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Section 1: 10-K (10-K 2018)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018  
Commission file number 001-38414
 
SPIRIT MTA REIT
(Exact name of registrant as specified in its charter)
 
Maryland
 
 
 
82-6712510
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
2727 North Harwood Street, Suite 300,
                 Dallas, Texas 75201     
 
 
 
(972) 476-1409
(Address of principal executive offices; zip code)
 
 
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
 
Name of exchange on which registered:
Common Shares of Beneficial Interest, par value $0.01 per share
 
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  o No   x 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      Yes  o No   x         
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 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).         Yes  x No   o     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 
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.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
o
Emerging growth company
x
 
 
 
 
 
 
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.     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 June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of Spirit MTA REIT's common shares, $0.01 par value, held by non-affiliates of the Registrant, was $441.4 million based on the last reported sale price of $10.30 per share on the New York Stock Exchange on June 29, 2018.




The number of outstanding shares of Spirit MTA REIT's common shares, $0.01 par value, as of March 19, 2019, was 43,085,751 shares.
Documents Incorporated by Reference

Certain specific portions of the definitive Proxy Statement for Spirit MTA REIT's 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K. Only those portions of the Proxy Statement which are specifically incorporated by reference herein shall constitute a part of this Annual Report on Form 10-K.
 




EXPLANATORY NOTE
This annual report of Spirit MTA REIT includes the financial information of the Company as of December 31, 2018 and December 31, 2017 and for the years ended December 31, 2018, 2017 and 2016.
On May 31, 2018, the distribution date, Spirit Realty Capital, Inc. completed the previously announced Spin-Off of the assets that collateralize Master Trust 2014, all of its properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, Spirit MTA REIT. The Spin-Off was effected by means of a pro rata distribution of one SMTA common share for every ten shares of Spirit common stock held by each of Spirit's stockholders as of May 18, 2018, the record date.
The accompanying financial statements include the consolidated accounts of the Company and its wholly-owned subsidiaries for the period subsequent to the Spin-Off on May 31, 2018. The pre-spin financial statements were prepared on a carve-out basis and reflect the combined net assets and operations of the predecessor legal entities for periods prior to the Spin-Off which formed the Company at the time of the Spin-Off. Accordingly, the results of operations for the years ended December 31, 2018, 2017 and 2016 reflect the aggregate operations and changes in cash flows and equity on a combined basis for all periods prior to May 31, 2018 and on a consolidated basis for all periods subsequent to May 31, 2018. The discussion of our results of operations, cash flows and financial condition set forth in this report is not necessarily indicative of the future results of operations, cash flows or financial condition as an independent, publicly traded company.





GLOSSARY
2017 Tax Legislation
Tax Cuts and Jobs Act
2018 Incentive Award Plan
Spirit MTA REIT and Spirit MTA REIT, L.P. 2018 Incentive Award Plan
ACM
Asbestos-containing materials
ADA
Americans with Disabilities Act
Adjusted Debt
Adjusted Debt is a non-GAAP financial measure. See definition in Item 6. Selected Financial Data.
Adjusted EBITDAre
Adjusted EBITDAre is a non-GAAP financial measure. See definition in Item 6. Selected Financial Data.
AFFO
Adjusted Funds From Operations is a non-GAAP financial measure. See definition in Item 6. Selected Financial Data.
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
CMBS
Commercial mortgage-backed securities
Code
Internal Revenue Code of 1986, as amended
Collateral Pool
Pool of collateral assets that are pledged to the indenture trustee for the benefit of the noteholders and secure obligations of issuers under Master Trust 2014
Contractual Rent
Monthly contractual cash rent, excluding percentage rents, from 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. We use Contractual Rent when calculating certain metrics that are useful to evaluate portfolio credit, asset type, industry, and geographic diversity and to manage risk.
CPI
Consumer Price Index
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDAR
EBITDAR is a non-GAAP financial measure defined as Earnings Before Interest, Taxes, Depreciation, Amortization and Rent
EBITDAre
EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. See definition in Item 6. Selected Financial Data.
EDF
Expected Default Frequency
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FFO
Funds From Operations. See definition in Item 6. Selected Financial Data.
GAAP
Generally Accepted Accounting Principles in the United States
LIBOR
London Interbank Offered Rate
Liquidity Reserve
Cash held on deposit until there is a cashflow shortfall as defined in the Master Trust 2014 agreements or a liquidation of Master Trust 2014 occurs
Manager
Spirit Realty, L.P., a wholly-owned subsidiary of Spirit
Master Trust 2014
The asset-backed securitization trust established in 2005, and amended and restated in 2014, which issues non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans from time to time. Indirect special purpose entity subsidiaries of the Company are the borrowers.
MGCL
Maryland General Corporation Law




NAREIT
National Association of Real Estate Investment Trusts
NYSE
New York Stock Exchange
Occupancy
The number of economically yielding owned properties divided by total owned properties
Other Properties
One of two reportable segments consisting of all properties not included in the Master Trust 2014 Collateral Pool
Properties
Owned properties and mortgage loans receivable secured by properties
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
Release Account
Proceeds from the sale of assets securing Master Trust 2014 held in a restricted account until a qualifying substitution is made or the funds are applied as prepayment of principal
Separation and Distribution Agreement
Separation and Distribution Agreement between Spirit Realty Capital, Inc. and Spirit MTA REIT dated May 21, 2018
SEC
Securities and Exchange Commission
Shopko
Shopko Stores Inc. and its affiliates and subsidiaries, including Specialty Retail Shops Holding Corp.
Shopko B-1 Term Loan
The secured loan made to Shopko in the initial principal amount of $35.0 million
Shopko CMBS Loan Agreements
The combination of the non-recourse mortgage loan agreement, establishing an aggregate loan amount of $125.0 million, and the mezzanine loan agreement, establishing an aggregate loan amount of $40.0 million
Shopko Lenders
An institutional lender and certain other lenders from time to time party to the Shopko CMBS Loan Agreements
SMTA
Spirit MTA REIT
Spin-Off
Creation of an independent, publicly traded REIT, SMTA, through the a pro rata distribution of one SMTA common share for every ten shares of Spirit common stock held by each of Spirit's stockholders as of May 18, 2018, the record date
Spirit
Spirit Realty Capital, Inc.
SubREIT
Spirit MTA SubREIT, Inc., a wholly-owned subsidiary of SMTA
TRS
Taxable REIT Subsidiary, a corporation, other than a REIT, in which a REIT directly or indirectly holds stock or shares, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary
U.S.
United States of America
Vacant
Owned properties that are not economically yielding
VFN
Variable funding notes
Unless otherwise indicated or unless the context requires otherwise, all references to the "Company," "Spirit MTA REIT," “SMTA,” "we," "us" or "our" refer to Spirit MTA REIT and its wholly-owned subsidiaries.





INDEX

PART I
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosure
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
PART III
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Trustees, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Trustee Independence
Item 14.
Principal Accountant Fees and Services
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
 





PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). When used in this Annual Report on Form 10-K, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words 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:
our success in pursuing and executing on strategic alternatives to maximize shareholder value;
industry and economic conditions;
the financial performance of our retail tenants and the demand for retail space, particularly with respect to challenges being experienced by general merchandise retailers;
the impact of any financial, accounting, legal or regulatory issues, bankruptcy or litigation that may affect us or our major tenants, in particular the bankruptcy petition of Shopko;
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 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;
our ability to manage our operations;
our ability and willingness to maintain our qualification as a REIT;
our relationship with our Manager and its ability to retain qualified personnel;
potential conflicts of interest with our Manager or Spirit;
our ability to achieve the intended benefits from our Spin-Off from Spirit; 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.
You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.
Available Information
The Company's principal executive offices are located at 2727 North Harwood Street, Suite 300, Dallas, Texas 75201. Our telephone number at that location is 972-476-1409. We maintain a website at www.spiritmastertrust.com. On the Investor Relations page of our website, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and the Section 16 filings of our directors and officers, as well as any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings on our Investor Relations page of our website are available to be viewed free of charge. Also available on our website, free of charge, are our corporate governance guidelines, the charters of the related party transaction, nominating and corporate

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governance, audit and compensation committees of our Board of Trustees and our code of business conduct and ethics (which applies to all directors and our principal executive officer).
Information contained on or hyperlinked from our website is not incorporated by reference into and should not be considered part of this Annual Report on Form 10-K or our other filings with the SEC. Our common shares are listed on the NYSE under the symbol “SMTA.”
Item 1.     Business
THE COMPANY
We operate as an externally managed REIT formed in Maryland that invests in and manages 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, and industrial property types.
We began operations through predecessor legal entities which were wholly-owned subsidiaries of Spirit. On May 31, 2018, Spirit completed the Spin-Off that resulted in our establishment as an independent, publicly traded company. The Spin-Off was effected by means of a pro rata distribution of SMTA common shares to Spirit shareholders of record as of the close of business on the record date of May 18, 2018. In conjunction with the Spin-Off, we and our Manager, a wholly-owned subsidiary of Spirit, entered into an Asset Management Agreement under which our Manager provides external management of SMTA for a flat rate of $20 million per annum. As of December 31, 2018, we had no employees.
Our portfolio currently includes (i) Master Trust 2014, an asset-backed securitization trust which issues non-recourse asset-backed securities collateralized by commercial real estate, net-leases and mortgage loans, (ii) a portfolio of properties leased to Shopko encumbered with CMBS debt under the Shopko CMBS Loan Agreements, subject to the Shopko bankruptcy filing and subsequent foreclosure on the CMBS debt as discussed elsewhere in this Annual Report, (iii) a single distribution center property leased to a sporting goods tenant encumbered with CMBS debt, and (iv) a portfolio of 14 unencumbered properties. As of December 31, 2018, our gross investment in real estate and loans totaled approximately $2.56 billion, representing investments in 876 owned properties (788 excluding properties leased to Shopko) and eight properties securing our mortgage loans. See Item 2. "Properties" for further information on our properties and tenants.
RECENT DEVELOPMENTS
Shopko Bankruptcy Filing
On January 16, 2019, Shopko, our largest tenant, filed a petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). As of December 31, 2018, we received $42.1 million in annualized Contractual Rent from Shopko, which represented 17.9% of our total annualized Contractual Rent. As a consequence of the bankruptcy filing and the subsequent foreclosure by the Shopko Lenders on the majority of our Shopko assets, we do not expect to receive any additional cash flow going forward from any of the assets leased to Shopko, nor bear further meaningful expenses related to those assets. On March 18, 2019, Shopko announced that it would seek to liquidate its operations.
We also hold a secured loan previously made to Shopko with principal outstanding of $34.4 million as of December 31, 2018 (the "Shopko B-1 Term Loan"). While the outcome of the Shopko bankruptcy filing is uncertain and there can be no assurances that we will recover any amounts due to us under the Shopko B-1 Term Loan, we intend to pursue all of our rights and remedies in connection with the bankruptcy proceedings, with the goal of maximizing the receipt of amounts due to us under the Shopko B-1 Term loan.
Strategy Update
On January 16, 2019, in connection with Shopko filing for relief under Chapter 11 of the Bankruptcy Code, we announced that our Board of Trustees had elected to accelerate our strategic plan by initiating a process to explore strategic alternatives focused on maximizing shareholder value. Strategic alternatives to be considered may include, but are not limited to, a sale of the Company or the Master Trust 2014, a merger, the sale of the single distribution center property and other non-core assets, and the maximizing of recoveries in connection with the Shopko bankruptcy. We have not set a timetable for completion of the execution of any portion of this strategic plan, and there can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative.

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Recent Financings
Shopko CMBS
On November 1, 2018, four indirectly wholly-owned, property-owning subsidiaries of the Company entered into a non-recourse mortgage loan agreement with an institutional lender and certain other lenders from time to time party thereto (the "Shopko Lenders"), in an aggregate amount of $165.0 million. The Company received net proceeds from this loan agreement of approximately $141.9 million after the payment of fees, expenses and required reserves. The loan was secured by a pledge of the equity in the four subsidiaries, which collectively hold 85 assets (83 owned properties and two seller-financed notes on properties) that are leased to Shopko. On November 27, 2018, SMTA, through the indirectly wholly-owned subsidiary that owns the four property-owning subsidiaries, entered into a non-recourse mezzanine loan agreement with the Shopko Lenders, pursuant to which $40.0 million of the original $165.0 million was carved out, resulting in no additional proceeds to SMTA (such mezzanine loan agreement, together with the original loan agreement, the “Shopko CMBS Loan Agreements”). The mezzanine loan was secured by an equity pledge of the indirect wholly-owned subsidiary that owns the four property-owning subsidiaries.
In connection with the Shopko CMBS Loan Agreements, SMTA entered into a customary non-recourse loan guaranty agreement, in favor of the Shopko Lenders, pursuant to which SMTA guaranteed the payment and performance of the liabilities of the property-owning subsidiaries under the non-recourse loan agreements for damages resulting from certain breaches or actions, including, but not limited to, fraud or intentional misrepresentation by the borrowers, and for the repayment in full of the debt in the event of certain actions, including, without limitation, certain bankruptcy events and prohibited transactions.
On January 16, 2019, our indirect wholly-owned subsidiaries as borrowers under the Shopko CMBS Loan Agreements defaulted on the loans when those entities ceased to make interest payments as a result of Shopko ceasing to pay its rent obligations following its bankruptcy filing. The full principal amount of $157.4 million outstanding under the Shopko CMBS Loan Agreements immediately became due and payable, and interest is accruing at the default rate of LIBOR plus 12.5% on the original loan portion and LIBOR plus 18.0% on the mezzanine loan portion. On March 1, 2019, the Shopko Lenders foreclosed on the equity of the entity that owns the four property-owning subsidiaries.
Variable Funding Notes
On November 1, 2018 (the “VFN Closing Date”), the Company completed the issuance of net-lease mortgage notes Series 2018-1, Class A (the “Variable Funding Notes” or "VFN"), which allow for the funding of up to $50.0 million of Variable Funding Notes within Master Trust 2014. Master Trust 2014 is comprised of five issuers, each an indirectly wholly-owned, bankruptcy remote subsidiary of the Company. The VFN has been rated “A+” by Standard & Poor’s Rating Services. The VFN was sold in reliance on certain exemptions from registration under the Securities Act. The VFN may only be acquired by qualified institutional buyers in reliance on Rule 144A under the Securities Act or pursuant to another exemption under the Securities Act. Prior to the VFN Closing Date, Master Trust 2014 had existing notes that are secured by the same collateral as the VFN, which had approximately $1.95 billion in aggregate outstanding principal as of the VFN Closing Date.
For further discussion of the Non-Recourse Loan, Mezzanine Loan and Variable Funding Notes, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Real Estate Portfolio Activities
Concentration
During the year ended December 31, 2018, no tenant, excluding Shopko, exceeded 7.0% of our Contractual Rent and no one single property contributed more than 7.0% of our Contractual Rent. See Item 2. “Properties" for further information on our ten largest tenants and the composition of our tenant base.
Acquisitions and Dispositions
During the year ended December 31, 2018, we purchased nine properties, representing an aggregate gross investment of $112.6 million, and invested $2.6 million in revenue producing capital expenditures on existing properties. During the same period, we sold 47 properties for $91.0 million in gross sales proceeds. See Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K for additional discussion of our investments.

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Declaration of Quarterly and Special Dividend
On December 5, 2019, we announced that our Board of Trustees declared a quarterly cash dividend of $0.33 per common share for the fourth quarter of 2018. In addition, the Board of Trustees declared a special cash dividend of $1.00 per common share. Both dividends were paid on January 15, 2019 to shareholders of record as of December 31, 2018.
On March 5, 2019, the Board of Trustees declared a special cash dividend of $0.33 per common share for the first quarter ended March 31, 2019. The dividend will be paid on April 15, 2019 to holders of record as of March 29, 2019.
LEASING
We typically enter into master leases, leases with contractual rent escalators and leases that require ongoing tenant financial reporting. Most of our leases contain rent escalators, or provisions that periodically increase the base rent payable by the tenant under the lease. Although 34.7% of our rent escalators increase rent at a fixed amount on fixed dates, as of December 31, 2018, approximately 59.6% (41.5% excluding Shopko) (excluding leases on multi-tenant properties) of our rent escalators increase rent by a multiple of any increases in the CPI or the lesser of (a) a multiple of any increase in the CPI over a specified period or (b) a fixed percentage.
Many of our tenants are required to provide financial information, which includes balance sheet, income statement and cash flow statement data, on a quarterly and/or annual basis, and, as of December 31, 2018, approximately 76.2% (58.3% excluding Shopko) of our lease investment portfolio requires the tenant to provide property-level performance information, which includes income statement data on a quarterly and/or annual basis. To assist in our determination of a tenant’s credit quality, we license a product from Moody’s Analytics that provides an EDF and a “shadow rating,” and we evaluate a lease’s property-level rent coverage ratio. An EDF is only an estimate of default probability based, in part, on assumptions incorporated into the product. A shadow rating does not constitute a published credit rating and lacks the extensive company participation that is typically involved when a rating agency publishes a rating; accordingly, a shadow rating may not be as indicative of creditworthiness as a rating published by Moody’s, S&P, or another nationally recognized statistical rating organization. Our calculations of EDFs, shadow ratings and rent coverage ratios are based on financial information provided to us by our tenants and prospective tenants without independent verification on our part, and we must assume the appropriateness of estimates and judgments that were made by the party preparing the financial information. See Item 2. “Properties."
OUR MANAGER
We and our Manager are parties to the Asset Management Agreement, pursuant to which our Manager provides a management team that is responsible for implementing our business strategy and performing certain services for us, subject to oversight by our Board of Trustees. We do not have any employees. Our officers and the other individuals who execute our business strategy are employees of our Manager or its affiliates. Our Manager’s duties, subject to the supervision of our Board of Trustees, include: (1) performing all of our day-to-day functions, (2) sourcing, analyzing and executing on investments and dispositions, (3) determining investment criteria, (4) performing liability management duties, including financing and hedging, and (5) performing financial and accounting management. For its services, our Manager is entitled to an annual management fee and incentive compensation, as well as a termination fee and a promoted interest under certain circumstances. This description of our Asset Management Agreement is qualified in its entirety by the text of the Asset Management Agreement, which has been included as an exhibit to this Annual Report.
COMPETITION
As a landlord, we compete in the multi-billion dollar commercial real estate market with numerous developers and owners of properties, many of which own properties similar to ours in the same markets in which our properties are located. In operating and managing our portfolio, we compete for tenants based on a number of factors, including location, rental rates and flexibility. Some of our competitors have greater economies of scale, have lower cost of capital, have access to more resources and have greater name recognition than we do. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose our tenants or prospective tenants and we may be pressured to reduce our rental rates or to offer substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options in order to retain tenants when our leases expire.

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REGULATION
General
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of our properties has the necessary permits and approvals.
Americans With Disabilities Act
Pursuant to the ADA, our properties are required to meet federal requirements related to access and use by persons with disabilities. Compliance with the ADA, as well as a number of additional federal, state and local laws and regulations, may require modifications to properties we currently own and any properties we purchase, or may restrict renovations of those properties. Noncompliance with these laws or regulations could result in the imposition of fines or an award of damages to private litigants, as well as the incurrence of the costs of making modifications to attain compliance, and future legislation could impose additional financial obligations or restrictions on our properties. Although our tenants are generally responsible for all maintenance and repair costs pursuant to triple-net leases, including compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the property for a failure of one of our tenants to comply with such laws or regulations.
Environmental Matters
Federal, state and local environmental laws and regulations regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various of these laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances, hazardous wastes or petroleum product releases or threats of releases at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by those parties in connection with actual or threatened contamination. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under these laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may seek contributions from other identified, solvent, responsible parties for their fair share toward these costs. These costs may be substantial, and can exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow using the property as collateral and may adversely impact our investment in that property.
Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. Similarly, some of our properties are or were used for commercial or industrial purposes that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar commercial or industrial purposes. These operations create a potential for the release of petroleum products or other hazardous or toxic substances, and we could potentially be required to pay to clean up any contamination. In addition, strict environmental laws regulate a variety of activities that can occur on a property, including the storage of petroleum products or other hazardous or toxic substances, air emissions and water discharges. Such laws may impose fines or penalties for violations. As a result of the foregoing, we could be materially and adversely affected.
Environmental laws also govern the presence, maintenance and removal of ACM. Federal regulations require building owners and those exercising control over a building’s management to identify and warn, through signs and labels, of potential hazards posed by workplace exposure to installed ACM in their building. The regulations also have employee training, record keeping and due diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations. As a result of these regulations, building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to ACM. The regulations may affect the value of a building containing ACM in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of ACM when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for improper handling or a release into the environment of ACM and may provide for fines to owners or operators of real properties. In addition, owners or operators of real properties can be exposed to third-party liability for personal injury or improper work exposure associated with ACM.

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When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at our properties that have not been previously addressed or remediated by us.
Before completing any property acquisition, we obtain environmental assessments in order to identify potential environmental concerns at the property. These assessments are carried out in accordance with the Standard Practice for Environmental Site Assessments (ASTM Practice E 1527-13) as set by ASTM International, formerly known as the American Society for Testing and Materials, and generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historical aerial photographs and other information on past uses of the property. These assessments are limited in scope; however, if recommended in the initial assessments, we may undertake additional assessments such as soil and/or groundwater sampling or other limited subsurface investigations and ACM or mold surveys to test for substances of concern. A prior owner or operator of a property or historic operations at our properties may have created a material environmental condition that is not known to us or the independent consultants preparing the site assessments. Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances or regulations may impose material additional environmental liability. If environmental concerns are not satisfactorily resolved in any initial or additional assessments, we may obtain environment insurance policies to insure against potential environmental risk or loss depending on the type of property, the availability and cost of the insurance and various other factors we deem relevant (e.g., an environmental occurrence affects one of our properties where our lessee may not have the financial capability to honor its indemnification obligations to us).
Generally, our leases provide that the lessee will indemnify us for any loss or expense we incur as a result of the presence, use or release of hazardous materials on our property. However, our ultimate liability for environmental conditions may exceed the policy limits on any environmental insurance policies we obtain, if any. If we are unable to enforce the indemnification obligations of our lessees or if the amount of environmental insurance we carry is inadequate, our results of operations would be adversely affected.
INSURANCE
Our tenants are generally required to maintain liability and property insurance coverage for the properties they lease from us pursuant to triple-net leases. Under such leases, our tenants are generally required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. Tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged. See Item 1A. “Risk Factors - Risks Related to Our Business and Properties - Insurance on our properties may not adequately cover all losses, which could materially and adversely affect us.”
In addition to being generally named as additional insureds on our tenants’ liability policies, we separately maintain commercial general liability coverage with limits of $1.0 million for each occurrence and $2.0 million general aggregate. We also maintain primary property coverage on (i) all unleased properties, (ii) all properties for which such coverage is not required to be carried by a tenant and (iii) all properties for which we obtain such coverage but the costs of which are reimbursed by tenants. In addition, we maintain excess property coverage on all remaining properties and other property coverage as may be required by our lenders.

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Item 1A.     Risk Factors
You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, which could materially affect our business, financial condition, results of operations and prospects. The risks described below are not the only risks facing us. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition, results of operations and prospects.
RISKS RELATED TO OUR BUSINESS AND PROPERTIES
We are exploring and evaluating strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic alternative or that any such strategic alternative will yield additional value for our shareholders.
On January 16, 2019, our Board of Trustees announced the intention to explore strategic alternatives focused on maximizing shareholder value. Strategic alternatives being considered by the Board of Trustees may include, but are not limited to, a sale of SMTA or the Master Trust 2014, a merger or other potential alternatives transactions. There can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction or transactions or that any resulting plans or transactions will yield additional value for shareholders. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in our business.
The bankruptcy or insolvency of Shopko is likely to result in the termination of Shopko leases and material losses to us.
On January 16, 2019, Shopko filed a petition for relief under chapter 11 of the Bankruptcy Code, and subsequently announced on March 18, 2019 that it intends to liquidate its operations. Rental revenues generated from Shopko represented 17.9% of our Contractual Rent at December 31, 2018. As a consequence of the Shopko bankruptcy filing, we do not expect to receive any additional cash flow going forward from any of the assets leased to Shopko. The loss of Shopko as a tenant will reduce our contractual rent in future periods, which is likely to have a material adverse effect on our business, financial condition and results of operations.
We also made the Shopko B-1 Term Loan to Shopko, with principal outstanding of $34.4 million as of December 31, 2018. This secured loan has been accelerated due to the Shopko bankruptcy filing. The outcome of the Shopko bankruptcy is uncertain and there can be no assurances that there will be any recovery with respect to the Shopko B-1 Term Loan.
The bankruptcy or insolvency of any of our other tenants could result in the termination of such tenant’s lease and incremental material losses to us, in addition to those from the Shopko leases.
The occurrence of a bankruptcy or insolvency of any of our other tenants could diminish the income we receive from that tenant’s lease or leases. In particular, the retail industry is facing reductions in sales revenues and increased bankruptcies throughout the United States, and revenues generated from retail tenants other than Shopko represented 29.4% of our Contractual Rent at December 31, 2018. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. In addition, any claim we have for unpaid past rent, if any, may not be paid in full. We may also be unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms. Moreover, tenants who are considering filing for bankruptcy protection may request that we agree to amendments of their master leases to remove certain of the properties they lease from us under such master leases. We cannot guarantee that we will be able to sell or re-lease such properties or that lease termination fees, if any, received in exchange for such releases will be sufficient to make up for the rental revenues lost as a result of such lease amendments. As a result, future tenant bankruptcies may materially and adversely affect us.

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Risks related to commercial real estate ownership could reduce the value of our properties.
Our core business is the ownership of real estate that is leased to retail, service and distribution companies on a triple-net basis. Accordingly, our performance is subject to risks inherent to the ownership of commercial real estate, including:
inability to collect rent from tenants due to financial hardship, including bankruptcy;
changes in local real estate markets resulting in the lack of availability or demand for single-tenant retail space;
changes in consumer trends and preferences that reduce the demand for products/services of our tenants;
inability to lease or sell properties upon expiration or termination of existing leases;
environmental risks related to the presence of hazardous or toxic substances or materials on our properties;
subjectivity of real estate valuations and changes in such valuations over time;
illiquid nature of real estate compared to most other financial assets;
changes in laws and regulations, including those governing real estate usage and zoning;
changes in interest rates and the availability of financing; and
changes in the general economic and business climate.
The occurrence of any of the risks described above may cause the value of our real estate to decline, which could materially and adversely affect our business, financial condition and results of operations.
Credit and capital market conditions may adversely affect our access to and/or the cost of capital.
Periods of volatility in the credit and capital markets negatively affect the amounts, sources and cost of capital available to us. We primarily use external financing to refinance indebtedness as it matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our business activities and repayment of debt, such as selling assets. To the extent that we access capital at a higher cost (reflected in higher interest rates for debt financing or lower share price for equity financing), our earnings per share and cash flow could be adversely affected.
Our tenants may fail to successfully operate their businesses, which could adversely affect us.
The success of our investments is dependent on the financial stability of our tenants’ financial condition and leasing practices. Adverse economic conditions such as high unemployment levels, interest rates, tax rates and fuel and energy costs may have an impact on the results of operations and financial condition of our tenants and result in a decline in rent or an increased incidence of default under existing leases. Such adverse economic conditions may also reduce overall demand for rental space, which could adversely affect our ability to maintain our current tenants and attract new tenants.
At any given time, our tenants may experience a downturn in their business that may weaken the operating results and financial condition of individual properties or of their business as whole. As a result, a tenant may delay lease commencement, decline to extend a lease upon its expiration, fail to make rental payments when due, become insolvent or declare bankruptcy, as in the case of Shopko's recent bankruptcy filing. We depend on our tenants to operate the properties we own in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage and pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status. The ability of our tenants to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their operations. Cash flow generated by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us. Although our occupied properties are generally operationally essential to our tenants, meaning the property is essential to the tenant’s generation of sales and profits, this does not guarantee that a tenant’s operations at a particular property will be successful or that the tenant will be able to meet all of its obligations to us. Our tenants’ failure to successfully operate their businesses could materially and adversely affect us.
Single-tenant leases involve particular and significant risks related to tenant default.
Many properties in our portfolio are single-tenant triple-net leased properties throughout the U.S. The financial failure of, or default in payment by, a single tenant under its lease is likely to cause a significant reduction in, or elimination of, our rental revenue from that property and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. This risk is magnified in situations where we lease multiple properties to a single tenant under a master lease. The failure or default of a tenant under a master lease could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master

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lease structure may be beneficial to us because it restricts the ability of tenants to individually remove underperforming properties from the portfolio of properties leased from us, there is no guarantee that a tenant will not default in its obligations to us or decline to renew its master lease upon expiration. The default of a tenant that leases multiple properties from us, as in the case of Shopko's recent bankruptcy filing, could materially and adversely affect us.
A substantial portion of our properties are leased to unrated tenants and the tools we use to measure the credit quality of such tenants may not be accurate.
A substantial portion of our properties are leased to unrated tenants whom we determine, through our internal underwriting and credit analysis, to be creditworthy. Many of our tenants are required to provide financial information, which includes balance sheet, income statement and cash flow statement data, on a quarterly and/or annual basis, and, as of December 31, 2018, approximately 76.2% (58.3% excluding Shopko) of our Contractual Rent was generated pursuant to leases that require the tenant to provide property-level performance information, which includes income statement data on a quarterly and/or annual basis. To assist in our determination of a tenant’s credit quality, we license a product from Moody’s Analytics that provides an EDF and a “shadow rating,” and we evaluate a lease’s property-level rent coverage ratio. An EDF is only an estimate of default probability based, in part, on assumptions incorporated into the product. A shadow rating does not constitute a published credit rating and lacks the extensive company participation that is typically involved when a rating agency publishes a rating; accordingly, a shadow rating may not be as indicative of creditworthiness as a rating published by Moody’s, S&P, or another nationally recognized statistical rating organization. Our calculations of EDFs, shadow ratings and rent coverage ratios are based on financial information provided to us by our tenants and prospective tenants without independent verification on our part, and we must assume the appropriateness of estimates and judgments that were made by the party preparing the financial information. If our measurement of credit quality proves to be inaccurate, we may be subject to defaults, and investors may view our cash flows as less stable.
Decrease in demand for retail and restaurant space may materially and adversely affect us.
As of December 31, 2018, leases representing approximately 47.3% (29.4% excluding Shopko) and 19.6% of our Contractual Rent were with tenants in the retail and restaurant industries, respectively, and we may enter into leases with additional retail and restaurant tenants in the future. Accordingly, a decrease in the demand for retail and/or restaurant spaces adversely impacts us. The market for retail and restaurant space has previously been, and could continue to be, adversely affected by the following factors: weakness in the national, regional and local economies; the adverse financial condition of some large retail and restaurant companies; the ongoing consolidation in the retail and restaurant industries; the excess amount of retail and restaurant space in a number of markets; and, in the case of the retail industry, increasing consumer purchases over the Internet. To the extent that these conditions continue, they are likely to negatively affect market rents for retail and restaurant space, which could materially and adversely affect our business, financial condition and results of operations.
High geographic concentration of our properties could magnify the effects of adverse economic or regulatory developments in such geographic areas on our operations and financial condition.
As of December 31, 2018, 11.7% of our portfolio (as a percentage of Contractual Rent) was located in Texas, representing the highest concentration of our assets. Geographic concentration exposes us to greater economic or regulatory risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the economic or regulatory environments of the geographic areas in which we concentrate (or in which we may develop a substantial concentration of assets in the future), such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes or costs of complying with governmental regulations.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
Our results of operations depend on our ability to strategically lease space in our properties (by renewing or re-leasing expiring leases and leasing vacant space), optimize our tenant mix or lease properties on more economically favorable terms. As of December 31, 2018, leases representing approximately 4.7% of our Contractual Revenue will expire during 2020. As of December 31, 2018, 25 of our properties, representing approximately 2.9% of our total number of owned properties, were Vacant. Current tenants may decline, or may not have the financial resources available, to renew current leases and we cannot guarantee that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew the leases as they expire, we will have to find new tenants to lease our properties and there is no guarantee that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights, below-market renewal options or other lease incentive

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payments will not be offered to attract new tenants. We may experience significant costs in connection with renewing, leasing or re-leasing a significant number of our properties, which could materially and adversely affect our results of operations.
Our ability to realize future rent increases will vary depending on changes in the CPI.
Most of our leases contain rent escalators, or provisions that periodically increase the base rent payable by the tenant under the lease. Although 34.7% of our rent escalators increase rent at a fixed amount on fixed dates, as of December 31, 2018, approximately 59.6% (41.5% excluding Shopko) (excluding leases on multi-tenant properties) of our rent escalators increase rent by a multiple of any increases in the CPI or the lesser of (a) a multiple of any increase in the CPI over a specified period or (b) a fixed percentage. If the product of any increase in the CPI multiplied by the applicable factor is less than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on a fixed percentage. Therefore, during periods of low inflation or deflation, small increases or decreases in the CPI will subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on fixed percentages or amounts. Conversely, if the product of any increase in the CPI multiplied by the applicable factor is more than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on an increase in CPI. Therefore, periods of high inflation will subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on CPI increases.
Property vacancies could result in significant capital expenditures and illiquidity.
The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new tenant. Many of the leases we enter into or acquire are for properties that are specially suited to the particular business of our tenants. Because these properties have been designed or physically modified for a particular tenant, if the current lease is terminated or not renewed, we may be required to renovate the property at substantial costs, decrease the rent we charge or provide other concessions in order to lease the property to another tenant. In the event we are required to sell these or other properties, we may have difficulty selling it then due to the special purpose for which the property may have been designed or modified. This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions, including tenant demand. These limitations could have a material adverse effect on our business, financial condition and results of operations.
Operational risks may disrupt our businesses or result in losses.
We are completely dependent on our Manager’s financial, accounting, communications and other data processing systems. Such systems may fail to operate properly or become disabled as a result of tampering or a breach of the network security systems or otherwise. In addition, such systems are from time to time subject to cyberattacks. Breaches of our Manager’s network security systems could involve attacks that are intended to obtain unauthorized access to our proprietary information or personal identifying information of our shareholders, destroy data or disable, degrade or sabotage our systems, often through the introduction of computer viruses, cyberattacks and other means, and could originate from a wide variety of sources, including unknown third parties. There can be no assurance that measures to provide adequate protection to the integrity of our systems will be successful. If such systems are compromised, do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage. Finally, our Manager relies on third-party service providers for certain aspects of our business, including for certain information systems, technology and administration. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of our operations and could affect our reputation and hence adversely affect our business.
Illiquidity of real estate investments could significantly impede our ability to pursue our ongoing business strategy to sell certain of our assets or respond to adverse changes in the performance of our properties and harm our financial condition.
The real estate investments we have made are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial or investment conditions is limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objective by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the

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financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of the jurisdiction in which a property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may materially and adversely affect our business and results of operations.
We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties.
We compete with numerous developers, owners and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. In operating and managing our portfolio, we compete for tenants based on a number of factors, including location, rental rates and flexibility. Some of our competitors have greater economies of scale, have lower cost of capital, have access to more resources and have greater name recognition than we do. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments in order to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties, which could materially and adversely affect us.
The loss of a borrower or the failure of a borrower to make loan payments on a timely basis will reduce our revenues, which could lead to losses on our investments and reduced returns to our shareholders.
We have originated or acquired long-term, commercial mortgage and other loans. The success of our loan investments is dependent on the financial stability of our borrowers. The success of our borrowers is dependent on each of their individual businesses and their industries, which could be affected by economic conditions in general, changes in consumer trends and preferences and other factors over which neither they nor we have control. For example, in connection with Shopko’s bankruptcy filing, Shopko has filed pleadings asserting that any recovery under the Shopko B-1 Term Loan will be limited and may be impaired in full. We have therefore established a loss reserve in the amount of approximately $33.8 million, representing the remaining amount of the Shopko B-1 Term Loan as of the date hereof. A default on loans owed to us, including the loan made to Shopko, could prevent us from earning interest or receiving a return of the principal of our loan and, as a result, would materially and adversely affect us. In the event of a default, we may also experience delays in enforcing our rights as lender and may incur substantial costs in collecting the amounts owed to us and in liquidating any collateral.
Foreclosure and other similar proceedings used to enforce payment of real estate loans are generally subject to principles of equity, which are designed to relieve the indebted party from the legal effect of that party’s default. Foreclosure and other similar laws may limit our right to obtain a deficiency judgment against the defaulting party after a foreclosure or sale. The application of any of these principles may lead to a loss or delay in the payment on loans we hold, which in turn could reduce the amounts we have available to make distributions. Further, in the event we have to foreclose on a property, the amount we receive from the foreclosure sale of the property may be inadequate to fully pay the amounts owed to us by the borrower and our costs incurred to foreclose, repossess and sell the property which could materially and adversely affect us.
Our investments in mortgage loans may be affected by unfavorable real estate market conditions, including interest rate fluctuations, which could decrease the value of those loans.
Our investments in mortgage loans are subject to risk of default by the borrowers and to interest rate risks. To the extent we incur delays in liquidating defaulted mortgage loans, we may not be able to obtain all amounts due to us under such loans. Further, we will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans or the dates of our investment in the loans. If the values of the underlying properties decline, the value of the collateral securing our mortgage loans will also decline and if we were to foreclose on any of the properties securing the mortgage loans, we may not be able to sell or lease them for an amount equal to the unpaid amounts due to us under the mortgage loans. As such, defaults on mortgage loans in which we invest may materially and adversely affect our investment strategy.

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Inflation may materially and adversely affect us and our tenants.
Increased inflation could have a negative impact on variable-rate debt we currently have or that we may incur in the future. Our leases typically contain provisions designed to mitigate the adverse impact of inflation on our results of operations. Because tenants are typically required to pay all property operating expenses, increases in property-level expenses at our leased properties generally do not affect us. However, increased operating expenses at vacant properties and the limited number of properties that are not subject to full triple-net leases could cause us to incur additional operating expenses, which could increase our exposure to inflation. Additionally, the increases in rent provided by many of our leases may not keep up with the rate of inflation. Increased costs may also have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us.
If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately and timely report our financial results.
Section 404(a) of Sarbanes-Oxley Act of 2002 ("SOX") requires that, beginning with our annual report for the fiscal year ending December 31, 2020, our management is required to assess and report annually on the effectiveness of our internal controls over financial reporting and identify any material weaknesses in internal controls over financial reporting. However, for so long as we are an “emerging growth company”, our independent registered public accounting firm will not be required to issue an annual report that addresses the effectiveness of our internal controls over financial reporting.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of SOX.
Any failure to maintain effective internal controls or timely effect any necessary improvement of our internal control over financial reporting controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect the listing of our common shares on the NYSE. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common shares.
The requirements of being a public company may strain our resources.
We are subject to the reporting requirements of the Exchange Act, SOX, the listing requirements of the NYSE, and other applicable securities rules and regulations. Compliance with these rules and regulations requires substantial legal and financial compliance costs, makes some activities more difficult, time-consuming, or costly, and places increased demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and current reports with respect to our business and operating results. SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain disclosure controls and procedures and internal control over financial reporting that meet this standard, significant resources and oversight are required.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to complying with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

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We depend on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.
In order to maintain our qualification as a REIT, we are required under the Code to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs from operating cash flow. Consequently, we may rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:
general market conditions;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price of our common shares.
If we cannot obtain capital from third-party sources, we may not be able to meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our shareholders necessary to maintain our qualification as a REIT.
Historically, we have raised a significant amount of capital through debt issuances of our Master Trust 2014. We have generally used the proceeds from this program to repay other debt and fund real estate acquisitions. As of December 31, 2018, we had issued notes under our Master Trust 2014 in seven different series over five separate issuances with $1.94 billion aggregate principal amount outstanding. Additionally, under our Master Trust 2014, we had availability of $41.1 million borrowing capacity under our variable funding note as of December 31, 2018 ($45.8 million as of March 19, 2019). The Master Trust 2014 notes have a weighted average maturity of 4.4 years as of December 31, 2018. Our obligations under this program are generally secured by liens on certain of our properties. Subject to certain conditions, we may substitute real estate collateral within our securitization trust from time to time. Moreover, we view our ability to substitute collateral under our Master Trust 2014 favorably, and no assurance can be given that financing facilities offering similar flexibility will be available to us in the future.
Dispositions of real estate assets could change the holding period assumption in our valuation analyses, which could result in material impairment losses and adversely affect our financial results.
We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If we change our intended holding period due to our intention to sell or otherwise dispose of an asset, we must reevaluate whether that asset is impaired under GAAP. Depending on the carrying value of the property at the time we change our intention and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our financial results. Such losses could be material to our assets in the period that it is recognized. In December 2018, we recorded $167.2 million of impairment charges related to tangible and intangible assets due to the Shopko bankruptcy filing.
We may become subject to litigation, which could materially and adversely affect us.
In the ordinary course of business, we may become subject to litigation, including claims relating to our operations, security offerings and otherwise. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves. However, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.
Costs of compliance with, or liabilities related to, environmental laws may materially and adversely affect us.
The properties we own or have owned in the past may subject us to known and unknown environmental liabilities. Under various federal, state and local laws and regulations relating to the environment, as a current or former owner

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or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate and clean up such contamination and liability for harm to natural resources. We may face liability regardless of:
our knowledge of the contamination;
the timing of the contamination;
the cause of the contamination; or
the existence of other parties responsible for the contamination of the property.
There may be environmental liabilities associated with our properties of which we are unaware. We obtain Phase I environmental site assessments on all properties we finance or acquire. The Phase I environmental site assessments are limited in scope and therefore may not reveal all environmental conditions affecting a property. Therefore, there could be undiscovered environmental liabilities on the properties we own. Some of our properties use, or may have used in the past, underground tanks for the storage of petroleum-based products or other hazardous or toxic substances that could create a potential for release of hazardous substances or penalties if tanks do not comply with legal standards. If environmental contamination exists on our properties, we could be subject to strict, joint and/or several liability for the contamination by virtue of our ownership interest. Some of our properties may contain ACM. Strict environmental laws govern the presence, maintenance and removal of ACM and such laws may impose fines and penalties for failure to comply with these requirements or expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos). Strict environmental laws also apply to other activities that can occur on a property, such as air emissions and water discharges, and such laws may impose fines and penalties for violations.
The presence of hazardous substances on a property may adversely affect our ability to sell, lease or improve the property or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or businesses may be operated, and these restrictions may require substantial expenditures.
In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could be subject to strict liability by virtue of our ownership interest. We cannot be sure that our tenants will, or will be able to, satisfy their indemnification obligations, if any, under our leases. Furthermore, the discovery of environmental liabilities on any of our properties could lead to significant remediation costs or to other liabilities or obligations attributable to the tenant of that property, which may affect such tenant’s ability to make payments to us, including rental payments and, where applicable, indemnification payments.
Our environmental liabilities may include property damage, personal injury, investigation and clean-up costs. These costs could be substantial. Although we may obtain insurance for environmental liability for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies. If we were to become subject to significant environmental liabilities, we could be materially and adversely affected.
Most of the environmental risks discussed above refer to properties that we own or may acquire in the future. However, each of the risks identified also applies to the owners (and potentially, the lessees) of the properties that secure each of the loans we have made and any loans we may acquire or make in the future. Therefore, the existence of environmental conditions could diminish the value of each of the loans and the abilities of the borrowers to repay the loans and could materially and adversely affect us.
Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, should our tenants or their employees or customers be exposed to mold at any of our properties we could be required to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, exposure to mold

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by our tenants or others could subject us to liability if property damage or health concerns arise. If we were to become subject to significant mold-related liabilities, our business and results of operations could be materially and adversely affected.
Insurance on our properties may not adequately cover all losses, which could materially and adversely affect us.
Our tenants are required to maintain liability and property insurance coverage for the properties they lease from us pursuant to triple-net leases. Pursuant to such leases, our tenants are generally required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged.
As of December 31, 2018, 11.7% of our portfolio (as a percentage of Contractual Rent) was located in Texas, representing the highest concentration of our assets. We recognize that the frequency and / or intensity of extreme weather events may continue to increase due to climate change, and as a result, our exposure to these events could increase. These weather conditions also disrupt our business and the business of our tenants, which could affect the ability of some tenants to pay rent and may reduce the willingness of residents to remain in or move to the affected area. Therefore, as a result of the geographic concentration of our properties in Texas, we face risks, including higher costs, such as uninsured property losses and higher insurance premiums, and disruptions to our business and the businesses of our tenants.
Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Furthermore, in the event we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.
Compliance with the ADA and fire, safety and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.
Our properties are subject to the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases and financing agreements to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, our tenants' ability to cover the costs could be adversely affected. We may be required to expend our own funds to comply with the provisions of the ADA, which could materially and adversely affect us.
In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial

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compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us and could materially and adversely affect us.
As a result of acquiring C corporations in carry-over basis transactions, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits.
From time to time, we have acquired C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.
If we acquire any asset from a corporation that is or has been a C corporation in a carry-over basis transaction, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we will be required to pay regular U.S. federal corporate income tax on this gain to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our shareholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a carry-over basis transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any non-REIT earnings and profits by the close of the taxable year in which such transaction occurs. Any adjustments to the acquired corporation’s income for taxable years ending on or before the date of the transaction, including as a result of an examination of the corporation’s tax returns by the IRS, could affect the calculation of the corporation’s earnings and profits. If the IRS were to determine that we acquired non-REIT earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the carry-over basis transaction occurred, we could avoid disqualification as a REIT by paying a “deficiency dividend.” Under these procedures, we generally would be required to distribute any such non-REIT earnings and profits to our shareholders within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement and may require that we borrow funds to make the distribution even if the then-prevailing market conditions are not favorable for borrowings. In addition, payment of the statutory interest charge could materially and adversely affect us.
Changes in accounting standards may materially and adversely affect us.
From time to time the FASB, and the SEC, who create and interpret appropriate accounting standards, respectively, may change the financial accounting and reporting standards or their interpretation and application of these standards that will govern the preparation of our financial statements. These changes could materially and adversely affect our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could materially and adversely affect our tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate.
The FASB is considering various changes to GAAP, some of which may be significant, as part of a joint effort with the IASB to converge accounting standards. In particular, FASB issued a new accounting standard that requires companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. For public companies, this new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Many companies that account for certain leases on an “off balance sheet” basis would be required to account for such leases “on balance sheet” upon adoption of this rule. This change removes many of the differences in the way companies account for owned property and leased property, and could have a material effect on various aspects of our tenants’ businesses, including their credit quality and the factors they consider in deciding whether to own or lease properties. Additionally, it could cause companies that lease properties to prefer shorter lease terms in an effort to reduce the leasing liability required to be recorded on their balance sheet. This new standard could also make lease renewal options less attractive, because, under certain circumstances, the rule would require a tenant to assume that a renewal right will be exercised and accrue a liability relating to the longer lease term.
RISKS RELATED TO OUR INDEBTEDNESS
We are in default of payment obligations under certain of our indebtedness.
On January 16, 2019, our indirect wholly-owned subsidiaries as borrowers under the Shopko CMBS Loan Agreements defaulted on the loans secured by Shopko assets when those entities ceased to make interest payments as a result

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of Shopko ceasing to pay its rent obligations following its bankruptcy filing. The full outstanding principal amount of $157.4 million under the Shopko CMBS Loan Agreements immediately became due and payable, and interest is accruing at the default rate of LIBOR plus 12.5% on the original loan portion and LIBOR plus 18.0% on the mezzanine loan portion. On March 1, 2019, the lenders foreclosed on the equity of the entity that owns the four property-owning subsidiaries.
We have have a significant amount of indebtedness.
As of December 31, 2018, we had approximately $2.18 billion aggregate principal amount of indebtedness outstanding, of which $2.02 billion incurs interest at a fixed rate. We may also incur significant additional debt to finance future investment activities. As of December 31, 2018, our Adjusted Debt to Annualized Adjusted EBITDAre ratio was 12.6x, our Adjusted Debt + Preferred to Annualized Adjusted EBITDAre ratio was 13.6x and our Fixed Charge Coverage Ratio was 1.4x, each of which include an adjustment to reflect the impact of Shopko's complete default on its payments to us. Our Fixed Charge Coverage Ratio does not reflect the impact of our amortizing debt principal payments. Payments of principal and interest on borrowings may leave us with insufficient cash resources to meet our cash needs or make the distributions to our shareholders necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
our cash flow may be insufficient to meet our required principal and interest payments;
cash interest expense and financial covenants relating to our indebtedness may limit or eliminate our ability to make distributions to our common shareholders and the holders of our Series A preferred shares and may adversely affect our ability to pay the asset management fee due under the Asset Management Agreement;
the inability to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;
the inability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
the inability to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;
the need to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;
the default on our obligations and foreclosure of the lenders or mortgagees on our properties or our interests in the entities that own the properties that secure their loans;
the restriction from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;
the violation of restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and
our default under any loan with cross-default provisions could result in a default on other indebtedness.
Changes in our leverage ratios may also negatively impact the market price of our equity or debt securities. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all.
Over the last few years, the credit markets have experienced significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances have materially impacted liquidity in the financial markets, making financing terms for borrowers less attractive, and in certain cases, have resulted in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness. Reductions in our available borrowing capacity or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs

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of capital will increase, which could materially and adversely affect us. Total debt service, including scheduled principal maturities and interest, for 2019 and 2020 is $314.6 million and $491.4 million, respectively.
Our financing arrangements involve balloon payment obligations.
Our financings require us to make a lump-sum or “balloon” payment at maturity. In addition, there are principal amortization payments of $110.8 million due under our debt instruments prior to January 1, 2022. Our ability to make any balloon payment is uncertain and may depend on our ability to obtain additional financing or our ability to sell our properties. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell our properties at a price sufficient to make the balloon payment, if at all. If the balloon payment is refinanced at a higher rate, it will reduce or eliminate any income from our properties. Our inability to meet a balloon payment obligation, through refinancing or sale proceeds, or refinancing on less attractive terms could materially and adversely affect us.
The agreements governing our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our common shareholders.
The agreements governing our indebtedness contain restrictions and covenants that limit or will limit our ability to operate our business. These covenants, as well as any additional covenants to which we may be subject in the future because of additional indebtedness, could cause us to forgo investment opportunities, reduce or eliminate distributions to our common shareholders or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. In addition, the agreements may have cross default provisions, which provide that a default under one of our financing agreements would lead to a default on some or all of our debt financing agreements.
If an event of default occurs under our current or future CMBS loans, if the master tenants at the properties that secure such CMBS loans fail to maintain certain EBITDAR ratios, or if an uncured monetary default exists under the master leases, such as in the case of the Shopko CMBS Loan Agreements, then a portion of or all of the cash which would otherwise be distributed to us may be restricted by our lenders and unavailable to us until the terms are cured or the debt refinanced. If the financial performance of the collateral for our indebtedness under our Master Trust 2014 fails to achieve certain financial performance criteria, cash from such collateral may be unavailable to us until the terms are cured or the debt refinanced. Such cash sweep triggering events have occurred previously and may be ongoing from time to time. The occurrence of these events limit the amount of cash available to us for use in our business and could limit or eliminate our ability to make distributions to our common shareholders.
The covenants and other restrictions under our debt agreements affect, among other things, our ability to:
sell or substitute assets;
modify certain terms of our leases;
prepay debt with higher interest rates;
manage our cash flows; and
make distributions to equity holders.
Additionally, we must comply with certain covenants in order to incur additional leverage under our Master Trust 2014. All of these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.
RISKS RELATED TO OUR RELATIONSHIP WITH OUR MANAGER
We depend on our Manager to conduct our business and any material adverse change in its financial condition or our relationship with our Manager could have a material adverse effect on our business and ability to achieve our investment objectives.
We have no employees. We are completely reliant on our Manager for the effective operation of our business, which has discretion regarding the implementation of our operating policies and strategies, subject to the supervision of our Board of Trustees. Our officers and other individuals who perform services for us are employees of our Manager, including certain key employees of our Manager whose continued service is not guaranteed. Our Manager may suffer or become distracted by adverse financial or operational problems in connection with our Manager’s business and activities unrelated to us and over which we have no control. Should our Manager fail to allocate sufficient resources to perform its responsibilities to us for any reason, we may be unable to achieve our investment objectives or to pay distributions to our shareholders.

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Lastly, we are subject to the risk that our Manager may terminate the Asset Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all. Our Manager may terminate our Asset Management Agreement without cause upon 180-day notice prior to the expiration of the original term or any renewal term. Our Manager may terminate our Asset Management Agreement upon 60 days’ prior written notice for cause in the event that we are in default in the performance or observance of any material term, condition or covenant contained in our Asset Management Agreement and such default continues for a period of 30 days after such notice specifying such default and requesting that the same be remedied within 30 days, or effective immediately concurrently with or within 90 days following a Change in Control or a non-cause termination of the Property Management and Servicing Agreement, in each case upon 30 days’ notice to us. Furthermore, if the Asset Management Agreement is terminated for any reason, our Manager may resign as property manager and special servicer of Master Trust 2014, subject to certain conditions, which could adversely our results of operations and financial condition.
There are conflicts of interest in our relationship with our Manager.
There are conflicts of interest in our relationship with our Manager insofar as our Manager and its parent, Spirit, have investment objectives that overlap with our investment objectives. Spirit has instituted a proprietary Spirit Property Ranking Model that our Manager will also apply to our portfolio. The Spirit Property Ranking Model is used annually to rank all properties across twelve factors and weightings, consisting of both real estate quality scores and credit underwriting criteria, in order to benchmark property quality, identify asset recycling opportunities and to enhance disposition decisions. Spirit also updates the Spirit Heat Map that will be used for us and Spirit, which analyzes tenant industries across Porter’s Five Forces and potential causes of technological disruption to identify tenant industries which Spirit believes to have good fundamentals for future performance. Our Manager will use an “every other” rotation system when considering potential investments by Spirit and us, subject to available liquidity and certain other criteria. As a result, we may not be presented with certain investment opportunities that may be appropriate for us. Additionally, we own real estate assets in the same geographic regions as Spirit and may compete with it for tenants. This competition may affect our ability to attract and retain tenants and may reduce the rent we are able to charge.
The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Asset Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage (subject to our investment manual and conflicts of interest policy) in material transactions with our Manager or Spirit, which may present an actual, potential or perceived conflict of interest. In order to avoid any actual, potential or perceived conflicts of interest with our Manager or Spirit, we adopted a conflicts of interest policy to address specifically some of the conflicts relating to our activities. However, there is no assurance that this policy will be adequate to address all of the conflicts of interest that may arise or to address such conflicts in a manner that is favorable to us.
It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including difficulty in raising additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting risk of litigation and regulatory enforcement actions.
Certain terms of our Asset Management Agreement could make it difficult and costly to terminate our Manager and could delay or prevent a change of control transaction.
The initial term of our Asset Management Agreement will be three years from its effective date, with automatic one-year renewal terms on each anniversary date thereof, unless previously terminated by us or by our Manager. In the event of a termination of our Asset Management Agreement by us without cause or a termination for cause by our Manager for cause (including upon a Change in Control, as defined elsewhere in this information statement), our Manager will be entitled to a termination fee equal to 1.75 times the sum of (x) the management fee for the 12 full calendar months preceding the effective termination date, plus (y) all fees due to the Manager or its affiliates under the Property Management and Servicing Agreement for the 12 full calendar months preceding the effective termination date. Additionally, our Manager will receive a promoted interest pursuant to our Asset Management Agreement based on our performance and our ability to generate total shareholder return, due upon the earlier of (i) a termination of our Asset Management Agreement by us without cause, (ii) a termination of our Asset Management Agreement by our Manager for cause (including upon a Change in Control), and (iii) the date that is 36 full calendar months after the distribution date. The termination fee and promoted interest will increase the cost to us of terminating our Asset

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Management Agreement and may make termination more difficult. Additionally, the termination fee and promoted interest could have the effect of delaying, deferring or preventing a Change in Control that would otherwise be economically attractive to us.
The offer to purchase feature of the Series A preferred shares owned by our Manager could affect change of control transactions.
Our Manager owns Series A preferred shares, which may give it different incentives from our common shareholders in a change of control transaction. Upon the occurrence of a Change of Control (as defined), we must offer to purchase the Series A preferred shares held by our Manager at the liquidation preference, plus any accrued and unpaid dividends to, but not including, the payment date. As such, our Manager might be incentivized to facilitate a Change of Control even if such Change of Control might not otherwise prove beneficial to our common shareholders. At the same time, the offer to purchase feature of the Series A preferred shares held by our Manager may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a Change of Control if we do not have sufficient cash to complete such offer to purchase, under circumstances that otherwise could provide our common shareholders with the opportunity to realize a premium over the then-current market price or that our common shareholders may otherwise believe is in their best interests.
We must pay a base management fee to our Manager regardless of our performance.
Our Manager is entitled to a substantial base management fee from us for the first three years, regardless of the performance of our portfolio. Our Manager’s entitlement to a base fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking investments that maximize total returns to our shareholders. This in turn could negatively impact both our ability to make distributions to our shareholders and the market price of our common shares.
We do not own the Spirit name and may not be able to continue to use the Spirit name in the future.
Under our Asset Management Agreement, we and our affiliates have a royalty-free, non-exclusive and nontransferable license to use the name “Spirit”. Pursuant to the Asset Management Agreement, we have a right to use this name for so long as Spirit Realty, L.P. (or an affiliate thereof) serves as our Manager. The Manager and its affiliates retain the right to continue using the “Spirit” name. We will be unable to preclude the Manager or its affiliates from licensing or transferring the ownership of the “Spirit” name to third parties, some of whom may compete with us. Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of the Manager or others. Furthermore, in the event that our Asset Management Agreement is terminated, we and our affiliates will be required to, among other things, change our name. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise harm our business.
RISKS RELATED TO THE SPIN-OFF
Prior to the Spin-off, we had no history operating as an independent company, and most of our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.
Most of the historical information we have included in this Annual Report on Form 10-K, including for the fiscal years ended 2016, 2017 and six months ended June 30, 2018, has been derived from Spirit’s consolidated financial statements and accounting records and does not necessarily reflect what our financial position, results of operation or cash flows would have been had we been a separate, stand-alone company during those periods presented, or those that we will achieve in the future. Our cost structure, management, financing and business operations are significantly different as a result of recently operating as an independent, externally-managed public company. These changes result in increased costs, including, but not limited to, fees paid to our Manager, legal, accounting, compliance and other costs associated with being a public company.
Certain of our agreements with Spirit may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.
Certain of the agreements related to the Spin-off, including the Separation and Distribution Agreement and Management Agreement, were prepared in the context of the Spin-off while we were still part of Spirit and, accordingly, did not result from arm’s-length negotiations among unaffiliated third parties and, therefore, may not reflect terms that would have resulted from an arm's-length negotiation. The terms of the agreements prepared in the context of our Spin-off related

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to, among other things, allocation of assets, liabilities, rights, indemnifications and other obligations among Spirit and us.
The ownership by our executive officers and some of our trustees of shares of common stock, options, or other equity awards of Spirit may create, or may create the appearance of, conflicts of interest.
Some of our trustees and employees of the Manager own common stock or options to purchase common stock of Spirit, or any other equity awards, which creates, or may create, the appearance of conflicts of interest when these trustees and officers are faced with decisions regarding transaction between Spirit and us, or our Manager and us, that could have different implications for Spirit or our Manager, as applicable, than they do for us.
RISKS RELATED TO OWNERSHIP OF OUR COMMON SHARES AND OUR ORGANIZATIONAL STRUCTURE
Changes in market interest rates may adversely impact the value of our common shares.
The market price of our common shares will generally be influenced by the dividend yield on our common shares (as a percentage of the price of our common shares) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our common shares to expect a higher dividend yield. However, higher market interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to decrease.
The market price and trading volume of our common shares may fluctuate or decline.
The market price and trading volume of our common shares may fluctuate widely due to various factors, including:
actual or anticipated variations in our or our competitors' quarterly operating results or distributions;
publication of research reports about us, our competitors or the real estate industry;
adverse market reaction to any additional indebtedness we incur or debt or equity securities we or the Operating Partnership issue in the future;
additions or departures of key management personnel;
changes in our credit ratings;
the financial condition, performance and prospects of our tenants; and
the realization of any of the other risk factors presented in this Annual Report on Form 10-K.
We may issue shares of our common shares or other securities without shareholder approval, including shares issued to satisfy REIT dividend distribution requirements. Our existing shareholders have no preemptive rights to acquire any of these securities, and any issuance of equity securities by us may dilute shareholder investment.
Broad market fluctuations could negatively impact the market price of our common shares.
The stock market has experienced extreme price and volume fluctuations that have affected the market price of the common equity of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations. Either of these factors could lead to a material decline in the per share trading price of our common shares.
We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.
We intend to make quarterly distributions of an amount at least equal to all or substantially all of our REIT taxable income to holders of our common shares out of assets legally available therefore. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this Annual Report. Distributions will be authorized by our Board of Trustees and declared by us based upon a number of factors, including actual results of operations, restrictions under Delaware law or any applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our Board of Trustees deems relevant. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future.

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Furthermore, we may elect not to maintain our REIT status, subject to the requirements of the Tax Matters Agreement, in which case we would no longer be required to make distributions in order to maintain our REIT status (as described below under "Risks Related to Taxes and Our Status as a REIT"). Moreover, even if we do elect to maintain our REIT status, we may elect to comply with the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of the required amount in the form of our common shares in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common shares in lieu of cash, such action could negatively affect our business and financial condition as well as the price of our common shares. No assurance can be given that we will pay any dividends on our common shares in the future.
Future offerings of additional debt securities, which would be senior to our common shares upon liquidation, and/or preferred equity securities that may be senior to our common shares for purposes of distributions or upon liquidation, may materially and adversely affect the market price of our common shares.
In the future, we may attempt to increase our capital resources by making offerings of preferred equity securities or additional debt securities (or causing our Operating Partnership to issue debt securities). Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive distributions of our available assets prior to our common shareholders. Additionally, any additional convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common shares and may result in dilution to owners of our common shares. Our common shareholders are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make distributions to our common shareholders. In addition, our common shares ranks junior to our Series A preferred shares. Our outstanding Series A preferred shares also have a preference upon our dissolution, liquidation or winding up in respect of assets available for distribution to our common shareholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Our common shareholders bear the risk of our future offerings reducing the per share trading price of our common shares.
Your percentage ownership in us may be diluted in the future.
Your percentage ownership of common shares may be diluted in the future because of equity awards that we expect to be granted to our Manager, to the directors, officers and employees of our Manager who perform services for us, and to our trustees and officers, as well as other equity instruments. Our Board of Trustees approved an equity incentive plan (the "2018 Incentive Award Plan"), providing for the grant of equity-based awards, under which we reserved 3,645,000 shares of our common shares for issuance. The issuance of these shares of common shares and other potential issuances are likely to have a dilutive effect on your ownership percentage.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of SOX, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may choose to take advantage of these reporting exemptions until we are no longer an emerging growth company. We cannot predict if investors will find our common shares less attractive if we choose to rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.
We will remain an emerging growth company for up to five years, although we may lose that status sooner. We would cease to qualify as an emerging growth company on the earliest of (i) the last day of any fiscal year in which we have more than $1.07 billion of revenue, (ii) the last day of any fiscal year in which we have more than $700.0 million in market value of our common shares held by non-affiliates as of June 30 of such fiscal year and (iii) the date on which we issue more than $1.0 billion of non-convertible debt over a rolling three-year period.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We may choose to elect to avail ourselves of this exemption from new or revised accounting standards and, if we do, we would be subject to the different new or revised accounting standards than public companies that are not emerging growth companies.

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To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common shares to be less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.
Our declaration of trust and bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction, even if such a change in control may be in the interest of our shareholders.
Our declaration of trust contains certain restrictions on ownership and transfer of our common shares. Our declaration of trust contains various provisions that are intended to preserve our qualification as a REIT and, subject to certain exceptions, authorize our trustees to take such actions as are necessary or appropriate to preserve our qualification as a REIT. For example, our declaration of trust prohibits the actual, beneficial or constructive ownership by any person of more than 9.8% in value of the aggregate of our outstanding shares of all classes and series, or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding common shares or any class or series of our outstanding preferred shares. Our Board of Trustees, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our common shares may:
discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common shares or that our shareholders otherwise believe to be in their best interests; or
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
We could increase the number of authorized shares of common shares of beneficial interest, classify and reclassify unissued shares of beneficial interest and issue shares of beneficial interest without shareholder approval. Our Board of Trustees, without shareholder approval, has the power under our declaration of trust to amend our declaration of trust to increase the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class or series that we are authorized to issue, to authorize us to issue authorized but unissued common shares or preferred shares and to classify or reclassify any unissued common shares or preferred shares into one or more classes or series of shares of beneficial interest and to set the terms of such newly classified or reclassified shares. As a result, we may issue one or more series or classes of common shares or preferred shares with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of our common shareholders. Although our Board of Trustees has no such intention at the present time, it could establish a class or series of common shares or preferred shares that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common shares or that our shareholders otherwise believe to be in their best interest. For more information regarding these provisions, see “Certain Provisions of Maryland Law and Our Declaration of Trust and Bylaws.” Such provisions include the following:
“business combination” provisions that, subject to certain limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or of an affiliate of ours or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting shares at any time within a two-year period immediately prior to the date in question) or any affiliate of an interested shareholder for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter impose fair price and/or supermajority and shareholder voting requirements on these combinations; and
“control share” provisions that provide that a holder of “control shares” of our Company (defined as shares that, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of outstanding “control shares”) has no voting rights with respect to those shares except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
As permitted by Maryland law, we have elected, pursuant to provisions in our declaration of trust, to opt out of the Maryland Business Combination Act and to exempt any acquisition of our common shares from the Maryland Control

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Share Acquisition Act. Any amendment to or repeal of either of these provisions of our declaration of trust must be approved by our shareholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter. In the event that either of these provisions of our declaration of trust are amended or revoked by our shareholders, we would be subject to the Maryland Business Combination Act and/or the Maryland Control Share Acquisition Act, as the case may be.
Certain provisions of Maryland law permit our Board of Trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could be in the best interests of our shareholders. Our declaration of trust contains a provision whereby we elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL, or Subtitle 8, relating to the filling of vacancies on our Board of Trustees. However, we have opted out of the provision of Subtitle 8 that would have permitted our Board of Trustees to unilaterally divide itself into classes with staggered terms of three years each (also referred to as a classified board) without shareholder approval, and we are prohibited from electing to be subject to such provision of Subtitle 8 unless such election is first approved by our shareholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter. We do not currently have a classified board.
Our Board of Trustees may change our investment and financing policies without shareholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.
Our investment and financing policies are exclusively determined by our Board of Trustees. Accordingly, our shareholders do not control these policies. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our Board of Trustees may alter or eliminate our current policy on borrowing at any time without shareholder approval. If this policy changed, we could become more highly leveraged, which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could materially and adversely affect us.
Our rights and the rights of our shareholders to take action against our trustees and officers are limited.
As permitted by Maryland law, our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.
As a result, we and our shareholders have rights against our trustees and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our trustees or officers impede the performance of our company, our shareholders’ and our ability to recover damages from such trustee or officer will be limited. In addition, our declaration of trust authorizes us to obligate our company, and our bylaws require us, to indemnify our trustees and officers (and, with the approval of our Board of Trustees, any employee or agent of ours) for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law.
We are a holding company with no direct operations and will rely on funds received from the Operating Partnership to pay liabilities.
We are a holding company and conduct substantially all of our operations through the Operating Partnership. We do not have, apart from an interest in the Operating Partnership, any independent operations. As a result, we rely on distributions from the Operating Partnership to pay any dividends we might declare on our common shares. We also rely on distributions from the Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from the Operating Partnership. In addition, because we are a holding company, shareholder claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the Operating Partnership and its subsidiaries will be able to satisfy the claims of our shareholders only after all of our and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

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We own directly or indirectly 100% of the interests in the Operating Partnership. However, in the future, we may issue partnership interests of the Operating Partnership to third parties. Such issuances would reduce our ownership in the Operating Partnership. Because our shareholders will not directly own partnership interests of the Operating Partnership, they will not have any voting rights with respect to any such issuances or other partnership level activities of the Operating Partnership.
Conflicts of interest could arise in the future between the interests of our shareholders and the interests of holders of partnership interests in the Operating Partnership, which may impede business decisions that could benefit our shareholders.
Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the Operating Partnership or any future partner thereof, on the other. Our trustees and officers have duties to our company under applicable Maryland law in connection with the management of our company. At the same time, one of our wholly-owned subsidiaries, OP Holdings, as the general partner of the Operating Partnership, has fiduciary duties and obligations to the Operating Partnership and its future limited partners under Delaware law and the partnership agreement of the Operating Partnership in connection with the management of the Operating Partnership. The fiduciary duties and obligations of OP Holdings, as general partner of the Operating Partnership, and its future partners may come into conflict with the duties of the trustees and officers of our company.
Under the terms of the partnership agreement of the Operating Partnership, if there is a conflict between the interests of our shareholders on one hand and any future limited partners on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our shareholders or any future limited partners; provided, however, that for so long as we own a controlling interest in the Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our shareholders or any future limited partners shall be resolved in favor of our shareholders.
The partnership agreement also provides that the general partner will not be liable to the Operating Partnership, its partners or any other person bound by the partnership agreement for monetary damages for losses sustained, liabilities incurred or benefits not derived by the Operating Partnership or any future limited partner, except for liability for the general partner’s intentional harm or gross negligence. Moreover, the partnership agreement provides that the Operating Partnership is required to indemnify the general partner and its members, managers, managing members, officers, employees, agents and designees from and against any and all claims that relate to the operations of the Operating Partnership, except (1) if the act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active or deliberate dishonesty, (2) for any transaction for which the indemnified party received an improper personal benefit, in money, property or services or otherwise in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal proceeding, if the indemnified person had reasonable cause to believe that the act or omission was unlawful.
RISKS RELATED TO OUR TAXES AND OUR STATUS AS A REIT
Failure to qualify as a REIT would materially and adversely affect us and the value of our common shares.
We will elect to be taxed as a REIT and believe we will be organized and operate in a manner that will allow us to qualify and to remain qualified as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2018. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT and the statements in this Annual Report are not binding on the IRS or any court. Therefore, we cannot guarantee that we will qualify as a REIT or that we will remain qualified as such in the future. If we fail to qualify as a REIT or lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our shareholders for each of the years involved because:
we would not be allowed a deduction for distributions to shareholders in computing our taxable income and would be subject to regular U.S. federal corporate income tax;
we could be subject to increased state and local taxes; and
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to shareholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our shareholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and adversely affect the trading price of our common shares.

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Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our common shares, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to shareholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.
We own and may acquire direct or indirect interests in one or more entities that have elected or will elect to be taxed as REITs under the Code (each, a “Subsidiary REIT”). A Subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to us. If a Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to federal income tax, (ii) shares in such Subsidiary REIT would cease to be qualifying assets for purposes of the asset tests applicable to REITs, and (iii) it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our TRSs will be subject to income tax as regular corporations in the jurisdictions in which they operate.
If Spirit failed to qualify as a REIT during certain periods prior to the Spin-Off, we would be prevented from electing to qualify as a REIT.
Under applicable Treasury Regulations, if Spirit failed to qualify as a REIT during certain periods prior to the Spin-Off, unless Spirit’s failure was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Spirit failed to qualify.
If certain of our subsidiaries, including the Operating Partnership, fail to qualify as partnerships or disregarded entities for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
One or more of our subsidiaries may be treated as a partnership or disregarded entity for federal income tax purposes and, therefore, will not be subject to federal income tax on its income. Instead, each of its partners or its owner, as applicable, which may include us, will be allocated, and may be required to pay tax with respect to, such partner’s or owner’s share of its income. We cannot assure you that the IRS will not challenge the status of any subsidiary partnership or limited liability company in which we own an interest as a disregarded entity or partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating any subsidiary partnership or limited liability company as an entity taxable as a corporation for federal income tax purposes, we could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of any subsidiary partnerships or limited liability company to qualify as a disregarded entity or partnership for applicable income tax purposes could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners or members, including us.
Our ownership of TRSs is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our TRSs are not conducted on arm’s-length terms.
From time to time we may own interests in one or more TRSs. A TRS is a corporation, other than a REIT, in which a REIT directly or indirectly holds shares and that has made a joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

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A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets may be represented by securities (including securities of TRSs), other than those securities includable in the 75% asset test, and not more than 20% of the value of our total assets may be represented by securities of TRSs. We anticipate that the aggregate value of the shares and securities of any TRS and other nonqualifying assets that we own will be less than 20% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with any TRSs that we own to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the above limitations or to avoid application of the 100% excise tax discussed above.
We may be forced to borrow funds to maintain our REIT status, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us.
To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding any net capital gains, and we will be subject to regular corporate income taxes on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We could have a potential distribution shortfall as a result of, among other things, differences in timing between the actual receipt of cash and recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Also, the ability of Master Trust 2014 to make cash distributions is limited and, in some cases, could be eliminated entirely. In addition, as discussed in this Annual Report, our tenants, such as Shopko in connection with its bankruptcy filing, may experience a downturn in their business, and as a result may delay lease commencement, decline to extend a lease upon its expiration, fail to make rental payments when due, become insolvent or declare bankruptcy. In order to maintain REIT status and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements. Our ability to borrow funds, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including our current debt levels, the market price of our common shares, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to dispose of assets at inopportune times, and could materially and adversely affect us. Alternatively, we may make taxable in-kind distributions of our own shares, which may cause our shareholders to be required to pay income taxes with respect to such distributions in excess of any cash they receive, or we may be required to withhold taxes with respect to such distributions in excess of any cash our shareholders receive.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.
The IRS may take the position that specific sale-leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of re-characterization unless we elect to make an additional distribution to maintain our REIT status. The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of our REIT taxable income and could cause us to fail the REIT distribution test that requires a REIT to distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all shareholders at the time of declaration rather than the shareholders existing in the taxable year affected by the re-characterization.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends, which may negatively affect the value of our shares.
Income from “qualified dividends” payable to U.S. shareholders that are individuals, trusts and estates are generally subject to tax at preferential rates, currently at a maximum federal rate of 20%. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Under the recently enacted 2017 Tax Legislation, however, U.S. shareholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified

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dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common shares.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors. Accordingly, these rules could limit our ability to execute sales of the Shopko assets or assets that collateralize Master Trust 2014 in accordance with our business strategy outlined herein.
Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our shareholders. We may be required to liquidate otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be used for repayment of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT. The 2017 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the 2017 Tax Legislation that could affect us and our shareholders include:
temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21%;
permitting a deduction for certain pass-through business income, including dividends received by our shareholders from us that are not designated by us as capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;
reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;

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limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of our REIT taxable income (determined without regard to the dividends paid deduction);
generally limiting the deduction for net business interest expense in excess of 30% of a business’s “adjusted taxable income,” except for taxpayers that engage in certain real estate businesses (including most equity REITs) and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods); and
eliminating the corporate alternative minimum tax.
Many of these changes that are applicable to us became effective with our 2018 taxable year, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the 2017 Tax Legislation as a whole will have on us.
Item 1B. Unresolved Staff Comments
None.
Item 2.     Properties
876
$235.6M
45
203
23
Owned Properties
Annualized Contractual Rent
States
Tenants
Industries
Our diverse real estate portfolio at December 31, 2018 had:
an Occupancy of 97.1%;
57.5% of Contractual Rent from master leases;
94.3% of leases containing contractual rent escalators (based on Contractual Rent); and
a weighted average remaining lease term of 9.7 years.


33



Diversification By Tenant
Tenant concentration represents the tenant’s contribution to Contractual Rent of our owned real estate properties at December 31, 2018 (total square feet in thousands):
Tenant (1) 
 
Number of
Properties
  
 
Total Square
Feet
  
 
Percent of
Contractual Rent
 
 
 
 
 
 
 
Shopko (2)
 
88

 
6,022

 
17.9
%
AMC Entertainment, Inc.
 
14

 
696

 
4.6

Academy, LTD.
 
2

 
1,564

 
4.2

Universal Pool Co., Inc.
 
14

 
543

 
3.0

Crème De La Crème, Inc.
 
9

 
190

 
2.3

Goodrich Quality Theaters, Inc.
 
4

 
245

 
2.3

Life Time Fitness, Inc.
 
3

 
420

 
2.2

Destination XL Group, Inc.
 
1

 
756

 
2.2

Buehler Food Markets Inc.
 
5

 
503

 
2.2

Carmax, Inc.
 
4

 
201

 
2.1

Other
 
707

 
8,301

 
57.0

Vacant
 
25

 
356

 

Total
 
876

 
19,797

 
100.0
%
(1) 
Tenants represent legal entities ultimately responsible for obligations under the lease agreements or affiliated entities. Other tenants may operate the same or similar business concepts or brands as those set forth above.
(2)
SMTA had 88 owned properties leased to Shopko as of December 31, 2018, 83 were encumbered by the Shopko CMBS Loan Agreements and were within the Other Properties segment and the remaining five constituted collateral within Master Trust 2014.
Diversification By Asset Type
Asset type concentration represents the type of asset's contribution to Contractual Rent within our owned real estate properties as of December 31, 2018 (total square feet in thousands):
Asset Type
 
Number of
Properties
  
 
Total Square
Feet
  
 
Percent of
Contractual Rent
 
 
 
 
 
 
 
Retail
 
755

 
15,338

 
83.0
%
Industrial
 
40

 
3,616

 
9.2

Office
 
81

 
843

 
7.8

Total
 
876

 
19,797

 
100.0
%


34



Diversification By Industry
Industry concentration represents the type of asset's contribution to Contractual Rent within our owned real estate properties as of December 31, 2018 (total square feet in thousands):
Industry
 
Number of
Properties
  
 
Total Square
Feet
  
 
Percent of
Contractual Rent
 
 
 
 
 
 
 
 
General Merchandise
 
91

 
6,121

 
18.1
%
Restaurants - Quick Service
 
305

 
792

 
10.9

Movie Theaters
 
29

 
1,519

 
10.2

Restaurants - Casual Dining
 
89

 
640

 
8.7

Health and Fitness
 
19

 
1,049

 
5.9

Medical / Other Office
 
79

 
517

 
5.5

Sporting Goods
 
4

 
1,832

 
5.4

Specialty Retail
 
22

 
857

 
4.5

Education
 
18

 
429

 
4.5

Home Furnishings
 
17

 
907

 
3.8

Automotive Parts and Service
 
79

 
362

 
3.7

Grocery
 
19

 
1,020

 
3.6

Automotive Dealers
 
12

 
323

 
3.4

Apparel
 
3

 
1,019

 
2.6

Other
 
3

 
183

 
2.1

Entertainment
 
4

 
200

 
1.7

Multi-Tenant
 
3

 
169

 
1.1

Manufacturing
 
7

 
763

 
1.0

Car Washes
 
6

 
49

 
1.0

Building Materials
 
28

 
458

 
0.9

Drug Stores / Pharmacies
 
8

 
83

 
0.7

Distribution
 
1

 
94

 
0.5

Dollar Stores
 
5

 
55

 
0.2

Vacant
 
25

 
356

 

Total
 
876

 
19,797

 
100.0
%


35



Diversification By Geography
Geographic concentration represents the type of asset's contribution to Contractual Rent within our owned real estate properties as of December 31, 2018 (total square feet in thousands):
397216821_heatmapa03.jpg
Location
 
Number of Properties
 
Total Square Feet (in thousands)
 
Percent of Contractual Rent
 
Location
 
Number of Properties
 
Total Square Feet (in thousands)
 
Percent of Contractual Rent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
64

 
2,696

 
11.7
%
 
New Mexico
 
10

 
76

 
1.3
%
Wisconsin
 
32

 
2,481

 
8.5
%
 
Arkansas
 
19

 
318

 
1.2
%
Illinois
 
69

 
1,363

 
7.8
%
 
Washington
 
5

 
348

 
1.2
%
Minnesota
 
26

 
1,574

 
6.3
%
 
New York
 
10

 
104

 
1.2
%
Georgia
 
73

 
459

 
5.3
%
 
Kansas
 
17

 
236

 
1.1
%
Ohio
 
40

 
1,162

 
5.1
%
 
Virginia
 
15

 
202

 
1.0
%
Indiana
 
41

 
637

 
4.3
%
 
South Dakota
 
3

 
205

 
0.9
%
Michigan
 
63

 
1,148

 
4.3
%
 
Montana
 
3

 
254

 
0.8
%
Arizona
 
22

 
346

 
3.0
%
 
West Virginia
 
8

 
233

 
0.7
%
Missouri
 
37

 
520

 
2.9
%
 
Nebraska
 
7

 
227

 
0.7
%
South Carolina
 
16

 
415

 
2.7
%
 
Kentucky
 
15

 
95

 
0.6
%
Florida
 
46

 
380

 
2.6
%
 
Idaho
 
4

 
233

 
0.6
%
Pennsylvania
 
23

 
405

 
2.5
%
 
Mississippi
 
11

 
60

 
0.6
%
North Carolina
 
20

 
387

 
2.3
%
 
Wyoming
 
6

 
113

 
0.5
%
Massachusetts
 
1

 
756

 
2.2
%
 
Maryland
 
10

 
34

 
0.3
%
Colorado
 
8

 
328

 
2.1
%
 
New Jersey
 
2

 
195

 
0.3
%
Oklahoma
 
16

 
303

 
2.0
%
 
Louisiana
 
7

 
19

 
0.3
%
Oregon
 
6

 
300

 
1.9
%
 
Utah
 
2

 
97

 
0.2
%
Nevada
 
3

 
166

 
1.9
%
 
Rhode Island
 
1

 
22

 
0.1
%
Tennessee
 
48

 
233

 
1.8
%
 
Alaska
 
1

 
50

 
0.1
%
California
 
13

 
122

 
1.8
%
 
North Dakota
 
1

 
8

 
0.1
%
Alabama
 
31

 
110

 
1.8
%
 
Maine
 
1

 
6

 
%
Iowa
 
20

 
371

 
1.4
%
 
 
 
 
 
 
 
 


36



Lease Expirations
The following table sets forth a summary schedule of expiration dates for leases in place as of December 31, 2018. The information set forth in the table assumes that tenants do not exercise renewal options and/or any early termination rights (Annualized Contractual Rent and total square feet in thousands):
Leases Expiring In: 
 
Number of
Properties
 
 
Annualized Contractual Rent (1) 
 
Total Square
Feet
  
 
Percent of Expiring
Contractual Rent
 
 
 
 
 
 
 
 
 
 
2019
 
62
 
$
11,109

 
921

 
4.7
%
2020
 
39
 
6,726

 
465

 
2.9

2021
 
64
 
12,260

 
1,225

 
5.2

2022
 
77
 
13,514

 
1,054

 
5.7

2023
 
24
 
4,103

 
369

 
1.7

2024
 
41
 
8,159

 
423

 
3.5

2025
 
38
 
16,061

 
783

 
6.8

2026
 
106
 
19,708

 
1,918

 
8.4

2027
 
57
 
36,847

 
3,374

 
15.6

2028
 
27
 
10,372

 
655

 
4.5

Thereafter
 
316
 
96,678

 
8,254

 
41.0

Vacant
 
25
 

 
356

 

Total owned properties
 
876
 
$
235,537

 
19,797

 
100.0
%
(1) 
Contractual Rent for the month ended December 31, 2018 for properties owned at December 31, 2018, multiplied by twelve.
Item 3.     Legal Proceedings
From time-to-time, we may be subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these ordinary course claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.
SMTA, through four indirectly wholly-owned, property-owning subsidiaries, entered into the Shopko CMBS Loan Agreements. The loan was secured by a pledge of the equity of the entity that owns the four property-owning subsidiaries, which collectively hold 85 assets (83 owned and two financed) that were leased to Shopko. In connection with the Shopko CMBS Loan Agreements, SMTA entered into a customary non-recourse loan guaranty agreement, in favor of the Shopko Lenders, pursuant to which SMTA guaranteed the payment and performance of the liabilities of the property-owning subsidiaries under the non-recourse loan agreements for damages resulting from certain breaches or actions, including, but not limited to, fraud or intentional misrepresentation by the borrowers, and for the repayment in full of the debt in the event of certain actions, including, without limitation, certain bankruptcy events and prohibited transactions.
On January 16, 2019, our indirect wholly-owned subsidiaries as borrowers under the Shopko CMBS Loan Agreements defaulted on the loans when those entities ceased to make interest payments as a result of Shopko ceasing to pay its rent obligations following its bankruptcy filing. The full outstanding principal amount of $157.4 million outstanding under the Shopko CMBS Loan Agreements immediately became due and payable, and interest is accruing at the default rate of LIBOR plus 12.5% on the original loan portion and LIBOR plus 18.0% on the mezzanine loan portion. On March 1, 2019, the Shopko Lenders foreclosed on the equity of the entity that owns the four property-owning subsidiaries.
On March 4, 2019, SMTA received a demand notice from the Shopko Lenders seeking repayment of the loans under the Shopko CMBS Loan Agreements pursuant to SMTA’s guaranty of the loans in which the Shopko Lenders allege, among other things, fraud and intentional misrepresentations by the borrowers. SMTA believes the allegations are without merit, will not honor the demand and intends to vigorously defend against any lawsuit initiated by the Shopko Lenders in connection with SMTA’s decision not to comply with the repayment request made under the notice of demand.
Item 4.     Mine Safety Disclosure
None.

37



PART II
Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION FOR COMMON SHARE, HOLDERS OF RECORD AND DIVIDEND POLICY
Our common shares are traded on the NYSE under the symbol “SMTA.” As of March 19, 2019, there were approximately 2,447 shareholders of record of our common shares. Because many of our common shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
We intend to pay dividends to our shareholders to maintain our REIT status, although all future distributions will be declared and paid at the discretion of the Board of Trustees and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES
Our subsidiary, SubReit, Inc. issued and sold 125 Series B preferred shares with an aggregate liquidation preference of $125 thousand in December 2018 to certain institutional investors pursuant to Regulation D under the Securities Act of 1933.
In December 2018, the Company's Board of Trustees approved a share repurchase program, which authorized repurchases of up to $50.0 million of the Company's common shares. These repurchases can be made in the open market or through private transactions. The amount and timing of repurchases is dependent on management's assessment of the capital needs of the Company. No repurchases have been made under the program as of December 31, 2018.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
EQUITY COMPENSATION PLAN INFORMATION
Our equity compensation plan information required by this item will be included in the Proxy Statement to be filed relating to our 2019 Annual Meeting of Shareholders and is incorporated herein by reference. As of December 31, 2018, 3.5 million shares are available for award under the 2018 Incentive Award Plan.

38



PERFORMANCE GRAPH
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The following graph shows our cumulative total shareholder return for the period beginning with the initial listing of our common shares on the NYSE on May 31, 2018 and ending on December 31, 2018. The graph assumes a $100 investment in each of the indices on May 31, 2018 and the reinvestment of all dividends. Our share price performance shown in the following graph is not indicative of future share price performance.
397216821_chart-fc2a61eae704655818d.jpg
Index
Spirit MTA REIT
S&P 500
FTSE NAREIT US Equity REIT Index
 
 
 
 
May 31, 2018

$100.00


$100.00


$100.00

December 31, 2018

$95.49


$92.67


$98.54


39



Item 6.     Selected Financial Data
The following tables set forth, on a historical basis, selected financial and operating data for the Company. The following data should be read in conjunction with our financial statements and notes thereto and Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.
Operating Data:
Years Ended December 31,
(In Thousands)
2018
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rental income
$
240,410

 
$
226,586

 
$
236,801

 
$
251,084

Interest income on loans receivable
3,080

 
768

 
2,207

 
3,685

Other income
2,817

 
4,448

 
6,295

 
6,394

Total revenues
246,307

 
231,802

 
245,303

 
261,163

Expenses:
 
 
 
 
 
 
 
General and administrative
13,425

 
20,491

 
18,956

 
20,790

Related party fees
19,533

 
5,500

 
5,427

 
5,506

Restructuring charges

 

 
2,465

 
3,036

Transaction costs
8,676

 
4,354

 

 

Property costs (including reimbursable)
12,758

 
12,496

 
5,258

 
5,043

Interest
114,997

 
76,733

 
77,895

 
83,719

Depreciation and amortization
84,678

 
80,386

 
85,761

 
93,692

Impairment and allowance for loan losses
221,349

 
33,548

 
26,565

 
19,935

Total expenses
475,416

 
233,508

 
222,327

 
231,721

Other income:
 
 
 
 
 
 
 
Loss on debt extinguishment
(366
)
 
(2,223
)
 
(1,372
)
 
(787
)
Gain on disposition of assets
9,458

 
22,393

 
26,499

 
84,111

Total other income
9,092

 
20,170

 
25,127

 
83,324

(Loss) income before income tax expense
(220,017
)
 
18,464

 
48,103

 
112,766

Income tax (expense) benefit
(221
)
 
(179
)
 
(181
)
 
33

(Loss) income from continuing operations
(220,238
)
 
18,285

 
47,922

 
112,799

Income from discontinued operations

 

 

 
98

Gain on disposition of assets

 

 

 
590

Income from discontinued operations

 

 

 
688

Net (loss) income and total comprehensive (loss) income
(220,238
)
 
18,285

 
47,922

 
113,487

Preferred dividends
(9,275
)
 

 

 

Net (loss) income attributable to common shareholders
$
(229,513
)
 
$
18,285

 
$
47,922

 
$
113,487

 
 
 
 
 
 
 
 
Net (loss) income per share attributable to common shareholders
 
 
 
 
 
 
 
Basic
$
(5.36
)
 
$
0.43

 
$
1.12

 
$
2.65

Diluted
$
(5.36
)
 
$
0.43

 
$
1.12

 
$
2.65

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
42,851,010

 
42,851,010

 
42,851,010

 
42,851,010

Diluted
42,851,010

 
42,851,010

 
42,851,010

 
42,851,010

 
 
 
 
 
 
 
 
Dividends declared per common share issued
$
1.66

 
N/A

 
N/A

 
N/A




40



Balance Sheet Data (end of period):
Years Ended December 31,
(Dollars In Thousands)
2018
 
2017
 
2016
 
 
 
 
 
 
Gross investments, including related lease intangibles
$
2,560,745

 
$
2,870,592

 
$
2,817,732

Net investments
2,036,861

 
2,212,488

 
2,226,235

Cash and cash equivalents
161,013

 
6

 
1,268

Total assets
2,305,649

 
2,357,660

 
2,325,538

Mortgages and notes payable, net
2,138,804

 
1,926,835

 
1,339,614

Total liabilities
2,240,109

 
1,966,742

 
1,380,681

Total shareholders' and parent company (deficit) equity
(89,585
)
 
390,918

 
944,857

 
 
 
 
 
 
Other Data:
 
 
 
 
 
FFO
$
25,048

 
$
109,826

 
$
133,749

AFFO
$
89,798

 
$
126,765

 
$
143,560

Number of properties in investment portfolio
876

 
918

 
982

Owned properties occupancy at period end (based on number of properties)
97.1
%
 
99.2
%
 
98.2
%
Non-GAAP Financial Measures
FFO AND AFFO
We calculate FFO in accordance with the standards established by NAREIT. FFO represents net income (loss) attributable to common shareholders (computed in accordance with GAAP) excluding real estate-related depreciation and amortization, impairment charges and net (gains) losses from property dispositions. FFO is a supplemental non-GAAP financial measure. We use FFO as a supplemental performance measure because we believe that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate-related depreciation and amortization, gains and losses from property dispositions and impairment charges, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other equity REITs. However, because FFO excludes depreciation and amortization and does not capture the changes in the value of our properties that result from use or market conditions, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO as we do, and, accordingly, our FFO may not be comparable to such other equity REITs’ FFO. Accordingly, FFO should be considered only as a supplement to net income (loss) attributable to common shareholders (computed in accordance with GAAP) as a measure of our performance.

AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. We adjust FFO to eliminate the impact of certain items that we believe are not indicative of our core operating performance, including restructuring and divestiture costs, other general and administrative costs associated with relocation of the Company's headquarters, transaction costs associated with our Spin-Off, default interest and fees on non-recourse mortgage indebtedness, debt extinguishment gains (losses), transaction costs incurred in connection with the acquisition of real estate investments subject to existing leases, amortization of the promote fee and certain non-cash items. These certain non-cash items include non-cash revenues (comprised of straight-line rents, amortization of above- and below- market rent on our leases, amortization of lease incentives, amortization of net premium/discount on loans receivable,bad debt expense and amortization of capitalized lease transaction costs), non-cash interest expense (comprised of amortization of deferred financing costs and amortization of net debt discount/premium) and non-cash compensation expense (stock-based compensation expense). In addition, other equity REITs may not calculate AFFO as we do, and, accordingly, our AFFO may not be comparable to such other equity REITs’ AFFO. AFFO does not represent cash generated from operating activities determined in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should only be considered a supplement, and not an alternative, to net income (loss) attributable to common shareholders (computed in accordance with GAAP) as a performance measure.

41



Adjusted Debt
Adjusted Debt represents interest bearing debt (reported in accordance with GAAP) adjusted to exclude unamortized debt discount/premium, deferred financing costs, and reduced by cash and cash equivalents and cash reserves on deposit with lenders as additional security. By excluding these amounts, the result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition.
EBITDAre
EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. EBITDAre is defined as net income (loss) (computed in accordance with GAAP), plus interest expense, plus income tax expense (if any), plus depreciation and amortization, plus (minus) losses and gains on the disposition of depreciated property, plus impairment write-downs of depreciated property and investments in unconsolidated real estate ventures, plus adjustments to reflect the Company's share of EBITDAre of unconsolidated real estate ventures. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition.
Adjusted EBITDAre
Adjusted EBITDAre represents EBITDAre adjusted for transaction costs, revenue producing acquisition costs and dispositions for the quarter as if such acquisitions and dispositions had occurred as of the beginning of the quarter, real estate acquisition costs, impairments and loan losses related to the Shopko loan, debt extinguishment gains (losses), and amortization (recovery) of the promote fee. We focus our business plans to enable us to sustain increasing shareholder value. Accordingly, we believe that excluding these items, which are not key drivers of our investment decisions and may cause short-term fluctuations in net income (loss), provides a useful supplemental measure to investors and analysts in assessing the net earnings contribution of our real estate portfolio. Because these measures do not represent net income (loss) that is computed in accordance with GAAP, they should only be considered a supplement, and not an alternative, to net income (loss) attributable to common shareholders (computed in accordance with GAAP) as a performance measure.
Annualized Adjusted EBITDAre
Annualized Adjusted EBITDAre is calculated as Adjusted EBITDAre for the quarter, adjusted for items where annualization would not be appropriate, multiplied by four. Our computation of Adjusted EBITDAre and Annualized Adjusted EBITDAre may differ from the methodology used by other equity REITs to calculate these measures and, therefore, may not be comparable to such other REITs.
Adjusted Debt to Annualized Adjusted EBITDAre
Adjusted Debt to Annualized Adjusted EBITDAre is a supplemental non-GAAP financial measure we use to evaluate the level of borrowed capital being used to increase the potential return of our real estate investments and a proxy for a measure we believe is used by many lenders and ratings agencies to evaluate our ability to repay and service our debt obligations over time. We believe this ratio is a beneficial disclosure to investors as a supplemental means of evaluating our ability to meet obligations senior to those of our equity holders. Our computation of this ratio may differ from the methodology used by other equity REITs and, therefore, may not be comparable to such other REITs.
Fixed Charge Coverage Ratio (FCCR)
Fixed Charge Coverage Ratio is the ratio of Adjusted EBITDAre to Fixed Charges, a ratio derived from non-GAAP measures that we use to evaluate our liquidity and ability to obtain financing. Fixed Charges consist of interest
expense, reported in accordance with GAAP, less non-cash interest expense.

42



FFO AND AFFO
 
 
Year Ended December 31,
(Unaudited, In Thousands)
 
2018 (1)
 
2017 (2)
 
2016 (2)
 
2015 (2)
 
 
 
 
 
 
 
Net (loss) income attributable to common shareholders
 
$
(229,513
)
 
$
18,285

 
$
47,922

 
$
113,487

Add/(less):
 
 

 
 

 
 
 
 
Portfolio depreciation and amortization
 
84,678

 
80,386

 
85,761

 
93,692

Portfolio impairments
 
179,341

 
33,548

 
26,565

 
19,969

Gain on disposition of real estate assets
 
(9,458
)
 
(22,393
)
 
(26,499
)
 
(84,701
)
FFO
 
$
25,048

 
$
109,826

 
$
133,749

 
$
142,447

Add/(less):
 
 

 
 

 
 
 
 
Loss on debt extinguishment
 
366

 
2,223

 
1,372

 
787

Restructuring charges
 

 

 
2,465

 
3,036

Other cost included in general and administrative associated with headquarters relocation
 

 

 
1,411

 

Transaction costs
 
8,676

 
4,354

 

 

Real Estate Acquisition Costs
 
411

 

 
6

 
201

Non-cash interest expense
 
11,623

 
6,069

 
4,839

 
4,257

Straight-line rent, net of related bad debt expense
 
(3,000
)
 
(2,406
)
 
(4,266
)
 
(4,439
)
Other amortization and non-cash charges
 
507

 
568

 
264

 
206

Non-cash compensation expense
 
3,326

 
6,131

 
3,720

 
5,731

(Recovery) amortization of the promote fee
 
833

 

 

 

Other impairment and allowance for loan losses
 
42,008

 

 

 

AFFO
 
$
89,798

 
$
126,765

 
$
143,560

 
$
152,226

 
 
 
 
 
 
 
 
 
Dividends declared to common shareholders
 
$
71,381

 
N/A

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
Net (loss) income per common share
 
 
 
 
 
 
 
 
Diluted (3)
 
$
(5.36
)
 
$
0.43

 
$
1.12

 
$
2.65

FFO per common share
 
 
 
 
 
 
 
 
Diluted (3)
 
$
0.58

 
$
2.56

 
$
3.12

 
$
3.32

AFFO per share of common share
 
 
 
 
 
 
 
 
Diluted (3)
 
$
2.09

 
$
2.96

 
$
3.35

 
$
3.55

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
42,851,010

 
42,851,010

 
42,851,010

 
42,851,010

Diluted
 
42,851,010

 
42,851,010

 
42,851,010

 
42,851,010

(1) Amounts for the year ended December 31, 2018 include five months of income and expense items based on SMTA's legal predecessor entities and seven months of actual results from SMTA operations as a stand alone company.
(2)  
Amounts for the years ended 2017, 2016 and 2015 are based entirely on results of SMTA's legal predecessor entities.
(3)  
For the year ended December 31, 2018, there were dividends declared to unvested restricted shareholders of $249 thousand.

43



Leverage - Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
 
 
December 31,
(Unaudited, In Thousands)
 
2018
 
2017
 
 
 
Master Trust 2014, net
 
$
1,905,321

 
$
1,926,835

CMBS, net
 
233,483

 

Total debt, net
 
$
2,138,804

 
$
1,926,835

Add/(less):
 
 

 
 

Unamortized debt discount
 
21,155

 
36,342

Unamortized deferred financing costs
 
21,885

 
17,989

Cash and cash equivalents
 
(161,013
)
 
(6
)
Cash reserves on deposit with lenders as additional security classified as other assets
 
(44,087
)
 
(66,504
)
Adjusted Debt
 
1,976,744

 
1,914,656

Preferred Stock at liquidation value
 
155,125

 

Adjusted Debt + Preferred Stock
 
2,131,869

 
1,914,656

 
 
 
 
 
Three Months Ended December 31,
(Unaudited, In Thousands)
 
2018
 
2017 (1)
 
 
 
Net (loss) income
 
$
(210,064
)
 
$
1,472

Add/(less):
 
 
 
 

Interest
 
31,570

 
20,409

Depreciation and amortization
 
21,607

 
19,610

Income tax expense
 
82

 
44

Gain on disposition of real estate assets
 
(1,994
)
 
(4,197
)
Portfolio impairments
 
163,926

 
6,200

EBITDAre
 
$
5,127

 
$
43,538

Add/(less):
 
 
 
 

Adjustments to revenue producing acquisitions and dispositions (2)
 
(294
)
 

Transaction costs
 
56

 
2,254

Real estate acquisition costs
 
138

 

Loss on debt extinguishment
 
3

 
2,224

(Recovery) amortization of the promote fee
 
(786
)
 

Other impairment and allowance for loan losses
 
42,008

 

Adjusted EBITDAre
 
$
46,252

 
$
48,016

Other adjustments for Annualized Adjusted EBITDAre
 

 

Impact of Shopko bankruptcy (3)
 
(6,991
)
 
 
Annualized Adjusted EBITDAre
 
$
157,044

 
$
192,064

 
 
 
 
 
Interest Expense
 
31,570

 
20,409

Less: Non-cash interest
 
(3,751
)
 
(1,878
)
Preferred Share Dividends
 
3,975

 

Fixed Charges
 
$
31,794

 
$
18,531

 
 
 
 
 
Adjusted Debt / Annualized Adjusted EBITDAre (3)
 
12.6x

 
10.0x

Adjusted Debt + Preferred / Adjusted EBITDAre (3)
 
13.6x

 
N/A

Fixed Charge Coverage Ratio (Adjusted EBITDAre / Fixed Charges) (4)
 
1.4x

 
2.6x

(1) 
Amounts for 2017 are based on SMTA's allocated portion of Spirit’s expense. For further detail on the allocation, see related party transactions as described in Note 11 to the consolidated financial statements herein.
(2) 
Revenue producing acquisitions and dispositions were adjusted as if such acquisitions and dispositions had occurred at the beginning of the quarter.
(3) 
Adjustments to exclude contractual rent and interest income received from Shopko, as SMTA does not expect to receive any additional cash flow going forward from Shopko, and property operating costs on assets leased to Shopko, as SMTA does not expect to pay due to the foreclosure on the loans secured by such properties. Excluding the Shopko CMBS Loan Agreements and related unamortized deferred costs of $157.4

44



million, the Adjusted Debt/ Annualized Adjusted EBITDAre ratio would be 11.6x and the Adjusted Debt + Preferred/Annualized Adjusted EBITDAre ratio would be 12.6x for the year ended December 31, 2018.
(4) 
For the Fixed Charge Coverage Ratio, Adjusted EBITDAre was adjusted to exclude the $7.0 million impact of Shopko bankruptcy described above and Fixed Charges were adjusted to exclude the $2.7 million of cash interest expense on the Shopko CMBS Loan Agreements.

45



Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion relates to our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this report, that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially. Some of the financial and other information presented is forward-looking in nature, including information concerning projected future occupancy rates, rental rate increases, property development timing and investment amounts. Although the information is based on our current expectations, actual results could vary from expectations stated in this report. Numerous factors will affect our actual results, some of which are beyond our control. These include the breadth and duration of the current economic environment and its impact on our tenants, particularly Shopko, which filed for bankruptcy protection and recently announced that it intends to liquidate its operations, the strength of commercial and industrial real estate markets, market conditions affecting tenants, competitive market conditions, interest rate levels, volatility in our share price, capital markets conditions and our ability to execute on our strategic plans. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We assume no obligation to update publicly any forward-looking information, whether as a result of new information, future events, or otherwise, except to the extent required by law. For a discussion of important risks related to our business, financial condition and results of operations and related to investing in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see Item 1A. and Item 7. - "Liquidity and Capital Resources.”
OVERVIEW
SMTA was formed for the purpose of receiving, via contribution from Spirit, the legal entities which held (i) Master Trust 2014, an asset-backed securitization trust which issues non-recourse asset-back securities collateralized by commercial real estate, net-leases and mortgage loans, (ii) all of Spirit's properties leased to Shopko, (iii) a single distribution center property leased to a sporting goods tenant encumbered with CMBS debt, and (iv) a portfolio of unencumbered properties, as well as a $35.0 million B-1 Term Loan with Shopko as borrower, and a cash contribution of $3.0 million. The activities of the newly formed legal entities are not reflected in the accompanying financial statements balances or results of operations prior to May 31, 2018, but the ten additional properties, the B-1 Term Loan and cash are reflected as contributions as of their respective legal dates of transfer.
On May 31, 2018, the distribution date, Spirit completed the Spin-Off of SMTA. On the distribution date, Spirit distributed on a pro rata basis one SMTA common share for every ten shares of Spirit common stock held by each of Spirit's stockholders as of May 18, 2018, the record date. As a result, 42,851,010 shares of SMTA common were issued on May 31, 2018.
In conjunction with the Spin-Off, we and our Manager, a wholly-owned subsidiary of Spirit, entered into an Asset Management Agreement under which our Manager provides various services including, but not limited to: active portfolio management (including underwriting and risk management), financial reporting, and SEC compliance. The fees for these services are a flat rate of $20 million per annum. Additionally, Spirit Realty, L.P. continues as the property manager and special servicer of Master Trust 2014, under which Spirit Realty, L.P. receives property management fees which accrue daily at 0.25% per annum of the collateral value of the Master Trust 2014 Collateral Pool less any specially serviced assets, and special servicing fees which accrue daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced per the terms of the Property Management and Servicing Agreement. SMTA and Spirit also entered into a Separation and Distribution Agreement, an Insurance-Sharing Agreement, a Tax Matters Agreement, and a Registration Rights Agreement in connection with the Spin-Off.
SMTA expects to operate in a manner intended to enable it to qualify as a REIT under the applicable provisions of the Internal Revenue Code of 1986, as amended. To maintain REIT status, SMTA must meet a number of organizational and operational requirements, including a requirement to distribute annually to shareholders at least 90% of SMTA’s REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. 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 for the period presented subsequent to the Spin-Off. For the period presented prior to the Spin-Off, the Company was disregarded for federal income tax purposes, so no provision for federal income tax was made. SMTA is subject to certain other taxes, including state taxes, which have been reflected as income tax expense in the consolidated statements of operations and comprehensive income (loss).

46



The accompanying financial statements include the consolidated accounts of the Company and its wholly-owned subsidiaries for the period subsequent to the Spin-Off on May 31, 2018. The pre-spin financial statements were prepared on a carve-out basis and reflect the combined net assets and operations of the predecessor legal entities which formed the Company at the time of the Spin-Off. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting periods. Actual results could differ from these estimates. The historical financial results prior to the Spin-Off include allocated expenses for certain corporate costs which we believe are reasonable. These expenses were based on either actual costs incurred or a proportion of costs estimated to be allocable to SMTA based on the relative property count of the Company to those owned by Spirit as a whole. Such costs do not necessarily reflect what the actual costs would have been if SMTA had been operating as a separate standalone public company. These expenses are discussed further in Note 11 of the accompanying financial statements.
Recent Developments
Shopko Bankruptcy Filing
On January 16, 2019, Shopko, the Company's largest tenant, filed for relief under the Bankruptcy Code. As of December 31, 2018, we received $42.1 million in annualized Contractual Rent from Shopko, which represented 17.9% of our total annualized Contractual Rent. On January 16, 2019, our indirect wholly-owned subsidiaries as borrowers under the Shopko CMBS Loan Agreements defaulted on the loans when those entities ceased to make interest payments as a result of Shopko ceasing to pay its rent obligations following its bankruptcy filing. The full outstanding principal amount of $157.4 million outstanding under the Shopko CMBS Loan Agreements immediately became due and payable, and interest is accruing at the default rate of LIBOR plus 12.5% on the original loan portion and LIBOR plus 18.0% on the mezzanine loan portion. On March 1, 2019, the Shopko Lenders foreclosed on the equity of the entity that owns the four property-owning subsidiaries.
We also hold the Shopko B-1 Term Loan, with principal outstanding of $34.4 million as of December 31, 2018. While the outcome of the Shopko bankruptcy filing is uncertain and there can be no assurances that we will recover any amounts due to us under the Shopko B-1 Term Loan, we intend to pursue all of our rights and remedies in connection with the bankruptcy proceedings, with the goal of maximizing the receipt of amounts due to us under the the Shopko B-1 Term loan.
As a consequence of the bankruptcy filing and the subsequent foreclosure by the Shopko Lenders on the equity of the entity that indirectly holds the majority of our Shopko assets, we do not expect to receive any additional cash flow going forward from any of the assets leased to Shopko, nor bear further meaningful expenses related to those assets. On March 18, 2019, Shopko announced that it would seek to liquidate its operations.
On January 16, 2019, in connection with the Shopko bankruptcy filing, the Company announced that its Board of Trustees had elected to accelerate its strategic plan by engaging advisors to explore strategic alternatives focused on maximizing shareholder value. Strategic alternatives to be considered may include, but are not limited to, a sale of the Company or Master Trust 2014, a merger, the sale of other assets, and the maximizing of recoveries in connection with the Shopko bankruptcy. The Company has not set a timetable for completion of the execution of any portion of this strategic plan, and there can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative.
Common Dividend Declared
On March 5, 2019, the Board of Trustees declared a special cash dividend of $0.33 per common share for the first quarter ended March 31, 2019. The dividend will be paid on April 15, 2019 to holders of record as of March 29, 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. See Notes 2 and 8 to the consolidated financial statements for further details.

47



Purchase Accounting and Acquisition of Real Estate; Lease Intangibles
We use a number of sources to estimate fair value of real estate acquisitions, including building age, building location, building condition, rent comparables from similar properties, and terms of in-place leases, if any. Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above or below-market leases. In-place lease intangibles are valued based on our estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. We then allocate the purchase price (including acquisition and closing costs) to land, building, improvements and equipment based on their relative fair values. For properties acquired with in-place leases, we allocate the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values. Above and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and our estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease.
Impairment
We review our real estate investments and related lease intangibles periodically for indicators of impairment, including the asset being held for sale, vacant or non-operating, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. For assets with indicators of impairment, we then evaluate if its carrying amount may not be recoverable. We consider factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.
Impairment is then calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, as the amount by which the carrying value exceeds fair value less costs to sell. Estimating future cash flows and fair values is highly subjective and such estimates could differ materially from actual results. Key assumptions used in estimating future cash flows and fair values include, but are not limited to, revenue growth rates, interest rates, discount rates, capitalization rates, lease renewal probabilities, tenant vacancy rates and other factors.
Impairment and Allowance for Loan Losses
We periodically evaluate the collectability of our loans receivable, including accrued interest, by analyzing the underlying property-level economics and trends, collateral value and quality, and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted.
A loan is placed on non-accrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on non-accrual status, interest income is recognized only when received.
REIT Status
We will elect to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2018. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT commencing with such taxable year. To maintain our REIT status, we are required to annually distribute to our shareholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of share ownership. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate level federal income tax on the earnings distributed to our shareholders that we derive from our REIT qualifying activities. We are still subject to state and local income and franchise taxes and to federal income and excise tax on our undistributed income. If we fail to qualify as a REIT in any taxable year, or we elect not to maintain our REIT status, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates. Unless entitled to relief under specific statutory provisions, we would be ineligible to elect to be treated as a REIT for the four taxable years following the year for which we lose our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief.

48



RESULTS OF OPERATIONS: COMPARISON OF THE YEARS ENDED DECEMBER 31, 2018 AND 2017
<
 
Year Ended December 31,
(In Thousands)
2018
 
2017
 
Change 
 
% Change 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rental income
$
240,410

 
$
226,586

 
$
13,824

 
6.1
 %
Interest income on loans receivable
3,080

 
768

 
2,312

 
NM

Other income
2,817

 
4,448

 
(1,631
)
 
(36.7
)%
Total revenues
246,307

 
231,802

 
14,505

 
6.3
 %
Expenses:
 

 
 

 
 
 
 
General and administrative
13,425

 
20,491

 
(7,066
)
 
(34.5
)%
Related party fees
19,533

 
5,500

 
14,033

 
NM

Transaction costs
8,676

 
4,354

 
4,322

 
99.3
 %
Property costs (including reimbursable)
12,758

 
12,496

 
262

 
2.1
 %
Interest
114,997

 
76,733

 
38,264

 
49.9
 %
Depreciation and amortization
84,678

 
80,386

 
4,292

 
5.3
 %
Impairment and allowance for loan losses
221,349

 
33,548

 
187,801

 
NM

Total expenses
475,416

 
233,508

 
241,908

 
NM

Other income:
 

 
 

 
 
 
 
Loss on debt extinguishment
(366
)
 
(2,223
)
 
1,857

 
(83.5
)%
Gain on disposition of real estate assets
9,458

 
22,393

 
(12,935
)
 
(57.8
)%
Total other income
9,092

 
20,170

 
(11,078
)
 
(54.9
)%
(Loss) income before income tax expense
(220,017
)
 
18,464

 
(238,481
)
 
NM