Toggle SGML Header (+)


Section 1: 10-Q (10-Q Q3 2018)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number
Spirit Realty Capital, Inc.                                     001-36004
Spirit Realty, L.P.                                         333-216815-01
___________________________________________________________
SPIRIT REALTY CAPITAL, INC.
SPIRIT REALTY, L.P.
(Exact name of registrant as specified in its charter)
_______________________________________________
Spirit Realty Capital, Inc.
 
Maryland
 
20-1676382
Spirit Realty, L.P.
 
Delaware
 
20-1127940
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
 
2727 North Harwood Street, Suite 300, Dallas, Texas 75201
 
(972) 476-1900
 
 
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Spirit Realty Capital, Inc.     Yes  x No   o
Spirit Realty, L.P.     Yes  x No   o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    
Spirit Realty Capital, Inc.     Yes  x No   o
Spirit Realty, L.P.     Yes  x No   o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Spirit Realty Capital, Inc.
 Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
Spirit Realty, L.P.
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Spirit Realty Capital, Inc.            o
Spirit Realty, L.P.            o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Spirit Realty Capital, Inc.     Yes  o No  x
Spirit Realty, L.P.     Yes  o No  x
As of November 7, 2018, there were 428,476,552 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.
 



Explanatory Note
This report combines the quarterly reports on Form 10-Q for the three and nine months ended ended September 30, 2018 of Spirit Realty Capital, Inc., a Maryland corporation, and Spirit Realty, L.P., a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or the “Company” refer to Spirit Realty Capital, Inc. together with its consolidated subsidiaries, including Spirit Realty, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Spirit Realty, L.P. together with its consolidated subsidiaries.
Spirit General OP Holdings, LLC ("OP Holdings") is the sole general partner of the Operating Partnership. The Company is a real estate investment trust ("REIT") and the sole member of OP Holdings, as well as the special limited partner of the Operating Partnership. As sole member of the general partner of our Operating Partnership, our Company has the full, exclusive and complete responsibility for our Operating Partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of our Company and Operating Partnership into a single report results in the following benefits:
enhancing investors’ understanding of our Company and Operating Partnership by enabling investors to view the business as a whole, reflective of how management views and operates the business;
eliminating duplicative disclosure and providing a streamlined presentation as a substantial portion of the disclosures apply to both our Company and Operating Partnership; and
creating time and cost efficiencies by preparing one combined report in lieu of two separate reports.
There are a few differences between our Company and Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand these differences in the context of how we operate as an interrelated, consolidated company. Our Company is a REIT, the only material assets of which are the partnership interests in our Operating Partnership. As a result, our Company does not conduct business itself, other than acting as the sole member of the general partner of our Operating Partnership, issuing equity from time to time and guaranteeing certain debt of our Operating Partnership. Our Operating Partnership holds substantially all the assets of our Company. Our Company issued convertible notes and guarantees some of the debt of our Operating Partnership. See Note 4 to the consolidated financial statements included herein for further discussion. Our Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from the issuance of convertible notes and equity issuances by our Company, which are generally contributed to our Operating Partnership in exchange for partnership units of our Operating Partnership, our Operating Partnership generates the capital required by our Company’s business through our Operating Partnership’s operations or our Operating Partnership’s incurrence of indebtedness.
The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our Operating Partnership. The partnership units in our Operating Partnership are accounted for as partners’ capital in our Operating Partnership’s consolidated financial statements. There are no non-controlling interests in the Company or the Operating Partnership.
To help investors understand the significant differences between our Company and our Operating Partnership, this report presents the consolidated financial statements separately for our Company and our Operating Partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our Operating Partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act, and 18 U.S.C. §1350, this report also includes separate “Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our Operating Partnership.




SPIRIT REALTY CAPITAL, INC.
INDEX

Glossary
 
 

 

2


GLOSSARY
2017 Tax Legislation
Tax Cuts and Jobs Act
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. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Amended Incentive Award Plan
Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
ASC
Accounting Standards Codification
Asset Management Agreement
Asset Management Agreement between Spirit Realty, L.P. and Spirit MTA REIT dated May 31, 2018
ASU
Accounting Standards Update
ATM Program
At the Market equity distribution program, pursuant to which the Company may offer and sell registered shares of common stock from time to time
CMBS
Commercial Mortgage-Backed Securities
Code
Internal Revenue Code of 1986, as amended
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 Master Trust 2013 and Master Trust 2014
Company
The Corporation and its consolidated subsidiaries
Contractual Rent
Monthly contractual cash rent and earned income from direct financing leases, excluding percentage rents, from our properties owned fee-simple or ground leased, recognized during the final month of the reporting period, adjusted to exclude amounts received from properties sold during that period and adjusted to include a full month of contractual rent for properties acquired during that period.
Convertible Notes
The 2019 Notes and 2021 Notes, together
Corporation
Spirit Realty Capital, Inc., a Maryland corporation
CPI
Consumer Price Index
Credit Agreement
Revolving credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015, as amended or otherwise modified from time to time
EBITDAre
EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FFO
Funds From Operations. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
GAAP
Generally Accepted Accounting Principles in the United States
LIBOR
London Interbank Offered Rate
Master Trust 2013
The net-lease mortgage securitization trust established in December 2013
Master Trust 2014
The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014
Master Trust Notes
Master Trust 2013 and Master Trust 2014 notes, together
Master Trust Release
Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made or until used for principal reduction
Moody's
Moody's Investor Services
NAREIT
National Association of Real Estate Investment Trusts
OP Holdings
Spirit General OP Holdings, LLC
Operating Partnership
Spirit Realty, L.P., a Delaware limited partnership

3


Property Management and Servicing Agreement
Second amended and restated agreement governing the management services and special services provided to Master Trust 2014 by Spirit Realty, L.P., dated as of May 20, 2014, as amended, supplemented, amended and restated or otherwise modified
Real Estate Investment Value
The gross acquisition cost, including capitalized transaction costs, plus improvements and less impairments, if any
REIT
Real Estate Investment Trust
Revolving Credit Facility
$800.0 million unsecured credit facility pursuant to the Credit Agreement
S&P
Standard & Poor's Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Senior Unsecured Notes
$300 million aggregate principal amount of senior notes issued in August 2016
Series A Preferred Stock
6,900,000 shares of 6.000% Cumulative Redeemable Preferred Stock issued October 3, 2017, with a liquidation preference of $25.00 per share.
Shopko
Specialty Retail Shops Holding Corp. and certain of its affiliates
SMTA
Spirit MTA REIT, a Maryland real estate investment trust
Spin-Off
Creation of an independent, publicly traded REIT, SMTA, through our contribution of properties leased to Shopko, assets that collateralize Master Trust 2014 and other additional assets to SMTA followed by the distribution by us to our stockholders of all of the common shares of beneficial interest in SMTA.
SubREIT
Spirit MTA SubREIT, a wholly-owned subsidiary of SMTA
Term Loan
$420.0 million senior unsecured term facility pursuant to the Term Loan Agreement
Term Loan Agreement
Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015, as amended or otherwise modified from time to time
TSR
Total Stockholder Return
U.S.
United States
Vacant
Owned properties which are not economically yielding

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


4


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
September 30,
2018
 
December 31,
2017
Assets



Investments:



Real estate investments:



Land and improvements
$
1,629,509


$
1,598,355

Buildings and improvements
3,100,749


2,989,451

Total real estate investments
4,730,258


4,587,806

Less: accumulated depreciation
(589,599
)

(503,568
)
 
4,140,659


4,084,238

Loans receivable, net
52,001


78,466

Intangible lease assets, net
302,954


306,252

Real estate assets under direct financing leases, net
24,809


24,865

Real estate assets held for sale, net
43,601


20,469

Net investments
4,564,024


4,514,290

Cash and cash equivalents
7,578


8,792

Deferred costs and other assets, net
112,149


121,949

Investment in Master Trust 2014
33,558

 

Preferred equity investment in SMTA
150,000

 

Goodwill
225,600


225,600

Assets related to SMTA Spin-Off

 
2,392,880

Total assets
$
5,092,909


$
7,263,511

 
 
 
 
Liabilities and stockholders’ equity



Liabilities:



Revolving Credit Facility
$
157,000


$
112,000

Term Loan, net
419,920

 

Senior Unsecured Notes, net
295,654

 
295,321

Mortgages and notes payable, net
465,433


589,644

Convertible Notes, net
726,261


715,881

Total debt, net
2,064,268

 
1,712,846

Intangible lease liabilities, net
123,613


130,574

Accounts payable, accrued expenses and other liabilities
99,670


131,642

Liabilities related to SMTA Spin-Off

 
1,968,840

Total liabilities
2,287,551


3,943,902

Commitments and contingencies (see Note 6)





Stockholders’ equity:



Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both September 30, 2018 and December 31, 2017
166,177

 
166,193

Common stock, $0.01 par value, 750,000,000 shares authorized: 428,478,845 and 448,868,269 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
4,285


4,489

Capital in excess of common stock par value
4,989,804


5,193,631

Accumulated deficit
(2,354,908
)

(2,044,704
)
Total stockholders’ equity
2,805,358

 
3,319,609

Total liabilities and stockholders’ equity
$
5,092,909

 
$
7,263,511

See accompanying notes.

5


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


 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rentals
$
97,311

 
$
103,523

 
$
290,549

 
$
307,822

Interest income on loans receivable
1,121

 
865

 
2,410

 
2,392

Earned income from direct financing leases
465

 
483

 
1,395

 
1,613

Tenant reimbursement income
3,516

 
3,270

 
10,021

 
10,922

Related party fee income
6,750

 

 
8,969

 

Other income
481

 
580

 
2,298

 
1,139

Total revenues
109,644

 
108,721

 
315,642

 
323,888

Expenses:
 
 
 
 
 
 
 
General and administrative
11,033

 
12,712

 
39,843

 
46,789

Property costs (including reimbursable)
5,172

 
5,180

 
15,529

 
19,193

Real estate acquisition costs
26

 
177

 
143

 
851

Interest
24,784

 
29,948

 
71,385

 
85,805

Depreciation and amortization
40,379

 
43,318

 
121,015

 
130,634

Impairments
1,279

 
22,301

 
6,254

 
60,258

Total expenses
82,673

 
113,636

 
254,169

 
343,530

Income (loss) from continuing operations before other income and income tax expense
26,971

 
(4,915
)
 
61,473

 
(19,642
)
Other income:
 
 
 
 
 
 
 
Gain on debt extinguishment

 
1,792

 
27,092

 
1,769

Gain on disposition of assets
436

 
10,089

 
827

 
21,986

Preferred dividend income from SMTA
3,750

 

 
5,000

 

Total other income
4,186

 
11,881

 
32,919

 
23,755

Income from continuing operations before income tax expense
31,157

 
6,966

 
94,392

 
4,113

Income tax expense
(135
)
 
(144
)
 
(475
)
 
(421
)
Income from continuing operations
31,022

 
6,822

 
93,917

 
3,692

(Loss) income from discontinued operations
(966
)
 
(1,500
)
 
(15,979
)
 
37,665

Net income and total comprehensive income
$
30,056

 
$
5,322

 
$
77,938

 
$
41,357

Dividends paid to preferred stockholders
(2,588
)
 

 
(7,764
)
 

Net income attributable to common stockholders
$
27,468

 
$
5,322

 
$
70,174

 
$
41,357

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.01

 
$
0.20

 
$
0.01

Discontinued operations

 

 
(0.04
)
 
0.08

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

 
$
0.01

 
$
0.16

 
$
0.09

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.01

 
$
0.20

 
$
0.01

Discontinued operations

 

 
(0.04
)
 
0.08

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

 
$
0.01

 
$
0.16

 
$
0.09

 
 
 
 
 
 
 
 

6


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


 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2018
 
2017
 
2018
 
2017
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
426,678,579

 
456,671,617

 
433,162,760

 
472,698,692

Diluted
427,890,152

 
456,671,617

 
433,940,701

 
472,698,692

 
 
 
 
 
 
 
 
Dividends declared per common share issued
$
0.1250

 
$
0.1800

 
$
0.4850

 
$
0.5400

See accompanying notes.

7


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

 
Preferred Stock
 
Common Stock
 
 
 
 
 
Shares
 
Par Value and Capital in Excess of Par Value
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balances, December 31, 2017
6,900,000

 
$
166,193

 
448,868,269

 
$
4,489

 
$
5,193,631

 
$
(2,044,704
)
 
$
3,319,609

Net income

 

 

 

 

 
77,938

 
77,938

Dividends declared on preferred stock

 

 

 

 

 
(7,764
)
 
(7,764
)
Net income available to common stockholders
 
 

 
 
 

 

 
70,174

 
70,174

Dividends declared on common stock

 

 

 

 

 
(209,270
)
 
(209,270
)
Tax withholdings related to net stock settlements

 

 
(285,378
)
 
(3
)
 

 
(2,344
)
 
(2,347
)
Repurchase of common shares

 

 
(21,222,257
)
 
(212
)
 

 
(167,953
)
 
(168,165
)
SMTA dividend distribution

 

 

 

 
(216,005
)
 

 
(216,005
)
Issuance of preferred shares, net

 
(16
)
 

 

 

 

 
(16
)
Stock-based compensation, net

 

 
1,118,211

 
11

 
12,178

 
(811
)
 
11,378

Balances, September 30, 2018
6,900,000

 
$
166,177

 
428,478,845

 
$
4,285

 
$
4,989,804

 
$
(2,354,908
)
 
$
2,805,358

See accompanying notes.

8


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

 
Nine Months Ended  
 September 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
77,938

 
$
41,357

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
156,476

 
192,887

Impairments
17,197

 
88,109

Amortization of deferred financing costs
7,442

 
7,274

Amortization of debt discounts
10,888

 
9,663

Stock-based compensation expense
12,189

 
13,778

Gain on debt extinguishment
(26,729
)
 
(1,770
)
Gain on dispositions of real estate and other assets
(553
)
 
(40,197
)
Non-cash revenue
(14,239
)
 
(20,642
)
Bad debt expense and other
1,596

 
4,902

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(5,681
)
 
(1,684
)
Accounts payable, accrued expenses and other liabilities
(2,712
)
 
5,726

Net cash provided by operating activities
233,812

 
299,403

Investing activities
 
 
 
Acquisitions of real estate
(242,491
)
 
(278,470
)
Capitalized real estate expenditures
(26,769
)
 
(34,939
)
Investments in notes receivable
(35,450
)
 
(4,995
)
Collections of principal on loans receivable and real estate assets under direct financing leases
25,858

 
7,817

Proceeds from dispositions of real estate and other assets, net
41,461

 
342,032

Net cash (used in) provided by investing activities
(237,391
)
 
31,445


9


 
Nine Months Ended  
 September 30,
 
2018
 
2017
Financing activities
 
 
 
Borrowings under Revolving Credit Facility
737,800

 
781,200

Repayments under Revolving Credit Facility
(692,800
)
 
(481,200
)
Borrowings under mortgages and notes payable
104,247

 

Repayments under mortgages and notes payable
(167,671
)
 
(76,403
)
Borrowings under Term Loan
420,000

 

Debt extinguishment costs
(2,968
)
 

Deferred financing costs
(1,417
)
 
(192
)
Cash, cash equivalents and restricted cash held by SMTA at Spin-Off
(73,081
)
 

Sale of SubREIT preferred shares
5,000

 

Repurchase of shares of common stock
(170,512
)
 
(225,748
)
Preferred stock dividends paid
(7,764
)
 

Common stock dividends paid
(236,663
)
 
(257,112
)
Net cash used in financing activities
(85,829
)
 
(259,455
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(89,408
)
 
71,393

Cash, cash equivalents and restricted cash, beginning of period
114,707

 
36,898

Cash, cash equivalents and restricted cash, end of period
$
25,299

 
$
108,291

See accompanying notes.

10



 
SPIRIT REALTY, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Investments:
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,629,509

 
$
1,598,355

Buildings and improvements
3,100,749

 
2,989,451

Total real estate investments
4,730,258

 
4,587,806

Less: accumulated depreciation
(589,599
)
 
(503,568
)
 
4,140,659

 
4,084,238

Loans receivable, net
52,001

 
78,466

Intangible lease assets, net
302,954

 
306,252

Real estate assets under direct financing leases, net
24,809

 
24,865

Real estate assets held for sale, net
43,601

 
20,469

Net investments
4,564,024

 
4,514,290

Cash and cash equivalents
7,578

 
8,792

Deferred costs and other assets, net
112,149

 
121,949

Investment in Master Trust 2014
33,558

 

Preferred equity investment in SMTA
150,000

 

Goodwill
225,600

 
225,600

Assets related to SMTA Spin-Off

 
2,392,880

Total assets
$
5,092,909

 
$
7,263,511

 
 
 
 
Liabilities and partners' capital
 
 
 
Liabilities:
 
 
 
Revolving Credit Facility
$
157,000

 
$
112,000

Term Loan, net
419,920

 

Senior Unsecured Notes, net
295,654

 
295,321

Notes payable to Spirit Realty Capital, Inc., net
465,433

 
589,644

Convertible Notes, net
726,261

 
715,881

Total debt, net
2,064,268

 
1,712,846

Intangible lease liabilities, net
123,613

 
130,574

Accounts payable, accrued expenses and other liabilities
99,670

 
131,642

Liabilities related to SMTA Spin-Off

 
1,968,840

Total liabilities
2,287,551

 
3,943,902

Commitments and contingencies (see Note 6)


 


Partners' capital:
 
 
 
Partnership units
 
 
 
General partner's capital: 3,988,218 units issued and outstanding as of both September 30, 2018 and December 31, 2017
23,151

 
24,426

Limited partners' preferred capital: 6,900,000 units issued and outstanding as of both September 30, 2018 and December 31, 2017
166,177

 
166,193

Limited partners' capital: 424,490,627 and 444,880,051 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
2,616,030

 
3,128,990

Total partners' capital
2,805,358

 
3,319,609

Total liabilities and partners' capital
$
5,092,909

 
$
7,263,511

See accompanying notes.

11

SPIRIT REALTY, L.P.
Consolidated Statements of Operations and Comprehensive Income
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)



 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rentals
$
97,311

 
$
103,523

 
$
290,549

 
$
307,822

Interest income on loans receivable
1,121

 
865

 
2,410

 
2,392

Earned income from direct financing leases
465

 
483

 
1,395

 
1,613

Tenant reimbursement income
3,516

 
3,270

 
10,021

 
10,922

Related party fee income
6,750

 

 
8,969

 

Other income
481

 
580

 
2,298

 
1,139

Total revenues
109,644

 
108,721

 
315,642

 
323,888

Expenses:
 
 
 
 
 
 
 
General and administrative
11,033

 
12,712

 
39,843

 
46,789

Property costs (including reimbursable)
5,172

 
5,180

 
15,529

 
19,193

Real estate acquisition costs
26

 
177

 
143

 
851

Interest
24,784

 
29,948

 
71,385

 
85,805

Depreciation and amortization
40,379

 
43,318

 
121,015

 
130,634

Impairments
1,279

 
22,301

 
6,254

 
60,258

Total expenses
82,673

 
113,636

 
254,169

 
343,530

Income (loss) from continuing operations before other income and income tax expense
26,971

 
(4,915
)
 
61,473

 
(19,642
)
Other income:
 
 
 
 
 
 
 
Gain on debt extinguishment

 
1,792

 
27,092

 
1,769

Gain on disposition of assets
436

 
10,089

 
827

 
21,986

Preferred dividend income from SMTA
3,750

 

 
5,000

 

Total other income
4,186

 
11,881

 
32,919

 
23,755

Income from continuing operations before income tax expense
31,157

 
6,966

 
94,392

 
4,113

Income tax expense
(135
)
 
(144
)
 
(475
)
 
(421
)
Income from continuing operations
31,022

 
6,822

 
93,917

 
3,692

(Loss) income from discontinued operations
(966
)
 
(1,500
)
 
(15,979
)
 
37,665

Net income and total comprehensive income
$
30,056

 
$
5,322

 
$
77,938

 
$
41,357

Preferred distributions
(2,588
)
 

 
(7,764
)
 

Net income after preferred distributions
$
27,468

 
$
5,322

 
$
70,174

 
$
41,357

 
 
 
 
 
 
 
 
Net income attributable to the general partner
 
 
 
 
 
 
 
Continuing operations
$
313

 
$
56

 
$
789

 
$
29

Discontinued operations
(32
)
 
(12
)
 
(146
)
 
315

Net income attributable to the general partner
$
281

 
$
44

 
$
643

 
$
344

 
 
 
 
 
 
 
 
Net income attributable to the limited partners
 
 
 
 
 
 
 
Continuing operations
$
28,121

 
$
6,766

 
$
85,364

 
$
3,663

Discontinued operations
(934
)
 
(1,488
)
 
(15,833
)
 
37,350

Net income attributable to the limited partners
$
27,187

 
$
5,278

 
$
69,531

 
$
41,013


12

SPIRIT REALTY, L.P.
Consolidated Statements of Operations and Comprehensive Income
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income per partnership unit - basic
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.01

 
$
0.20

 
$
0.01

Discontinued operations

 

 
(0.04
)
 
0.08

Net income per partnership unit - basic
$
0.06

 
$
0.01

 
$
0.16

 
$
0.09

 
 
 
 
 
 
 
 
Net income per partnership unit - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.01

 
$
0.20

 
$
0.01

Discontinued operations

 

 
(0.04
)
 
0.08

Net income per partnership unit - diluted
$
0.06

 
$
0.01

 
$
0.16

 
$
0.09

 
 
 
 
 
 
 
 
Weighted average partnership units outstanding:
 
 
 
 
 
 
 
Basic
426,678,579

 
456,671,617

 
433,162,760

 
472,698,692

Diluted
427,890,152

 
456,671,617

 
433,940,701

 
472,698,692

 
 
 
 
 
 
 
 
Distributions declared per partnership unit issued
$
0.1250

 
$
0.1800

 
$
0.4850

 
$
0.5400

See accompanying notes.

13



SPIRIT REALTY, L.P.
Consolidated Statements of Partners' Capital
(In Thousands, Except Unit Data)
(Unaudited)
 
Preferred Units
 
Common Units
 
Total Partnership Capital
 
Limited Partners' Capital (1)
 
General Partner's Capital (2)
 
Limited Partners' Capital (1)
 
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Balances, December 31, 2017
6,900,000

 
$
166,193

 
3,988,218

 
$
24,426

 
444,880,051

 
$
3,128,990

 
$
3,319,609

Net income and total comprehensive income (3)

 
7,764

 

 
643

 

 
69,531

 
77,938

Partnership distributions declared on preferred units

 
(7,764
)
 

 

 

 

 
(7,764
)
Net income after preferred distributions
 
 

 
 
 
643

 
 
 
69,531

 
70,174

Partnership distributions declared on common units

 

 

 
(1,918
)
 

 
(207,352
)
 
(209,270
)
Tax withholdings related to net partnership unit settlements

 

 

 

 
(285,378
)
 
(2,347
)
 
(2,347
)
Repurchase of partnership units

 

 

 

 
(21,222,257
)
 
(168,165
)
 
(168,165
)
SMTA dividend distribution

 

 

 

 

 
(216,005
)
 
(216,005
)
Issuance of preferred partnership units

 
(16
)
 

 

 

 

 
(16
)
Stock-based compensation, net

 

 

 

 
1,118,211

 
11,378

 
11,378

Balances, September 30, 2018
6,900,000

 
$
166,177

 
3,988,218

 
$
23,151

 
424,490,627

 
$
2,616,030

 
$
2,805,358

(1) Consists of limited partnership interests held by the Corporation and Spirit Notes Partner, LLC.
(2) Consists of general partnership interests held by OP Holdings.
(3) Net income and total comprehensive income is allocated first to the preferred unitholders, with income after the preferred distributions allocated to the common units on a pro rata basis.
See accompanying notes.


14



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

 
Nine Months Ended  
 September 30,
 
2018
 
2017
Operating activities
 
 
 
Net income attributable to partners
$
77,938

 
$
41,357

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
156,476

 
192,887

Impairments
17,197

 
88,109

Amortization of deferred financing costs
7,442

 
7,274

Amortization of debt discounts
10,888

 
9,663

Stock-based compensation expense
12,189

 
13,778

Gain on debt extinguishment
(26,729
)
 
(1,770
)
Gain on dispositions of real estate and other assets
(553
)
 
(40,197
)
Non-cash revenue
(14,239
)
 
(20,642
)
Bad debt expense and other
1,596

 
4,902

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(5,681
)
 
(1,684
)
Accounts payable, accrued expenses and other liabilities
(2,712
)
 
5,726

Net cash provided by operating activities
233,812

 
299,403

Investing activities
 
 
 
Acquisitions of real estate
(242,491
)
 
(278,470
)
Capitalized real estate expenditures
(26,769
)
 
(34,939
)
Investments in notes receivable
(35,450
)
 
(4,995
)
Collections of principal on loans receivable and real estate assets under direct financing leases
25,858

 
7,817

Proceeds from dispositions of real estate and other assets, net
41,461

 
342,032

Net cash (used in) provided by investing activities
(237,391
)
 
31,445


15



 
Nine Months Ended  
 September 30,
 
2018
 
2017
Financing activities
 
 
 
Borrowings under Revolving Credit Facility
737,800

 
781,200

Repayments under Revolving Credit Facility
(692,800
)
 
(481,200
)
Borrowings under mortgages and notes payable
104,247

 

Repayments under mortgages and notes payable
(167,671
)
 
(76,403
)
Borrowings under Term Loan
420,000

 

Debt extinguishment costs
(2,968
)
 

Deferred financing costs
(1,417
)
 
(192
)
Cash, cash equivalents and restricted cash held by SMTA at Spin-Off
(73,081
)
 

Sale of SubREIT preferred shares
5,000

 

Repurchase of partnership units
(170,512
)
 
(225,748
)
Preferred distributions paid
(7,764
)
 

Common distributions paid
(236,663
)
 
(257,112
)
Net cash used in financing activities
(85,829
)
 
(259,455
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(89,408
)
 
71,393

Cash, cash equivalents and restricted cash, beginning of period
114,707

 
36,898

Cash, cash equivalents and restricted cash, end of period
$
25,299

 
$
108,291

See accompanying notes.

16


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)



Note 1. Organization
Company Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate and deliver sustainable and attractive returns for stockholders by primarily investing 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 retail, office, industrial and data center property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.The Company began operations through a predecessor legal entity in 2003.
The Company’s operations are generally carried out through Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC ("OP Holdings"), one of the Company's wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. The Corporation and a wholly-owned subsidiary ("Spirit Notes Partner, LLC") are the only limited partners and together own the remaining 99% of the Operating Partnership.
On May 31, 2018, (the "Distribution Date"), Spirit completed the previously announced spin-off (the "Spin-Off") of the assets that collateralize Master Trust 2014, properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). Beginning in the second quarter of 2018, the historical financial results of SMTA are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2017 and its Current Report on Form 8-K dated September 20, 2018.
The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. The consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
All expenses incurred by the Company have been allocated to the Operating Partnership in accordance with the Operating Partnership's first amended and restated agreement of limited partnership, which management determined to be a reasonable method of allocation. Therefore, expenses incurred would not be materially different if the Operating Partnership had operated as an unaffiliated entity.
The Company has formed multiple special purpose entities to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of September 30, 2018 and December 31, 2017, net assets totaling $0.90 billion and $2.78 billion, respectively, were held, and net liabilities totaling $0.48 billion and $2.63 billion, respectively, were owed by these encumbered special purpose entities and are included in the accompanying consolidated balance sheets.

17


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2018
(Unaudited)

Discontinued Operations
A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition. Examples of a strategic shift include disposing of: (i) a separate major line of business, (ii) a separate major geographic area of operations, or (iii) other major parts of the Company. The Company determined that the Spin-Off represented a strategic shift that has a major effect on the Company's results and, therefore, SMTA's operations qualify as discontinued operations. See Note 8 for further discussion on discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Allowance for Doubtful Accounts
The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. If the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made. The Company's reserves for uncollectible amounts totaled $4.2 million and $12.4 million as of September 30, 2018 and December 31, 2017, respectively, against accounts receivable balances of $14.7 million and $27.2 million, respectively. Receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets. Receivables are written off against the reserves for uncollectible amounts when all possible means of collection have been exhausted.
For rental revenues related to the straight-line method of reporting rental revenue, the collectability review includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience. The Company established a reserve for losses of $0.5 million and $1.8 million as of September 30, 2018 and December 31, 2017, respectively, against straight-line rental revenue receivables of $66.4 million and $81.6 million, respectively. These receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. No impairment was recorded for the periods presented.

18


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2018
(Unaudited)

Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term investments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
 
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Cash and cash equivalents
$
7,578

 
$
8,798

 
$
11,947

Restricted cash:
 
 
 
 
 
Collateral deposits (1)
423

 
1,751

 
1,229

Tenant improvements, repairs, and leasing commissions (2)
8,898

 
8,257

 
7,988

Master Trust Release (3)
7,410

 
85,703

 
79,353

Liquidity reserve (4)

 
5,503

 

Other (5)
990

 
4,695

 
7,774

Total cash, cash equivalents and restricted cash
$
25,299

 
$
114,707

 
$
108,291

(1) Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses.
(2) Deposits held as additional collateral support by lenders to fund improvements, repairs and leasing commissions incurred to secure a new tenant.
(3) Proceeds from the sale of assets pledged as collateral under either Master Trust 2013 or Master Trust 2014, which are held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
(4) Liquidity reserve cash was placed on deposit for Master Trust 2014 and is held until there is a cashflow shortfall or upon achieving certain performance criteria, as defined in the agreements governing Master Trust 2014, or a liquidation of Master Trust 2014 occurs.
(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. Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes, which are not material.
The Operating Partnership is a partnership for federal income tax purposes. Partnerships are pass-through entities and are not subject to U.S. federal income taxes, therefore no provision has been made for federal income taxes in the accompanying financial statements. Although most states and cities where the Operating Partnership operates follow the U.S. federal income tax treatment, there are certain jurisdictions such as Texas, Tennessee and Ohio that impose income or franchise taxes on a partnership.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income.
On May 31, 2018, the Company completed the Spin-Off of Spirit MTA REIT through a distribution of shares in SMTA to the Company’s shareholders.  The distribution resulted in a deemed sale of assets and recognition of taxable gain by the Company, which is entitled to a dividends paid deduction equal to the value of the shares in SMTA that it distributed. The Company believes that its dividends paid deduction for 2018, including the value of the SMTA shares distributed, will equal or exceed its taxable income, including the gain recognized. As a result, the Company does not expect the distribution to result in current tax other than an immaterial amount of state and local tax which has been recognized in the accompanying financial statements.



19


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2018
(Unaudited)

New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This new guidance establishes a principles-based approach for accounting for revenue from contracts with customers and is effective for annual reporting periods beginning after December 15, 2017, with early application permitted for annual reporting periods beginning after December 15, 2016. The Company adopted the new revenue recognition standard effective January 1, 2018 under the modified retrospective method, and elected to apply the standard only to contracts that were not completed as of the date of adoption (i.e. January 1, 2018). In evaluating the impact of this new standard, the Company identified that lease contracts covered by Leases (Topic 840) are excluded from the scope of this new guidance. As such, this ASU had no material impact on the Company's reported revenues, results of operations, financial position, cash flows and disclosures.
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. Leases pursuant to which the Company is the lessee primarily consist of its corporate office, ground leases and equipment leases. The amendments in this ASU are effective for the 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 has elected to use all of the practical expedients available for adoption of this ASU except for the hindsight expedient, which would require the re-evaluation of the lease term on all leases using current facts and circumstances. The Company has begun implementation of the ASU and is currently evaluating the overall impact of this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. ASU 2016-13 requires financial assets (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. The Company adopted ASU 2016-15 effective January 1, 2018 and has applied it retrospectively. As a result of adoption, debt prepayment and debt extinguishment costs, previously presented in operating activities, are now presented in financing activities in the consolidated statement of cash flows. There was no impact on the statements of cash flows for the Company for other types of transactions.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This guidance requires entities to include restricted cash and restricted cash equivalents within the cash and cash equivalents balances presented in the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the new guidance is to be applied retrospectively. The Company adopted ASU 2016-18 effective January 1, 2018 and applied it retrospectively. As a result, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.
Note 3. Investments
Real Estate Investments
As of September 30, 2018, the Company's gross investment in real estate properties and loans totaled approximately $5.1 billion, representing investments in 1,523 properties, including 53 properties securing mortgage loans. The gross

20


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)


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 Texas, at 11.9%, as the only state with a Real Estate Investment Value greater than 10% of the Real Estate Investment Value of the Company's entire portfolio.

During the nine months ended September 30, 2018, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:
 
Number of Properties
 
Dollar Amount of Investments
 
Owned
 
Financed
 
Total
 
Owned
 
Financed
 
Total
 
 
 
 
 
 
 
(In Thousands)
Gross balance, December 31, 2017
2,392

 
88

 
2,480

 
$
7,823,058

 
$
79,967

 
$
7,903,025

Acquisitions/improvements (1)
18

 
2

 
20

 
269,260

 
37,888

 
307,148

Dispositions of real estate (2)(3)(4)
(41
)
 
(5
)
 
(46
)
 
(83,338
)
 

 
(83,338
)
Principal payments and payoffs

 
(30
)
 
(30
)
 

 
(26,316
)
 
(26,316
)
Impairments

 

 

 
(17,197
)
 

 
(17,197
)
Write-off of gross lease intangibles

 

 

 
(50,505
)
 

 
(50,505
)
Loan premium amortization and other

 

 

 
(886
)
 
(1,650
)
 
(2,536
)
Spin-off to SMTA
(899
)
 
(2
)
 
(901
)
 
(2,855,052
)
 
(37,888
)
 
(2,892,940
)
Gross balance, September 30, 2018
1,470

 
53

 
1,523

 
5,085,340

 
52,001

 
5,137,341

Accumulated depreciation and amortization
 
 
 
 
 
 
(696,930
)
 

 
(696,930
)
Net balance, September 30, 2018
 
 
 
 
 
 
$
4,388,410

 
$
52,001

 
$
4,440,411

(1) Includes investments of $23.1 million in revenue producing capitalized expenditures, as well as $4.3 million of non-revenue producing capitalized expenditures as of September 30, 2018.
(2) The total accumulated depreciation and amortization associated with dispositions of real estate was $14.4 million as of September 30, 2018.
(3) For the nine months ended September 30, 2018, the total (loss) gain on disposal of assets for properties held in use and held for sale was $(2.6) million and $3.2 million, respectively.
(4) Includes six deed-in-lieu properties with a real estate investment of $28.5 million that were transferred to the lender during the nine months ended September 30, 2018.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases (including contractual fixed rent increases occurring on or after October 1, 2018) at September 30, 2018 (in thousands):
 
September 30,
2018
Remainder of 2018
$
95,355

2019
379,441

2020
373,089

2021
353,153

2022
330,083

Thereafter
2,473,691

Total future minimum rentals
$
4,004,812

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

21


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)


Loans Receivable
The following table details loans receivable, net of premiums, discounts and allowance for loan losses (in thousands):
 
September 30,
2018
 
December 31,
2017
Mortgage loans - principal
$
43,900

 
$
69,963

Mortgage loans - premiums, net of amortization
2,954

 
5,038

Allowance for loan losses

 
(389
)
Mortgages loans, net
46,854

 
74,612

Other notes receivable - principal
5,388

 
5,355

Other notes receivable - discounts, net of amortization
(241
)
 

Allowance for loan losses

 

Other notes receivable, net
5,147

 
5,355

Total loans receivable, net
$
52,001

 
$
79,967

The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are three other notes receivable included within loans receivable, as of September 30, 2018, of which two notes totaling $3.4 million are secured by tenant assets and stock and the remaining note, with a balance of $1.7 million, is unsecured. As of December 31, 2017, there were three other notes receivable included within loans receivable, of which one $3.5 million note was secured by tenant assets and stock and the other two were unsecured.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
September 30,
2018
 
December 31,
2017
In-place leases
$
385,936

 
$
591,551

Above-market leases
62,822

 
89,640

Less: accumulated amortization
(145,804
)
 
(271,288
)
Intangible lease assets, net
$
302,954

 
$
409,903

 
 
 
 
Below-market leases
$
168,485

 
$
216,642

Less: accumulated amortization
(44,872
)
 
(61,339
)
Intangible lease liabilities, net
$
123,613

 
$
155,303

The amounts amortized as a net increase to rental revenue for capitalized above and below-market leases were $1.3 million and $1.5 million for the three months ended September 30, 2018 and 2017, respectively, and $4.2 million and $4.9 million for the nine months ended September 30, 2018 and 2017, respectively. The value of in place leases amortized and included in depreciation and amortization expense was $7.0 million and $10.8 million for the three months ended September 30, 2018 and 2017, respectively, and $25.7 million and $33.0 million for the nine months ended September 30, 2018 and 2017, respectively.

22


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)


Real Estate Assets Under Direct Financing Leases
The components of real estate investments held under direct financing leases were as follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Minimum lease payments receivable
$
5,874

 
$
7,325

Estimated residual value of leased assets
24,552

 
24,552

Unearned income
(5,617
)
 
(7,012
)
Real estate assets under direct financing leases, net
$
24,809

 
$
24,865

Real Estate Assets Held for Sale
The following table shows the activity in real estate assets held for sale for the nine months ended September 30, 2018 (dollars in thousands):
 
Number of Properties
 
Carrying
Value
Balance, December 31, 2017
15

 
$
48,929

Transfers from real estate investments held and used
9

 
39,487

Sales
(6
)
 
(10,257
)
Transfers to real estate investments held in use
(7
)
 
(25,715
)
Transfers to SMTA
(5
)
 
(7,853
)
Impairments

 
(990
)
Balance, September 30, 2018
6

 
$
43,601

Impairments

The following table summarizes total impairment losses recognized on the accompanying consolidated statements of operations and comprehensive income (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended  
 September 30,
 
2018
 
2017
 
2018
 
2017
Real estate and intangible asset impairment
$
1,113

 
$
32,676

 
$
16,737

 
$
82,553

Write-off of lease intangibles, net
166

 
5,061

 
477

 
5,556

Recovery of loans receivable, previously impaired

 

 
(17
)
 

Total impairment loss
$
1,279

 
$
37,737

 
$
17,197

 
$
88,109


Impairments for the three months ended September 30, 2018 and 2017, were comprised of $0.7 million and $32.9 million on properties classified as held and used, respectively, and $0.6 million and $4.8 million on properties classified as held for sale for the three months ended September 30, 2018 and 2017.
Impairments for the nine months ended September 30, 2018 and 2017, were comprised of $16.2 million and $65.5 million on properties classified as held and used, respectively, and $1.0 million and $22.6 million on properties classified as held for sale, respectively.


23


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2018
(Unaudited)

Note 4. Debt
The debt of the Company and the Operating Partnership are the same, except for the presentation of the Convertible Notes which were issued by the Company. Subsequently, an intercompany note between the Company and the Operating Partnership was executed with terms identical to those of the Convertible Notes. Therefore, in the consolidated balance sheet of the Operating Partnership, the amounts related to the Convertible Notes are reflected as notes payable to Spirit Realty Capital, Inc., net. The Company's debt is summarized below:
 
Weighted Average Effective
Interest Rates
(1)
 
Weighted Average
Stated
Rates (2)
 
Weighted Average Maturity (3)
 
September 30,
2018
 
December 31,
2017
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facility
5.42
%
 
3.37
%
 
0.5
 
$
157,000

 
$
112,000

Term Loan
3.78
%
 
3.57
%
 
0.1
 
420,000

 

Master Trust Notes
5.89
%
 
5.27
%
 
5.2
 
169,012

 
2,248,504

CMBS
5.90
%
 
5.51
%
 
4.7
 
275,460

 
332,647

Related Party Notes Payable
1.00
%
 
1.00
%
 
9.5
 
28,630

 

Convertible Notes
5.31
%
 
3.28
%
 
1.5
 
747,500

 
747,500

Senior Unsecured Notes
4.60
%
 
4.45
%
 
8.0
 
300,000

 
300,000

Total debt
5.04
%
 
3.93
%
 
2.9
 
2,097,602

 
3,740,651

Debt discount, net
 
 
 
 
 
 
(17,406
)
 
(61,399
)
Deferred financing costs, net (4)
 
 
 
 
 
 
(15,928
)
 
(39,572
)
Total debt, net
 
 
 
 
 
 
$
2,064,268

 
$
3,639,680

(1) The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs, facility fees, and non-utilization fees, where applicable, calculated for the three months ended September 30, 2018 and based on the average principal balance outstanding during the period.
(2) Represents the weighted average stated interest rate based on the outstanding principal balance as of September 30, 2018.
(3) Represents the weighted average maturity based on the outstanding principal balance as of September 30, 2018.
(4) The Company records deferred financing costs for its Revolving Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.
Revolving Credit Facility
The Company has access to an unsecured credit facility, the Revolving Credit Facility, which matures on March 31, 2019 (extendable at the Operating Partnership's option to March 31, 2020, subject to satisfaction of certain requirements) and includes an accordion feature to increase the committed facility size up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments. The Operating Partnership may voluntarily prepay the Revolving Credit Facility, in whole or in part, at any time without premium or penalty, but subject to applicable LIBOR breakage fees, if any.
Borrowings bear interest at 1-Month LIBOR plus 0.875% to 1.55% per annum and require a facility fee in an amount equal to the aggregate revolving credit commitments (whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum. As of September 30, 2018, the Revolving Credit Facility bore interest at 1-Month LIBOR plus 1.25% and incurred a facility fee of 0.25% per annum.
In connection with placement and use of the Revolving Credit Facility, the Company has incurred costs of $4.8 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Revolving Credit Facility. The unamortized deferred financing costs relating to the Revolving Credit Facility were $0.7 million and $1.6 million as of September 30, 2018 and December 31, 2017, respectively, and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.
As of September 30, 2018, $157.0 million was outstanding and $643.0 million of borrowing capacity was available under the Revolving Credit Facility. The Operating Partnership's ability to borrow under the Revolving Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and

24


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2018
(Unaudited)

negative covenants. As of September 30, 2018, the Company and the Operating Partnership were in compliance with these financial covenants.
Term Loan
On November 3, 2015, the Company entered into a Term Loan Agreement with 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 from $420.0 million up to $600.0 million, subject to obtaining additional lender commitments. Borrowings may be repaid without premium or penalty, and may be re-borrowed within 30 days up to the then available loan commitment and subject to occurrence limitations within any twelve-month period. The Company elected to exercise its option to extend the Term Loan, see Note 13 for further discussion.
The Term Loan Agreement provides that outstanding borrowings bear interest at 1-Month LIBOR plus 0.90% to 1.75% per annum, depending on the Company’s credit ratings. As of September 30, 2018, the Term Loan bore interest at 1-Month LIBOR plus 1.35%.
As a result of entering into the Term Loan, the Company incurred origination costs of $2.4 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Term Loan. As of September 30, 2018 and December 31, 2017, the unamortized deferred financing costs relating to the Term Loan were $0.1 million and $0.7 million, respectively, and were recorded net against the principal balance of mortgages and notes payable as of September 30, 2018 and December 31, 2017, on the accompanying consolidated balance sheets.
As of September 30, 2018, the Term Loan had a $420.0 million outstanding balance and no available borrowing capacity. The Operating Partnership's ability to borrow under the Term Loan is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. The Corporation has unconditionally guaranteed all obligations of the Operating Partnership under the Term Loan Agreement. As of September 30, 2018, the Corporation and the Operating Partnership were in compliance with these financial covenants.
Senior Unsecured Notes
On August 18, 2016, the Operating Partnership completed a private placement of $300.0 million aggregate principal amount of senior notes, which are guaranteed by the Company. The Senior Unsecured Notes were issued at 99.378% of their principal face amount, resulting in net proceeds of $296.2 million, after deducting transaction fees and expenses. The Senior Unsecured Notes accrue interest at a rate of 4.45% per annum, payable on March 15 and September 15 of each year, and mature on September 15, 2026. The Company filed a registration statement with the SEC to exchange the private Senior Unsecured Notes for registered Senior Unsecured Notes with substantially identical terms, which became effective on April 14, 2017. All $300.0 million aggregate principal amount of private Senior Unsecured Notes were tendered in the exchange for registered Senior Unsecured Notes.
The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed on or after June 15, 2026 (three months prior to the maturity date of the Senior Unsecured Notes), the redemption price will not include a make-whole premium.  
In connection with the offering, the Operating Partnership incurred $3.4 million in deferred financing costs and an offering discount of $1.9 million. These amounts are being amortized to interest expense over the life of the Senior Unsecured Notes. As of September 30, 2018 and December 31, 2017, the unamortized deferred financing costs relating to the Senior Unsecured Notes were $2.8 million and $3.0 million, respectively, and the unamortized discount was $1.5 million and $1.7 million, respectively, with both the deferred financing costs and offering discount recorded net against the Senior Unsecured Notes principal balance on the accompanying consolidated balance sheets.
In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative

25


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
September 30, 2018
(Unaudited)

covenants. As of September 30, 2018, the Company and the Operating Partnership were in compliance with these financial covenants.
Master Trust Notes
Master Trust 2013 and Master Trust 2014 are asset-backed securitization platforms through which the Company has raised capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans.
On January 23, 2018, the Company re-priced a private offering of the Master Trust 2014 Series 2017-1 notes with $674.2 million aggregate principal amount. As a result, the interest rate on the Class B Notes was reduced from 6.35% to 5.49%, while the other terms of the Class B Notes remained unchanged. The terms of the Class A Notes were unaffected by the repricing. In connection with the re-pricing, the Company received $8.2 million in additional proceeds, that reduced the discount on the underlying debt.

On February 2, 2018, the Operating Partnership sold its holding of Master Trust 2014 Series 2014-2 notes with a principal balance of $11.6 million to a third-party. This transaction resulted in an increase in the Company's mortgages and notes payable, net balance as shown in the balance sheet.
On May 21, 2018, the Company retired $123.1 million of Master Trust 2013 Series 2013-1 Class A notes. There was no make-whole payment associated with the redemption of these notes. During the nine months ended September 30, 2018 there were $15.2 million in prepayments on Master Trust 2013 Series 2013-2 Class A notes with $934 thousand in associated make-whole payments.
On May 31, 2018, in conjunction with the Spin-Off, the Company contributed Master Trust 2014, which is included in liabilities related to SMTA Spin-Off in our December 31, 2017 consolidated balance sheet.
The Master Trust Notes are summarized below:
 
 
Stated
Rate
 
Maturity
 
September 30,
2018
 
December 31,
2017
 
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A2
 
 
 
 
 
$

 
$
252,437

Series 2014-2
 
 
 
 
 

 
222,683

Series 2014-3
 
 
 
 
 

 
311,336

Series 2014-4 Class A1
 
 
 
 
 

 
150,000

Series 2014-4 Class A2
 
 
 
 
 

 
358,664

Series 2017-1 Class A
 
 
 
 
 

 
515,280

Series 2017-1 Class B
 
 
 
 
 

 
125,400

Total Master Trust 2014 notes
 
 
 
 
 

 
1,935,800

Series 2013-1 Class A
 
 
 
 
 

 
125,000

Series 2013-2 Class A
 
5.3