SEC Info - Spirit Realty Capital, Inc. - ‘10-K’ for 12/31/22

2021

2020

Revenues:

Rental income

i 703,029

i 606,099

i 479,901

Interest income on loans receivable

i 1,884

i 29

i 998

Earned income from direct financing leases

i 525

i 526

i 571

Related party fee income

—

i 678

Other operating income

i 4,191

i 1,736

i 1,469

Total revenues

i 709,629

i 608,390

i 483,617

Expenses:

General and administrative

i 57,368

i 52,608

i 48,380

Property costs (including reimbursable)

i 29,837

i 23,232

i 24,492

Deal pursuit costs

i 4,655

i 1,136

i 2,432

Interest

i 117,622

i 103,003

i 104,165

Depreciation and amortization

i 292,985

i 244,624

i 212,620

Impairments

i 37,156

i 23,760

i 81,476

Total expenses

i 539,623

i 448,363

i 473,565

Other income:

Loss on debt extinguishment

( i 172

)

( i 29,186

)

( i 7,227

)

Gain on disposition of assets

i 110,900

i 41,468

i 24,156

Other income

i 5,679

—

Total other income

i 116,407

i 12,282

i 16,929

Income before income tax expense

i 286,413

i 172,309

i 26,981

Income tax expense

( i 897

)

( i 607

)

( i 273

)

Net income

i 285,516

i 171,702

i 26,708

Dividends paid to preferred stockholders

( i 10,350

)

( i 10,350

)

( i 10,350

)

Net income attributable to common stockholders

i 275,166

i 161,352

i 16,358

Net income per share attributable to common stockholders:

Basic

i 2.04

i 1.36

i 0.15

Diluted

i 2.04

i 1.35

i 0.15

Weighted average shares of common stock outstanding:

Basic

i 134,548,086

i 118,342,441

i 104,357,660

Diluted

i 134,645,651

i 118,715,838

i 104,535,384

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Comprehensive Income

(In Thousands)

For the Year Ended December 31,

2021

2020

Net income attributable to common stockholders

i 275,166

i 161,352

i 16,358

Other comprehensive income:

Net reclassification of amounts from AOCIL

i 39,935

i 2,807

Total comprehensive income

i 315,101

i 164,159

i 19,165

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Stockholders’ Equity

(In Thousands, Except Share Data)

Preferred Stock

Common Stock

Par Value and
Capital in Excess
of Par Value

Par Value

Capital in
Excess of
Par Value

Accumulated
Deficit

AOCIL

Total
Stockholders’
Equity

Balances, December 31, 2019

i 6,900,000

i 166,177

i 102,476,152

i 5,124

i 5,686,247

( i 2,432,838

)

( i 11,461

)

i 3,413,249

Net income

—

i 26,708

—

i 26,708

Dividends declared on preferred stock

—

( i 10,350

)

—

( i 10,350

)

Net income attributable to common stockholders

—

i 16,358

—

i 16,358

Other comprehensive income

—

i 2,807

Dividends declared on common stock

—

( i 266,659

)

—

( i 266,659

)

Tax withholdings related to net stock settlements

—

( i 117,543

)

( i 6

)

—

( i 4,375

)

—

( i 4,381

)

Issuance of shares of common stock, net

—

i 12,137,210

i 607

i 427,632

—

i 428,239

Stock-based compensation, net

—

i 316,796

i 16

i 12,624

( i 1,133

)

—

i 11,507

Balances, December 31, 2020

i 6,900,000

i 166,177

i 114,812,615

i 5,741

i 6,126,503

( i 2,688,647

)

( i 8,654

)

i 3,601,120

Net income

—

i 171,702

—

i 171,702

Dividends declared on preferred stock

—

( i 10,350

)

—

( i 10,350

)

Net income attributable to common stockholders

—

i 161,352

—

i 161,352

Other comprehensive income

—

i 2,807

Dividends declared on common stock

—

( i 306,325

)

—

( i 306,325

)

Tax withholdings related to net stock settlements

—

( i 206,597

)

( i 10

)

—

( i 4,385

)

—

( i 4,395

)

Issuance of shares of common stock, net

—

i 12,567,506

i 628

i 532,960

—

i 533,588

Stock-based compensation, net

—

i 525,711

i 26

i 13,977

( i 2,351

)

—

i 11,652

Balances, December 31, 2021

i 6,900,000

i 166,177

i 127,699,235

i 6,385

i 6,673,440

( i 2,840,356

)

( i 5,847

)

i 3,999,799

Net income

—

i 285,516

—

i 285,516

Dividends declared on preferred stock

—

( i 10,350

)

—

( i 10,350

)

Net income attributable to common stockholders

—

i 275,166

—

i 275,166

Other comprehensive income

—

i 39,935

Dividends declared on common stock

—

( i 358,906

)

—

( i 358,906

)

Tax withholdings related to net stock settlements

—

( i 41,016

)

( i 2

)

—

( i 6,485

)

—

( i 6,487

)

Issuance of shares of common stock, net

—

i 13,445,051

i 673

i 594,831

—

i 595,504

Stock-based compensation, net

—

i 127,949

i 6

i 17,358

( i 1,059

)

—

i 16,305

Balances, December 31, 2022

i 6,900,000

i 166,177

i 141,231,219

i 7,062

i 7,285,629

( i 2,931,640

)

i 34,088

i 4,561,316

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Cash Flows

(In Thousands)

For the Year Ended December 31,

2021

2020

Operating activities

Net income

i 285,516

i 171,702

i 26,708

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

i 292,985

i 244,624

i 212,620

Impairments

i 37,156

i 23,760

i 81,476

Amortization of deferred financing costs

i 5,410

i 3,942

i 5,278

Amortization of debt discounts

i 1,269

i 2,140

i 4,343

Amortization of deferred losses on interest rate swaps

i 2,807

Stock-based compensation expense

i 17,364

i 14,003

i 12,640

Loss on debt extinguishment

i 172

i 29,186

i 7,227

Gain on dispositions of real estate and other assets

( i 110,900

)

( i 41,468

)

( i 24,156

)

Non-cash revenue

( i 39,092

)

( i 47,605

)

( i 12,996

)

Other

i 17

i 14

i 221

Changes in operating assets and liabilities:

Deferred costs and other assets, net

( i 1,734

)

i 2,598

( i 21,296

)

Accounts payable, accrued expenses and other liabilities

( i 4,520

)

i 5,430

i 19,440

Net cash provided by operating activities

i 486,450

i 411,133

i 314,312

Investing activities

Acquisitions of real estate

( i 1,428,674

)

( i 1,235,861

)

( i 867,456

)

Capitalized real estate expenditures

( i 88,675

)

( i 21,957

)

( i 12,659

)

Investments in loans receivable

( i 12,700

)

( i 11,000

)

—

Collections of principal on loans receivable

—

i 31,771

Proceeds from dispositions of real estate and other assets, net

i 315,182

i 98,991

i 100,594

Net cash used in investing activities

( i 1,214,867

)

( i 1,169,827

)

( i 747,750

)

Financing activities

Borrowings under revolving credit facilities

i 1,441,800

i 1,077,500

i 1,155,000

Repayments under revolving credit facilities

( i 1,674,700

)

( i 789,100

)

( i 1,271,500

)

Repayments under mortgages payable

( i 525

)

( i 208,891

)

( i 4,101

)

Borrowings under term loans

i 800,000

—

i 400,000

Repayments under term loans

—

( i 178,000

)

( i 222,000

)

Repayments under Convertible Notes

—

( i 190,426

)

( i 154,574

)

Borrowings under Senior Unsecured Notes

—

i 794,842

i 445,509

Debt extinguishment costs

—

( i 26,685

)

( i 4,032

)

Deferred financing costs

( i 24,150

)

( i 7,071

)

( i 6,642

)

Proceeds from issuance of common stock, net of offering costs

i 595,448

i 533,868

i 428,272

Repurchase of shares of common stock, including tax withholdings related to net stock settlements

( i 6,487

)

( i 4,395

)

( i 4,381

)

Common stock dividends paid

( i 348,465

)

( i 298,097

)

( i 260,488

)

Preferred stock dividends paid

( i 10,350

)

( i 10,350

)

( i 10,350

)

Net cash provided by financing activities

i 772,571

i 693,195

i 490,713

Net increase (decrease) in cash, cash equivalents and restricted cash

i 44,154

( i 65,499

)

i 57,275

Cash, cash equivalents and restricted cash, beginning of period

i 17,799

i 83,298

i 26,023

Cash, cash equivalents and restricted cash, end of period

i 61,953

i 17,799

i 83,298

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Cash Flows

(In Thousands)

For the Year Ended December 31,

2021

2020

Supplemental Cash Flow Disclosures:

Cash paid for interest, net of interest capitalized

i 108,220

i 89,866

i 82,916

Interest capitalized

i 1,119

—

Cash paid for taxes

i 752

i 657

i 801

Supplemental Disclosures of Non-Cash Activities:

Dividends declared and unpaid

i 93,636

i 81,380

i 71,758

Accrued market-based award dividend rights

i 1,059

i 2,304

i 1,133

Accrued capitalized costs

i 30,997

i 10,369

i 2,174

Derivative changes in fair value

i 37,128

—

Reclass of residual value from direct financing lease to operating lease

—

i 6,831

Receivable for disposal of real estate property

—

i 2,000

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 1. ORGANIZATION

Organization and Operations

Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate sustainable and attractive returns for stockholders by primarily investing in and managing a portfolio of single-tenant, operationally essential real estate throughout the United States that is generally leased on a long-term, triple-net basis to tenants operating retail, industrial and other property types. Single-tenant, operationally essential real estate 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’s operations are generally carried out through Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC, one of the Corporation’s wholly-owned subsidiaries, is the sole general partner and owns approximately i 1% of the Operating Partnership. The Corporation and a wholly-owned subsidiary (Spirit Notes Partner, LLC) are the only limited partners and, together, own the remaining i 99% of the Operating Partnership.

On May 31, 2018, the Company completed the spin-off (the "Spin-Off") of certain assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). The Company provided management services to SMTA until September 4, 2020.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

i The consolidated financial statements of the Company have been prepared on the accrual basis of accounting, in accordance with GAAP. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for fair statement of the information required to be set forth therein. i The consolidated financial statements of the Company include the accounts of the Corporation and its wholly-owned subsidiaries, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements include certain special purpose entities that were formed to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of December 31, 2022 and 2021, net assets totaling $ i 11.7 million and $ i 12.3 million, respectively, were held, and net liabilities totaling $ i 4.9 million and $ i 5.5 million, respectively, were owed by these encumbered special purpose entities and are included in the consolidated balance sheets.

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 i one reportable segment, which consists of net leasing operations.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Real Estate Investments

Purchase Accounting and Acquisition of Real Estate

When acquiring a property, the purchase price (including acquisition and closing costs) is allocated to land, building, improvements and equipment based on their relative fair values. The Company considers several assumptions to estimate the fair value of the components of the tangible property acquired including market assumptions for land, building and improvements. The determination of the intangible assets and liabilities primarily relate to the contractual lease terms, estimates of the fair market rental rates, discount rates, and estimates of costs to carry and obtain a tenant. For properties acquired with in-place leases, the purchase price of real estate is allocated to the tangible and intangible assets and liabilities acquired based on their relative fair values. In making estimates of fair values for this purpose, a number of sources are used, including independent appraisals and information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.

Carrying Value of Real Estate Investments

The Company’s real estate properties are recorded at cost and depreciated using the straight-line method over the estimated remaining useful lives of the properties, which generally range from i 20 to i 50 years for buildings and improvements and from i 5 to i 20 years for tenant and land improvements. Properties classified as held for sale are not depreciated and are recorded at the lower of their carrying value or their fair value, less anticipated selling costs.

Held for Sale

The Company is continually evaluating the portfolio of real estate assets and may elect to dispose of assets considering criteria including, but not limited to, tenant concentration, tenant credit quality, unit financial performance, local market conditions and lease rates, associated indebtedness, asset location, and tenant operation type (e.g., industry or concept/brand). Real estate assets held for sale are expected to be sold within twelve months.

Lease Intangibles

Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above- or below-market leases. In-place lease intangibles are valued based on the Company’s estimate of costs related to acquiring a tenant and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering costs to execute similar leases at the time of the acquisition and current market conditions. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.

Direct Financing Leases

For real estate property leases classified as direct financing leases, the building portion of the lease is accounted for as a direct financing lease, while the land portion is accounted for as an operating lease when certain criteria are met. For direct financing leases, the Company records an asset which represents the net investment that is determined by using the aggregate of the total amount of future minimum lease payments, the estimated residual value of the leased property and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are reviewed annually, represent the estimated amount the Company expects to receive at lease termination from the disposition of the leased property. Actual residual values realized could differ from these estimates.

Impairment

The Company reviews its real estate investments and related lease intangibles periodically for indicators of impairment, including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in i 60 days or less. For assets with indicators of impairment, the Company then evaluates if its carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Impairment is calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, as the amount by which the carrying value exceeds fair value less costs to sell. Estimating fair values is highly subjective and such estimates could differ materially from actual results. Key assumptions used in estimating fair values include, but are not limited to: signed purchase and sale agreements or letters of intent; broker opinions of value; recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.

Gain or Loss on Disposition of Assets

When real estate properties are disposed of, the related net book value of the properties is removed and a gain or loss on disposition is recognized in the consolidated statements of operations as the difference between the proceeds from the disposition, net of any costs to sell, and the net book value. As leasing is the Company’s primary activity, the Company determined that its sales of real estate, which are nonfinancial assets, are sold to noncustomers and fall within the scope of ASC 610-20. The full gain or loss on the disposition of real estate properties is recognized at time of sale, provided that the Company has no (i) controlling financial interest in the real estate or (ii) continuing interest or obligation with respect to the disposed real estate.

Revenue Recognition

Rental Income: Cash and Straight-line Rent

The Company primarily leases real estate to its tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, the Company assesses the terms and conditions of the lease to determine the appropriate lease term. The majority of our operating leases include one or more options to extend, typically for a period of five to i ten years per renewal option. Excluding Walgreen Co., less than i i 1 / % of the Company’s operating leases at both December 31, 2022 and 2021 include an option to terminate. Walgreen Co. leases are generally for i fifty years or more and contain certain termination options after an initial non-cancellable term. Less than i i 10 / % of the Company’s operating leases at both December 31, 2022 and 2021 include an option to purchase, where the purchase option is generally determined based on fair market value of the underlying property. Options to extend, terminate or purchase are not included in the evaluation for lease classification or for recognition of rental income unless the Company is reasonably certain the tenant will exercise the option.

Evaluation of lease classification also requires an estimate of the residual value of the real estate at the end of the lease term. For acquisitions, the Company uses the tangible value of the property at the date of acquisition. For lease modifications, the Company generally uses sales comparables or a direct capitalization approach to determine residual value. The Company seeks to protect residual value through its underwriting of acquisitions, incorporating the proprietary Spirit Property Ranking Model which is real estate centric. Once a property is acquired, the lessee is responsible for maintenance of the property, including insurance protecting against any damage to the property. To further protect residual value, the Company supplements the tenant insurance policies with a master policy covering all properties owned by the Company. As an active manager, the Company will occasionally invest in capital improvements on properties, re-lease properties to new tenants or extend lease terms to protect residual value.

The Company elected to account for lease concessions related to the COVID-19 pandemic consistent with ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether they explicitly exist in the lease). As such, rent deferrals are recorded as an increase to rent receivables and recognized as income during the deferral period. For the years ended December 31, 2022, 2021 and 2020, $ i 0.4 million, $ i 13.4 million and $ i 26.3 million, respectively, of deferrals were recognized in rental income. Lease concessions other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification.

Some of the Company’s leases also provide for contingent rent based on a percentage of the tenant’s gross sales, which is recognized as rental income when the factor on which the contingent lease payment is based has occurred.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

The Company’s leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. Accordingly, the difference between rental income recognized on a straight-line basis and billed rents is recorded as rent receivables, which the Company will receive only if the tenant makes all rent payments required through the initial term of their lease. For leases with variable rent escalators, rental income typically increases at a multiple of any increase in the CPI over a specified period. Because of the volatility and uncertainty regarding future changes in the CPI and the Company’s inability to determine the extent to which any specific future change in the CPI is probable, increases from variable rent escalators are recognized when the changes in the rental rates have occurred.

Rental income is subject to an evaluation for collectability, which includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant’s payment history and financial condition. The Company does not recognize rental income for amounts that are not probable of collection. For lease concessions granted in conjunction with the COVID-19 pandemic, management reviewed all amounts recognized on a tenant-by-tenant basis for collectability.

Rental Income: Tenant Reimbursement Revenue

Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. Certain leases contain additional amounts recoverable from tenants for common area maintenance and certain other expenses, which are non-lease components. The Company elected to combine all its non-lease components, which were determined to have the same pattern of transfer as the related operating lease component, into a single combined lease component. Tenant reimbursement revenue is variable and is recognized in the period in which the related expenses are incurred, with the related expenses included in property costs (including reimbursable) on the consolidated statements of operations. Tenant reimbursements are recorded on a gross basis in instances when our tenants reimburse us for property costs which we incur. Tenant receivables are reduced for amounts that are not probable of collection.

Rental Income: Intangible Amortization

Amortization of above- and below-market lease intangibles are included as a decrease and increase, respectively, to rental revenue and amortization of in-place lease intangibles is included in depreciation and amortization expense in the consolidated statements of operations. All lease intangibles are amortized on a straight-line basis over the term of the lease, which includes any renewal options the Company is reasonably certain the tenant will exercise. If the Company subsequently determines it is reasonably certain that the tenant will not exercise the renewal options, the unamortized portion of any related lease intangible is accelerated over the remaining initial term of the lease. If the Company believes a lease intangible balance is no longer recoverable, the unamortized portion is immediately recognized in impairments in the consolidated statements of operations.

Other Income: Lease Termination Fees

Lease termination fees are included in other income on the consolidated statements of operations and are recognized when there is a signed termination agreement and all of the conditions of the agreement have been met. The Company recorded lease termination fees of $ i 2 thousand, $ i 19 thousand and $ i 0.7 million during the years ended December 31, 2022, 2021 and 2020, respectively.

Loans Receivable

Interest on loans receivable is recognized using the effective interest rate method. A loan is placed on non-accrual status when the loan has become i 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on non-accrual status, interest income is recognized only when received. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted.

The Company evaluates its loans receivable balance, including accrued interest, for potential credit losses by analyzing the credit of the borrower, the remaining time to maturity of the loan, collateral value and quality (if any), and other relevant factors. Allowance for credit losses are recorded in impairments on the consolidated statement of operations.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Cash, Cash Equivalents and Restricted Cash

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

December 31,
2021

December 31,
2020

Cash and cash equivalents

i 8,770

i 17,799

i 70,303

Restricted cash:

Collateral deposits (1)

i —

i 335

Tenant improvements, repairs and leasing commissions (2)

i —

i 12,660

1031 Exchange proceeds

i 53,183

i —

Total cash, cash equivalents and restricted cash

i 61,953

i 17,799

i 83,298

(1) Funds held in lender-controlled accounts generally used to meet future debt service or certain property operating expenses.

(2) Deposits held as additional collateral support by lenders to fund improvements, repairs and leasing commissions incurred to secure a new tenant.

Tenant Receivables

The Company reviews its rent and other tenant receivables for collectability on a regular basis, considering changes in factors such as the tenant’s payment history, the tenant’s financial condition, industry conditions in which the tenant operates and economic conditions in the geographic area in which the tenant operates. If a receivable is not probable of collection, a direct write-off of the receivable will be made. The Company had accounts receivable balances of $ i 18.2 million and $ i 21.7 million at December 31, 2022 and 2021, respectively, after the impact of $ i 3.2 million and $ i 3.9 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred cost and other assets, net in the consolidated balance sheets.

For receivable balances related to the straight-line method of recognizing rental income, the collectability is generally assessed in conjunction with the evaluation of rental income as described above. The Company had straight-line rent receivables of $ i 167.1 million and $ i 137.6 million at December 31, 2022 and 2021, respectively, after the impact of $ i 1.3 million and $ i 2.6 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred costs and other assets, net in the consolidated balance sheets.

Goodwill

Goodwill arises from business combinations as 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 annually or 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. The Company performs a qualitative assessment to determine if the quantitative impairment test is necessary. The quantitative impairment test, if deemed necessary, compares the fair value of each reporting unit with its carrying amount and impairment is recognized as the amount by which the carrying amount exceeds the reporting unit’s fair value. i No impairment was recorded for the periods presented. Goodwill for the years ended December 31, 2022, 2021 and 2020 was $ i i i 225.6 / / million, respectively.

Accounting for Derivative Financial Instruments and Hedging Activities

The Company may utilize derivative instruments such as interest rate swaps for purposes of hedging exposures to fluctuations in interest rates associated with certain of its financing transactions. At the inception of a hedge transaction, the Company enters into a contractual arrangement with the hedge counterparty and formally documents the relationship between the derivative instrument and the financing transaction being hedged, as well as its risk management objective and strategy for undertaking the hedge transaction. The fair value of the derivative instrument is recorded on the balance sheet as either an asset or liability. At inception and at least quarterly thereafter, a formal assessment is performed to determine whether the derivative instrument has been highly effective in offsetting changes in cash flows of the related financing transaction and whether it is expected to be highly effective in the future. The Company recognizes the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in AOCIL and amounts are subsequently reclassified to earnings when the hedged item affects earnings.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Income Taxes

The Corporation has elected to be taxed as a REIT under the Code. As a REIT, the Corporation 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 the Company’s assets, the amounts distributed to the Corporation’s stockholders and the ownership of Corporation stock. Management believes the Corporation has qualified and will continue to qualify as a REIT and, therefore, i no provision has been made for federal income taxes in the consolidated financial statements. Even if the Corporation qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.

Taxable income earned by any of the Company’s taxable REIT subsidiaries, including from non-REIT activities, is subject to federal, state and local taxes. See Note 12 for additional discussion.

Earnings Per Share

The Company’s unvested restricted common stock, which contains non-forfeitable rights to receive dividends, are considered participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on their respective weighted average shares outstanding during the period.

Under the terms of the Amended Incentive Award Plan, restricted stock awards are not allocated losses, including undistributed losses as a result of dividends declared exceeding net income. The Company uses net income (loss) attributable to common shareholders to determine whether potential common shares are dilutive or anti-dilutive and undistributed net income (loss) to determine whether undistributed earnings are allocable to participating securities.

Forward Equity Sale Agreements

The Corporation may enter into forward sale agreements for the sale and issuance of shares of our common stock, either through an underwritten public offering or through the 2021 ATM Program. These agreements may be physically settled in stock, settled in cash, or net share settled at the Company’s election. The Company evaluated the forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Corporation’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Corporation’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Corporation’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Corporation’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Corporation elects to physically settle or net share settle such forward sale agreement, delivery of the Corporation’s shares will result in dilution to the Company’s earnings per share.

Unaudited Interim Information

The consolidated quarterly financial data in Note 13 is unaudited. In the opinion of management, this financial information reflects all adjustments necessary for a fair presentation of the respective interim periods. All such adjustments are of a normal recurring nature.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 3. INVESTMENTS

Owned Properties

As of December 31, 2022, the Company’s gross investment in owned real estate properties totaled $ i 9.2 billion. The gross investment, as adjusted for any impairment, is comprised of land, buildings, lease intangible assets, lease intangible liabilities, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout i 49 states with Texas, at i 14.5%, as the only state with a gross investment greater than i 10.0% of the total gross investment of the Company’s entire portfolio.

During the years ended December 31, 2022 and 2021, the Company had the following real estate activity (dollars in thousands):

Number of Properties

Dollar Amount of Investments

Held in Use

Held for Sale

Total

Held in Use

Held for Sale

Total

Gross balance, December 31, 2020

i 1,853

i 7

i 1,860

i 6,777,673

i 27,764

i 6,805,437

Acquisitions/improvements (1)

i 166

i —

i 166

i 1,256,983

i —

i 1,256,983

Dispositions of real estate (2)

( i 13

)

( i 10

)

( i 23

)

( i 42,472

)

( i 22,750

)

( i 65,222

)

Transfers to Held for Sale

( i 9

)

i 9

i —

( i 18,403

)

i 18,403

i —

Transfers from Held for Sale

i 3

( i 3

)

i —

i 11,300

( i 11,300

)

i —

Impairments (3)

i —

( i 21,474

)

( i 1,736

)

( i 23,210

)

Reset of gross balances (4)

i —

( i 31,143

)

( i 2,019

)

( i 33,162

)

Other

i —

i 2,359

i —

i 2,359

Gross balance, December 31, 2021

i 2,000

i 3

i 2,003

i 7,934,823

i 8,362

i 7,943,185

Acquisitions/improvements (1)

i 172

i —

i 172

i 1,546,808

i —

i 1,546,808

Dispositions of real estate (2)

( i 38

)

( i 22

)

( i 60

)

( i 198,865

)

( i 41,200

)

( i 240,065

)

Transfers to Held for Sale

( i 37

)

i 37

i —

( i 96,234

)

i 96,234

i —

Transfers from Held for Sale

i 1

( i 1

)

i —

i 1,529

( i 1,529

)

i —

Impairments (3)

i —

( i 36,894

)

( i 135

)

( i 37,029

)

Reset of gross balances (4)

i —

( i 29,004

)

( i 151

)

( i 29,155

)

Gross balance, December 31, 2022

i 2,098

i 17

i 2,115

i 9,122,163

i 61,581

i 9,183,744

Accumulated depreciation and amortization

( i 1,387,637

)

( i 12,433

)

( i 1,400,070

)

Net balance, December 31, 2022 (5)

i 7,734,526

i 49,148

i 7,783,674

(1) Includes investments of $ i 95.4 million and $ i 15.4 million, respectively, in revenue producing capitalized expenditures, and $ i 16.8 million and $ i 10.7 million, respectively, of non-revenue producing capitalized expenditures for the years ended December 31, 2022 and 2021.

(2) The total net gain on disposition of properties held in use was $ i 87.9 million, $ i 37.3 million and $ i 10.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The total gain on disposition of properties held for sale was $ i 23.0 million, $ i 2.2 million and $ i 14.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. Additionally, there were $ i 1.7 million of gains recognized on two asset substitutions within a master lease and $ i 0.3 million in other gains recognized during the year ended December 31, 2021.

(3) Impairments on owned real estate is comprised of real estate and intangible asset impairment and allowance for credit losses on direct financing leases.

(4) Represents write-off of gross investment balances against the related accumulated depreciation and amortization balances as a result of basis reset due to impairment or intangibles and tenant improvements which have been fully amortized.

(5) Reconciliation of total owned investments to the consolidated balance sheet at December 31, 2022 is as follows:


Real estate assets held for investment, net	$	i 7,421,306
Intangible lease assets, net		i 423,870
Real estate assets under direct financing leases, net		i 7,427
Real estate assets held for sale, net		i 49,148
Intangible lease liabilities, net		( i 118,077	)
Net balance	$	i 7,783,674

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Operating Leases

As of December 31, 2022, 2021, and 2020, the Company held i 2,111, i 1,998 and i 1,852 properties under operating leases, respectively. i The following table summarizes the components of rental income recognized on these operating leases in the consolidated statements of operations (in thousands):

For the Year Ended December 31,

2021

2020

Base Cash Rent (1)

i 638,340

i 541,726

i 453,013

Variable cash rent (including reimbursables)

i 25,597

i 16,768

i 13,176

Straight-line rent, net of uncollectible reserve (2)

i 36,902

i 44,758

i 11,876

Amortization of above- and below- market lease intangibles, net (3)

i 2,190

i 2,847

i 1,836

Total rental income

i 703,029

i 606,099

i 479,901

(1) Includes net impact of amounts (reserved)/recovered of $( i 0.5) million, $ i 5.5 million and $( i 10.9) million for the years ended December 31, 2022, 2021 and 2020, respectively.

(2) Includes net impact of amounts (reserved)/recovered of $( i 26) thousand, $ i 10.9 million and $( i 14.9) million for the years ended December 31, 2022 2021 and 2020, respectively.

(3) Excludes amortization of in-place leases of $ i 43.9 million, $ i 38.5 million and $ i 34.8 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in depreciation and amortization expense in the consolidated statements of operations.

Lease renewal periods are exercisable at the lessees’ option and, as such, minimum future rent only includes the remaining initial non-cancellable term of our operating leases. In addition, minimum future rent includes fixed rent escalations occurring on or after January 1, 2023, but does not include variable rent escalations, such as those based on CPI, or contingent rents. i Minimum future rent at December 31, 2022 is as follows (in thousands):


	December 31, 2022
2023	$	i 679,645
2024		i 670,893
2025		i 659,867
2026		i 633,330
2027		i 589,881
Thereafter		i 4,706,694
Total minimum future rent	$	i 7,940,310

The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):


	December 31, 2022			December 31, 2021
In-place leases	$	i 559,962		$	i 536,344
Above-market leases		i 101,594			i 100,837
Less: accumulated amortization		( i 237,686	)		( i 210,209	)
Intangible lease assets, net	$	i 423,870		$	i 426,972

Below-market leases	$	i 179,187		$	i 188,718
Less: accumulated amortization		( i 61,110	)		( i 60,641	)
Intangible lease liabilities, net	$	i 118,077		$	i 128,077

The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was i 12.4 years, i 13.0 years, i 18.2 years and i 13.8 years, respectively, as of December 31, 2022. The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was i 13.3 years, i 13.7 years, i 17.6 years and i 14.3 years, respectively, as of December 31, 2021. During the year ended December 31, 2022, the Company acquired in-place lease intangible assets of $ i 57.3 million, above-market lease intangible assets of $ i 3.2 million and below-market lease intangible liabilities of $ i 9.5 million. During the year ended December 31, 2021, the Company acquired in-place lease intangible assets of $ i 84.8 million, above-market lease intangible assets of $ i 23.1 million and below-market lease intangible liabilities of $ i 16.8 million.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Based on the intangible assets and liabilities at December 31, 2022, the net aggregate amortization expense for the next five years and thereafter is expected to be as follows (in thousands):


	December 31, 2022
2023	$	i 41,412
2024		i 39,365
2025		i 35,767
2026		i 32,490
2027		i 26,873
Thereafter		i 129,886
Total future minimum amortization	$	i 305,793

Direct Financing Leases

As of December 31, 2022 and 2021, the Company held i i one / property under a direct financing lease, which was held in use. As of December 31, 2022, this property had $ i 2.5 million in scheduled minimum future payments to be received under its remaining non-cancellable lease term. As of December 31, 2022, the Company had a reserve of $ i 0.1 million against the net investment balance of $ i 7.5 million, which was initially recorded in 2020 as a result of the initial term of the direct financing lease extending until 2027.

Loans Receivable

During 2021, the Company issued a fixed-rate, uncollateralized loan receivable for $ i 11.0 million. During 2022, the Company issued a fixed-rate, construction loan for $ i 12.7 million. The Company evaluated the collectability of the amounts receivable under the loans and had a total allowance for credit losses of $ i 0.7 million as of December 31, 2022.

During the years ended December 31, 2022 and 2021, the Company had the following loan activity (dollars in thousands):

Mortgage Loans

Other Loans

Total

Properties

Investment

Principal, December 31, 2020

—

Issuance of loan

—

i 11,000

Principal, December 31, 2021

—

i 11,000

Issuance of loan

—

i 12,700

Principal, December 31, 2022

—

i 23,700

Impairments and Allowance for Credit Losses

The following table summarizes impairments and allowance for credit losses recognized in the consolidated statements of operations (in thousands):


	Year Ended December 31,
	2022		2021		2020
Real estate asset impairment	$	i 35,988	$	i 22,120	$	i 59,206
Intangible net asset impairment		i 1,041		i 1,090		i 22,118
Allowance for credit losses on direct financing leases		—		—		i 152
Allowance for credit losses on loans receivable		i 127		i 550		—
Total impairment loss	$	i 37,156	$	i 23,760	$	i 81,476

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 4. DEBT

The Company's debt is summarized below (dollars in thousands):

2022 Weighted Average Effective Interest Rates (1)

2022 Weighted Average Stated Rates (2)

2022 Weighted Average Remaining Years to Maturity (3)

December 31,
2021

Revolving credit facilities

i 2.85

i 5.17

i 3.2

i 55,500

i 288,400

Term loans

i 3.92

i 3.50

i 3.9

i 800,000

—

Senior Unsecured Notes

i 3.42

i 3.25

i 6.4

i 2,750,000

Mortgages payable

i 4.87

i 5.82

i 8.0

i 4,825

i 5,350

Total debt

i 3.47

i 3.73

i 5.8

i 3,610,325

i 3,043,750

Debt discount, net

( i 9,556

)

( i 10,824

)

Deferred financing costs, net (4)

( i 25,460

)

( i 20,334

)

Total debt, net

i 3,575,309

i 3,012,592

(1) Includes amortization of debt discount/premium, amortization of deferred financing costs, facility fees, non-utilization fees and impact of cash flow hedges, where applicable, calculated for the year ended December 31, 2022 based on the average principal balance outstanding during the period.

(2) Based on the outstanding principal balance as of December 31, 2022. Term loans include the impact of cash flow hedges. Excluding the impact of cash flow hedges, the stated interest rate for the term loans was i 5.29% as of December 31, 2022.

(3) Based on the outstanding principal balance as of December 31, 2022.

(4) Excludes deferred financing costs for the revolving credit facilities.

Deferred financing costs and offering discount/premium incurred in connection with entering into debt agreements are amortized to interest expense over the initial term of the respective agreement. Both deferred financing costs and offering discount/premium are recorded net against the principal debt balance on the consolidated balance sheets, except for deferred costs related to revolving credit facilities, which are recorded in deferred costs and other assets, net.

Revolving Credit Facilities

On January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, which included the 2019 Credit Facility with a borrowing capacity of $ i 800.0 million. On March 30, 2022, the Operating Partnership amended and restated the 2019 Revolving Credit and Term Loan Agreement, increasing the borrowing capacity of the 2019 Credit Facility to $ i 1.2 billion. The borrowing capacity can be further increased by $ i 500.0 million through exercise of an accordion feature, subject to satisfying certain requirements. The 2019 Credit Facility has a maturity date of i March 31, 2026 and includes i two i six-month extensions that can be exercised at the Company’s option. Borrowings may be repaid, in whole or in part, at any time, without premium or penalty, but subject to applicable breakage fees, if any. Payment is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions. The 2019 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.

As of December 31, 2022, outstanding loans under the 2019 Credit Facility bore interest at a i 1-month adjusted SOFR rate plus an applicable margin of i 0.775% per annum and the aggregate revolving commitments incurred a facility fee of i 0.150% per annum, in each case, based on the Operating Partnership’s credit rating and leverage ratio (as defined in the agreement). Prior to March 30, 2022, outstanding loans under the 2019 Credit Facility bore interest at i 1-month LIBOR plus an applicable margin of i 0.90% per annum and the aggregate revolving commitments incurred a facility fee of i 0.20% per annum.

In connection with the amendment and restatement of the 2019 Credit Facility, the Company wrote off $ i 0.2 million in deferred financing costs and incurred deferred financing costs of $ i 8.6 million. The unamortized deferred financing costs were $ i 7.8 million as of December 31, 2022, compared to $ i 1.4 million as of December 31, 2021.

As of December 31, 2022, $ i 1.1 billion of borrowing capacity was available under the 2019 Credit Facility and there were i no outstanding letters of credit. The Operating Partnership's ability to borrow under the 2019 Credit Facility is subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2022.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Term Loans

On April 2, 2020, the Operating Partnership entered into the 2020 Term Loan Agreement, which provided for $ i 200.0 million of unsecured term loans with a maturity date of i April 2, 2022. The 2020 Term Loan Agreement included an accordion feature, which the Operating Partnership fully exercised in the second quarter of 2020 to borrow an additional $ i 200.0 million of term loans. The 2020 Term Loans bore interest at LIBOR plus an applicable margin of i 1.50% per annum, based on the Operating Partnership’s credit rating. In connection with entering into the 2020 Term Loan Agreement, the Company incurred $ i 2.5 million in deferred financing costs.

On August 6, 2020, the issuance of the 2031 Senior Unsecured Notes triggered a mandatory prepayment under the 2020 Term Loan Agreement. As such, the Company repaid $ i 222.0 million of the 2020 Term Loans and wrote-off $ i 1.0 million of related unamortized deferred financing costs. On January 4, 2021, the Company repaid the 2020 Term Loan in full and wrote-off the remaining unamortized deferred financing costs.

On August 22, 2022, the Operating Partnership entered into the 2022 Term Loan Agreement, which provides for borrowings in an aggregate amount of $ i 800.0 million comprised of a $ i 300.0 million tranche with a maturity date of i August 22, 2025 and a $ i 500.0 million tranche with a maturity date of i August 20, 2027. The Term Loan Agreement also includes an accordion feature to increase the available term loans by $ i 200.0 million in aggregate, subject to satisfying certain requirements. As of December 31, 2022, the 2022 Term Loans bore interest at a i 1-month adjusted SOFR rate plus an applicable margin of i 0.850% per annum, based on the Operating Partnership’s credit rating. In conjunction with entering into the 2022 Term Loans, the Company entered into interest rate swaps as a cash flow hedge. See Note 7 for further detail. The Company incurred $ i 8.4 million in deferred financing costs in connection with entering into the 2022 Term Loan Agreement, and the unamortized deferred financing costs were $ i 7.7 million as of December 31, 2022.

On November 17, 2022, the Operating Partnership entered into the 2023 Term Loan Agreement, which provides for $ i 500.0 million of unsecured term loans with a maturity date of i June 16, 2025 and allows funds to be drawn up to July 2, 2023. The 2023 Term Loan Agreement also includes an accordion feature to increase the available term loans by $ i 100.0 million, subject to satisfying certain requirements. The 2023 Term Loans will bear interest at a i 1-month adjusted SOFR rate plus an applicable margin of i 0.950% per annum, based on the Operating Partnership's credit rating as of December 31, 2022. The full $ i 500.0 million of borrowing capacity was available under the 2023 Term Loan Agreements as of December 31, 2022.

In connection with the 2022 Term Loan Agreement and the 2023 Term Loan Agreement, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2022.

Senior Unsecured Notes

The Senior Unsecured Notes were issued by the Operating Partnership and are guaranteed by the Company. The following is a summary of the Senior Unsecured Notes outstanding (dollars in thousands):

Maturity Date

Interest Payment Dates

Stated Interest Rate

December 31,
2021

2026 Senior Notes

i September 15, 2026

i March 15 and September 15

i 4.45%

i 300,000

2027 Senior Notes

i January 15, 2027

i January 15 and July 15

i 3.20%

i 300,000

2028 Senior Notes

i March 15, 2028

i March 15 and September 15

i 2.10%

i 450,000

2029 Senior Notes

i July 15, 2029

i January 15 and July 15

i 4.00%

i 400,000

2030 Senior Notes

i January 15, 2030

i January 15 and July 15

i 3.40%

i 500,000

2031 Senior Notes

i February 15, 2031

i February 15 and August 15

i 3.20%

i 450,000

2032 Senior Notes

i February 15, 2032

i February 15 and August 15

i 2.70%

i 350,000

Total Senior Unsecured Notes

i 3.25%

i 2,750,000

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2022, 2021 and 2020, the Operating Partnership completed the following issuances of Senior Unsecured Notes:

•

2031 Senior Notes issued on August 6, 2020, resulting in net proceeds of $ i 441.3 million, deferred financing costs of $ i 4.2 million and an offering discount of $ i 4.5 million and

•

2028 Senior Notes and 2032 Senior Notes issued on March 3, 2021, resulting in net proceeds of $ i 787.7 million, deferred financing costs of $ i 7.1 million and an offering discount of $ i 5.2 million.

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: i 100% of the principal amount of the respective 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. If any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.

As of December 31, 2022 and 2021, the unamortized deferred financing costs were $ i 17.8 million and $ i 20.3 million, respectively, and the unamortized discount was $ i 9.7 million and $ i 11.0 million, respectively. In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2022.

Mortgages Payable

Indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under five fixed-rate non-recourse loans, which were securitized into CMBS and secured by the borrowers’ respective leased properties and related assets. In connection with the issuance of the 2028 and 2032 Senior Unsecured Notes, the Company repaid i three of these loans in March 2021 and, as of December 31, 2022, had i two non-defaulted loans with stated interest rates of i 5.80% and i 6.00%, respectively. Each loan was secured by i one property. There were i i no / unamortized deferred financing costs as of either December 31, 2022 and December 31, 2021, and the unamortized net premium as of both December 31, 2022 and 2021 was $ i i 0.2 / million.

Convertible Notes

In May 2014, the Company issued $ i 345.0 million aggregate principal amount of i 3.75% convertible notes for which interest was payable semi-annually in arrears on May 15 and November 15. During the year ended December 31, 2020, the Company repurchased $ i 154.6 million of the 2021 Convertible Notes in cash. As of December 31, 2020, the unamortized discount was $ i 1.0 million and the unamortized deferred financing costs were $ i 0.3 million. The remaining 2021 Convertible Notes matured on i May 15, 2021 at which time they were settled in cash and the remaining discount and deferred financing costs were fully amortized.

Debt Extinguishment

During the year ended December 31, 2022, the Company recognized a loss on debt extinguishment of $ i 0.2 million as a result of the amendment and restatement of the 2019 Revolving Credit and Term Loan Agreement.

During the year ended December 31, 2021, the Company extinguished the following debt:

•

$ i 207.4 million aggregate principal amount of CMBS indebtedness on i three loans secured by i 86 properties, resulting in a loss on debt extinguishment of $ i 28.5 million,

•

$ i 190.4 million of Convertible Notes upon their maturity, and

•

$ i 178.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $ i 0.7 million.

During the year ended December 31, 2020, the Company extinguished the following debt:

•

$ i 222.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $ i 1.0 million and

•

$ i 154.6 million aggregate principal amount of the 2021 Convertible Notes, resulting in a loss on debt extinguishment of $ i 6.2 million.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Debt Maturities

As of December 31, 2022, scheduled debt maturities, including balloon payments, were as follows (in thousands):

Scheduled
Principal

Balloon
Payment

Total

2023

i 556

—

i 556

2024

i 590

—

i 590

2025

i 610

i 300,016

i 300,626

2026

i 469

i 355,500

i 355,969

2027

i 497

i 800,000

i 800,497

Thereafter

i 2,034

i 2,150,053

i 2,152,087

Total

i 4,756

i 3,605,569

i 3,610,325

Interest Expense

The components of interest expense were as follows (in thousands):

Year Ended December 31,

2021

2020

Revolving credit facilities (1)

i 9,470

i 2,930

i 3,686

Term loans (2)

i 10,237

i 24

i 3,545

Senior Unsecured Notes

i 89,252

i 85,996

i 61,750

Mortgages payable

i 296

i 2,506

i 12,028

Convertible Notes

i —

i 2,658

i 10,728

Non-cash:

Amortization of deferred financing costs

i 5,410

i 3,942

i 5,278

Amortization of debt discount, net

i 1,269

i 2,140

i 4,343

Amortization of net losses related to interest rate swaps

i 2,807

Capitalized interest

( i 1,119

)

i —

Total interest expense

i 117,622

i 103,003

i 104,165

(1) Includes facility fees of approximately $ i 2.1 million, $ i 1.7 million and $ i 1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.

(2) Includes impact of cash flow hedge.

NOTE 5. STOCKHOLDERS' EQUITY

Preferred Stock

On October 3, 2017, the Company completed an underwritten public offering of i 6.9 million shares of Series A Preferred Stock. The Series A Preferred Stock pays cumulative cash dividends at the rate of i 6.00% per annum on their liquidation preference of $ i 25.00 per share (equivalent to $ i 1.50 per share on an annual basis). Dividends are payable quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock trades on the NYSE under the symbol “SRC-A.”

Prior to October 3, 2022, the Company could not redeem the Series A Preferred Stock except in limited circumstances to preserve the Corporation’s status as a REIT or pursuant to a special optional redemption provision upon a change of control. On and after October 3, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time for cash at a redemption price of $ i 25.00 per share, plus any accrued and unpaid dividends up to, but excluding, the redemption date.

Common Stock

In June 2020, the Company entered into forward sale agreements in connection with an offering of i 9.2 million shares of common stock at an initial public offering price of $ i 37.35 per share, before underwriting discounts and offering expenses. All i 9.2 million of these shares were settled during 2020, generating net proceeds of $ i 319.1 million.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

In January 2022, the Company entered into forward sale agreements in connection with an offering of i 9.4 million shares of common stock at an initial public offering price of $ i 47.60 per share, before underwriting discounts and offering expenses. All i 9.4 million of these shares were settled during 2022, generating net proceeds of $ i 427.7 million.

ATM Program

An ATM Program provides for the offer and sale of shares of the Company’s common stock up to an approved aggregate gross sales price through sales agents, directly to principals, or through forward sellers. The Company can sell shares in amounts and at times to be determined by the Company, but has no obligation to sell shares under an ATM Program.

In November 2016, a $ i 500.0 million 2016 ATM Program was approved and the prior ATM Program was terminated. From inception of the 2016 ATM Program through its termination in November 2020, i 8.8 million shares of the Company’s common stock were sold, of which i 7.0 million were sold through forward sales agreements. During the year ended December 31, 2020, i 2.9 million of these shares were settled, generating net proceeds of $ i 109.2 million. During the year ended December 31, 2021, i 0.6 million of these shares were settled, generating net proceeds of $ i 21.9 million.

In November 2020, a $ i 500.0 million 2020 ATM Program was approved and the 2016 ATM Program was terminated. From inception of the 2020 ATM Program through its termination in November 2021, i 9.3 million shares of the Company’s common stock were sold, all through forward sale agreements. All i 9.3 million shares were settled during the year ended December 31, 2021, generating net proceeds of $ i 391.4 million.

In November 2021, a $ i 500.0 million 2021 ATM Program was approved and the 2020 ATM program was terminated. i The following details the activity under the 2021 ATM Program since its inception (in thousands):

2021 ATM

Forward Shares

Regular Shares

Total Shares

Net Proceeds on Issuances

Month ended 12/31/2021

Shares sold

i 2,268

i 438

i 2,706

Shares issued

( i 2,212

)

( i 438

)

( i 2,650

)

i 120,286

Unsettled shares sold as of 12/31/2021

i 56

—

i 56

Year ended 12/31/2022

Shares sold

i 2,434

i 1,525

i 3,959

Shares issued

( i 2,490

)

( i 1,525

)

( i 4,015

)

i 167,850

Unsettled shares sold as of 12/31/2022

—

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Dividends Declared

In fiscal years 2022 and 2021, the Company's Board of Directors declared the following dividends:

Declaration Date

Dividend Per Share

Record Date

Total Amount

Payment Date

(in Thousands)

2022

Preferred Stock

i 0.375

i 2,588

i 0.375

i 2,588

i 0.375

i 2,587

i 0.375

i 2,587

Total Preferred Dividend

i 1.500

i 10,350

Common Stock

i 0.638

i 85,688

i 0.638

i 86,987

i 0.663

i 92,595

i 0.663

i 93,636

Total Common Dividend

i 2.602

i 358,906

2021

Preferred Stock

i 0.375

i 2,588

i 0.375

i 2,588

i 0.375

i 2,587

i 0.375

i 2,587

Total Preferred Dividend

i 1.500

i 10,350

Common Stock

i 0.625

i 71,837

i 0.625

i 74,436

i 0.638

i 78,674

i 0.638

i 81,378

Total Common Dividend

i 2.526

i 306,325

The common stock dividend declared on November 4, 2022 is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2022.

NOTE 6. COMMITMENTS AND CONTINGENCIES

The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are typically insured against such claims. The Company was contingently liable for $ i 5.7 million of debt owed by i one of its former tenants, which was fully accrued in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2021. No payments were made in relation to this contingent liability. Therefore, upon the maturity of the tenant's debt on March 15, 2022, the Company reversed the full $ i 5.7 million of the accrued liability, which is reflected as other income in the consolidated statement of operations.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

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. As of December 31, 2022, i no accruals have been made.

As of December 31, 2022, there were i 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.

Purchase and Capital Improvement Commitments

As of December 31, 2022, the Company had commitments totaling $ i 111.1 million, of which $ i 13.8 million relates to future acquisitions and the remainder relates to improvements on properties the Company already owns. Acquisition commitments contain standard cancellation clauses contingent on the results of due diligence. $ i 35.1 million of the Company’s commitments are expected to be funded during 2023, with the remainder to be funded by the end of 2024.

Lessee Contracts

The Company leases its corporate office space, which is classified as an operating lease. The corporate office lease contains a variable lease cost related to the lease of parking spaces and a non-lease component related to the reimbursement of certain common area maintenance expenses, both of which are recognized as incurred. The Company elected to use the components expedient for all lessee operating leases, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same. As such, total rental expense, including variable rent, for the corporate office space amounted to $ i i i 1.5 / / million for each of the years ended December 31, 2022, 2021 and 2020, respectively, and is included in general and administrative expense. The Company’s lease of its corporate office space has an initial term that expires on January 31, 2027 and is renewable at the Company’s option for i two additional periods of i five years each after the initial term.

The Company is also a lessee under long-term, non-cancellable ground leases under which it is obligated to pay monthly rent. There were i i four / ground leases as of December 31, 2022 and 2021, respectively. Total rental expense included in property costs amounted to $ i i i 0.3 / / million for each of the years ended December 31, 2022, 2021 and 2020, respectively. For all of the ground leases, rental expenses are reimbursed by tenants, and the corresponding rental revenue is recorded in rental income on the consolidated statements of operations. All leases are classified as operating leases and have a weighted average remaining lease term of i 5.1 years.

The Company’s minimum aggregate rental commitments under all non-cancellable operating leases as of December 31, 2022 are as follows (in thousands):

Ground Leases

Office Lease

Total

2023

i 285

i 1,055

i 1,340

2024

i 285

i 1,070

i 1,355

2025

i 267

i 1,086

i 1,353

2026

i 258

i 1,101

i 1,359

2027

i 167

i 92

i 259

Thereafter

i 107

—

i 107

Total

i 1,369

i 4,404

i 5,773

Less: imputed interest

( i 241

)

( i 939

)

( i 1,180

)

Total operating lease liabilities

i 1,128

i 3,465

i 4,593

Imputed interest was calculated using a weighted-average discount rate of i 4.19%. The discount rate is based on our estimated incremental borrowing rate, calculated as the treasury rate for the same period as the underlying lease term, plus a spread determined using factors including the Company's credit rating and REIT industry performance. The evaluation of the Company's right-of-use lease asset associated with the corporate office included the unamortized portion of a $ i 1.7 million cash lease incentive paid at inception of the lease. As of December 31, 2022 and 2021, the Company had a right-of-use lease asset balance of $ i 3.4 million and $ i 3.7 million, respectively, which are included in deferred costs and other assets, net and an operating lease liability balance of $ i 4.6 million and $ i 5.1 million, respectively, which are included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 7. DERIVATIVE AND HEDGING ACTIVITIES

The Company may use 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 either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in AOCIL and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash activities in the consolidated statements of cash flows. Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.

The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates this risk through monitoring the creditworthiness of counterparties, which includes review of their debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.

In the third quarter of 2019, the Company terminated interest rate swaps which had been entered into in December 2018 and accelerated the reclassification of a loss of $ i 12.5 million from AOCIL to termination of interest rate swaps as a result of a portion of the hedged forecasted transactions becoming probable not to occur. There were no events of default related to the interest rate swaps prior to their termination. Given that a portion of the hedged transactions remained probable to occur, $ i 12.3 million of the loss was deferred in other comprehensive loss and is being amortized over the remaining initial term of the interest rate swaps, which ends January 31, 2024. As of December 31, 2022, the unamortized portion of loss in AOCIL related to terminated interest rate swaps was $ i 3.0 million.

During the third quarter of 2022, the Company entered into new interest rate swaps, which were designated as cash flow hedge instruments and are recorded in deferred costs and other assets, net on the consolidated balance sheet. These instruments swap 1-month SOFR for a fixed payment. i The following table summarizes the key terms and fair value of these instruments (in thousands):

Fair Value of Asset

Interest Rate Swap Notional Amount

Fixed Interest Rate

Effective Date

Maturity Date

i 300,000

i 2.501%

i September 15, 2022

i August 22, 2027

i 15,675

i 200,000

i 2.507%

i September 15, 2022

i August 22, 2027

i 10,349

i 300,000

i 2.636%

i September 15, 2022

i August 22, 2025

i 11,104

i 37,128

The following table provides information about the amounts recorded in AOCIL, as well as any amounts reclassified to operations (in thousands):


	Year Ended December 31,
	2022			2021		2020
Cash flow hedge derivatives	$	i 39,366		$	—	$	—
Amount of gain reclassified from AOCIL to interest		( i 2,238	)		—		—
Amount of loss reclassified from AOCIL to interest		i 2,807			i 2,807		i 2,807
Total	$	i 39,935		$	i 2,807	$	i 2,807

During the next 12 months, we estimate that approximately $ i 2.8 million will be reclassified as an increase to interest expense related to terminated hedges of existing floating-rate debt and $ i 17.6 million will be reclassified as a decrease to interest expense related to cash flow hedge derivatives.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 8. FAIR VALUE MEASUREMENTS

The fair value measurement framework specifies a hierarchy of valuation inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable:

•

Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 – Inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. These types of inputs include the Company's own assumptions.

Recurring Fair Value Measurements

The Company’s interest rate swaps are measured using a market approach, using prices obtained from a nationally recognized pricing service and pricing models with market observable inputs such as interest rates and volatilities. These measurements are classified as Level 2 of the fair value hierarchy.

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis (in thousands):

Fair Value Hierarchy Level

Description

Fair Value

Level 1

Level 2

Level 3

Derivatives held at December 31, 2022

Interest rate swaps

i 37,128

—

i 37,128

—

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. 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, tenant bankruptcy or delinquency, and leases expiring in i 60 days or less. The fair values of real estate and intangible assets were estimated using the following information, depending on availability, in order of preference: signed purchase and sale agreements (“PSA”) or letters of intent (“LOI”); broker opinions of value (“BOV”); recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.

The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of their respective measurement dates (in thousands):

Fair Value Hierarchy Level

Description

Fair Value

Level 1

Level 2

Level 3

Assets held at December 31, 2022

Impaired at March 31, 2022

—

Impaired at June 30, 2022

i 4,700

—

i 4,700

Impaired at September 30, 2022

i 4,094

—

i 4,094

Impaired at December 31, 2022

i 29,636

—

i 29,636

Assets held at December 31, 2021

Impaired at March 31, 2021

i 1,739

—

i 1,739

Impaired at June 30, 2021

i 9,655

—

i 9,655

Impaired at September 30, 2021

i 3,479

—

i 3,479

Impaired at December 31, 2021

i 11,656

—

i 11,656

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

As of December 31, 2022, the Company held i 18 properties that were impaired during 2022. As of December 31, 2021, the Company held i 14 properties that were impaired during 2021. For i one property held at December 31, 2021, the Company estimated fair value using a capitalization rate of i 14.00% based on capitalization rates from market comparables. i For the remaining properties, the Company estimated property fair value using price per square foot from unobservable inputs. The unobservable inputs for the remaining properties are as follows:

Unobservable Input

Asset Type

Property Count

Price Per Square Foot Range

Weighted Average Price Per Square Foot

Square
Footage

PSA, LOI or BOV

Retail

i 12

$ i 30.00 - $ i 384.88

i 93.60

i 223,225

PSA, LOI or BOV

Data Center

i 1

$ i 24.94

i 24.94

i 188,475

Comparable Properties

Retail

i 3

$ i 26.05 - $ i 197.15

i 56.36

i 100,195

Comparable Properties

Office

i 2

$ i 71.69 - $ i 135.00

i 98.97

i 73,000

December 31, 2021

PSA, LOI or BOV

Retail

i 6

$ i 63.83 - $ i 418.57

i 102.35

i 39,603

PSA, LOI or BOV

Medical

i 2

$ i 65.63 - $ i 105.16

i 75.60

i 41,496

PSA, LOI or BOV

Data Center

i 1

$ i 38.57

i 38.57

i 188,475

Comparable Properties

Retail

i 3

$ i 29.35 - $ i 483.09

i 67.48

i 42,357

Comparable Properties

Medical

i 1

$ i 78.66 - $ i 106.35

i 95.00

i 15,974

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 consolidated balance sheets. In addition, 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 measurement date. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities. The estimated fair values of these financial instruments have been derived either based on (i) market quotes for identical or similar instruments in markets or (ii) discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. The estimated fair values of the Senior Unsecured Notes are classified as Level 1 of the fair value of the hierarchy, and the remaining estimates are classified as Level 2.

The following table discloses fair value information for these financial instruments (in thousands):

December 31, 2021

Carrying Value

Estimated Fair Value

Carrying Value

Estimated Fair Value

Loans receivable, net (1)

i 23,023

i 23,462

i 10,450

i 11,381

2019 Credit Facility

i 55,500

i 55,502

i 288,400

i 288,549

2022 Term Loans, net (2)

i 792,309

i 802,363

—

Senior Unsecured Notes, net (2)

i 2,722,514

i 2,310,547

i 2,718,641

i 2,865,187

Mortgages payable, net (2)

i 4,986

i 4,685

i 5,551

i 5,748

(1) The carrying value of the loans receivable are net of an allowance for credit losses.

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

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 9. INCENTIVE AWARD PLAN AND EMPLOYEE BENEFIT PLAN

Amended Incentive Award Plan

Under the Amended Incentive Award Plan, the Company may grant equity incentive awards to eligible employees, directors and other advisors of the Company. Awards under the Amended Incentive Award Plan may be in the form of stock options, restricted stock, dividend equivalents, stock appreciation rights, performance awards, stock payment awards, market-based awards, Operating Partnership units and other incentive awards. If an award under the Amended Incentive Award Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the Amended Incentive Award Plan. As of December 31, 2022, i 4.8 million shares remained available for award under the Amended Incentive Award Plan.

Shares of common stock have been granted pursuant to the Amended Incentive Award Plan and, during the periods presented, portions of these awards vested. The vesting of these shares 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 shares of common stock during the years ended December 31, 2022, 2021 and 2020 valued at $ i 6.5 million, $ i 4.4 million and $ i 4.4 million, respectively, solely to pay the associated statutory tax withholdings, which do not exceed the maximum statutory rate. Common shares repurchased are considered retired under Maryland law, and the cost of the stock repurchased is recorded as a reduction to common stock and accumulated deficit on the consolidated balance sheets. The Company has made an accounting policy election to recognize stock-based compensation forfeitures as they occur.

Restricted Shares of Common Stock

Restricted share awards have been granted to certain employees, including executive officers, and members of the Board of Directors. The requisite service period for the awards is generally three years for employees and one year for members of the Board of Directors. i The following table summarizes the restricted share activity:

2022

2021

2020

Number of
Shares

Weighted
Average
Price (1)
(per share)

Number of
Shares

Weighted
Average
Price (1)
(per share)

Number of
Shares

Weighted
Average
Price (1)
(per share)

Outstanding non-vested shares, beginning of year

i 233,135

i 42.22

i 279,912

i 42.67

i 321,627

i 40.66

Shares granted

i 128,367

i 45.73

i 118,996

i 39.22

i 148,045

i 46.42

Shares vested

( i 145,723

)

i 42.23

( i 157,054

)

i 40.83

( i 182,653

)

i 42.04

Shares forfeited

( i 418

)

i 46.30

( i 8,719

)

i 40.87

( i 7,107

)

i 45.77

Outstanding non-vested shares, end of year

i 215,361

i 44.30

i 233,135

i 42.22

i 279,912

i 42.67

(1) Based on grant date fair values.

The Company recorded $ i 5.9 million in deferred stock-based compensation associated with restricted shares granted during the year ended December 31, 2022. The fair value of the restricted stock grants was determined based on the Company's closing stock price on the date of grant. During the year ended December 31, 2022, restricted shares with an aggregate fair value of $ i 6.7 million vested. The fair value of the vesting was determined based on the Company’s closing stock price on the date of vest. Outstanding non-vested awards as of December 31, 2022 have a remaining weighted average recognition period of i 0.7 years.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Market-Based Awards

Market-based awards have been granted to executive officers upon approval from the Board of Directors or committee thereof. These awards are granted at a target number of units and represent shares that are potentially issuable in the future. The market-based share awards vest based on the Company’s stock price, dividend performance, and TSR at the end of their respective performance periods relative to a group of industry peers. The performance periods generally begin on January 1st of the year of grant and end after i three years on December 31st. 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 i 0% and i 375%. i The following table summarizes the market-based award activity:

2022

2021

2020

Number of
Target
Shares

Weighted
Average Fair
Value
(per share)

Number of
Target
Shares

Weighted
Average Fair
Value
(per share)

Number of
Target
Shares

Weighted
Average Fair
Value
(per share)

Outstanding non-vested awards, beginning of year

i 258,053

i 74.08

i 201,468

i 58.12

i 319,731

i 49.49

Grants at target

i 166,307

i 93.26

i 170,307

i 77.57

i 87,746

i 67.30

Earned above performance target

—

i 154,312

i 50.92

i 83,259

i 54.57

Vested

—

( i 266,319

)

i 50.92

( i 268,694

)

i 54.57

Forfeited

( i 87,746

)

i 67.30

—

Incremental Shares (1)

—

N/A

( i 1,715

)

N/A

( i 20,574

)

N/A

Outstanding non-vested awards, end of year

i 336,614

i 85.32

i 258,053

i 74.08

i 201,468

i 58.12

(1) In 2018, in connection with the Spin-Off and in accordance with the rights granted per the Amended Incentive Award Plan, the Board of Directors made an equitable adjustment for all market-based awards outstanding, resulting in incremental shares. During the years ended December 31, 2021 and 2020, i 1.7 thousand and i 20.6 thousand, respectively, of these incremental shares were earned. Because the fair value of the outstanding market-based awards the day prior to and the day after the Spin-Off did not materially change, there was no change to unrecognized compensation expense and no incremental compensation expense related to the incremental shares.

Grant date fair value of the market-based share awards was calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the time horizons matching the performance periods. For market-based awards granted in 2022, significant inputs for the calculation were expected volatility of the Company of i 39.5% and expected volatility of the Company's peers, ranging from i 21.5% to i 53.6%, with an average volatility of i 35.7% and a risk-free interest rate of i 1.59%. Expected volatility was determined using an equal weighting of implied volatility and historical volatility.

The projected shares to be awarded are not considered issued under the Amended Incentive Award Plan until the performance period has ended and the actual number of shares to be released is determined. The market-based shares and dividend rights are subject to forfeiture in the event of a non-qualifying termination of a participant prior to the performance period end date. During the year ended December 31, 2022, zero market-based awards vested as the requisite performance conditions were not met. Outstanding non-vested awards as of December 31, 2022 have a remaining weighted average recognition period of i 1.7 years and would have resulted in i 0.2 million shares released based on the Corporation's TSR relative to the specified peer groups through that date.

In addition, final shares issued under each market-based share award entitle its holder to a cash payment equal to the aggregate dividends declared with record dates during the performance period, beginning on the grant date and ending the day before the awards are released. Approximately $ i 2.5 million and $ i 3.3 million in dividend rights have been accrued as of December 31, 2022 and 2021, respectively.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

Stock-based Compensation Expense

For the years ended December 31, 2022, 2021 and 2020, the Company recognized $ i 17.4 million, $ i 14.0 million and $ i 12.6 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the consolidated statements of operations. Stock-based compensation is recognized on a straight-line basis over the minimum required service period of each applicable award.

The following is a summary of remaining unamortized stock-based compensation expense (in thousands):


	December 31, 2022		December 31, 2021
Restricted share awards	$	i 4,727	$	i 4,787
Market-based awards		i 15,165		i 11,143
Total unamortized stock-based compensation expense	$	i 19,892	$	i 15,930

401(k) Plan

The Company has a 401(k) Plan, which is available to employees on the first month following their date of hire with the Company. Currently, the Company provides a matching contribution equal to i 100% of elective deferrals up to i 4% of compensation, which vests immediately.

NOTE 10. INCOME PER SHARE

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):

Years Ended December 31,

2021

2020

Basic and diluted income:

Income from continuing operations

i 285,516

i 171,702

i 26,708

Less: dividends paid to preferred stockholders

( i 10,350

)

( i 10,350

)

( i 10,350

)

Less: dividends and income attributable to unvested restricted stock

( i 555

)

( i 581

)

( i 728

)

Net income attributable to common stockholders used in basic and diluted income per share

i 274,611

i 160,771

i 15,630

Basic weighted average shares of common stock outstanding:

Weighted average shares of common stock outstanding

i 134,768,664

i 118,587,722

i 104,656,242

Less: unvested weighted average shares of restricted stock

( i 220,578

)

( i 245,281

)

( i 298,582

)

Basic weighted average shares of common stock outstanding

i 134,548,086

i 118,342,441

i 104,357,660

Net income per share attributable to common stockholders - basic

i 2.04

i 1.36

i 0.15

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

Plus: unvested market-based awards

i 97,565

i 373,396

i 175,952

Plus: unsettled shares under open forward equity contracts

—

i 1

i 1,772

Diluted weighted average shares of common stock outstanding

i 134,645,651

i 118,715,838

i 104,535,384

Net income per share attributable to common stockholders - diluted

i 2.04

i 1.35

i 0.15

Potentially dilutive shares of common stock related to:

Unvested restricted share awards

i 67,206

i 95,411

i 62,448

(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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

NOTE 11. RELATED PARTY TRANSACTIONS

Asset Management Agreement and Interim Management Agreement

In conjunction with the Spin-Off, the Company entered into the Asset Management Agreement to provide various management services to SMTA. On June 2, 2019, the Company and SMTA entered into a termination agreement of the Asset Management Agreement and concurrently entered into the Interim Management Agreement, which was subsequently terminated September 4, 2020. Asset management fees of $ i 0.7 million were earned during the year ended December 31, 2020 and are included in related party fee income in the consolidated statements of operations.

Cost Sharing Arrangements

In conjunction with the Spin-Off, the Company and SMTA entered into certain agreements, including the Separation and Distribution Agreement, Tax Matters Agreement, Registration Rights Agreement and Insurance Sharing Agreement. These agreements provided a framework for the relationship between the Company and SMTA after the Spin-Off, by which Spirit could incur certain expenses on behalf of SMTA that had to be reimbursed in a timely manner. These agreements, except for the Tax Matters Agreement, were terminated in conjunction with the termination of the Asset Management Agreement. The Tax Matters Agreement was terminated in conjunction with the termination of the Interim Management Agreement.

NOTE 12. INCOME TAXES

The Company’s total income tax expense was as follows (in thousands):


	Year Ended December 31,
	2022		2021		2020
State income tax	$	i 890	$	i 605	$	i 128
Federal income tax		i 7		i 2		i 145
Total income tax expense	$	i 897	$	i 607	$	i 273

The Operating Partnership is a partnership for federal income tax purposes. Partnerships are pass-through entities and are not subject to U.S. federal income taxes, and therefore, no provision has been made for federal income taxes in the consolidated financial statements. Although most states and cities where the Operating Partnership operates follow the U.S. federal income tax treatment, there are certain jurisdictions such as Texas, Tennessee and Ohio that impose income or franchise taxes on partnerships. The Company’s deferred income tax expense and its ending balance in deferred tax assets and liabilities, which are recorded within accounts payable, accrued expenses and other liabilities in the consolidated balance sheets, were immaterial as of December 31, 2022, 2021 and 2020.

The Operating Partnership transferred its rights and obligations under the Asset Management Agreement to Spirit Realty AM Corporation (“SRAM”), a wholly-owned taxable REIT subsidiary of Spirit, on April 1, 2019. This agreement was subsequently terminated and simultaneously replaced by the Interim Management Agreement, effective from September 20, 2019 through September 4, 2020. The Operating Partnership allocated personnel and other general and administrative costs to SRAM for management services provided to SMTA. Accordingly, all asset management fees earned from April 1, 2019 through September 4, 2020 were subject to income tax.

To the extent that the Company acquires property that has been owned by a C corporation in a transaction in which the tax basis of the property carries over, and the Company recognizes a gain on the disposition of such property during the subsequent recognition period, it will be required to pay tax at the regular corporate tax rate to the extent of such built-in gain. No properties subject to state built-in gain tax were sold during the years ended December 31, 2022, 2021 or 2020.

The Corporation has federal net operating loss carry-forwards for income tax purposes totaling $ i i i 66.1 / / million for each of the years ended December 31, 2022, 2021 and 2020. These losses, which begin to expire in 2027 through 2034, are available to reduce future taxable income or distribution requirements, subject to certain ownership change limitations. The Corporation intends to make annual distributions at least equal to its taxable income and thus does not expect to utilize its net operating loss carryforwards in the foreseeable future.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

The Company files federal, state and local income tax returns. Federal tax returns for years prior to 2019 are no longer subject to examination. Additionally, state tax returns for years prior to 2018 are generally no longer subject to examination. The Company recognizes any interest related to underpayment of income taxes as interest expense and recognizes any penalties as operating expenses. There was no material interest or penalties for the years ended December 31, 2022, 2021 and 2020. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

Common stock dividends paid were characterized for tax as follows (per share):


	Year Ended December 31,
	2022		2021		2020
Ordinary income	$	i 2.41	$	i 1.37	$	i 1.80
Return of capital		i 0.06		i 1.14		i 0.70
Capital gain		i 0.11		—		—
Total	$	i 2.58	$	i 2.51	$	i 2.50

NOTE 13. CONSOLIDATED QUARTERLY FINANCIAL DATA

The following table sets forth certain unaudited consolidated financial information for each of the four quarters included in the years ended December 31, 2022 and 2021 (in thousands, except share and per share data):

2022

First

Second

Third

Fourth

(Unaudited)

Quarter

Year

Total operating revenues

i 168,396

i 174,935

i 182,904

i 183,394

i 709,629

Depreciation and amortization

( i 69,108

)

( i 72,898

)

( i 74,600

)

( i 76,379

)

( i 292,985

)

Interest

( i 26,023

)

( i 27,594

)

( i 30,956

)

( i 33,049

)

( i 117,622

)

Other operating expenses

( i 23,593

)

( i 30,631

)

( i 24,010

)

( i 51,679

)

( i 129,913

)

Loss on debt extinguishment

( i 172

)

—

( i 172

)

Gain on disposition of assets

i 877

i 38,928

i 23,302

i 47,793

i 110,900

Other income

i 5,679

—

i 5,679

Net income

i 56,056

i 82,740

i 76,640

i 70,080

i 285,516

Dividends paid to preferred stockholders

( i 2,588

)

( i 2,588

)

( i 2,587

)

( i 2,587

)

( i 10,350

)

Net income attributable to common stockholders

i 53,468

i 80,152

i 74,053

i 67,493

i 275,166

Net income per share attributable to common stockholders - basic

i 0.42

i 0.60

i 0.54

i 0.48

i 2.04

Net income per share attributable to common stockholders - diluted

i 0.42

i 0.60

i 0.54

i 0.48

i 2.04

Dividends declared per common share

i 0.638

i 0.663

i 2.602

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements