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Section 1: 10-Q (10-Q)

3.31.15 - SRC 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-36004
_______________________________________________
SPIRIT REALTY CAPITAL, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________
Maryland
 
20-1676382
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
16767 North Perimeter Drive, Suite 210, Scottsdale, Arizona 85260
 
(480) 606-0820
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o    No x
As of May 4, 2015, there were 441,445,875 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.
 




SPIRIT REALTY CAPITAL, INC.
INDEX
Glossary
 
 
Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014
Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (Unaudited)
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (Unaudited)
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2015 (Unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (Unaudited)
 

 

2


GLOSSARY
Definitions:
 
1031 Exchange
Tax-deferred like-kind exchange of properties held for business or investment purposes, pursuant to Section 1031 of the Code
2013 Credit Facility
$400.0 million secured credit facility pursuant to the credit agreement between the Operating Partnership and certain lenders dated July 17, 2013
2015 Credit Facility
$600.0 million unsecured credit facility pursuant to the Credit Agreement
2019 Notes
$402.5 million convertible notes of the Corporation due in 2019
2021 Notes
$345.0 million convertible notes of the Corporation due in 2021
Additional Collateral Deposit
A cash reserve deposit or letter of credit in the amount of $8.0 million required pursuant to an amendment of a certain CMBS loan agreement
AFFO
Adjusted Funds From Operations
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM Program
At the Market equity distribution program, pursuant to which the Corporation may offer and sell shares of common stock from time to time
CMBS
Commercial Mortgage Backed Securities
Code
Internal Revenue Code of 1986, as amended
Cole II
Cole Credit Property Trust II, Inc.
Cole II Merger
Acquisition on July 17, 2013 of Cole II by the Company, in which the Company merged with and into the Cole II legal entity
Collateral Pools
Pools of collateral assets that are pledged to the indenture trustee for the benefit of the noteholders and secure obligations of issuers under the Spirit Master Funding Program
Company
The Corporation and its consolidated subsidiaries
Convertible Notes
The 2019 Notes and 2021 Notes, together
Corporation
Spirit Realty Capital, Inc., a Maryland corporation
CPI
Consumer Price Index
Credit Agreement
2015 credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDAR
Earnings Before Interest, Taxes, Depreciation, Amortization and Rent
Excess Cash
Rent received in excess of debt service obligations
Exchange Act
Securities Exchange Act of 1934, as amended
Exchange Offer
Offer to exchange the outstanding principal balance of three series of existing net-lease mortgage notes for three series of newly issued Master Trust 2014 notes in May 2014
FASB
Financial Accounting Standards Board
FFO
Funds From Operations
GAAP
Generally Accepted Accounting Principles
Incentive Award Plan
Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
IPO
Initial Public Offering
LIBOR
London Interbank Offered Rate
Line of Credit
$40.0 million secured revolving credit facility pursuant to the loan agreement between an indirect wholly-owned subsidiary of the Corporation and a certain lender dated March 27, 2013, as amended
Master Trust 2013
The net-lease mortgage securitization trust established in December 2013 under the Spirit Master Funding Program
Master Trust 2014
The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014 under the Spirit Master Funding Program



Definitions:
 
Master Trust Notes
The Master Trust 2013 and Master Trust 2014 notes, together
Master Trust Release
Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made
Moody's
Moody's Investor Services
NAREIT
National Association of Real Estate Investment Trusts
OP Holdings
Spirit General OP Holdings, LLC
Operating Partnership
Spirit Realty, L.P., a Delaware limited partnership
REIT
Real Estate Investment Trust
Revolving Credit Facilities
The 2013 Credit Facility, the 2015 Credit Facility and Line of Credit, together
S&P
Standard & Poor's Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Shopko
Specialty Retail Shops Holding Corp. and certain of its affiliates
Spirit Master Funding Program
The Company's asset-backed securitization program that comprises Master Trust 2013 and Master Trust 2014
TSR
Total Shareholder Return
Walgreens
Walgreen Company

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



PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)

 
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
2,666,746

 
$
2,614,630

Buildings and improvements
4,651,097

 
4,579,166

Total real estate investments
7,317,843

 
7,193,796

Less: accumulated depreciation
(779,083
)
 
(752,210
)
 
6,538,760

 
6,441,586

Loans receivable, net
107,403

 
109,425

Intangible lease assets, net
573,925

 
590,073

Real estate assets under direct financing leases, net
52,852

 
56,564

Real estate assets held for sale, net
177,237

 
119,912

Net investments
7,450,177

 
7,317,560

Cash and cash equivalents
108,134

 
176,181

Deferred costs and other assets, net
149,789

 
183,173

Goodwill
291,421

 
291,421

Total assets
$
7,999,521

 
$
7,968,335

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Revolving Credit Facilities, net
$
181,518

 
$
12,780

Mortgages and notes payable, net
3,456,609

 
3,629,998

Convertible Notes, net
681,109

 
678,190

Total debt, net
4,319,236

 
4,320,968

Intangible lease liabilities, net
204,161

 
205,968

Accounts payable, accrued expenses and other liabilities
122,973

 
123,298

Total liabilities
4,646,370

 
4,650,234

Commitments and contingencies (see Note 7)


 


Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 418,935,311 issued shares and 418,401,109 outstanding shares at March 31, 2015 and 411,824,039 issued shares and 411,350,440 outstanding shares at December 31, 2014
4,189

 
4,118

Capital in excess of par value
4,443,468

 
4,361,320

Accumulated deficit
(1,087,306
)
 
(1,041,392
)
Accumulated other comprehensive loss
(1,618
)
 
(1,083
)
Treasury stock, at cost
(5,582
)
 
(4,862
)
Total stockholders’ equity
3,353,151

 
3,318,101

Total liabilities and stockholders’ equity
$
7,999,521

 
$
7,968,335

See accompanying notes.


5


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


 
Three Months Ended 
 March 31,
 
2015
 
2014
Revenues:
 
 
 
Rentals
$
154,518

 
$
137,479

Interest income on loans receivable
1,722

 
1,837

Earned income from direct financing leases
795

 
846

Tenant reimbursement income
4,631

 
3,319

Interest income and other
621

 
491

Total revenues
162,287

 
143,972

Expenses:
 
 
 
General and administrative
12,600

 
11,067

Property costs
7,407

 
5,282

Real estate acquisition costs
1,093

 
1,281

Interest
57,914

 
54,399

Depreciation and amortization
66,296

 
60,549

Impairments
1,624

 
1,707

Total expenses
146,934

 
134,285

Income from continuing operations before other expense and income tax expense
15,353

 
9,687

Other expense:
 
 
 
Loss on debt extinguishment
(1,230
)
 

Total other expense
(1,230
)
 

Income from continuing operations before income tax expense
14,123

 
9,687

Income tax expense
(362
)
 
(217
)
Income from continuing operations
13,761

 
9,470

Discontinued operations:
 
 
 
Income from discontinued operations
227

 
3,054

Loss on dispositions of assets

 
(7
)
Income from discontinued operations
227

 
3,047

Income before gain on dispositions of assets
13,988

 
12,517

Gain on dispositions of assets
11,336

 
1,722

Net income attributable to common stockholders
$
25,324

 
$
14,239

Net income per share of common stock—basic:
 
 
 
Continuing operations
$
0.06

 
$
0.03

Discontinued operations

 
0.01

Net income per share attributable to common stockholders—basic
$
0.06

 
$
0.04

Net income per share of common stock—diluted:
 
 
 
Continuing operations
$
0.06

 
$
0.03

Discontinued operations

 
0.01

Net income per share attributable to common stockholders—diluted
$
0.06

 
$
0.04

Weighted average common shares outstanding:
 
 
 
Basic
411,017,895

 
368,684,942

Diluted
411,622,434

 
369,387,638

Dividends declared per common share issued
$
0.17000

 
$
0.16625

See accompanying notes.

6


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

 
Three Months Ended 
 March 31,
 
2015
 
2014
Net income
$
25,324

 
$
14,239

Other comprehensive income (loss):
 
 
 
Change in net unrealized losses on cash flow hedges
(852
)
 
(402
)
Net cash flow hedge losses reclassified to operations
317

 
323

Total comprehensive income
$
24,789

 
$
14,160

See accompanying notes.


7


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

 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
Shares
 
Par Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 Shares
 
 Value
 
Total
Stockholders’
Equity
Balances, December 31, 2014
411,824,039

 
$
4,118

 
$
4,361,320

 
$
(1,041,392
)
 
$
(1,083
)
 
(473,599
)
 
$
(4,862
)
 
$
3,318,101

Net income

 

 

 
25,324

 

 

 

 
25,324

Other comprehensive loss

 

 

 

 
(535
)
 

 

 
(535
)
Dividends declared on common stock

 

 

 
(71,123
)
 

 

 

 
(71,123
)
Repurchase of common shares

 

 

 

 

 
(60,603
)
 
(720
)
 
(720
)
Issuance of common shares, net
6,610,100

 
66

 
78,486

 

 

 

 

 
78,552

Stock-based compensation, net
501,172

 
5

 
3,662

 
(115
)
 

 

 

 
3,552

Balances, March 31, 2015
418,935,311

 
$
4,189

 
$
4,443,468

 
$
(1,087,306
)
 
$
(1,618
)
 
(534,202
)
 
$
(5,582
)
 
$
3,353,151

See accompanying notes.

8


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
Three Months Ended 
 March 31,
 
2015
 
2014
Operating activities
 
 
 
Net income
$
25,324

 
$
14,239

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
66,296

 
60,549

Impairments
1,658

 
1,707

Amortization of deferred financing costs
2,072

 
973

Derivative net settlements, amortization and other interest rate hedge losses
(28
)
 
(26
)
Amortization of debt discounts (premiums)
476

 
(929
)
Stock-based compensation expense
3,827

 
2,452

Loss on debt extinguishment
1,230

 

Debt extinguishment costs
(2,733
)
 

Gains on dispositions of real estate and other assets, net
(11,336
)
 
(1,715
)
Non-cash revenue
(4,809
)
 
(3,962
)
Other
(14
)
 
121

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(1,938
)
 
(1,510
)
Accounts payable, accrued expenses and other liabilities
(420
)
 
(6,055
)
Net cash provided by operating activities
79,605

 
65,844

Investing activities
 
 
 
Acquisitions/investments of real estate
(265,740
)
 
(157,972
)
Collections of principal on loans receivable and real estate assets under direct financing leases
1,452

 
1,319

Proceeds from dispositions of real estate and other assets
71,547

 
6,243

Transfers of net sales proceeds (to) from restricted accounts under 1031 Exchanges
(6,937
)
 
20,784

Transfers of net sales proceeds from (to) Master Trust Release
43,412

 
(6,345
)
Net cash used in investing activities
(156,266
)
 
(135,971
)
Financing activities
 
 
 
Borrowings under Revolving Credit Facilities
345,000

 
180,535

Repayments under Revolving Credit Facilities
(175,101
)
 
(80,049
)
Borrowings under mortgages and notes payable

 
10,000

Repayments under mortgages and notes payable
(167,102
)
 
(14,116
)
Deferred financing costs
(3,562
)
 
(503
)
Proceeds from issuance of common stock, net of offering costs
78,552

 

Proceeds from exercise of stock options

 
183

Purchase of treasury stock
(720
)
 
(104
)
Dividends paid/distributions to equity owners
(70,046
)
 
(61,573
)
Transfers from (to) escrow deposits with lenders
1,593

 
(850
)
Net cash provided by financing activities
8,614

 
33,523

Net decrease in cash and cash equivalents
(68,047
)
 
(36,604
)
Cash and cash equivalents, beginning of period
176,181

 
66,588

Cash and cash equivalents, end of period
$
108,134

 
$
29,984

See accompanying notes.

9


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
March 31, 2015
(Unaudited)



Note 1. Organization
Company Organization and Operations
The Company operates as a self-administered and self-managed REIT that seeks to generate and deliver sustainable and attractive returns for stockholders by investing primarily in and managing a portfolio of single-tenant, operationally essential real estate throughout the United States that is generally leased on a long-term, triple-net basis predominantly to tenants operating within retail, office and industrial property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.
The Company’s operations are carried out through the Operating Partnership. OP Holdings, one of the Corporation's wholly-owned subsidiaries, is the sole general partner and owns 1.0% of the Operating Partnership. The Corporation and a wholly-owned subsidiary are the only limited partners and together own the remaining 99.0% of the Operating Partnership.

As of March 31, 2015, our undepreciated gross investment in real estate and loans totaled approximately $8.23 billion, representing investments in 2,547 properties, including properties securing mortgage loans made by the Company. Of this amount, 98.7% consisted of our gross investment in real estate, representing ownership of 2,402 properties, having a gross investment of $8.12 billion, and the remaining 1.3% consisted of commercial mortgage loans receivable, having a gross investment of $107.4 million, secured by the remaining 145 properties or other related assets.
Recent Developments

2015 Credit Facility    

On March 31, 2015, the Operating Partnership entered into a new $600.0 million unsecured Credit Agreement with various lenders with an initial term that expires on March 31, 2019 (extendable at the Operating Partnership's option to March 31, 2020, subject to certain requirements). The 2015 Credit Facility initially bears interest at a borrowing margin of LIBOR plus 1.70% and replaces the Operating Partnership’s previous secured $400.0 million revolving credit facility. The Credit Agreement includes an accordion feature to increase the size of the 2015 Credit Facility to up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments.
ATM Program Activity    

During the three months ended March 31, 2015, the Corporation sold 6.6 million shares of its common stock having aggregate gross proceeds of $79.8 million and aggregate net sales proceeds of $78.6 million under its ATM Program.
Acquisitions and Dispositions

During the three months ended March 31, 2015, the Company purchased 53 properties, representing an aggregate gross investment in real estate properties of $265.5 million, which includes $0.2 million in revenue producing capital expenditures in existing properties. During the same period, the Company sold 15 properties for $77.2 million in gross sales proceeds. See Note 3 for additional discussion of the Company's investments.

10


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the unaudited consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The unaudited consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has formed numerous special purpose entities to acquire and hold real estate encumbered by indebtedness (see Note 4). As a result, the majority of the Company’s consolidated assets are held in these wholly-owned special purpose entities. 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 owner or affiliate of the special purpose entity. At March 31, 2015 and December 31, 2014, net assets totaling $5.2 billion and $5.7 billion, respectively, were held, and net liabilities totaling $3.6 billion and $3.8 billion, respectively, were owed by these special purpose entities and are included in the accompanying 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.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation. During the quarter ended March 31, 2015, the Company elected to early adopt ASU 2015-03 described below. Under the ASU, capitalized deferred financing costs, previously recorded in deferred costs and other assets on the consolidated balance sheet, are presented as a direct deduction from the carrying amount of the debt liability these costs relate to and retrospectively applied to prior periods. As of December 31, 2014, unamortized deferred financing costs of approximately $48.7 million were previously presented in deferred costs and other assets, net on the consolidated balance sheet and are now included as a reduction of debt. At March 31, 2015, unamortized deferred financing costs of $48.5 million are presented as a reduction of debt (see Note 4).
Segment Reporting
The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Real Estate Investments
Purchase Accounting and Acquisition of Real Estate - When acquiring a property for investment purposes, the Company allocates the purchase price (including acquisition and closing costs) to land, building, improvements, and equipment based on their relative fair values. For properties acquired with in-place leases, the Company allocates the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values, and acquisition costs are expensed as incurred. In making estimates of fair values for this purpose, the Company uses a number of sources, including independent appraisals and information obtained about each property as a result of its pre-acquisition due diligence and its marketing and leasing activities.

11


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

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. For real estate acquired subject to existing lease agreements, in-place lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition, and are amortized on a straight-line basis over the remaining initial term of the related lease. 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. Capitalized above-market lease intangibles are amortized over the remaining initial terms of the respective leases as a decrease in rental revenue. Below-market lease intangibles are amortized as an increase in rental revenue over the remaining initial terms of the respective leases plus any fixed-rate renewal periods on those leases. Should a lease terminate early, the unamortized portion of any related lease intangible is immediately recognized in the Company’s consolidated statements of operations.
Allowance for Doubtful Accounts

The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. The Company provided for reserves for uncollectible amounts totaling $9.2 million and $8.4 million at March 31, 2015 and December 31, 2014, respectively, against accounts receivable balances of $22.4 million and $21.3 million, respectively; receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
For deferred rental revenues related to the straight-line method of reporting rental revenue, the collectability review includes management’s estimates of amounts that will not be realized and an assessment of the risks inherent in the portfolio, giving consideration to historical experience and industry default rates for long-term receivables. The Company established a provision for losses of $9.0 million and $10.9 million at March 31, 2015 and December 31, 2014, respectively, against deferred rental revenue receivables of $50.7 million and $48.3 million, respectively.
Loans Receivable
Impairment and Allowance for Loan Losses - The Company periodically evaluates the collectability of its loans receivable, including accrued interest, by analyzing the underlying property-level economics and trends, collateral value and quality, and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted. There was no allowance for loan losses at March 31, 2015 or December 31, 2014.
A loan is placed on nonaccrual status when the loan has become 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 nonaccrual status, interest income is recognized only when received. As of March 31, 2015 and December 31, 2014, there were no mortgages or notes on nonaccrual status.

12


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Restricted Cash and Escrow Deposits

Restricted cash and deposits in escrow, classified within deferred costs and other assets, net in the accompanying consolidated balance sheets consisted of the following (in thousands):
 
March 31,
2015
 
December 31,
2014
Collateral deposits (1)
$
29,783

 
$
29,483

Tenant improvements, repairs, and leasing commissions (2)
13,130

 
13,427

Master Trust Release (3)
9,658

 
53,069

Title company escrow (4)
6,937

 

Loan impounds (5)
671

 
794

Other (6)
2,097

 
3,571

 
$
62,276

 
$
100,344

(1) Funds held in reserve by lenders which, at their sole discretion, can be applied to the repayment of debt. Any funds remaining on deposit after the debt is paid in full are released to the borrower.
(2) Deposits held on collateral properties by lenders that are reserved to fund tenant improvements, repairs and leasing commissions incurred to secure a new tenant.
(3) Proceeds from the sale of assets within the Spirit Master Funding Program, which are held on deposit as collateral until a qualifying substitution is made.
(4) Includes net sales proceeds from property dispositions that can be released upon qualified re-investment from 1031 Exchanges.
(5) Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses.
(6) Funds held in lender controlled accounts released within the following month after debt service requirements are met.

A significant amount of these reserves were established in connection with obtaining lender consents relating to our IPO during 2012 and the Cole II Merger during 2013.
Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of its assets, the amounts distributed to its stockholders, and the ownership of Company stock. Management believes the Company has qualified and will continue to qualify as a REIT and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Company qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary is subject to federal, state, and local taxes, which are not material.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or the SEC that are adopted by the Company as of the specified effective date. Unless otherwise discussed, these new accounting pronouncements entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore will have minimal, if any, impact on the Company's financial position or results of operations upon adoption.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that deferred financing costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.

13


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

The Company early adopted the provisions of ASU 2015-03 beginning with the period ended March 31, 2015, and has applied the provisions retrospectively.

Note 3. Investments
Real Estate Investments

As of March 31, 2015, the Company's gross investment in real estate and loans totaled approximately $8.23 billion, representing investments in 2,547 properties, including 145 properties securing mortgage loans. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with only one state, Texas, with an 11.9% investment, accounting for more than 10% of the total dollar amount of the Company’s investment portfolio.

The properties that the Company owns are leased to tenants under long-term operating leases that typically include one or more renewal options. The leases are generally triple-net, which provides that the lessee is responsible for the payment of all property operating expenses, including property taxes, maintenance and repairs, and insurance costs. Therefore, the Company is generally not responsible for repairs or other capital expenditures related to its properties, unless the property is not subject to a lease agreement.

During the three months ended March 31, 2015, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:
 
Number of Properties
 
Dollar Amount of Investments, net
 
Owned (3)
 
Financed
 
Total
 
Owned
 
Financed
 
Total
 
 
 
 
 
 
 
(In Thousands)
Gross balance, December 31, 2014
2,364

 
145

 
2,509

 
$
7,934,938

 
$
109,425

 
$
8,044,363

Acquisitions/improvements (1) (3)
53

 

 
53

 
265,740

 

 
265,740

Dispositions of real estate (2) (3)
(15
)
 

 
(15
)
 
(78,428
)
 

 
(78,428
)
Principal payments and payoffs

 

 

 

 
(1,403
)
 
(1,403
)
Impairments

 

 

 
(1,555
)
 

 
(1,555
)
Write off of gross lease intangibles

 

 

 
(1,844
)
 

 
(1,844
)
Loan premium amortization and other

 

 

 
(49
)
 
(619
)
 
(668
)
Gross balance, March 31, 2015
2,402

 
145

 
2,547

 
$
8,118,802

 
$
107,403

 
$
8,226,205

Accumulated depreciation and amortization
 
 
 
 
 
 
(981,784
)
 

 
(981,784
)
Other non-real estate assets held for sale
 
 
 
 
 
 
1,595

 

 
1,595

Net balance, March 31, 2015
 
 
 
 
 
 
$
7,138,613

 
$
107,403

 
$
7,246,016

(1) Includes investments of $0.2 million in revenue producing capitalized expenditures, as well as $0.2 million of non-revenue producing capitalized maintenance expenditures. Capitalized maintenance expenditures are not included in the Company's gross investments in real estate disclosed elsewhere.
(2) The total accumulated depreciation and amortization associated with these dispositions of real estate was $12.5 million.
(3) During the three months ended March 31, 2015, the Company sold 6 properties for $39.4 million under 1031 Exchanges of which $32.5 million of this amount was used to partially fund 4 property acquisitions.
(4) At March 31, 2015 and December 31, 2014, 42 and 37, respectively, of the Company's properties were vacant, not subject to a lease and in the Company’s possession; of this amount 14 and 8, respectively, of these properties were held for sale.

14


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases at March 31, 2015 (in thousands):
Remainder of 2015
$
459,105

2016
600,209

2017
585,456

2018
570,474

2019
550,798

Thereafter
4,320,779

Total future minimum rentals
$
7,086,821

Because lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum rentals do not include any contingent rentals based on a percentage of the lessees' gross sales or lease escalations based on future changes in the CPI or other stipulated reference rate.
Certain of the Company’s leases contain tenant purchase options. Most of these options are at or above fair market value at the time the option is exercisable, and none of these purchase options represent bargain purchase options.
Loans Receivable
The following table details loans receivable, net of premium (in thousands):
 
March 31,
2015
 
December 31,
2014
Mortgage - principal
$
95,204

 
$
96,594

Mortgage - premium
11,833

 
12,452

Mortgages, net
107,037

 
109,046

Other note - principal
366

 
379

Total loans receivable, net
$
107,403

 
$
109,425

The mortgage loans are secured by single-tenant commercial properties and may provide for scheduled increases in interest rates over the term of the loans. The other note receivable is unsecured.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
March 31,
2015
 
December 31,
2014
In-place leases
$
670,127

 
$
676,665

Above-market leases
100,125

 
100,568

Less: accumulated amortization
(196,327
)
 
(187,160
)
Intangible lease assets, net
$
573,925

 
$
590,073

 
 
 
 
Below-market leases
$
239,050

 
$
237,593

Less: accumulated amortization
(34,889
)
 
(31,625
)
Intangible lease liabilities, net
$
204,161

 
$
205,968

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases was $1.4 million and $1.3 million for the three months ended March 31, 2015 and 2014, respectively. The value of in-place leases

15


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

amortized and included in depreciation and amortization expense was $12.8 million and $13.4 million for the three months ended March 31, 2015 and 2014, respectively.
Real Estate Assets Under Direct Financing Leases
The components of real estate investments held under direct financing leases were as follows (in thousands):
 
March 31,
2015
 
December 31,
2014
Minimum lease payments receivable
$
15,053

 
$
15,897

Estimated residual value of leased assets
52,195

 
55,858

Unearned income
(14,396
)
 
(15,191
)
Total
$
52,852

 
$
56,564


Real Estate Assets Held for Sale
The following table shows the activity in real estate assets held for sale, for continuing and discontinued operations, for the three months ended March 31, 2015:
 
Number of Properties
 
Carrying Value
 
Continuing Operations
 
Discontinued Operations
 
Total
 
Continuing Operations
 
Discontinued Operations
 
Total
 
 
 
 
 
 
 
(In Thousands)
Balance, December 31, 2014
19

 
5

 
24

 
$
110,918

 
$
8,994

 
$
119,912

Transfers from real estate investments
23

 

 
23

 
105,976

 
(34
)
 
105,942

Sales
(10
)
 

 
(10
)
 
(48,617
)
 

 
(48,617
)
Balance, March 31, 2015
32

 
5

 
37

 
$
168,277

 
$
8,960

 
$
177,237


Properties included in discontinued operations as of March 31, 2015, are collateral assets under the 2014 Master Trust securitization. The following table is a reconciliation of the major classes of assets and liabilities from discontinued operations included in real estate assets held for sale on the accompanying consolidated balance sheets (in thousands):

16


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Land and improvements
$
5,335

 
$
5,351

Buildings and improvements
5,780

 
5,798

Total real estate investments
11,115

 
11,149

Less: accumulated depreciation
(2,167
)
 
(2,167
)
Intangible lease assets, net
460

 
460

Total assets
$
9,408

 
$
9,442

 
 
 
 
Liabilities
 
 
 
Intangible lease liabilities, net
$
448

 
$
448

Total liabilities
$
448

 
$
448

 
 
 
 
Net assets
$
8,960

 
$
8,994

Impairments
The following table summarizes total impairment losses recognized in continuing and discontinued operations on the accompanying consolidated statements of operations (in thousands): 
 
Three Months Ended 
 March 31,
 
2015
 
2014
Real estate and intangible asset impairment
$
1,043

 
$
1,637

Write-off of lease intangibles due to lease terminations, net
512

 
70

Total impairments from real estate investment net assets
1,555

 
1,707

Other impairment
103

 

Total impairment loss in continuing and discontinued operations
$
1,658

 
$
1,707



17


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Note 4. Debt
The Company's debt is summarized below:
 

Weighted Average Effective
Interest Rates
(1)
 

Weighted Average
Stated
Rates (2)
 

Weighted Average Term (3)
 
March 31,
2015
 
December 31,
2014
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facilities
NM

 
2.23
%
 
3.8
 
$
185,081

 
$
15,181

Master Trust Notes
5.44
%
 
5.04
%
 
7.9
 
1,705,910

 
1,710,380

CMBS - fixed-rate
5.45
%
 
5.86
%
 
3.0
 
1,671,951

 
1,836,181

CMBS - variable-rate (4)
3.50
%
 
3.30
%
 
2.5
 
110,598

 
110,685

Convertible Notes
4.84
%
 
3.28
%
 
5.0
 
747,500

 
747,500

Unsecured fixed rate promissory note
9.12
%
 
7.00
%
 
6.8
 
1,269

 
1,293

 
5.33
%
 
4.89
%
 
5.3
 
4,422,309

 
4,421,220

Debt discount, net
 
 
 
 
 
(54,574
)
 
(51,586
)
Deferred financing costs, net (5)
 
 
 
 
 
 
(48,499
)
 
(48,666
)
Total debt, net
 
 
 
 
 
 
$
4,319,236

 
$
4,320,968

(1) The effective interest rates include amortization of debt discount, amortization of deferred financing costs and non-utilization fees, where applicable, calculated for the three months ended March 31, 2015 and based on the average principal balance outstanding during the period. The average outstanding principal balance of the Revolving Credit Facilities was not significant during the three months ended March 31, 2015, resulting in an effective interest rate that was not meaningful.
(2) Represents the weighted average stated interest rate based on the outstanding principal balance as of March 31, 2015.
(3) Represents the weighted average time to maturity based on the outstanding principal balance as of March 31, 2015.
(4) Variable-rate notes are predominantly hedged with interest rate swaps (see Note 5).
(5) The Company early adopted ASU 2015-03 requiring deferred financing costs to be presented as a direct deduction from the carrying amount of the related indebtedness.
Revolving Credit Facilities
2015 Credit Facility
On March 31, 2015, the Operating Partnership entered into the Credit Agreement and established a new $600.0 million unsecured credit facility and terminated its secured $400.0 million 2013 Credit Facility. The 2015 Credit Facility matures on March 31, 2019 (extendable at the Operating Partnership's option to March 31, 2020, subject to satisfaction of certain requirements). The 2015 Credit Facility includes an accordion feature to increase the committed facility size to up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments. The 2015 Credit Facility includes a $50.0 million sublimit for swingline loans and up to $60.0 million available for issuances of letters of credit. Swingline loans and letters of credit reduce availability under the 2015 Credit Facility on a dollar-for-dollar basis.
The 2015 Credit Facility bears interest at LIBOR plus 1.70% based the Company's current leverage grid pricing per annum, with an unused fee of 0.15%. If the Corporation obtains an investment grade rating of its senior unsecured long-term indebtedness of at least BBB- or Baa3 from S&P or Moody's, respectively, the Operating Partnership may make an irrevocable election to change the grid pricing for the 2015 Credit Facility from leverage based to credit rating based pricing. Upon such an event, the 2015 Credit Facility will bear interest at a rate equal to either LIBOR plus 0.875% to 1.55% per annum. In each case, the applicable borrowing margin depends on the credit rating for the Corporation.

If the Corporation obtains an investment grade credit rating from either S&P or Moody’s, the Operating Partnership will be required to pay a facility fee in an amount equal to the aggregate revolving credit commitments (whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum, depending on the credit rating for the Corporation.

18


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

The Operating Partnership may voluntarily prepay the 2015 Credit Facility, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees, if any. Payment of the 2015 Credit Facility is unconditionally guaranteed by the Corporation and certain of the existing and future subsidiaries that are not currently securing or anticipated to secure other indebtedness. The 2015 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.

As a result of entering into the 2015 Credit Facility, the Company incurred origination costs of $3.5 million. These costs are being amortized to interest expense over the remaining initial term of the 2015 Credit Facility.

As of March 31, 2015, $170.0 million was outstanding and $430.0 million of borrowing capacity was available under the 2015 Credit Facility. The Operating Partnership's ability to borrow under the 2015 Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of March 31, 2015, the Corporation and the Operating Partnership were in compliance with these financial covenants.
2013 Credit Facility
On March 31, 2015, the secured 2013 Credit Facility was terminated and its outstanding borrowings were repaid with proceeds from the 2015 Credit Facility.  Properties securing this facility became unencumbered upon its termination. The 2013 Credit Facility's borrowing margin was LIBOR plus 2.50% based on the Company's current leverage grid pricing per annum, with an unused fee of 0.35%. Upon terminating the 2013 Credit Facility, the Company recognized debt extinguishment costs of $2.0 million, resulting from the write-off of unamortized deferred financing costs.
Line of Credit
A special purpose entity indirectly owned by the Corporation has access to a $40.0 million secured revolving line of credit. The initial term of the Line of Credit expires in March 2016, and each advance under the Line of Credit has a 24-month term. As of March 31, 2015, $15.1 million was outstanding on the Line of Credit under three separate advances and secured by three properties. Outstanding advances under the Line of Credit incurred a weighted average effective interest rate of 3.89% during the three months ended March 31, 2015. The weighted average stated rate as of March 31, 2015 was 3.58%. The ability to borrow under the Line of Credit is subject to the Operating Partnership and special purpose entity's ongoing compliance with a number of customary financial covenants. As of March 31, 2015, the Operating Partnership and, if applicable, the special purpose entity were in compliance with these financial covenants.
Master Trust Notes

The Company has access to an asset-backed securitization platform, the Spirit Master Funding Program, to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. The Spirit Master Funding Program consists of two separate securitization trusts, Master Trust 2013 and Master Trust 2014, each of which have one or multiple bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. Each issuer is an indirect wholly-owned subsidiary of the Corporation.

19


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

The Master Trust Notes are summarized below:
 
Effective
Interest Rates
(1)
 
Stated
Rates (2)
 
Remaining Term
 
March 31,
2015
 
December 31,
2014
 
 
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A1
6.0
%
 
5.1
%
 
5.2
 
$
72,933

 
$
75,489

Series 2014-1 Class A2
6.0
%
 
5.4
%
 
5.3
 
253,300

 
253,300

Series 2014-2
6.1
%
 
5.8
%
 
6.0
 
232,086

 
232,867

Series 2014-3
6.0
%
 
5.7
%
 
7.0
 
312,600

 
312,705

Series 2014-4 Class A1
3.9
%
 
3.5
%
 
4.8
 
150,000

 
150,000

Series 2014-4 Class A2
4.8
%
 
4.6
%
 
14.8
 
360,000

 
360,000

Total Master Trust 2014 notes
5.5
%
 
5.1
%
 
8.2
 
1,380,919

 
1,384,361

Series 2013-1 Class A
4.6
%
 
3.9
%
 
3.7
 
125,000

 
125,000

Series 2013-2 Class A
5.6
%
 
5.3
%
 
8.7
 
199,991

 
201,019

Total Master Trust 2013 notes
5.2
%
 
4.7
%
 
6.8
 
324,991

 
326,019

 
 
 
 
 
 
 
1,705,910

 
1,710,380

Debt discount, net
 
 
 
 
 
 
(25,916
)
 
(26,903
)
Deferred financing costs, net
 
 
 
 
 
 
(21,808
)
 
(22,113
)
Total Master Trust Notes, net
 
 
 
 
 
 
$
1,658,186

 
$
1,661,364

(1) The effective interest rates include amortization of debt discount and amortization of deferred financing costs calculated for the three months ended March 31, 2015 based on the average principal balance outstanding during the period.
(2) Represents the individual series stated interest rate as of March 31, 2015 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of March 31, 2015.
 
As of March 31, 2015, the Master Trust 2014 notes were secured by 963 properties, including 82 properties securing mortgage loans issued by five indirect wholly-owned subsidiaries of the Corporation. The notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within this trust. As of March 31, 2015, the Master Trust 2013 notes were secured by 313 properties, including 77 properties securing mortgage loans, issued by a single indirect wholly-owned subsidiary of the Corporation.

CMBS

As of March 31, 2015, indirect wholly-owned subsidiaries of the Corporation were borrowers under 163 fixed and 11 variable-rate non-recourse loans which have been securitized into CMBS and are secured by the borrowers' respective leased properties and related assets. The stated interest rates as of March 31, 2015 for these fixed-rate notes ranged from 3.90% to 8.39%. The stated interest rates as of March 31, 2015 for the variable-rate notes ranged from 2.67% to 3.68%. As of March 31, 2015, these fixed and variable-rate loans were secured by 505 and 123 properties, respectively. The Company entered into interest rate swaps that effectively fixed the interest rates at approximately 4.55% on a significant portion of the variable-rate debt (see Note 5).

As of March 31, 2015, certain borrowers were in default under the loan agreements relating to four separate CMBS fixed-rate loans where the 12 properties securing the respective loans are no longer generating sufficient revenue to pay the required debt service. The default interest rate on these loans was between 9.52% and 10.88%. Each defaulted borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligations. As of March 31, 2015, the aggregate principal balance under the defaulted CMBS loans was $77.4 million, which includes $4.4 million of interest added to principal. In addition, approximately $14.0 million of lender controlled restricted cash is being held in connection these loans that may be applied to reduce amounts owed.


20


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Convertible Notes

In May 2014, the Corporation issued $402.5 million aggregate principal amount of 2.875% convertible notes due in 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes due in 2021. Interest on the Convertible Notes is payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes will mature on May 15, 2019 and the 2021 Notes will mature on May 15, 2021.

The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Corporation's common stock, or a combination thereof. The initial conversion rate applicable to each series is 76.3636 per $1,000 principal note (equivalent to an initial conversion price of $13.10 per share of common stock, representing a 22.5% premium above the public offering price). Earlier conversion may be triggered if shares of the Corporation's common stock trade higher than the established thresholds, if the Convertible Notes trade below established thresholds, or certain corporate events occur.

In connection with the issuance of the Convertible Notes, the Company recorded a discount of $56.7 million, which represents the estimated value of the embedded conversion feature for each of the Convertible Notes. The discount is being amortized to interest expense using the effective interest method over the term of each of the 2019 Notes and 2021 Notes. As of March 31, 2015, the unamortized discount was $49.4 million. The discount is shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature is recorded in capital in excess of par value in the accompanying consolidated balance sheet, net of financing transaction costs.

In connection with the offering, the Company also incurred $19.6 million in deferred financing costs. This amount has been allocated on a pro-rata basis to each of the Convertible Notes and is being amortized to interest expense over the term of each note. As of March 31, 2015, the unamortized deferred financing costs relating to the Convertible Notes was $17.0 million.

Debt Extinguishment

During the quarter ended March 31, 2015, the Company extinguished a total of $162.8 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 5.76% and terminated the 2013 Credit Facility. As a result of these transactions, the Company recognized a net loss on debt extinguishment of approximately $1.2 million.

Debt Maturities

As of March 31, 2015, scheduled debt maturities of the Company’s Revolving Credit Facilities, mortgages and notes payable and Convertible Notes, including balloon payments, are as follows (in thousands):
 
Scheduled
Principal
 
Balloon
Payment
 
Total
Remainder of 2015 (1)
$
22,363

 
$
230,032

 
$
252,395

2016
29,090

 
284,930

 
314,020

2017
28,535

 
816,108

 
844,643

2018
42,560

 
248,851

 
291,411

2019
44,520

 
622,000

 
666,520

Thereafter
289,321

 
1,763,999

 
2,053,320

Total
$
456,389

 
$
3,965,920

 
$
4,422,309

(1) The balloon payment balance in 2015 includes $77.4 million for the acceleration of principal payable following an event of default under four separate non-recourse CMBS loans.


21


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Interest Expense

The following table is a summary of the components of interest expense related to the Company's borrowings (in thousands):
 
Three Months 
 Ended March 31,
 
2015
 
2014
Interest expense – Revolving Credit Facilities (1)
$
803

 
$
720

Interest expense – mortgages and notes payable
48,408

 
53,596

Interest expense – Convertible Notes
6,127

 

Interest expense – other

 
6

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
2,072

 
973

Amortization of net losses related to interest rate swaps
28

 
33

Amortization of debt (premium)/discount
476

 
(929
)
Total interest expense
$
57,914

 
$
54,399

(1) Includes interest expense associated with non-utilization fees of approximately $0.4 million and $0.3 million for the three months ended March 31, 2015 and 2014, respectively.

Note 5. Derivative and Hedging Activities
The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value and included in accounts payable, accrued expenses and other liabilities on the accompanying consolidated balance sheets. Assessments of hedge effectiveness are performed quarterly using regression analysis and the measurement of hedge ineffectiveness is based on the hypothetical derivative method. The effective portion of changes in fair value are recorded in AOCL and subsequently reclassified to earnings when the hedged transactions affect earnings. The ineffective portion is recorded immediately in earnings in general and administrative expenses.
The following table summarizes the notional amount and fair value of the Company’s derivative instruments (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Liability
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Notional
Amount
 
Fixed
Interest
Rate
 
Effective
Date
 
Maturity
Date
 
March 31,
2015
 
December 31,
2014
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
10,787

 
4.62
%
 
06/28/12
 
07/06/17
 
$
(85
)
 
$
(46
)
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
6,627

 
5.75
%
 
07/17/13
 
03/01/16
 
(147
)
 
(180
)
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
32,400

 
3.15
%
 
07/17/13
 
09/05/15
 
(63
)
 
(93
)
Interest Rate Swaps(1)
 
Accounts payable, accrued expenses and other liabilities
 
$
61,758

 
5.14
%
 
01/02/14
 
12/13/18
 
(1,335
)
 
(803
)
 
 
 
 
 
 
 
 
 
 
 
 
$
(1,630
)
 
$
(1,122
)
(1) Represents a tranche of eight individual interest rate swap agreements with notional amounts ranging from $7.6 million to $7.9 million. The swap agreements contain the same payment terms, stated interest rate, effective date, and maturity date.


22


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

The following tables provide information about the amounts recorded in AOCL, as well as the loss recorded in operations, when reclassified out of AOCL or recognized in earnings immediately, for the three months ended March 31, 2015 and 2014, respectively (in thousands):
 
 
Amount of Loss Recognized
in AOCL on Derivative
(Effective Portion)
 
 
Three Months 
 Ended March 31,
Derivatives in Cash Flow Hedging Relationships
 
2015
 
2014
Interest rate swaps
 
$
(852
)
 
$
(402
)
 
 
 
 
 
 
 
Amount of Loss Reclassified from
AOCL into Operations
(Effective Portion)
 
 
Three Months 
 Ended March 31,
Location of Loss Reclassified from AOCL into Operations
 
2015
 
2014
Interest expense
 
$
(317
)
 
$
(323
)
 
 
 
 
 
 
 
Amount of Loss Recognized in
Operations on Derivative
(Ineffective Portion)
 
 
Three Months 
 Ended March 31,
Location of Loss Recognized in Operations on Derivatives
 
2015
 
2014
General and administrative expense
 
$
(4
)
 
$

Approximately $1.1 million of the remaining balance in AOCL is estimated to be reclassified as an increase to interest expense during the next twelve months. The Company does not enter into derivative contracts for speculative or trading purposes.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with counterparties it considers credit-worthy. As of March 31, 2015 and December 31, 2014, there were no termination events or events of default related to the interest rate swaps.

Note 6. Stockholders’ Equity

ATM Program

During the three months ended March 31, 2015, the Corporation sold 6.6 million shares of its common stock at the weighted average share price of $12.07 under its ATM Program, for aggregate gross proceeds of $79.8 million and aggregate net proceeds of $78.6 million. The ATM Program was not in existence during the first quarter of 2014.
Dividends Declared
For the three months ended March 31, 2015, the Corporation's Board of Directors declared the following dividends:
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount (1)
 
Payment Date
 
 
 
 
 
 
(in thousands)
 
 
March 16, 2015
 
$
0.17000

 
March 31, 2015
 
$
71,123

 
April 15, 2015
(1) Net of estimated forfeitures of approximately $5,000 for dividends declared on employee restricted stock awards that are reported in general and administrative on the accompanying consolidated statements of operations.
The dividend declared on March 16, 2015 was paid on April 15, 2015 and is included in accounts payable, accrued expenses and other liabilities as of March 31, 2015.

Note 7. Commitments and Contingencies
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are typically insured against such claims.
As of March 31, 2015, there were no outstanding claims against the Company that are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of March 31, 2015, the Company had commitments totaling $194.7 million, of which $185.3 million relates to future acquisitions with the remainder to fund improvements on properties the Company currently owns. Commitments related to acquisitions contain standard cancellation clauses contingent on results of due diligence. All commitments are expected to be funded during fiscal year 2015. In addition, the Company is contingently liable for $5.7 million of debt owed by one of its tenants and is indemnified by that tenant for any payments the Company may be required to make on such debt.
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of

23


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
March 31, 2015
(Unaudited)


estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements.

Note 8. Fair Value Measurements
Recurring Fair Value Measurements
The Company’s assets and liabilities that are required to be measured at fair value in the accompanying consolidated financial statements are summarized below. The following table sets forth the Company’s financial liabilities that were accounted for at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Hierarchy Level
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
March 31, 2015
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(1,630
)
 
$

 
$
(1,630
)
 
$

December 31, 2014
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(1,122
)
 
$

 
$
(1,122
)
 
$

The 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.
Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis (in thousands):
 
 
 
 
 
Fair Value Hierarchy Level
 
Impairment
Charges (1)
Description
Fair Value
 
Dispositions
 
Level 1
 
Level 2
 
Level 3
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Lease intangible assets
$

 
$

 
$

 
$

 
$

 
$
(615
)
Long-lived assets held for sale
4,495

 

 

 

 
4,495

 
(1,043
)
 
 
 
 
 
 
 
 
 
 
 
$
(1,658
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
$
37,278

 
$

 
$

 
$

 
$
37,278

 
$
(20,679
)
Lease intangible assets
10,013

 

 

 

 
10,013

 
4,317

Long-lived assets held for sale
65,958

 
(26,721
)
 

 

 
92,679

 
(20,074
)
 
 
 
 
 
 
 
 
 
 
 
$
(36,436
)
(1) Impairment charges are presented for the three months ended March 31, 2015 and for the year ended December 31, 2014.
The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; recently quoted bid or ask prices, or market prices for comparable properties; estimates of cash flow, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, and expenses based upon market conditions; and expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate and intangible assets falls within Level 3 of the fair value hierarchy.
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

24


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

liabilities are short-term in duration and are recorded at cost, which approximates fair value, on the accompanying consolidated balance sheets.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair values. The fair values of financial instruments are estimates based upon market conditions and perceived risks at March 31, 2015 and December 31, 2014. 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 the loans receivable, Revolving Credit Facilities, Convertible Notes and the fixed-rate mortgages and notes payable have been derived based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. The loans receivable, Revolving Credit Facilities, Convertible Notes and mortgages and notes payable were measured using a market approach from nationally recognized financial institutions with market observable inputs such as interest rates and credit analytics. These measurements are classified as Level 2 of the fair value hierarchy. The following table discloses fair value information for these financial instruments (in thousands): 
 
March 31, 2015
 
December 31, 2014
 
Carrying
Value (1)
 
Estimated
Fair Value
 
Carrying
Value (1)
 
Estimated
Fair Value
Loans receivable, net
$
107,403

 
$
113,495

 
$
109,425

 
$
115,747

Revolving Credit Facilities, net
181,518

 
185,212

 
12,780

 
15,254

Mortgages and notes payable, net
3,456,609

 
3,697,971

 
3,629,998

 
3,899,950

Convertible Notes, net
681,109

 
747,589

 
678,190

 
729,231

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

Note 9. Significant Credit and Revenue Concentration

As of March 31, 2015 and December 31, 2014, the Company’s real estate investments are leased to 474 and 454 tenants, respectively, which operate within retail, office and industrial property types across various industries throughout the United States. Shopko operates in the general merchandise industry and is the Company’s largest tenant as a percentage of total revenue. Total rental revenues from properties leased to Shopko for the three months ended March 31, 2015 and 2014, contributed 12.8% and 14.0% of the Company's total revenues from continuing operations, respectively. No other tenant contributed 5% or more of the Company’s total revenues during any of the periods presented. As of March 31, 2015 and December 31, 2014, the combined properties that are operated by Shopko represent approximately 12.3% and 13.1%, respectively, of the Company’s total gross investment portfolio.

Note 10. Discontinued Operations

Properties that were reported as held for sale as of December 31, 2013, will be presented in discontinued operations until the properties are disposed of. As a result, net gains or losses from the disposition of these properties, as well as the current and prior period operations, will continue to be reclassified to discontinued operations. The following sets forth the results of discontinued operations (dollars in thousands):

25


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

 
Three Months Ended 
 March 31,
 
2015
 
2014
Revenues:
 
 
 
Rent
$
310

 
$
308

Non-cash rent

 
(29
)
Other
13

 
2,917

Total revenues
323

 
3,196

Expenses:
 
 
 
General and administrative
1

 
3

Property costs
61

 
139

Impairments
34

 

Total expenses
96

 
142

Income from discontinued operations
227

 
3,054

Loss on dispositions of assets

 
(7
)
Total discontinued operations
$
227

 
$
3,047

Number of properties disposed of during period

 
2


Note 11. Supplemental Cash Flow Information
The following table presents the supplemental cash flow disclosures (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2014
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Reduction of debt through sale of certain real estate properties
$
3,615

 
$

Accrued interest capitalized to principal (1)
1,799

 

Accrued performance share dividend rights
115

 

Accrued deferred financing costs
304

 

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

Note 12. Incentive Award Plan
As of March 31, 2015, 2.0 million shares remained available for award under the Incentive Award Plan.
Restricted Shares of Common Stock
During the three months ended March 31, 2015, the Company granted 0.4 million restricted shares under the Incentive Award Plan to certain officers and employees. The Company recorded $4.3 million in deferred compensation associated with these grants, which will be recognized in expense over the service period of the awards. As of March 31, 2015, there were approximately 1.3 million unvested restricted shares outstanding.
Performance Share Awards
During the three months ended March 31, 2015, the Compensation Committee of the Board of Directors approved an initial target grant of 236,826 performance shares to certain executive officers of the Company. The performance period of this grant runs from January 1, 2015 through December 31, 2017. Pursuant to the performance share award agreement, each participant is eligible to vest in and receive shares of the Corporation's common stock based on the initial target number of shares granted multiplied by a percentage range between 0% and 250%. The percentage range is based on the attainment of TSR of the Corporation compared to certain specified peer groups of companies during the performance period. In addition, final shares issued under each performance share award entitle its holder to a

26


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

cash payment equal to the aggregate dividends that were declared during the performance period as if the shares had been issued and outstanding on each dividend record date. Based on the grant date fair value, the Corporation expects to recognize $3.5 million in compensation expense on a straight-line basis over the requisite service period associated with this market-based grant.
As of March 31, 2015, under each separate annual performance share award, the Corporation's TSR compared to the specified peer groups during the performance periods would have resulted in the release of 1.0 million shares, in the aggregate. In addition, approximately $0.7 million in dividend rights have been accrued. The projected shares to be released are not considered issued under the Incentive Award Plan until the performance period has ended and the actual number of shares to be released is determined. The performance 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.
Stock-based Compensation Expense
For the three months ended March 31, 2015 and 2014, the Company recognized $3.8 million and $2.5 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations.
As of March 31, 2015, the remaining unamortized stock-based compensation expense, including amounts relating to the performance share awards, totaled $16.2 million, which is recognized as the greater of the amount amortized on a straight-line basis over the service period of each applicable award or the amount vested over the vesting periods.


27


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Note 13. Income Per Share
Income per share has been computed using the two-class method. Income per common share under the two-class method is computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period. Classification of the Company's unvested restricted stock, which contain rights to receive nonforfeitable dividends, are deemed participating securities under the two-class method. Under the two-class method, earnings attributable to unvested restricted shares are deducted from income from continuing operations in the computation of net income attributable to common stockholders. The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted income per share (dollars in thousands):
 
Three Months 
 Ended March 31,
 
2015
 
2014
Basic and diluted earnings:
 
 
 
Income from continuing operations
$
13,761

 
$
9,470

Gain on dispositions of assets
11,336

 
1,722

Less: income attributable to unvested restricted stock
(209
)
 
(333
)
Income used in basic and diluted income per share from continuing operations
24,888

 
10,859

Income from discontinued operations
227

 
3,047

Net income attributable to common stockholders used in basic and diluted income per share
$
25,115

 
$
13,906

 
 
 
 
Basic weighted average shares of common stock outstanding:
 
 
 
Weighted average shares of common stock outstanding
412,195,685

 
370,535,587

Less: unvested weighted average shares of restricted stock
(1,177,790
)
 
(1,850,645
)
Weighted average number of shares outstanding used in basic and diluted income per share
411,017,895

 
368,684,942

 
 
 
 
Diluted weighted average shares of common stock outstanding: (1)
 
 
 
Unvested performance shares
598,015

 
697,638

Stock options
6,524

 
5,058

Weighted average number of shares of common stock used in diluted income per share
411,622,434

 
369,387,638

 
 
 
 
Potentially dilutive shares of common stock
 
 
 
Unvested shares of restricted stock
457,283

 
688,348

Total
457,283

 
688,348

(1)  Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.
The Corporation intends to satisfy its exchange obligation for the principal amount of the Convertible Notes to the note holders entirely in cash, therefore, the "if-converted" method does not apply and the treasury stock method is being used. As the Corporation's stock price is below the conversion price, there are no potentially dilutive shares associated with the Convertible Notes.


28


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2015
(Unaudited)

Note 14. Subsequent Events

On April 14, 2015, the Company completed an underwritten public offering of 23.0 million shares of its common stock, at $11.85 per share, including 3.0 million shares issued pursuant to the underwriter’s option to purchase additional shares. Gross proceeds raised were approximately $272.6 million; net proceeds were approximately $268.9 million after underwriter discounts and offering costs paid by the Company. Net proceeds from the common stock offering were used to repay the outstanding balances under the 2015 Credit Facility and Line of Credit. The remaining net proceeds were retained to fund potential future acquisitions and for general corporate purposes.








29



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this quarterly report, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following risks and uncertainties, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

industry and economic conditions;
volatility and uncertainty in the financial markets, including potential fluctuations in the CPI;
our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate, integrate and manage diversifying acquisitions or investments;
our ability to diversify our tenant base and reduce the concentration of our significant tenant;
the nature and extent of future competition;
increases in our costs of borrowing as a result of changes in interest rates and other factors;
our ability to access debt and equity capital markets;
our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;
our ability and willingness to renew our leases upon expiration and to reposition our properties on the same or better terms upon expiration in the event such properties are not renewed by tenants or we exercise our rights to replace existing tenants upon default;
the impact of any financial, accounting, legal or regulatory issues or litigation that may affect us or our major tenants;
our ability to manage our expanded operations;
our ability and willingness to maintain our qualification as a REIT; and
other risks inherent in the real estate business, including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments and potential damages from natural disasters.

The factors included in this quarterly report, including the documents incorporated by reference, and documents we subsequently file with the SEC and incorporate by reference, are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional risk factors, see the factors included under the caption “Risk Factors” in our most recent Annual Report on Form 10-K. All forward-looking statements are based on information that was available, and speak only, as of the date on which they were made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under Federal securities laws.


30



Overview
We are a self-administered and self-managed REIT that primarily invests in single-tenant, operationally essential real estate throughout the United States that is leased on a long-term, triple-net basis to tenants operating within retail, office and industrial property types. Single tenant, operationally essential real estate consists of properties that are generally free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. In support of our primary business of owning and leasing real estate, we have also strategically originated or acquired long-term, commercial mortgage and other loans to provide a range of financing solutions to our tenants.
Our operations are carried out through the Operating Partnership, a Delaware limited partnership. OP Holdings, one of our wholly owned subsidiaries, is the sole general partner and owns 1.0% of the Operating Partnership. We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99.0% of the Operating Partnership. Although the Operating Partnership is wholly-owned by us, in the future, we may issue partnership interests in the Operating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in the Operating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in the Operating Partnership are issued.
We have elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in such a manner.
We generate our revenue primarily by leasing our properties to our tenants. As of March 31, 2015, our undepreciated gross investment in real estate and loans totaled approximately $8.23 billion, representing investments in 2,547 properties, including properties securing our mortgage loans. Of this amount, 98.7% consisted of our gross investment in real estate, representing ownership of 2,402 properties, and the remaining 1.3% consisted primarily of commercial mortgage loans receivable secured by 145 real properties.
As of March 31, 2015, our owned properties were approximately 98.3% occupied (based on number of properties), and our leases had a weighted average non-cancelable remaining lease term (based on total rental revenue) of approximately 10.9 years. Our leases are generally originated with long lease terms, typically non-cancelable initial terms of 15 to 20 years and tenant renewal options for additional years. As of March 31, 2015, approximately 89% of our single-tenant properties (based on total rental revenue) provided for increases in future annual base contractual rent.

2015 Highlights

For the first quarter ended March 31, 2015:
Recognized revenues of $162.3 million, a 12.7% increase over the revenues reported in the first quarter of 2014.
Generated AFFO of $0.21 per share, FFO of $0.20 per share, and net income of $0.06 per share.
Closed 32 real estate transactions and invested $265.5 million (including $0.2 million in follow on investments in existing properties), which added 53 properties to our portfolio, earning an initial cash yield of approximately 7.68% under leases with an average remaining term of 17.2 years.
Sold 15 properties generating gross proceeds of $77.2 million, including 5 Shopko properties for approximately $38.8 million, with an overall gain on sale of $11.3 million.
Entered into a new $600.0 million unsecured credit facility and terminated our $400.0 million secured credit facility.
Extinguished $162.8 million of high coupon debt that had a 5.76% weighted average coupon rate.
Sold 6.6 million common shares through Spirit's at-the-market program ("ATM"), at an average share price of $12.07, and generating net proceeds of $78.6 million.
Reduced Shopko tenant concentration to 12.8% of total revenues down from 14.0% at December 31, 2014.
Declared cash dividends for the first quarter of $0.17 per share, which equates to an annualized dividend of $0.68 per share.
Maintained essentially full occupancy at over 98%.

31




Factors that May Influence Our Operating Results

Acquisitions
Our principal line of business is acquiring commercial real estate properties and leasing these properties to our tenants. Our ability to grow revenue and produce superior risk adjusted returns will principally depend on our ability to acquire additional properties that meet our investment criteria at a yield sufficiently in excess of our cost of capital. We primarily focus on opportunities to acquire attractive commercial real estate by providing capital to small and middle-market companies that we conclude have stable and proven operating histories and attractive credit characteristics, but lack the access to capital that large companies often have. Small and middle-market companies are often willing to enter into leases with structures and terms that we consider appealing (such as master leases and leases that require ongoing tenant financial reporting) and that we believe increase the security of rental payments.

Operationally Essential Real Estate with Relatively Long-Term Leases

We seek to own properties that are operationally essential to our tenants, thereby reducing the risk that our tenant would choose not to renew an expiring lease or reject a lease in bankruptcy. In addition, we seek to enter into leases with relatively long terms, typically with non-cancelable initial terms of 15 to 20 years and tenant renewal options for additional terms with attractive rent escalation provisions. As of March 31, 2015, our leases had a weighted average non-cancelable remaining lease term (based on rental revenue) of approximately 10.9 years compared to approximately 10.2 years as of March 31, 2014.

Portfolio Diversification

Our strategy emphasizes a portfolio that (1) derives no more than 10% of its annual rent from any single tenant and no more than 2.5% of its annual rent from any single property, (2) is leased to tenants operating in various industries and (3) is located across the United States without significant geographic concentration.

We believe that our experience, in-depth market knowledge and extensive network of long-standing relationships in the real estate industry will continue to provide us access to an ongoing pipeline of attractive acquisitions. However, because we primarily use external financing to fund acquisitions, periods of volatility in the credit and capital markets that may negatively affect the amounts, sources and cost of capital available to us could force us to limit our acquisition activity. Additionally, to the extent that we access capital at a higher cost (reflected in higher interest rates for debt financing or lower stock price for equity financing), our financial results could be adversely affected.

Our Leases

Rent Escalators

Generally, our single-tenant leases contain contractual provisions increasing the rental revenue over the term of the lease at specified dates by: (1) a fixed amount or (2) the lesser of (a) 1 to 1.25 times any increase in CPI over a specified period or (b) a fixed percentage, typically 1% to 2% per year. The percentage of our single-tenant properties (based on total rental revenue) containing rent escalators increased to approximately 89% as of March 31, 2015 compared to 87% as of March 31, 2014.

Master Lease Structure

Where appropriate, we seek to enter into master leases, pursuant to which we lease multiple properties to a single tenant on an “all or none” basis. We seek to use the master lease structure to prevent a tenant from unilaterally giving up underperforming properties while retaining well-performing properties. Master lease revenue contributed approximately 46% of our total rental revenues during the month ended March 31, 2015 compared to 43% for the same period in 2014.

Triple-Net Leases

Our leases are predominantly triple-net which require the tenant to pay all property operating expenses such as real estate taxes, insurance premiums and repair and maintenance costs. As of March 31, 2015, approximately 86.5% of

32



our single-tenant properties (based on rental revenue) are subject to triple-net leases compared to 85.1% as of March 31, 2014.

Asset Management

The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to 1) pay rent and our ability to collect rent due 2) renew expiring leases or re-lease space upon expiration or other termination 3) lease currently vacant properties and 4) maintain or increase rental rates. Each of these could be negatively impacted by adverse economic conditions, particularly those that affect the markets in which our properties are located, downturns in our tenants’ industries, increased competition for our tenants at our property locations, or the bankruptcy of one or more of our tenants. We seek to manage these risks by using our developed underwriting and risk management processes to structure and manage our portfolio.

Active Management and Monitoring of Risks Related to Our Investments

We seek to measure tenant financial distress risk and lease renewal risk through various processes. Many of our tenants are required to provide corporate-level financial information, which includes balance sheet, income statement and cash flow statement data on a quarterly and/or annual basis. Our underwriting and risk management processes are designed to structure new investments and manage existing investments to mitigate tenant credit quality risks and preserve the long-term return on our invested capital. Since our inception, our occupancy has never been below 96.1% (based on number of properties). As of March 31, 2015, the percentage of our properties that were occupied was 98.3% compared to 98.9% as of March 31, 2014.

Following the 2014 restructuring of the Shopko master lease and defeasance of the related secured indebtedness, we have continued our objective to reduce the tenant concentration of Shopko. During the three months ended March 31, 2015, we sold five Shopko properties having a gross investment value of $38.9 million. These sales, coupled with our increased rental revenue from real estate investments of $665.0 million during the past two quarters, have reduced our Shopko tenant concentration to 12.8% as of March 31, 2015 compared to 14.0% as of December 31, 2014.

Capital Recycling

We continuously evaluate opportunities for the potential disposition of properties in our portfolio when we believe such disposition is appropriate in view of our business objectives, considering criteria including, but not limited to, tenant concentration, tenant credit quality, unit financial performance, local market conditions and lease rates, associated indebtedness, asset location, tenant operation type (e.g., industry, sector, or concept/brand), and asset zoning, as well as potential capital appreciation, potential uses of proceeds and tax considerations. As part of this strategy, we attempt to enter into 1031 Exchanges, when possible, to defer some or all of the taxable built-in gains on the dispositions, if any, for federal and state income tax purposes.

The timing of any potential dispositions, including the disposition of any Shopko properties, will depend on market conditions and other factors, including but not limited to our capital needs and ability to defer some or all of the taxable gains on the sales. We can provide no assurance that we will dispose of any additional properties or that future acquisitions and/or dispositions, if any, will qualify as 1031 Exchanges. Furthermore, we can provide no assurance that we will deploy the proceeds from future dispositions in a manner that produces comparable or better yields.

Capital Funding

Our principal demands for funds are for property acquisitions, payment of principal and interest on our outstanding indebtedness, operating and property maintenance expenses and distributions to our stockholders. Generally, cash needs for payments of principal and interest, operating and property maintenance expenses and distributions to stockholders will be generated from cash flows from operations, which are primarily driven by the rental income received from our leased properties, interest income earned on mortgage notes receivable and interest income on our cash balances. We generally temporarily fund the acquisition of real estate utilizing our Revolving Credit Facilities, followed by permanent financing through asset level financing or by issuing debt or equity securities.

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Interest Costs

Our fixed-rate debt structure provides us with a stable and predictable cash requirement related to our debt service. Any changes to our debt structure, including borrowings under our 2015 Credit Facility or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such indebtedness. A significant amount of our debt provides for scheduled principal payments. As principal is repaid, our interest expense decreases. Changing interest rates will increase or decrease the interest expense we incur on unhedged variable interest rate debt and may impact our ability to refinance maturing debt.


34



Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have not made any material changes to these policies during the periods covered by this quarterly report.

Results of Operations
Comparison of Three Months Ended March 31, 2015 to Three Months Ended March 31, 2014
The following discussion includes the results of our continuing operations as summarized in the table below:
 
Three Months Ended March 31,
 
2015
 
2014
 
 Change
 
 % Change
 
 (In Thousands)
 
 
Revenues:
 
 
 
 
 
 
 
Rentals
$
154,518

 
$
137,479

 
$
17,039

 
12.4
 %
Interest income on loans receivable
1,722

 
1,837

 
(115
)
 
(6.3
)%
Earned income from direct financing leases
795

 
846

 
(51
)
 
(6.0
)%
Tenant reimbursement income
4,631

 
3,319

 
1,312

 
39.5
 %
Interest income and other
621

 
491

 
130

 
26.5
 %
Total revenues
162,287

 
143,972

 
18,315

 
12.7
 %
Expenses:
 
 
 
 
 
 
 
General and administrative
12,600

 
11,067

 
1,533

 
13.9
 %
Property costs
7,407

 
5,282

 
2,125

 
40.2
 %
Real estate acquisition costs
1,093

 
1,281

 
(188
)
 
(14.7
)%
Interest
57,914

 
54,399

 
3,515

 
6.5
 %
Depreciation and amortization
66,296

 
60,549

 
5,747

 
9.5
 %
Impairments
1,624

 
1,707

 
(83
)
 
(4.9
)%
Total expenses
146,934

 
134,285

 
12,649

 
9.4
 %
Income from continuing operations before other expense and income tax expense
15,353

 
9,687

 
5,666

 
58.5
 %
Other expense:
 
 
 
 
 
 
 
Loss on debt extinguishment
(1,230
)
 

 
(1,230
)
 
NM

Total other expense
(1,230
)
 

 
(1,230
)
 
NM

Income from continuing operations before income tax expense
14,123

 
9,687

 
4,436

 
45.8
 %
Income tax expense
(362
)
 
(217
)
 
(145
)
 
(66.8
)%
Income from continuing operations
$
13,761

 
$
9,470

 
$
4,291

 
45.3
 %
 
 
 
 
 
 
 
 
Gain on dispositions of assets
$
11,336

 
$
1,722

 
$
9,614

 
NM

NM - Percentages over 100% are not displayed.

35



Revenues
For the three months ended March 31, 2015, approximately 95.2% of our total revenues was attributable to long-term leases. The year over year increase of 12.7% in total revenue was due primarily to an increase in base rental revenue due to the acquisition of 310 properties, representing an investment in real estate of $1.08 billion, during the twelve month period ended March 31, 2015 and to a lessor extent, revenue increased through contractual rent escalations within our existing real estate portfolio. This increase was partially offset from the sale of 50 properties during the same period having a gross investment value of $199.5 million.

Rentals

The year over year increase in rental revenue was primarily attributable to the acquisition of 310 properties representing an investment in real estate of $1.08 billion during the twelve month period ended March 31, 2015. Non-cash rentals for the three months ended March 31, 2015 and 2014 were $5.4 million and $4.6 million, respectively. These amounts represent approximately 3.5% and 3.4% of total rental revenue from continuing operations for each of the three months ended March 31, 2015 and 2014, respectively. Contractual rent escalations subsequent to March 31, 2014 also contributed to the increase.

As of March 31, 2015, 98.3% of our owned properties were occupied (based on number of properties). The majority of our nonperforming properties were in the restaurant and manufacturing industries. As of March 31, 2015 and 2014, 42 and 24 of our properties, representing approximately 1.7% and 1.1%, respectively, of our owned properties were vacant and not generating rent. The increase in the number of vacant properties is primarily attributable to the bankruptcy of two tenants under two master leases comprising sixteen properties within the restaurant and manufacturing industries. Fourteen of our vacant properties were held for sale as of March 31, 2015.

Tenant reimbursement income

We have a number of leases that require our tenants to reimburse us for certain property costs we incur. Tenant reimbursement income is driven by the tenant reimbursable property costs described below.
Expenses
General and administrative
The year over year increase in general and administrative expenses is primarily due to higher compensation and related benefits of $2.3 million, which includes $1.2 million of non-cash stock compensation. The increase in compensation and related benefits is primarily attributable to the acceleration of cash and non-cash stock compensation related to the departure of an executive officer during the most recently completed quarter. These increases were partially offset by $0.5 million in lower professional fees for accounting, tax, audit and consulting and $0.2 million in lower franchise taxes in the current period.
Property costs

For the three months ended March 31, 2015, property costs were $7.4 million (including $4.6 million of tenant reimbursables) as compared to $5.3 million (including $3.3 million in tenant reimbursables) for the same period in 2014. The year over year increase in tenant reimbursable property costs is primarily attributable to increased property taxes at certain of our multi-tenant properties. The remainder of the increase is attributable to higher property taxes and utilities due to a rise in the number of vacant properties between periods in addition to property cost recoveries of approximately $0.5 million during the comparable period in 2014.
Interest
The year over year increase in interest expense is primarily attributable to a $2.5 million rise in non-cash interest resulting mostly from the amortization of capitalized deferred financing costs of $30.6 million and debt discounts of $56.7 million related to debt offerings that occurred during the past twelve months, which are being amortized to interest expense over the term of the instruments. During the twelve months ended March 31, 2015, we borrowed $1.26 billion of debt with a weighted average interest rate of 3.69% through our Convertible Notes and series 2014-4 Master Trust Notes offerings, and we extinguished $746.6 million of indebtedness with a weighted average interest rate of 6.27%. The lower weighted average interest rate partially offset the impact of the increase in our net borrowing amount.

36



The following table summarizes our interest expense and related borrowings from continuing operations:
 
 Three Months Ended
 
March 31,
 
2015
 
2014
 
 (In Thousands)
Interest expense – Revolving Credit Facilities (1)
$
803

 
$
720

Interest expense – mortgages and notes payable
48,408

 
53,596

Interest expense – Convertible Notes
6,127

 

Interest expense – other