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Spirit Realty Capital, Inc., et al. – ‘10-Q’ for 9/30/17

On:  Thursday, 11/2/17, at 6:38am ET   ·   For:  9/30/17   ·   Accession #:  1308606-17-125   ·   File #s:  1-36004, 333-216815-01

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  As Of               Filer                 Filing    For·On·As Docs:Size

11/02/17  Spirit Realty Capital, Inc.       10-Q        9/30/17   86:9.9M
          Spirit Realty, L.P.

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        10-Q 3Q2017                                         HTML   1.00M 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     32K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     32K 
 4: EX-31.3     Certification -- §302 - SOA'02                      HTML     32K 
 5: EX-31.4     Certification -- §302 - SOA'02                      HTML     32K 
 6: EX-32.1     Certification -- §906 - SOA'02                      HTML     30K 
 7: EX-32.2     Certification -- §906 - SOA'02                      HTML     30K 
14: R1          Document and Entity Information                     HTML     50K 
15: R2          Consolidated Balance Sheets                         HTML    132K 
16: R3          Consolidated Balance Sheets (Parenthetical)         HTML     44K 
17: R4          Consolidated Statements of Operations               HTML    135K 
18: R5          Consolidated Statements of Comprehensive Income     HTML     42K 
19: R6          Consolidated Statement of Stockholders' Equity      HTML     63K 
20: R7          Consolidated Statements of Partners' Capital        HTML     59K 
                Consolidated Statements of Partners' Capital                     
21: R8          Consolidated Statements of Cash Flows               HTML    149K 
22: R9          Organization                                        HTML     31K 
23: R10         Summary of Significant Accounting Policies          HTML     57K 
24: R11         Investments                                         HTML    163K 
25: R12         Debt                                                HTML    200K 
26: R13         Derivative and Hedging Activities                   HTML     54K 
27: R14         Stockholders' Equity and Partners' Capital          HTML     50K 
28: R15         Commitments and Contingencies                       HTML     38K 
29: R16         Fair Value Measurements                             HTML    132K 
30: R17         Significant Credit and Revenue Concentration        HTML     30K 
31: R18         Supplemental Cash Flow Information                  HTML     46K 
32: R19         Incentive Award Plan                                HTML     38K 
33: R20         Income Per Share and Partnership Unit               HTML     88K 
34: R21         Costs Associated With Restructuring Activities      HTML     30K 
35: R22         Subsequent Event                                    HTML     28K 
36: R23         Summary of Significant Accounting Policies          HTML     64K 
                (Policies)                                                       
37: R24         Summary of Significant Accounting Policies          HTML     42K 
                (Tables)                                                         
38: R25         Investments (Tables)                                HTML    207K 
39: R26         Debt (Tables)                                       HTML    173K 
40: R27         Derivative and Hedging Activities (Tables)          HTML     52K 
41: R28         Stockholders' Equity and Partners' Capital          HTML     42K 
                (Tables)                                                         
42: R29         Fair Value Measurements (Tables)                    HTML    151K 
43: R30         Supplemental Cash Flow Information (Tables)         HTML     45K 
44: R31         Income Per Share and Partnership Unit (Tables)      HTML     86K 
45: R32         Organization - Narrative (Details)                  HTML     35K 
46: R33         Summary of Significant Accounting Policies -        HTML     47K 
                Narrative (Details)                                              
47: R34         Summary of Significant Accounting Policies -        HTML     39K 
                Schedule of Restricted Cash and Escrow Deposits                  
                (Details)                                                        
48: R35         Investments - Narrative (Details)                   HTML     65K 
49: R36         Investments - Summary of Real Estate and Loan       HTML     75K 
                Activity, Net of Accumulated Depreciation and                    
                Amortization (Details)                                           
50: R37         Investments - Summary of Real Estate and Loan       HTML     32K 
                Activity, Net of Accumulated Depreciation and                    
                Amortization (Footnote) (Details)                                
51: R38         Investments - Schedule of Minimum Future            HTML     41K 
                Contractual Rent to be Received (Details)                        
52: R39         Investments - Schedule of Loans Receivable, Net of  HTML     42K 
                Premium and Allowance for Loan Losses (Details)                  
53: R40         Investments - Schedule of Lease Intangible Assets   HTML     42K 
                and Liabilities, Net of Accumulated Amortization                 
                (Details)                                                        
54: R41         Investments - Schedule of Components of Real        HTML     35K 
                Estate Investments Held Under Direct Financing                   
                Leases (Details)                                                 
55: R42         Investments - Schedule of Activity in Real Estate   HTML     44K 
                Assets Held for Sale (Details)                                   
56: R43         Investments - Summary of Total Impairment Losses    HTML     40K 
                Recognized (Details)                                             
57: R44         Debt - Summary of Debt (Details)                    HTML     73K 
58: R45         Debt - Revolving Credit Facilities - Narrative      HTML     71K 
                (Details)                                                        
59: R46         Debt - Term Loan - Narrative (Details)              HTML     64K 
60: R47         Debt - Senior Unsecured Notes (Details)             HTML     46K 
61: R48         Debt - Summary of Debt - Master Trust Notes         HTML     73K 
                (Details)                                                        
62: R49         Debt - Master Trust Notes - Narrative (Details)     HTML     34K 
63: R50         Debt - CMBS - Narrative (Details)                   HTML     57K 
64: R51         Debt - Convertible Notes - Narrative (Details)      HTML     52K 
65: R52         Debt - Debt Extinguishment - Narrative (Details)    HTML     35K 
66: R53         Debt - Schedule of Debt Maturities (Details)        HTML     55K 
67: R54         Debt - Schedule of Debt Maturities (Footnote)       HTML     48K 
                (Details)                                                        
68: R55         Debt - Summary of Components of Interest Expense    HTML     54K 
                Related to Borrowings (Details)                                  
69: R56         Derivative and Hedging Activities - Summary of      HTML     47K 
                Amounts Recorded in AOCL (Details)                               
70: R57         Stockholders' Equity and Partners' Capital -        HTML     50K 
                Narrative (Details)                                              
71: R58         Stockholders' Equity and Partners' Capital -        HTML     31K 
                Summary of Dividends Declared (Details)                          
72: R59         Commitments and Contingencies - Narrative           HTML     80K 
                (Details)                                                        
73: R60         Fair Value Measurements - Narrative (Details)       HTML     32K 
74: R61         Fair Value Measurements - Schedule of Assets at     HTML     57K 
                Fair Value on Nonrecurring Basis (Details)                       
75: R62         Fair Value Measurements - Fair Value Inputs of      HTML     60K 
                Long-Lived Assets Held and Used (Details)                        
76: R63         Fair Value Measurements - Schedule of Carrying      HTML     48K 
                Amount And Estimated Fair Value Of Financial                     
                Instruments (Details)                                            
77: R64         Significant Credit and Revenue Concentration -      HTML     43K 
                Narrative (Details)                                              
78: R65         Supplemental Cash Flow Information - Schedule of    HTML     54K 
                Supplemental Cash Flow Disclosures (Details)                     
79: R66         Incentive Award Plan - Narrative (Details)          HTML     68K 
80: R67         Income Per Share and Partnership Unit - Schedule    HTML     73K 
                of Reconciliation of the Numerator and Denominator               
                Used in the Computation of Basic and Diluted                     
                Income Per Share (Details)                                       
81: R68         Income Per Share and Partnership Unit - Narrative   HTML     28K 
                (Details)                                                        
82: R69         Costs Associated With Restructuring Activities -    HTML     29K 
                Narrative (Details)                                              
83: R70         Subsequent Event (Details)                          HTML     37K 
85: XML         IDEA XML File -- Filing Summary                      XML    153K 
84: EXCEL       IDEA Workbook of Financial Reports                  XLSX     95K 
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 9: EX-101.SCH  XBRL Schema -- src-20170930                          XSD    233K 
86: ZIP         XBRL Zipped Folder -- 0001308606-17-000125-xbrl      Zip    293K 


‘10-Q’   —   10-Q 3Q2017
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Part I -- Financial Information
"Item 1. Financial Statements
"Item 3. Quantitative and Qualitative Disclosures About Market Risk
"Item 4. Controls and Procedures
"Part Ii -- Other Information
"Item 1. Legal Proceedings
"Signatures

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  Document  
 
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 September 30, 2017
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  o No   x
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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” or an emerging growth company. See definitions of "large 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 October 31, 2017, there were 455,897,075 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 nine months ended September 30, 2017 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, or 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 footnote 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
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
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM Program
At the Market equity distribution program, pursuant to which the Corporation 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
Cole II
Cole Credit Property Trust II, Inc.
Cole II Merger
Acquisition on July 17, 2013 of Cole II by the Company, in which the Company merged with and into the Cole II legal entity
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 the Spirit Master Funding Program
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
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
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 under the Spirit Master Funding Program
Master Trust 2014
The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014 under the Spirit Master Funding Program
Master Trust Notes
Master Trust 2013 and Master Trust 2014 notes, together
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
Operating Partnership
Spirit Realty, L.P., a Delaware limited partnership

3


Definitions:
 
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 Cumulative Redeemable 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
Spirit Master Funding Program
The Company's asset-backed securitization program that comprises Master Trust 2013 and Master Trust 2014
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 Shareholder Return
U.S.
United States

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

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)
 
 
Assets



Investments:



Real estate investments:



Land and improvements
$
2,600,873


$
2,704,010

Buildings and improvements
4,702,828


4,775,221

Total real estate investments
7,303,701


7,479,231

Less: accumulated depreciation
(1,018,544
)

(940,005
)

6,285,157


6,539,226

Loans receivable, net
76,821


66,578

Intangible lease assets, net
429,857


470,276

Real estate assets under direct financing leases, net
24,883


36,005

Real estate assets held for sale, net
133,382


160,570

Net investments
6,950,100


7,272,655

Cash and cash equivalents
11,947


10,059

Deferred costs and other assets, net
218,400


140,917

Goodwill
254,340


254,340

Total assets
$
7,434,787


$
7,677,971

Liabilities and stockholders’ equity



Liabilities:



Revolving Credit Facility
$
386,000


$
86,000

Term Loan, net
419,091

 
418,471

Senior Unsecured Notes, net
295,242

 
295,112

Mortgages and notes payable, net
2,050,302


2,162,403

Convertible Notes, net
712,510


702,642

Total debt, net
3,863,145

 
3,664,628

Intangible lease liabilities, net
162,619


182,320

Accounts payable, accrued expenses and other liabilities
149,858


148,915

Total liabilities
4,175,622


3,995,863

Commitments and contingencies (see Note 7)





Stockholders’ equity:



Common stock, $0.01 par value, 750,000,000 shares authorized: 455,900,032 and 483,624,120 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
4,559


4,836

Capital in excess of par value
5,190,849


5,177,086

Accumulated deficit
(1,936,243
)

(1,499,814
)
Accumulated other comprehensive income



Total stockholders’ equity
3,259,165

 
3,682,108

Total liabilities and stockholders’ equity
$
7,434,787

 
$
7,677,971

See accompanying notes.

5


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


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rentals
$
159,799

 
$
161,765

 
$
479,506

 
$
484,090

Interest income on loans receivable
1,003

 
1,042

 
2,769

 
4,326

Earned income from direct financing leases
483

 
660

 
1,613

 
2,082

Tenant reimbursement income
4,691

 
3,469

 
13,136

 
10,493

Other income
3,574

 
5,572

 
6,583

 
11,600

Total revenues
169,550

 
172,508

 
503,607

 
512,591

Expenses:
 
 
 
 
 
 
 
General and administrative
13,712

 
15,112

 
49,992

 
40,611

Restructuring charges

 
3,264

 

 
5,726

Transaction costs
2,660

 

 
3,145

 

Property costs
8,080

 
6,916

 
26,763

 
20,854

Real estate acquisition costs
196

 
1,056

 
773

 
2,092

Interest
48,680

 
47,653

 
142,129

 
149,842

Depreciation and amortization
63,673

 
65,300

 
192,887

 
194,227

Impairments
37,737

 
15,407

 
88,109

 
41,396

Total expenses
174,738

 
154,708

 
503,798

 
454,748

(Loss) income before other income/(expense) and income tax benefit (expense)
(5,188
)
 
17,800

 
(191
)
 
57,843

Other income (expense):
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
1,792

 
(8,349
)
 
1,770

 
326

Total other income (expense)
1,792

 
(8,349
)
 
1,770

 
326

(Loss) income before income tax benefit (expense)
(3,396
)
 
9,451

 
1,579

 
58,169

Income tax benefit (expense)
11

 
(12
)
 
(419
)
 
(932
)
(Loss) income before gain on disposition of assets
(3,385
)
 
9,439

 
1,160

 
57,237

Gain on disposition of assets
8,707

 
17,960

 
40,197

 
39,221

Net income attributable to common stockholders
$
5,322

 
$
27,399

 
$
41,357

 
$
96,458

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders—basic
$
0.01

 
$
0.06

 
$
0.09

 
$
0.21

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders—diluted
$
0.01

 
$
0.06

 
$
0.09

 
$
0.21

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
456,671,617

 
479,554,362

 
472,698,692

 
457,263,526

Diluted
456,671,617

 
480,598,610

 
472,698,692

 
457,301,623

 
 
 
 
 
 
 
 
Dividends declared per common share issued
$
0.1800

 
$
0.1750

 
$
0.5400

 
$
0.5250

See accompanying notes.

6


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income attributable to common stockholders
$
5,322

 
$
27,399

 
$
41,357

 
$
96,458

Other comprehensive income:
 
 
 
 
 
 
 
Change in net unrealized losses on cash flow hedges

 
28

 

 
(1,145
)
Net cash flow hedge losses reclassified to operations

 

 

 
2,165

Total comprehensive income
$
5,322

 
$
27,427

 
$
41,357

 
$
97,478

See accompanying notes.


7


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

 
Common Stock
 
 
 
 
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
483,624,120

 
$
4,836

 
$
5,177,086

 
$
(1,499,814
)
 
$
3,682,108

Net income

 

 

 
41,357

 
41,357

Dividends declared on common stock

 

 

 
(251,606
)
 
(251,606
)
Tax withholdings related to net stock settlements
(430,429
)
 
(4
)
 

 
(3,454
)
 
(3,458
)
Repurchase of common shares
(28,819,865
)
 
(288
)
 
 
 
(222,002
)
 
(222,290
)
Stock-based compensation, net
1,526,206

 
15

 
13,763

 
(724
)
 
13,054

455,900,032

 
$
4,559

 
$
5,190,849

 
$
(1,936,243
)
 
$
3,259,165

See accompanying notes.

8


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

 
Nine Months Ended 
 September 30,
 
2017
 
2016
Operating activities
 
 
 
Net income attributable to common stockholders
$
41,357

 
$
96,458

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
192,887

 
194,227

Impairments
88,109

 
41,396

Amortization of deferred financing costs
7,274

 
6,706

Payment to terminate interest rate swaps

 
(1,724
)
Derivative net settlements, amortization and terminations

 
1,809

Amortization of debt discounts
9,663

 
3,354

Stock-based compensation expense
13,778

 
7,190

Gain on debt extinguishment
(1,770
)
 
(326
)
Debt extinguishment costs

 
(25,344
)
Gains on dispositions of real estate and other assets, net
(40,197
)
 
(39,221
)
Non-cash revenue
(20,642
)
 
(16,155
)
Other
4,902

 
(1,514
)
Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(8,728
)
 
(8,911
)
Accounts payable, accrued expenses and other liabilities
5,726

 
1,346

Net cash provided by operating activities
292,359

 
259,291

Investing activities
 
 
 
Acquisitions of real estate
(278,470
)
 
(424,468
)
Capitalized real estate expenditures
(34,939
)
 
(8,307
)
Investments in corporate leasehold improvements

 
(2,839
)
Investments in loans receivable
(4,995
)
 

Collections of principal on loans receivable and real estate assets under direct financing leases
7,817

 
6,331

Proceeds from dispositions of real estate and other assets
342,032

 
245,921

Transfers of net sales proceeds from restricted accounts pursuant to 1031 Exchanges

 
58,194

Transfers of net sales proceeds to Master Trust Release
(64,941
)
 
(3,953
)
Net cash used in investing activities
(33,496
)
 
(129,121
)

9


 
Nine Months Ended 
 September 30,
 
2017
 
2016
Financing activities
 
 
 
Borrowings under Revolving Credit Facility
781,200

 
828,000

Repayments under Revolving Credit Facility
(481,200
)
 
(723,000
)
Repayments under mortgages and notes payable
(76,403
)
 
(790,224
)
Borrowings under Term Loan

 
746,000

Repayments under Term Loan

 
(701,000
)
Borrowings under Senior Unsecured Notes

 
298,134

Deferred financing costs
(192
)
 
(4,017
)
Proceeds from issuance of common stock, net of offering costs

 
446,613

Repurchase of shares of common stock
(225,748
)
 
(739
)
Dividends paid
(257,112
)
 
(238,926
)
Transfers (from) to reserve/escrow deposits with lenders
2,480

 
383

Net cash used in financing activities
(256,975
)
 
(138,776
)
Net increase (decrease) in cash and cash equivalents
1,888

 
(8,606
)
Cash and cash equivalents, beginning of period
10,059

 
21,790

Cash and cash equivalents, end of period
$
11,947

 
$
13,184

 
 
 
 
Cash paid for interest
$
121,166

 
$
130,762

Cash paid for income taxes
$
872

 
$
763

See accompanying notes.

10



 
SPIRIT REALTY, L.P.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
2,600,873

 
$
2,704,010

Buildings and improvements
4,702,828

 
4,775,221

Total real estate investments
7,303,701

 
7,479,231

Less: accumulated depreciation
(1,018,544
)
 
(940,005
)

6,285,157

 
6,539,226

Loans receivable, net
76,821

 
66,578

Intangible lease assets, net
429,857

 
470,276

Real estate assets under direct financing leases, net
24,883

 
36,005

Real estate assets held for sale, net
133,382

 
160,570

Net investments
6,950,100

 
7,272,655

Cash and cash equivalents
11,947

 
10,059

Deferred costs and other assets, net
218,400

 
140,917

Goodwill
254,340

 
254,340

Total assets
$
7,434,787

 
$
7,677,971

Liabilities and partners' capital
 
 
 
Liabilities:
 
 
 
Revolving Credit Facility
$
386,000

 
$
86,000

Term Loan, net
419,091

 
418,471

Senior Unsecured Notes, net
295,242

 
295,112

Mortgages and notes payable, net
2,050,302

 
2,162,403

Notes payable to Spirit Realty Capital, Inc., net
712,510

 
702,642

Total debt, net
3,863,145

 
3,664,628

Intangible lease liabilities, net
162,619

 
182,320

Accounts payable, accrued expenses and other liabilities
149,858

 
148,915

Total liabilities
4,175,622

 
3,995,863

Commitments and contingencies (see Note 7)


 


Partners' capital:
 
 
 
Partnership units
 
 
 
General partner's capital: 3,988,218 units issued and outstanding as of both September 30, 2017 and December 31, 2016
24,835

 
26,586

Limited partners' capital: 451,911,814 and 479,635,902 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
3,234,330

 
3,655,522

Total partners' capital
3,259,165

 
3,682,108

Total liabilities and partners' capital
7,434,787

 
7,677,971


See accompanying notes.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rentals
$
159,799

 
$
161,765

 
$
479,506

 
$
484,090

Interest income on loans receivable
1,003

 
1,042

 
2,769

 
4,326

Earned income from direct financing leases
483

 
660

 
1,613

 
2,082

Tenant reimbursement income
4,691

 
3,469

 
13,136

 
10,493

Other income
3,574

 
5,572

 
6,583

 
11,600

Total revenues
169,550

 
172,508

 
503,607

 
512,591

Expenses:
 
 
 
 
 
 
 
General and administrative
13,712

 
15,112

 
49,992

 
40,611

Restructuring charges

 
3,264

 

 
5,726

Transaction costs
2,660

 

 
3,145

 

Property costs
8,080

 
6,916

 
26,763

 
20,854

Real estate acquisition costs
196

 
1,056

 
773

 
2,092

Interest
48,680

 
47,653

 
142,129

 
149,842

Depreciation and amortization
63,673

 
65,300

 
192,887

 
194,227

Impairments
37,737

 
15,407

 
88,109

 
41,396

Total expenses
174,738

 
154,708

 
503,798

 
454,748

(Loss) income before other income/(expense) and income tax benefit (expense)
(5,188
)
 
17,800

 
(191
)
 
57,843

Other income (expense):
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
1,792

 
(8,349
)
 
1,770

 
326

Total other income (expense)
1,792

 
(8,349
)
 
1,770

 
326

(Loss) income before income tax benefit (expense)
(3,396
)
 
9,451

 
1,579

 
58,169

Income tax benefit (expense)
11

 
(12
)
 
(419
)
 
(932
)
(Loss) income before gain on disposition of assets
(3,385
)
 
9,439

 
1,160

 
57,237

Gain on disposition of assets
8,707

 
17,960

 
40,197

 
39,221

Net income
$
5,322

 
$
27,399

 
$
41,357

 
$
96,458

Net income attributable to the general partner
$
44

 
$
232

 
344

 
817

Net income attributable to the limited partners
$
5,278

 
$
27,167

 
$
41,013

 
$
95,641

 
 
 
 
 
 
 
 
Net income per partnership unit - basic
$
0.01

 
$
0.06

 
$
0.09

 
$
0.21

 
 
 
 
 
 
 
 
Net income per partnership unit - diluted
$
0.01

 
$
0.06

 
$
0.09

 
$
0.21

 
 
 
 
 
 
 
 
Weighted average partnership units outstanding:

 

 

 

Basic
456,671,617

 
479,554,362

 
472,698,692

 
457,263,526

Diluted
456,671,617

 
480,598,610

 
472,698,692

 
457,301,623

 
 
 
 
 
 
 
 
Distributions declared per partnership unit issued
$
0.1800

 
$
0.1750

 
$
0.5400

 
$
0.5250


See accompanying notes.

11



SPIRIT REALTY, L.P.
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
5,322

 
$
27,399

 
$
41,357

 
$
96,458

Other comprehensive income:
 
 
 
 
 
 
 
Change in net unrealized losses on cash flow hedges

 
28

 

 
(1,145
)
Net cash flow hedge losses reclassified to operations

 

 

 
2,165

Total comprehensive income
$
5,322

 
$
27,427

 
$
41,357

 
$
97,478

See accompanying notes.


12



SPIRIT REALTY, L.P.
Consolidated Statements of Partners' Capital
(In Thousands, Except Unit Data)
(Unaudited)
 
 
General Partner's Capital (1)
 
 
Limited Partners' Capital (2)
 
 
Total Partnership Capital
 
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
3,988,218

 
$
26,586

 
479,635,902

 
$
3,655,522

 
$
3,682,108

Net income
 

 
344

 

 
41,013

 
41,357

Partnership distributions declared
 

 
(2,095
)
 

 
(249,511
)
 
(251,606
)
Tax withholdings related to net partnership unit settlements
 

 

 
(430,429
)
 
(3,458
)
 
(3,458
)
Repurchase of partnership units
 

 

 
(28,819,865
)
 
(222,290
)
 
(222,290
)
Stock-based compensation
 

 

 
1,526,206

 
13,054

 
13,054

 
3,988,218

 
$
24,835

 
451,911,814

 
$
3,234,330

 
$
3,259,165

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

See accompanying notes.


13



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

 
Nine Months Ended 
 September 30,
 
2017
 
2016
Operating activities
 
 
 
Net income attributable to partners
$
41,357

 
$
96,458

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
192,887

 
194,227

Impairments
88,109

 
41,396

Amortization of deferred financing costs
7,274

 
6,706

Payment to terminate interest rate swaps

 
(1,724
)
Derivative net settlements, amortization and terminations

 
1,809

Amortization of debt discounts
9,663

 
3,354

Stock-based compensation expense
13,778

 
7,190

Gain on debt extinguishment
(1,770
)
 
(326
)
Debt extinguishment costs

 
(25,344
)
Gains on dispositions of real estate and other assets, net
(40,197
)
 
(39,221
)
Non-cash revenue
(20,642
)
 
(16,155
)
Other
4,902

 
(1,514
)
Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(8,728
)
 
(8,911
)
Accounts payable, accrued expenses and other liabilities
5,726

 
1,346

Net cash provided by operating activities
292,359

 
259,291

Investing activities
 
 
 
Acquisitions of real estate
(278,470
)
 
(424,468
)
Capitalized real estate expenditures
(34,939
)
 
(8,307
)
Investments in corporate leasehold improvements

 
(2,839
)
Investments in loans receivable
(4,995
)
 

Collections of principal on loans receivable and real estate assets under direct financing leases
7,817

 
6,331

Proceeds from dispositions of real estate and other assets
342,032

 
245,921

Transfers of net sales proceeds from restricted accounts pursuant to 1031 Exchanges

 
58,194

Transfers of net sales proceeds to Master Trust Release
(64,941
)
 
(3,953
)
Net cash used in investing activities
(33,496
)
 
(129,121
)

14



 
Nine Months Ended 
 September 30,
 
2017
 
2016
Financing activities
 
 
 
Borrowings under Revolving Credit Facility
781,200

 
828,000

Repayments under Revolving Credit Facility
(481,200
)
 
(723,000
)
Repayments under mortgages and notes payable
(76,403
)
 
(790,224
)
Borrowings under Term Loan

 
746,000

Repayments under Term Loan

 
(701,000
)
Borrowings under Senior Unsecured Notes

 
298,134

Deferred financing costs
(192
)
 
(4,017
)
Proceeds from issuance of partnership units, net of offering costs

 
446,613

Repurchase of partnership units
(225,748
)
 
(739
)
Dividends paid
(257,112
)
 
(238,926
)
Transfers (from) to reserve/escrow deposits with lenders
2,480

 
383

Net cash used in financing activities
(256,975
)
 
(138,776
)
Net increase (decrease) in cash and cash equivalents
1,888

 
(8,606
)
Cash and cash equivalents, beginning of period
10,059

 
21,790

Cash and cash equivalents, end of period
$
11,947

 
$
13,184

 
 
 
 
Cash paid for interest
$
121,166

 
$
130,762

Cash paid for income taxes
$
872

 
$
763

See accompanying notes.


15


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)



Note 1. Organization
Company Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" 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 investing primarily 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 predominantly retail, but also office and industrial 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 Corporation's wholly-owned subsidiaries, is the sole general partner and owns approximately 1.0% 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 99.0% of the Operating Partnership.
On August 3, 2017, the Company announced a proposed spin-off of almost all of the properties leased to Shopko, the assets that collateralize Master Trust 2014 and potentially additional assets into an independent, publicly traded REIT. Transaction costs associated with the spin off for the three and nine months ended September 30, 2017 totaled $2.7 million and $3.1 million, respectively, and are included within transaction costs on the accompanying consolidated statements of operations.
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, 2016.
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 inter-company 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 under their governing documents. At September 30, 2017 and December 31, 2016, net assets totaling $2.73 billion and $2.95 billion, respectively, were held, and net liabilities totaling $2.15 billion and $2.26 billion, respectively, were owed by these special purpose entities and are included in the accompanying consolidated balance sheets.

16


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

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. In the event that 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 provided for reserves for uncollectible amounts totaling $8.3 million and $6.4 million at September 30, 2017 and December 31, 2016, respectively, against accounts receivable balances of $22.4 million and $25.3 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 and an assessment of the risks inherent in the portfolio, giving consideration to historical experience and industry default rates for long-term receivables. The Company established a reserve for losses of $2.4 million at September 30, 2017 and $7.7 million at December 31, 2016, against deferred rental revenue receivables of $77.3 million and $71.1 million, respectively. Deferred rental revenue receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Restricted Cash and Escrow Deposits
Restricted cash and deposits in escrow, classified within deferred costs and other assets, net in the accompanying consolidated balance sheets consisted of the following (in thousands):
 
 
Collateral deposits (1)
$
1,229

 
$
1,374

Tenant improvements, repairs, and leasing commissions (2)
7,988

 
9,739

Master Trust Release (3)
79,353

 
14,412

Loan impounds (4)
330

 
670

Other (5)
7,444

 
644

 
$
96,344

 
$
26,839

(1) Funds held in reserve by lenders which can be applied at their discretion to the repayment of debt (any funds remaining on deposit after the debt is paid in full are released to the borrower). Balance changes are reflected in financing activities within the Statement of Cash Flows.
(2) Deposits held as additional collateral support by lenders to fund tenant improvements, repairs and leasing commissions incurred to secure a new tenant. Balance changes are reflected in financing activities within the Statement of Cash Flows.
(3) Proceeds from the sale of assets pledged as collateral under the Spirit Master Funding Program, which are held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal. Balance changes are reflected in investing activities within the Statement of Cash Flows.
(4) Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses. Balance changes are reflected in financing activities within the Statement of Cash Flows.
(5) Primarily funds held in lender controlled accounts released after scheduled debt service requirements are met. Balance changes are reflected in operating activities within the Statement of Cash Flows.

17


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

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.
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.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiaries are subject to federal, state and local taxes, which are not material.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or the SEC that are adopted by the Company as of the specified effective date. These new accounting pronouncements entail technical corrections to existing guidance or affect guidance related to specialized industries or entities. There are no updates to our prior disclosures regarding adoption of pronouncements that are not yet effective. Additionally, we have evaluated new accounting pronouncements issued subsequent to our most recent Annual Report on Form 10-K and have concluded that they are either not applicable or will not have a material impact on the Company's financial position or results of operations.
Changes in Accounting Principle
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies many aspects of accounting for share-based payment transactions under ASC Topic 718, Compensation - Stock Compensation, including income tax consequences, classification of awards as either equity or liability, forfeiture rate calculations and classification on the statement of cash flows. The Company adopted this new guidance effective January 1, 2017 and made an accounting policy election to recognize stock-based compensation forfeitures as they occur, whereas previously stock-based compensation forfeitures were estimated and recognized based on historical forfeiture rates. This change in accounting principle has been applied prospectively and the change in accounting principle had no material impact on the financial statements of the Company.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which narrows the definition of a business. The Company early adopted the guidance effective January 1, 2017 and application is on a prospective basis. Under the new guidance, the acquisition of a property with an in-place lease generally is no longer accounted for as an acquisition of a business, but instead as an asset acquisition, meaning the transaction costs of such an acquisition are now capitalized instead of expensed. Further, dispositions of properties generally no longer qualify as a disposition of a business and therefore do not generate allocated goodwill when determining gain or loss on sale.

18


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Note 3. Investments
Real Estate Investments

As of September 30, 2017, the Company's gross investment in real estate properties and loans totaled approximately $8.0 billion, representing investments in 2,511 properties, including 88 properties or other related assets securing mortgage loans. The gross 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 only one state, Texas, with a real estate investment of 12.2%, accounting for more than 10% of the total dollar amount of the Company’s real estate investment portfolio.
During the nine months ended September 30, 2017, 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, 2016
2,541

 
74

 
2,615

 
$
8,181,076

 
$
66,578

 
$
8,247,654

Acquisitions/improvements (1)
43

 
15

 
58

 
314,141

 
19,190

 
333,331

Dispositions of real estate (2)
(161
)
 

 
(161
)
 
(392,504
)
 

 
(392,504
)
Principal payments and payoffs

 
(1
)
 
(1
)
 

 
(7,817
)
 
(7,817
)
Impairments

 

 

 
(88,109
)
 

 
(88,109
)
Write-off of gross lease intangibles

 

 

 
(64,766
)
 

 
(64,766
)
Loan premium amortization and other

 

 

 
(4,847
)
 
(1,130
)
 
(5,977
)
Gross balance, September 30, 2017
2,423

 
88

 
2,511

 
7,944,991

 
76,821

 
8,021,812

Accumulated depreciation and amortization
 
 
 
 
 
 
(1,234,978
)
 

 
(1,234,978
)
Other
 
 
 
 
 
 
647

 

 
647

Net balance, September 30, 2017
 
 
 
 
 
 
$
6,710,660

 
$
76,821

 
$
6,787,481

(1) Includes investments of $33.8 million in revenue producing capitalized expenditures, as well as $1.2 million of non-revenue producing capitalized expenditures as of September 30, 2017.
(2) The total accumulated depreciation and amortization associated with dispositions of real estate was $42.0 million as of September 30, 2017.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases (including realized rent increases occurring after October 1, 2017) at September 30, 2017 (in thousands):
 
Remainder of 2017
$
151,042

2018
597,808

2019
583,233

2020
566,864

2021
538,273

Thereafter
4,084,670

Total future minimum rentals
$
6,521,890

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 rentals based on a percentage of the lessees' gross sales or lease escalations based on future changes in the CPI or other stipulated reference rate.

19


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)


Loans Receivable
The following table details loans receivable, net of premium and allowance for loan losses (in thousands):
 
 
Mortgage loans - principal
$
62,833

 
$
55,410

Mortgage loans - premium, net of amortization
5,568

 
7,194

Mortgages loans, net
68,401

 
62,604

Other note receivables - principal
8,420

 
4,474

Allowance for loan losses

 
(500
)
Other note receivables, net
8,420

 
3,974

Total loans receivable, net
$
76,821

 
$
66,578

The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are four other notes receivable included within loans receivable, of which two notes totaling $6.5 million are secured by tenant assets and stock and the remaining two notes are unsecured.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
 
In-place leases
$
599,905

 
$
624,723

Above-market leases
91,274

 
88,873

Less: accumulated amortization
(261,322
)
 
(243,320
)
Intangible lease assets, net
$
429,857

 
$
470,276

 
 
 
 
Below-market leases
$
222,078

 
$
236,008

Less: accumulated amortization
(59,459
)
 
(53,688
)
Intangible lease liabilities, net
$
162,619

 
$
182,320

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases were $4.9 million and $4.7 million for the nine months ended September 30, 2017 and 2016, respectively and $1.5 million and $1.8 million for the three months ended September 30, 2017 and 2016, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $33.0 million and $35.1 million for the nine months ended September 30, 2017 and 2016, respectively, and $10.8 million and $11.6 million for the three months ended September 30, 2017 and 2016, respectively.
Real Estate Assets Under Direct Financing Leases
The components of real estate investments held under direct financing leases were as follows (in thousands):
 
 
Minimum lease payments receivable
$
7,809

 
$
9,456

Estimated residual value of leased assets
24,552

 
35,640

Unearned income
(7,478
)
 
(9,091
)
Real estate assets under direct financing leases, net
$
24,883

 
$
36,005


20


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Real Estate Assets Held for Sale
The following table shows the activity in real estate assets held for sale for the nine months ended September 30, 2017 (dollars in thousands):
 
Number of Properties
 
Carrying
Value
44

 
$
160,570

Transfers from real estate investments held and used
80

 
212,726

Sales
(78
)
 
(157,156
)
Transfers to real estate investments held and used
(8
)
 
(63,597
)
Impairments
 
 
(19,161
)
38

 
$
133,382

Impairments

The following table summarizes total impairment losses recognized on the accompanying consolidated statements of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Real estate and intangible asset impairment
$
32,676

 
$
13,894

 
$
82,553

 
$
35,236

Write-off of lease intangibles, net
5,061

 
1,491

 
5,556

 
6,463

Loans receivable recovery

 

 

 
(324
)
Total impairments from real estate investment net assets
37,737

 
15,385

 
88,109

 
41,375

Other impairment

 
22

 

 
21

Total impairment loss
$
37,737

 
$
15,407

 
$
88,109

 
$
41,396


Impairments for the nine months ended September 30, 2017 were comprised of $22.6 million on properties classified as held for sale and $65.5 million on properties classified as held and used. Impairments for the nine months ended September 30, 2016 were comprised of $15.3 million on properties classified as held for sale and $26.1 million on properties classified as held and used.

21


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Note 4. Debt
The debt of the Company and the Operating Partnership are the same, except for the presentation of the Convertible Notes. The Convertible Notes 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)
 
 
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facility
3.43
%
 
2.49
%
 
1.5
 
$
386,000

 
$
86,000

Term Loan
2.83
%
 
2.59
%
 
1.1
 
420,000

 
420,000

Senior Unsecured Notes
4.59
%
 
4.45
%
 
9.0
 
300,000

 
300,000

Master Trust Notes
5.58
%
 
5.03
%
 
5.5
 
1,657,402

 
1,672,706

CMBS fixed-rate
5.85
%
 
5.89
%
 
3.9
 
426,583

 
528,427

Convertible Notes
5.32
%
 
3.28
%
 
2.5
 
747,500

 
747,500

Total debt
4.97
%
 
4.24
%
 
4.2
 
3,937,485

 
3,754,633

Debt discount, net
 
 
 
 
 
 
(43,327
)
 
(52,894
)
Deferred financing costs, net (4)
 
 
 
 
 
 
(31,013
)
 
(37,111
)
Total debt, net
 
 
 
 
 
 
$
3,863,145

 
$
3,664,628

(1) The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs and credit facility fees, where applicable, calculated for the three months ended September 30, 2017 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 September 30, 2017.
(3) Represents the weighted average maturity based on the outstanding principal balance as of September 30, 2017.
(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
On March 31, 2015, the Company entered into the Credit Agreement, among the Operating Partnership as borrower and the Company as guarantor, that established a new $600.0 million unsecured credit facility. The Revolving Credit Facility 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. On April 27, 2016, the Company expanded the borrowing capacity under the Revolving Credit Facility from $600.0 million to $800.0 million by partially exercising the accordion feature under the terms of the Credit Agreement. 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. On November 3, 2015, the Company entered into a first amendment to the Credit Agreement. The amendment conforms certain of the terms and covenants to those in the Term Loan Agreement, including limiting the requirement of subsidiary guarantees to material subsidiaries (as defined in the Credit Agreement) meeting certain conditions. At September 30, 2017, there were no subsidiaries meeting this requirement.
Borrowings bear interest at either a specified base rate or LIBOR plus an applicable margin, at the Operating Partnership's option. The Revolving Credit Facility bears interest at a rate equal to LIBOR plus 0.875% to 1.55% per annum or a specified base rate plus 0.00% to 0.55% and requires 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, in each case depending on the Corporation's credit rating. As of September 30, 2017, the Revolving Credit Facility bore interest at LIBOR plus 1.25% based on the Company's credit rating and incurred a facility fee of 0.25% per annum.

22


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

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 Corporation and material subsidiaries that meet certain conditions (as defined in the Credit Agreement). The Revolving Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.
As a result of entering into the Revolving Credit Facility and expanding the borrowing capacity, the Company 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 $2.0 million and $2.9 million as of September 30, 2017 and December 31, 2016, respectively, and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.
As of September 30, 2017, $386.0 million was outstanding, no letters of credit were issued and $414.0 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 covenants. As of September 30, 2017, the Corporation 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 among the Operating Partnership, as borrower, the Company as guarantor and the lenders that are parties thereto. The Term Loan Agreement provides for a $325.0 million senior unsecured term facility that has 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 up to $600.0 million, subject to obtaining additional lender commitments. During the fourth quarter of 2015 and 2016, the Company exercised the accordion feature under the Credit Agreement and increased the term facility borrowing capacity from $325.0 million to $370.0 million and $420.0 million, respectively.
The Term Loan Agreement provides that borrowings bear interest at either LIBOR plus 1.35% to 1.80% per annum or a specified base rate plus 0.35% to 0.80% per annum, at the Operating Partnership's option. The borrowings bear interest at either LIBOR plus 0.90% to 1.75% per annum or a specified base rate plus 0.00% to 0.75% per annum, in each case depending on the Corporation’s credit ratings. As of September 30, 2017, the Term Loan bore interest at LIBOR plus 1.35% based on the Company's credit rating.
The Operating Partnership may voluntarily prepay the Term Loan, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees. 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. Payment of the Term Loan is unconditionally guaranteed by the Corporation and, under certain circumstances, by one or more material subsidiaries (as defined in the Term Loan Agreement) of the Corporation. The obligations of the Corporation and any guarantor under the Term Loan are full recourse to the Corporation and each guarantor.
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 September 30, 2017 and December 31, 2016, the unamortized deferred financing costs relating to the Term Loan were $0.9 million and $1.5 million, respectively, and recorded net against the principal balance of the Term Loan on the accompanying consolidated balance sheets.
As of September 30, 2017, the Term Loan was fully drawn. The Operating Partnership's ability to borrow under the Term Loan is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. The Corporation has unconditionally guaranteed all obligations of the Operating Partnership under the Term Loan Agreement. As of September 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.


23


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

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 Corporation. The Senior Unsecured Notes were issued at 99.378% of their principal 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 year, payable on March 15 and September 15 of each year, until the maturity date of 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 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. This amount is being amortized to interest expense over the life of the Senior Unsecured Notes. As of both September 30, 2017 and December 31, 2016, the unamortized deferred financing costs relating to the Senior Unsecured Notes were $3.1 million, and 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 Corporation and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of September 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.
Master Trust Notes
The Company has access to an asset-backed securitization platform, the Spirit Master Funding Program, to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. The Spirit Master Funding Program consists of two separate securitization trusts, Master Trust 2013 and Master Trust 2014, each of which have one or multiple bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. Each issuer is an indirect wholly-owned special purpose entity of the Corporation.

24


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

The Master Trust Notes are summarized below:
 
 
Stated
Rates (1)
 
Maturity
 
 
 
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A1
 
5.1
%
 
2.7
 
$
45,141

 
$
53,919

Series 2014-1 Class A2
 
5.4
%
 
2.8
 
253,300

 
253,300

Series 2014-2
 
5.8
%
 
3.5
 
223,604

 
226,283

Series 2014-3
 
5.7
%
 
4.5
 
311,459

 
311,820

Series 2014-4 Class A1
 
3.5
%
 
2.3
 
150,000

 
150,000

Series 2014-4 Class A2
 
4.6
%
 
12.3
 
360,000

 
360,000

Total Master Trust 2014 notes
 
5.1
%
 
5.8
 
1,343,504

 
1,355,322

Series 2013-1 Class A
 
3.9
%
 
1.2
 
125,000

 
125,000

Series 2013-2 Class A
 
5.3
%
 
6.2
 
188,898

 
192,384

Total Master Trust 2013 notes
 
4.7
%
 
4.2
 
313,898

 
317,384

Total Master Trust notes
 
 
 
 
 
1,657,402

 
1,672,706

Debt discount, net
 
 
 
 
 
(15,613
)
 
(18,787
)
Deferred financing costs, net
 
 
 
 
 
(14,050
)
 
(16,376
)
Total Master Trust Notes, net
 
 
 
 
 
$
1,627,739

 
$
1,637,543

(1) Represents the individual series stated interest rate as of September 30, 2017 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of September 30, 2017.
As of September 30, 2017, the Master Trust 2014 notes were secured by 815 owned and financed properties issued by five indirect wholly-owned subsidiaries of the Corporation. The notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within this trust. As of September 30, 2017, the Master Trust 2013 notes were secured by 295 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Corporation.
CMBS
As of September 30, 2017, indirect wholly-owned special purpose entity subsidiaries of the Corporation were borrowers under 10 fixed-rate non-recourse loans, excluding six loans 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 of September 30, 2017, excluding the defaulted loans, ranged from 3.90% to 6.52% with a weighted average stated interest rate of 5.32%. As of September 30, 2017, these fixed-rate loans were secured by 113 properties. As of September 30, 2017 and December 31, 2016, the unamortized deferred financing costs associated with these fixed-rate loans were $4.2 million and $4.7 million, respectively, and recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets. The deferred financing costs are being amortized to interest expense over the term of the respective loans.
As of September 30, 2017, certain borrowers were in default under the loan agreements relating to six separate CMBS fixed-rate loans, where eight properties securing the respective loans were no longer generating sufficient revenue to pay the scheduled debt service. The default interest rate on these loans was between 7.53% and 10.62%. Each defaulted borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligations. As of September 30, 2017, the aggregate principal balance under the defaulted loans was $62.9 million, which includes $11.8 million of interest capitalized to the principal balance.

25


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Convertible Notes
In May 2014, the Corporation 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.
The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Corporation'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 September 30, 2017, the conversion rate was 77.1889 per $1,000 principal note. Earlier conversion may be triggered if shares of the Corporation's common stock trades 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 September 30, 2017 and December 31, 2016, the unamortized discount was $26.2 million and $33.5 million, respectively. The discount is shown net against the aggregate outstanding principal balance of the Convertible 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 September 30, 2017 and December 31, 2016, the unamortized deferred financing costs relating to the Convertible Notes were $8.8 million and $11.4 million, respectively, and recorded net against the Convertible Notes principal balance on the accompanying consolidated balance sheets.
Debt Extinguishment
During the nine months ended September 30, 2017, the Company extinguished a total of $101.0 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 5.84%. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $1.8 million. Payment of any premium is included in debt extinguishment costs within operating activities in the consolidated statement of cash flows.
During the nine months ended September 30, 2016, the Company extinguished a total of $817.3 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.02%. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $0.3 million.

26


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Debt Maturities
As of September 30, 2017, scheduled debt maturities of the Company’s Revolving Credit Facility, Term Loan, Senior Unsecured Notes, Master Trust Notes, CMBS and Convertible Notes, including balloon payments, are as follows (in thousands):
 
Scheduled
Principal
 
Balloon
Payment
 
Total
Remainder of 2017 (1)
$
7,538

 
$
122,634

 
$
130,172

2018 (2)
41,954

 
569,800

 
611,754

2019 (3)
44,325

 
798,500

 
842,825

2020
39,096

 
413,206

 
452,302

2021
30,658

 
554,753

 
585,411

Thereafter
219,000

 
1,096,021

 
1,315,021

Total
$
382,571

 
$
3,554,914

 
$
3,937,485

(1) The balloon payment balance in 2017 includes $62.9 million, including $11.8 million of capitalized interest, for the acceleration of principal payable following an event of default under six non-recourse CMBS loans with a stated maturity in 2017.
(2) 2018 includes $420 million unsecured Term Loan that is extendible at borrower's option pursuant to two one-year extension options.
(3) 2019 includes the Revolving Credit Facility which is extendible for one year at the borrower's option.
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Interest expense – Revolving Credit Facility (1)
$
3,075

 
$
1,155

 
$
5,632

 
$
2,507

Interest expense – Term Loan
2,768

 
1,307

 
7,525

 
3,376

Interest expense – Senior Unsecured Notes
3,337

 
1,595

 
10,013

 
1,595

Interest expense – mortgages and notes payable
27,563

 
33,291

 
83,640

 
113,837

Interest expense – Convertible Notes (2)
6,127

 
6,127

 
18,382

 
18,382

Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of deferred financing costs
2,451

 
2,303

 
7,274

 
6,706

Amortization of net losses related to interest rate swaps

 
28

 

 
85

Amortization of debt discount, net
3,359

 
1,847

 
9,663

 
3,354

Total interest expense
$
48,680

 
$
47,653

 
$
142,129

 
$
149,842

(1) Includes facility fees of approximately $0.5 million for both of the three month periods ended September 30, 2017 and 2016, and approximately $1.6 million and $1.5 million for the nine month periods ended September 30, 2017 and 2016, respectively.
(2) Included in interest expense on the Operating Partnership's consolidated statements of operations are amounts paid to the Corporation by the Operating Partnership related to the notes payable to Spirit Realty Capital, Inc.
Note 5. Derivative and Hedging Activities
The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using regression analysis and the measurement of hedge ineffectiveness is based on the hypothetical derivative method. The effective portion of changes in fair value are recorded in AOCL and subsequently reclassified to earnings when the hedged transactions affect earnings. The ineffective portion is recorded immediately in earnings in general and administrative expenses. The Company does not enter into derivatives contracts for speculative or trading purposes.

27


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.
The Company has terminated all existing derivative contracts as of June 30, 2016 and has not entered into any new derivative contracts as of September 30, 2017.
The following tables provide information about the amounts recorded in AOCL, as well as the loss recorded in operations, when reclassified out of AOCL or recognized in earnings immediately, for the nine months ended September 30, 2016 (in thousands):
 
 
Amount of Loss Recognized in AOCL on Derivative
(Effective Portion)
Derivatives in Cash Flow Hedging Relationships
 
Three Months Ended
 
Nine Months Ended
 
Interest rate swaps
 
$
28

 
$
(1,145
)
 
 
 
 
 
 
 
Amount of Loss Reclassified from AOCL into Operations
(Effective Portion)
Location of Loss Reclassified from AOCL into Operations
 
Three Months Ended
 
Nine Months Ended
 
Interest expense
 
$

 
$
(459
)
 
 
 
 
 
 
 
Amount of Loss Recognized in Operations on Derivative
(Ineffective Portion)
Location of Loss Recognized in Operations on Derivatives
 
Three Months Ended
 
Nine Months Ended
 
General and administrative expense
 
$

 
$
(1,706
)
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
Location of Loss Recognized in Operations on Derivatives
 
Three Months Ended
 
Nine Months Ended
 
General and administrative expense
 
$

 
$
(18
)
Note 6. Stockholders’ Equity and Partners' Capital
Issuance of Common Stock
During the nine months ended September 30, 2017, 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 0.4 million shares of common stock valued at $3.5 million, solely to pay the associated statutory tax withholdings during the nine months ended September 30, 2017.
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 September 30, 2017, 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.


28


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Stock Repurchase Programs
In August 2017, 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 September 30, 2017, 2,482,570 shares of the Company's common stock have been repurchased in open market transactions under the stock repurchase program, at a weighted average price of $8.75 per share, leaving $228.3 million in available capacity. Fees associated with the repurchase, of $49,700, are included in retained earnings.
In February 2016, the Company's Board of Directors approved a stock repurchase program, which authorized the Company to repurchase up to $200.0 million of its common stock over the 18 month time period following authorization. A total of 26,337,295 shares of the Company's outstanding common stock were repurchased in open market transactions under the stock repurchase program, at a weighted average price of $7.59 per share, equivalent to the full $200.0 million authorized. Fees associated with the share repurchase of $0.5 million are included in retained earnings.
Dividends Declared
For the nine months ended September 30, 2017, the Corporation's Board of Directors declared the following dividends:
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
 
Payment Date
 
 
 
 
 
 
(in thousands)
 
 
 
$
0.1800

 
 
$
87,122

 
 
$
0.1800

 
 
$
82,422

 
 
$
0.1800

 
 
$
82,062

 
The dividend declared on September 15, 2017 was paid on October 13, 2017 and is included in accounts payable, accrued expenses and other liabilities as of September 30, 2017.
Note 7. 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.

On September 8, 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC (collectively, the "Debtors"), filed petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. At the time of the filing, Haggen Operations Holdings, LLC ("Haggen") leased 20 properties on a triple net basis from a subsidiary of the Company under a master lease.
On November 25, 2015, Haggen and Spirit restructured the master lease in an initial settlement agreement with approved claims of $21.0 million.
On April 1, 2016, Spirit entered into a second settlement agreement with both Haggen and Albertsons, LLC for $3.4 million and $3.0 million, respectively.
As a result of the settlements, the leases for seven locations were rejected and the leases for thirteen locations were assumed by the Debtors and assigned to the following tenants: five locations to Albertsons, LLC, five locations to Smart & Final, LLC, two locations to Gelson’s Markets and one location to Safeway, Inc.

29


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

As of September 30, 2017, the Company had sold seven of the properties for total proceeds of $58.3 million, including five of the original seven rejected locations, resulting in 11 locations with leases in-place under substantially the same terms and rent (inclusive of the $3.0 million settlement related to rent reduction for an amended lease with Albertsons, LLC) and two locations that remain vacant.
To date, the Company has collected $5.5 million of the total claims and there is no guaranty that the remaining claims will be paid or otherwise satisfied in full.
As of September 30, 2017, 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 September 30, 2017, the Company had commitments totaling $54.1 million, of which $11.3 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 $54.1 million, $33.0 million is expected to be funded during fiscal year 2017. In addition, the Company is contingently liable for $5.7 million of debt owed by one of its tenants and is indemnified by that 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 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.


30


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

Note 8. Fair Value Measurements
Recurring Fair Value Measurements
The Company did not have any assets or liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016.
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 (in thousands):
 
 
Fair Value Hierarchy Level
Description
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
Retail
 
$

 
$

 
$
17,000

Industrial
 

 

 
6,954

Office
 

 

 
6,020

Long-lived assets held and used
 

 

 
29,974

Long-lived assets held for sale
 

 

 
47,748

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
$

 
$

 
$
37,934

Industrial
 

 

 
3,741

Office
 

 

 
8,538

Long-lived assets held and used
 

 

 
50,213

Lease intangible assets
 

 

 
6,384

Other assets
 

 

 
27

Long-lived assets held for sale
 

 

 
61,400

 
 
 
 
 
 
 
Real estate assets and their 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 twelve months 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 nine months ended September 30, 2017 and for the year ended December 31, 2016, we determined that 16 and 33 long-lived assets held and used, respectively, were impaired. The Company estimated the fair value of these properties using weighted average sales price per square foot of comparable properties for 15 of the 16 impaired properties during the nine months ended September 30, 2017 and for 16 of the 33 impaired properties during the year ended December 31, 2016.

31


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

The following table provides information about the weighted average sales price per square foot of comparable properties used to estimate fair value (price per square foot in dollars):
 
 
 
Description
 
Range
 
Weighted Average
 
Square Footage
 
Range
 
Weighted Average
 
Square Footage
Long-lived assets held and used by asset type
 
 
 
 
 
 
Retail
 
$13.66 - 285.98
 
$
53.99

 
355,428

 
$17.17 - $502.23
 
$
58.78

 
290,770

Industrial
 
 

 

 
$26.43
 
$
26.43

 
104,864

Office
 
$24.82 - 244.86
 
$
40.14

 
161,346

 
$35.00
 
$
35.00

 
135,675

The Company estimated the fair value on 1 of the 16 impaired properties using the weighted average listing price of comparable properties or broker opinion of value per square foot during the nine months ended September 30, 2017 and on 17 of the 33 impaired properties during the year ended December 31, 2016.
The following table provides information about the weighted average listing price and broker opinion of value per square foot of comparable properties used to estimate fair value (price per square foot in dollars):
 
 
 
Description
 
Range
 
Weighted Average
 
Square Footage
 
Range
 
Weighted Average
 
Square Footage
Long-lived assets held and used by asset type
 
 
 
 
 
 
Retail
 
 
$

 

 
$15.40 - $170.02
 
$
40.80

 
516,916

Industrial
 
$5.73
 
$
5.73

 
370,824

 
$9.09
 
$
9.09

 
149,627

Office
 
 
$

 

 
$56.81
 
$
56.81

 
34,992

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 September 30, 2017 and December 31, 2016. 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)
September 30, 2017
(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): 
 
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Loans receivable, net
$
76,821

 
$
80,396

 
$
66,578

 
$
71,895

Revolving Credit Facility
386,000

 
385,993

 
86,000

 
87,718

Term Loan, net (1)
419,091

 
420,024

 
418,471

 
428,441

Senior Unsecured Notes, net (1)
295,242

 
300,039

 
295,112

 
283,473

Mortgages and notes payable, net (1)
2,050,302

 
2,068,788

 
2,162,403

 
2,282,142

Convertible Notes, net (1)
712,510

 
758,085

 
702,642

 
784,175

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

Note 9. Significant Credit and Revenue Concentration
As of September 30, 2017 and December 31, 2016, the Company’s real estate investments are operated by 421 and 450 tenants, respectively, that operate within retail, office and industrial property types across various industries throughout the U.S. Shopko operates in the general merchandise industry and is the Company’s largest tenant as a percentage of rental revenue. Total rental revenues from properties leased to Shopko for the three months ended September 30, 2017 and 2016, contributed 7.5% and 8.3% of the rental revenue shown in the accompanying consolidated statements of operations. No other tenant contributed 4% or more of the rental revenue during any of the periods presented. As of September 30, 2017 and December 31, 2016, the Company's net investment in Shopko properties represents approximately 5.1% and 5.8%, respectively, of the Company’s total assets and the Company's real estate investment in Shopko represents approximately 7.0% and 7.7%, respectively, of the Company's total real estate investment portfolio.
Note 10. Supplemental Cash Flow Information
The following table presents the supplemental cash flow disclosures (in thousands):
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Reduction of debt in exchange for collateral assets

 
47,780

Reduction and assumption of debt through sale of certain real estate properties
39,141

 

Reclass of residual value on expired deferred financing lease to operating asset
11,088

 

Net real estate and other collateral assets sold or surrendered to lender
35,008

 
22,728

Mortgage notes receivable transferred for real estate properties acquired

 
26,609

Accrued interest capitalized to principal (1)
2,430

 
3,584

Accrued performance share dividend rights
699

 
340

Distributions declared and unpaid
82,062

 
84,730

Accrued deferred financing costs
1,373

 
4,043

Real estate properties acquired under 1031 exchange

 
83,560

Real estate properties sold under 1031 exchange

 
43,828

Financing provided in connection with disposition of assets
15,015

 

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

Note 11. Incentive Award Plan
Restricted Shares of Common Stock
During the nine months ended September 30, 2017, the Company granted 1.1 million restricted shares under the Amended Incentive Award Plan to certain executive officers and employees. The Company recorded $9.9 million in deferred compensation associated with these grants, which will be recognized in expense over the service period of the awards. As of September 30, 2017, there were approximately 1.5 million unvested restricted shares outstanding.
Performance Share Awards
During the nine months ended September 30, 2017, the Board of Directors or committee thereof approved target grants of 0.9 million performance shares to executive officers of the Company. The performance period of these grants runs through December 31, 2019. Potential shares of the Corporation'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. Based on the grant date fair value and as of September 30, 2017, the Corporation expects to recognize $8.7 million in compensation expense on a straight-line basis over the requisite service period.
Approximately $0.7 million and $0.5 million in dividend rights have been accrued for non-vested performance share awards outstanding as of September 30, 2017 and December 31, 2016, respectively. For outstanding non-vested awards at September 30, 2017, no shares would have been released based on the Corporation's TSR relative to the specified peer groups through that date.
Stock-based Compensation Expense
For the three months ended September 30, 2017 and 2016, the Company recognized $2.3 million and $3.4 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations. For the nine months ended September 30, 2017 and 2016, the Company recognized $13.8 million and $7.2 million, respectively, in stock-based compensation expense. Stock-based compensation expense for the nine months ended September 30, 2017 included $6.9 million related to the acceleration of Restricted Stock and Performance Share Awards upon the departure of the Chief Executive Officer.
As of September 30, 2017, the remaining unamortized stock-based compensation expense, including amounts relating to the performance share awards, totaled $20.6 million, including $11.9 million related to restricted stock awards and $8.7 million related to performance share awards, which 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 12. Income Per Share and Partnership Unit
Income per share 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.

33


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)

The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share computed using the two-class method (dollars in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Basic and diluted income:
 
 
 
 
 
 
 
Net income
5,322

 
27,399


41,357

 
96,458

Less: income attributable to unvested restricted stock
(265
)
 
(192
)
 
(682
)
 
(430
)
Net income attributable to common stockholders used in basic and diluted income per share
$
5,057

 
$
27,207

 
$
40,675

 
$
96,028

 
 
 
 
 
 
 
 
Basic weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
458,035,972

 
480,326,857

 
473,919,177

 
457,992,378

Less: unvested weighted average shares of restricted stock
(1,364,355
)
 
(772,495
)
 
(1,220,485
)
 
(728,852
)
Weighted average shares of common stock outstanding used in basic income per share
456,671,617

 
479,554,362

 
472,698,692

 
457,263,526

Net income per share attributable to common stockholders—basic
$
0.01

 
$
0.06

 
$
0.09

 
$
0.21

 
 
 
 
 
 
 
 
Diluted weighted average shares of common stock outstanding: (1)
 
 
 
 
 
 
 
Unvested performance shares

 
67,506

 

 
33,938

Stock options

 
4,688

 

 
4,159

Convertible debt

 
972,054

 

 

Weighted average shares of common stock outstanding used in diluted income per share
456,671,617

 
480,598,610

 
472,698,692

 
457,301,623

Net income per share attributable to common stockholders—diluted
$
0.01

 
$
0.06

 
$
0.09

 
$
0.21

 
 
 
 
 
 
 
 
Potentially dilutive shares of common stock
 
 
 
 
 
 
 
Unvested shares of restricted stock

 
181,667

 
32,150

 
121,230

Total

 
181,667

 
32,150

 
121,230

(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 Corporation 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 nine months ended September 30, 2017, the Corporation's average stock price was below the conversion price, resulting in zero potentially dilutive shares related to the conversion spread for both periods.
Note 13. Costs Associated With Restructuring Activities
On November 16, 2015, the Company’s Board of Directors approved the strategic decision to relocate its headquarters from Scottsdale, Arizona to Dallas, Texas. The Company began occupying temporary office space in the new headquarters building in the spring of 2016, and finalized the move with the opening of the new office space in late September 2016. As a result of moving its corporate headquarters, the Company incurred various restructuring charges, including employee separation and relocation costs. Restructuring charges for the nine months ended September 30, 2016 totaled $5.7 million, and are included within restructuring charges on the accompanying consolidated statements of operations. As of and for the nine months ended September 30, 2017, the Company no longer had any accrued restructuring charges and incurred no additional restructuring charges.

34


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2017
(Unaudited)


Note 14. Subsequent Event
On October 3, 2017, the Company closed on an offering of 6,900,000 shares of 6.000% Series A Cumulative Redeemable Preferred Stock with a liquidation preference of $25.00 per share, for aggregate net proceeds of 166.5 million, after deducting the underwriting discount and the Company's estimated expenses.


35



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 traditional retail tenants and the demand for traditional retail space, particularly with respect to challenges being experienced by general merchandise retailers;
our ability to diversify our tenant base and reduce the concentration of our significant tenant;
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 completion and timing of our proposed spin-off, and 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. For a discussion of additional risk factors, see the factors included under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, as well as those risk factors discussed in Part II Item 1a "Risk Factors" herein. All forward-looking statements are based on information that was available, and speak only, as of 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.

36



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 long-term, triple-net basis to high quality tenants with business operations within predominantly retail, but also office 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 mortgage and other loans to provide a range of financing solutions to our tenants. As of September 30, 2017, our owned real estate represented investments in 2,423 properties. Our properties are leased to 421 tenants across 49 states and 30 industries. As of September 30, 2017, our owned properties were approximately 99.1% occupied (based on number of properties). In addition, our investment in real estate includes commercial mortgage and other loans receivable primarily secured by an additional 88 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 has allowed us to qualify as a REIT for federal income tax purposes, and we intend to continue operating in such a manner.
On August 3, 2017, we announced a proposed spin-off of almost all of our interests in our properties leased to Shopko, assets that collateralize Master Trust 2014 and potentially additional assets into an independent, publicly traded REIT ("SpinCo"). Pursuant to the plan, if the spin-off is completed, our stockholders would receive a distribution of stock issued by SpinCo. The spin-off is subject to certain conditions, including declaration by the U.S. Securities and Exchange Commission that SpinCo's registration statement on Form 10 is effective, customary third party consents, and final approval and declaration of the distribution by our Board of Directors. Such conditions and other unforeseen developments, including in the debt or equity markets or general market conditions, could delay or prevent the spin-off or cause the spin-off to occur on terms or conditions that are less favorable and/or different than those described herein. The transaction is expected to be completed in the first half of 2018. We may, at any time and for any reason until the proposed transaction is complete, abandon the spin-off or modify or change its terms, including the assets we plan to contribute to SpinCo.
Highlights
For the three months ended September 30, 2017:
Generated net income of $0.01 per share and AFFO of $0.23 per share.
Invested $73.4 million in four properties, including revenue producing capital expenditures.
Disposed of 56 properties for $124.1 million, including 42 vacant properties for $46.8 million and three revenue producing Shopko properties for $18.5 million.
Approved a new stock repurchase program under which we may repurchase up to $250 million of our outstanding common stock.
Commenced an underwritten public offering of 6.000% Series A Cumulative Redeemable Preferred Stock, which closed on October 3, 2017, for aggregate net proceeds of $166.6 million.

37



For the nine months ended September 30, 2017:
Generated net income of $0.09 per diluted share and AFFO of $0.64 per share, including $4.2 million in cash severance charges.
Acquired 39 properties for $314.2 million and disposed of 161 properties for $406.4 million, including 96 vacant properties for $138.4 million and 11 properties leased to Shopko for $65.0 million.
Extinguished $101.0 million of high coupon secured debt that had a 5.84% weighted average rate.

38



Factors that May Influence Our Operating Results
ACQUISITIONS AND LEASE STRUCTURE
Our principal business is acquiring commercial real estate properties, generally leased to tenants under triple-net leases. Our ability to grow revenue and produce superior risk adjusted returns depends on our ability to acquire additional properties at a yield sufficiently in excess of our cost of capital. We focus on opportunities to acquire attractive commercial real estate by providing capital to small and middle-market companies that we conclude have stable and proven operating histories and attractive credit characteristics. Small and middle-market companies are often willing to enter into leases with structures and terms that we consider appealing and that we believe increase the security of rental payments.
Portfolio Diversification
Our strategy emphasizes a portfolio that (1) derives no more than 10% of its Contractual Rent from any single tenant and no more than 2.0% of its Contractual Rent from any single property, (2) is leased to tenants operating in various industries and (3) is located across the U.S. without significant geographic concentration.
A core component of our business is investing in and managing a portfolio of single-tenant, operationally essential retail real estate throughout the U.S. Accordingly, our performance is substantially dependent on the performance of our retail tenants. The market for traditional retail space has previously been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some traditional retail companies, the ongoing consolidation in the retail industry, the excess amount of retail space in a number of markets and increasing consumer purchases through catalogs or over the internet.
In particular, we have experienced and expect to continue to experience challenges with some of our retailers through increased credit losses. These credit losses resulted in lower revenues from non-performing leases and certain charges for the write-off of unrecoverable receivables. We expect the non-performance for certain of these leases to continue.
As of September 30, 2017, Shopko represents our most significant tenant. Currently we lease 101 properties to Shopko, pursuant to three master leases and two single site leases, under which we receive approximately $3.9 million in rental revenues per month. We reduced our Shopko tenant concentration to 7.8% at September 30, 2017 compared to 8.6% at September 30, 2016 (based on Contractual Rent). During the nine months ended September 30, 2017, we sold 11 Shopko properties for $65.0 million in gross proceeds as we continue our objective to reduce our exposure to Shopko.
As a result of the significant number of properties leased to Shopko, our results of operations and financial condition are significantly impacted by Shopko's performance under its leases. Shopko operates as a multi-department general merchandise retailer and retail health services provider primarily in mid-size and large communities in the Midwest, Pacific Northwest, North Central and Western Mountain states.
Based on our monitoring of Shopko's financial information and recent liquidity events and other challenges, including bankruptcies, impacting the retail industry generally relative to recent years, we continue to be concerned about Shopko's ongoing ability to meet its obligations to us under its leases. Although Shopko is current on all of its obligations to us under its lease arrangements with us as of September 30, 2017, we can give you no assurance that this will continue to be the case, particularly if Shopko (not just the stores subject to leases with us) experiences a further decline in its business, financial condition and results of operations or loses access to liquidity. If such events were to occur, Shopko may request discounts or deferrals on the rents it pays to us, seek to terminate its master leases with us or close certain of its stores, or file for bankruptcy, all of which could significantly decrease the amount of revenue we receive from it.
Operationally Essential Real Estate with Long-Term Leases
We seek to own properties that are operationally essential to our tenants, thereby reducing the risk that our tenants would choose not to renew an expiring lease or reject a lease in bankruptcy. We also seek to enter into leases with relatively long initial terms, typically 15 to 20 years, and renewal options with attractive rent escalation provisions. As of September 30, 2017, our leases had a weighted average remaining lease term of 10.1 years, compared to a weighted average remaining lease term of 11.0 years as of September 30, 2016 (based on Contractual Rent).

39



Rent Escalators
Our leases generally contain provisions contractually increasing the rental revenue over the term of the lease at specified dates by (1) a fixed amount or (2) the lesser of 1 to 1.25 times any increase in CPI over a specified period or a fixed amount (typically 1-2% per year). The percentage of our single-tenant properties containing rent escalators remained consistent at 89% as of both September 30, 2017 and September 30, 2016, respectively (based on Contractual Rent).
Master Lease Structure
Where appropriate, we seek to enter into master leases, whereby we lease multiple properties to a single tenant on an “all or none” basis. The master lease structure prevents a tenant from unilaterally giving up under-performing properties while retaining well-performing properties. Master lease revenue contributed approximately 44% of our Contractual Rent as of September 30, 2017, compared to approximately 47% as of September 30, 2016.
Triple-Net Leases
Our leases are predominantly triple-net leases, whereby the tenant pays all property operating expenses, including but not limited to real estate taxes, insurance premiums and repair and maintenance costs. As of September 30, 2017, approximately 82% of our properties (based on Contractual Rent) are subject to triple-net leases, compared to approximately 83% as of September 30, 2016.
ASSET MANAGEMENT
The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to pay rent and our ability to:
collect rent due,
renew expiring leases or re-lease space upon expiration or other termination,
lease currently vacant properties and
maintain or increase rental rates.
Each of these could be negatively impacted by adverse economic conditions, particularly those that affect the markets in which our properties are located, downturns in our tenants’ industries, increased competition for our tenants at our property locations, or the bankruptcy of one or more of our tenants. We seek to manage these risks by using our developed underwriting and risk management processes to structure and manage our portfolio.
Active Management and Monitoring of Risks Related to Our Investments
We seek to measure tenant financial distress risk and lease renewal risk through various processes. Many of our tenants are required to provide corporate-level and/or unit-level financial information, which includes balance sheet, income statement and cash flow statement data on a quarterly and/or annual basis. Our underwriting and risk management processes are designed to structure new investments and manage existing investments to mitigate tenant credit quality risks and preserve the long-term return on our invested capital. Since our inception, our occupancy based on economically yielding properties has never been below 96.1% (based on number of properties), despite the economic downturn of 2008 through 2010. The percentage of our properties that were occupied increased to approximately 99.1% as of September 30, 2017 from approximately 98.4% as of September 30, 2016.
On September 8, 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC, filed petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. At the time of the filing, Haggen Operations Holdings, LLC leased 20 properties on a triple net basis from a subsidiary of ours under a master lease. For discussion of the related settlement and current status of these properties, see footnote 7 to the consolidated financial statements herein.
CAPITAL RECYCLING
We continuously evaluate opportunities for the disposition of properties in our portfolio when we believe such disposition is appropriate in view of our business objectives, considering criteria including, but not limited to, tenant concentration, tenant credit quality, local market conditions and lease rates, associated indebtedness, asset location and tenant operation type (e.g., industry, sector, or concept/brand), as well as potential uses of proceeds and tax considerations. As part of this strategy, we may enter into 1031 Exchanges to defer some or all of the taxable gains on the dispositions, if any, for federal and state income tax purposes. We can provide no assurance that we will dispose of any additional properties or that future acquisitions and/or dispositions, if any, will qualify as 1031 Exchanges. Furthermore, we can provide no assurance that we will deploy the proceeds from future dispositions in a manner that produces comparable or better yields. We plan to deliberately slow down our acquisition activity for the remainder of 2017 and be selective with our dispositions. Additionally, we expect lease termination fees, which are recognized when there is a signed lease termination agreement and all of the conditions of the agreement have been met, may be less than in prior periods.

40



CAPITAL FUNDING
Our principal demands for funds are for property acquisitions, payment of principal and interest on our outstanding indebtedness, operating and property maintenance expenses and distributions to our stockholders. Generally, property acquisitions are temporarily funded through our Revolving Credit Facility, followed by permanent financing through asset level financing or issuance of debt or equity securities. Our remaining cash needs are typically met by cash flows from operations, which are primarily driven by the rental income received from our leased properties, interest income earned on loans receivable and interest income on our cash balances.
Interest Costs
Our fixed-rate debt structure provides us with a stable and predictable cash requirement related to our debt service. Any changes to our debt structure, including borrowings under our Term Loan and Revolving Credit Facility or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such indebtedness. A significant amount of our debt provides for scheduled principal payments. As principal is repaid, our interest expense decreases. Fluctuations in interest rates will affect the interest expense we incur on unhedged variable interest rate debt and may impact our ability to refinance maturing debt.
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, 2016 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.

41



Results of Operations
Comparison of Three Months Ended September 30, 2016 to Three Months Ended September 30, 2017
 
Three Months Ended September 30,
(In Thousands)
2017
 
2016
 
 Change
 
 % Change
Revenues:
 
 
 
 
 
 
 
Rentals
$
159,799

 
$
161,765

 
$
(1,966
)
 
(1.2
)%
Interest income on loans receivable
1,003

 
1,042

 
(39
)
 
(3.7
)%
Earned income from direct financing leases
483

 
660

 
(177
)
 
(26.8
)%
Tenant reimbursement income
4,691

 
3,469

 
1,222

 
35.2
 %
Other income
3,574

 
5,572

 
(1,998
)
 
(35.9
)%
Total revenues
169,550

 
172,508

 
(2,958
)
 
(1.7
)%
Expenses:
 
 
 
 
 
 
 
General and administrative
13,712

 
15,112

 
(1,400
)
 
(9.3
)%
Restructuring charges

 
3,264

 
(3,264
)
 
(100.0
)%
Transaction costs
2,660

 

 
2,660

 
100.0
 %
Property costs
8,080

 
6,916

 
1,164

 
16.8
 %
Real estate acquisition costs
196

 
1,056

 
(860
)
 
(81.4
)%
Interest
48,680

 
47,653

 
1,027

 
2.2
 %
Depreciation and amortization
63,673

 
65,300

 
(1,627
)
 
(2.5
)%
Impairments
37,737

 
15,407

 
22,330

 
NM

Total expenses
174,738

 
154,708

 
20,030

 
12.9
 %
(Loss) income from continuing operations before other income (expense) and income tax benefit (expense)
(5,188
)
 
17,800

 
(22,988
)
 
NM

Other income (expense):
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
1,792

 
(8,349
)
 
10,141

 
NM

Total other income (expense)
1,792

 
(8,349
)
 
10,141

 
NM

(Loss) income from continuing operations before income tax benefit (expense)
(3,396
)
 
9,451

 
(12,847
)
 
NM

Income tax benefit (expense)
11

 
(12
)
 
23

 
NM

(Loss) Income from continuing operations
$
(3,385
)
 
$
9,439

 
$
(12,824
)
 
NM

 
 
 
 
 
 
 
 
Gain on disposition of assets
$
8,707

 
$
17,960

 
$
(9,253
)
 
(51.5
)%
NM - Percentages over 100% are not displayed.
REVENUES
Rentals
Rental revenue for the comparative period remained relatively flat as decreases in contractual rent were offset by decreases in tenant credit losses. Our contractual rental revenue between periods decreased 2.3% as we were a moderate disposer of income producing real estate over the trailing twelve month period. Our overall dispositions resulted in a decrease in real estate investments, which totaled $7.9 billion at September 30, 2017, compared to $8.3 billion at September 30, 2016.
Non-cash rentals for the three months ended September 30, 2017 and 2016 were $6.9 million and $6.7 million, respectively. These amounts represent approximately 4.3% and 4.2% of total rental revenue for the three months ended September 30, 2017 and 2016, respectively. Tenant credit losses decreased between periods due to a higher amount of nonperforming properties in the convenience store industry and restaurant - casual dining industry in the prior period.

42



Tenant reimbursement income
We have a number of leases that require our tenants to reimburse us for certain property costs we incur. Tenant reimbursement income is driven by the tenant reimbursable property costs described below.
Other income
The period-over-period decrease was due primarily to the receipt of $2.6 million in fee income associated with the prepayment of certain mortgage loans receivable in the three months ended September 30, 2016, and no comparative receipt during the three months ended September 30, 2017.
EXPENSES
General and administrative
The period-over-period decrease in general and administrative expenses is primarily due to a $1.7 million decrease in compensation and benefits expenses, primarily due to severance costs following the departure of an executive officer recognized in the prior year. This was partially offset by a $0.5 million increase in bad debt expense recorded period-over-period. The change in bad debt expense increased primarily as a result of certain sporting goods and restaurant - casual dining properties for which the rent has been determined to be uncollectible for the three months ended September 30, 2017, offset by a decrease in bad dent expenses related to convenience store properties period-over-period.
Transaction costs
In connection with the proposed spin-off almost all of our interests in our properties leased to Shopko, assets that collateralize Master Trust 2014 and potentially additional assets into an independent, publicly traded REIT ("SpinCo"), we have incurred $2.7 million in costs. These costs are comprised of $2.0 million in legal and financial adviser fees and $0.7 million in consulting and other costs.
Property costs
The increase in property costs is primarily due to a $1.2 million increase in reimbursable property taxes. Non-reimbursable property taxes were flat, with a decrease due to a reduction in vacant properties, offset by an increase in tenant credit issues. As of September 30, 2017 and 2016, respectively, 21 and 43 of our properties, representing approximately 0.9% and 1.6% of our owned properties, were vacant. Total tenant reimbursable property costs for the three months ended September 30, 2017 were $5.1 million, an increase from $4.3 million for the same period in 2016.
Interest
The increase in interest expense is primarily due to increased borrowings under our Revolving Credit Facility and Term Loan, as well as interest on our Senior Unsecured Notes, which were issued in August 2016. This was partially offset by the extinguishment of $166.7 million of mortgage debt with a weighted average interest rate of 5.8% during the twelve months ended September 30, 2017.

43



The following table summarizes our interest expense on related borrowings:
 
Three Months Ended 
 September 30,
(In Thousands)
2017
 
2016
Interest expense – Revolving Credit Facility (1)
$
3,075

 
$
1,155

Interest expense – Term Loan
2,768

 
1,307

Interest expense – Senior Unsecured Notes
3,337

 
1,595

Interest expense – mortgages and notes payable
27,563

 
33,291

Interest expense – Convertible Notes
6,127

 
6,127

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
2,451

 
2,303

Amortization of net losses related to interest rate swaps

 
28

Amortization of debt discount, net
3,359

 
1,847

Total interest expense
$
48,680

 
$
47,653

(1) Includes facility fees of approximately $0.5 million for the three months ended September 30, 2017 and September 30, 2016, respectively.
Depreciation and amortization
During the twelve months ended September 30, 2017, we acquired 81 properties, representing an investment in real estate of $562.6 million, and we disposed of 292 properties with a gross investment of $726.2 million. While we were a net disposer during the period (based on investment in real estate), the impact to depreciation was relatively flat due to the timing of acquisition and disposition activity. Our real estate investment value was further reduced due to impairment charges during the twelve-month period ended September 30, 2017 on properties that remain in our portfolio. Additionally, our real estate held-for-sale increased period-over-period. Properties held for sale are no longer depreciated. As a result, depreciation and amortization overall decreased minimally. The following table summarizes our depreciation and amortization expense:
 
Three Months Ended 
 September 30,
(In Thousands)
2017
 
2016
Depreciation of real estate assets
$
52,698

 
$
53,592

Other depreciation
143

 
145

Amortization of lease intangibles
10,832

 
11,563

Total depreciation and amortization
$
63,673

 
$
65,300

Impairment
Impairment charges for the three months ended September 30, 2017 were $37.7 million. These charges included $4.8 million on properties held for sale, including $2.5 million on three education properties and $0.8 million on vacant held for sale properties. The remaining $32.9 million was recorded on properties held and used, primarily related to $31.7 million on vacant properties held and used. There was no significant impact as a result of Hurricanes Harvey and Irma.
For the same period in 2016, impairment charges included $9.5 million on underperforming properties within the restaurant-casual dining, distribution and drug store/pharmacy industries and $4.4 million on properties held for sale.
Gain (loss) on debt extinguishment
During the three months ended September 30, 2017, we extinguished $49.8 million of mortgage debt related to two loans, resulting in a gain on debt extinguishment of $1.8 million primarily related to debt forbearance. For the same period in 2016, we extinguished $322.1 million of mortgage debt related to 62 loans and recorded a loss on debt extinguishment of $8.3 million.

44



Gain on disposition of assets
For the three months ended September 30, 2017, the gain on disposition of 56 properties included $0.5 million from the sale of three Shopko properties and $6.2 million from the sale of two building materials properties and one home improvement property. For the same period in 2016, the gain on disposition of 17 properties included $3.9 million from the sale of four Shopko properties and $10.3 million from the sale of one grocery property. 
Results of Operations
Comparison of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2017
 
Nine Months Ended September 30,
(In Thousands)
2017
 
2016
 
 Change
 
 % Change
Revenues:
 
 
 
 
 
 
 
Rentals
$
479,506

 
$
484,090

 
$
(4,584
)
 
(0.9
)%
Interest income on loans receivable
2,769

 
4,326

 
(1,557
)
 
(36.0
)%
Earned income from direct financing leases
1,613

 
2,082

 
(469
)
 
(22.5
)%
Tenant reimbursement income
13,136

 
10,493

 
2,643

 
25.2
 %
Other income
6,583

 
11,600

 
(5,017
)
 
(43.3
)%
Total revenues
503,607

 
512,591

 
(8,984
)
 
(1.8
)%
Expenses:
 
 
 
 
 
 
 
General and administrative
49,992

 
40,611

 
9,381

 
23.1
 %
Restructuring charges

 
5,726

 
(5,726
)
 
(100.0
)%
Transaction costs
3,145

 

 
3,145

 
100.0
 %
Property costs
26,763

 
20,854

 
5,909

 
28.3
 %
Real estate acquisition costs
773

 
2,092

 
(1,319
)
 
(63.0
)%
Interest
142,129

 
149,842

 
(7,713
)
 
(5.1
)%
Depreciation and amortization
192,887

 
194,227

 
(1,340
)
 
(0.7
)%
Impairments
88,109

 
41,396

 
46,713

 
NM

Total expenses
503,798

 
454,748

 
49,050

 
10.8
 %
(Loss) income from continuing operations before other income and income tax expense
(191
)
 
57,843

 
(58,034
)
 
NM

Other income:
 
 
 
 
 
 
 
Gain on debt extinguishment
1,770

 
326

 
1,444

 
NM

Total other income
1,770

 
326

 
1,444

 
NM

Income from continuing operations before income tax expense
1,579

 
58,169

 
(56,590
)
 
(97.3
)%
Income tax expense
(419
)
 
(932
)
 
513

 
(55.0
)%
Income from continuing operations
$
1,160

 
$
57,237

 
$
(56,077
)
 
(98.0
)%
 
 
 
 
 
 
 
 
Gain on disposition of assets
$
40,197

 
$
39,221

 
$
976

 
2.5
 %
NM - Percentages over 100% are not displayed.
REVENUES
Rentals
Rental revenue for the comparative period remained relatively flat as decreases in contractual rent and increases in tenant credit losses were partially offset by increases in non-cash rent. Our contractual rental revenue between periods decreased 1.1% as we were a moderate disposer of income producing real estate over the trailing twelve month period. Our overall dispositions resulted in a decrease in real estate investments, which totaled $7.9 billion at September 30, 2017, compared to $8.3 billion at September 30, 2016. Additionally, we had tenant credit losses in the first quarter of 2017, where the majority of our nonperforming properties were in the convenience store and movie theater industries.

45



These decreases were partially offset by increases in non-cash rentals over the comparative period. Non-cash rentals for the nine months ended September 30, 2017 and 2016 were $22.3 million and $19.9 million, respectively. These amounts represent 4.6% and 4.1% of total rental revenue for the nine months ended September 30, 2017 and 2016, respectively.
Interest income on loans receivable
While financed properties increased from 75 at September 30, 2016 to 88 at September 30, 2017, resulting in an increase of 1.2% in mortgage loans receivable balances for the comparative period, interest income on loans receivable decreased as a result of a timing of the change in financed properties. We held 144 financed properties at the beginning of 2016, of which 66 were paid off in mid-2016. Additionally, the new properties financed in 2017 were all originated at the end of the nine months ended September 30, 2017.
Tenant reimbursement income
We have a number of leases that require our tenants to reimburse us for certain property costs we incur. Tenant reimbursement income is driven by the tenant reimbursable property costs described below.
Other income
The period-over-period decrease was due primarily to the receipt of $5.5 million in fee income associated with the prepayment of certain mortgage loans receivable in the nine months ended September 30, 2016, and no comparative receipt during the nine months ended September 30, 2017. This was partially offset by a $0.7 million increase in lease termination income over the comparative period.
EXPENSES
General and administrative
The period-over-period increase 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 nine months ended September 30, 2017 following the departure of our chief executive officer and an increase of $2.8 million in bad debt expense recorded period-over-period. The change in bad debt expense increased primarily as a result of certain sporting goods and restaurant - casual dining properties for which the rent has been determined to be uncollectible for the nine months ended September 30, 2017, offset by a decrease in bad debt expenses related to convenience store properties period-over-period. Finally, the period-over-period increase in general and administrative expenses was partially offset by the $1.7 million loss recognized in the comparable prior period related to swap termination fees.
Property costs
The increase in property costs is primarily due to an increase in non-reimbursable property taxes of $3.8 million and an increase in reimbursable property taxes of $2.1 million. The increase in non-reimbursable property taxes resulted from an increase in average vacancy rates over the comparative periods, as well as tenant credit issues. Additionally, tenant reimbursable property costs for the nine months ended September 30, 2017 were $15.3 million, an increase from $13.4 million for the same period in 2016.
Interest
The decrease in interest expense is primarily due to the extinguishment of $166.7 million of mortgage debt with a weighted average interest rate of 5.8% during the twelve months ended September 30, 2017, in addition to the extinguishment of $322.1 million of mortgage debt in the third quarter of 2016 with a weighted average interest rate of 5.6%. This was partially offset by an increase in interest due to increased borrowings under our Revolving Credit Facility and Term Loan, as well as interest on our Senior Unsecured Notes, which were issued in August 2016.

46



The following table summarizes our interest expense on related borrowings:
 
Nine Months Ended 
 September 30,
(In Thousands)
2017
 
2016
Interest expense – Revolving Credit Facility (1)
$
5,632

 
$
2,507

Interest expense – Term Loan
7,525

 
3,376

Interest expense – Senior Unsecured Notes
10,013

 
1,595

Interest expense – mortgages and notes payable
83,640

 
113,837

Interest expense – Convertible Notes
18,382

 
18,382

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
7,274

 
6,706

Amortization of net losses related to interest rate swaps

 
85

Amortization of debt discount, net
9,663

 
3,354

Total interest expense
$
142,129

 
$
149,842

(1) Includes facility fees of approximately $1.6 million and $1.5 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.
Depreciation and amortization
During the twelve months ended September 30, 2017, we acquired 81 properties representing an investment in real estate of $562.6 million and we disposed of 292 properties with a gross investment of $726.2 million. While we were a net disposer (based on investment in real estate), the impact to depreciation was relatively flat due to the timing of acquisition and disposition activity. Our real estate investment value was further reduced due to impairment charges during the twelve-month period ended September 30, 2017 on properties that remain in our portfolio. Additionally, our real estate held-for-sale increased period-over-period. Properties held for sale are no longer depreciated. As a result, depreciation and amortization overall decreased minimally. The following table summarizes our depreciation and amortization expense:
 
Nine Months Ended 
 September 30,
(In Thousands)
2017
 
2016
Depreciation of real estate assets
$
159,510

 
$
158,804

Other depreciation
420

 
335

Amortization of lease intangibles
32,957

 
35,088

Total depreciation and amortization
$
192,887

 
$
194,227

Impairment
Impairment charges for the nine months ended September 30, 2017 were $88.1 million. These charges included $19.2 million on properties held for sale, including $14.7 million on vacant held for sale properties. The remaining $68.9 million was recorded on properties held and used, including $53.5 million on vacant properties held and used and $10.0 million of impairment on eight underperforming properties within the drug store/pharmacy and consumer electronics industries.
During the nine months ended September 30, 2016, impairment losses included $20.0 million on seven under-performing properties within the restaurant-casual dining, movie theatre, distribution and drug store/pharmacy industries. In addition, impairment losses of $14.1 million were recorded on properties held for sale and $6.5 million were recorded from intangible lease write-offs, which were partially offset by a $0.3 million impairment recovery on a loan receivable. 
Gain on debt extinguishment
During the nine months ended September 30, 2017, we extinguished $101.0 million of mortgage debt related to four loans and recorded a $1.8 million gain. For the same period in 2016, we extinguished $817.3 million of mortgage debt and recognized a gain on debt extinguishment of $0.3 million. The gain was primarily attributable to the extinguishment of four defaulted mortgage loans upon transferring the properties collateralizing these loans to the lender, offset by losses from the defeasance fees on 391 properties.

47



Gain on disposition of assets
For the nine months ended September 30, 2017, the gain on disposition of 161 properties included $13.5 million from the sale of eleven Shopko properties, $7.6 million from the sale of five building materials properties, $7.4 million from the sale of 20 restaurant - casual dining and restaurant - quick service properties, and $9.0 million from the sale vacant properties. During the nine months ended September 30, 2016, we disposed of 82 properties and recorded gains totaling $39.2 million. These gains were primarily attributable to a $25.4 million gain from the sale of 21 properties within the restaurant - quick service industries, $10.3 million from the sale of one grocery property and a $8.4 million gain from the sale of nine Shopko properties. 
Property Portfolio Information
PROPERTY PORTFOLIO DIVERSIFICATION
2,423
99.1%
49
421
30
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 September 30, 2017:
Tenant

Number of
Properties

Total
Square Feet
(in thousands)

Percent of
Contractual Rent
 
 
 
 
 
 
 
Shopko (Specialty Retail Shops Holding Corp.)
 
101

 
6,812

 
7.8
%
AMC Entertainment, Inc. / Carmike Cinemas
 
18

 
917

 
2.6

Walgreen Company
 
42

 
622

 
2.4

Church's Chicken (Cajun Global, LLC)
 
186

 
264

 
2.2

Academy Sports + Outdoors (Academy, LTD )
 
6

 
1,805

 
1.9

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

 
248

 
1.9

Albertsons (AB Acquisition, LLC)
 
23

 
1,030

 
1.7

The Home Depot, Inc.
 
7

 
821

 
1.7

CVS Caremark Corporation
 
36

 
405

 
1.5

Carmax, Inc.
 
8

 
356

 
1.5

Other
 
1,893

 
34,119

 
74.8

Vacant
 
21

 
1,763

 

Total

2,423

 
49,162

 
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 of our owned real estate properties among different asset types as of September 30, 2017:
Asset Type
 
Number of Properties
 
Total Square Feet
(in thousands)
 
 
 
 
 
Retail
 
2,235

 
36,913

Industrial
 
70

 
9,730

Office
 
118

 
2,519

Total
 
2,423

 
49,162

a2017q3-sc_chartx43901.jpg

48



Diversification By Industry
Industry concentration represents the industry's contribution to Contractual Rent of our owned real estate properties as of September 30, 2017:
Industry

Number of Owned Properties
 
Total
Square Feet
(in thousands)
 
Percent of
Contractual Rent
 
 
 
 
 
 
 
General Merchandise
 
139

 
8,191

 
9.4
%
Restaurants - Casual Dining
 
306

 
1,830

 
8.6

Restaurants - Quick Service
 
586

 
1,364

 
8.1

Movie Theaters
 
62

 
3,115

 
7.4

Convenience Stores
 
318

 
1,026

 
7.0

Grocery
 
64

 
3,094

 
5.2

Drug Stores / Pharmacies
 
102

 
1,437

 
4.9

Medical / Other Office
 
120

 
1,268

 
4.8

Health and Fitness
 
44

 
1,775

 
4.1

Sporting Goods
 
18

 
2,547

 
3.4

Specialty Retail
 
42

 
2,175

 
3.3

Entertainment
 
26

 
1,199

 
3.1

Home Improvement
 
15

 
1,681

 
2.7

Education
 
55

 
821

 
2.7

Automotive Services
 
128

 
748

 
2.5

Home Furnishings
 
26

 
1,638

 
2.4

Building Materials
 
61

 
2,169

 
2.3

Automotive Dealers
 
23

 
665

 
2.3

Apparel
 
13

 
1,996

 
2.2

Distribution
 
12

 
1,239

 
2.1

Car Washes
 
41

 
231

 
1.9

Other
 
6

 
978

 
1.6

Manufacturing
 
17

 
2,289

 
1.4

Automotive Parts
 
61

 
523

 
1.2

Dollar Stores
 
77

 
788

 
1.2

Wholesale Clubs
 
5

 
512

 
1.1

Pet Supplies & Service
 
6

 
1,016

 
1.0

Financial Services
 
4

 
342

 
0.8

Office Supplies
 
18

 
488

 
0.8

Consumer Electronics
 
7

 
254

 
0.5

Vacant
 
21

 
1,763

 

Total

2,423

 
49,162

 
100.0
%








49



Diversification By Geography
Geographic concentration represents the geographic region's contribution to Contractual Rent of our owned real estate properties as of September 30, 2017:
heatmapa04.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
 
305

 
5,933

 
11.9
%
 
Arkansas
 
53

 
608

 
1.3
Georgia
 
182

 
2,080

 
6.0

 
Washington
 
14

 
578

 
1.2
Florida
 
155

 
1,579

 
5.7

 
Massachusetts
 
3

 
887

 
1.2
Illinois
 
112

 
2,890

 
5.7

 
Iowa
 
32

 
565

 
1.1
Ohio
 
124

 
2,448

 
5.2

 
New Jersey
 
14

 
883

 
1.1
California
 
37

 
1,421

 
4.3

 
Oregon
 
10

 
444

 
1.0
Michigan
 
137

 
2,105

 
3.9

 
Idaho
 
16

 
679

 
1.0
Wisconsin
 
45

 
3,054

 
3.9

 
Mississippi
 
41

 
360

 
0.9
Minnesota
 
50

 
2,169

 
3.5

 
New Hampshire
 
16

 
640

 
0.8
Arizona
 
60

 
940

 
3.0

 
Maryland
 
19

 
242

 
0.7
Tennessee
 
104

 
1,428

 
3.0

 
Louisiana
 
24

 
208

 
0.7
Missouri
 
91

 
1,369

 
2.9

 
South Dakota
 
8

 
390

 
0.7
Indiana
 
77

 
1,175

 
2.8

 
Montana
 
6

 
406

 
0.6
South Carolina
 
45

 
951

 
2.5

 
Connecticut
 
5

 
686

 
0.6
North Carolina
 
69

 
1,250

 
2.4

 
West Virginia
 
18

 
297

 
0.6
Alabama
 
106

 
726

 
2.2

 
Utah
 
7

 
618

 
0.5
Pennsylvania
 
55

 
1,174

 
2.0

 
Nebraska
 
12

 
363

 
0.4
Virginia
 
60

 
1,358

 
2.0

 
North Dakota
 
5

 
236

 
0.4
Colorado
 
29

 
993

 
1.9

 
Maine
 
25

 
68

 
0.4
New York
 
39

 
923

 
1.7

 
Rhode Island
 
4

 
117

 
0.3
New Mexico
 
38

 
548

 
1.7

 
Wyoming
 
8

 
180

 
0.2
Kansas
 
37

 
810

 
1.6

 
Alaska
 
5

 
63

 
0.1
Oklahoma
 
66

 
613

 
1.5

 
U.S. V.I.
 
1

 
38

 
0.1
Kentucky
 
47

 
564

 
1.5

 
Delaware
 
1

 
5

 
Nevada
 
5

 
1,099

 
1.3

 
Vermont
 
1

 
1

 

50



Lease Expirations
The following table sets forth a summary schedule of expiration dates for leases in place as of September 30, 2017. As of September 30, 2017, the weighted average remaining non-cancelable initial term of our leases (based on Contractual Rent) was 10.1 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 2017

29


$
8,230


1,013


1.4
%
2018

72


22,295


1,824


3.7

2019

103


19,193


1,758


3.2

2020

73


18,966


1,508


3.1

2021

186


44,525


3,861


7.3

2022

116


32,015


2,849


5.3

2023

107


31,318


3,330


5.1

2024

57


22,306


1,369


3.7

2025

77


35,704


2,078


5.9

2026

192


43,940


3,945


7.2

2027 and thereafter

1,390


330,082


23,864


54.1

Vacant

21




1,763



Total owned properties

2,423

 
$
608,574

 
49,162


100.0
%
(1) Contractual Rent for the month ended September 30, 2017 for properties owned at September 30, 2017 multiplied by twelve.
Liquidity and Capital Resources
SHARE REPURCHASE PROGRAM
In August 2017, 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 the new proceeds from asset sales, cash flows from operations, existing cash on the balance sheet and other sources. As of September 30, 2017, 2,482,570 shares of our common stock have been repurchased in open market transactions under the stock repurchase program, at a weighted average price of $8.75 per share, leaving $228.3 million in available capacity. Fees associated with the repurchase, of $49,700, are included in retained earnings.
In February 2016, our Board of Directors authorized a share repurchase program, under which we may repurchase up to $200.0 million of our outstanding common stock. Under the prior program, we have repurchased, in open market transactions, 26.3 million shares of our outstanding common stock,at a weighted average price of $7.59 per share, equivalent to the $200.0 million authorized.
SHORT-TERM LIQUIDITY AND CAPITAL RESOURCES
On a short-term basis, our principal demands for funds are for financing of acquisitions, distributions to stockholders, payment of interest and principal on our indebtedness and operating expenses (including property improvements and re-leasing costs). We expect to fund these demands primarily through cash provided by operating activities and borrowings under the Revolving Credit Facility. As of September 30, 2017, $414.0 million borrowing capacity was available under the Revolving Credit Facility along with $96.3 million in cash reserves on deposit with lenders and $11.9 million in cash and cash equivalents.

51



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 occasionally by issuing fixed rate secured or unsecured notes and bonds.
We have a shelf registration statement on file with the SEC under which we may offer shares of our common stock from time to time in amounts, at prices and on terms to be announced when and if such shares are offered. We may issue common stock when we believe our share price is at a level that allows for any offering proceeds to be accretively invested into additional properties or to permanently finance properties that were initially financed by our Revolving Credit Facility, Term Loan or other indebtedness.
In the future, some of our property acquisitions could be made by exchanging partnership units in our Operating Partnership 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 alternative financing and believe that we can obtain financing on reasonable terms. However, we cannot assure that we will have access to the capital markets at times and on terms that are acceptable to us.
DESCRIPTION OF CERTAIN DEBT
The following descriptions of debt should be read in conjunction with footnote 4 to the combined, consolidated financial statements herein.
Spirit Master Funding Program
The Spirit Master Funding Program is 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 with respect to the leases and mortgage loans 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 Spirit Master Funding Program. 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 from the Collateral Pools. Proceeds from the sale of these 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 September 30, 2017, $79.4 million was held on deposit and classified as restricted cash within deferred costs and other assets, net in our consolidated balance sheets.
The Spirit Master Funding Program consists of two separate securitization trusts that have one or multiple bankruptcy-remote, special purpose entities as issuers of the Master Trust 2013 and Master Trust 2014 notes. Each issuer is an indirect wholly-owned subsidiary of ours. All outstanding series of Master Trust Notes were rated investment grade as of September 30, 2017.

52


The Master Trust Notes as of September 30, 2017 are summarized below (principal in thousands):
 
 
Stated
Rates (1)
 
Maturity
 
 
 
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A1
 
5.1
%
 
2.7
 
$
45,141

 
$
53,919

Series 2014-1 Class A2
 
5.4
%
 
2.8
 
253,300

 
253,300

Series 2014-2
 
5.8
%
 
3.5
 
223,604

 
226,283

Series 2014-3
 
5.7
%
 
4.5
 
311,459

 
311,820

Series 2014-4 Class A1
 
3.5
%
 
2.3
 
150,000

 
150,000

Series 2014-4 Class A2
 
4.6
%
 
12.3
 
360,000

 
360,000

Total Master Trust 2014 notes
 
5.1
%
 
5.8
 
1,343,504

 
1,355,322

Series 2013-1 Class A
 
3.9
%
 
1.2
 
125,000

 
125,000

Series 2013-2 Class A
 
5.3
%
 
6.2
 
188,898

 
192,384

Total Master Trust 2013 notes
 
4.7
%
 
4.2
 
313,898

 
317,384

Total Master Trust notes
 
 
 
 
 
1,657,402

 
1,672,706

Debt discount, net
 
 
 
 
 
(15,613
)
 
(18,787
)
Deferred financing costs, net
 
 
 
 
 
(14,050
)
 
(16,376
)
Total Master Trust Notes, net
 
 
 
 
 
$
1,627,739

 
$
1,637,543

(1) Represents the individual series stated interest rate as of September 30, 2017 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of September 30, 2017.
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 September 30, 2017, the carrying amount of the Convertible Notes was $712.5 million, which is net of discounts (for 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. 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 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. 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 the notes to be repurchased, plus accrued and unpaid interest. 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. As of September 30, 2017, the conversion rate was 77.1889 per $1,000 principal note.
Revolving Credit Facility
As of September 30, 2017, the borrowing capacity 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. As of September 30, 2017, the Revolving Credit Facility bore interest at LIBOR plus 1.25% based on our credit rating and incurred a facility fee of 0.25% per annum. As of September 30, 2017, $386.0 million in borrowings were outstanding and $414.0 million of borrowing capacity was available under the Revolving Credit Facility.
Amounts available for borrowing under the Revolving Credit Facility remain subject to compliance with certain customary restrictive covenants. As of September 30, 2017, the Corporation and the Operating Partnership were in compliance with these covenants.

53


Term Loan
As of September 30, 2017, 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 and payment of an extension fee. As of September 30, 2017, the Term Loan bore interest at LIBOR plus 1.35% based on our credit rating and the Term Loan was fully drawn.
Amounts available for borrowing under the Term Loan remain subject to compliance with certain customary restrictive covenants. As of September 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.
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 Corporation. The Senior Unsecured Notes accrue interest at a rate of 4.45% per year, payable on March 15 and September 15 of each year, until the maturity date of 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 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, the redemption price will not include a make-whole premium.  
In connection with the issuance of the Senior Unsecured Notes, the Corporation and the Operating Partnership remain subject to compliance with certain customary restrictive covenants. As of September 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.
CMBS
We may use long-term, fixed-rate debt to finance our properties on a “match-funded” basis. In such events, we generally seek to use asset level financing that bears annual interest less than the annual rent on the related lease(s) and that matures prior to the expiration of such lease(s). In general, the obligor of our asset level debt is a special purpose entity that holds the real estate and other collateral securing the indebtedness. Each special purpose entity is a bankruptcy remote separate legal entity, and is the sole owner of its assets and solely responsible for its liabilities other than typical non-recurring covenants.
As of September 30, 2017, we had 16 fixed rate CMBS loans with $426.6 million of outstanding principal, a weighted average contractual interest rate of 5.89% and a weighted average maturity of 3.9 years. Approximately 71% of this debt is partially amortizing and requires a balloon payment at maturity. These balances include six CMBS fixed-rate loans that are in default, discussed further below. The following table shows the outstanding principal of the CMBS fixed-rate loans excluding the defaulted loans as of September 30, 2017 (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 2017
 
1

 
1

 
6.52%
 
6.50
%
 
$
51

 
$
39,830

 
$
39,881

2018
 
2

 
7

 
3.90% - 4.60%
 
4.21
%
 

 
44,550

 
44,550

2019
 
1

 
5

 
4.61%
 
4.61
%
 

 
10,000

 
10,000

2020
 

 

 
 

 

 

 

2021
 

 

 
 

 

 

 

Thereafter
 
6

 
100

 
4.67% - 6.00%
 
5.33
%
 
28,853

 
240,380

 
269,233

Total
 
10

 
113

 
 
 
5.32
%
 
$
28,904

 
$
334,760

 
$
363,664


54


CMBS Liquidity Matters
As of September 30, 2017, we are in default on six CMBS fixed-rate loans due to the underperformance of the eight properties securing the loans. The aggregate principal balance under the defaulted loans was $62.9 million, including $11.8 million of accrued interest. We believe the value of the eight properties is less than the related debt. As a result, we have notified the lender of the special purpose entity that we anticipate either surrendering these properties to the lender or selling them in exchange for relieving the indebtedness, including any accrued interest, encumbering the properties.
The following table provides key elements of the defaulted mortgage loans as of September 30, 2017 (dollars in thousands):
Industry
 
Properties
 
Net Book Value
 
Monthly Base Rent
 
Pre-Default Outstanding Principal
 
Capitalized interest (1)
 
Total Debt Outstanding
 
Restricted Cash (2)
 
Stated Rate
 
Default Rate
 
Accrued Interest (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
 
2
 
$
4,895

 
$

 
$
5,460

 
$
10,942

 
$
16,402

 
$

 
5.85
%
 
9.85
%
 
$
135

Sporting Goods
 
1
 
3,098

 

 
6,321

 
251

 
6,572

 
57

 
5.62

 
10.62

 
58

Consumer Electronics
 
1
 
3,057

 

 
8,592

 
367

 
8,959

 
286

 
5.87

 
9.87

 
74

Multi-Tenant Retail
 
1
 
12,773

 

 
17,250

 
148

 
17,398

 
265

 
5.53

 
7.53

 
73

Sporting Goods
 
2
 
3,480

 

 
9,625

 
78

 
9,703

 
455

 
4.39

 
9.39

 
76

Sporting Goods
 
1
 
2,019

 

 
3,853

 
32

 
3,885

 
169

 
4.65

 
9.65

 
31

Total
 
8
 
$
29,322

 
$

 
$
51,101

 
$
11,818

 
$
62,919

 
$
1,232

 
5.44
%
 
8.3
%
 
$
447

(1) Interest capitalized to principal that remains unpaid.
(2) Represents restricted cash controlled by the lender that may be applied to reduce the outstanding principal balance.
DEBT MATURITIES    
Future principal payments due on our various types of debt outstanding as of September 30, 2017 (in thousands):
 
 
Total
 
Remainder of 2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility (1)
 
$
386,000

 
$

 
$

 
$
386,000

 
$

 
$

 
$

Term Loan (2)

420,000

 

 
420,000

 

 

 

 

Senior Unsecured Notes
 
300,000

 

 

 

 

 

 
300,000

Master Trust Notes
 
1,657,402

 
6,589

 
163,262

 
40,420

 
448,202

 
236,046

 
762,883

CMBS - fixed-rate (3)
 
426,583

 
123,583

 
28,492

 
13,905

 
4,100

 
4,365

 
252,138

Convertible Notes
 
747,500

 

 

 
402,500

 

 
345,000

 

 
 
$
3,937,485

 
$
130,172

 
$
611,754

 
$
842,825

 
$
452,302

 
$
585,411

 
$
1,315,021

(1) 2019 includes the Revolving Credit Facility which is extendible for one year at the borrower's option.
(2) 2018 includes the $420 million unsecured Term Loan that is extendible at borrower's option pursuant to two one-year extension options.
(3) The CMBS - fixed-rate payment balance in 2017 includes $62.9 million, including $11.8 million of capitalized interest, for the acceleration of principal payable following an event of default under six CMBS fixed-rate loans with stated maturities in 2017.
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, 2016, 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.

55


DISTRIBUTION POLICY
Distributions from our current or accumulated earnings and profits are generally classified as ordinary income, whereas distributions in excess of our current and accumulated earnings and profits, to the extent of a stockholder’s federal income tax basis in our common stock, are generally characterized as a return of capital. 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 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 nine months ended September 30, 2017 and September 30, 2016, respectively:
 
Nine Months Ended 
 September 30,
 
 
 
2017
 
2016
 
Change
 
(in Thousands)
Net cash provided by operating activities
$
292,359

 
$
259,291

 
$
33,068

Net cash used in investing activities
(33,496
)
 
(129,121
)
 
95,625

Net cash used in financing activities
(256,975
)
 
(138,776
)
 
(118,199
)
Net increase (decrease) in cash and cash equivalents
$
1,888

 
$
(8,606
)
 
$
10,494

As of September 30, 2017, we had $11.9 million of cash and cash equivalents as compared to $10.1 million as of December 31, 2016.
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 increase in net cash provided by operating activities was primarily attributable to decreases in debt extinguishment costs of $25.3 million, cash paid for interest of $14.5 million, restructuring charge payments of $7.9 million and net changes in operating assets and liabilities of $4.5 million, and payments to terminate interest rate swaps of $1.7 million . This was partially offset by a reduction in cash revenue of $13.5 million, driven by tenant credit losses and the timing of acquisitions and dispositions, and increases in property costs of $5.9 million and general and administrative expenses of $2.8 million.
Investing Activities
Cash used in investing activities is generally used to fund property acquisitions, for investments in loans receivable and, to a lessor extent, for capital expenditures. Cash provided by investing activities generally relates to the disposition of real estate and other assets.

56



Net cash used in investing activities during the nine months ended September 30, 2017 included $278.5 million to fund the acquisition of 39 properties (one of which was acquired through a $2.7 million non-cash 1031 Exchange) and capitalized real estate expenditures of $34.9 million, and , the transfer of $64.9 million in net sales proceeds to restricted cash accounts, mostly offset by cash proceeds of $342.0 million from the disposition of 161 properties (two of which were disposed of through a $2.7 million 1031 Exchange).
During the same period in 2016, net cash used by investing activities included $424.5 million to fund the acquisition of 227 properties (33 of which were acquired through a $83.6 million non-cash 1031 Exchange) and capitalized real estate expenditures of $8.3 million, partially offset by proceeds of $245.9 million from the disposition of 82 properties (six of which were disposed of through a $43.7 million 1031 Exchange) and the transfer of $58.2 million in net sales proceeds from restricted accounts pursuant to 1031 Exchanges.
Financing Activities
Generally, our net cash used in financing activities is impacted by our net borrowings and common stock offerings, including sales of our common stock under our ATM Program, common stock offerings, borrowings under our Revolving Credit Facility and Term Loan, and issuances of net-lease mortgage notes under our Spirit Master Funding Program.
Net cash used in financing activities during the nine months ended September 30, 2017 was primarily attributable to the payment of dividends to equity owners of $257.1 million, the repurchase of shares of common stock totaling $225.7 million, $3.5 million of which related to net settlement of restricted shares, and the repayment of mortgages and notes payable of $76.4 million, all of which were paid primarily through sources from our operating cash flows and net borrowings under our Revolving Credit Facility. These amounts were partially offset by net borrowings under our Revolving Credit Facility of $300.0 million.
During the same period in 2016, net cash used in financing activities was primarily attributable to repayment of our indebtedness of $790.2 million and the payment of dividends to equity owners of $238.9 million, both of which were paid primarily through sources from our operating cash flows and net borrowings under our Revolving Credit Facility, Term Loan and Senior Unsecured Notes. These amounts were partially offset by the issuance of 34.5 million shares of our common stock through an underwritten public offering and sale of 6.3 million shares of our common stock under our ATM Program for aggregate net proceeds of $446.6 million, and net borrowings under our Revolving Credit Facility and Term Loan of $150.0 million and net proceeds of $296.2 million from the issuance of $300 million aggregate principal Senior Unsecured Notes (see Note 4).

57



Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any material off-balance sheet arrangements.
New Accounting Pronouncements
See footnote 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.

58



Adjusted EBITDA and Annualized Adjusted EBITDA
Adjusted EBITDA represents EBITDA modified to include other adjustments to GAAP net income (loss) attributable to common stockholders for restructuring charges, real estate acquisition costs, impairment losses, gains/losses from the sale of real estate and debt transactions and other items that we 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) attributable to common stockholders (computed in accordance with GAAP) to EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA 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 EBITDA 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, 2016.
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.

59



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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income attributable to common stockholders (1) (2)
$
5,322


$
27,399


$
41,357


$
96,458

Add/(less):







Portfolio depreciation and amortization
63,530


65,155


192,465


193,892

Portfolio impairments
37,737


15,384


88,109


41,693

Realized gains on sales of real estate
(8,707
)

(17,960
)

(40,197
)

(39,221
)
Total adjustments to net income
92,560

 
62,579

 
240,377

 
196,364

 







FFO
$
97,882

 
$
89,978

 
$
281,734

 
$
292,822

Add/(less):







(Gain) loss on debt extinguishment
(1,792
)

8,349


(1,770
)

(326
)
Restructuring charges


3,264




5,726

Other costs included in general and administrative associated with headquarters relocation


1,501




3,442

Transaction costs
2,660

 

 
3,145

 

Real estate acquisition costs
196


1,056


773


2,092

Non-cash interest expense
5,810


4,178


16,937


10,144

Accrued interest and fees on defaulted loans
1,344


853


2,917


3,951

Swap termination costs (included in general and administrative)

 

 

 
1,724

Straight-line rent, net of related bad debt expense (4)
(3,217
)

(3,246
)

(13,427
)

(14,097
)
Other amortization and non-cash charges
(743
)
 
(954
)
 
(2,447
)
 
(2,058
)
Non-cash compensation expense (1)
2,339


3,399


13,778


7,189

Total adjustments to FFO
6,597

 
18,400


19,906

 
17,787

 







AFFO
$
104,479

 
$
108,378

 
$
301,640

 
$
310,609

 
 
 
 
 
 
 
 
Dividends declared to common stockholders
$
82,062


$
84,606


$
251,606


$
246,151

Net income per share of common stock







Basic (3)
$
0.01


$
0.06


$
0.09


$
0.21

Diluted (3)
$
0.01


$
0.06


$
0.09

 
$
0.21

FFO per share of common stock







Diluted (3)
$
0.21


$
0.19


$
0.59


$
0.64

AFFO per share of common stock







Diluted (3)
$
0.23


$
0.22


$
0.64


$
0.68

Weighted average shares of common stock outstanding:







Basic
456,671,617


479,554,362


472,698,692


457,263,526

Diluted
456,671,617

 
480,598,610

 
472,698,692

 
457,301,623

(1) Included in G&A balances for the nine months ended September 30, 2017 is $11.1 million of severance related costs, comprising $4.2 million of cash compensation and $6.9 million of non-cash compensation related to the acceleration of Restricted Stock and Performance Share Awards.
(2) For the nine months ended September 30, 2016, Net Income Attributable to Common Stockholders includes compensation for lost rent received from the Haggen Holdings, LLC settlement for 6 rejected stores as follows (in millions):
Contractual rent from date of rejection through either sale or September 30, 2016        $ 1.3
Three month of prepaid rent for the 3 stores subsequently sold                 0.5
Total included in AFFO                            $ 1.8
(3) For the three months ended September 30, 2017 and 2016, dividends paid to unvested restricted stockholders of $0.3 million and $0.2 million, respectively, and for the nine months ended September 30, 2017 and 2016, 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 (see Note 12 to the consolidated financial statements herein).
(4) Straight-line bad debt expense totaled $2.4 million and $4.7 million for the three and nine months ended September 30, 2017, respectively.

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Adjusted Debt, Adjusted EBITDA and Annualized Adjusted EBITDA - Leverage
The following provides a calculation of adjusted debt and a reconciliation of EBITDA and annualized adjusted EBITDA (dollars in thousands):
 
 
2017
 
2016
 
(Unaudited)
Revolving Credit Facility
$
386,000


$
105,000

Term Loan, net
419,091

 
368,400

Unsecured Senior Notes, net
295,242

 
295,215

Mortgages and notes payable, net
2,050,302


2,241,783

Convertible Notes, net
712,510


699,465

 
3,863,145

 
3,709,863

Add/(less):





Unamortized debt discount, net
43,327


54,975

Unamortized deferred financing costs
31,013


38,812

Cash and cash equivalents
(11,947
)

(13,184
)
Restricted cash balances held for the benefit of lenders
(96,344
)

(39,038
)
Total adjustments
(33,951
)
 
41,565

Adjusted Debt
$
3,829,194

 
$
3,751,428

 
 
 
 
 
Three Months Ended 
 September 30,
 
2017
 
2016
 
(Unaudited)
Net income attributable to common stockholders
$
5,322


$
27,399

Add/(less):





Interest
48,680


47,653

Depreciation and amortization
63,673


65,300

Income tax expense
(11
)

12

Total adjustments
112,342

 
112,965

EBITDA
$
117,664

 
$
140,364

Add/(less):





Restructuring charges

 
3,264

Other costs in general and administrative associated with headquarters relocation


1,501

Transaction costs
2,660

 

Real estate acquisition costs
196


1,056

Impairments on real estate assets
37,737


15,384

Swap termination costs (included in general and administrative)

 

Realized gain on sales of real estate
(8,707
)

(17,960
)
Loss on debt extinguishment
(1,792
)

8,349

Total adjustments to EBITDA
30,094

 
11,594

Adjusted EBITDA
$
147,758

 
$
151,958

Annualized Adjusted EBITDA (1)
$
591,032


$
607,832

 



Adjusted Debt / Annualized Adjusted EBITDA
6.5
x

6.2
x
 
 
 
 
(1)  Adjusted EBITDA of the current quarter multiplied by four.
 
 
 


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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, however, 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 September 30, 2017, our assets were primarily long-term, fixed-rate leases (though most have scheduled rental increases during the terms of the leases). As of September 30, 2017, $3.1 billion of our indebtedness was fixed-rate, consisting of our Master Trust Notes, fixed-rate CMBS loans, Senior Unsecured Notes and Convertible Notes, with a weighted average stated interest rate of 4.67%, excluding amortization of deferred financing costs and debt discounts/premiums. As of September 30, 2017, $806.0 million of our indebtedness was variable-rate, consisting of our Revolving Credit Facility and Term Loan, with a weighted average stated interest rate of 2.54%, excluding amortization of deferred financing costs and debt discounts/premiums. If one-month LIBOR as of September 30, 2017 increased by 100 basis points, or 1.0%, the resulting increase in annual interest expense with respect to the $806.0 million outstanding under the Revolving Credit Facility and Term Loan would impact our future earnings and cash flows by $8.1 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 September 30, 2017 are as follows (in thousands):
 
Carrying
Value
 
Estimated
Fair Value
 
 
 
 
Revolving Credit Facility
$
386,000

 
$
385,993

Term Loan, net (1)
419,091

 
420,024

Senior Unsecured Notes, net (1)
295,242

 
300,039

Mortgages and notes payable, net (1)
2,050,302

 
2,068,788

Convertible Notes, net (1)
712,510

 
758,085

(1) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.
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 September 30, 2017 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 September 30, 2017 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 September 30, 2017 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 September 30, 2017 that have materially affected, or are reasonably likely to materially affect, Spirit Realty, L.P.'s internal control over financial reporting.


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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.
Please review the Risk Factors disclosed in the section entitled “Risk Factors” beginning on page 13 of our Annual Report on Form 10-K for the year ended December 31, 2016 and filed with the SEC on February 24, 2017, as well as the supplemental risk factors below. There were no other material changes to the risk factors as described in our Annual Report on Form 10-K.
A substantial number of our properties are leased to one tenant, which may result in increased risk due to tenant and industry concentration.
Currently, we lease 101 properties to Shopko, primarily pursuant to three master leases and two single-site leases. The Shopko leases are guaranteed by Specialty Retail Shops Holding Corp., the parent company of Shopko. Revenues generated from Shopko represented 7.8% of our Contractual Rent for the month ended September 30, 2017. Because a significant portion of our revenues are derived from rental revenues received from Shopko, any default, breach or delay in the payment of rent by Shopko may materially and adversely affect us.
As a result of the significant number of properties leased to Shopko, our results of operations and financial condition are significantly impacted by Shopko's performance under its leases. Shopko operates as a multi-department general merchandise retailer and retail health services provider primarily in mid-size and large communities in the Midwest, Pacific Northwest, North Central and Western Mountain states. Shopko is subject to the following risks, as well as other risks that we are not currently aware of, that could adversely affect its performance and thus its ability to pay rent to us:
The retail industry in which Shopko operates is highly competitive, which could impair its operations and liquidity, limit its growth opportunities and reduce profitability. Shopko competes with other discount retail merchants as well as mass merchants, catalog merchants, internet retailers and other general merchandise, apparel and household merchandise retailers. It faces strong competition from large national discount retailers, such as Walmart, Kmart and Target, and mid-tier merchants such as Kohl’s and J.C. Penney.
Shopko stores are geographically concentrated in the Midwest, Pacific Northwest, North Central and Western Mountain states. As a result, adverse economic conditions in these regions may materially and adversely affect its results of operations and retail sales.
The seasonality in retail operations may cause fluctuations in Shopko’s quarterly performance and results of operations and could adversely affect its cash flows.
Shopko stores are dependent on the efficient functioning of its distribution networks. Problems that cause delays or interruptions in the distribution networks could materially and adversely affect its results of operations.
Shopko stores depend on attracting and retaining quality employees. Many employees are entry-level or part-time with historically high rates of turnover.
Based on our monitoring of Shopko's financial information and recent liquidity events and other challenges, including bankruptcies, impacting the retail industry generally relative to recent years, we continue to be concerned about Shopko's ongoing ability to meet its obligations to us under its leases. Although Shopko is current on all of its obligations under its lease arrangements with us as of September 30, 2017, we can give you no assurance that this will continue to be the case, particularly if Shopko (not just the stores subject to leases with us) experiences a further decline in its business, financial condition and results of operations or loses access to liquidity. If such events were to occur, Shopko may request discounts or deferrals on the rents it pays to us, seek to terminate its master leases with us, close certain of its stores, or file for bankruptcy, all of which could significantly decrease the amount of revenue we receive from it.
While we seek to reduce the tenant concentration of Shopko, we may have difficulty in selling or leasing to other tenants the properties currently leased to Shopko, due to, among other things, market demand or tax constraints.

63



Furthermore, we can provide no assurance that we will deploy the proceeds from the disposition of any Shopko properties in a manner that would produce comparable or better yields.
Decrease in demand for retail and restaurant space may materially and adversely affect us.
As of September 30, 2017, leases representing approximately 33% and 17% of our Contractual Rent were with tenants in the retail and restaurant industries, respectively, and we may acquire additional retail and restaurant properties in the future. Accordingly, decreases in the demand for retail and/or restaurant spaces adversely impact us. The market for retail and restaurant space has previously been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retail and restaurant companies, the ongoing consolidation in the retail and restaurant industries, the excess amount of retail and restaurant space in a number of markets and, in the case of the retail industry, increasing consumer purchases through catalogs or over the Internet. In recent years a number of companies in the retail industry, including some of our tenants, have declared bankruptcy, have gone out of business or have significantly reduced the number of their retail stores. In particular, we have experienced, and expect to continue to experience, challenges with some of our general merchandise retailers through increased credit losses.
To the extent that the adverse conditions listed above continue, they are likely to negatively affect market rents for retail and restaurant space, thereby reducing rents payable to us, and they may lead to increased vacancy rates at our properties and diminish our ability to attract and retain retail and restaurant tenants.
The proposed spin-off of almost all of our properties leased to Shopko, assets that collateralize Master Trust 2014 and potentially other assets into an independent, publicly-traded REIT may not be completed on the currently contemplated timeline or terms, or at all, and may not achieve the intended benefits.
On August 3, 2017, we announced a plan to spin off our interests in almost all of our properties leased to Shopko, assets that collateralize Master Trust 2014 and potentially other assets into an independent, publicly traded REIT. If we complete the spin-off, we expect we would make a distribution of stock issued by SpinCo to our stockholders. We expect SpinCo to elect to be treated and qualify for taxation as a REIT for U.S. federal income tax purposes. We currently expect we would complete the spin-off in the first half of 2018, although there can be no assurance as to whether or when the spin-off will occur, or the final structure of the spin-off. The completion of the spin-off will be subject to various conditions, including declaration by the SEC that SpinCo's registration statement on Form 10 is effective, customary third-party consents and final approval and declaration of the distribution to our stockholders of SpinCo stock by our Board of Directors. Such conditions and other unforeseen developments, including in the debt or equity markets or general market conditions, could delay or prevent the spin-off or cause the spin-off to occur on terms or conditions that are less favorable and/or different than anticipated. We also expect to incur significant expenses in connection with the spin-off.
We may not be able to achieve the full strategic and financial benefits that we anticipate to result from the spin-off, or such benefits may be delayed or not occur at all. Additionally, we may experience negative reactions from financial markets if we do not complete the spin-off in a reasonable time period. Following the spin-off, the combined value of the common stock of the two publicly-traded companies may not be equal to or greater than what the value of our common stock would have been had the spin-off not occurred.
The assets that we would spin-off represent a significant portion of our gross real estate investment and annualized contractual rents. Under our current planning, we anticipate SpinCo would own over 915 properties, with a gross real estate investment of $2.7 billion to $2.9 billion. Additionally, we expect SpinCo would have approximately $220.0 million to $235 million in annualized contractual rent. As of June 30, 2017, the assets included in Master Trust 2014 secured $1,347.5 million of indebtedness and bore interest at a weighted average interest rate of 5.1% per annum. We expect the entire amount of this indebtedness would be transferred to SpinCo, and we are currently exploring issuing additional indebtedness in Master Trust 2014 prior to the spin-off, that would ultimately increase SpinCo’s leverage, with the net cash proceeds from any such incremental debt issuance by Master Trust 2014 to remain with our company. We are also currently exploring contributing additional assets to SpinCo that would be subject to mortgage debt. The identity of these assets and the amount of the mortgages that would encumber them has not yet been finally determined. While the number of properties, gross real estate investment and annualized contractual rents set forth above represent our current estimates, the number of properties that would be included in SpinCo and their related gross real estate investment and annualized contractual rent could change significantly. Moreover, gross real estate investment does not represent fair market value, and we expect that the fair market value of the assets that would be included in SpinCo could exceed our historical gross real estate investment in them.


64



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.


65



Item 6. Exhibits.
Exhibit No.
 
Description
 
 
 
2.1
 
 
2.2
 
 
3.1
 
 
3.2
 
 
3.3
 
 
3.4
 
 
3.5
 
 
4.1
 
 
4.2
 
 
4.3
 
 
4.4
 
 
4.5
 
 
4.6
 
 
4.7
 
 
4.8
 
 

66



Exhibit No.
 
Description
 
4.9
 
 
4.10
 
 
4.11
 
 
4.12
 
 
4.13
 
 
4.14
 
 
4.15
 
 
4.16
 
 
4.17
 
 
10.1
 
 
10.2
 
 
10.3
 
 
10.4
 
 
10.5
 
 
10.6
 
 
10.7
 
 

67



Exhibit No.
 
Description
 
10.8
 
 
10.9
 
 
10.10
 
 
10.11
 
 
10.12
 
 
10.13
 
 
10.14
 
 
10.15
 
 
10.16
 
 
10.17
 
 
10.18
 
 
10.19
 
 
10.21
 
 
10.23
 
 
10.25
 
 

68



Exhibit No.
 
Description
 
10.26
 
 
10.27
 
 
10.28
 
 
10.29
 
 
10.30
 
 
10.31
 
 
10.32
 
 
10.33
 
 
10.34
 
 
10.35
 
 
10.36
 
 
10.37
 
 
10.38
 
 
10.39
 
 
31.1*
 
 

69



Exhibit No.
 
Description
 
31.2*
 
 
31.3*
 
 
31.4*
 
 
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
*


70



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:
 
Name:
 
Title:
Chief Accounting Officer and Senior Vice President (Principal Accounting Officer)
 
SPIRIT REALTY, L.P.
(Registrant)
 
 
 
 
By:
Spirit General OP Holdings, LLC, as general partner of Spirit Realty, L.P.
 
 
 
 
 
 
Chief Accounting Officer and Senior Vice President (Principal Accounting Officer)
Date: November 2, 2017


71

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
9/15/26
6/15/26
5/15/21
11/15/20
3/31/2010-Q
12/31/1910-K
5/15/19
3/31/1910-Q
11/15/18
11/2/18
Filed on:11/2/178-K
10/31/17
10/13/17
10/3/174,  8-K
10/1/174
For Period end:9/30/17
9/29/17
9/15/17
8/3/1710-Q,  8-K
7/14/17
6/30/1710-Q
6/15/17
4/14/17424B3,  EFFECT
3/31/1710-Q,  DEF 14A
3/15/174
2/24/1710-K
1/1/17
12/31/1610-K,  DEF 14A
9/30/1610-Q
8/18/168-K
6/30/1610-Q,  10-Q/A,  3
4/27/16
4/1/16
11/25/15
11/16/153
11/3/15
9/8/15
3/31/1510-Q,  10-Q/A,  8-K
7/17/133,  8-K,  8-K/A,  S-8
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