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Section 1: 10-Q (10-Q)

06.30.15 - 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 June 30, 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 August 3, 2015, there were 441,520,851 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 June 30, 2015 (Unaudited) and December 31, 2014
Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014 (Unaudited)
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014 (Unaudited)
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2015 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended June 30, 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 registered shares of common stock from time to time
CMBS
Commercial Mortgage Backed Securities
Code
Internal Revenue Code of 1986, as amended
Cole II
Cole Credit Property Trust II, Inc.
Cole II Merger
Acquisition on July 17, 2013 of Cole II by the Company, in which the Company merged with and into the Cole II legal entity
Collateral Pools
Pools of collateral assets that are pledged to the indenture trustee for the benefit of the noteholders and secure obligations of issuers under the Spirit Master Funding Program
Company
The Corporation and its consolidated subsidiaries
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 Exchange Costs
Legal, accounting and financial advisory services costs incurred in connection with the Exchange Offer
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
Normalized Rental Revenue
Total rental revenue normalized to exclude rental revenues contributed by properties sold during a given period
Normalized Revenue
Total revenue normalized to exclude revenues contributed by properties sold during a given period
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
Total Debt
Principal debt outstanding before discounts or premiums
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)

 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets



Investments:



Real estate investments:



Land and improvements
$
2,679,387


$
2,614,630

Buildings and improvements
4,714,561


4,579,166

Total real estate investments
7,393,948


7,193,796

Less: accumulated depreciation
(785,360
)

(752,210
)

6,608,588


6,441,586

Loans receivable, net
109,377


109,425

Intangible lease assets, net
557,214


590,073

Real estate assets under direct financing leases, net
44,382


56,564

Real estate assets held for sale, net
108,339


119,912

Net investments
7,427,900


7,317,560

Cash and cash equivalents
39,674


176,181

Deferred costs and other assets, net
170,244


185,507

Goodwill
291,421


291,421

Total assets
$
7,929,239


$
7,970,669

Liabilities and stockholders’ equity



Liabilities:



Revolving Credit Facilities
$
20,000


$
15,114

Mortgages and notes payable, net
3,291,679


3,629,998

Convertible Notes, net
684,066


678,190

Total debt, net
3,995,745


4,323,302

Intangible lease liabilities, net
202,021


205,968

Accounts payable, accrued expenses and other liabilities
120,134


123,298

Total liabilities
4,317,900


4,652,568

Commitments and contingencies (see Note 7)





Stockholders’ equity:



Common stock, $0.01 par value; 442,047,125 issued shares and 441,512,923 outstanding shares at June 30, 2015 and 411,824,039 issued shares and 411,350,440 outstanding shares at December 31, 2014
4,420


4,118

Capital in excess of par value
4,715,340


4,361,320

Accumulated deficit
(1,101,642
)

(1,041,392
)
Accumulated other comprehensive loss
(1,197
)

(1,083
)
Treasury stock, at cost
(5,582
)

(4,862
)
Total stockholders’ equity
3,611,339


3,318,101

Total liabilities and stockholders’ equity
$
7,929,239


$
7,970,669

See accompanying notes.


5


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


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rentals
$
159,607

 
$
143,142

 
$
314,125

 
$
280,621

Interest income on loans receivable
1,730

 
1,821

 
3,452

 
3,658

Earned income from direct financing leases
779

 
838

 
1,574

 
1,684

Tenant reimbursement income
3,492

 
2,921

 
8,123

 
6,240

Other income and interest from real estate transactions
2,326

 
3,067

 
2,947

 
3,558

Total revenues
167,934

 
151,789

 
330,221

 
295,761

Expenses:
 
 
 
 
 
 
 
General and administrative
11,972

 
10,451

 
24,572

 
21,501

Finance restructuring costs

 
13,016

 

 
13,033

Property costs
6,414

 
6,576

 
13,821

 
11,858

Real estate acquisition costs
453

 
226

 
1,546

 
1,507

Interest
56,167

 
55,992

 
114,081

 
110,391

Depreciation and amortization
64,671

 
61,968

 
130,967

 
122,517

Impairments
33,766

 
27,627

 
35,390

 
29,334

Total expenses
173,443

 
175,856

 
320,377

 
310,141

(Loss) income from continuing operations before other income (expense) and income tax expense
(5,509
)
 
(24,067
)
 
9,844

 
(14,380
)
Other income (expense):
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
3,377

 
(64,708
)
 
2,147

 
(64,708
)
Total other income (expense)
3,377

 
(64,708
)
 
2,147

 
(64,708
)
(Loss) income from continuing operations before income tax expense
(2,132
)
 
(88,775
)
 
11,991

 
(79,088
)
Income tax expense
(161
)
 
(127
)
 
(523
)
 
(344
)
(Loss) income from continuing operations
(2,293
)
 
(88,902
)
 
11,468

 
(79,432
)
Discontinued operations:
 
 
 
 

 

(Loss) income from discontinued operations
(96
)
 
279

 
131

 
3,333

Gain on disposition of assets
590

 
92

 
590

 
85

Income from discontinued operations
494

 
371

 
721

 
3,418

(Loss) income before gain (loss) on disposition of assets
(1,799
)
 
(88,531
)
 
12,189

 
(76,014
)
Gain (loss) on disposition of assets
62,690

 
(1,290
)
 
74,026

 
432

Net income (loss) attributable to common stockholders
$
60,891

 
$
(89,821
)
 
$
86,215

 
$
(75,582
)
Net income (loss) per share of common stock—basic:
 
 
 
 
 
 
 
Continuing operations
$
0.14

 
$
(0.24
)
 
$
0.20

 
$
(0.21
)
Discontinued operations

 

 

 
0.01

Net income (loss) per share attributable to common stockholders—basic
$
0.14

 
$
(0.24
)
 
$
0.20

 
$
(0.20
)
Net income (loss) per share of common stock—diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.14

 
$
(0.24
)
 
$
0.20

 
$
(0.21
)
Discontinued operations

 

 

 
0.01

Net income (loss) per share attributable to common stockholders—diluted
$
0.14

 
$
(0.24
)
 
$
0.20

 
$
(0.20
)
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
436,619,138

 
381,775,203

 
423,889,238

 
375,266,233

Diluted
436,923,755

 
381,775,203

 
424,343,232

 
375,266,233

Dividends declared per common share issued
$
0.17000

 
$
0.16625

 
$
0.34000

 
$
0.33250

See accompanying notes.

6


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

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss) attributable to common stockholders
$
60,891

 
$
(89,821
)
 
$
86,215

 
$
(75,582
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on cash flow hedges
40

 
(875
)
 
(811
)
 
(1,277
)
Net cash flow hedge losses reclassified to operations
381

 
331

 
697

 
654

Total comprehensive income (loss)
$
61,312

 
$
(90,365
)
 
$
86,101

 
$
(76,205
)
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

 

 

 
86,215

 

 

 

 
86,215

Other comprehensive loss

 

 

 

 
(114
)
 

 

 
(114
)
Dividends declared on common stock

 

 

 
(146,177
)
 

 

 

 
(146,177
)
Repurchase of shares of common stock

 

 

 

 

 
(60,603
)
 
(720
)
 
(720
)
Issuance of shares of common stock, net
29,610,100

 
296

 
346,959

 

 

 

 

 
347,255

Exercise of stock options
5,000

 

 
46

 

 

 

 

 
46

Stock-based compensation, net
607,986

 
6

 
7,015

 
(288
)
 

 

 

 
6,733

Balances, June 30, 2015
442,047,125

 
$
4,420

 
$
4,715,340

 
$
(1,101,642
)
 
$
(1,197
)
 
(534,202
)
 
$
(5,582
)
 
$
3,611,339

See accompanying notes.

8


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
Six Months Ended 
 June 30,
 
2015
 
2014
Operating activities
 
 
 
Net income (loss) attributable to common stockholders
$
86,215

 
$
(75,582
)
Adjustments to reconcile net income (loss) attributable to common stockholders to net cash provided by operating activities:
 
 
 
Depreciation and amortization
130,967

 
122,517

Impairments
35,424

 
29,334

Amortization of deferred financing costs
3,973

 
2,297

Derivative net settlements, amortization and other interest rate hedge losses
(85
)
 
(50
)
Amortization of debt discounts (premiums)
1,139

 
(1,043
)
Stock-based compensation expense
7,288

 
5,484

(Gain) loss on debt extinguishment
(2,147
)
 
64,708

Debt extinguishment costs
(3,623
)
 
(59,069
)
Gains on dispositions of real estate and other assets, net
(74,616
)
 
(517
)
Non-cash revenue
(10,551
)
 
(8,344
)
Other
(27
)
 
242

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(1,641
)
 
(2,352
)
Accounts payable, accrued expenses and other liabilities
(4,677
)
 
(9,062
)
Net cash provided by operating activities
167,639

 
68,563

Investing activities
 
 
 
Acquisitions of real estate
(547,487
)
 
(363,643
)
Capitalized real estate expenditures
(3,175
)
 
(2,250
)
Investments in loans receivable
(4,000
)
 

Collections of principal on loans receivable and real estate assets under direct financing leases
2,924

 
3,286

Proceeds from dispositions of real estate and other assets
340,971

 
14,218

Transfers of net sales proceeds (to) from restricted accounts pursuant to 1031 Exchanges
(40,034
)
 
20,784

Transfers of net sales proceeds from (to) Master Trust Release
43,442

 
(13,054
)
Net cash used in investing activities
(207,359
)
 
(340,659
)
Financing activities
 
 
 
Borrowings under Revolving Credit Facilities
405,000

 
405,535

Repayments under Revolving Credit Facilities
(400,181
)
 
(425,127
)
Borrowings under mortgages and notes payable

 
757,500

Repayments under mortgages and notes payable
(321,884
)
 
(553,882
)
Deferred financing costs
(3,782
)
 
(20,000
)
Proceeds from issuance of common stock, net of offering costs
347,255

 
287,704

Proceeds from exercise of stock options
46

 
183

Offering costs paid on equity component of Convertible Notes

 
(1,609
)
Purchase of treasury stock
(720
)
 
(110
)
Dividends paid/distributions to equity owners
(141,174
)
 
(123,207
)
Transfers from (to) reserve/escrow deposits with lenders
18,653

 
(503
)
Net cash (used in) provided by financing activities
(96,787
)
 
326,484

Net (decrease) increase in cash and cash equivalents
(136,507
)
 
54,388

Cash and cash equivalents, beginning of period
176,181

 
66,588

Cash and cash equivalents, end of period
$
39,674

 
$
120,976

See accompanying notes.

9


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
June 30, 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 to tenants operating within predominantly retail, but also office and industrial property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.
The Company’s operations are generally 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 June 30, 2015, our undepreciated investment in real estate and loans totaled approximately $8.21 billion, representing investments in 2,600 properties, including properties securing mortgage loans made by the Company. Of this amount, 98.7% consisted of our $8.10 billion investment in real estate, representing ownership of 2,455 properties, and the remaining 1.3% consisted of $109.4 million in commercial mortgage and other loans receivable, primarily secured by the remaining 145 properties or other related assets.
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 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 affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted under their governing documents. At June 30, 2015 and December 31, 2014, net assets totaling $4.88 billion and $5.68 billion, respectively, were held, and net liabilities totaling $3.42 billion and $3.77 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.


10


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)


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 to which these costs relate, and this presentation is retrospectively applied to prior periods. For capitalized deferred financing costs that have been incurred relating to the 2013 Credit Facility and 2015 Credit Facility, the Company continues to present these costs in deferred costs and other assets, net on the accompanying consolidated balance sheets as amounts can be drawn and repaid periodically. As of December 31, 2014, unamortized deferred financing costs of approximately $46.3 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 (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.
Allowance for Doubtful Accounts

The Company provided for reserves for uncollectible amounts related to its rent and other tenant receivables totaling $8.1 million and $8.4 million at June 30, 2015 and December 31, 2014, respectively, against accounts receivable balances of $25.1 million and $20.5 million, respectively; receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
The Company established a provision for losses of $9.4 million and $10.9 million at June 30, 2015 and December 31, 2014, respectively, against deferred rental revenue receivables of $56.3 million and $48.3 million, respectively; deferred rental revenue receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Restricted Cash and Escrow Deposits

Restricted cash and deposits in escrow, classified within deferred costs and other assets, net in the accompanying consolidated balance sheets consisted of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Collateral deposits (1)
$
14,153

 
$
29,483

Tenant improvements, repairs, and leasing commissions (2)
8,856

 
13,427

Master Trust Release (3)
9,627

 
53,069

1031 Exchange proceeds, net
40,034

 

Loan impounds (4)
728

 
794

Other (5)
707

 
3,571

 
$
74,105

 
$
100,344

(1) Funds held in reserve by lenders which can be applied by lenders 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 pledged as collateral under the Spirit Master Funding Program, which are held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
(4) Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses.
(5) Funds held in lender controlled accounts released after debt service requirements are met.

11


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)


A significant amount of the lender 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. 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 June 30, 2015, the Company's investment in real estate and loans totaled approximately $8.21 billion, representing investments in 2,600 properties, including 145 properties securing mortgage loans. The investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with only one state, Texas, with a real estate investment of 12.0%, accounting for more than 10.0% of the total dollar amount of the Company’s real estate 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 triple net lease agreement.


12


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

During the six months ended June 30, 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 (4)
 
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)
148

 

 
148

 
550,662

 
4,000

 
554,662

Dispositions of real estate (2) (3)
(57
)
 

 
(57
)
 
(349,362
)
 

 
(349,362
)
Principal payments and payoffs

 

 

 

 
(2,811
)
 
(2,811
)
Impairments

 

 

 
(35,328
)
 

 
(35,328
)
Write off of gross lease intangibles

 

 

 
(2,382
)
 

 
(2,382
)
Loan premium amortization and other

 

 

 
(113
)
 
(1,237
)
 
(1,350
)
Gross balance, June 30, 2015
2,455

 
145

 
2,600

 
$
8,098,415

 
$
109,377

 
$
8,207,792

Accumulated depreciation and amortization
 
 
 
 
 
 
(983,229
)
 

 
(983,229
)
Other non-real estate assets held for sale
 
 
 
 
 
 
1,316

 

 
1,316

Net balance, June 30, 2015
 
 
 
 
 
 
$
7,116,502

 
$
109,377

 
$
7,225,879

(1) Includes investments of $2.6 million in revenue producing capitalized expenditures, as well as $0.6 million of non-revenue producing capitalized maintenance expenditures. Capitalized maintenance expenditures are not included in the Company's investment in real estate disclosed elsewhere.
(2) The total accumulated depreciation and amortization associated with these dispositions of real estate was $73.7 million.
(3) During the six months ended June 30, 2015, pursuant to 1031 Exchanges, the Company sold 23 properties for $212.1 million and used $172.1 million of this amount to partially fund 62 property acquisitions.
(4) At June 30, 2015 and December 31, 2014, 33 and 37, respectively, of the Company's properties were vacant and in the Company’s possession; of these amounts, 11 and 8, respectively, were held for sale.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases at June 30, 2015 (in thousands):
Remainder of 2015
$
308,950

2016
608,206

2017
594,922

2018
580,686

2019
561,657

Thereafter
4,526,522

Total future minimum rentals
$
7,180,943

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.

13


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

Loans Receivable
The following table details loans receivable, net of premium (in thousands):
 
June 30,
2015
 
December 31,
2014
Mortgage - principal
$
93,810

 
$
96,594

Mortgage - premium
11,215

 
12,452

Mortgages, net
105,025

 
109,046

Other notes - principal
4,352

 
379

Total loans receivable, net
$
109,377

 
$
109,425

The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are two other notes receivable, one $4.0 million note is secured by tenant assets and stock and the other is unsecured.
Allowance for Loan Losses
At June 30, 2015 and December 31, 2014, there was no allowance for loan losses, and there were no mortgages or notes on nonaccrual status.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
June 30,
2015
 
December 31,
2014
In-place leases
$
661,206

 
$
676,665

Above-market leases
99,760

 
100,568

Less: accumulated amortization
(203,752
)
 
(187,160
)
Intangible lease assets, net
$
557,214

 
$
590,073

 
 
 
 
Below-market leases
$
240,437

 
$
237,593

Less: accumulated amortization
(38,416
)
 
(31,625
)
Intangible lease liabilities, net
$
202,021

 
$
205,968

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases were $2.8 million and $3.0 million for the six months ended June 30, 2015 and 2014, respectively, and $1.4 million and $1.7 million for the three months ended June 30, 2015 and 2014, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $25.4 million and $26.9 million for the six months ended June 30, 2015 and 2014, respectively, and $12.6 million and $13.5 million for the three months ended June 30, 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):
 
June 30,
2015
 
December 31,
2014
Minimum lease payments receivable
$
14,210

 
$
15,897

Estimated residual value of leased assets
43,789

 
55,858

Unearned income
(13,617
)
 
(15,191
)
Real estate assets under direct financing leases, net
$
44,382

 
$
56,564


14


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

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 six months ended June 30, 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
33

 

 
33

 
140,060

 
(34
)
 
140,026

Sales
(28
)
 
(2
)
 
(30
)
 
(147,124
)
 
(4,475
)
 
(151,599
)
Balance, June 30, 2015
24

 
3

 
27

 
$
103,854

 
$
4,485

 
$
108,339


Properties included in discontinued operations as of June 30, 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):
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Land and improvements
$
2,922

 
$
5,351

Buildings and improvements
2,916

 
5,798

Total real estate investments
5,838

 
11,149

Less: accumulated depreciation
(1,202
)
 
(2,167
)
Intangible lease assets, net
297

 
460

Total assets
$
4,933

 
$
9,442

 
 
 
 
Liabilities
 
 
 
Intangible lease liabilities, net
$
448

 
$
448

Total liabilities
$
448

 
$
448

 
 
 
 
Net assets
$
4,485

 
$
8,994


15


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Real estate and intangible asset impairment
$
33,730

 
$
24,610

 
$
34,773

 
$
26,247

Write-off of lease intangibles due to lease terminations, net
43

 
2,529

 
555

 
2,599

Total impairments from real estate investment net assets
33,773

 
27,139

 
35,328

 
28,846

Other impairment
(7
)
 
488

 
96

 
488

Total impairment loss in continuing and discontinued operations
$
33,766

 
$
27,627

 
$
35,424

 
$
29,334


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)
 
June 30,
2015
 
December 31,
2014
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facilities
NM

 
1.89
%
 
3.8
 
$
20,000

 
$
15,181

Master Trust Notes
5.44
%
 
5.04
%
 
7.7
 
1,701,371

 
1,710,380

CMBS - fixed-rate
5.45
%
 
5.88
%
 
2.9
 
1,554,414

 
1,836,181

CMBS - variable-rate (4)
3.42
%
 
3.55
%
 
3.2
 
68,345

 
110,685

Convertible Notes
4.86
%
 
3.28
%
 
4.8
 
747,500

 
747,500

Unsecured fixed rate promissory note
9.12
%
 
7.00
%
 
6.5
 
1,232

 
1,293

Total Debt
5.33
%
 
5.00
%
 
5.3
 
4,092,862

 
4,421,220

Debt discount, net
 
 
 
 
 
(54,247
)
 
(51,586
)
Deferred financing costs, net (5)
 
 
 
 
 
 
(42,870
)
 
(46,332
)
Total debt, net
 
 
 
 
 
 
$
3,995,745

 
$
4,323,302

(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 June 30, 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 June 30, 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 June 30, 2015.
(3) Represents the weighted average time to maturity based on the outstanding principal balance as of June 30, 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. The Company records deferred financing costs for its 2013 Credit Facility and 2015 Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.

16


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

Revolving Credit Facilities
2015 Credit Facility
On March 31, 2015, the Operating Partnership entered into the Credit Agreement that 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.
During the quarter ended June 30, 2015, the 2015 Credit Facility bore interest at LIBOR plus 1.70% based on the Company's leverage and incurred an unused fee of 0.25%. 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 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.
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 its 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 $3.7 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the 2015 Credit Facility. As of June 30, 2015, the unamortized deferred financing costs relating to the 2015 Credit Facility was $3.5 million and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.

As of June 30, 2015, $20.0 million of borrowings were outstanding, $18.0 million of letters of credit were issued and $562.0 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 June 30, 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 leverage, 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 June 30, 2015, the Line of Credit was undrawn and had $40.0 million of borrowing capacity available. 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 June 30, 2015, the Operating Partnership and, if applicable, the special purpose entity were in compliance with these financial covenants.

17


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

Master Trust Notes

The Company has access to an asset-backed securitization platform, the Spirit Master Funding Program, to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. The Spirit Master Funding Program consists of two separate securitization trusts, Master Trust 2013 and Master Trust 2014, each of which have one or multiple bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. Each issuer is an indirect wholly-owned special purpose entity subsidiary of the Corporation.
The Master Trust Notes are summarized below:
 
Effective
Interest Rates
(1)
 
Stated
Rates (2)
 
Remaining Term
 
June 30,
2015
 
December 31,
2014
 
 
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A1
6.0
%
 
5.1
%
 
5.0
 
$
70,336

 
$
75,489

Series 2014-1 Class A2
6.0
%
 
5.4
%
 
5.1
 
253,300

 
253,300

Series 2014-2
6.1
%
 
5.8
%
 
5.7
 
231,294

 
232,867

Series 2014-3
6.0
%
 
5.7
%
 
6.7
 
312,494

 
312,705

Series 2014-4 Class A1
3.9
%
 
3.5
%
 
4.6
 
150,000

 
150,000

Series 2014-4 Class A2
4.8
%
 
4.6
%
 
14.6
 
360,000

 
360,000

Total Master Trust 2014 notes
5.5
%
 
5.1
%
 
8.0
 
1,377,424

 
1,384,361

Series 2013-1 Class A
4.6
%
 
3.9
%
 
3.5
 
125,000

 
125,000

Series 2013-2 Class A
5.6
%
 
5.3
%
 
8.5
 
198,947

 
201,019

Total Master Trust 2013 notes
5.2
%
 
4.7
%
 
6.5
 
323,947

 
326,019

Total Master Trust Notes
 
 
 
 
 
 
1,701,371

 
1,710,380

Debt discount, net
 
 
 
 
 
 
(24,921
)
 
(26,903
)
Deferred financing costs, net
 
 
 
 
 
 
(20,809
)
 
(22,113
)
Total Master Trust Notes, net
 
 
 
 
 
 
$
1,655,641

 
$
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 June 30, 2015 based on the average principal balance outstanding during the period.
(2) Represents the individual series stated interest rate as of June 30, 2015 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of June 30, 2015.
 
As of June 30, 2015, the Master Trust 2014 notes were secured by 957 owned and financed properties issued by five indirect wholly-owned subsidiaries of the Corporation. The notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within this trust. As of June 30, 2015, the Master Trust 2013 notes were secured by 315 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Corporation.

CMBS

As of June 30, 2015, indirect wholly-owned special purpose entity subsidiaries of the Corporation were borrowers under 153 fixed and 9 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 June 30, 2015 for these fixed-rate notes, excluding the defaulted loans, ranged from 3.90% to 8.39%. The stated interest rates as of June 30, 2015 for the variable-rate notes ranged from 3.18% to 3.59%. As of June 30, 2015, these fixed and variable-rate loans were secured by 475 and 86 properties, respectively. The Company entered into interest rate swaps that effectively fixed the interest rates at approximately 5.2% on a significant portion of the variable-rate debt (see Note 5). As of June 30, 2015 and December 31, 2014, the unamortized deferred financing costs relating to certain of the CMBS loans

18


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

were $5.8 million and $6.4 million, respectively. The deferred financing costs are being amortized to expense over the term of the respective loans.

As of June 30, 2015, certain borrowers were in default under the loan agreements relating to four separate CMBS fixed-rate loans where the 10 properties securing the respective loans are no longer generating sufficient revenue to pay the scheduled debt service. The default interest rate on these loans was between 9.67% 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 June 30, 2015, the aggregate principal balance under the defaulted CMBS loans was $79.0 million, which includes $5.7 million of interest added to principal. In addition, approximately $12.1 million of lender controlled reserves, within restricted cash, are being held in connection with these loans that may be applied to reduce amounts owed. During the three months ended June 30, 2015, defaulted loan balances aggregating $25.4 million, which included $0.4 million of capitalized interest, were retired upon the disposition of 5 properties and the application of $3.6 million of lender reserves securing these defaulted loans. One of the properties disposed was surrendered to the lender pursuant to a consensual foreclosure and release of the debt. The remaining four properties were sold by the Company to third parties pursuant to an amendment to the loan agreement, which provided for a specified reduction in principal balance associated with the sale of those individual properties.

Convertible Notes

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

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

In connection with the issuance of the Convertible Notes, the Company recorded a discount of $56.7 million, which represents the estimated value of the embedded conversion feature for each of the Convertible Notes. The discount is being amortized to interest expense using the effective interest method over the term of each of the 2019 Notes and 2021 Notes. As of June 30, 2015 and December 31, 2014, the unamortized discount was $47.2 million and $51.5 million, respectively. The discount is shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature is recorded in capital in excess of par value in the accompanying consolidated balance 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 June 30, 2015 and December 31, 2014, the unamortized deferred financing costs relating to the Convertible Notes was $16.2 million and $17.8 million, respectively.


19


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

Debt Extinguishment

During the six months ended June 30, 2015, the Company extinguished a total of $336.8 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 5.64% and terminated the 2013 Credit Facility. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $2.1 million. The gain was primarily attributable to the write-off of net debt premiums and the reduction of $17.5 million of debt using net sales proceeds of $14.0 million from the sale of four properties securing a portion of a defaulted CMBS note, partially offset by defeasance costs.

During the six months ended June 30, 2014, the Company extinguished a total of $509.8 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.59% and redeemed $18.0 million of net-lease mortgage notes that were not tendered in connection with the Exchange Offer. As a result of these transactions, the Company recognized a loss on debt extinguishment during the six months ended June 30, 2014 of approximately $64.7 million primarily from costs incurred related to the defeasance of the Shopko indebtedness.

Debt Maturities

As of June 30, 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)
$
14,127

 
$
95,051

 
$
109,178

2016
28,170

 
273,059

 
301,229

2017
27,952

 
797,827

 
825,779

2018
42,297

 
244,537

 
286,834

2019
44,520

 
472,000

 
516,520

Thereafter
289,321

 
1,764,001

 
2,053,322

Total
$
446,387

 
$
3,646,475

 
$
4,092,862

(1) The balloon payment balance in 2015 includes $79.0 million, including $5.7 million of capitalized interest, for the acceleration of principal payable following an event of default under four separate non-recourse CMBS loans with stated maturities in 2015 and 2017 of $25.3 million and $53.7 million, respectively.


20


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Interest expense – Revolving Credit Facilities (1)
$
586

 
$
1,100

 
$
1,389

 
$
1,820

Interest expense – mortgages and notes payable
46,863

 
50,778

 
95,271

 
104,374

Interest expense – Convertible Notes
6,128

 
2,871

 
12,255

 
2,871

Interest expense – other

 

 

 
6

Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of deferred financing costs
1,901

 
1,324

 
3,973

 
2,297

Amortization of net losses related to interest rate swaps
26

 
33

 
54

 
66

Amortization of debt (premium)/discount
663

 
(114
)
 
1,139

 
(1,043
)
Total interest expense
$
56,167

 
$
55,992

 
$
114,081

 
$
110,391

(1) Includes interest expense associated with non-utilization fees of approximately $0.4 million and $0.3 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $0.8 million and $0.6 million for the six months ended June 30, 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. Assessments of hedge effectiveness are performed quarterly using regression analysis and the measurement of hedge ineffectiveness is based on the hypothetical derivative method. The effective portion of changes in fair value are recorded in AOCL and subsequently reclassified to earnings when the hedged transactions affect earnings. The ineffective portion is recorded immediately in earnings in general and administrative expenses.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings. As of June 30, 2015 and December 31, 2014, there were no termination events or events of default related to the interest rate swaps.

21


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

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
 
June 30,
2015
 
December 31,
2014
Interest Rate Swap (1)
 
Accounts payable, accrued expenses and other liabilities
 
$
10,741

 
4.62
%
 
06/28/12
 
07/06/17
 
$

 
$
(46
)
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
6,587

 
5.75
%
 
07/17/13
 
03/01/16
 
(108
)
 
(180
)
Interest Rate Swap (1)
 
Accounts payable, accrued expenses and other liabilities
 
$
32,400

 
3.15
%
 
07/17/13
 
09/05/15
 

 
(93
)
Interest Rate Swaps(2)
 
Accounts payable, accrued expenses and other liabilities
 
$
61,758

 
5.14
%
 
01/02/14
 
12/13/18
 
(1,044
)
 
(803
)
 
 
 
 
 
 
 
 
 
 
 
 
$
(1,152
)
 
$
(1,122
)
(1) During June 2015, the Company terminated certain interest rate swap agreements upon the repayment of two CMBS variable-rate loans. The Company paid $0.1 million to terminate these swaps and recognized a loss of $0.1 million, which is included in general and administrative expenses.
(2) 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.

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 six months ended June 30, 2015 and 2014, respectively (in thousands):
 
 
Amount of Gain or (Loss) Recognized
in AOCL on Derivative
(Effective Portion)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Derivatives in Cash Flow Hedging Relationships
 
2015
 
2014
 
2015
 
2014
Interest rate swaps
 
$
40

 
$
(875
)
 
$
(811
)
 
$
(1,277
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Loss Reclassified from
AOCL into Operations
(Effective Portion)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Location of Loss Reclassified from AOCL into Operations
 
2015
 
2014
 
2015
 
2014
Interest expense
 
$
(305
)
 
$
(331
)
 
$
(621
)
 
$
(654
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain or (Loss) Recognized in
Operations on Derivative
(Ineffective Portion) (1)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Location of Loss Recognized in Operations on Derivatives
 
2015
 
2014
 
2015
 
2014
General and administrative expense
 
$
(75
)
 
$
(3
)
 
$
(78
)
 
$
(3
)
(1) Three months and six months ended June 30, 2015 includes a loss of $76.0 thousand that was reclassified from accumulated other comprehensive loss in the balance sheet resulting from hedged transactions that were no longer probable of occurring as the swaps were terminated prior to their respective maturity dates.
Approximately $0.9 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.


22


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

Note 6. Stockholders’ Equity

Issuance of Common Stock

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 sold pursuant to the underwriter’s option to purchase additional shares. Gross proceeds raised were approximately $272.6 million; net proceeds were approximately $268.8 million after deducting the underwriting discounts and offering costs paid by the Company. The 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 (including additional repayments of borrowings outstanding from time to time under the Revolving Credit Facilities).

ATM Program

During the six months ended June 30, 2015, the Corporation sold 6.6 million shares of its common stock under its ATM Program, at a weighted average share price of $12.07, for aggregate gross proceeds of $79.8 million and aggregate net proceeds of $78.5 million after payment of commissions and other issuance costs of $1.3 million. The net proceeds were used to fund acquisitions, repay borrowings under the Revolving Credit Facilities and for general corporate purposes. During the three months ended June 30, 2015, no shares were sold under our ATM program. As of June 30, 2015, $103.6 million in gross proceeds capacity remained available under the ATM Program.
Dividends Declared
For the six months ended June 30, 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
June 15, 2015
 
$
0.17000

 
June 30, 2015
 
$
75,054

 
July 15, 2015
(1) Net of estimated forfeitures of approximately $3,000 and $8,000 during the three and six months ended June 30, 2015, respectively, 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 June 15, 2015 was paid on July 15, 2015 and is included in accounts payable, accrued expenses and other liabilities as of June 30, 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 June 30, 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 June 30, 2015, the Company had commitments totaling $75.8 million, of which $68.1 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

23


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
June 30, 2015
(Unaudited)


available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements.

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
June 30, 2015
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(1,152
)
 
$

 
$
(1,152
)
 
$

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
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
$
32,671

 
$
(3,207
)
 
$

 
$

 
$
35,878

 
$
(26,110
)
Lease intangible assets
2,303

 

 

 

 
2,303

 
(1,493
)
Long-lived assets held for sale
42,047

 
(1,096
)
 

 

 
43,143

 
(7,821
)
 
 
 
 
 
 
 
 
 
 
 
$
(35,424
)
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 six months ended June 30, 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

24


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

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 liabilities are short-term in duration and are recorded at cost, which approximates fair value, on the accompanying consolidated balance sheets.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair values. The fair values of financial instruments are estimates based upon market conditions and perceived risks at June 30, 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): 
 
June 30, 2015
 
December 31, 2014
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Loans receivable, net
$
109,377

 
$
115,735

 
$
109,425

 
$
115,747

Revolving Credit Facilities, net (1)
20,000

 
19,405

 
15,114

 
15,254

Mortgages and notes payable, net (2)
3,291,679

 
3,467,272

 
3,629,998

 
3,899,950

Convertible Notes, net (2)
684,066

 
700,170

 
678,190

 
729,231

(1) As of December 31, 2014, only amounts under the Line of Credit were outstanding and net of unamortized deferred financing costs. As of June 30, 2015, only amounts under the 2015 Credit Facility were outstanding.
(2) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.

Note 9. Significant Credit and Revenue Concentration

As of June 30, 2015 and December 31, 2014, the Company’s real estate investments are leased to 455 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 Normalized Revenue. Total rental revenues from properties leased to Shopko for the three months ended June 30, 2015 and 2014, contributed 10.4% and 13.8% of the Company's Normalized Revenue from continuing operations, respectively. No other tenant contributed 5% or more of the Company’s Normalized Revenue during any of the periods presented. As of June 30, 2015 and December 31, 2014, the Company's net investment in Shopko properties represents approximately 8.1% and 10.7%, respectively, of the Company’s total assets and the Company's real estate investment in Shopko represents approximately 10.4% and 13.1%, respectively, of the Company's total real estate 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)
June 30, 2015
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rent
$
25

 
$
309

 
$
335

 
$
617

Non-cash rent

 
2

 

 
(27
)
Other
3

 
33

 
16

 
2,950

Total revenues
28

 
344

 
351

 
3,540

Expenses:
 
 
 
 
 
 
 
General and administrative
1

 
9

 
2

 
12

Property costs
123

 
56

 
184

 
195

Impairments

 

 
34

 

Total expenses
124

 
65

 
220

 
207

Income from discontinued operations
(96
)
 
279

 
131

 
3,333

Gain on dispositions of assets
590

 
92

 
590

 
85

Total discontinued operations
$
494

 
$
371

 
$
721

 
$
3,418

Number of properties disposed of during period
2

 
3

 
2

 
5


Note 11. Supplemental Cash Flow Information
The following table presents the supplemental cash flow disclosures (in thousands):
 
Six Months Ended 
 June 30,
 
2015
 
2014
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Reduction of debt through sale of certain real estate properties
$
7,155

 
$

Reduction of debt in exchange for collateral assets
7,904

 

Net real estate and other collateral assets surrendered to lender
7,384

 

Accrued interest capitalized to principal (1)
3,551

 

Accrued performance share dividend rights
288

 
280

Accrued equity offering costs

 
250

Accrued deferred financing costs

 
281

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

Note 12. Incentive Award Plan
As of June 30, 2015, 1.9 million shares remained available for award under the Incentive Award Plan.
Restricted Shares of Common Stock
During the six months ended June 30, 2015, the Company granted 0.5 million restricted shares under the Incentive Award Plan to certain officers and employees. The Company recorded $5.5 million in deferred compensation associated with these grants, which will be recognized in expense over the service period of the awards. As of June 30, 2015, there were approximately 1.3 million unvested restricted shares outstanding.

26


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
June 30, 2015
(Unaudited)

Performance Share Awards
During the six months ended June 30, 2015, the Compensation Committee of the Board of Directors approved an initial target grant of 279,199 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 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 $4.1 million in compensation expense on a straight-line basis over the requisite service period associated with this market-based grant.
As of June 30, 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 0.7 million shares, in the aggregate. In addition, approximately $0.9 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 June 30, 2015 and 2014, the Company recognized $3.5 million and $3.0 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations. For the six months ended June 30, 2015 and 2014, the Company recognized $7.3 million and $5.5 million, respectively, in stock-based compensation expense.
As of June 30, 2015, the remaining unamortized stock-based compensation expense, including amounts relating to the performance share awards, totaled $14.7 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)
June 30, 2015
(Unaudited)

Note 13. Income (Loss) Per Share
Income (loss) per share has been computed using the two-class method. Income (loss) 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 shares of common stock outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both shares of common stock and participating securities based on the weighted average shares outstanding during the period. Classification of the Company's unvested restricted stock, which contain rights to receive 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 (loss) 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 (loss) per share (dollars in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Basic and diluted income (loss):
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(2,293
)
 
$
(88,902
)
 
$
11,468

 
$
(79,432
)
Gain (loss) on disposition of assets
62,690

 
(1,290
)
 
74,026

 
432

Less: income attributable to unvested restricted stock
(225
)
 
(334
)
 
(434
)
 
(667
)
Income (loss) used in basic and diluted income (loss) per share from continuing operations
60,172

 
(90,526
)
 
85,060

 
(79,667
)
Income from discontinued operations
494