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Section 1: 10-Q (10-Q)

10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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 2, 2016, there were 479,655,830 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, 2016 (Unaudited) and December 31, 2015
Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 (Unaudited)
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (Unaudited)
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2016 (Unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (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
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
CAM
Tenant Common Area Maintenance costs
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, as amended on November 3, 2015
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FFO
Funds From Operations
GAAP
Generally Accepted Accounting Principles in the United States
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
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



Definitions:
 
Normalized Rental Revenue
Total rental revenues and earned income from direct financing leases from our owned properties during the final month of the reporting period normalized to exclude total rental revenues and earned income from direct financing leases from our owned properties during the final month of the reporting period contributed by properties sold during that period
Normalized Revenue
Total revenues normalized to exclude total revenues contributed by properties sold during that 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
Term Loan
$325.0 million senior unsecured term facility pursuant to the Term Loan Agreement as amended from time to time
Term Loan Agreement
Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015
Total Debt
Principal debt outstanding before discounts, premiums or deferred financing costs
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,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets



Investments:



Real estate investments:



Land and improvements
$
2,679,409


$
2,710,888

Buildings and improvements
4,767,151


4,816,481

Total real estate investments
7,446,560


7,527,369

Less: accumulated depreciation
(891,909
)

(860,954
)

6,554,651


6,666,415

Loans receivable, net
101,602


104,003

Intangible lease assets, net
509,089


526,718

Real estate assets under direct financing leases, net
41,499


44,324

Real estate assets held for sale, net
115,423


85,145

Net investments
7,322,264


7,426,605

Cash and cash equivalents
8,992


21,790

Deferred costs and other assets, net
173,295


179,180

Goodwill
291,421


291,421

Total assets
$
7,795,972


$
7,918,996

Liabilities and stockholders’ equity



Liabilities:



Revolving Credit Facilities
$
24,000


$

Term Loan, net
332,019

 
322,902

Mortgages and notes payable, net
2,969,893


3,079,787

Convertible Notes, net
693,173


690,098

Total debt, net
4,019,085


4,092,787

Intangible lease liabilities, net
187,211


193,903

Accounts payable, accrued expenses and other liabilities
136,743


142,475

Total liabilities
4,343,039


4,429,165

Commitments and contingencies (see Note 7)





Stockholders’ equity:



Common stock, $0.01 par value, 750,000,000 shares authorized: 443,435,556 and 441,819,964 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
4,434


4,418

Capital in excess of par value
4,737,534


4,721,323

Accumulated deficit
(1,287,386
)

(1,234,882
)
Accumulated other comprehensive loss
(1,649
)

(1,028
)
Total stockholders’ equity
3,452,933


3,489,831

Total liabilities and stockholders’ equity
$
7,795,972


$
7,918,996

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,
 
2016
 
2015
Revenues:
 
 
 
Rentals
$
161,819

 
$
154,518

Interest income on loans receivable
1,659

 
1,722

Earned income from direct financing leases
724

 
795

Tenant reimbursement income
3,824

 
4,631

Other income and interest from real estate transactions
331

 
621

Total revenues
168,357

 
162,287

Expenses:
 
 
 
General and administrative
11,649

 
12,600

Restructuring charges
649

 

Property costs
7,327

 
7,407

Real estate acquisition costs
57

 
1,093

Interest
53,017

 
57,914

Depreciation and amortization
64,664

 
66,296

Impairments
12,131

 
1,624

Total expenses
149,494

 
146,934

Income from continuing operations before other expense and income tax expense
18,863

 
15,353

Other expense:
 
 
 
Loss on debt extinguishment
(5,341
)
 
(1,230
)
Total other expense
(5,341
)
 
(1,230
)
Income from continuing operations before income tax expense
13,522

 
14,123

Income tax expense
(81
)
 
(362
)
Income from continuing operations
13,441

 
13,761

Discontinued operations:
 
 
 
Income from discontinued operations

 
227

Income before gain on disposition of assets
13,441

 
13,988

Gain on disposition of assets
12,562

 
11,336

Net income attributable to common stockholders
$
26,003

 
$
25,324

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

 
$
0.06

Discontinued operations

 

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

 
$
0.06

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

 
$
0.06

Discontinued operations

 

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

 
$
0.06

Weighted average shares of common stock outstanding:
 
 
 
Basic
441,365,927

 
411,017,895

Diluted
441,368,407

 
411,622,434

Dividends declared per common share issued
$
0.17500

 
$
0.17000

See accompanying notes.

6


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

 
Three Months Ended 
 March 31,
 
2016
 
2015
Net income attributable to common stockholders
$
26,003

 
$
25,324

Other comprehensive income (loss):
 
 
 
Change in net unrealized losses on cash flow hedges
(856
)
 
(852
)
Net cash flow hedge losses reclassified to operations
235

 
317

Total comprehensive income
$
25,382

 
$
24,789

See accompanying notes.


7


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

 
Common Stock
 
 
 
 
 
 
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
AOCL
 
Total
Stockholders’
Equity
Balances, December 31, 2015
441,819,964

 
$
4,418

 
$
4,721,323

 
$
(1,234,882
)
 
$
(1,028
)
 
$
3,489,831

Net income

 

 

 
26,003

 

 
26,003

Other comprehensive loss

 

 

 

 
(621
)
 
(621
)
Dividends declared on common stock

 

 

 
(77,596
)
 

 
(77,596
)
Repurchase of shares of common stock
(71,658
)
 
(1
)
 

 
(737
)
 

 
(738
)
Issuance of shares of common stock, net
1,282,560

 
13

 
13,910

 

 

 
13,923

Stock-based compensation, net
404,690

 
4

 
2,301

 
(174
)
 

 
2,131

Balances, March 31, 2016
443,435,556

 
$
4,434

 
$
4,737,534

 
$
(1,287,386
)
 
$
(1,649
)
 
$
3,452,933

See accompanying notes.

8


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
Three Months Ended 
 March 31,
 
2016
 
2015
Operating activities
 
 
 
Net income attributable to common stockholders
$
26,003

 
$
25,324

Adjustments to reconcile net income attributable to common stockholders to net cash provided by operating activities:
 
 
 
Depreciation and amortization
64,664

 
66,296

Impairments
12,131

 
1,658

Amortization of deferred financing costs
2,166

 
2,072

Derivative amortization and interest rate net settlements
30

 
(28
)
Amortization of debt discounts
760

 
476

Stock-based compensation expense
2,305

 
3,827

Loss on debt extinguishment
5,341

 
1,230

Debt extinguishment costs
(540
)
 
(2,733
)
Gains on dispositions of real estate and other assets, net
(12,562
)
 
(11,336
)
Non-cash revenue
(6,587
)
 
(4,809
)
Other
(14
)
 
(14
)
Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
95

 
(1,938
)
Accounts payable, accrued expenses and other liabilities
(3,085
)
 
(420
)
Accrued restructuring charges
(1,072
)
 

Net cash provided by operating activities
89,635

 
79,605

Investing activities
 
 
 
Acquisitions of real estate
(72,458
)
 
(265,314
)
Capitalized real estate expenditures
(3,552
)
 
(426
)
Collections of principal on loans receivable and real estate assets under direct financing leases
2,151

 
1,452

Proceeds from dispositions of real estate and other assets
89,349

 
71,547

Transfers of net sales proceeds from (to) restricted accounts pursuant to 1031 Exchanges
39,867

 
(6,937
)
Transfers of net sales proceeds (to) from Master Trust Release
(30,578
)
 
43,412

Net cash provided by (used in) investing activities
24,779

 
(156,266
)
Financing activities
 
 
 
Borrowings under Revolving Credit Facilities
60,000

 
345,000

Repayments under Revolving Credit Facilities
(36,000
)
 
(175,101
)
Repayments under mortgages and notes payable
(96,732
)
 
(167,102
)
Borrowings under Term Loan
45,000

 

Repayments under Term Loan
(36,000
)
 

Deferred financing costs
(125
)
 
(3,562
)
Proceeds from issuance of common stock, net of offering costs
13,923

 
78,552

Repurchase of shares of common stock
(738
)
 
(720
)
Dividends paid to equity owners
(77,381
)
 
(70,046
)
Transfers from reserve/escrow deposits with lenders
841

 
1,593

Net cash (used in) provided by financing activities
(127,212
)
 
8,614

Net decrease in cash and cash equivalents
(12,798
)
 
(68,047
)
Cash and cash equivalents, beginning of period
21,790

 
176,181

Cash and cash equivalents, end of period
$
8,992

 
$
108,134

See accompanying notes.

9


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
March 31, 2016
(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 U.S. that is generally leased on a long-term, triple-net basis to tenants operating within predominantly retail, but also office and industrial property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.
The Company’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 March 31, 2016, our undepreciated investment in real estate and loans totaled approximately $8.25 billion, representing investments in 2,610 properties, including properties securing mortgage loans made by the Company. Of this amount, 98.8% consisted of our $8.15 billion investment in real estate, representing ownership of 2,467 properties, and the remaining 1.2% consisted of $101.6 million in commercial mortgage and other loans receivable, primarily secured by the remaining 143 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, 2015.
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 March 31, 2016 and December 31, 2015, net assets totaling $4.38 billion and $4.57 billion, respectively, were held, and net liabilities totaling $3.07 billion and $3.19 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)
March 31, 2016
(Unaudited)

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 $11.8 million and $11.5 million at March 31, 2016 and December 31, 2015, respectively, against accounts receivable balances of $26.9 million and $26.3 million, respectively. Receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
The Company established a reserve for losses of $9.9 million and $12.2 million at March 31, 2016 and December 31, 2015, respectively, against deferred rental revenue receivables of $70.8 million and $68.0 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):
 
March 31,
2016
 
December 31,
2015
Collateral deposits (1)
$
13,903

 
$
14,475

Tenant improvements, repairs, and leasing commissions (2)
8,708

 
8,362

Master Trust Release (3)
42,670

 
12,091

1031 Exchange proceeds, net
2

 
39,869

Loan impounds (4)
1,054

 
1,025

Other (5)
1,178

 
1,823

 
$
67,515

 
$
77,645

(1) Funds held in reserve by lenders which can be applied at their discretion to the repayment of debt (any funds remaining on deposit after the debt is paid in full are released to the borrower).
(2) Deposits held as additional collateral support by lenders 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 scheduled debt service requirements are met.
Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of its assets, the amounts distributed to its stockholders, and the ownership of Company stock. Management believes the Company has qualified and will continue to qualify as a REIT and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Company qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiaries are subject to federal, state, and local taxes, which are not material.

11


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation.
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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies many aspects of accounting for share-based payment transactions under ASC Topic 718, Compensation - Stock Compensation, including income tax consequences, classification of awards as either equity or liability, forfeiture rate calculations and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

Note 3. Investments
Real Estate Investments

As of March 31, 2016, the Company's gross investment in real estate properties and loans totaled approximately $8.25 billion, representing investments in 2,610 properties, including 143 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 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 or becomes vacant. Generally, the Company's 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) increases in CPI over a specified period (typically subject to ceilings) or (b) a fixed percentage.


12


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

During the three months ended March 31, 2016, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:
 
Number of Properties
 
Dollar Amount of Investments
 
Owned (4)
 
Financed
 
Total
 
Owned
 
Financed
 
Total
 
 
 
 
 
 
 
(In Thousands)
Gross balance, December 31, 2015
2,485

 
144

 
2,629

 
$
8,199,571

 
$
104,003

 
$
8,303,574

Acquisitions/improvements (1) (3)
15

 

 
15

 
76,010

 

 
76,010

Dispositions of real estate (2) (3)
(33
)
 

 
(33
)
 
(113,471
)
 

 
(113,471
)
Principal payments and payoffs

 
(1
)
 
(1
)
 

 
(2,121
)
 
(2,121
)
(Impairments)/recoveries

 

 

 
(12,452
)
 
324

 
(12,128
)
Write-off of gross lease intangibles

 

 

 
(1,771
)
 

 
(1,771
)
Loan premium amortization and other

 

 

 
(30
)
 
(604
)
 
(634
)
Gross balance, March 31, 2016
2,467

 
143

 
2,610

 
$
8,147,857

 
$
101,602

 
$
8,249,459

Accumulated depreciation and amortization
 
 
 
 
 
 
(1,116,106
)
 

 
(1,116,106
)
Other non-real estate assets held for sale
 
 
 
 
 
 
1,700

 

 
1,700

Net balance, March 31, 2016
 
 
 
 
 
 
$
7,033,451

 
$
101,602

 
$
7,135,053

(1) Includes investments of $3.1 million in revenue producing capitalized expenditures, as well as $0.4 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 dispositions of real estate was $17.3 million.
(3) During the three months ended March 31, 2016, pursuant to 1031 Exchanges, the Company sold 4 properties for $21.0 million. Of this amount, and including $39.9 million of 2015 proceeds, $60.9 million was used to partially fund 10 property acquisitions.
(4) At March 31, 2016 and December 31, 2015, 31 and 36, respectively, of the Company's properties were vacant and in the Company’s possession; of these vacant properties, 9 and 12, respectively, were held for sale.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases at March 31, 2016 (in thousands):
Remainder of 2016
$
443,714

2017
579,699

2018
565,883

2019
547,960

2020
526,685

Thereafter
3,889,569

Total future minimum rentals
$
6,553,510

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 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)
March 31, 2016
(Unaudited)

Loans Receivable
The following table details loans receivable, net of premium and allowance for loan losses (in thousands):
 
March 31,
2016
 
December 31,
2015
Mortgage loans - principal
$
88,040

 
$
90,096

Mortgage loans - premium
9,382

 
9,986

Mortgages loans, net
97,422

 
100,082

Other note receivables - principal
4,180

 
4,245

Allowance for loan losses

 
(324
)
Other note receivables, net
4,180

 
3,921

Total loans receivable, net
$
101,602

 
$
104,003

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 $3.9 million note is secured by tenant assets and stock and the other is unsecured.
Allowance for Loan Losses

At March 31, 2016, there was no allowance for loan losses compared to an allowance for loan losses on an unsecured note receivable of $0.3 million at December 31, 2015. At March 31, 2016, there were no mortgages or notes receivable on non-accrual status compared to no mortgage loans and one note receivable with a balance of $0.3 million on non-accrual status at December 31, 2015.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
March 31,
2016
 
December 31,
2015
In-place leases
$
643,725

 
$
649,182

Above-market leases
96,490

 
98,056

Less: accumulated amortization
(231,126
)
 
(220,520
)
Intangible lease assets, net
$
509,089

 
$
526,718

 
 
 
 
Below-market leases
$
234,557

 
$
238,039

Less: accumulated amortization
(47,346
)
 
(44,136
)
Intangible lease liabilities, net
$
187,211

 
$
193,903

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases were $1.5 million and $1.4 million for the three months ended March 31, 2016 and 2015, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $11.9 million and $12.8 million for the three months ended March 31, 2016 and 2015, respectively.

14


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

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,
2016
 
December 31,
2015
Minimum lease payments receivable
$
11,517

 
$
12,702

Estimated residual value of leased assets
41,091

 
43,789

Unearned income
(11,109
)
 
(12,167
)
Real estate assets under direct financing leases, net
$
41,499

 
$
44,324

Real Estate Assets Held for Sale
The following table shows the activity in real estate assets held for sale for the three months ended March 31, 2016 (dollars in thousands):
 
Number of Properties
 
Carrying
Value
Balance, December 31, 2015
36

 
$
85,145

Transfers from real estate investments
20

 
55,995

Sales
(14
)
 
(25,717
)
Balance, March 31, 2016
42

 
$
115,423

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,
 
2016
 
2015
Real estate and intangible asset impairment
$
12,143

 
$
1,043

Write-off of lease intangibles due to lease terminations, net
309

 
512

Loans receivable recovery
(324
)
 

Total impairments from real estate investment net assets
12,128

 
1,555

Other impairment
3

 
103

Total impairment loss in continuing and discontinued operations
$
12,131

 
$
1,658



15


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

Note 4. Debt
The Company's debt is summarized below:
 
Weighted Average Effective
Interest Rates
(1)
 
Weighted Average
Stated
Rates (2)
 
Weighted Average Maturity (3)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facilities
NM

 
4.20
%
(6) 
3.0
 
$
24,000

 
$

Term Loan
2.16
%
 
2.04
%
 
2.6
 
334,000

 
325,000

Master Trust Notes
5.59
%
 
5.03
%
 
7.0
 
1,687,353

 
1,692,094

CMBS - fixed-rate
5.34
%
 
5.81
%
 
2.6
 
1,255,960

 
1,360,215

CMBS - variable-rate (4)
2.95
%
 
3.84
%
 
2.7
 
61,758

 
61,758

Convertible Notes
5.32
%
 
3.28
%
 
4.0
 
747,500

 
747,500

Total debt
5.18
%
 
4.69
%
 
4.7
 
4,110,571

 
4,186,567

Debt discount, net
 
 
 
 
 
(51,707
)
 
(52,203
)
Deferred financing costs, net (5)
 
 
 
 
 
 
(39,779
)
 
(41,577
)
Total debt, net
 
 
 
 
 
 
$
4,019,085

 
$
4,092,787

(1) The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs and non-utilization fees, where applicable, calculated for the three months ended March 31, 2016 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, 2016, 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, 2016.
(3) Represents the weighted average maturity based on the outstanding principal balance as of March 31, 2016.
(4) Variable-rate notes are predominantly hedged with interest rate swaps (see Note 5).
(5) The Company records deferred financing costs for its 2015 Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.
(6) At the end of the first quarter 2016, the Company borrowed $24.0 million on short notice incurring interest charges at a higher base rate (prime rate) plus an applicable margin. These borrowings were repaid within 5 business days.
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) and 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. On November 3, 2015, the Company entered into a first amendment to the Credit Agreement. The amendment conforms certain of the terms and covenants to those in the Term Loan Agreement, including limiting the requirement of subsidiary guaranties to material subsidiaries (as defined) meeting certain conditions. At March 31, 2016, there were no subsidiaries meeting this requirement.
Borrowings bear interest at either a specified base rate or LIBOR plus an applicable margin, at the Operating Partnership's option. As of March 31, 2016, the 2015 Credit Facility bore interest at LIBOR plus 1.70% based on the Company's leverage and incurred non-utilization fees of 0.25% per annum. Per the amendment, the Operating Partnership’s election to change the grid pricing from leverage based to credit rating based pricing will initially require at least two credit ratings of BBB- or better from S&P or Fitch or Baa3 or better from Moody’s. 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 or a specified base rate plus 0.0% to 0.55% and requires a facility fee in an amount equal to the aggregate revolving credit commitments

16


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

(whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum, in each case depending on the Corporation's credit rating.
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 material subsidiaries that meet certain conditions (as defined in the Credit Agreement). 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 $3.9 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the 2015 Credit Facility. As of March 31, 2016 and December 31, 2015, the unamortized deferred financing costs relating to the 2015 Credit Facility were $2.9 million and $3.2 million, respectively, and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.

As of March 31, 2016, $24.0 million of borrowings were outstanding, $8.3 million of letters of credit were issued and $567.7 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, 2016, 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 had access to a $40.0 million secured revolving line of credit, which expired on March 27, 2016.

Term Loan

On November 3, 2015, the Company entered into a Term Loan Agreement among the Operating Partnership, as borrower, the Company as guarantor and the lenders that are parties thereto. The Term Loan Agreement provides for a $325.0 million senior unsecured term facility that has an initial maturity date of November 2, 2018, which may be extended at the Company's option pursuant to two one-year extension options, subject to the satisfaction of certain conditions and payment of an extension fee. In addition, an accordion feature allows the facility to be increased to up to $600.0 million, subject to obtaining additional lender commitments. During the fourth quarter of 2015, upon obtaining additional lender commitments, the Company increased the term facility from $325.0 million to $370.0 million. Borrowings may be repaid without premium or penalty, and may be reborrowed within 30 days up to the then available loan commitment. Borrowings bear interest at either a specified base rate or LIBOR plus a margin, at the Operating Partnership’s option. As of March 31, 2016, the Term Loan bore interest at LIBOR plus 1.60%.

Initially, borrowings under the Term Loan bear interest at either LIBOR plus 1.35% to 1.80% per annum or a specified base rate plus 0.35% to 0.80% per annum. Initially, the applicable margin is determined based upon the Corporation’s leverage ratio. If the Corporation obtains at least two credit ratings on its senior unsecured long-term indebtedness of BBB- from S&P or Fitch, Inc. or Baa3 from Moody's, the Operating Partnership may make an irrevocable election to have the margin based upon the Corporation's credit ratings, in which case borrowings under the Term Loan will bear interest at either LIBOR plus 0.90% to 1.75% per annum or a specified base rate plus 0.0% to 0.75% per annum, in each case depending on the Corporation’s credit ratings.


17


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

The Operating Partnership may voluntarily prepay the Term Loan, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees. Payment of the Term Loan is unconditionally guaranteed by the Corporation and, under certain circumstances, by one or more material subsidiaries (as defined in the Term Loan Agreement) of the Corporation. The obligations of the Corporation and any guarantor under the Term Loan are full recourse to the Corporation and each guarantor.

As a result of entering into the Term Loan, the Company incurred origination costs of $2.3 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Term Loan. As of March 31, 2016 and December 31, 2015, the unamortized deferred financing costs relating to the Term Loan were $2.0 million and $2.1 million, respectively, and recorded net against the principal balance of the Term Loan on the accompanying consolidated balance sheets.
As of March 31, 2016, $334.0 million of borrowings were outstanding and $36.0 million of borrowing capacity was available under the Term Loan. The Operating Partnership's ability to borrow under the Term Loan is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. The Corporation has unconditionally guaranteed all obligations of the Operating Partnership under the Term Loan Agreement. As of March 31, 2016, the Corporation and the Operating Partnership were in compliance with these financial covenants.
Master Trust Notes

The Company has access to an asset-backed securitization platform, the Spirit Master Funding Program, to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. The Spirit Master Funding Program consists of two separate securitization trusts, Master Trust 2013 and Master Trust 2014, each of which have one or multiple bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. Each issuer is an indirect wholly-owned special purpose entity of the Corporation.
The Master Trust Notes are summarized below:
 
Stated
Rates (1)
 
Maturity
 
March 31,
2016
 
December 31,
2015
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A1
5.1
%
 
4.2
 
$
62,312

 
$
65,027

Series 2014-1 Class A2
5.4
%
 
4.3
 
253,300

 
253,300

Series 2014-2
5.8
%
 
5.0
 
228,845

 
229,674

Series 2014-3
5.7
%
 
6.0
 
312,164

 
312,276

Series 2014-4 Class A1
3.5
%
 
3.8
 
150,000

 
150,000

Series 2014-4 Class A2
4.6
%
 
13.8
 
360,000

 
360,000

Total Master Trust 2014 notes
5.1
%
 
7.2
 
1,366,621

 
1,370,277

Series 2013-1 Class A
3.9
%
 
2.7
 
125,000

 
125,000

Series 2013-2 Class A
5.3
%
 
7.7
 
195,732

 
196,817

Total Master Trust 2013 notes
4.7
%
 
5.8
 
320,732

 
321,817

Total Master Trust Notes
 
 
 
 
1,687,353

 
1,692,094

Debt discount, net
 
 
 
 
(21,890
)
 
(22,909
)
Deferred financing costs, net
 
 
 
 
(18,644
)
 
(19,345
)
Total Master Trust Notes, net
 
 
 
 
$
1,646,819

 
$
1,649,840

(1) Represents the individual series stated interest rate as of March 31, 2016 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of March 31, 2016.
 
As of March 31, 2016, the Master Trust 2014 notes were secured by 929 owned and financed properties issued by five indirect wholly-owned subsidiaries of the Corporation. The notes issued under Master Trust 2014 are cross-

18


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

collateralized by the assets of all issuers within this trust. As of March 31, 2016, the Master Trust 2013 notes were secured by 307 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Corporation.

CMBS

As of March 31, 2016, indirect wholly-owned special purpose entity subsidiaries of the Corporation were borrowers under 133 fixed and 8 variable-rate non-recourse loans, excluding the defaulted 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, 2016 for the fixed-rate notes, excluding the defaulted loans, ranged from 3.90% to 6.62% with a weighted average stated interest rate of 5.81%, and the weighted average stated interest rate for the variable-rate notes was 3.84%. As of March 31, 2016, these fixed and variable-rate loans were secured by 377 and 83 properties, respectively. The Company entered into interest rate swaps that effectively fixed the interest rates at approximately 5.14% on the variable-rate loans (see Note 5). As of March 31, 2016 and December 31, 2015, the unamortized deferred financing costs associated with the CMBS loans were $5.3 million and $5.5 million, respectively, and recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets. The deferred financing costs are being amortized to interest expense over the term of the respective loans.

As of March 31, 2016, certain borrowers were in default under the loan agreements relating to four separate CMBS fixed-rate loans where the eight properties securing the respective loans were no longer generating sufficient revenue to pay the scheduled debt service. The default interest rate on these loans was between 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 March 31, 2016, the aggregate principal balance under the defaulted CMBS loans was $69.1 million, which includes $9.5 million of interest added to principal. In addition, approximately $12.5 million of lender controlled restricted cash is being held in connection with these loans that may be applied to reduce amounts owed.

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 March 31, 2016 and December 31, 2015, the unamortized discount was $40.5 million and $42.7 million, respectively. The discount is shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature is recorded in capital in excess of par value in the accompanying consolidated balance sheets, net of financing transaction costs.

In connection with the offering, the Company also incurred $19.6 million in deferred financing costs. This amount has been allocated on a pro-rata basis to each of the Convertible Notes and is being amortized to interest expense over the term of each note. As of March 31, 2016 and December 31, 2015, the unamortized deferred financing costs relating to the Convertible Notes were $13.9 million and $14.7 million, respectively, and recorded net against the Convertible Notes principal balance on the accompanying consolidated balance sheets.


19


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

Debt Extinguishment

During the three months ended March 31, 2016, the Company extinguished a total of $103.8 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.72%. As a result of these transactions, the Company recognized a net loss on debt extinguishment of approximately $5.3 million.

During the three months 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, 2016, scheduled debt maturities of the Company’s Revolving Credit Facilities, Term Loan, mortgages and notes payable and Convertible Notes, including balloon payments, are as follows (in thousands):
 
Scheduled
Principal
 
Balloon
Payment
 
Total
Remainder of 2016 (1)
$
19,724

 
$
167,830

 
$
187,554

2017
27,343

 
701,829

 
729,172

2018
42,115

 
578,537

 
620,652

2019
44,325

 
476,000

 
520,325

2020
39,096

 
413,206

 
452,302

Thereafter
249,792

 
1,350,774

 
1,600,566

Total
$
422,395

 
$
3,688,176

 
$
4,110,571

(1) The balloon payment balance in 2016 includes $69.1 million, including $9.5 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 $11.7 million and $57.4 million, respectively.

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,
 
2016
 
2015
Interest expense – Revolving Credit Facilities (1)
$
457

 
$
803

Interest expense – Term Loan
1,747

 

Interest expense – mortgages and notes payable
41,730

 
48,408

Interest expense – Convertible Notes
6,127

 
6,127

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
2,166

 
2,072

Amortization of net losses related to interest rate swaps
30

 
28

Amortization of debt (premium)/discount, net
760

 
476

Total interest expense
$
53,017

 
$
57,914

(1) Includes non-utilization fees of approximately $0.4 million for both the three months ended March 31, 2016 and 2015, respectively.





20


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

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 March 31, 2016 and December 31, 2015, there were no termination events or events of default related to the interest rate swaps.
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,
2016
 
December 31,
2015
Interest Rate Swaps(1)
 
Accounts payable, accrued expenses and other liabilities
 
$
61,758

 
5.14
%
 
01/02/14
 
12/13/18
 
$
(1,585
)
 
$
(934
)
 
 
 
 
 
 
 
 
 
 
 
 
$
(1,585
)
 
$
(934
)
(1) Represents a tranche of eight individual interest rate swap agreements with notional amounts ranging from $7.6 million to $7.9 million. The payment terms, stated interest rate, effective date, and maturity date of these swaps are consistent with the terms of the debt.


21


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(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, 2016 and 2015, respectively (in thousands):
 
 
Amount of Loss Recognized
in AOCL on Derivative
(Effective Portion)
 
 
Three Months Ended 
 March 31,
Derivatives in Cash Flow Hedging Relationships
 
2016
 
2015
Interest rate swaps
 
$
(856
)
 
$
(852
)
 
 
 
 
 
 
 
Amount of Loss Reclassified from
AOCL into Operations
(Effective Portion)
 
 
Three Months Ended 
 March 31,
Location of Loss Reclassified from AOCL into Operations
 
2016
 
2015
Interest expense
 
$
(235
)
 
$
(317
)
 
 
 
 
 
 
 
Amount of Loss Recognized in
Operations on Derivative
(Ineffective Portion)
 
 
Three Months Ended 
 March 31,
Location of Loss Recognized in Operations on Derivatives
 
2016
 
2015
General and administrative expense
 
$

 
$
(4
)
Approximately $0.8 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.

Note 6. Stockholders’ Equity

ATM Program

During the three months ended March 31, 2016, the Corporation sold 1.3 million shares of its common stock under its ATM Program, at a weighted average share price of $11.10, for aggregate gross proceeds of $14.2 million and aggregate net proceeds of $13.9 million after payment of commissions and other issuance costs of $0.3 million. The net proceeds were used to fund acquisitions, repay borrowings under the Revolving Credit Facilities and for general corporate purposes. As of March 31, 2016, $89.3 million in gross proceeds capacity remained available under the ATM Program.

Stock Repurchase Program
In February 2016, the Company's Board of Directors approved a stock repurchase program, which authorizes the Company to purchase up to $200.0 million of its common stock in the open market or through private transactions from time to time over the next 18 months. The stock repurchase program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company's discretion. The Company intends to fund any repurchases with the net proceeds from asset sales, cash flows from operations, existing cash on the balance sheet and other sources. During the three months ended March 31, 2016, no stock was repurchased under the stock repurchase program.

Repurchase of Shares of Common Stock

During the three months ended March 31, 2016, portions of awards of restricted common stock and performance share awards granted to certain of the Company's officers and other employees vested. The vesting of these awards, granted

22


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

pursuant to the Incentive Award Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender 0.1 million shares of common stock valued at $0.7 million, solely to pay the associated minimum statutory tax withholdings during the three months ended March 31, 2016. The Company records its repurchased shares of common stock using the cost method. Shares repurchased are considered retired under Maryland law and the cost of the stock repurchased is recorded as a reduction to common stock and accumulated deficit on the consolidated balance sheets.
Dividends Declared
For the three months ended March 31, 2016, 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 15, 2016
 
$
0.17500

 
March 31, 2016
 
$
77,596

 
April 15, 2016
(1) Net of estimated forfeitures of approximately $5,000 during the three months ended March 31, 2016, 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 15, 2016 was paid on April 15, 2016 and is included in accounts payable, accrued expenses and other liabilities as of March 31, 2016.

Note 7. Commitments and Contingencies
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are typically insured against such claims.

On September 8, 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC, (collectively, the "Debtors") filed petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. At the time of the filing, Haggen Operations Holdings, LLC leased 20 properties on a triple net basis from a subsidiary of the Company under a master lease with initial monthly rents of $1.4 million and an initial lease expiration date of February 28, 2035. Haggen Holdings, LLC is the guarantor of the tenant’s obligations under that master lease. A subsidiary of the Company and the debtors entered into a settlement agreement whereby the subsidiary consented to the partial assumption and partial rejection of the master lease permitting (a) the assumption of nine stores subject to the lease and their assignment to three unaffiliated grocery operators with winning bids in an auction of the respective leaseholds, (b) the rejection of the leasehold with respect to six of the stores and their return to the Company's possession, and (c) the assumption and continued operation by the tenant of five of the stores. Under the settlement agreement, the subsidiary of the Company received an unsecured stipulated damages claim for $21.0 million against each of Haggen Operations Holdings, LLC and Haggen Holdings, LLC, as well as certain agreed upon fees, expenses and cure payments in the bankruptcy. The court approved the settlement agreement in an order entered November 25, 2015. The bankruptcy proceeding remains ongoing, and there is no guaranty that the claims will be paid or otherwise satisfied in full.
As of March 31, 2016, 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, 2016, the Company had commitments totaling $30.1 million, of which $3.0 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 the results of due diligence. Of the $30.1 million of total commitments, $29.8 million is expected to be funded during fiscal year 2016. 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.

23


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements.

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, 2016
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(1,585
)
 
$

 
$
(1,585
)
 
$

December 31, 2015
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(934
)
 
$

 
$
(934
)
 
$

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.

24


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

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, 2016
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
$
6,329

 
$

 
$

 
$

 
$
6,329

 
$
(7,235
)
Lease intangible assets
1,723

 

 

 

 
1,723

 
(1,267
)
Other assets

 

 

 

 

 
324

Long-lived assets held for sale
21,874

 

 

 

 
21,874

 
(3,953
)
 
 
 
 
 
 
 
 
 
 
 
$
(12,131
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
$
60,298

 
$
(3,207
)
 
$

 
$

 
$
63,505

 
$
(51,002
)
Lease intangible assets
3,843

 

 

 

 
3,843

 
(3,825
)
Other assets

 

 

 

 

 
(324
)
Long-lived assets held for sale
15,957

 
(33,563
)
 

 

 
49,520

 
(14,617
)
 
 
 
 
 
 
 
 
 
 
 
$
(69,768
)
(1) Impairment charges are presented for the three months ended March 31, 2016 and for the year ended December 31, 2015.
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 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, 2016 and December 31, 2015. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

25


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

The estimated fair values of the loans receivable, Revolving Credit Facilities, Term Loan, 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, Term Loan, 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, 2016
 
December 31, 2015
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Loans receivable, net
$
101,602

 
$
107,284

 
$
104,003

 
$
110,019

Revolving Credit Facilities
24,000

 
24,430

 

 

Term Loan, net (1)
332,019

 
334,206

 
322,902

 
338,366

Mortgages and notes payable, net (1)
2,969,893

 
3,151,982

 
3,079,787

 
3,220,239

Convertible Notes, net (1)
693,173

 
751,519

 
690,098

 
713,095

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

Note 9. Significant Credit and Revenue Concentration

As of March 31, 2016 and December 31, 2015, the Company’s real estate investments are operated by 435 and 438 tenants, respectively, that operate within retail, office and industrial property types across various industries throughout the U.S. Shopko operates in the general merchandise industry and is the Company’s largest tenant as a percentage of Normalized Revenue. Total rental revenues from properties leased to Shopko for the three months ended March 31, 2016 and 2015, contributed 9.1% and 12.8% of the Company's Normalized Revenue from continuing operations, respectively. No other tenant contributed 4% or more of the Company’s Normalized Revenue during any of the periods presented. As of both March 31, 2016 and December 31, 2015, the Company's net investment in Shopko properties represents approximately 6.9% of the Company’s total assets and the Company's real estate investment in Shopko represents approximately 9.0% of the Company's total real estate investment portfolio.

Note 10. Supplemental Cash Flow Information
The following table presents the supplemental cash flow disclosures (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Reduction of debt through sale of certain real estate properties
$

 
$
3,615

Reduction of debt in exchange for collateral assets
13,631

 

Net real estate and other collateral assets surrendered to lender
19,942

 

Accrued interest capitalized to principal (1)
1,260

 
1,799

Accrued performance share dividend rights
174

 
115

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

Note 11. Incentive Award Plan
As of March 31, 2016, 0.8 million shares remained available for award under the Incentive Award Plan. On March 30, 2016, the Company's Board of Directors adopted, subject to stockholder approval, an amendment and restatement of the Incentive Award Plan, which would increase the number of shares of common stock reserved for issuance thereunder by 5,500,000 shares.

26


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

Restricted Shares of Common Stock
During the three months ended March 31, 2016, the Company granted 0.4 million restricted shares under the Incentive Award Plan to certain executive officers and employees. The Company recorded $3.8 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, 2016, there were approximately 0.8 million unvested restricted shares outstanding.
Performance Share Awards
During the three months ended March 31, 2016, the Board of Directors or committee thereof approved an initial target grant of 310,706 performance shares to executive officers of the Company. The performance period of this grant runs from January 1, 2016 through December 31, 2018. Potential shares of the Corporation's common stock that each participant is eligible to receive is based on the initial target number of shares granted multiplied by a percentage range between 0% and 250%. Grant date fair value was calculated using the Monte Carlo simulation model, which incorporated stock price correlation, projected dividend yields and other variables over the time horizons matching the performance periods. Stock-based compensation expense associated with unvested performance share awards is recognized on a straight-line basis over the minimum required service period, which is generally three years. Based on the grant date fair value, the Corporation expects to recognize $5.0 million in compensation expense on a straight-line basis over the requisite service period associated with this market-based grant.
Approximately $0.3 million and $0.2 million in dividend rights have been accrued for non-vested performance share awards outstanding as of March 31, 2016 and December 31, 2015, respectively. For outstanding non-vested awards at March 31, 2016, 0.6 million shares would have been released based on the Corporation's TSR relative to the specified peer groups through that date. During the three months ended March 31, 2016, 53,533 shares were released at target in connection with qualifying terminations of participants.
Stock-based Compensation Expense
For the three months ended March 31, 2016 and 2015, the Company recognized $2.3 million and $3.8 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, 2016, the remaining unamortized stock-based compensation expense, including amounts relating to the performance share awards, totaled $15.2 million, including $7.4 million related to restricted stock awards and $7.8 million related to performance share awards, which is recognized as the greater of the amount amortized on a straight-line basis over the service period of each applicable award or the amount vested over the vesting periods.


27


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
March 31, 2016
(Unaudited)

Note 12. 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 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 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 net income per share computed using the two-class method (dollars in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Basic and diluted income:
 
 
 
Income from continuing operations
$
13,441

 
$
13,761

Gain on disposition of assets
12,562

 
11,336

Less: income attributable to unvested restricted stock
(127
)
 
(209
)
Income used in basic and diluted income per share from continuing operations
25,876

 
24,888

Income from discontinued operations

 
227

Net income attributable to common stockholders used in basic and diluted income per share
$
25,876

 
$
25,115

 
 
 
 
Basic weighted average shares of common stock outstanding:
 
 
 
Weighted average shares of common stock outstanding
442,033,226

 
412,195,685

Less: unvested weighted average shares of restricted stock
(667,299
)
 
(1,177,790
)
Weighted average shares of common stock outstanding used in basic income per share
441,365,927

 
411,017,895

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

 
$
0.06

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

 
598,015

Stock options
2,480

 
6,524

Weighted average shares of common stock outstanding used in diluted income per share
441,368,407

 
411,622,434

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

 
$
0.06

 
 
 
 
Potentially dilutive shares of common stock
 
 
 
Unvested shares of restricted stock
67,709

 
457,283

Total
67,709

 
457,283

(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.

Note 13. Costs Associated With Restructuring Activities

On November 16, 2015, the Company’s Board of Directors approved the strategic decision to relocate its headquarters from Scottsdale, Arizona to Dallas, Texas. The Company began occupying temporary office space in the new headquarters in the spring of 2016, and the Company anticipates the move will be finalized by the end of 2016. As a result of moving its corporate headquarters, the Company is incurring various restructuring charges, including employee separation and relocation costs. Restructuring charges incurred for the three months ended March 31, 2016 totaled $0.6 million and are included within restructuring charges on the accompanying consolidated statements of operations. To date, the Company has incurred restructuring charges totaling $7.7 million.

The following table presents a reconciliation of the liability attributable to restructuring charges incurred as of March 31, 2016, which is recorded within accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets (in thousands):
 
Employee Separation/Relocation Costs
 
Other Restructuring Costs
 
Total
Beginning balance, as of December 31, 2015
$
5,754

 
$
172

 
$
5,926

Accruals
196

 
453

 
649

Payments
(1,316
)
 
(405
)
 
(1,721
)
Ending balance, as of March 31, 2016
$
4,634

 
$
220

 
$
4,854


The Company currently anticipates to incur total relocation costs of approximately $20.7 million, of which $10.3 million is restructuring, $5.1 million is capitalized costs related to tenant improvements and fixtures for the new corporate headquarters and $5.3 million represents other relocation costs primarily for redundant office space and employee salaries and benefits of departing employees during the transition phase.

Note 14. Subsequent Events

On April 15, 2016, the Company completed an underwritten public offering of 34.5 million shares of its common stock, at $11.15 per share, including 4.5 million shares sold pursuant to the underwriters' option to purchase additional shares. Gross proceeds raised were approximately $384.7 million; net proceeds were approximately $368.9 million after deducting underwriter discounts and offering costs paid by the Company. The net proceeds were primarily used to reduce amounts outstanding under the Term Loan.

During April 2016 and prior to the public offering above, the Corporation sold an additional 1.7 million shares of its common stock under its ATM Program, at a weighted average share price of $11.22, for aggregate gross proceeds of $19.4 million and aggregate net proceeds of $19.1 million after payment of commissions and other issuance costs of $0.3 million. The net proceeds were used to fund acquisitions and for general corporate purposes.

On April 27, 2016, the Company expanded the borrowing capacity under the 2015 Credit Facility from $600.0 million to $800.0 million by partially exercising the accordion feature under the terms of the Credit Agreement.


28



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;
risks related to the relocation of our corporate headquarters to Dallas, Texas;
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.


29



Overview
Spirit Realty Capital, Inc. is a New York Stock Exchange listed company under the ticker symbol "SRC". We are a self-administered and self-managed REIT with in-house capabilities including acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting and capital markets. We primarily invest in single-tenant, operationally essential real estate assets throughout the U.S., which are generally acquired through strategic sale-leaseback transactions and subsequently leased on long-term, triple-net basis to high-quality tenants with business operations within predominantly retail, but also office and industrial property types. Single tenant, operationally essential real estate consists of properties that are generally free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. In support of our primary business of owning and leasing real estate, we have also strategically originated or acquired long-term, commercial mortgage and other loans to provide a range of financing solutions to our tenants.
We generate our revenue primarily by leasing our properties to our tenants. As of March 31, 2016, our undepreciated investment in real estate and loans totaled approximately $8.25 billion, representing investments in 2,610 properties, including properties securing our mortgage loans. Of this amount, 98.8% consisted of investment in real estate, representing ownership of 2,467 properties, and the remaining 1.2% consisted of commercial mortgage and other loans receivable primarily secured by the remaining 143 real properties or other related assets.

Our operations are primarily carried out through the Operating Partnership. OP Holdings, one of our wholly owned subsidiaries, is the sole general partner and owns 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.
As of March 31, 2016, our owned properties were approximately 98.7% 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 10.6 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, 2016, approximately 89% of our single-tenant properties (based on Normalized Rental Revenue) provided for increases in future annual base contractual rent.

2016 Highlights

For the first quarter ended March 31, 2016:
Recognized revenues of $168.4 million, a 3.7% increase over revenues reported in the first quarter of 2015.
Generated AFFO of $0.22 per share, FFO of $0.20 per share, and net income of $0.06 per share.
Closed 9 real estate transactions totaling $75.6 million, which added 15 properties to our portfolio, earning an initial weighted average cash yield of approximately 8.09% under leases with an average term of 15.6 years.
Disposed of 33 properties generating gross proceeds of $106.3 million, with a weighted average capitalization rate of 6.37%, resulting in an overall gain on sale of $12.6 million. Included in gross proceeds was $14.9 million of principal and interest that was extinguished as a partial settlement of debt related to the transfer of two vacant real estate properties securing a fixed-rate CMBS loan that was in default.
Extinguished $103.8 million of high coupon debt that had a 6.72% weighted average rate.
Declared cash dividends in the first quarter of $0.175 per share, which equates to an annualized dividend of $0.70 per share.
Sold 1.3 million shares of common stock under our ATM program, at a weighted average share price of $11.10, generating aggregate net proceeds of $13.9 million.


30



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 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 initial terms of 15 to 20 years and tenant renewal options for additional terms with attractive rent escalation provisions. As of March 31, 2016, our leases had a weighted average remaining lease term (based on rental revenue) of approximately 10.6 years compared to approximately 10.9 years as of March 31, 2015.

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 1.0% of its annual rent from any single property, (2) is leased to tenants operating in various industries and (3) is located across the U.S. without significant geographic concentration.

As of March 31, 2016, Shopko represents our most significant tenant at 9.1% of Normalized Revenue. 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 twelve months ended March 31, 2016, we sold 29 Shopko properties having an investment value of $248.1 million. These sales, coupled with our increased rental revenue from real estate investments of $695.3 million acquired during the twelve months ended March 31, 2016, have reduced our current Shopko tenant concentration to 9.1% for the three months ended March 31, 2016 compared to 12.8% for the same period in 2015.

84 Properties, LLC, with a 3.1% tenant concentration as of March 31, 2016, represents our second most significant tenant. As of March 31, 2016, there were 108 properties under a master lease subject to senior mortgage debt with $68.2 million of principal outstanding. The master lease agreement includes a purchase option, which upon 180 days prior written notice, 84 Properties, LLC can elect to purchase all of the properties from us prior to the end of the 10th, 15th and 20th years of the lease. The purchase option does not allow for a purchase of less than all of the properties. The option purchase price is equal to 100% of our gross purchase price of approximately $200.6 million in May 2007, plus any subsequent improvements and other capitalized costs incurred in connection with the properties (as defined in the master lease agreement). 84 Properties, LLC will be eligible to execute its first purchase option in May 2017 and, if it elects to exercise it, 84 Properties, LLC will need to provide written notice in December 2016 of their intent to purchase the properties.

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

31



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 Normalized Rental Revenue) containing rent escalators remained consistent at approximately 89% as of both March 31, 2016 and March 31, 2015, respectively.

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 Normalized Rental Revenue during both months ended March 31, 2016 and March 31, 2015, respectively.

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, 2016, approximately 86.2% of our single-tenant properties (based on Normalized Rental Revenue) are subject to triple-net leases compared to approximately 86.5% as of March 31, 2015.

Asset Management

The stability of the rental revenue generated by our properties depends principally on our and 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.

On September 8, 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC, (collectively, the "Debtors") filed petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. At the time of the filing, Haggen Operations Holdings, LLC leased 20 properties on a triple net basis from a subsidiary of ours under a master lease with initial monthly rents of $1.4 million and an initial lease expiration date of February 28, 2035. Haggen Holdings, LLC is the guarantor of the tenant’s obligations under that master lease. Our subsidiary and the Debtors entered into a settlement agreement whereby our subsidiary consented to the partial assumption and partial rejection of the master lease permitting (a) the assumption of nine stores subject to the lease and their assignment to three unaffiliated grocery operators with winning bids in an auction of the respective leaseholds, (b) the rejection of the leasehold with respect to six of the stores and their return to our possession, and (c) the assumption and continued operation by the tenant of five of the stores. Under the settlement agreement, our subsidiary received an unsecured stipulated damages claim for $21.0 million against each of Haggen Operations Holdings, LLC and Haggen Holdings, LLC, as well as certain agreed upon fees, expenses and cure payments in the bankruptcy. The bankruptcy court approved the settlement agreement in an order entered November 25, 2015.

During the three months ended March 31, 2016, we sold two of the six rejected stores for $15.0 million and sold a third store at the beginning of the second quarter for $5.8 million, with the remaining three rejected stores being marketed for sale or lease. In April 2016, the bankruptcy court approved a settlement agreement, by and between our subsidiary, the Debtors and Albertson’s LLC, which provides for (a) the partial assignment of the existing Haggen Operations Holdings, LLC master lease to Albertson’s LLC with respect to four of the five properties under the master lease, (b) the rejection of the leasehold with respect to the one store not included in the master lease assignment, (c) the execution of a new lease or leases between our subsidiary and Albertson’s LLC with respect to the four assigned stores, including a $0.35 million annual rent reduction for one store, and (d) the reimbursement of certain of our fees, expenses and cure amounts solely with respect to the assigned stores. In return for the rent concession, Albertson’s LLC shall pay us $3.0 million upon execution of the amended lease or leases and the Debtors have agreed to grant us an allowed administrative claim of $0.8 million. In return for the rejected store, we have been granted an incremental allowed unsecured claim of $2.6 million, of which $1.8 million shall be entitled to administrative priority, against each of Haggen Operations Holdings, LLC and Haggen Holdings, LLC. The bankruptcy proceeding remains ongoing, and there is no guaranty that the claims will be paid or otherwise satisfied in full.

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Active Management and Monitoring of Risks Related to Our Investments

We seek to measure tenant financial distress risk and lease renewal risk through various processes. Many of our tenants are required to provide corporate-level and or unit-level financial information, which includes balance sheet, income statement and cash flow statement data on a quarterly and/or annual basis. Our underwriting and risk management processes are designed to structure new investments and manage existing investments to mitigate tenant credit quality risks and preserve the long-term return on our invested capital. Since our inception, our occupancy has never been below 96.1% (based on number of properties). As of March 31, 2016 and March 31, 2015, the percentage of our properties that were occupied was 98.7% and 98.3%, respectively.

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 and tenant operation type (e.g., industry, sector, or concept/brand), as well as potential uses of proceeds and tax considerations. As part of this strategy, we attempt at times to enter into 1031 Exchanges, when possible, to defer some or all of the taxable gains on the dispositions, if any, for federal and state income tax purposes.

The timing of any potential dispositions 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 loans receivable and interest income on our cash balances. We generally temporarily fund the acquisition of real estate utilizing our Revolving Credit Facilities or Term Loan, followed by permanent financing through asset level financing or by issuing debt or equity securities.
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, Term Loan 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.

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

33



in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2015 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, 2016 to Three Months Ended March 31, 2015
The following discussion includes the results of our continuing operations as summarized in the table below:
 
Three Months Ended March 31,
 
2016
 
2015
 
 Change
 
 % Change
 
 (In Thousands)
 
 
Revenues:
 
 
 
 
 
 
 
Rentals
$
161,819

 
$
154,518

 
$
7,301

 
4.7
 %
Interest income on loans receivable
1,659

 
1,722

 
(63
)
 
(3.7
)%
Earned income from direct financing leases
724

 
795

 
(71
)
 
(8.9
)%
Tenant reimbursement income
3,824

 
4,631

 
(807
)
 
(17.4
)%
Other income and interest from real estate transactions
331

 
621

 
(290
)
 
(46.7
)%
Total revenues
168,357

 
162,287

 
6,070

 
3.7
 %
Expenses:
 
 
 
 
 
 
 
General and administrative
11,649

 
12,600

 
(951
)
 
(7.5
)%
Restructuring charges
649

 

 
649

 
NM

Property costs
7,327

 
7,407

 
(80
)
 
(1.1
)%
Real estate acquisition costs
57

 
1,093

 
(1,036
)
 
(94.8
)%
Interest
53,017

 
57,914

 
(4,897
)
 
(8.5
)%
Depreciation and amortization
64,664

 
66,296

 
(1,632
)
 
(2.5
)%
Impairments
12,131

 
1,624

 
10,507

 
NM

Total expenses
149,494

 
146,934

 
2,560

 
1.7
 %
Income from continuing operations before other expense and income tax expense
18,863

 
15,353

 
3,510

 
22.9
 %
Other expense:
 
 
 
 
 
 
 
Loss on debt extinguishment
(5,341
)
 
(1,230
)
 
(4,111
)
 
NM

Total other expense
(5,341
)
 
(1,230
)
 
(4,111
)
 
NM

Income from continuing operations before income tax expense
13,522

 
14,123

 
(601
)
 
(4.3
)%
Income tax expense
(81
)
 
(362
)
 
281

 
77.6
 %
Income from continuing operations
$
13,441

 
$
13,761

 
$
(320
)
 
(2.3
)%
 
 
 
 
 
 
 
 
Gain on disposition of assets
$
12,562

 
$
11,336

 
$
1,226

 
10.8
 %
NM - Percentages over 100% are not displayed.
Revenues
For the three months ended March 31, 2016, approximately 96.5% of our total revenue was attributable to long-term leases. The year-over-year increase of 3.7% in total revenue was due primarily to an increase in base rental revenue resulting from real estate acquisitions subsequent to March 31, 2015 and to a lesser extent, to contractual rent escalations within our existing real estate portfolio.


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Rentals

The year-over-year increase in rental revenue was primarily attributable to the acquisition of 194 properties representing an investment in real estate of $695.3 million during the twelve-month period ended March 31, 2016. This increase was partially offset by the sale of 128 properties during the same period having an investment value of $579.7 million. Non-cash rentals for the three months ended March 31, 2016 and 2015 were $7.2 million and $5.4 million, respectively. These amounts represent approximately 4.4% and 3.5% of total rental revenue from continuing operations for the three months ended March 31, 2016 and 2015, respectively. Contractual rent escalations subsequent to March 31, 2015 also contributed to the increase.

As of March 31, 2016, 98.7% of our owned properties were occupied (based on number of properties). The majority of our nonperforming properties were in the manufacturing, grocery and general merchandise industries. As of March 31, 2016 and 2015, respectively, 31 and 42 of our properties, representing approximately 1.3% and 1.7% of our owned properties, were vacant and not generating rent. Of the 31 vacant properties, 9 were held for sale as of March 31, 2016.

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 decrease in general and administrative expenses is primarily due to a decrease in compensation and related benefits of $2.3 million, which includes $1.5 million in lower non-cash stock compensation. This decrease was offset by $1.1 million in higher professional fees. The decrease in compensation expense was due to the departure of an executive officer during the prior period resulting in the acceleration of cash and non-cash stock compensation. Higher professional fees during the current period related primarily to consulting charges incurred in connection with the Company's relocation to Dallas. As a result of our relocation to Dallas, we anticipate a temporary increase in compensation costs and certain professional fees over the next several quarters.
Restructuring charges

During the fourth quarter of 2015, we made the strategic decision to relocate the Company's headquarters from Scottsdale, Arizona to Dallas, Texas. During the three months ended March 31, 2016, we incurred $0.6 million in restructuring charges related to our relocation. Of this amount, $0.4 million related to professional fees and consulting services, while the balance was for employee related charges. There were no such costs incurred during the three months ended March 31, 2015.
Property costs

For the three months ended March 31, 2016, property costs were $7.3 million (including $3.8 million of tenant reimbursables) as compared to $7.4 million (including $4.6 million in tenant reimbursables) for the same period in 2015. Although total property costs remained relatively flat during the comparable periods, non-reimbursable property costs increased by approximately $0.7 million primarily due to higher non-routine repair, maintenance and other property expenses on our operating properties and a decrease in occupancy at one of our multi-tenants, which was offset by lower property taxes and property protection expenses due to a decrease in the number of vacant properties as compared to the same period a year ago.
Interest
The year-over-year decrease in interest expense is primarily due to the extinguishment of $477.6 million of mortgage debt with a weighted average interest rate of 5.93% during the twelve months ended March 31, 2016. This decrease was partially offset by an increase in interest from our Term Loan which was entered into during November 2015.

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The following table summarizes our interest expense and related borrowings from continuing operations:
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
 (In Thousands)
Interest expense – Revolving Credit Facilities (1)
$
457

 
$
803

Interest expense – Term Loan
1,747

 

Interest expense – mortgages and notes payable
41,730

 
48,408

Interest expense – Convertible Notes
6,127

 
6,127

Non-cash interest expense:
 
 
 
Amortization of deferred financing costs
2,166

 
2,072

Amortization of net losses related to interest rate swaps
30

 
28

Amortization of debt (premium)/discount, net
760

 
476

Total interest expense
$
53,017

 
$
57,914

(1) Includes interest expense associated with non-utilization fees of approximately $0.4 million for both of the three months ended March 31, 2016 and 2015.
Depreciation and amortization
During the twelve months ended March 31, 2016, we acquired 194 properties, representing an investment in real estate of $695.3 million. During that same period we disposed of 128 properties with a gross investment of $616.0 million. Despite our net acquisitions during this period, our year-over-year depreciation expense decreased primarily as a result of a reduction in our real estate investment value due to impairment charges during the twelve-month period ended March 31, 2016 of $50.3 million on properties that remain in our portfolio and $30.9 million in the real estate value of properties held for sale throughout the current period, which were not classified as such during the comparable period. Properties held for sale are no longer depreciated. The following table summarizes our depreciation and amortization expense from continuing operations:
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
 (In Thousands)
Depreciation of real estate assets
$
52,679

 
$
53,380

Other depreciation
93

 
94

Amortization of lease intangibles
11,892

 
12,822

Total depreciation and amortization
$
64,664

 
$
66,296


Impairments

Impairment charges for the three months ended March 31, 2016 includes $5.3 million on two properties within the casual dining industry, $2.9 million on a single movie theatre property, $4.2 million in properties held for sale and intangible lease write-offs and a $0.3 million impairment recovery on a loan receivable. For the same period in 2015, we recorded impairment losses of $1.0 million on the impairment of five properties that were held for sale and $0.6 million of lease intangible write-offs resulting from lease terminations.

Other expense    

During the three months ended March 31, 2016, we extinguished $103.8 million of mortgage debt and recorded a loss on debt extinguishment of $5.3 million. The loss was primarily from the partial extinguishment of a defaulted mortgage loan after transferring two of the three properties collateralizing this loan to the lender. We anticipate recording a net gain on debt extinguishment for this defaulted loan during the second quarter of 2016 when we transfer the final property to the lender and the loan is fully extinguished. During the three months ended March 31, 2015, we recorded a loss on debt extinguishment of $1.2 million. The amount of aggregate principal indebtedness extinguished was $162.8 million primarily from property sales encumbered by CMBS debt and other debt prepayments.


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Gain on disposition of assets
For the three months ended March 31, 2016, the gain on disposition of assets included $5.2 million from the sale of a five property pizza restaurant master lease and $2.6 million from the sale of eight quick service restaurants. The balance of the gain related to the sale of twenty additional properties including ten vacant properties. For the three months ended March 31, 2015, gain on disposition of assets included $7.1 million from the sale of five Shopko properties and $2.1 million from the sale of one of our distribution properties.

Property Portfolio Information

Our diverse real estate portfolio at March 31, 2016 consisted of 2,467 owned properties:
leased to 435 tenants;
located in 49 states as well as in the U.S. Virgin Islands, with only four states each contributing 5% or more of our rental revenue;
operating in 28 different industries;
with an occupancy rate of 98.7%; and
with a weighted average remaining lease term of 10.6 years.
Property Portfolio Diversification
The following tables present the diversity of our properties owned at March 31, 2016. The portfolio metrics are calculated based on the percentage of Normalized Revenue or Normalized Rental Revenue. Total revenues and total rental revenues used in the calculations are normalized to exclude revenues contributed by properties sold during the given period.

Diversification By Tenant

Tenant concentration represents the tenant's quarterly contribution to Normalized Revenue during the period. The following table lists the top ten tenants of our owned real estate properties as of March 31, 2016:
Tenant (2)

Number of Properties

Total Square Feet
(in thousands)