$
409,903

 
 
 
 
Below-market leases
$
169,149

 
$
216,642

Less: accumulated amortization
(43,244
)
 
(61,339
)
Intangible lease liabilities, net
$
125,905

 
$
155,303

The amounts amortized as a net increase to rental revenue for capitalized above and below-market leases were $1.4 million and $1.6 million for the three months ended June 30, 2018 and 2017, respectively, and $2.9 million and $3.4 million for the six months ended June 30, 2018 and 2017, respectively. The value of in place leases amortized and included in depreciation and amortization expense was $8.7 million and $10.9 million for the three months ended June 30, 2018 and 2017, respectively, and $18.7 million and $22.1 million for the six months ended June 30, 2018 and 2017, respectively.


22


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
June 30, 2018
(Unaudited)


Real Estate Assets Under Direct Financing Leases
The components of real estate investments held under direct financing leases were as follows (in thousands):
 
June 30,
2018
 
December 31,
2017
Minimum lease payments receivable
$
6,358

 
$
7,325

Estimated residual value of leased assets
24,552

 
24,552

Unearned income
(6,082
)
 
(7,012
)
Real estate assets under direct financing leases, net
$
24,828

 
$
24,865

Real Estate Assets Held for Sale
The following table shows the activity in real estate assets held for sale for the six months ended June 30, 2018 (dollars in thousands):
 
Number of Properties
 
Carrying
Value
Balance, December 31, 2017
15

 
$
48,929

Transfers from real estate investments held and used
6

 
14,090

Sales
(6
)
 
(10,257
)
Transfers to real estate investments held in use
(7
)
 
(25,715
)
Transfers to SMTA
(5
)
 
(7,853
)
Impairments

 
(369
)
Balance, June 30, 2018
3

 
$
18,825

Impairments

The following table summarizes total impairment losses recognized on the accompanying consolidated statements of operations and comprehensive income (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Real estate and intangible asset impairment
$
662

 
$
14,657

 
$
15,624

 
$
49,877

Write-off of lease intangibles, net
687

 
1,339

 
311

 
495

Recovery of loans receivable, previously impaired

 

 
(17
)
 

Total impairment loss
$
1,349

 
$
15,996

 
$
15,918

 
$
50,372


Impairments for the three months ended June 30, 2018 and 2017, were comprised of $1.3 million and $13.1 million on properties classified as held and used, respectively, and $2.9 million on properties classified as held for sale for the three months ended June 30, 2017.
Impairments for the six months ended June 30, 2018 and 2017, were comprised of $15.5 million and $36.0 million on properties classified as held and used, respectively, and $0.4 million and $14.4 million on properties classified as held for sale, respectively.


23


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Note 4. Debt
The debt of the Company and the Operating Partnership are the same, except for the presentation of the Convertible Notes which were issued by the Company. Subsequently, an intercompany note between the Company and the Operating Partnership was executed with terms identical to those of the Convertible Notes. Therefore, in the consolidated balance sheet of the Operating Partnership, the amounts related to the Convertible Notes are reflected as notes payable to Spirit Realty Capital, Inc., net. The Company's debt is summarized below:
 
Weighted Average Effective
Interest Rates
(1)
 
Weighted Average
Stated
Rates (2)
 
Weighted Average Maturity (3)
 
June 30,
2018
 
December 31,
2017
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facility
4.49
%
 
3.32
%
 
0.8
 
$
346,500

 
$
112,000

Term Loan
%
 
%
 
0.3
 

 

Master Trust Notes
5.50
%
 
5.27
%
 
5.5
 
170,154

 
2,248,504

CMBS
5.73
%
 
5.51
%
 
5.0
 
276,124

 
332,647

Related Party Notes Payable
0.99
%
 
1.00
%
 
9.4
 
29,368

 

Convertible Notes
5.32
%
 
3.28
%
 
1.8
 
747,500

 
747,500

Senior Unsecured Notes
4.65
%
 
4.45
%
 
8.2
 
300,000

 
300,000

Total debt
5.30
%
 
3.95
%
 
3.6
 
1,869,646

 
3,740,651

Debt discount, net
 
 
 
 
 
 
(20,042
)
 
(61,399
)
Deferred financing costs, net (4)
 
 
 
 
 
 
(17,472
)
 
(39,572
)
Total debt, net
 
 
 
 
 
 
$
1,832,132

 
$
3,639,680

(1) The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs, facility fees, and non-utilization fees, where applicable, calculated for the three months ended June 30, 2018 and based on the average principal balance outstanding during the period.
(2) Represents the weighted average stated interest rate based on the outstanding principal balance as of June 30, 2018.
(3) Represents the weighted average maturity based on the outstanding principal balance as of June 30, 2018.
(4) The Company records deferred financing costs for its Revolving Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.
Revolving Credit Facility
The Company has access to an unsecured credit facility, the Revolving Credit Facility, which matures on March 31, 2019 (extendable at the Operating Partnership's option to March 31, 2020, subject to satisfaction of certain requirements) and includes an accordion feature to increase the committed facility size up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments. The Operating Partnership may voluntarily prepay the Revolving Credit Facility, in whole or in part, at any time without premium or penalty, but subject to applicable LIBOR breakage fees, if any.
Borrowings bear interest at 1-Month LIBOR plus 0.875% to 1.55% per annum and require a facility fee in an amount equal to the aggregate revolving credit commitments (whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum. As of June 30, 2018, the Revolving Credit Facility bore interest at 1-Month LIBOR plus 1.25% and incurred a facility fee of 0.25% per annum.
In connection with placement and use of the Revolving Credit Facility, the Company has incurred costs of $4.8 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Revolving Credit Facility. The unamortized deferred financing costs relating to the Revolving Credit Facility were $1.0 million and $1.6 million as of June 30, 2018 and December 31, 2017, respectively, and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.
As of June 30, 2018, $346.5 million was outstanding and $453.5 million of borrowing capacity was available under the Revolving Credit Facility. The Operating Partnership's ability to borrow under the Revolving Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative

24


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

covenants. As of June 30, 2018, the Company and the Operating Partnership were in compliance with these financial covenants.
Term Loan
On November 3, 2015, the Company entered into a Term Loan Agreement with an initial maturity date of November 2, 2018, which may be extended at the Company's option pursuant to two one-year extension options, subject to the satisfaction of certain conditions and payment of an extension fee. In addition, an accordion feature allows the facility to be increased to $600.0 million, subject to obtaining additional lender commitments. Borrowings may be repaid without premium or penalty, and may be re-borrowed within 30 days up to the then available loan commitment and subject to occurrence limitations within any twelve-month period.
As of June 30, 2018, the Term Loan had a zero outstanding balance and $420.0 million of available borrowing capacity.The Term Loan Agreement provides that outstanding borrowings bear interest at 1-Month LIBOR plus 0.90% to 1.75% per annum, depending on the Company’s credit ratings.
As a result of entering into the Term Loan, the Company incurred origination costs of $2.4 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Term Loan. As of June 30, 2018 and December 31, 2017, the unamortized deferred financing costs relating to the Term Loan were $0.3 million and $0.7 million, respectively, and were recorded net against the principal balance of mortgages and notes payable as of June 30, 2018 and December 31, 2017, on the accompanying consolidated balance sheets.
Senior Unsecured Notes
On August 18, 2016, the Operating Partnership completed a private placement of $300.0 million aggregate principal amount of senior notes, which are guaranteed by the Company. The Senior Unsecured Notes were issued at 99.378% of their principal face amount, resulting in net proceeds of $296.2 million, after deducting transaction fees and expenses. The Senior Unsecured Notes accrue interest at a rate of 4.45% per annum, payable on March 15 and September 15 of each year, and mature on September 15, 2026. The Company filed a registration statement with the SEC to exchange the private Senior Unsecured Notes for registered Senior Unsecured Notes with substantially identical terms, which became effective on April 14, 2017. All $300.0 million aggregate principal amount of private Senior Unsecured Notes were tendered in the exchange for registered Senior Unsecured Notes.
The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed on or after June 15, 2026 (three months prior to the maturity date of the Senior Unsecured Notes), the redemption price will not include a make-whole premium.  
In connection with the offering, the Operating Partnership incurred $3.4 million in deferred financing costs and an offering discount of $1.9 million. These amounts are being amortized to interest expense over the life of the Senior Unsecured Notes. As of June 30, 2018 and December 31, 2017, the unamortized deferred financing costs relating to the Senior Unsecured Notes were $2.9 million and $3.0 million, respectively, and the unamortized discount was $1.6 million and $1.7 million, respectively, with both the deferred financing costs and offering discount recorded net against the Senior Unsecured Notes principal balance on the accompanying consolidated balance sheets.
In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of June 30, 2018, the Company and the Operating Partnership were in compliance with these financial covenants.

25


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Master Trust Notes
Master Trust 2013 and Master Trust 2014 are asset-backed securitization platforms through which the Company has raised capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans.
On January 23, 2018, the Company re-priced a private offering of the Master Trust 2014 Series 2017-1 notes with $674.2 million aggregate principal amount. As a result, the interest rate on the Class B Notes was reduced from 6.35% to 5.49%, while the other terms of the Class B Notes will remain unchanged. The terms of the Class A Notes were unaffected by the repricing. In connection with the re-pricing, the Company received $8.2 million in additional proceeds, that reduced the discount on the underlying debt.

On February 2, 2018, Spirit Realty, L.P., sold its holding of Master Trust 2014 Series 2014-2 notes with a principal balance of $11.6 million to a third-party. This transaction resulted in an increase in the Company's mortgages and notes payable, net balance as shown in the balance sheet.
On May 21, 2018, the Company retired $123.1 million of Master Trust 2013 Series 2013-1 Class A notes. There was no make-whole payment associated with the redemption of these notes. During the six months ended June 30, 2018 there were $15.2 million in prepayments on Master Trust 2013 Series 2013-2 Class A notes with $934 thousand in associated make-whole payments.
On May 31, 2018, in conjunction with the Spin-Off, the Company contributed Master Trust 2014, which is included in liabilities related to SMTA Spin-Off in our December 31, 2017 consolidated balance sheet.
The Master Trust Notes are summarized below:
 
 
Stated
Rates (1)
 
Maturity
 
June 30,
2018
 
December 31,
2017
 
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A2
 
 
 
 
 
$

 
$
252,437

Series 2014-2
 
 
 
 
 

 
222,683

Series 2014-3
 
 
 
 
 

 
311,336

Series 2014-4 Class A1
 
 
 
 
 

 
150,000

Series 2014-4 Class A2
 
 
 
 
 

 
358,664

Series 2017-1 Class A
 
 
 
 
 

 
515,280

Series 2017-1 Class B
 
 
 
 
 

 
125,400

Total Master Trust 2014 notes
 
 
 
 
 

 
1,935,800

Series 2013-1 Class A
 
 
 
 
 

 
125,000

Series 2013-2 Class A
 
5.3
%
 
5.5
 
170,154

 
187,704

Total Master Trust 2013 notes
 
5.3
%
 
5.5
 
170,154

 
312,704

Debt discount, net
 
 
 
 
 

 
(36,188
)
Deferred financing costs, net
 
 
 
 
 
(4,588
)
 
(24,010
)
Total Master Trust Notes, net
 
 
 
 
 
$
165,566

 
$
2,188,306

(1) Represents the individual series stated interest rate as of June 30, 2018 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of June 30, 2018.
As of June 30, 2018, the Master Trust 2013 notes were secured by 269 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Company which is a bankruptcy-remote, special purpose entity.
CMBS
As of June 30, 2018, indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under six fixed-rate non-recourse loans, excluding one loan in default, which have been securitized into CMBS and are secured by the borrowers' respective leased properties and related assets. The stated interest rates of the loans as

26


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

of June 30, 2018, excluding the defaulted loan, ranged from 4.67% to 6.00% with a weighted average stated interest rate of 5.35%. As of June 30, 2018, these fixed-rate loans were secured by 100 properties. As of June 30, 2018 and December 31, 2017, the unamortized deferred financing costs associated with these fixed-rate loans were $3.5 million and $3.9 million, respectively, and the unamortized net offering discount was $0.1 million as-of both periods. Both the deferred financing costs and offering discount were recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets and are being amortized to interest expense over the term of the respective loans.
On January 22, 2018, the Company entered into a new non-recourse loan agreement with Société Générale and Barclays Bank PLC as lenders. The loan is collateralized by a single distribution center property located in Katy, Texas. The loan has a term of ten years to maturity with an interest rate based on the 10-year mid-market swap rate (or Treasury rate, whichever is greater) plus a spread of 245 basis points. As a result of the issuance, the Company received approximately $84 million in proceeds. The loan along with the single distribution center property were contributed to SMTA as part of the Spin-Off.
As of June 30, 2018, a certain borrower remained in default under the loan agreement relating to one CMBS fixed-rate loan, where one property securing the respective loan was no longer generating sufficient revenue to pay the scheduled debt service. The default interest rate on this loan was 9.85%. The defaulted borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligation. As of June 30, 2018, the aggregate principal balance under the defaulted loan was $9.6 million, which includes $2.9 million of interest capitalized to the principal balance.
Related Party Mortgage Loans Payable
Wholly-owned subsidiaries of Spirit are the borrower on four mortgage loans payable held by SMTA and secured by six single-tenant commercial properties. In total, these mortgage notes had outstanding principal of $29.4 million at June 30, 2018, which is included in mortgages and notes payable, net on the consolidated balance sheets. As of June 30, 2018, these mortgage notes have a weighted average stated interest rate of 1.0%, a weighted average term of 9.4 years and are eligible for early repayment without penalty.
Convertible Notes
In May 2014, the Company issued $402.5 million aggregate principal amount of 2.875% convertible notes due in 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes due in 2021. Interest on the Convertible Notes is payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes will mature on May 15, 2019 and the 2021 Notes will mature on May 15, 2021. Proceeds from the issuance were contributed to the Operating Partnership and are recorded as a note payable to Spirit Realty Capital, Inc., on the consolidated balance sheets of the Operating Partnership.
The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Company's common stock, or a combination thereof. The initial conversion rate applicable to each series is 76.3636 per $1,000 principal note (equivalent to an initial conversion price of $13.10 per share of common stock, representing a 22.5% premium above the public offering price of the common stock offered concurrently at the time the Convertible Notes were issued). The conversion rate is subject to adjustment for certain anti-dilution events, including special distributions and regular quarterly cash dividends exceeding $0.16625 per share. As of June 30, 2018, the conversion rate was 87.013 per $1,000 principal note, which reflects the adjustment from the SMTA dividend distribution related to the Spin-Off, in addition to the other regular dividends declared during the life of the Convertible Notes. Earlier conversion may be triggered if shares of the Company's common stock trade higher than the established thresholds, if the Convertible Notes trade below established thresholds, or certain corporate events occur.
In connection with the issuance of the Convertible Notes, the Company recorded a discount of $56.7 million, which represents the estimated value of the embedded conversion feature for each of the Convertible Notes. The discount is being amortized to interest expense using the effective interest method over the term of each of the 2019 Notes and 2021 Notes. As of June 30, 2018 and December 31, 2017, the unamortized discount was $18.6 million and $23.7 million, respectively. The discount is shown net against the aggregate outstanding principal balance of the Convertible

27


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature is recorded in capital in excess of par value in the accompanying consolidated balance sheets, net of financing transaction costs.
In connection with the offering, the Company also incurred $19.6 million in deferred financing costs. This amount has been allocated on a pro-rata basis to each of the Convertible Notes and is being amortized to interest expense over the term of each note. As of June 30, 2018 and December 31, 2017, the unamortized deferred financing costs relating to the Convertible Notes were $6.2 million and $8.0 million, respectively, and recorded net against the Convertible Notes principal balance on the accompanying consolidated balance sheets.
Debt Extinguishment
During the six months ended June 30, 2018, the Company extinguished a total of $179.3 million aggregate principal amount of indebtedness, including the retirement of $123.1 million of Master Trust 2013 Series 2013-1 Class A notes and $56.2 million of CMBS debt. The extinguishments had a weighted average contractual interest rate of 5.69%. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $26.7 million.
During the six months ended June 30, 2017, the Company extinguished a total of $51.2 million aggregate principal amount of mortgage indebtedness with a weighted average contractual interest rate of 5.69%. As a result of these transactions, the Company recognized a de minimis net loss.
Debt Maturities
As of June 30, 2018, scheduled debt maturities of the Company’s Revolving Credit Facility, Term Loan, Senior Unsecured Notes, Master Trust 2013, CMBS and Convertible Notes, including balloon payments, are as follows (in thousands):
 
Scheduled
Principal
 
Balloon
Payment
 
Total
Remainder of 2018 (1)
$
5,635

 
$
9,624

 
$
15,259

2019 (2)
11,672

 
749,000

 
760,672

2020
12,164

 

 
12,164

2021
12,737

 
345,000

 
357,737

2022
13,315

 
42,400

 
55,715

Thereafter
28,410

 
639,689

 
668,099

Total
$
83,933

 
$
1,785,713

 
$
1,869,646

(1) The balloon payment balance in 2018 of $9.6 million includes $2.9 million of capitalized interest for the acceleration of principal payable following an event of default under one non-recourse CMBS loan with a stated maturity in 2018.
(2) 2019 includes the Revolving Credit Facility, which is extendible for one year at the borrower's option.

28


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Interest Expense
The following table is a summary of the components of interest expense related to the Company's borrowings (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Interest expense – Revolving Credit Facility (1)
$
2,849

 
$
1,325

 
$
4,201

 
$
2,557

Interest expense – Term Loan

 
2,511

 

 
4,757

Interest expense – Senior Unsecured Notes
3,337

 
3,338

 
6,675

 
6,675

Interest expense – mortgages and notes payable
23,480

 
27,860

 
56,187

 
56,078

Interest expense – Convertible Notes (2)
6,128

 
6,127

 
12,255

 
12,255

Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of deferred financing costs
2,573

 
2,423

 
5,552

 
4,823

Amortization of debt discount, net
3,689

 
3,242

 
8,252

 
6,304

Total interest expense
$
42,056

 
$
46,826

 
$
93,122

 
$
93,449

(1) Includes facility fees of approximately $0.6 million and $0.5 million for the three month periods ended June 30, 2018 and 2017, respectively, and $1.1 million for each of the six months ended June 30, 2018 and 2017.
(2) Included in interest expense on the Operating Partnership's consolidated statements of operations and comprehensive income are amounts paid to the Company by the Operating Partnership related to the notes payable to Spirit Realty Capital, Inc.
Note 5. Stockholders’ Equity and Partners' Capital
Common Stock
During the six months ended June 30, 2018, portions of awards of restricted common stock and performance share awards granted to certain of the Company's officers and other employees vested. The vesting of these awards, granted pursuant to the Amended Incentive Award Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Amended Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender 0.2 million shares of common stock valued at $1.7 million, solely to pay the associated statutory tax withholdings during the six months ended June 30, 2018.
Preferred Stock
As of June 30, 2018, the Company had 6.9 million shares of 6.00% Series A Preferred Stock outstanding. The Series A Preferred Stock pays cumulative cash dividends at the rate of 6.00% per annum on the liquidation preference of $25.00 per share (equivalent to $0.375 per share on a quarterly basis and $1.50 per share on an annual basis). During the six months ended June 30, 2018, the Company paid $5.2 million in Series A Preferred Stock dividends.
ATM Program
In November 2016, the Company's Board of Directors approved a new ATM Program and the Company terminated its existing program. As of June 30, 2018, no shares of the Company's common stock had been sold under the new ATM Program and $500.0 million in gross proceeds capacity remained available.
Stock Repurchase Programs
In May 2018, the Company's Board of Directors approved a new stock repurchase program, which authorizes the Company to repurchase up to $250.0 million of its common stock. These purchases can be made in the open market or through private transactions from time to time over the 18-month time period following authorization, depending on prevailing market conditions and applicable legal and regulatory requirements. Purchase activity will be dependent on various factors, including the Company's capital position, operating results, funds generated by asset sales, dividends that may be required by those sales, and investment options that may be available, including acquiring new properties or retiring debt. The stock repurchase program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company's discretion. As of June 30, 2018, no shares of the Company's

29


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

common stock had been repurchased under the new program and the full $250.0 million in gross repurchase capacity remained available.
In August 2017, the Company's Board of Directors approved a stock repurchase program, which authorized the Company to repurchase up to $250.0 million of its common stock during the 18-month time period following authorization. During the six months ended June 30, 2018, prior to the SMTA Spin-Off, 21.2 million shares of the Company's common stock were repurchased in open market transactions under this stock repurchase program at a weighted average price of $7.90 per share, and no additional capacity remains under this stock repurchase program. Fees associated with the repurchase of $0.5 million are included in accumulated deficit.
Dividends Declared
For the six months ended June 30, 2018, the Company's Board of Directors declared the following preferred and common stock dividends:
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
(in thousands)
 
Payment Date
Preferred Stock
 
 
 
 
 
 
 
 
March 5, 2018
 
$
0.375

 
March 15, 2018
 
$
2,588

 
March 30, 2018
May 29, 2018
 
$
0.375

 
June 15, 2018
 
$
2,588

 
June 29, 2018
Common Stock
 
 
 
 
 
 
 
 
March 5, 2018
 
$
0.18

 
March 30, 2018
 
$
78,581

 
April 13, 2018
May 29, 2018
 
$
0.18

 
June 29, 2018
 
$
77,143

 
July 13, 2018
The Common Stock dividend declared on May 29, 2018 was paid on July 13, 2018 and is included in accounts payable, accrued expenses and other liabilities as of June 30, 2018.
Note 6. Commitments and Contingencies
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are typically insured against such claims.

In 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC ("Haggen"), filed petitions for bankruptcy. At the time of the filing, Haggen leased 20 properties from a subsidiary of the Company under a master lease. The Company and Haggen restructured the master lease in an initial settlement agreement with approved claims of $21.0 million. In 2016, the Company entered into a second settlement agreement with both Haggen and Albertsons, LLC for $3.4 million and $3.0 million, respectively. To date, the Company has collected $5.5 million of the total claims and there is no guaranty that the remaining claims of $21.9 million will be paid or otherwise satisfied in full.
As of June 30, 2018, there were no outstanding claims against the Company that are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of June 30, 2018, the Company had commitments totaling $57.6 million, of which $21.8 million relates to future acquisitions, with the majority of the remainder to fund revenue generating improvements on properties the Company currently owns. Commitments related to acquisitions contain standard cancellation clauses contingent on the results of due diligence. Of the total commitments of $57.6 million, $56.0 million is expected to be funded during fiscal year 2018. In addition, the Company is contingently liable for $5.7 million of debt owed by one of its former tenants and is indemnified by that former tenant for any payments the Company may be required to make on such debt.
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of

30


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements. As of June 30, 2018, no accruals have been made.

Note 7. Fair Value Measurements
Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
 
 
Fair Value Hierarchy Level
Description
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
June 30, 2018
 
 
 
 
 
 
 
 
Long-lived assets held and used
 
$
4,818

 
$

 
$

 
$
4,818

Long-lived assets held for sale
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Long-lived assets held and used
 
$
28,312

 
$

 
$

 
$
28,312

Long-lived assets held for sale
 
$
42,142

 
$

 
$

 
$
42,142

 
 
 
 
 
 
 
 
 
Real estate and the related intangible assets are evaluated for impairment based on certain indicators including, but not limited to: the asset being held for sale, vacant, non-operating or the lease on the asset expiring in 60 days or less. The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; recently quoted bid or ask prices, or market prices for comparable properties; estimates of cash flow, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, and expenses based upon market conditions; and expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate and intangible assets falls within Level 3 of the fair value hierarchy.
During the six months ended June 30, 2018 and for the year ended December 31, 2017, we determined that two and 18 long-lived assets held and used, respectively, were impaired.
For 17 of the held and used properties impaired during the year ended December 31, 2017, the Company estimated property fair value using price per square foot of comparable properties. The following table provides information about the price per square foot of comparable properties used as inputs (price per square foot in dollars):
 
 
June 30, 2018
 
December 31, 2017
Description
 
Range
 
Weighted Average
 
Square Footage
 
Range
 
Weighted Average
 
Square Footage
Long-lived assets held and used by asset type
 
 
 
 
 
 
Retail
 
$

 
$

 

 
$13.66 - $305.05
 
$
55.68

 
364,940

Industrial
 
$

 
$

 

 
$3.30 - $8.56
 
$
5.35

 
370,824

Office
 
$

 
$

 

 
$24.82 - $244.86
 
$
40.14

 
161,346


31


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

For the two held and used properties impaired during the six months ended June 30, 2018 and one held and used property impaired during the year ended December 31, 2017, the Company estimated property fair value using price per square foot based on a listing price or a broker opinion of value. The following table provides information about the price per square foot based on a listing price and broker opinion of value used as inputs (price per square foot in dollars):
 
 
June 30, 2018
 
December 31, 2017
Description
 
Range
 
Weighted Average
 
Square Footage
 
Range
 
Weighted Average
 
Square Footage
Long-lived assets held and used by asset type
 
 
 
 
 
 
Retail
 
$
232.81

 
$
232.81

 
16,000

 
$
88.89

 
$
88.89

 
22,500

Office
 
$
225.04

 
$
225.04

 
5,999

 
$

 
$

 

For the eight long-lived assets held for sale impaired during the year ended December 31, 2017, the Company estimated fair value of held for sale properties using price per square foot from the signed purchase and sale agreements as follows (price per square foot in dollars):
 
 
June 30, 2018
 
December 31, 2017
Description
 
Range
 
Weighted Average
 
Square Footage
 
Range
 
Weighted Average
 
Square Footage
Long-lived assets held for sale by asset type
 
 
 
 
 
 
Retail
 
$

 
$

 

 
$55.30 - $346.23
 
$
230.52

 
150,376

Industrial
 
$

 
$

 

 
$24.02 - $54.21
 
$
37.09

 
223,747

Estimated Fair Value of Financial Instruments
Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash and escrow deposits, and accounts receivable and payable. Generally, these assets and liabilities are short-term in duration and are recorded at cost, which approximates fair value, on the accompanying consolidated balance sheets.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair values. The fair values of financial instruments are estimates based upon market conditions and perceived risks at June 30, 2018 and December 31, 2017. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

32


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

The estimated fair values of the following financial instruments have been derived based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 of the fair value hierarchy. The following table discloses fair value information for these financial instruments (in thousands): 
 
June 30, 2018
 
December 31, 2017
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Loans receivable, net
$
55,438

 
$
58,408

 
$
79,967

 
$
82,886

Revolving Credit Facility
346,500

 
346,470

 
112,000

 
111,997

Term Loan, net

 

 

 

Senior Unsecured Notes, net (1)
295,542

 
289,236

 
295,321

 
299,049

Mortgages and notes payable, net (1)
467,334

 
495,046

 
2,516,478

 
2,657,599

Convertible Notes, net (1)
722,756

 
750,624

 
715,881

 
761,440

Investment in Master Trust 2014
33,581

 
33,581

 

 

(1) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.

Note 8. Discontinued Operations
On May 31, 2018, the Company completed the Spin-Off of SMTA by means of a pro rata distribution of one share of SMTA common stock for every ten shares of Spirit common stock held by each of Spirit's stockholders of record as of May 18, 2018. The Company determined that the Spin-Off represented a strategic shift that has a major effect on the Company's results and, therefore, SMTA's operations qualify as discontinued operations. Accordingly, beginning in the second quarter of 2018, the historical financial results of SMTA are reflected in our consolidated financial statements as discontinued operations for all periods presented.
The assets and liabilities related to discontinued operations are separately classified on the consolidated balance sheets as of December 31, 2017, and the operations have been classified as (loss) income from discontinued operations on the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017. The consolidated statements of cash flows and all other notes herein include the results of both continuing operations and discontinued operations.
Goodwill was allocated to SMTA based on the fair value of SMTA relative to the total fair value of the Company, resulting in a reduction in goodwill of the Company of $28.7 million as a result of the Spin-Off. This reduction in the Company's goodwill is reflected in the SMTA dividend distribution in the accompanying consolidated statement of stockholders' equity and consolidated statement of partners' capital.

33


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

The table below summarizes the Company's assets and liabilities related to discontinued operations reported in its consolidated balance sheets.
 
 
December 31, 2017
(in thousands)
 
 
Assets
 
 
Investments:
 
 
Real estate investments:
 
 
Land and improvements
 
$
990,575

Buildings and improvements
 
1,702,926

Total real estate investments
 
2,693,501

Less: accumulated depreciation
 
(572,075
)
 
 
2,121,426

Loans receivable, net
 
1,501

Intangible lease assets, net
 
103,651

Real estate assets held for sale, net
 
28,460

Net investments
 
2,255,038

Cash and cash equivalents
 
6

Deferred costs and other assets, net
 
109,096

Goodwill
 
28,740

Total assets of discontinued operations
 
$
2,392,880

 
 
 
Liabilities
 
 
Mortgages and notes payable, net
 
$
1,926,834

Intangible lease liabilities, net
 
24,729

Accounts payable, accrued expenses and other liabilities
 
17,277

Total liabilities of discontinued operations
 
$
1,968,840


34


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

The table below provides information about income and expenses related to the Company's discontinued operations reported in its consolidated statements of operations and comprehensive income.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rentals
 
$
39,843

 
$
57,569

 
$
99,816

 
$
115,408

Interest income on loans receivable
 
663

 
120

 
1,495

 
239

Tenant reimbursement income
 
306

 
308

 
856

 
793

Other income
 
392

 
1,968

 
776

 
2,450

Total revenues
 
41,204

 
59,965

 
102,943

 
118,890

Expenses:
 
 
 
 
 
 
 
 
General and administrative
 
112

 
994

 
707

 
2,236

Transaction costs
 
16,033

 
485

 
19,965

 
485

Property costs (including reimbursable)
 
1,405

 
1,852

 
3,268

 
4,670

Real estate acquisition costs
 
338

 
10

 
339

 
(97
)
Interest
 
18,508

 
18,775

 
46,521

 
37,592

Depreciation and amortization
 
14,038

 
20,779

 
35,461

 
41,898

Impairments (recoveries)
 
(129
)
 
5,922

 
10,943

 
12,415

Total expenses
 
50,305

 
48,817

 
117,204

 
99,199

(Loss) income from discontinued operations before other income (loss) and income tax expense
 
(9,101
)
 
11,148

 
(14,261
)
 
19,691

Other income:
 
 
 
 
 
 
 
 
(Loss) gain on debt extinguishment
 
(108
)
 
1

 
(363
)
 
1

Gain (loss) on disposition of assets
 
1,582

 
8,389

 
(274
)
 
19,593

Total other income (loss)
 
1,474

 
8,390

 
(637
)
 
19,594

(Loss) income from discontinued operations before income tax expense
 
(7,627
)
 
19,538

 
(14,898
)
 
39,285

Income tax expense
 
(26
)
 
(105
)
 
(115
)
 
(153
)
(Loss) income from discontinued operations
 
$
(7,653
)
 
$
19,433

 
$
(15,013
)
 
$
39,132


35


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

The table below provides information about operating and investing cash flows related to the Company's discontinued operations reported in its consolidated statements of cash flows.
 
 
Six Months Ended June 30,
 
 
2018
 
2017
(in thousands)
 
 
 
 
Net cash provided by operating activities
 
$
36,589

 
$
79,950

Net cash (used in) provided by investing activities
 
(31,452
)
 
74,130

Continuing Involvement
Subsequent to the Spin-Off, the Company will have continuing involvement with SMTA through the terms of the Asset Management Agreement and Property Management and Servicing Agreement. For detail on the continuing involvement, see Note 11 Related Party Transactions and Arrangements. Subsequent to the Spin-Off, the Company has had cash inflows from SMTA of $9.6 million and cash outflows to SMTA of $7.1 million.
Note 9. Incentive Award Plan
Restricted Shares of Common Stock
During the six months ended June 30, 2018, the Company granted 1.0 million restricted shares under the Amended Incentive Award Plan to certain executive officers and employees. The Company recorded $7.9 million in deferred compensation associated with these grants, which will be recognized in expense over the service period of the awards. As of June 30, 2018, there were approximately 1.9 million unvested restricted shares outstanding.
In connection with the Spin-Off on May 31, 2018, holders of unvested restricted shares of Spirit common stock received unrestricted shares of SMTA common stock on a pro rata basis of one share of SMTA common stock for every ten shares of Spirit common stock. The distribution of unrestricted SMTA shares is considered an award modification that did not result in incremental fair value and, therefore, incremental compensation expense was not recognized. However, since the vesting period of the unrestricted SMTA shares was accelerated, $1.4 million of unrecognized stock-based compensation expense was accelerated and is reflected within general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
Performance Share Awards
During the six months ended June 30, 2018, the Board of Directors, or committee thereof, approved target grants of 504,497 performance shares to executive officers of the Company. The performance period of these grants runs primarily through December 31, 2020. Potential shares of the Company's common stock that each participant is eligible to receive is based on the initial target number of shares granted, multiplied by a percentage range between 0% and 250%. Grant date fair value was calculated using the Monte Carlo simulation model, which incorporated stock price correlation, projected dividend yields and other variables over the time horizons matching the performance periods. Stock-based compensation expense associated with unvested performance share awards is recognized on a straight-line basis over the minimum required service period, which is generally three years.
In connection with the Spin-Off and in accordance with the rights granted per the Amended Incentive Award Plan, the Board of Directors made an equitable adjustment for all performance share awards outstanding, resulting in 134,000 incremental target shares. Because the fair value of the outstanding performance awards the day prior to and the day after the Spin-off did not materially change, there was no change to unrecognized compensation expense and incremental compensation expense did not result.
Approximately $1.2 million and $0.8 million in dividend rights have been accrued for non-vested performance share awards outstanding as of June 30, 2018 and December 31, 2017, respectively. For outstanding non-vested awards at June 30, 2018, 2.5 million shares would have been released based on the Company's TSR relative to the specified peer groups through that date.

36


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Stock-based Compensation Expense
For the three months ended June 30, 2018 and 2017, the Company recognized $4.7 million and $9.2 million, respectively, in stock-based compensation expense, and for the six months ended June 30, 2018 and 2017, the Company recognized $9.1 million and $11.4 million, respectively, in stock-based compensation expense which is included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income.
As of June 30, 2018, the remaining unamortized stock-based compensation expense totaled $21.6 million, with $11.8 million related to restricted stock awards and $9.8 million related to performance share awards. Amortization is recognized as the greater of the amount amortized on a straight-line basis over the service period of each applicable award or the amount vested over the vesting periods.
Note 10. Income Per Share and Partnership Unit
Income per share and unit has been computed using the two-class method, which is computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of shares of common stock outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both shares of common stock and participating securities based on the weighted average shares outstanding during the period. Classification of the Company's unvested restricted stock, which contain rights to receive non-forfeitable dividends, are deemed participating securities under the two-class method. Under the two-class method, earnings attributable to unvested restricted shares are deducted from income from continuing operations in the computation of net income attributable to common stockholders and partners.

37


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share and unit computed using the two-class method (dollars in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Basic and diluted income:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
24,817

 
$
3,773

 
$
62,895

 
$
(3,097
)
Less: income attributable to unvested restricted stock
(345
)
 
(183
)
 
(728
)
 
(417
)
Less: dividends paid to preferred stockholders
(2,588
)
 

 
(5,176
)
 

Income (loss) used in basic and diluted income (loss) per share from continuing operations
21,884

 
3,590

 
56,991

 
(3,514
)
(Loss) income used in basic and diluted (loss) income per share from discontinued operations
(7,653
)
 
19,433

 
(15,013
)
 
39,132

Net income attributable to common stockholders used in basic and diluted income per share
$
14,231

 
$
23,023

 
$
41,978

 
$
35,618

 
 
 
 
 
 
 
 
Basic weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
430,140,787

 
480,251,922

 
438,266,822

 
481,992,408

Less: Unvested weighted average shares of restricted stock
(2,006,547
)
 
(1,149,654
)
 
(1,808,234
)
 
(1,147,357
)
Weighted average shares of common stock outstanding used in basic income per share
428,134,240

 
479,102,268

 
436,458,588

 
480,845,051

Net income per share attributable to common stockholders - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.01

 
$
0.13

 
$
(0.01
)
Discontinued operations
(0.02
)
 
0.04

 
(0.03
)
 
0.08

Net income per share attributable to common stockholders - basic
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

 
 
 
 
 
 
 
 
Dilutive weighted average shares of common stock outstanding: (1)
 
 
 
 
 
 
 
Unvested performance shares
884,694

 

 
557,563

 

Weighted average shares of common stock outstanding used in diluted income per share
429,018,934

 
479,102,268

 
437,016,151

 
480,845,051

Net income per share attributable to common stockholders - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.01

 
$
0.13

 
$
(0.01
)
Discontinued operations
(0.02
)
 
0.04

 
(0.03
)
 
0.08

Net income per share attributable to common stockholders - diluted
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

 
 
 
 
 
 
 
 
Potentially dilutive shares of common stock
 
 
 
 
 
 
 
Unvested shares of restricted stock
424,536

 

 
338,981

 
48,491

Total
424,536

 

 
338,981

 
48,491

(1)  Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.
The Company intends to satisfy its exchange obligation for the principal amount of the Convertible Notes to the note holders entirely in cash; therefore, the "if-converted" method does not apply and the treasury stock method is being used. For the three and six months ended June 30, 2018, the Company's average stock price was below the conversion price, resulting in zero potentially dilutive shares related to the conversion spread for both periods.

38


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Note 11. Related Party Transactions and Arrangements
Related Party Agreements
In conjunction with the Spin-Off, the Company and SMTA entered into certain agreements, including the Separation and Distribution Agreement, Tax Matters Agreement, Registration Rights Agreement and Insurance Sharing Agreement, which provide a framework for the relationship between the Company and SMTA after the Spin-Off, by which Spirit may incur certain expenses on behalf of SMTA which must be reimbursed in a timely manner. As part of the Separation and Distribution Agreement, Spirit contributed $3.0 million of cash to SMTA at time of the Spin-Off. Additionally, in relation to rental payments received by SMTA subsequent to the Spin-Off that relate to rents prior to the Spin-Off, SMTA will reimburse $2.0 million to Spirit within 60 days of the Spin-Off. As of June 30, 2018, the Company had an accrued receivable balance of $3.2 million and an accrued payable balance of $1.5 million in connection with these matters.
Related Party Asset Management Agreement
In conjunction with the Spin-off, the Company entered into the Asset Management Agreement pursuant to which Spirit Realty, L.P. will provide various services subject to the supervision of SMTA's Board of Trustees, including, but not limited to: (i) performing all of SMTA's day-to-day functions, (ii) sourcing, analyzing and executing on investments and dispositions, (iii) determining investment criteria, (iv) performing investment and liability management duties, including financing and hedging, and (v) performing financial and accounting management. For its services, the Company is entitled to an annual management fee of $20.0 million per annum, payable monthly in arrears. Additionally, the Company may be entitled to, under certain circumstances, a promoted interest fee based on the total shareholder return of SMTA's common shares during the relevant period, as well as a termination fee. No revenue for the promoted interest fee or termination fee has been recognized as they do not meet the criteria for recognition under ASC 606-10 as of June 30, 2018. Asset management fees of $1.7 million were earned during the three and six months ended June 30, 2018 for services performed from June 1, 2018 through June 30, 2018 and are included in related party fee income in the consolidated statements of operations and comprehensive income. As of June 30, 2018, the Company had an accrued receivable balance of $1.7 million related to the asset management fees.
Related Party Property Management and Servicing Agreement
The Operating Partnership provides property management services and special services for Master Trust 2014. The property management fees accrue daily at 0.25% per annum of the collateral value of the Master Trust 2014 collateral pool less any specially serviced assets, and the special servicing fees accrue daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced per the terms of the Property Management and Servicing Agreement dated May 20, 2014. Property management fees of $0.5 million and special servicing fees of $51.5 thousand were earned during the three and six months ended June 30, 2018, for services performed from June 1, 2018 through June 30, 2018, and are included in related party fee income in the consolidated statements of operations and comprehensive income. As of June 30, 2018, the Company had an accrued receivable balance of $0.4 million related to the property management fees.
Investments in SMTA
In conjunction with the Spin-Off, SMTA issued to the Operating Partnership and one of its affiliates, both wholly-owned subsidiaries of Spirit, a total of 6.0 million shares of Series A preferred stock with an aggregate liquidation preference of $150.0 million (the "SMTA Preferred Stock"). The SMTA Preferred Stock pays cash dividends at the rate of 10.0% per annum on the liquidation preference of $25.00 per share (equivalent to $0.625 per share on a quarterly basis and $2.50 per share on an annual basis). Spirit received $1.3 million in cash dividends during the three and six months ended June 30, 2018 that are reflected as preferred dividend income from SMTA in the consolidated statements of operations and comprehensive income. Preferred dividend income is recognized when dividends are declared. The carrying value of the SMTA Preferred Stock is $150.0 million as of June 30, 2018, reflected in the consolidated balance sheets and will be accounted for at cost, less impairments, if any.
Prior to the Spin-Off, the Operating Partnership contributed certain assets to SubREIT in exchange for $5.0 million in SubREIT preferred shares. Then, on the Distribution Date, Spirit Realty, L.P. sold the SubREIT preferred shares to a third party for $5.0 million in cash.

39


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
June 30, 2018
(Unaudited)

Related Party Mortgage Loans Payable
Wholly-owned subsidiaries of Spirit are the borrower on four mortgage loans payable to SMTA and secured by six single-tenant commercial properties owned by Spirit. In total, these mortgage notes had an outstanding principal balance of $29.4 million at June 30, 2018, which is included in mortgages and notes payable, net on the consolidated balance sheet. The notes incurred interest expense of $24.5 thousand for the three and six months ended June 30, 2018, which is included in interest expense in the consolidated statements of operations and comprehensive income. As of June 30, 2018, these mortgage notes have a weighted-average stated interest rate of 1.0%, a weighted-average term of 9.4 years and are eligible for early repayment without penalty.
Related Party Notes Receivable
In conjunction with the Master Trust 2014 Series 2017-1 notes issuance completed in December 2017, the Operating Partnership, as sponsor of the issuance, retained a 5.0% economic interest in the Master Trust 2014 Series 2017-1 notes as required by the risk retention rules issued under 17 CFR Part 246. The principal amount receivable under the notes was $33.6 million at June 30, 2018 and is included in Investment in Master Trust 2014 on the consolidated balance sheet. The notes generated interest income of $128.2 thousand for the three and six months ended June 30, 2018, which is included in interest income on loans receivable in the consolidated statements of operations and comprehensive income. The notes have a weighted-average stated interest rate of 4.6% with a remaining term of 4.5 years to maturity as of June 30, 2018. The notes are classified as held-to-maturity and, as of June 30, 2018, the amortized cost basis is equal to carrying value.
Note 12. Subsequent Events
Utilization of Term Loan
Subsequent to June 30, 2018, the Company fully drew on the available $420.0 million of borrowing capacity under the Term Loan, and utilized the borrowings to pay down the Revolving Credit Facility and for other general corporate purposes.



40



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this quarterly report, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).
The following risks and uncertainties, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
industry and economic conditions;
volatility and uncertainty in the financial markets, including potential fluctuations in the CPI;
our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate, integrate and manage diversifying acquisitions or investments;
the financial performance of our retail tenants and the demand for retail space;
our ability to diversify our tenant base;
the nature and extent of future competition;
increases in our costs of borrowing as a result of changes in interest rates and other factors;
our ability to access debt and equity capital markets;
our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;
our ability and willingness to renew our leases upon expiration and to reposition our properties on the same or better terms upon expiration in the event such properties are not renewed by tenants or we exercise our rights to replace existing tenants upon default;
the impact of any financial, accounting, legal or regulatory issues or litigation that may affect us or our major tenants;
our ability to manage our expanded operations;
our ability and willingness to maintain our qualification as a REIT;
uncertainties as to the impact of the Spin-Off on our business; and
other risks inherent in the real estate business, including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments and potential damages from natural disasters.
The factors included in this quarterly report, including the documents incorporated by reference, and documents we subsequently file with the SEC and incorporate by reference, are not exhaustive and additional factors could adversely affect our business and financial performance. Additional factors that may cause risks and uncertainties include those discussed in the sections entitled "Business", "Risk Factors" and "Management's Discussion & Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. All forward-looking statements are based on information that was available, and speak only, to the date on which they were made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

41



Overview
Spirit Realty Capital, Inc. is a New York Stock Exchange listed company under the ticker symbol "SRC." We are a self-administered and self-managed REIT with in-house capabilities including acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting and capital markets. We primarily invest in single-tenant, operationally essential real estate assets throughout the U.S., which are generally acquired through strategic sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high quality tenants with business operations within retail, office, data centers and industrial property types. Single tenant, operationally essential real estate consists of properties that are generally free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. In support of our primary business of owning and leasing real estate, we have also strategically originated or acquired long-term, commercial mortgages and other loans to provide a range of financing solutions to our tenants.
As of June 30, 2018, our owned real estate represented investments in 1,458 properties. Our properties are leased to 250 tenants across 49 states and 32 industries. As of June 30, 2018, our owned properties were approximately 99.6% occupied (based on the number of economically yielding properties). In addition, our investment in real estate includes commercial mortgage and other loans receivable primarily secured by 54 real estate properties or other related assets.
Our operations are primarily carried out through the Operating Partnership. OP Holdings, one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of the Operating Partnership.
Although the Operating Partnership is wholly-owned by us, in the future, we may issue partnership interests in the Operating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in the Operating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in the Operating Partnership are issued.
We have elected to be taxed as a REIT for federal income tax purposes and believe we have been organized and have operated in a manner that allows us to qualify as a REIT for federal income tax purposes.
On May 31, 2018, we completed a Spin-Off of all of our interests in the assets that collateralize Master Trust 2014, our properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, SMTA. Upon completion of the Spin-Off, our stockholders received a distribution of common shares of beneficial interest in SMTA, which are treated as a taxable distribution to them. Beginning in the second quarter of 2018, the historical financial results of SMTA are reflected in our consolidated financial statements as discontinued operations for all periods presented, see Note 8 to the accompanying consolidated financial statements for further discussion.
Highlights
For the three months ended June 30, 2018:
Generated net income from continuing operations of $0.05 versus $0.01 per share, FFO of $0.16 versus $0.18 per share and AFFO of $0.20 versus $0.21 per share, in each case, compared to same quarter in 2017.
Real estate portfolio occupancy was 99.6% as of June 30, 2018.
Repurchased 8.1 million shares of outstanding common stock, prior to the Spin-Off of SMTA, at a weighted average price of $7.93.
Spirit's corporate liquidity was $882.8 million as of June 30, 2018, including availability under its unsecured line of credit, term loan and cash available for investment.
On May 31, 2018, successfully completed the previously announced spin-off of SMTA with the distribution of one share of SMTA common stock for every ten shares of Spirit common stock to all of Spirit's stockholders.


42



Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and various other assumptions deemed reasonable under the circumstances. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2017 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have not made any material changes to these policies during the periods covered by this quarterly report.
Results of Continuing Operations
Comparison of Three Months Ended June 30, 2018 to Three Months Ended June 30, 2017
 
Three Months Ended June 30,
(In Thousands)
2018
 
2017
 
 Change
 
 % Change
Revenues:
 
 
 
 
 
 
 
Rentals
$
95,599

 
$
102,918

 
$
(7,319
)
 
(7.1
)%
Interest income on loans receivable
294

 
754

 
(460
)
 
(61.0
)%
Earned income from direct financing leases
465

 
518

 
(53
)
 
(10.2
)%
Tenant reimbursement income
2,637

 
4,172

 
(1,535
)
 
(36.8
)%
Related party fee income
2,219

 

 
2,219

 
100.0
 %
Other income
1,245

 
308

 
937

 
NM

Total revenues
102,459

 
108,670

 
(6,211
)
 
(5.7
)%
Expenses:
 
 
 
 
 
 
 
General and administrative
13,520

 
21,868

 
(8,348
)
 
(38.2
)%
Property costs (including reimbursable)
4,806

 
7,780

 
(2,974
)
 
(38.2
)%
Real estate acquisition costs
70

 
414

 
(344
)
 
(83.1
)%
Interest
23,548

 
28,051

 
(4,503
)
 
(16.1
)%
Depreciation and amortization
39,942

 
43,441

 
(3,499
)
 
(8.1
)%
Impairments
1,478

 
10,074

 
(8,596
)
 
(85.3
)%
Total expenses
83,364

 
111,628

 
(28,264
)
 
(25.3
)%
Income (loss) from continuing operations before other income and income tax expense
19,095

 
(2,958
)
 
22,053

 
NM

Other income:
 
 
 
 
 
 
 
Gain on debt extinguishment
5,509

 
7

 
5,502

 
NM

(Loss) gain on disposition of assets
(860
)
 
6,884

 
(7,744
)
 
NM

Preferred dividend income from SMTA
1,250

 

 
1,250

 
100.0
 %
Total other income
5,899

 
6,891

 
(992
)
 
(14.4
)%
Income from continuing operations before income tax expense
24,994

 
3,933

 
21,061

 
NM

Income tax expense
(177
)
 
(160
)
 
(17
)
 
10.6
 %
Income from continuing operations
$
24,817

 
$
3,773

 
$
21,044

 
NM

NM - Percentages over 100% are not displayed.

43



REVENUES
Rentals
Rental revenue from continuing operations for the comparative period decreased, primarily driven by a decrease in contractual rent. Our contractual rental revenue between periods decreased 7.4% as we were a net disposer of income producing real estate over the trailing twelve-month period. During the twelve months ended June 30, 2018, we disposed of 59 properties with a Real Estate Investment Value of $236.4 million, while acquiring five properties with a Real Estate Investment Value of $65.0 million.
Non-cash rentals for the three months ended June 30, 2018 and 2017 were $4.9 million and $6.4 million, respectively. These amounts represent approximately 5.1% and 6.2% of total rental revenue for the three months ended June 30, 2018 and 2017, respectively.
Interest income on loans receivable
The decrease in interest income on loans receivable period-over-period from continuing operations relates to the decrease in outstanding principal on mortgage loans over the trailing twelve-month period, where one mortgage loan collateralized by 26 properties was paid off. This was partially offset by the issuance of a new mortgage loan over the trailing twelve-month period which is collateralized by 11 properties as of June 30, 2018. This activity resulted in a decrease in outstanding principal on mortgage loans receivable of $7.4 million over the comparative periods.
Tenant reimbursement income
We have a number of leases that require our tenants to reimburse us for certain property costs we incur, which we record on a gross basis. As such, tenant reimbursement income is driven by the tenant reimbursable property costs described below, less an allowance for reimbursable expenses determined to be uncollectible from our tenants.
Related party fee income
In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provide a management team that is responsible for implementing SMTA’s business strategy and performing certain services for SMTA. Under this agreement, we recognized $1.7 million of revenues for the month of June 2018.
Additionally, we provide property management services and special services for Master Trust 2014, which was contributed to SMTA as part of the Spin-Off. Therefore, for the month of June 2018 we recognized $0.5 million in revenue under the terms of the Property Management and Servicing Agreement.
Other income
The driver for the increase in other income was the pre-payment penalty income of $1.0 million received in 2018 when one of our mortgage loans receivable, which was collateralized by 26 properties, was paid off prior to its scheduled maturity.
EXPENSES
General and administrative
The period-over-period decrease in general and administrative expenses is primarily due to $11.1 million in severance related costs, comprising $4.2 million of cash compensation and $6.9 million of non-cash compensation, recorded in the three months ended June 30, 2017 following the departure of one executive officer. There were no severance related costs incurred in the current period, but the decrease was partially offset by higher compensation recorded in the three months ended June 30, 2018.
Additionally, there was a decrease in professional fees, primarily legal fees, of $0.8 million and a decrease in bad debt expense of $0.7 million period-over-period. The decrease in bad debt expense was primarily a result of certain properties operated by tenants in the entertainment and movie theater industries for which the rent had been determined to be uncollectible for the three months ended June 30, 2017, whereas there was no bad debt expense recognized in continuing operations for the three months ended June 30, 2018.

44



Property costs (including reimbursable)
For the three months ended June 30, 2018, property costs were $4.8 million (including $3.6 million of tenant reimbursable expenses) compared to $7.8 million (including $4.4 million of tenant reimbursable expenses) for the same period in 2017. The decrease in non-reimbursable costs of $2.2 million was driven by a decrease in vacant properties and distressed tenants.
Interest
The decrease in interest expense is primarily related to the extinguishment of $327.7 million principal outstanding of Master Trust 2013 and CMBS debt during the twelve months ended June 30, 2018. Additionally, there is no interest expense for the Term Loan for the three months ended June 30, 2018 as the facility was not utilized during this period.
The following table summarizes our interest expense on related borrowings:
 
Three Months Ended 
 June 30,
(In Thousands)
2018
 
2017
Interest expense – Revolving Credit Facility (1)
$
2,849

 
$
1,325

Interest expense – Term Loan

 
2,511

Interest expense – Senior Unsecured Notes
3,337

 
3,338

Interest expense – mortgages and notes payable
6,627

 
10,482

Interest expense – Convertible Notes
6,128

 
6,127

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
2,005

 
2,095

Amortization of debt discount, net
2,602

 
2,173

Total interest expense
$
23,548

 
$
28,051

(1) Includes facility fees of approximately $0.6 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively.
Depreciation and amortization
During the twelve months ended June 30, 2018, we acquired five properties, representing a Real Estate Investment Value of $65.0 million, and we disposed of 59 properties with a Real Estate Investment Value of $236.4 million. As we were a net disposer during the period (based on Real Estate Investment Value), depreciation and amortization have also decreased period-over-period. The following table summarizes our depreciation and amortization expense:
 
Three Months Ended 
 June 30,
(In Thousands)
2018
 
2017
Depreciation of real estate assets
$
32,857

 
$
35,088

Other depreciation
142

 
139

Amortization of lease intangibles
6,943

 
8,214

Total depreciation and amortization
$
39,942

 
$
43,441

Impairment
Impairment charges for the three months ended June 30, 2018 were $1.5 million. All of the impairment was recorded on properties classified as held for use, made up primarily of six underperforming properties with a tenant in the convenience store industry and one underperforming property with a tenant in the automotive dealer industry.
During the three months ended June 30, 2017, we recorded impairment losses of $10.1 million, of which $8.1 million was recorded on properties classified as held for use, primarily attributable to five vacant properties and four underperforming properties with a tenant in the consumer electronics industry. The remaining $2.0 million of impairment was recorded on held for sale properties, primarily attributable to five vacant properties.
Gain on debt extinguishment
During the three months ended June 30, 2018, we extinguished $22.2 million of mortgage debt related to two defaulted loans on two underperforming properties, resulting in a gain on debt extinguishment of $6.7 million. This was partially

45



offset by the extinguishment of $124.7 million of Master Trust 2013 debt, which resulted in approximately $1.2 million in losses on debt extinguishment.
During the three months ended June 30, 2017, we extinguished $1.9 million of mortgage debt related to one loan and recorded a de minimis gain.
(Loss) gain on disposition of assets
During the three months ended June 30, 2018, we disposed of eight properties and recorded net losses totaling $0.9 million. This included losses of $1.2 million, which were primarily driven by $1.1 million in losses on the sale of two vacant properties. These losses were partially offset by $0.4 million in gains on the sale of two properties operated by tenants in the convenience store and drug store/pharmacy industries, respectively.
For the same period in 2017, we disposed of 34 properties and recorded net gains totaling $6.9 million. There were $10.5 million in gains on the sale of active properties, including:
$3.1 million in gains on three properties operated by a tenant in the building materials industry,
$2.9 million in gains on three properties operated by a tenant in the restaurants-quick service industry,
$1.7 million in gains on three properties operated by a tenant in the drug store/pharmacy industry,
$1.6 million in gains on one property operated by a tenant in our other industry, and
$1.4 million in gains on three properties operated by a tenant in the automotive services industry.
These gains were partially offset by $3.6 million in losses on the sale of 12 vacant properties.
Preferred dividend income from SMTA
As part of the Spin-Off of SMTA, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of $150.0 million. For the month of June 2018, we recognized preferred dividend income of $1.3 million from these shares.

46



Results of Continuing Operations
Comparison of Six Months Ended June 30, 2018 to Six Months Ended June 30, 2017
 
Six Months Ended June 30,
(In Thousands)
2018
 
2017
 
 Change
 
 % Change
Revenues:
 
 
 
 
 
 
 
Rentals
$
193,238

 
$
204,299

 
$
(11,061
)
 
(5.4
)%
Interest income on loans receivable
1,289

 
1,527

 
(238
)
 
(15.6
)%
Earned income from direct financing leases
930

 
1,130

 
(200
)
 
(17.7
)%
Tenant reimbursement income
6,505

 
7,652

 
(1,147
)
 
(15.0
)%
Related party fee income
2,219

 

 
2,219

 
NM

Other income
1,817

 
559

 
1,258

 
100.0
 %
Total revenues
205,998

 
215,167

 
(9,169
)
 
(4.3
)%
Expenses:
 
 
 
 
 
 
 
General and administrative
28,810

 
34,044

 
(5,234
)
 
(15.4
)%
Property costs (including reimbursable)
10,357

 
14,013

 
(3,656
)
 
(26.1
)%
Real estate acquisition costs
117

 
674

 
(557
)
 
(82.6
)%
Interest
46,601

 
55,857

 
(9,256
)
 
(16.6
)%
Depreciation and amortization
80,636

 
87,316

 
(6,680
)
 
(7.7
)%
Impairments
4,975

 
37,957

 
(32,982
)
 
(86.9
)%
Total expenses
171,496

 
229,861

 
(58,365
)
 
(25.4
)%
Income (loss) from continuing operations before other income and income tax expense
34,502

 
(14,694
)
 
49,196

 
NM

Other income:
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
27,092

 
(23
)
 
27,115

 
NM

Gain on disposition of assets
391

 
11,897

 
(11,506
)
 
(96.7
)%
Preferred dividend income from SMTA
1,250

 

 
1,250

 
100.0
 %
Total other income
28,733

 
11,874

 
16,859

 
NM

Income (loss) from continuing operations before income tax expense
63,235

 
(2,820
)
 
66,055

 
NM

Income tax expense
(340
)
 
(277
)
 
(63
)
 
22.7
 %
Income (loss) from continuing operations
$
62,895

 
$
(3,097
)
 
$
65,992

 
NM

NM - Percentages over 100% are not displayed.
REVENUES
Rentals
Rental revenue from continuing operations for the comparative period decreased, primarily driven by a decrease in contractual rent. Our contractual rental revenue between periods decreased 7.0% as we were a net disposer of income producing real estate over the trailing twelve-month period. During the twelve months ended June 30, 2018, we disposed of 59 properties with a Real Estate Investment Value of $236.4 million, while acquiring five properties with a Real Estate Investment Value of $65.0 million.
Non-cash rentals for the six months ended June 30, 2018 and 2017 were $10.1 million and $13.3 million, respectively. These amounts represent 5.2% and 6.5% of total rental revenue for the six months ended June 30, 2018 and 2017, respectively.
Interest income on loans receivable
The decrease in interest income on loans receivable period-over-period from continuing operations relates to the decrease in outstanding principal on mortgage loans over the trailing twelve-month period, where one mortgage loan

47



collateralized by 26 properties was paid off. This was partially offset by the issuance of a new mortgage loan over the trailing twelve-month period which is collateralized by 11 properties as of June 30, 2018. This activity resulted in a decrease in outstanding principal on mortgage loans receivable of $7.4 million over the comparative periods.
Tenant reimbursement income
We have a number of leases that require our tenants to reimburse us for certain property costs we incur, which we record on a gross basis. As such, tenant reimbursement income is driven by the tenant reimbursable property costs described below, less an allowance for reimbursable expenses determined to be uncollectible from our tenants.
Related party fee income
In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provide a management team that is responsible for implementing SMTA’s business strategy and performing certain services for SMTA. Under this agreement, we recognized $1.7 million of revenues for the month of June 2018.
Additionally, we provide property management services and special services for Master Trust 2014, which was contributed to SMTA as part of the Spin-Off. Therefore, for the month of June 2018 we recognized $0.5 million in revenue under the terms of the Property Management and Servicing Agreement.
Other income
The driver for the increase in other income was the pre-payment penalty income of $1.0 million received in 2018 when one of our mortgage loans receivable, which was collateralized by 26 properties, was paid off prior to its scheduled maturity.
EXPENSES
General and administrative
The period-over-period decrease in general and administrative expenses is primarily due to $11.1 million in severance related costs, comprising $4.2 million of cash compensation and $6.9 million of non-cash compensation, recorded in the six months ended June 30, 2017 following the departure of one executive officer. This decrease was partially offset by $3.9 million of severance related costs, comprised of $2.1 million of cash compensation and $1.8 million of non-cash compensation, following the departure of two executive officers and higher compensation recorded in the six months ended June 30, 2018.
Additionally, there was a decrease in professional fees, primarily legal fees, of $1.6 million and a decrease in bad debt expense of $1.0 million period-over-period. The decrease in bad debt expense was primarily a result of certain properties operating by tenants in the entertainment and movie theater industries for which the rent had been determined to be uncollectible for the six months ended June 30, 2017, whereas there was no bad debt expense recognized in continuing operations for the six months ended June 30, 2018.
Property costs (including reimbursable)
For the six months ended June 30, 2018, property costs were $10.4 million (including $8.0 million of tenant reimbursable expenses) compared to $14.0 million (including $8.3 million of tenant reimbursable expenses) for the same period in 2017. The decrease in non-reimbursable costs of $3.3 million was driven by a decrease non-reimbursable property taxes on vacant properties as a reduction in total vacancies, as well as a decrease in non-reimbursable property taxes on operating properties as a result of fewer tenant credit issues.
Interest
The decrease in interest expense is primarily related to the extinguishment of $327.7 million principal outstanding of Master Trust 2013 and CMBS debt during the twelve months ended June 30, 2018. Additionally, there is no interest expense for the Term Loan for the six months ended June 30, 2018 as the facility was not utilized during this period.

48



The following table summarizes our interest expense on related borrowings:
 
Six Months Ended 
 June 30,
(In Thousands)
2018
 
2017
Interest expense – Revolving Credit Facility (1)
$
4,200

 
$
2,557

Interest expense – Term Loan

 
4,757

Interest expense – Senior Unsecured Notes
6,675

 
6,675

Interest expense – mortgages and notes payable
14,197

 
21,270

Interest expense – Convertible Notes
12,255

 
12,255

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
4,109

 
4,169

Amortization of debt discount, net
5,165

 
4,174

Total interest expense
$
46,601

 
$
55,857

(1) Includes facility fees of approximately $1.1 million for both the six months ended June 30, 2018 and June 30, 2017.
Depreciation and amortization
During the twelve months ended June 30, 2018, we acquired 5 properties, representing a Real Estate Investment Value of $65.0 million, and we disposed of 59 properties with a Real Estate Investment Value of $236.4 million. As we were a net disposer during the period (based on Real Estate Investment Value), depreciation and amortization have also decreased period-over-period. The following table summarizes our depreciation and amortization expense:
 
Six Months Ended 
 June 30,
(In Thousands)
2018
 
2017
Depreciation of real estate assets
$
66,176

 
$
70,428

Other depreciation
283

 
277

Amortization of lease intangibles
14,177

 
16,611

Total depreciation and amortization
$
80,636

 
$
87,316

Impairment
Impairment charges for the six months ended June 30, 2018 were $5.0 million. $4.6 million of the impairment was recorded on properties classified as held for use, made up primarily of six underperforming properties with a tenant in the convenience store industry, and three underperforming properties with tenants in the grocery, drug store/pharmacy, and automotive dealer industries, respectively. The remaining $0.4 million of impairment was recorded on two held for sale properties.
During the six months ended June 30, 2017, we recorded impairment losses of $38.0 million. $26.9 million of the impairment was recorded on properties classified as held for use, made up primarily of ten vacant properties, four underperforming properties with a tenant in the consumer electronics industry, and one underperforming property with a tenant in the general merchandise industry. The remaining $11.1 million of impairment was recorded on held for sale properties, made up primarily of nine vacant properties.
Gain (loss) on debt extinguishment
During the six months ended June 30, 2018, we extinguished $56.2 million of mortgage debt related to six defaulted loans on six underperforming properties, resulting in a gain on debt extinguishment of $27.9 million and sold our retained notes in Master Trust 2014 Series 2014-2 for a gain of $0.5 million. These gains were partially offset by the extinguishment of $127.3 million of Master Trust 2013 debt, which resulted in approximately $1.3 million in losses on debt extinguishment.
During the six months ended June 30, 2017, we extinguished $51.2 million of mortgage debt related to two loans and recorded a de minimis loss.

49



Gain on disposition of assets
During the six months ended June 30, 2018, we disposed of 17 properties and recorded net gains totaling $0.4 million. These gains were primarily driven by $1.4 million in gains on the sale of three properties operated by tenants in the convenience store industries and $0.2 million in gains on the sale of one property operated by a tenant in the drug store/pharmacy industry. These gains were partially offset by $1.1 million in losses on the sale of two vacant properties.
For the same period in 2017, we disposed of 74 properties and recorded net gains totaling $11.9 million. There were $18.4 million in gains on the sale of active properties, including:
$4.5 million in gains on one property operated by a tenant in the apparel industry,
$3.6 million in gains on five properties operated by a tenant in the drug store/pharmacy industry,
$3.1 million in gains on three properties operated by a tenant in the building materials industry,
$2.9 million in gains on three properties operated by a tenant in the restaurants-quick service industry,
$1.6 million in gains on one property operated by a tenant in our other industry, and
$1.4 million in gains on three properties operated by a tenant in the automotive services industry.
These gains were partially offset by $6.5 million in losses on the sale of 46 vacant properties.
Preferred dividend income from SMTA
As part of the Spin-Off of SMTA, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of $150.0 million. For the month of June 2018, we recognized preferred dividend income of $1.3 million from these shares.

50



Property Portfolio Information
PROPERTY PORTFOLIO DIVERSIFICATION
1,458
99.6%
49
250
32
Properties
Occupancy
States
Tenants
Industries
Diversification By Tenant
Tenant concentration represents the tenant's contribution to Contractual Rent of our owned real estate properties as of June 30, 2018:
Tenant

Number of
Properties

Square Feet
(in thousands)

Percent of
Contractual Rent
 
 
 
 
 
 
 
Walgreen Company
 
41

 
600

 
3.8
%
Church's Chicken (Cajun Global, LLC)
 
170

 
243

 
3.5

Circle K (Alimentation Couche-Tard, Inc.)
 
82

 
248

 
3.2

The Home Depot, Inc.
 
7

 
821

 
3.0

CVS Caremark Corporation
 
36

 
446

 
2.6

GPM Investments, LLC
 
105

 
272

 
2.4

Albertsons (AB Acquisition, LLC)
 
16

 
734

 
2.0

PetSmart, Inc.
 
4

 
1,016

 
1.7

Ferguson Enterprises, Inc.
 
7

 
1,003

 
1.7

BJ's Wholesale Club, Inc.
 
4

 
475

 
1.6

Other
 
980

 
20,448

 
74.5

Vacant
 
6

 
1,008

 

Total

1,458

 
27,314

 
100.0
%
(1) Tenants represent legal entities ultimately responsible for obligations under the lease agreements or affiliated entities. Other tenants may operate the same or similar business concepts or brands set forth above.
Diversification By Asset Type
Asset type concentration represents the type of asset's contribution to Contractual Rent within our owned real estate properties as of June 30, 2018:
Asset Type
 
Number of Properties
 
Total Square Feet
(in thousands)
 
Percent of Contractual Rent
 
 
 
 
 
 
 
Retail
 
1,391

 
20,212

 
85.0
%
Industrial
 
27

 
5,553

 
8.0
%
Office
 
37

 
1,120

 
5.4
%
Data Centers
 
3

 
429

 
1.6
%
Total
 
1,458

 
27,314

 
100.0
%

51



Diversification By Industry
Industry concentration represents the industry's contribution to Contractual Rent of our owned real estate properties as of June 30, 2018:
Tenant Industry
Industry Category
Number of Owned Properties
 
Total Square Feet
(in thousands)
 
Percent of Contractual Rent
 
 
 
 
 
 
 
Convenience Stores
 Service
312

 
963

 
10.8
%
Restaurants - Quick Service
 Service
332

 
686

 
7.6

Drug Stores / Pharmacies
 Service
89

 
1,204

 
7.4

Restaurants - Casual Dining
 Service
101

 
725

 
6.2

Movie Theaters
 Service
32

 
1,636

 
5.9

Grocery
 Retail
42

 
1,940

 
5.6

Health and Fitness
 Service
30

 
1,213

 
4.8

Home Improvement
 Retail
14

 
1,653

 
4.4

Specialty Retail
 Retail
62

 
1,682

 
4.1

Medical Office
 Service
36

 
621

 
4.1

Home Furnishings
 Retail
19

 
1,869

 
3.8

Entertainment
 Service
21

 
812

 
3.1

Manufacturing
 Industrial
13

 
1,875

 
2.9

Professional Services
 Service
6

 
685

 
2.6

Car Washes
 Service
35

 
183

 
2.5

Warehouse Clubs/Supercenters
 Retail
9

 
883

 
2.4

Automotive Services
 Service
54

 
419

 
2.2

Sporting Goods
 Retail
13

 
667

 
2.1

Building Materials
 Retail
9

 
1,047

 
1.8

Dollar Stores
 Retail
69

 
707

 
1.8

Pet Supplies & Services
 Retail
4

 
1,016

 
1.7

Education
 Service
37

 
390

 
1.7

Distribution
 Industrial
6

 
675

 
1.7

Automotive Dealers
 Retail
10

 
308

 
1.6

Automotive Parts
 Retail
54

 
383

 
1.5

Office Supplies
 Retail
17

 
458

 
1.2

General Merchandise
 Retail
6

 
483

 
1.0

Apparel
 Retail
4

 
477

 
1.0

Travel Plaza
 Service
3

 
48

 
0.8

Other
 Other
6

 
244

 
0.8

Consumer Electronics
 Retail
4

 
188

 
0.6

Discount Retailer
 Retail
3

 
166

 
0.3

Vacant
 
6

 
1,008

 

Total
 
1,458

 
27,314

 
100.0
%

52



Diversification By Geography
Geographic concentration represents the geographic region's contribution to Contractual Rent of our owned real estate properties as of June 30, 2018:
heatmapa16.jpg
Location

Number of Properties

Total Square Feet (in thousands)

Percent of Contractual Rent
 
Location (continued)
 
Number of Properties
 
Total Square Feet (in thousands)
 
Percent of Contractual Rent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
231

 
3,016

 
12.2
%
 
Mississippi
 
30

 
295

 
1.3
Florida
 
106

 
1,261

 
7.9

 
Nevada
 
2

 
934

 
1.2
Georgia
 
106

 
1,484

 
6.9

 
Kansas
 
16

 
397

 
1.1
California
 
23

 
1,248

 
5.6

 
Idaho
 
11

 
236

 
1.0
Ohio
 
75

 
1,002

 
4.8

 
Louisiana
 
17

 
189

 
1.0
Illinois
 
37

 
1,295

 
4.2

 
Connecticut
 
5

 
686

 
1.0
Tennessee
 
51

 
1,133

 
3.6

 
Maryland
 
7

 
201

 
1.0
Arizona
 
39

 
639

 
3.5

 
Iowa
 
11

 
186

 
0.9
Michigan
 
72

 
913

 
3.4

 
Utah
 
5

 
577

 
0.8
Missouri
 
54

 
939

 
3.2

 
Washington
 
7

 
114

 
0.7
South Carolina
 
28

 
535

 
2.7

 
North Dakota
 
4

 
228

 
0.6
Virginia
 
43

 
1,149

 
2.7

 
Maine
 
24

 
63

 
0.6
Alabama
 
74

 
512

 
2.6

 
Oregon
 
4

 
144

 
0.6
North Carolina
 
48

 
852

 
2.5

 
Montana
 
3

 
152

 
0.5
Colorado
 
21

 
795

 
2.4

 
Massachusetts
 
2

 
131

 
0.5
Minnesota
 
24

 
764

 
2.3

 
Wisconsin
 
7

 
137

 
0.4
New York
 
24

 
704

 
2.0

 
Rhode Island
 
3

 
95

 
0.3
Kentucky
 
31

 
448

 
2.0

 
West Virginia
 
10

 
64

 
0.3
Indiana
 
35

 
472

 
2.0

 
Nebraska
 
5

 
136

 
0.2
New Mexico
 
26

 
440

 
1.9

 
U.S. V.I.
 
1

 
38

 
0.2
Oklahoma
 
49

 
412

 
1.5

 
Wyoming
 
1

 
35

 
0.1
New Jersey
 
11

 
590

 
1.5

 
Alaska
 
4

 
13

 
0.1
New Hampshire
 
16

 
640

 
1.4

 
South Dakota
 
1

 
20

 
0.1
Pennsylvania
 
19

 
709

 
1.3

 
Delaware
 
1

 
5

 
0.1
Arkansas
 
33

 
283

 
1.3

 
Vermont
 
1

 
3

 
*

53



Lease Expirations
The following table sets forth a summary schedule of expiration dates for leases in place as of June 30, 2018. The weighted average remaining non-cancelable initial term of our leases (based on Contractual Rent) was 9.6 years. The information set forth in the table assumes that tenants do not exercise renewal options and or any early termination rights:
Leases Expiring In:

Number of Properties

Contractual Rent Annualized
(in thousands)
(1)

Total Square Feet
(in thousands)

Percent of Contractual Rent
 
 
 
 
 
 
 
 
 
Remainder of 2018

7


$
3,052


422


0.8
%
2019

26


7,641


617


2.1

2020

35


12,378


1,011


3.4

2021

116


30,764


2,406


8.5

2022

44


20,147


1,825


5.6

2023

110


36,050


3,760


9.9

2024

20


12,639


1,113


3.5

2025

37


17,083


1,258


4.7

2026

77


22,344


1,683


6.2

2027

120


34,538


2,471


9.5

2028 and thereafter

860


166,310


9,740


45.8

Vacant

6




1,008



Total owned properties

1,458

 
$
362,946

 
27,314


100.0
%
(1) Contractual Rent for properties owned at June 30, 2018 multiplied by twelve.
Liquidity and Capital Resources
SHARE REPURCHASE PROGRAM
In May 2018, our Board of Directors approved a new stock repurchase program, which authorizes the repurchase of up to $250.0 million of our common stock. These purchases can be made in the open market or through private transactions from time to time over the 18-month time period following authorization. Purchase activity will be dependent on various factors, including our capital position, operating results, funds generated by asset sales, dividends that may be required by those sales, and investment options that may be available, including acquiring new properties or retiring debt. The stock repurchase program does not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion. We intend to fund any repurchases with new proceeds from asset sales, cash flows from operations, existing cash on the balance sheet and other sources, including debt. As of June 30, 2018, no shares have been repurchased under this new program.
In August 2017, our Board of Directors approved a stock repurchase program, which authorized the repurchase of up to $250.0 million of our common stock. These purchases can be made in the open market or through private transactions from time to time over the 18-month time period following authorization. During the three and six months ended June 30, 2018, and prior to the SMTA Spin-Off, 8.1 million and 21.2 million shares, respectively, of the Company's common stock have been repurchased in open market transactions under the stock repurchase program at a weighted average price of $7.93 and $7.90, respectively, per share. Fees associated with the three and six month repurchases, of $241.8 thousand and $543.0 thousand, respectively, are included in accumulated deficit on the consolidated balance sheets.
As of June 30, 2018, 30.7 million shares of our common stock have been repurchased in open market transactions since the authorization of the August 2017 stock repurchase program, at a weighted average price of $8.14 per share, and no additional capacity remains under this stock repurchase program. There were fees of $733.1 thousand associated with these repurchases.
SHORT-TERM LIQUIDITY AND CAPITAL RESOURCES
On a short-term basis, our principal demands for funds will be for operating expenses, including financing of acquisitions,

54


distributions to stockholders and payment of interest and principal on current and any future debt financings. We expect to fund these demands primarily through cash provided by operating activities and borrowings under the Revolving Credit Facility and Term Loan. As of June 30, 2018, available liquidity was comprised of $453.5 million of borrowing capacity under the Revolving Credit Facility and $420.0 million under the Term Loan, $18.4 million in restricted cash and restricted cash equivalents and $9.3 million in cash and cash equivalents.
LONG-TERM LIQUIDITY AND CAPITAL RESOURSES
We plan to meet our long-term capital needs, including long-term financing of property acquisitions, by issuing registered debt or equity securities, obtaining asset level financing and by issuing fixed rate secured or unsecured notes and bonds. In the future, some of our property acquisitions could be made by issuing partnership interests of our Operating Partnership in exchange for property owned by third parties. These partnership units would be exchangeable for cash or, at our election, shares of our common stock.
We continually evaluate financing alternatives and believe that we can obtain financing on reasonable terms. However, we cannot be sure that we will have access to the capital markets at times and on terms that are acceptable to us. We expect that our primary uses of capital will be for property and other asset acquisitions, the payment of tenant improvements, operating expenses, debt service payments and distributions to our stockholders.
DESCRIPTION OF CERTAIN DEBT
The following descriptions of debt should be read in conjunction with Note 4 to the consolidated financial statements herein.
Revolving Credit Facility
As of June 30, 2018, the aggregate gross commitment under the Revolving Credit Facility was $800.0 million, which may be increased up to $1.0 billion by exercising an accordion feature, subject to satisfying certain requirements and obtaining additional lender commitments. The Revolving Credit Facility also includes a $50.0 million sub-limit for swing-line loans and up to $60.0 million available for issuances of letters of credit. Swing-line loans and letters of credit reduce availability under the Revolving Credit Facility on a dollar-for-dollar basis. The Revolving Credit Facility has an initial maturity of March 31, 2019, which is extendable for one year at our option, subject to the satisfaction of certain conditions.
The Operating Partnership may voluntarily prepay the Revolving Credit Facility, in whole or in part, at any time without premium or penalty, but subject to applicable LIBOR breakage fees, if any. Payment of the Revolving Credit Facility is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions (as defined in the Credit Agreement). As of June 30, 2018, there were no subsidiaries that met this requirement.
As of June 30, 2018, the Revolving Credit Facility bore interest at 1-Month LIBOR plus 1.25%, with $346.5 million in borrowings outstanding, and a ratings-based facility fee in the amount of $550,000 per quarter. As of June 30, 2018, there were no swing-line loans or letters of credit outstanding.
Term Loan
As of June 30, 2018, there was no outstanding balance on the Term Loan. The borrowing capacity under the Term Loan was $420.0 million and may be increased up to $600.0 million by exercising an accordion feature, subject to obtaining additional lender commitments. The Term Loan has an initial maturity date of November 2, 2018, which may be extended at our option pursuant to two one-year extension options, subject to the satisfaction of certain conditions.
Borrowings may be repaid without premium or penalty, and may be re-borrowed within 30 days up to the then available loan commitment and subject to occurrence limitations within any twelve-month period.
Senior Unsecured Notes
The Senior Unsecured Notes of the Operating Partnership have an aggregate principal amount of $300.0 million and are guaranteed by the Company. The Senior Unsecured Notes accrue interest at a rate of 4.45% per year, payable on March 15 and September 15 with a final maturity date of September 15, 2026.
The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to,

55


but not including, the redemption date; and a make-whole premium calculated in accordance with the indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed on or after June 15, 2026, the redemption price will not include a make-whole premium.  
Master Trust Notes
The Master Trust Notes are an asset-backed securitization platform through which we raise capital by issuing non-recourse net lease mortgage notes collateralized by commercial real estate, net leases and mortgage loans. The commercial real estate is managed by the Company in our capacity as property manager. Rental and mortgage receipts are deposited with the indenture trustee, who first utilizes these funds to satisfy the debt service requirements on the notes and any fees and costs of administration of the Master Trust Notes. Any remaining funds are remitted to the issuers on the monthly note payment date.
Upon satisfaction of certain conditions, we may, from time to time, sell or exchange real estate properties or mortgage loans in the Collateral Pools. Proceeds from the sale of the assets are held on deposit by the indenture trustee until a qualifying substitution is made or the amounts are distributed as an early repayment of principal. At June 30, 2018, $7.4 million was held on deposit with the indenture trustees and classified as restricted cash within deferred costs and other assets, net in our consolidated balance sheets.
On May 21, 2018, the Company retired $123.1 million of Master Trust 2013 Series 2013-1 Class A notes. There was no make-whole payment associated with the redemption of these notes. During the six months ended June 30, 2018 there were $15.2 million in prepayments on Master Trust 2013 Series 2013-2 Class A notes with $934 thousand in associated make-whole payments.
As of June 30, 2018, the Maser Trust 2013 notes were secured by 269 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Company. The outstanding series of Master Trust Notes was rated investment grade as of June 30, 2018.
The Master Trust 2013 notes as of June 30, 2018 are summarized below (dollars in thousands):
 
 
    Stated
     Rates (1)
 
Maturity
 
June 30,
2018
 
December 31,
2017
 
 
 
 
(in Years)
 
(in Thousands)
Series 2013-1 Class A
 


 

 
$

 
$
125,000

Series 2013-2 Class A
 
5.3
%
 
5.5
 
170,154

 
187,704

Total Master Trust 2013 notes
 
5.3
%
 
5.5
 
170,154

 
312,704

Debt discount, net
 
 
 
 
 

 

Deferred financing costs, net
 
 
 
 
 
(4,588
)
 
(6,021
)
Total Master Trust 2013 notes, net
 
 
 
 
 
$
165,566

 
$
306,683

(1) Represents the individual series stated interest rate as of June 30, 2018 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of June 30, 2018.
CMBS
As of June 30, 2018, we had seven fixed-rate CMBS loans with $276.1 million of aggregate outstanding principal, a weighted-average contractual interest rate of 5.51% and a weighted-average maturity of 5.0 years. Approximately 71% of this debt is partially amortizing and requires a balloon payment at maturity. These balances include one CMBS fixed-rate loan that is in default, discussed further below.

56


The following table shows the scheduled principal repayments, including amortization, of the CMBS fixed-rate loans, excluding the one defaulted loan and the property securing it, as of June 30, 2018 (dollars in thousands):
Year of Maturity
 
Number of Loans
 
Number of Properties
 
Stated Interest Rate Range
 
Weighted Average Stated Rate
 
Scheduled Principal
 
Balloon
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Remainder of 2018
 

 

 
 
%
 
$
1,859

 
$

 
$
1,859

2019
 

 

 
 

 
3,905

 

 
3,905

2020
 

 

 
 

 
4,100

 

 
4,100

2021
 

 

 
 

 
4,365

 

 
4,365

2022
 
1

 
12

 
4.67%
 
4.67
%
 
4,617

 
42,400

 
47,017

Thereafter
 
5

 
88

 
5.23% - 6.00%
 
5.48
%
 
7,274

 
197,980

 
205,254

Total
 
6

 
100

 
 
 
5.35
%
 
$
26,120

 
$
240,380

 
$
266,500

CMBS Liquidity Matters
As of June 30, 2018, we are in default on one CMBS fixed-rate loan due to the underperformance of the property securing the loan. The aggregate principal balance under the defaulted loan was $9.6 million, including $2.9 million of accrued interest. We believe the value of the one property is less than the related debt. As a result, we have notified the special servicer for this loan that we anticipate either surrendering the associated property or selling it in exchange for relieving the indebtedness of our special purpose borrower.
The following table provides key elements of the defaulted mortgage loans as of June 30, 2018 (dollars in thousands):
Industry
 
Properties
 
Net Book Value
 
Monthly Base Rent
 
Pre-Default Outstanding Principal
 
Capitalized interest (1)
 
Total Debt Outstanding
 
Stated Rate
 
Default Rate
 
Accrued Interest (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
 
1
 
$
712

 
$

 
$
6,734

 
$
2,890

 
$
9,624

 
5.85
%
 
9.85
%
 
$
79

(1) Interest capitalized to principal that remains unpaid.
Related Party Mortgage Loans Payable
Wholly-owned subsidiaries of Spirit are the borrower on four mortgage loans payable held by SMTA and secured by six single-tenant commercial properties owned by the Company. In total, these mortgage notes had outstanding principal of $29.4 million at June 30, 2018, which is included in mortgages and notes payable, net on the consolidated balance sheet. As of June 30, 2018, these mortgage notes have a weighted average stated interest rate of 1.0%, a weighted average term of 9.4 years and are eligible for early repayment without penalty.
Convertible Notes
The Convertible Notes are comprised of two series of notes: $402.5 million aggregate principal amount of 2.875% convertible notes maturing on May 15, 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes maturing on May 15, 2021. Interest on the Convertible Notes is payable semiannually in arrears on May 15 and November 15 of each year. As of June 30, 2018, the carrying amount of the Convertible Notes was $722.8 million, net of discounts (primarily consisting of the value of the embedded conversion feature) and unamortized deferred financing costs.
Holders may convert notes of either series prior to November 15, 2018, in the case of the 2019 Notes, or November 15, 2020, in the case of the 2021 Notes, only under specific circumstances: (1) if the closing price of our common stock for each of at last 20 trading days (whether or not consecutive) during the last 30 consecutive trading days in the quarter is greater than or equal to 130% of the conversion price for the Convertible Notes; (2) during the five business day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last closing price of our common stock and the conversion rate for the Convertible Notes; (3) if we call any or all of the Convertible Notes for redemption prior to the redemption date; or (4) upon the occurrence of specified corporate events as described in the Convertible Notes prospectus supplement. On or after November 15, 2018, in the case of the 2019 Notes, or November 15, 2020, in the case of the 2021 Notes, until the close of business on the second scheduled trading day

57


immediately preceding the maturity date of the Convertible Notes, holders may convert the Convertible Notes of the applicable series at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver cash, shares of common stock or a combination of cash and shares of common stock, at our election.
The conversion rate for each series of the Convertible Notes is subject to adjustment for some events, including dividends paid in excess of threshold amounts stipulated in the agreement, but will not be adjusted for any accrued and unpaid interest. As of June 30, 2018, the conversion rate was 87.013 per $1,000 principal note. If we undergo a fundamental change (as defined in the Convertible Notes supplemental indentures), holders may require us to repurchase all or any portion of their notes at a repurchase price equal to 100% of the principal amount of such notes to be repurchased, plus accrued and unpaid interest.
DEBT MATURITIES    
Future principal payments due on our various types of debt outstanding as of June 30, 2018 (in thousands):
 
 
Total
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility (1)
 
$
346,500

 
$

 
$
346,500

 
$

 
$

 
$

 
$

Senior Unsecured Notes
 
300,000

 

 

 

 

 

 
300,000

Master Trust Notes
 
170,154

 
2,300

 
4,788

 
5,055

 
5,333

 
5,629

 
147,049

CMBS (2)
 
276,124

 
11,481

 
3,905

 
4,100

 
4,365

 
47,017

 
205,256

Related Party Mortgages
 
29,368

 
1,478

 
2,979

 
3,009

 
3,039

 
3,069

 
15,794

Convertible Notes
 
747,500

 

 
402,500

 

 
345,000

 

 

 
 
$
1,869,646

 
$
15,259

 
$
760,672

 
$
12,164

 
$
357,737

 
$
55,715

 
$
668,099

(1) The Revolving Credit Facility is extendible for one year at the borrower's option.
(2) The CMBS payment balance in 2018 includes $6.7 million of principal and $2.9 million of capitalized interest, for the one defaulted CMBS fixed-rate loan with a stated maturity in 2018.
CONTRACTUAL OBLIGATIONS
There were no material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC.
We may enter into commitments to purchase goods and services in connection with the operations of our properties. Those commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures.
DISTRIBUTION POLICY
Distributions from our current or accumulated earnings are generally classified as ordinary income, whereas distributions in excess of our current and accumulated earnings, to the extent of a stockholder’s federal income tax basis in our common stock, are generally characterized as a return of capital. Under the 2017 Tax Legislation, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Distributions in excess of a stockholder’s federal income tax basis in our common stock are generally characterized as capital gain.
We are required to distribute 90% of our taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and are required to pay federal income tax at regular corporate rates to the extent we distribute less than 100% of our taxable income (including capital gains).
We intend to make distributions that will enable us to meet the distribution requirements applicable to REITs and to eliminate or minimize our obligation to pay corporate-level federal income and excise taxes.
Any distributions will be at the sole discretion of our Board of Directors, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service

58


requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable laws and such other factors as our Board of Directors deems relevant.
Cash Flows
The following table presents a summary of our cash flows for the six months ended June 30, 2018 and June 30, 2017, respectively:
 
Six Months Ended 
 June 30,
 
 
 
2018
 
2017
 
Change
 
(in Thousands)
Net cash provided by operating activities
$
160,411

 
$
201,387

 
$
(40,976
)
Net cash used in investing activities
(14,346
)
 
(3,293
)
 
(11,053
)
Net cash used in financing activities
(233,114
)
 
(171,471
)
 
(61,643
)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(87,049
)
 
$
26,623

 
$
(113,672
)
As of June 30, 2018, we had $27.7 million of cash, cash equivalents and restricted cash as compared to $114.7 million as of December 31, 2017 and $63.5 million as of June 30, 2017.
Operating Activities
Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent and the level of our operating expenses and other general and administrative costs.
The decrease in net cash provided by operating activities was primarily attributable to:

59



a decrease in cash revenue of $4.6 million,
a decrease in operating assets and liabilities of $13.6 million, and
an increase in transaction costs of $19.5 million.
This decrease was partially offset by:
a decrease in compensation and benefit expenses, primarily due to $4.2 million of cash severance charges during the six months ended June 30, 2017, compared to $2.1 million of cash severance charges incurred during the six months ended June 30, 2018,
a decrease in cash interest expense of $10.2 million, and
a decrease in property costs of $3.3 million, primarily due to a reduction in vacant properties.
Investing Activities
Cash used in investing activities is generally used to fund property acquisitions, for investments in loans receivable and for capital expenditures. Cash provided by investing activities generally relates to the disposition of real estate and other assets.
Net cash used in investing activities during the six months ended June 30, 2018 included $18.1 million for the acquisition of five properties, $21.1 million of capitalized real estate expenditures, and $35.5 million for investments in loans receivable. These outflows were partially offset by $37.6 million in proceeds from the disposition of 40 properties and $22.8 million in collections of principal on loans receivable.
During the same period in 2017, net cash used in investing activities primarily consisted of $218.1 million for the acquisition of 35 properties and $23.3 million of capitalized real estate expenditures. These outflows were mostly offset by $239.1 million in proceeds from the disposition of 105 properties.
Financing Activities
Generally, our net cash used in financing activities is impacted by our borrowings under our Revolving Credit Facility and Term Loan, issuances of net-lease mortgage notes, common stock offerings and repurchases and dividend payments on our common and preferred stock.
Net cash used in financing activities during the six months ended June 30, 2018 was primarily attributable to common stock share repurchases totaling $169.8 million, payment of dividends to equity owners of $164.7 million, the transfer of $73.1 million in cash, cash equivalents and restricted cash to SMTA in conjunction with the Spin-Off and the net repayment of $60.6 million on mortgages and notes payable, partially offset by net borrowings of $234.5 million under our Revolving Credit Facility.
During the same period in 2017, net cash used in financing activities was primarily attributable to common stock repurchases of $203.8 million and the payment of dividends to equity owners of $174.7 million. These amounts were partially offset by net borrowings under our Revolving Credit Facility of $234.0 million.

60



Off-Balance Sheet Arrangements
As of June 30, 2018, we did not have any material off-balance sheet arrangements.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements herein.
Non-GAAP Financial Measures
FFO AND AFFO
We calculate FFO in accordance with the standards established by NAREIT. FFO represents net income (loss) attributable to common stockholders (computed in accordance with GAAP), excluding real estate-related depreciation and amortization, impairment charges and net losses (gains) from property dispositions. FFO is a supplemental non-GAAP financial measure. We use FFO as a supplemental performance measure because we believe that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization, gains and losses from property dispositions and impairment charges, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year-over-year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other equity REITs. However, because FFO excludes depreciation and amortization and does not capture the changes in the value of our properties that result from use or market conditions, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO as we do, and, accordingly, our FFO may not be comparable to such other equity REITs’ FFO. Accordingly, FFO should be considered only as a supplement to net income (loss) attributable to common stockholders as a measure of our performance.
AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. Accordingly, AFFO should be considered only as a supplement to net income (loss) attributable to common stockholders as a measure of our performance. We adjust FFO to eliminate the impact of certain items that we believe are not indicative of our core operating performance, including restructuring costs, other general and administrative costs associated with relocation of our headquarters, transaction costs associated with our proposed Spin-Off, default interest on non-recourse mortgage indebtedness, debt extinguishment gains (losses), transaction costs incurred in connection with the acquisition of real estate investments subject to existing leases and certain non-cash items. These certain non-cash items include non-cash revenues (comprised of straight-line rents, amortization of above and below market rent on our leases, amortization of lease incentives, amortization of net premium (discount) on loans receivable and amortization of capitalized lease transaction costs), non-cash interest expense (comprised of amortization of deferred financing costs and amortization of net debt discount/premium) and non-cash compensation expense (stock-based compensation expense). In addition, other equity REITs may not calculate AFFO as we do, and, accordingly, our AFFO may not be comparable to such other equity REITs' AFFO. AFFO does not represent cash generated from operating activities determined in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income determined in accordance with GAAP as a performance measure. A reconciliation of our FFO and AFFO to net income (loss) attributable to common stockholders (computed in accordance with GAAP) is included in the financial information accompanying this report.
EBITDAre
EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. EBITDAre is defined as net income (loss) (computed in accordance with GAAP), plus interest expense, plus income tax expense (if any), plus depreciation and amortization, plus (minus) losses and gains on the disposition of depreciated property, plus impairment write-downs of depreciated property and investments in unconsolidated real estate ventures, plus adjustments to reflect the Company's share of EBITDAre of unconsolidated real estate ventures.
Adjusted EBITDAre and Annualized Adjusted EBITDAre
Adjusted EBITDAre represents EBITDAre modified to include other adjustments to GAAP net income (loss) for restructuring charges, severance charges, real estate acquisition costs, and debt transactions and other items that we

61



do not consider to be indicative of our on-going operating performance. We focus our business plans to enable us to sustain increasing shareholder value. Accordingly, we believe that excluding these items, which are not key drivers of our investment decisions and may cause short-term fluctuations in net income, provides a useful supplemental measure to investors and analysts in assessing the net earnings contribution of our real estate portfolio. Because these measures do not represent net income (loss) that is computed in accordance with GAAP, they should not be considered alternatives to net income (loss) or as an indicator of financial performance. A reconciliation of net income (loss) (computed in accordance with GAAP) to EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre is included in the financial information accompanying this report.
Adjusted Debt
Adjusted Debt represents interest bearing debt (reported in accordance with GAAP) adjusted to exclude unamortized debt discount/premium and deferred financing costs, as further reduced by cash and cash equivalents and cash reserves on deposit with lenders as additional security. By excluding unamortized debt discount/premium and deferred financing costs, cash and cash equivalents, and cash reserves on deposit with lenders as additional security, the result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition.
Adjusted Debt to Annualized Adjusted EBITDAre is a supplemental non-GAAP financial measure we use to evaluate the level of borrowed capital being used to increase the potential return of our real estate investments, and a proxy for a measure we believe is used by many lenders and ratings agencies to evaluate our ability to repay and service our debt obligations over time. We believe the ratio is a beneficial disclosure to investors as a supplemental means of evaluating our ability to meet obligations senior to those of our equity holders. Our computation of this ratio may differ from the methodology used by other equity REITs, and, therefore, may not be comparable to such other REITs. A reconciliation of interest bearing debt (reported in accordance with GAAP) to Adjusted Debt is included in the financial information accompanying this report.
Initial Cash Yield
We calculate initial cash yield from properties by dividing the annualized first month base rent (excluding any future rent escalations provided for in the lease) by the gross investment in the related properties. Gross investment for an acquired property represents gross acquisition costs including the contracted purchase price and related capitalized transaction costs. Initial cash yield is a measure (expressed as a percentage) of the contractual cash rent expected to be earned on an acquired property in the first year. Because it excludes any future rent increases or additional rent that may be contractually provided for in the lease, as well as any other income or fees that may be earned from lease modifications or asset dispositions, initial cash yield does not represent the annualized investment rate of return of our acquired properties. Additionally, actual contractual cash rent earned from the properties acquired may differ from the initial cash yield based on other factors, including difficulties collecting anticipated rental revenues and unanticipated expenses at these properties that we cannot pass on to tenants, as well as the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.
Capitalization Rate
We calculate the capitalization rate for disposed properties as the annualized cash rent on the date of disposition divided by the gross sales price. For multi-tenant properties, non-reimbursable property costs are deducted from the annualized cash rent prior to computing the capitalization rate. Annualized cash rent for a disposed property represents the annualized monthly contractual cash rent under the related lease at time of disposition.

62



FFO and AFFO
The following is a reconciliation of net income attributable to common stockholders (which we believe is the most comparable GAAP measure) to FFO and AFFO. Also presented is information regarding distributions paid to common stockholders and the weighted average shares of common stock outstanding used for the basic and diluted computations per share (dollars in thousands, except per share amounts):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net income attributable to common stockholders
$
14,576

 
$
23,206

 
$
42,706

 
$
36,035

Add/(less):







Portfolio depreciation and amortization
53,838


64,081


115,814


128,936

Portfolio impairments
1,349


15,996


15,918


50,372

Realized losses (gains) on sales of real estate
(722
)

(15,273
)

(117
)

(31,490
)
Total adjustments to net income
54,465

 
64,804

 
131,615

 
147,818

 







FFO attributable to common stockholders
$
69,041

 
$
88,010

 
$
174,321

 
$
183,853

Add/(less):







(Gain) loss on debt extinguishment
(5,401
)

(8
)

(26,729
)

22

Real estate acquisition costs
408

 
424

 
456

 
577

Transaction costs
16,033

 
485

 
19,965

 
485

Non-cash interest expense
6,263


5,665


13,804


11,127

Accrued interest and fees on defaulted loans
295


899


851


1,573

Straight-line rent, net of related bad debt expense
(4,187
)

(4,763
)

(8,644
)

(10,209
)
Other amortization and non-cash charges
(89
)
 
(760
)
 
(694
)
 
(1,705
)
Non-cash compensation expense (1)
4,739


9,194


9,105


11,438

Total adjustments to FFO
18,061

 
11,136


8,114

 
13,308

 







AFFO attributable to common stockholders
$
87,102

 
$
99,146

 
$
182,435

 
$
197,161

 
 
 
 
 
 
 
 
Dividends declared to common stockholders (2)
$
77,143


$
82,422


$
155,724


$
169,544

Net income per share of common stock







Basic
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

Diluted
$
0.03

 
$
0.05

 
$
0.10

 
$
0.07

FFO per share of common stock







Diluted
$
0.16


$
0.18


$
0.40


$
0.38

AFFO per share of common stock







Diluted
$
0.20


$
0.21


$
0.42


$
0.41

AFFO per share of common stock, excluding severance charges
 
 
 
 
 
 
 
Diluted
$
0.20

 
$
0.22

 
$
0.42

 
$
0.42

Weighted average shares of common stock outstanding:







Basic
428,134,240


479,102,268


436,458,588


480,845,051

Diluted
429,018,934

 
479,102,268

 
437,016,151

 
480,845,051

(1) Included in G&A balance for the six months ended June 30, 2018 is $3.9 million of severance-related costs, comprised of $2.1 million of cash compensation and $1.8 million of non-cash compensation related to the acceleration of Restricted Stock and Performance Share Awards in connection with the departure of two executive officers.
(2) For the three months ended June 30, 2018 and 2017, dividends paid to unvested restricted stockholders of $0.3 million and $0.2 million, respectively, and for the six months ended June 30, 2018 and 2017, dividends paid to unvested restricted stockholders of $0.7 million and $0.4 million, respectively, are deducted from net income, FFO and AFFO attributable to common stockholders in the computation of per share amounts.



63



Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre - Leverage
The following provides a calculation of adjusted debt and a reconciliation of EBITDAre and annualized adjusted EBITDAre (dollars in thousands):
 
June 30,
 
2018
 
2017
 
(Unaudited)
Revolving Credit Facility
$
346,500


$
320,000

Term Loan, net

 
418,880

Unsecured Senior Notes, net
295,542

 
295,135

Mortgages and notes payable, net
467,334


2,103,425

Convertible Notes, net
722,756


709,183

 
1,832,132

 
3,846,623

Add/(less):





Unamortized debt discount, net
20,042


46,687

Unamortized deferred financing costs
17,472


33,132

Cash and cash equivalents
(9,289
)

(11,246
)
Restricted cash balances held for the benefit of lenders
(18,369
)

(52,277
)
Total adjustments
9,856

 
16,296

Adjusted Debt
$
1,841,988

 
$
3,862,919

 
 
 
 
 
Three Months Ended 
 June 30,
 
2018
 
2017
 
(Unaudited)
Net income
$
17,164

 
$
23,206

Add/(less):





Interest
42,056


46,826

Depreciation and amortization
53,980


64,220

Income tax expense
203


265

Realized loss (gain) on sales of real estate
(722
)
 
(15,273
)
Impairments on real estate assets
1,349

 
15,996

Total adjustments
96,866

 
112,034

EBITDAre
$
114,030

 
$
135,240

Add/(less):





Other costs in general and administrative associated with Spin-off
1,392

 

Transaction costs
16,033

 
485

Real estate acquisition costs
408


424

(Gain) loss on debt extinguishment
(5,401
)

(8
)
Total adjustments to EBITDAre
12,432

 
901

Adjusted EBITDAre
$
126,462

 
$
136,141

Annualized Adjusted EBITDAre (1)
$
505,848


$
544,564

 



Adjusted Debt / Annualized Adjusted EBITDAre
3.6
x

7.1
x
 
 
 
 
(1)  Adjusted EBITDAre of the current quarter multiplied by four.
 
 
 


64



Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, especially interest rate risk. Interest rates and other factors, such as occupancy, rental rates and the financial condition of our tenants, influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. As described in Item 2, we generally offer leases that provide for payments of base rent with scheduled increases and, to a lesser extent, contingent rent based on a percentage of the tenant’s gross sales to help mitigate the effect of inflation. Because the properties in our portfolio are generally leased to tenants under triple-net leases, our exposure to rising property operating costs due to inflation is mitigated.
Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and global economic and political conditions, which are beyond our control. Our operating results depend heavily on the difference between the revenue from our assets and the interest expense incurred on our borrowings. We may incur additional variable rate debt in the future, including amounts that we may borrow under our Revolving Credit Facility and Term Loan. In addition, decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments, which may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected. Significant increases in interest rates may also have an adverse impact on our earnings if we are unable to acquire real estate with rental rates high enough to offset the increase in interest rates on our borrowings.
In the event interest rates rise significantly or there is an economic downturn, defaults may increase and result in credit losses, which may adversely affect our liquidity and operating results. In a decreasing interest rate environment, borrowers are generally more likely to prepay their loans in order to obtain financing at lower interest rates. However, the vast majority of our mortgage notes payable have prepayment clauses that make refinancing during a decreasing interest rate environment uneconomical. Investments in our mortgage loans receivable also have significant prepayment protection in the form of yield maintenance provisions, which provide us with substantial yield protection in a decreasing interest rate environment with respect to this portion of our investment portfolio.
The objective of our interest rate risk management policy is to match fund fixed-rate assets with fixed-rate liabilities. As of June 30, 2018, our assets were primarily long-term, fixed-rate leases (though most have scheduled rental increases during the terms of the leases). As of June 30, 2018, $1.5 billion of our indebtedness was fixed-rate, consisting of our Master Trust Notes, fixed-rate CMBS and mortgage loans, Senior Unsecured Notes and Convertible Notes, with a weighted average stated interest rate of 4.09%, excluding amortization of deferred financing costs and debt discounts/premiums. As of June 30, 2018, $346.5 million of our indebtedness was variable-rate, consisting of our Revolving Credit Facility with a stated interest rate of 3.32%. If one-month LIBOR as of June 30, 2018 increased by 100 basis points, or 1.0%, the resulting increase in annual interest expense with respect to the $346.5 million outstanding under the Revolving Credit Facility would impact our future earnings and cash flows by $3.5 million.
The estimated fair values of our debt instruments have been derived based on market quotes for comparable instruments or discounted cash flow analysis using estimates of the amount and timing of future cash flows, market rates and credit spreads. The debt instrument balances as of June 30, 2018 are as follows (in thousands):
 
Carrying
Value
 
Estimated
Fair Value
 
 
 
 
Revolving Credit Facility
$
346,500

 
$
346,470

Term Loan, net (1)

 

Senior Unsecured Notes, net (1)
295,542

 
289,236

Mortgages and notes payable, net (1)
467,334

 
495,046

Convertible Notes, net (1)
722,756

 
750,624

(1) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.

65



Item 4. Controls and Procedures
SPIRIT REALTY CAPITAL, INC.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of Spirit Realty Capital, Inc.'s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness as of June 30, 2018 of the design and operation of Spirit Realty Capital, Inc.'s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting
There were no changes to Spirit Realty Capital, Inc.'s internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, Spirit Realty Capital, Inc.'s internal control over financial reporting.
SPIRIT REALTY, L.P.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of Spirit Realty, L.P.'s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness as of June 30, 2018 of the design and operation of Spirit Realty, L.P.'s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting
There were no changes to Spirit Realty, L.P.'s internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, Spirit Realty, L.P.'s internal control over financial reporting.


66



PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
From time-to-time, we may be subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. We are not currently a party as plaintiff or defendant to any legal proceedings that we believe to be material or that individually or in the aggregate would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to us.
Item 1A. Risk Factors.
There have been no material changes to the risk factors as disclosed in the section entitled “Risk Factors” beginning on page 12 of our Annual Report on Form 10-K for the year ended December 31, 2017 and filed with the SEC on February 23, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table summarized the repurchases of the Company's equity securities during the second quarter of 2018 :
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
Period
 
 
 
 
 
 
 
April 1 - 30, 2018
8,061,192

 
$
7.93

 
8,061,192

 
$
250,000,000

May 1 - 31, 2018

 

 

 
250,000,000

June 1 - 30, 2018

 

 

 
250,000,000

Total
8,061,192

 
$
7.93

 
8,061,192

 
$
250,000,000

Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.


67



Item 6. Exhibits.
Exhibit No.
 
Description
 
 
 
2.1
 
 
3.1
 
 
3.2
 
 
3.3
 
 
3.4
 
 
3.5
 
 
3.6
 
 
3.7
 
 
10.1
 
 
10.2
 
 
10.3
 
 
10.4
 
 
10.5
 
 
10.6*
 
 
31.1*
 
 
31.2*
 
 
31.3*
 
 
31.4*
 
 

68



Exhibit No.
 
Description
 
32.1*
 
 
32.2*
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
*
Filed herewith.


69



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
 
SPIRIT REALTY CAPITAL, INC.
(Registrant)
 
 
 
 
By:
/s/ Prakash J. Parag
 
Name:
Prakash J. Parag
 
Title:
Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)
 
SPIRIT REALTY, L.P.
(Registrant)
 
 
 
 
By:
Spirit General OP Holdings, LLC, as general partner of Spirit Realty, L.P.
 
 
/s/ Prakash J. Parag
 
 
Prakash J. Parag
 
 
Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)
Date: August 8, 2018


70