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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number
Spirit Realty Capital, Inc.                                     001-36004
Spirit Realty, L.P.                                         333-216815-01
___________________________________________________________
SPIRIT REALTY CAPITAL, INC.
SPIRIT REALTY, L.P.
(Exact name of registrant as specified in its charter)
_______________________________________________
Spirit Realty Capital, Inc.
 
Maryland
 
20-1676382
Spirit Realty, L.P.
 
Delaware
 
20-1127940
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
 
2727 North Harwood Street, Suite 300, Dallas, Texas 75201
 
(972) 476-1900
 
 
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.05 per share
SRC
New York Stock Exchange
6.000% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share
SRC-A
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Spirit Realty Capital, Inc.     Yes  x No   o
Spirit Realty, L.P.     Yes  x No   o



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
Spirit Realty Capital, Inc.     Yes  x No   o
Spirit Realty, L.P.     Yes  x No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Spirit Realty Capital, Inc.
 Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
Spirit Realty, L.P.
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Spirit Realty Capital, Inc.            o
Spirit Realty, L.P.            o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Spirit Realty Capital, Inc.     Yes  o No  x
Spirit Realty, L.P.     Yes  o No  x
As of April 30, 2019, there were 87,338,212 shares of common stock, par value $0.05, of Spirit Realty Capital, Inc. outstanding.
 



Explanatory Note
This report combines the quarterly reports on Form 10-Q for the three months ended ended March 31, 2019 of Spirit Realty Capital, Inc., a Maryland corporation, and Spirit Realty, L.P., a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or the “Company” refer to Spirit Realty Capital, Inc. together with its consolidated subsidiaries, including Spirit Realty, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Spirit Realty, L.P. together with its consolidated subsidiaries.
Spirit General OP Holdings, LLC ("OP Holdings") is the sole general partner of the Operating Partnership. The Company is a real estate investment trust ("REIT") and the sole member of OP Holdings, as well as the special limited partner of the Operating Partnership. As sole member of the general partner of our Operating Partnership, our Company has the full, exclusive and complete responsibility for our Operating Partnership’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of our Company and Operating Partnership into a single report results in the following benefits:
enhancing investors’ understanding of our Company and Operating Partnership by enabling investors to view the business as a whole, reflective of how management views and operates the business;
eliminating duplicative disclosure and providing a streamlined presentation as a substantial portion of the disclosures apply to both our Company and Operating Partnership; and
creating time and cost efficiencies by preparing one combined report in lieu of two separate reports.
There are a few differences between our Company and Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand these differences in the context of how we operate as an interrelated, consolidated company. Our Company is a REIT, the only material assets of which are the partnership interests in our Operating Partnership. As a result, our Company does not conduct business itself, other than acting as the sole member of the general partner of our Operating Partnership, issuing equity from time to time and guaranteeing certain debt of our Operating Partnership. Our Operating Partnership holds substantially all the assets of our Company. Our Company issued convertible notes and guarantees some of the debt of our Operating Partnership. See Note 4 to the consolidated financial statements included herein for further discussion. Our Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from the issuance of convertible notes and equity issuances by our Company, which are generally contributed to our Operating Partnership in exchange for partnership units of our Operating Partnership, our Operating Partnership generates the capital required by our Company’s business through our Operating Partnership’s operations or our Operating Partnership’s incurrence of indebtedness.
The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our Operating Partnership. The partnership units in our Operating Partnership are accounted for as partners’ capital in our Operating Partnership’s consolidated financial statements. There are no non-controlling interests in the Company or the Operating Partnership.
To help investors understand the significant differences between our Company and our Operating Partnership, this report presents the consolidated financial statements separately for our Company and our Operating Partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our Operating Partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act, and 18 U.S.C. §1350, this report also includes separate “Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our Operating Partnership.




INDEX

Glossary
 
 

 

2


GLOSSARY
1031 Exchange
Tax-deferred like-kind exchange of properties held for business or investment purposes, pursuant to Section 1031 of the Code
2015 Credit Agreement
Revolving credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015, as amended or otherwise modified from time to time
2015 Credit Facility
$800.0 million unsecured credit facility pursuant to the 2015 Credit Agreement
2015 Term Loan
$420.0 million senior unsecured term facility pursuant to the 2015 Term Loan Agreement
2015 Term Loan Agreement
Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015, as amended or otherwise modified from time to time
2017 Tax Legislation
Tax Cuts and Jobs Act
2019 Credit Facility
$800.0 million unsecured revolving credit facility pursuant to the 2019 Revolving Credit and Term Loan Agreement
2019 Facilities Agreements
2019 Revolving Credit and Term Loan Agreement and A-2 Term Loan
2019 Notes
$402.5 million convertible notes of the Corporation due in 2019
2019 Revolving Credit and Term Loan Agreement
Revolving credit and term loan agreement between the Operating Partnership and certain lenders dated January 14, 2019, as amended or otherwise modified from time to time
2021 Notes
$345.0 million convertible notes of the Corporation due in 2021
A-1 Term Loans
$420.0 million unsecured term loan facility pursuant to the 2019 Revolving Credit and Term Loan Agreement
A-2 Term Loans
$400.0 million unsecured term loan facility pursuant to a term loan agreement between the Operating Partnership and certain lenders dated January 14, 2019, as amended or otherwise modified from time to time
Adjusted Debt
Adjusted Debt is a non-GAAP financial measure. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Adjusted EBITDAre
Adjusted EBITDAre is a non-GAAP financial measure. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
AFFO
Adjusted Funds From Operations. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Amended Incentive Award Plan
Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
Asset Management Agreement
Asset Management Agreement between Spirit Realty, L.P. and Spirit MTA REIT dated May 31, 2018
ASU
Accounting Standards Update
ATM Program
At the Market equity distribution program, pursuant to which the Company may offer and sell registered shares of common stock from time to time
CMBS
Commercial Mortgage-Backed Securities
Code
Internal Revenue Code of 1986, as amended
Company
The Corporation and its consolidated subsidiaries
Contractual Rent
Monthly contractual cash rent and earned income from direct financing leases, excluding percentage rents, from our properties owned fee-simple or ground leased, recognized during the final month of the reporting period, adjusted to exclude amounts received from properties sold during that period and adjusted to include a full month of contractual rent for properties acquired during that period. 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.
Convertible Notes
The 2019 Notes and 2021 Notes, together
Corporation
Spirit Realty Capital, Inc., a Maryland corporation
CPI
Consumer Price Index

3


EBITDAre
EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FFO
Funds From Operations. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
GAAP
Generally Accepted Accounting Principles in the United States
LIBOR
London Interbank Offered Rate
Master Trust 2013
The net-lease mortgage securitization trust established in December 2013
Master Trust 2014
The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014
Master Trust Notes
Master Trust 2013 and Master Trust 2014 notes, together
Master Trust Release
Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made or until used for principal reduction
Moody's
Moody's Investor Services
NAREIT
National Association of Real Estate Investment Trusts
Occupancy
The number of economically yielding owned properties divided by total owned properties
OP Holdings
Spirit General OP Holdings, LLC
Operating Partnership
Spirit Realty, L.P., a Delaware limited partnership
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
S&P
Standard & Poor's Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Senior Unsecured Notes
$300 million aggregate principal amount of senior notes issued in August 2016
Series A Preferred Stock
6,900,000 shares of 6.000% Cumulative Redeemable Preferred Stock issued October 3, 2017, with a liquidation preference of $25.00 per share.
Shopko
Specialty Retail Shops Holding Corp. and certain of its affiliates
SMTA
Spirit MTA REIT, a Maryland real estate investment trust
Spin-Off
Creation of an independent, publicly traded REIT, SMTA, through our contribution of properties leased to Shopko, assets that collateralize Master Trust 2014 and other additional assets to SMTA followed by the distribution by us to our stockholders of all of the common shares of beneficial interest in SMTA.
SubREIT
Spirit MTA SubREIT, a wholly-owned subsidiary of SMTA
Spirit Property Ranking Model
A proprietary model used annually to rank 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 acquisition or disposition decisions
TSR
Total Stockholder Return
U.S.
United States
Vacant
Owned properties which are not economically yielding

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

4


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
Assets



Investments:



Real estate investments:



Land and improvements
$
1,645,060


$
1,632,664

Buildings and improvements
3,159,235


3,125,053

Total real estate investments
4,804,295


4,757,717

Less: accumulated depreciation
(636,780
)

(621,456
)
 
4,167,515


4,136,261

Loans receivable, net
43,015


47,044

Intangible lease assets, net
291,095


294,463

Real estate assets under direct financing leases, net
20,320


20,289

Real estate assets held for sale, net
94,339


18,203

Net investments
4,616,284


4,516,260

Cash and cash equivalents
9,376


14,493

Deferred costs and other assets, net
124,085


156,428

Investment in Master Trust 2014
33,512

 
33,535

Preferred equity investment in SMTA
150,000

 
150,000

Goodwill
225,600


225,600

Total assets
$
5,158,857


$
5,096,316

 
 
 
 
Liabilities and stockholders’ equity



Liabilities:



Revolving credit facilities
$
206,500


$
146,300

Term loans, net
413,905

 
419,560

Senior Unsecured Notes, net
295,882

 
295,767

Mortgages and notes payable, net
450,534


463,196

Convertible Notes, net
733,412


729,814

Total debt, net
2,100,233

 
2,054,637

Intangible lease liabilities, net
114,805


120,162

Accounts payable, accrued expenses and other liabilities
125,183


119,768

Total liabilities
2,340,221


2,294,567

Commitments and contingencies (see Note 6)





Stockholders’ equity:



Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both March 31, 2019 and December 31, 2018
166,177

 
166,177

Common stock, $0.05 par value, 750,000,000 shares authorized: 86,811,786 and 85,787,355 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
4,341


4,289

Capital in excess of common stock par value
5,031,829


4,995,697

Accumulated deficit
(2,371,531
)

(2,357,255
)
Accumulated other comprehensive loss
(12,180
)

(7,159
)
Total stockholders’ equity
2,818,636

 
2,801,749

Total liabilities and stockholders’ equity
$
5,158,857

 
$
5,096,316

See accompanying notes.

5


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


 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental income
$
104,067

 
$
101,507

Interest income on loans receivable
986

 
995

Earned income from direct financing leases
396

 
465

Related party fee income
6,927

 

Other income
217

 
572

Total revenues
112,593

 
103,539

Expenses:
 
 
 
General and administrative
13,181

 
15,290

Property costs (including reimbursable)
5,154

 
5,551

Real estate acquisition costs
71

 
47

Interest
26,611

 
23,053

Depreciation and amortization
41,349

 
40,694

Impairments
3,692

 
3,497

Total expenses
90,058

 
88,132

Other income:
 
 
 
Gain on debt extinguishment
8,783

 
21,583

Gain on disposition of assets
8,730

 
1,251

Preferred dividend income from SMTA
3,750

 

Total other income
21,263

 
22,834

Income from continuing operations before income tax expense
43,798

 
38,241

Income tax expense
(220
)
 
(163
)
Income from continuing operations
43,578

 
38,078

Loss from discontinued operations

 
(7,360
)
Net income
$
43,578

 
$
30,718

Dividends paid to preferred shareholders
(2,588
)
 
(2,588
)
Net income attributable to common stockholders
$
40,990

 
$
28,130

 
 
 
 
Net income per share attributable to common stockholders - basic:
 
 
 
Continuing operations
$
0.48

 
$
0.39

Discontinued operations

 
(0.08
)
Net income per share attributable to common stockholders - basic
$
0.48

 
$
0.31

 
 
 
 
Net income per share attributable to common stockholders - diluted
 
 
 
Continuing operations
$
0.48

 
$
0.39

Discontinued operations

 
(0.08
)
Net income per share attributable to common stockholders - diluted
$
0.48

 
$
0.31

 
 
 
 
Weighted average shares of common stock outstanding:
 
 
 
Basic
85,497,093

 
88,975,391

Diluted
85,504,897

 
89,020,751

 
 
 
 
Dividends declared per common share issued
$
0.6250

 
$
0.9000

See accompanying notes.

6


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


 
Three Months Ended 
 March 31,
 
2019
 
2018
Net income attributable to common stockholders
$
40,990

 
$
28,130

Other comprehensive loss:
 
 
 
Change in net unrealized losses on cash flow hedges
(5,021
)
 

Total comprehensive income
$
35,969

 
$
28,130

See accompanying notes.


7


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


Three Months Ended March 31, 2019
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Par Value and Capital in Excess of Par Value
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
AOCL
 
Total
Stockholders’
Equity
Balances, December 31, 2018
6,900,000

 
$
166,177

 
85,787,355

 
$
4,289

 
$
4,995,697

 
$
(2,357,255
)
 
$
(7,159
)
 
$
2,801,749

Net income

 

 

 

 

 
43,578

 

 
43,578

Dividends declared on preferred stock

 

 

 

 

 
(2,588
)
 

 
(2,588
)
Net income available to common stockholders
 
 

 
 
 

 

 
40,990

 

 
40,990

Other comprehensive loss

 

 

 

 

 

 
(5,021
)
 
(5,021
)
Dividends declared on common stock

 

 

 

 

 
(54,254
)
 

 
(54,254
)
Tax withholdings related to net stock settlements

 

 
(17,800
)
 
(1
)
 

 
(703
)
 

 
(704
)
Issuance of shares of common stock, net

 

 
893,526

 
45

 
32,641

 

 

 
32,686

Other

 

 

 

 
(79
)
 

 

 
(79
)
Stock-based compensation, net

 

 
148,705

 
8

 
3,570

 
(309
)
 

 
3,269

Balances, March 31, 2019
6,900,000

 
$
166,177

 
86,811,786

 
$
4,341

 
$
5,031,829

 
$
(2,371,531
)
 
$
(12,180
)
 
$
2,818,636

Three Months Ended March 31, 2018
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Par Value and Capital in Excess of Par Value
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
AOCL
 
Total
Stockholders’
Equity
Balances, December 31, 2017
6,900,000

 
$
166,193

 
89,774,135

 
$
4,489

 
$
5,193,631

 
$
(2,044,704
)
 
$

 
$
3,319,609

Net income

 

 

 

 

 
30,718

 

 
30,718

Dividends declared on preferred stock

 

 

 

 

 
(2,588
)
 

 
(2,588
)
Net income available to common stockholders
 
 

 
 
 

 

 
28,130

 

 
28,130

Dividends declared on common stock

 

 

 

 

 
(78,581
)
 

 
(78,581
)
Tax withholdings related to net stock settlements

 

 
(12,188
)
 

 

 
(484
)
 

 
(484
)
Repurchase of common shares

 

 
(2,632,210
)
 
(132
)
 

 
(103,910
)
 

 
(104,042
)
Stock-based compensation, net

 

 
183,081

 
9

 
4,357

 
(275
)
 

 
4,091

Balances, March 31, 2018
6,900,000

 
$
166,193

 
87,312,818

 
$
4,366

 
$
5,197,988

 
$
(2,199,824
)
 
$

 
$
3,168,723

See accompanying notes.


8


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


 
Three Months Ended  
 March 31,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
43,578

 
$
30,718

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41,349

 
62,117

Impairments
3,692

 
14,569

Amortization of deferred financing costs
2,031

 
2,979

Amortization of debt discounts
2,706

 
4,562

Stock-based compensation expense
3,578

 
4,366

Gain on debt extinguishment
(8,783
)
 
(21,328
)
(Gain) loss on dispositions of real estate and other assets
(8,730
)
 
605

Non-cash revenue
(4,110
)
 
(5,491
)
Bad debt expense and other
799

 
1,488

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(700
)
 
478

Accounts payable, accrued expenses and other liabilities
(4,057
)
 
(1,903
)
Net cash provided by operating activities
71,353

 
93,160

Investing activities
 
 
 
Acquisitions of real estate
(160,262
)
 
(2,722
)
Capitalized real estate expenditures
(19,612
)
 
(9,890
)
Investments in loans receivable

 
(35,450
)
Collections of principal on loans receivable and real estate assets under direct financing leases
3,653

 
3,798

Proceeds from dispositions of real estate and other assets, net
34,848

 
26,082

Net cash used in investing activities
(141,373
)
 
(18,182
)

9


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


 
Three Months Ended  
 March 31,
 
2019
 
2018
Financing activities
 
 
 
Borrowings under revolving credit facilities
372,700

 
198,500

Repayments under revolving credit facilities
(312,500
)
 
(156,000
)
Borrowings under mortgages and notes payable

 
104,247

Repayments under mortgages and notes payable
(2,906
)
 
(18,002
)
Borrowings under term loans
420,000

 

Repayments under 2015 Term Loan
(420,000
)
 

Debt extinguishment costs
(1,009
)
 
(1,105
)
Deferred financing costs
(11,266
)
 
(1,236
)
Proceeds from issuance of common stock, net of offering costs
32,379

 

Repurchase of shares of common stock, including tax withholdings related to net stock settlements
(704
)
 
(104,526
)
Common stock dividends paid
(53,615
)
 
(80,821
)
Preferred stock dividends paid
(2,588
)
 
(2,588
)
Net cash provided by (used in) financing activities
20,491

 
(61,531
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(49,529
)
 
13,447

Cash, cash equivalents and restricted cash, beginning of period
77,421

 
114,707

Cash, cash equivalents and restricted cash, end of period
$
27,892

 
$
128,154

 
 
 
 
Cash paid for interest
$
17,052

 
$
38,555

Cash paid for income taxes
$
262

 
$
107

Supplemental Disclosures of Non-Cash Activities:
Three Months Ended  
 March 31,
 
2019
 
2018
Distributions declared and unpaid
54,254

 
79,369

Relief of debt through sale or foreclosure of real estate properties
10,368

 
33,917

Net real estate and other collateral assets sold or surrendered to lender
654

 
12,758

Derivative changes in fair value
5,021

 

Accrued interest capitalized to principal (1)
251

 
1,062

Accrued market-based award dividend rights
308

 
276

Accrued capitalized costs
1,142

 

Right of use assets
6,143

 

Lease liabilities
6,143

 

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

10



 
SPIRIT REALTY, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit and Per Unit Data)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Investments:
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
1,645,060

 
$
1,632,664

Buildings and improvements
3,159,235

 
3,125,053

Total real estate investments
4,804,295

 
4,757,717

Less: accumulated depreciation
(636,780
)
 
(621,456
)
 
4,167,515

 
4,136,261

Loans receivable, net
43,015

 
47,044

Intangible lease assets, net
291,095

 
294,463

Real estate assets under direct financing leases, net
20,320

 
20,289

Real estate assets held for sale, net
94,339

 
18,203

Net investments
4,616,284

 
4,516,260

Cash and cash equivalents
9,376

 
14,493

Deferred costs and other assets, net
124,085

 
156,428

Investment in Master Trust 2014
33,512

 
33,535

Preferred equity investment in SMTA
150,000

 
150,000

Goodwill
225,600

 
225,600

Total assets
$
5,158,857

 
$
5,096,316

 
 
 
 
Liabilities and partners' capital
 
 
 
Liabilities:
 
 
 
Revolving credit facilities
$
206,500

 
$
146,300

Term loans, net
413,905

 
419,560

Senior Unsecured Notes, net
295,882

 
295,767

Notes payable to Spirit Realty Capital, Inc., net
450,534

 
463,196

Convertible Notes, net
733,412

 
729,814

Total debt, net
2,100,233

 
2,054,637

Intangible lease liabilities, net
114,805

 
120,162

Accounts payable, accrued expenses and other liabilities
125,183

 
119,768

Total liabilities
2,340,221

 
2,294,567

Commitments and contingencies (see Note 6)


 


Partners' capital:
 
 
 
Partnership units
 
 
 
General partner's capital: 797,644 units issued and outstanding as of both March 31, 2019 and December 31, 2018
22,889

 
23,061

Limited partners' preferred capital: 6,900,000 units issued and outstanding as of both March 31, 2019 and December 31, 2018
166,177

 
166,177

Limited partners' capital: 86,014,142 and 84,989,711 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
2,629,570

 
2,612,511

Total partners' capital
2,818,636

 
2,801,749

Total liabilities and partners' capital
$
5,158,857

 
$
5,096,316

See accompanying notes.

11


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

 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental income
$
104,067

 
$
101,507

Interest income on loans receivable
986

 
995

Earned income from direct financing leases
396

 
465

Related party fee income
6,927

 

Other income
217

 
572

Total revenues
112,593

 
103,539

Expenses:
 
 
 
General and administrative
13,181

 
15,290

Property costs (including reimbursable)
5,154

 
5,551

Real estate acquisition costs
71

 
47

Interest
26,611

 
23,053

Depreciation and amortization
41,349

 
40,694

Impairments
3,692

 
3,497

Total expenses
90,058

 
88,132

Other income:
 
 
 
Gain on debt extinguishment
8,783

 
21,583

Gain on disposition of assets
8,730

 
1,251

Preferred dividend income from SMTA
3,750

 

Total other income
21,263

 
22,834

Income from continuing operations before income tax expense
43,798

 
38,241

Income tax expense
(220
)
 
(163
)
Income from continuing operations
43,578

 
38,078

Loss from discontinued operations

 
(7,360
)
Net income
$
43,578

 
$
30,718

Preferred distributions
(2,588
)
 
(2,588
)
Net income after preferred distributions
$
40,990

 
$
28,130

 
 
 
 
Net income attributable to the general partner
 
 
 
Continuing operations
$
380

 
$
284

Discontinued operations

 
(55
)
Net income attributable to the general partner
$
380

 
$
229

 
 
 
 
Net income attributable to the limited partners
 
 
 
Continuing operations
$
43,198

 
$
37,794

Discontinued operations

 
(7,305
)
Net income attributable to the limited partners
$
43,198

 
$
30,489

 
 
 
 

12


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

 
Three Months Ended 
 March 31,
 
2019
 
2018
Net income per partnership unit - basic
 
 
 
Continuing operations
$
0.48

 
$
0.39

Discontinued operations

 
(0.08
)
Net income per partnership unit - basic
$
0.48

 
$
0.31

 
 
 
 
Net income per partnership unit - diluted
 
 
 
Continuing operations
$
0.48

 
$
0.39

Discontinued operations

 
(0.08
)
Net income per partnership unit - diluted
$
0.48

 
$
0.31

 
 
 
 
Weighted average partnership units outstanding:
 
 
 
Basic
85,497,093

 
88,975,391

Diluted
85,504,897

 
89,020,751

 
 
 
 
Distributions declared per partnership unit issued
$
0.6250

 
$
0.9000

See accompanying notes.

13


SPIRIT REALTY, L.P.
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)

 
Three Months Ended 
 March 31,
 
2019
 
2018
Net income after preferred distributions
$
40,990

 
$
28,130

Other comprehensive loss:
 
 
 
Change in net unrealized losses on cash flow hedges
(5,021
)
 

Total comprehensive income
$
35,969

 
$
28,130

See accompanying notes.


14


SPIRIT REALTY, L.P.
Consolidated Statements of Partners' Capital
(In Thousands, Except Unit Data)
(Unaudited)


Three Months Ended March 31, 2019
Preferred Units
 
Common Units
 
Total Partnership Capital
 
Limited Partners' Capital (1)
 
General Partner's Capital (2)
 
Limited Partners' Capital (1)
 
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Balances, December 31, 2018
6,900,000

 
$
166,177

 
797,644

 
$
23,061

 
84,989,711

 
$
2,612,511

 
$
2,801,749

Net income

 

 

 
380

 

 
43,198

 
43,578

Partnership distributions declared on preferred units

 

 

 

 

 
(2,588
)
 
(2,588
)
Net income after preferred distributions
 
 

 
 
 
380

 
 
 
40,610

 
40,990

Other comprehensive loss

 

 

 
(47
)
 

 
(4,974
)
 
(5,021
)
Partnership distributions declared on common units

 

 

 
(504
)
 

 
(53,750
)
 
(54,254
)
Tax withholdings related to net settlement of common units

 

 

 

 
(17,800
)
 
(704
)
 
(704
)
Issuance of common units, net

 

 

 

 
893,526

 
32,686

 
32,686

Other

 

 

 
(1
)
 

 
(78
)
 
(79
)
Stock-based compensation, net

 

 

 

 
148,705

 
3,269

 
3,269

Balances, March 31, 2019
6,900,000

 
$
166,177

 
797,644

 
$
22,889

 
86,014,142

 
$
2,629,570

 
$
2,818,636

Three Months Ended March 31, 2018
Preferred Units
 
Common Units
 
Total Partnership Capital
 
Limited Partners' Capital (1)
 
General Partner's Capital (2)
 
Limited Partners' Capital (1)
 
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Balances, December 31, 2017
6,900,000

 
$
166,193

 
797,644

 
$
24,426

 
88,976,491

 
$
3,128,990

 
$
3,319,609

Net income

 

 

 
229

 

 
30,489

 
30,718

Partnership distributions declared on preferred units

 

 

 

 

 
(2,588
)
 
(2,588
)
Net income after preferred distributions
 
 

 
 
 
229

 
 
 
27,901

 
28,130

Partnership distributions declared on common units

 

 

 
(701
)
 

 
(77,880
)
 
(78,581
)
Tax withholdings related to net settlement of common units

 

 

 

 
(12,189
)
 
(484
)
 
(484
)
Repurchase of partnership units

 

 

 

 
(2,632,213
)
 
(104,041
)
 
(104,041
)
Stock-based compensation, net

 

 

 

 
183,079

 
4,090

 
4,090

Balances, March 31, 2018
6,900,000

 
$
166,193

 
797,644

 
$
23,954

 
86,515,168

 
$
2,978,576

 
$
3,168,723

(1) Consists of limited partnership interests held by the Corporation and Spirit Notes Partner, LLC.
(2) Consists of general partnership interests held by OP Holdings.
    
See accompanying notes.

15


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


 
Three Months Ended  
 March 31,
 
2019
 
2018
Operating activities
 
 
 
Net income
$
43,578

 
$
30,718

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41,349

 
62,117

Impairments
3,692

 
14,569

Amortization of deferred financing costs
2,031

 
2,979

Amortization of debt discounts
2,706

 
4,562

Stock-based compensation expense
3,578

 
4,366

Gain on debt extinguishment
(8,783
)
 
(21,328
)
(Gain) loss on dispositions of real estate and other assets
(8,730
)
 
605

Non-cash revenue
(4,110
)
 
(5,491
)
Bad debt expense and other
799

 
1,488

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(700
)
 
478

Accounts payable, accrued expenses and other liabilities
(4,057
)
 
(1,903
)
Net cash provided by operating activities
71,353

 
93,160

Investing activities
 
 
 
Acquisitions of real estate
(160,262
)
 
(2,722
)
Capitalized real estate expenditures
(19,612
)
 
(9,890
)
Investments in loans receivable

 
(35,450
)
Collections of principal on loans receivable and real estate assets under direct financing leases
3,653

 
3,798

Proceeds from dispositions of real estate and other assets, net
34,848

 
26,082

Net cash used in investing activities
(141,373
)
 
(18,182
)

16


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


 
Three Months Ended  
 March 31,
 
2019
 
2018
Financing activities
 
 
 
Borrowings under revolving credit facilities
372,700

 
198,500

Repayments under revolving credit facilities
(312,500
)
 
(156,000
)
Borrowings under mortgages and notes payable

 
104,247

Repayments under mortgages and notes payable
(2,906
)
 
(18,002
)
Borrowings under term loans
420,000

 

Repayments under 2015 Term Loan
(420,000
)
 

Debt extinguishment costs
(1,009
)
 
(1,105
)
Deferred financing costs
(11,266
)
 
(1,236
)
Proceeds from issuance of partnership units, net of offering costs
32,379

 

Repurchase of partnership units, including tax withholdings related to net settlement of common units
(704
)
 
(104,526
)
Common distributions paid
(53,615
)
 
(80,821
)
Preferred distributions paid
(2,588
)
 
(2,588
)
Net cash provided by (used in) financing activities
20,491

 
(61,531
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(49,529
)
 
13,447

Cash, cash equivalents and restricted cash, beginning of period
77,421

 
114,707

Cash, cash equivalents and restricted cash, end of period
$
27,892

 
$
128,154

 
 
 
 
Cash paid for interest
$
17,052

 
$
38,555

Cash paid for income taxes
$
262

 
$
107

Supplemental Disclosures of Non-Cash Activities:
Three Months Ended  
 March 31,
 
2019
 
2018
Distributions declared and unpaid
54,254

 
79,369

Relief of debt through sale or foreclosure of real estate properties
10,368

 
33,917

Net real estate and other collateral assets sold or surrendered to lender
654

 
12,758

Derivative changes in fair value
5,021

 

Accrued interest capitalized to principal (1)
251

 
1,062

Accrued market-based award dividend rights
308

 
276

Accrued capitalized costs
1,142

 

Right of use assets
6,143

 

Lease liabilities
6,143

 

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

17


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)



Note 1. Organization
Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate and deliver sustainable and attractive returns for stockholders by primarily investing in and managing a portfolio of single-tenant, operationally essential real estate throughout the U.S. that is generally leased on a long-term, triple-net basis to tenants operating within retail, office, industrial and data center property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.The Company began operations through a predecessor legal entity in 2003.
The Company’s operations are generally carried out through Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC ("OP Holdings"), one of the Company's wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. The Corporation and a wholly-owned subsidiary ("Spirit Notes Partner, LLC") are the only limited partners and together own the remaining 99% of the Operating Partnership.
On May 31, 2018 (the "Distribution Date"), the Company completed the spin-off (the "Spin-Off") of the assets that collateralized Master Trust 2014, properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). For periods prior to the Spin-Off, the historical financial results of SMTA are reflected in our consolidated financial statements as discontinued operations.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2018.
The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. The consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company also consolidates a variable interest entity ("VIE") when the Company is determined to be the primary beneficiary. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company's determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements and other contractual arrangements. The Company evaluated SMTA under ASC 810 Consolidation at time of Spin-Off, and continues to evaluate quarterly thereafter. As a result of this analysis, the Company concluded that while it has variable interests in SMTA, SMTA is not a VIE. Control of SMTA is therefore evaluated under the voting interest model and does not require consolidation by the Company.
All expenses incurred by the Company have been allocated to the Operating Partnership in accordance with the Operating Partnership's first amended and restated agreement of limited partnership, which management determined to be a reasonable method of allocation. Therefore, expenses incurred would not be materially different if the Operating Partnership had operated as an unaffiliated entity.

18


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
March 31, 2019
(Unaudited)

These consolidated financial statements include certain special purpose entities that were formed to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of March 31, 2019 and December 31, 2018, net assets totaling $0.88 billion and $0.90 billion, respectively, were held, and net liabilities totaling $0.47 billion and $0.48 billion, respectively, were owed by these encumbered special purpose entities and are included in the accompanying consolidated balance sheets.
Discontinued Operations
A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition. Examples of a strategic shift include disposing of: (i) a separate major line of business, (ii) a separate major geographic area of operations, or (iii) other major parts of the Company. The Company determined that the Spin-Off represented a strategic shift that has a major effect on the Company's results and, therefore, SMTA's operations qualify as discontinued operations. See Note 12 for further discussion on discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Revenue Recognition
Rental Income: Cash and Straight-line Rent
The Company primarily leases real estate to its tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, the Company assesses the terms and conditions of the lease to determine the appropriate lease term. For the majority of our operating leases at March 31, 2019, the lease includes one or more options to extend, typically for a period of five to ten years per renewal option. Excluding Walgreen Co., less than 1% of the Company's operating leases at March 31, 2019 include an option to terminate. Walgreen Co. leases are generally for fifty years or more with several five year termination periods after an initial non-cancelable term. For less than 6% of operating leases at March 31, 2019, the lease includes an option to purchase, where the purchase option is generally determined based on fair market value of the underlying property. The Company does not include any of these options in its evaluation for lease classification purposes or for recognizing rental income unless the Company is reasonably certain the tenant will exercise the option. 
Another component of lease classification which requires significant assumptions and judgment is the amount expected to be derived from the property at the end of the lease term. Generally, the Company assumes a value that is equal to net book value of the property at the date of the assessment, as the Company generally expects fair value to be equal to or greater than net book value. The Company seeks to protect residual value through its underwriting of acquisitions, incorporating the proprietary Spirit Property Ranking Model which is real estate centric. Once a property is acquired, the lessee is responsible for maintenance of the property, including insurance protecting any damage to the property. To further protect residual value, the Company supplements the tenant insurance policy with a master policy covering all properties owned by the Company. As an active manager, the Company will occasionally invest in capital improvements on properties, re-lease properties to new tenants or extend lease terms to protect residual value.

19


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
March 31, 2019
(Unaudited)

Some of the Company’s leases provide for contingent rent based on a percentage of the tenant’s gross sales. For contingent rentals that are based on a percentage of the tenant’s gross sales, the Company recognizes contingent rental revenue when the change in the factor on which the contingent lease payment is based actually occurs.
The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that have contingent rent escalators indexed to future changes in the CPI, they may adjust over a one-year period or over multiple-year periods. Typically, these CPI-based escalators increase rent at a multiple of any increase in the CPI over a specified period. Because of the volatility and uncertainty with respect to future changes in the CPI and the Company’s inability to determine the extent to which any specific future change in the CPI is probable at each rent adjustment date during the entire term of these leases, increases in rental revenue from leases with this type of escalator are recognized when the changes in the rental rates have occurred.
For leases that provide for fixed contractual escalations, rental revenue is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, accrued rental revenue, calculated as the aggregate difference between the rental revenue recognized on a straight-line basis and scheduled rents, represents unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the initial term of the leases.
Rental income is subject to an evaluation for collectability, which includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. The Company records a provision for losses against rental income for amounts that are not probable of collection.
Rental Income: Tenant Reimbursement Revenue
Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. Certain leases contain additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, which are non-lease components. The Company has elected to combine all of its nonlease components, which were determined to have the same pattern of transfer as the related operating lease component, into a single combined lease component. Tenant reimbursement revenue is variable and is recognized as revenue in the period in which the related expenses are incurred, with the related expense included in property costs (including reimbursable). Tenant reimbursements are recorded on a gross basis in instances when our tenants reimburse us for property costs which we incur. Tenant receivables are carried net of any allowances for amounts that are not probable of collection.
Rental Income: Intangible Amortization
Initial direct costs associated with the origination of a lease are deferred and amortized over the related lease term as an adjustment to rental revenue. In-place lease intangibles are amortized on a straight-line basis over the remaining initial term of the related lease and included in depreciation and amortization expense. Above-market lease intangibles are amortized over the remaining initial terms of the respective leases as a decrease in rental revenue. Below-market lease intangibles are amortized as an increase to rental revenue over the remaining initial term of the respective leases, but may be amortized over the renewal periods if the Company believes it is reasonably certain the tenant will exercise the renewal option. If the Company believes it is reasonably certain a lease will terminate early, the unamortized portion of any related lease intangible is immediately recognized in impairments in the Company’s consolidated statements of operations.
Allowance for Doubtful Accounts
The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. If the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made. The Company provided for reserves for uncollectible amounts totaling $5.4 million and $4.9 million at March 31, 2019 and December 31, 2018, respectively, against accounts receivable balances of $11.9 million and $12.4 million, respectively. Receivables are recorded within deferred costs

20


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
March 31, 2019
(Unaudited)

and other assets, net in the accompanying consolidated balance sheets. Receivables are written off against the reserves for uncollectible amounts when all possible means of collection have been exhausted.
For receivable balances related to the straight-line method of reporting rental revenue, the collectability is assessed in conjunction with the evaluation of rental income as described above. The Company has a reserve for losses of $2.0 million and $1.1 million at March 31, 2019 and December 31, 2018, respectively, against straight-line receivables of $73.0 million and $69.4 million, respectively. These receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term investments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Cash and cash equivalents
$
9,376

 
$
14,493

 
$
10,989

Restricted cash:
 
 
 
 
 
Collateral deposits (1)
401

 
351

 
1,190

Tenant improvements, repairs, and leasing commissions (2)
9,539

 
9,093

 
8,782

Master Trust Release (3)
7,413

 
7,412

 
97,010

1031 Exchange proceeds, net

 
45,042

 

Liquidity reserve (4)

 

 
5,527

Other (5)
1,163

 
1,030

 
4,656

Total cash, cash equivalents and restricted cash
$
27,892

 
$
77,421

 
$
128,154

(1)  
Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses.
(2)  
Deposits held as additional collateral support by lenders to fund improvements, repairs and leasing commissions incurred to secure a new tenant.
(3)
Proceeds from the sale of assets pledged as collateral under either Master Trust 2013 or Master Trust 2014, which are held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
(4)
Liquidity reserve cash was placed on deposit for Master Trust 2014 and is held until there is a cashflow shortfall or upon achieving certain performance criteria, as defined in the agreements governing Master Trust 2014, or a liquidation of Master Trust 2014 occurs.
(5)  
Funds held in lender controlled accounts released after scheduled debt service requirements are met.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. No impairment was recorded for the periods presented.
Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of its assets, the amounts distributed to its stockholders and the ownership of Company stock. Management believes the Company has qualified and will continue to qualify as a REIT and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Company qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income. Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes, which are not material.

21


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
March 31, 2019
(Unaudited)

The Operating Partnership is a partnership for federal income tax purposes. Partnerships are pass-through entities and are not subject to U.S. federal income taxes, therefore no provision has been made for federal income taxes in the accompanying financial statements. Although most states and cities where the Operating Partnership operates follow the U.S. federal income tax treatment, there are certain jurisdictions such as Texas, Tennessee and Ohio that impose income or franchise taxes on a partnership.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations.
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. Leases pursuant to which the Company is the lessee consist of its corporate office, ground leases and equipment leases. The amendments in this ASU are effective for the fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and as such, the Company adopted ASU 2016-02 effective January 1, 2019. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief as follows:
The Company elected to use the package of practical expedients, which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date.
The Company elected to use the comparative period expedient, which permits the Company to recognize any cumulative adjustments as of the date of initial application and not record adjustments to prior reported periods. As a result of this election, bad debt expense is being presented in "rental income" on a prospective basis, compared to "property costs (including reimbursable)" for periods prior to January 1, 2019. Bad debt expense was $0.9 million for the three months ended March 31, 2019. The adoption of the lease standard did not result in a cumulative catch-up adjustment to opening equity.
The Company elected to use the land easements expedient, which permits the Company to not reassess land easements for potential lease classification.
The Company elected to use the components expedient, which permits the Company to not separate nonlease components from lease components if timing and pattern of transfer is the same. The Company elected this expedient for all lessee and lessor operating leases, where certain leases contain nonlease components related to tenant reimbursement, and concluded that the leasing component is the predominant component.
The Company elected not to use the hindsight expedient, which would require the re-evaluation of the lease term on all leases using current facts and circumstances.
As a lessee, the Company recognized the right-of-use assets and lease liabilities for our operating leases of $6.4 million and $8.6 million, respectively, on January 1, 2019, which are included in deferred costs and other assets, net and accounts payable, accrued expenses and other liabilities, respectively, on the accompanying consolidated balance sheet. As a lessor, our recognition of rental income remained materially consistent with previous guidance, apart from expanded disclosure requirements. As such, the Company concludes that the overall impact of the ASU had no material impact on the Company's reported revenues, results of operations or financial position.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. ASU 2016-13 requires financial assets (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Per the subsequently issued ASU 2018-19, receivables arising from operating leases are not within the scope of ASU 2016-13. As such, the Company is currently evaluating the impact of this ASU on its consolidated financial statements, but does not expect its impact to be material.

22


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)


Note 3. Investments
As of March 31, 2019, the Company's gross investment in real estate properties and loans totaled approximately $5.3 billion, representing investments in 1,528 properties, including 51 properties securing mortgage loans. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with Texas, at 12.5%, as the only state with a Real Estate Investment Value greater than 10% of the Real Estate Investment Value of the Company's entire portfolio.
Owned Properties
During the three months ended March 31, 2019, the Company had the following owned real estate activity, net of accumulated depreciation and amortization (dollars in thousands):
 
Number of Properties
 
Dollar Amount of Investments
 
Held in Use
 
Held for Sale
 
Total
 
Held in Use
 
Held for Sale
 
Total
Gross balance, December 31, 2018
1,459

 
3

 
1,462

 
$
5,054,524

 
$
22,064

 
$
5,076,588

Acquisitions/improvements (1)(2)
22

 

 
22

 
179,842

 

 
179,842

Dispositions of real estate (3)(4)
(6
)
 
(1
)
 
(7
)
 
(19,229
)
 
(12,669
)
 
(31,898
)
Transfers to Held for Sale
(15
)
 
15

 

 
(107,723
)
 
107,723

 

Transfers from Held for Sale

 

 

 

 

 

Impairments

 

 

 
334

 
(4,026
)
 
(3,692
)
Write-off of gross lease intangibles

 

 

 
(2,431
)
 

 
(2,431
)
Gross balance, March 31, 2019
1,460

 
17

 
1,477

 
5,105,317

 
113,092

 
5,218,409

Accumulated depreciation
 
 
 
 
 
 
(636,780
)
 
(14,665
)
 
(651,445
)
Accumulated amortization
 
 
 
 
 
 
(104,412
)
 
(4,088
)
 
(108,500
)
Net balance, March 31, 2019 (5)
 
 
 
 
 
 
$
4,364,125

 
$
94,339

 
$
4,458,464

(1) Includes investments of $18.3 million in revenue producing capitalized expenditures, as well as $1.3 million of non-revenue producing capitalized expenditures as of March 31, 2019.
(2) The acquisition of 20 properties were completed as sales-lease back transactions, representing $147.2 million of investment, during the three months ended March 31, 2019.
(3) For the three months ended March 31, 2019, the total (loss) gain on disposal of assets for properties held in use and held for sale was $2.8 million and $5.9 million, respectively.
(4) Includes one deed-in-lieu properties with a real estate investment of $0.8 million that were transferred to the lender during the three months ended March 31, 2019.
(5) 
Reconciliation of total owned investments to the accompanying consolidated balance sheet at March 31, 2019 is as follows:
        
Held in Use land and buildings, net of accumulated depreciation
$
4,167,515

Intangible lease assets, net
291,095

Real estate assets under direct financing leases, net
20,320

Real estate assets held for sale, net
94,339

Intangible lease liabilities, net
(114,805
)
Net balance
$
4,458,464


23


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)


Operating Leases
As of March 31, 2019 and December 31, 2018, the Company held 1,473 and 1,458 properties under operating leases, respectively. The following table summarizes the components of rental income recognized on these operating leases in the accompanying consolidated statements of operations (in thousands):
 
Three Months Ended 
 March 31,
 
2019
 
2018
Base cash rent
$
96,799

 
$
150,447

Variable cash rent (including reimbursables)
3,638

 
5,530

Straight-line rent, net of bad debt expense (1)
2,907

 
4,900

Amortization of above- and below- market lease intangibles, net (2)
723

 
1,153

Total rental income
$
104,067

 
$
162,030

(1) 
As a result of the Company's adoption of ASU 2016-02 on January 1, 2019, the Company reclassified bad debt expense to rental income on a prospective basis. See Note 2 for additional detail.
(2) 
Excludes amortization of in-place leases of $6.7 million and $10.0 million for the three months ended March 31, 2019 and 2018, respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of these operating leases (including contractual fixed rent increases occurring on or after April 1, 2019) at March 31, 2019 are as follows (in thousands):
 
March 31,
2019
Remainder of 2019
$
286,400

2020
378,963

2021
360,762

2022
340,377

2023
319,112

Thereafter
2,304,511

Total future minimum rentals
$
3,990,125

Because lease renewals are exercisable at the lessees' options, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum rentals do not include any contingent rent based on a percentage of the lessees' gross sales or lease escalations based on future changes in the CPI.
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
March 31,
2019
 
December 31,
2018
In-place leases
$
370,592

 
$
381,143

Above-market leases
68,704

 
62,902

Less: accumulated amortization
(148,201
)
 
(149,582
)
Intangible lease assets, net
$
291,095

 
$
294,463

 
 
 
 
Below-market leases
$
158,594

 
$
167,527

Less: accumulated amortization
(43,789
)
 
(47,365
)
Intangible lease liabilities, net
$
114,805

 
$
120,162


24


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)


Direct Financing Leases
As of both March 31, 2019 and December 31, 2018, the Company held four properties under direct financing leases, respectively, all of which were held in use. The components of real estate investments held under direct financing leases were as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Minimum lease payments receivable
$
5,025

 
$
5,390

Estimated residual value of leased assets
20,097

 
20,097

Unearned income
(4,802
)
 
(5,198
)
Real estate assets under direct financing leases, net
$
20,320

 
$
20,289

Scheduled minimum future payments to be received under the remaining non-cancelable term of these direct financing leases at March 31, 2019 are as follows (in thousands):
 
March 31,
2019
Remainder of 2019
$
878

2020
578

2021
527

2022
541

2023
554

Thereafter
1,947

Total future minimum rentals
$
5,025

Loans Receivable
The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are two other notes receivable included within loans receivable, as of March 31, 2019, of which one note totaling $0.1 million is secured by tenant assets and stock and the remaining note, with a balance of $1.7 million, is unsecured. During the three months ended March 31, 2019, the Company had the following loan activity:
 
Mortgage Loans
 
Other Notes
 
 
 
Properties
 
Investment
 
Investment
 
Total Investment
Principal, December 31, 2018
52

 
$
42,660

 
$
2,082

 
$
44,742

Acquisitions

 

 

 

Dispositions

 

 

 

Principal payments and payoffs
(1
)
 
(3,604
)
 
(26
)
 
(3,630
)
Allowance for loan losses

 

 

 

Principal, March 31, 2019
51

 
$
39,056

 
$
2,056

 
$
41,112


25


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)


The following table details loans receivable, net of premiums, discounts and allowance for loan losses (dollars in thousands):
 
March 31,
2019
 
December 31,
2018
Mortgage loans - principal
$
39,056

 
$
42,660

Mortgage loans - premiums, net of amortization
2,112

 
2,527

Allowance for loan losses

 

Mortgages loans, net
41,168

 
45,187

Other notes receivable - principal
2,056

 
2,082

Other notes receivable - discounts, net of amortization
(209
)
 
(225
)
Allowance for loan losses

 

Other notes receivable, net
1,847

 
1,857

Total loans receivable, net
$
43,015

 
$
47,044

Impairments
The following table summarizes total impairment losses recognized in the accompanying consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Real estate and intangible asset impairment
$
3,692

 
$
14,585

Recovery of loans receivable, previously impaired

 
(16
)
Total impairment loss
$
3,692

 
$
14,569


26


SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
March 31, 2019
(Unaudited)

Note 4. Debt
The debt of the Company and the Operating Partnership are the same, except for the presentation of the Convertible Notes which were issued by the Company. Subsequently, an intercompany note between the Company and the Operating Partnership was executed with terms identical to those of the Convertible Notes. Therefore, in the consolidated balance sheet of the Operating Partnership, the amounts related to the Convertible Notes are reflected as notes payable to Spirit Realty Capital, Inc., net. The Company's debt is summarized below:
 
Weighted Average Effective
Interest Rates
(1)
 
Weighted Average
Stated
Rates
(2)
 
Weighted Average Maturity (3)
 
March 31,
2019
 
December 31,
2018
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving credit facilities
5.64
%
 
3.62
%
 
4.0
 
$
206,500

 
$
146,300

Term loans
4.37
%
 
3.75
%
 
5.0
 
420,000

 
420,000

Senior Unsecured Notes
4.70
%
 
4.45
%
 
7.5
 
300,000

 
300,000

Master Trust Notes
5.89
%
 
5.27
%
 
4.7
 
166,681

 
167,854

CMBS
5.89
%
 
5.35
%
 
4.4
 
263,651

 
274,758

Related party notes payable
1.00
%
 
1.00
%
 
9.0
 
27,148

 
27,890

Convertible Notes
5.31
%
 
3.28
%
 
1.0
 
747,500

 
747,500

Total debt
5.13
%
 
3.95
%
 
3.8
 
2,131,480

 
2,084,302

Debt discount, net