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Section 1: 10-Q (10-Q Q1 2019)

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 001-38414
___________________________________________________________
SPIRIT MTA REIT
(Exact name of registrant as specified in its charter)
_______________________________________________
Maryland
 
 
 
82-6712510
(State or other Jurisdiction of Incorporation)
 
 
 
(IRS Employer Identification No.)
 
 
 
 
 
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)
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares of beneficial interest,
par value $0.01 per share
SMTA
New York Stock Exchange

(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes  x   No   o
Indicate by check mark whether the registrant has submitted electronically 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 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 May 9, 2019, there were 43,159,931 common shares, par value $0.01, of Spirit MTA REIT outstanding.
 





EXPLANATORY NOTE
This quarterly report of Spirit MTA REIT (the "Company" or "SMTA") includes the financial information of the Company as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.
On May 31, 2018, Spirit Realty Capital, Inc. completed the 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, SMTA (the "Spin-Off"). 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, which was 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 which formed the Company at the time of the Spin-Off. Accordingly, the results of operations for the three months ended March 31, 2019 and 2018 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.





INDEX

Glossary
 
Item 1. Spirit MTA REIT Financial Statements (Unaudited)
 





GLOSSARY
 
2018 Incentive Award Plan
Spirit MTA REIT and Spirit MTA REIT, L.P. 2018 Incentive Award Plan
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
Annualized Contractual Rent
Contractual Rent multiplied by twelve
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
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
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.
NAREIT
National Association of Real Estate Investment Trusts
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

3



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
Specialty Retail Shops Holding Corp. and certain of its affiliates
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
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.


4



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPIRIT MTA REIT
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
$
774,527

 
$
870,549

Buildings and improvements
1,432,458

 
1,526,933

Total real estate investments
2,206,985

 
2,397,482

Less: accumulated depreciation
(463,528
)
 
(459,615
)
 
1,743,457

 
1,937,867

Loans receivable, net
27,148

 
30,093

Intangible lease assets, net
75,722

 
79,314

Real estate assets held for sale, net
15,603

 
7,263

Net investments
1,861,930

 
2,054,537

Cash and cash equivalents
108,883

 
161,013

Deferred costs and other assets, net
66,710

 
83,087

Goodwill
7,012

 
7,012

Total assets
$
2,044,535

 
$
2,305,649

Liabilities and deficit
 
 
 
Liabilities:
 
 
 
Mortgages and notes payable, net
$
1,980,939

 
$
2,138,804

Intangible lease liabilities, net
16,428

 
17,676

Accounts payable, accrued expenses and other liabilities
37,367

 
83,629

Total liabilities
2,034,734

 
2,240,109

Commitments and contingencies (see Note 6)


 


Redeemable preferred equity:
 

 
 

SMTA Preferred Shares, $0.01 par value, $25 per share liquidation preference, 20,000,000 shares authorized: 6,000,000 shares issued and outstanding at both March 31, 2019 and December 31, 2018
150,000

 
150,000

SubREIT Preferred Shares, $0.01 par value, $1,000 per share liquidation preference, 50,000,000 shares authorized: 5,125 shares issued and outstanding at both March 31, 2019 and December 31, 2018
5,125

 
5,125

Total redeemable preferred equity
155,125

 
155,125

Shareholders' deficit:
 
 
 
Common shares, $0.01 par value, 750,000,000 shares authorized; 43,085,751 and 43,000,862 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
431

 
430

Capital in excess of common share par value
201,824

 
201,056

Accumulated deficit
(347,579
)
 
(291,071
)
Total shareholders' deficit
(145,324
)
 
(89,585
)
Total liabilities and deficit
$
2,044,535

 
$
2,305,649

See accompanying notes.

5



SPIRIT MTA REIT
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental income
$
53,052

 
$
59,608

Interest income on loans receivable
1,236

 
81

Other income
1,193

 
379

Total revenues
55,481

 
60,068

Expenses:
 

 
 

General and administrative
6,052

 
5,651

Related party fees
6,950

 
1,730

Transaction costs
606

 
3,017

Property costs (including reimbursable)
1,573

 
1,413

Interest
32,335

 
28,012

Depreciation and amortization
19,375

 
20,993

Impairment and allowance for loan losses
6,037

 
4,825

Total expenses
72,928

 
65,641

Other loss:
 

 
 

Loss on debt extinguishment
(21,267
)
 
(255
)
Gain (loss) on disposition of real estate assets
478

 
(1,694
)
Total other loss
(20,789
)
 
(1,949
)
Loss before income tax expense
(38,236
)
 
(7,522
)
Income tax expense
(34
)
 
(57
)
Net loss and total comprehensive loss
(38,270
)
 
(7,579
)
Preferred dividends
(3,975
)
 

Net loss attributable to common shareholders
$
(42,245
)
 
$
(7,579
)
 
 
 
 
Net loss per share attributable to common shareholders
 
 
 
Basic
$
(0.99
)
 
$
(0.18
)
Diluted
$
(0.99
)
 
$
(0.18
)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
42,860,427

 
42,851,010

Diluted
42,860,427

 
42,851,010

 
 
 
 
Dividends declared per common share issued
$
0.33

 
N/A
See accompanying notes.

6



SPIRIT MTA REIT
Consolidated Statement of Changes in Equity
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
Redeemable Preferred Equity
 
Shareholders' Equity (Deficit) and Parent Company Equity
 
SMTA Preferred Shares
 
SubREIT Preferred Shares
 
 
 
Common Shares
 
 
 
 
 
Shares
 
Par Value and Capital in Excess of Par Value
 
Shares
 
Par Value and Capital in Excess of Par Value
 
Total Redeemable Preferred Equity
 
Shares
 
Par 
Value
 
Capital in
Excess of
Par Value
 
Accumulated Deficit
 
Net Parent Investment
 
Total Shareholders' Equity and Parent Company Equity (Deficit)
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2018
6,000,000

 
$
150,000

 
5,125

 
$
5,125

 
$
155,125

 
43,000,862

 
$
430

 
$
201,056

 
$
(291,071
)
 
$

 
$
(89,585
)
Net loss

 

 

 

 

 

 

 

 
(38,270
)
 

 
(38,270
)
Issuance of preferred shares, net

 

 

 

 

 

 

 
(25
)
 

 

 
(25
)
Dividends declared on common shares

 

 

 

 

 

 

 

 
(14,218
)
 

 
(14,218
)
Dividends declared on preferred shares

 

 

 

 

 

 

 

 
(3,975
)
 

 
(3,975
)
Share-based compensation, net

 

 

 

 

 
89,513

 
1

 
793

 
(9
)
 

 
785

Tax withholdings related to net stock settlements

 

 

 

 

 
(4,624
)
 

 

 
(36
)
 

 
(36
)
Balances, March 31, 2019
6,000,000

 
$
150,000

 
5,125

 
$
5,125

 
$
155,125

 
43,085,751

 
$
431

 
$
201,824

 
$
(347,579
)
 
$

 
$
(145,324
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2017

 
$

 

 
$

 
$

 

 
$

 
$

 
$

 
$
390,918

 
$
390,918

Net loss

 

 

 

 

 

 

 

 
 
 
(7,579
)
 
(7,579
)
Contributions from parent company

 

 

 

 

 

 

 

 

 
49,819

 
49,819

Distributions to parent company

 

 

 

 

 

 

 

 

 
(158,396
)
 
(158,396
)
Balances, March 31, 2018

 
$

 

 
$

 
$

 

 
$

 
$

 
$

 
$
274,762

 
$
274,762

See accompanying notes.

7



SPIRIT MTA REIT
Consolidated Statements of Cash Flows
(In Thousands, Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Operating activities
 

 
 

Net loss
$
(38,270
)
 
$
(7,579
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
19,375

 
20,993

Impairment and allowance for loan losses
6,037

 
4,825

Amortization of deferred financing costs
2,068

 
875

Amortization of debt discounts
1,702

 
2,000

Share-based compensation expense
794

 
1,606

Loss on debt extinguishment, net
21,267

 
255

(Gain) loss on disposition of real estate assets
(478
)
 
1,694

Non-cash revenue
(871
)
 
(769
)
Bad debt expense and other
7

 
(58
)
Changes in operating assets and liabilities:
 

 
 

Deferred costs and other assets, net
1,729

 
430

Accounts payable, accrued expenses and other liabilities
5,450

 
1,050

Net cash provided by operating activities
18,810

 
25,322

Investing activities
 

 
 

Capitalized real estate expenditures
(1,421
)
 
(178
)
Collections of principal on loans receivable
1,356

 
2,267

Proceeds from dispositions of real estate and other assets
5,257

 
16,911

Net cash provided by investing activities
5,192

 
19,000

Financing activities
 

 
 

Borrowings under mortgages and notes payable

 
92,216

Repayments under mortgages and notes payable
(8,938
)
 
(12,904
)
Restricted cash surrendered in loan foreclosure
(21,227
)
 
(255
)
Deferred financing costs

 
(1,251
)
Repurchase of common shares for tax withholdings related to net shares settlements
(36
)
 

Dividends paid on common shares
(57,191
)
 

Dividends paid on preferred shares
(3,975
)
 

Contributions from parent company

 
48,213

Distributions to parent company

 
(156,252
)
Net cash used in financing activities
(91,367
)
 
(30,233
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(67,365
)
 
14,089

Cash, cash equivalents and restricted cash, beginning of period
205,100

 
66,510

Cash, cash equivalents and restricted cash, end of period
$
137,735

 
$
80,599

 
 
 
 
Interest paid
$
25,016

 
$
26,518

Taxes paid
$
16

 
$
19

 
Three Months Ended March 31,
 
2019
 
2018
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
 
 
Investment distribution to parent
$

 
$
2,144

Relief of debt through foreclosure of real estate properties
160,785

 

Net real estate and other assets surrendered to lender
159,735

 

Accrued interest capitalized to principal
3,364

 

Distributions declared and unpaid
14,218

 

See accompanying notes.  

8

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)


Note 1. Organization
Organization and Operations
Spirit MTA REIT ("SMTA" or the "Company") operates 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. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.
The Company's portfolio as of March 31, 2019 includes (i) an asset-backed securitization trust which issues non-recourse asset-backed securities collateralized by commercial real estate, net-leases and mortgage loans (“Master Trust 2014”), (ii) a single distribution center property leased to a sporting goods tenant encumbered with CMBS debt, and (iii) a portfolio of unencumbered properties.
The Company began operations through predecessor legal entities which were wholly-owned subsidiaries of Spirit Realty Capital, Inc. ("Spirit"). On May 31, 2018, Spirit completed the Spin-Off that resulted in the Company's 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 stockholders of record as of the close of business on the record date. In conjunction with the Spin-Off, SMTA and Spirit Realty, L.P. (the "Manager"), a wholly-owned subsidiary of Spirit, entered into an Asset Management Agreement under which the Manager provides external management of SMTA.
Costs associated with the execution of strategic alternatives in the three months ended March 31, 2019 totaled $0.6 million and costs associated with the Spin-Off incurred in the three months ended March 31, 2018 totaled $3.0 million. These are reflected as transaction costs on the accompanying consolidated statements of operations and comprehensive income (loss).
Note 2. Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company 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 for interim financial reports 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.
Subsequent to the Spin-Off on May 31, 2018, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The pre-spin consolidated financial statements were prepared on a carve-out basis and reflect significant assumptions and allocations.
For the periods prior to the Spin-Off, the financial position and results of operations reflect a combination of entities under common control that have been carved-out from Spirit’s consolidated financial statements and present Spirit's historical carrying values of the assets and liabilities, consistent with accounting for spin-off transactions in accordance with GAAP. Since the Company prior to the Spin-Off did not represent one entity, a separate capital structure did not exist. As a result, the combined net assets of the predecessor legal entities have been reflected in the consolidated financial statements as net parent investment for periods prior to the Spin-Off. All transactions between Spirit and the predecessor legal entities are considered effectively settled through equity in the consolidated financial statements at the time the transaction is recorded, other than certain mortgages as discussed in Note 11. The settlement of these transactions is reflected as contributions from and distributions to parent in the consolidated statement of changes in equity and contributions from and distributions to parent in the consolidated statements of cash flows as a financing activity.
Through May 31, 2018, the pre-spin consolidated financial statements include expense allocations related to certain Spirit corporate general and administrative functions. These expenses have been allocated based on direct usage or

9

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

benefit where specifically identifiable, with the remainder allocated pro rata based on property count. All the expense allocations were deemed to have been incurred and settled through net parent investment in the period in which the costs were incurred. Management considers the expense allocation methodology and results to be reasonable. However, the allocations may not be indicative of the actual expense that would have been incurred had the Company operated as an independent, publicly traded company for the periods presented prior to May 31, 2018. At time of the Spin-Off, SMTA entered into an Asset Management Agreement with Spirit to provide these corporate functions.
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 under their governing documents. As of March 31, 2019 and December 31, 2018, net assets totaling $2.00 billion and $2.18 billion, respectively, were held and net liabilities totaling $2.01 billion and $2.18 billion, respectively, were owed by these encumbered special purpose entities included in the accompanying consolidated balance sheets.
Use of Estimates     
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations in two segments—Master Trust 2014 and all other properties ("Other Properties"), see Note 7 for further discussion on these segments. 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. Less than 1% of the Company's operating leases at March 31, 2019 include an option to terminate. For approximately 21% 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 lease. 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 Manager's 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. Additionally, the Company will occasionally invest in capital improvements on properties, re-lease properties to new tenants or extend lease terms to protect residual value.
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

10

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

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 and comprehensive income (loss).
Allowance for Doubtful Accounts
The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. If the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made. The Company’s reserves for uncollectible amounts totaled $8.1 million and $6.6 million as of March 31, 2019 and December 31, 2018, respectively, against accounts receivable balances of $9.7 million and $8.2 million, respectively. Receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets. Receivables are written off against the reserves for uncollectible amounts when all possible means of collection have been exhausted.
For 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 established a reserve for losses of $0.6 million and $0.5 million as of March 31, 2019 and December 31, 2018, respectively, against straight-line receivables of $29.1 million and $28.2 million, respectively. These receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.

11

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term instruments. 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
$
108,883

 
$
161,013

 
$
5

Restricted cash:
 
 
 
 
 
Release Account (1)
17,137

 
16,141

 
74,982

Liquidity Reserve (2)
5,631

 
5,599

 
5,527

Lender controlled accounts (3)
6,084

 
22,347

 
81

Other (4)

 

 
4

Total cash, cash equivalents and restricted cash
$
137,735

 
$
205,100

 
$
80,599

(1)  
Release Account cash consists of proceeds from the sales of assets pledged as collateral under Master Trust 2014 and is held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
(2) 
Liquidity Reserve cash was placed on deposit in conjunction with the issuance of additional series of notes under Master Trust 2014 and is held until there is a cashflow shortfall, as defined in the Master Trust 2014 agreements, or a liquidation of Master Trust 2014 occurs.
(3) 
Funds held in lender controlled accounts are released after scheduled debt service requirements are met. As of March 31, 2019, $5.0 million of this balance was rent-related receipts associated with Master Trust 2014.
(4) 
Funds held in escrow accounts until the related purchase/sale transaction closes.
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. Goodwill was initially allocated to each reporting unit based upon the relative fair value of each reporting unit, resulting in $7.0 million allocated to Master Trust 2014 and $6.5 million allocated to Other Properties. The goodwill related to the Other Properties segment was fully impaired in 2018. No additional impairment of goodwill was recorded for the three months ended March 31, 2019.
Income Taxes
For the period prior to the Spin-Off, the Company applies the provisions of FASB ASC Topic 740, Income Taxes, and computes the provision for income taxes on a separate return basis. The separate return method applies the accounting guidance for income taxes to the stand-alone consolidated financial statements as if the Company was a separate taxpayer and a stand-alone enterprise for the periods presented.
The Company was wholly-owned by the Manager prior to the Spin-Off and was disregarded for federal income tax purposes. The Manager is wholly-owned by Spirit through certain direct and indirect ownership interests and is taxed as a partnership for Federal income tax purposes. Spirit has elected to be taxed as a REIT under the applicable provisions of the Code and, as a result, will not be subject to federal income tax as long as it distributes 100% of its taxable income and satisfies certain other requirements. Therefore, no provision for federal income tax has been made in the accompanying consolidated financial statements for the period prior to the Spin-Off.
For the period subsequent to the Spin-Off, the Company intends to elect to be taxed as a REIT under the Code beginning with its initial tax year ended December 31, 2018. 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 shareholders, and the ownership of Company shares. 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.

12

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

The Company is subject to certain other taxes which are reflected as income tax expense in the consolidated statements of operations and comprehensive income (loss). Franchise taxes are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss).
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. 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 $7 thousand 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 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 lessor, our recognition of rental income remained 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.
Note 3. Investments
Real Estate Investments
As of March 31, 2019, the Company’s gross investment in real estate properties and loans totaled approximately $2.4 billion, representing investments in 790 owned properties and six 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 and real estate assets held for sale. The portfolio is geographically dispersed throughout 43 states with Texas, at 14.9%, as the only state with a Real Estate Investment Value greater than 10.0% of the Real Estate Investment Value of the Company’s entire portfolio.

13

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Owned Properties
During the three months ended March 31, 2019, the Company had the following owned real estate, 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
869

 
7

 
876

 
$
2,523,426

 
$
7,821

 
$
2,531,247

Acquisitions/improvements (1)

 

 

 
1,421

 

 
1,421

Dispositions of real estate (2)(3)
(86
)
 

 
(86
)
 
(172,803
)
 

 
(172,803
)
Transfers to Held for Sale
(6
)
 
6

 

 
(9,432
)
 
9,432

 

Transfers from Held for Sale
1

 
(1
)
 

 
528

 
(528
)
 

Impairments

 

 

 
(5,839
)
 
(182
)
 
(6,021
)
Write-off of gross lease intangibles

 

 

 
(6,389
)
 
(110
)
 
(6,499
)
Gross balance, March 31, 2019
778

 
12

 
790

 
$
2,330,912

 
$
16,433

 
$
2,347,345

Accumulated depreciation
 

 
 

 
 

 
(463,528
)
 
(799
)
 
(464,327
)
Accumulated amortization
 
 
 
 
 
 
(64,633
)
 
(76
)
 
(64,709
)
Other non-real estate assets held for sale
 

 
 

 
 

 

 
45

 
45

Net balance, March 31, 2019 (4)
 

 
 

 
 

 
$
1,802,751

 
$
15,603

 
$
1,818,354

(1)  
Includes investments of $1.4 million of non-revenue producing capitalized expenditures as of March 31, 2019.
(2)  
For the three months ended March 31, 2019, the total gain on disposal of assets on held and used properties was $0.5 million and no gain or loss on disposal was recorded on held for sale properties.
(3)
Includes 83 properties with a real estate investment of $167.6 million that were transferred to the lender during the three months ended March 31, 2019.
(4) 
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
$
1,743,457

Intangible lease assets, net
75,722

Real estate assets held for sale, net
15,603

Intangible lease liabilities, net
(16,428
)
Net balance
$
1,818,354

Operating Leases
As of March 31, 2019 and December 31, 2018, the Company held 790 and 876 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
$
50,503

 
$
57,427

Variable cash rent (including reimbursables)
1,684

 
1,423

Straight-line rent, net of bad debt expense (1)
896

 
847

Amortization of lease intangibles (2)
(31
)
 
(89
)
Total rental income
$
53,052

 
$
59,608

(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 $2.3 million and $2.7 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 and comprehensive income (loss).


14

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases (including contractual fixed rent increases occurring on or after April 1, 2019) are as follows (in thousands):
 
March 31, 2019
2019 Remainder
$
145,004

2020
188,494

2021
180,251

2022
168,970

2023
162,690

Thereafter
947,031

Total future minimum rentals
$
1,792,440

Because lease renewals are exercisable at the lessee's option, 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
$
127,380

 
$
130,477

Above-market leases
23,661

 
23,661

Less: accumulated amortization
(75,319
)
 
(74,824
)
Intangible lease assets, net
$
75,722

 
$
79,314

 
 
 
 
Below-market leases
$
27,114

 
$
28,193

Less: accumulated amortization
(10,686
)
 
(10,517
)
Intangible lease liabilities, net
$
16,428

 
$
17,676

Loans Receivable
The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. Other notes consists of the Shopko B-1 Term Loan. A loan is placed on non-accrual status when the loan has become 60 days 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. In connection with Shopko’s bankruptcy filing in January 2019, Shopko has filed pleadings asserting that any recovery under the Shopko B-1 Term Loan will be limited and may be impaired in full. Therefore, the Company has recorded a full allowance for the Shopko B-1 Term Loan and placed the loan on non-accrual status. While the outcome of the Shopko bankruptcy filing is uncertain and there can be no assurances that the Company will recover any amounts due to it under the Shopko B-1 Term Loan, the Company intends to pursue all of its rights and remedies in connection with the bankruptcy proceedings, with the goal of maximizing the receipt of amounts due to the Company under the Shopko B-1 Term loan. During the three months ended March 31, 2019, the Company recorded interest income on loans receivable of $1.1 million on the B-1 Term Loan.

15

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

During the three months ended March 31, 2019, the Company had the following loan activity (in thousands):
 
Mortgage Loans
 
Other Notes
 
 
 
Properties
 
Investment
 
Investment
 
Total Investment
Principal, December 31, 2018
8

 
$
30,778

 
$
34,416

 
$
65,194

Acquisitions

 

 

 

Dispositions

 

 

 

Principal payments and payoffs

 
(742
)
 
(614
)
 
(1,356
)
Write-off of principal balance
(2
)
 
(2,888
)
 

 
(2,888
)
Principal, March 31, 2019
6

 
$
27,148

 
$
33,802

 
$
60,950

The following table details loans receivable, net of allowance for loan losses (in thousands):
 
March 31, 2019
 
December 31, 2018
Mortgage loans-principal
$
27,148

 
$
30,778

Allowance for loan losses

 
(1,299
)
Mortgage loans, net
27,148

 
29,479

Other note receivables - principal
33,802

 
34,416

Allowance for loan losses
(33,802
)
 
(33,802
)
Total loans receivable, net
$
27,148

 
$
30,093

Impairments
The following table summarizes total impairment losses recognized on the accompanying consolidated statements of operations and comprehensive loss (in thousands):  
 
Three Months Ended March 31,
 
2019
 
2018
Real estate and intangible asset impairment
$
6,021

 
$
4,841

Allowance (recovery) for loan loss
16

 
(16
)
Other impairment

 

Total impairment loss
$
6,037

 
$
4,825

Note 4. Debt
Master Trust 2014
The Company has access to an asset-backed securitization platform, Master Trust 2014, to raise capital through the issuance of non-recourse asset-back securities collateralized by commercial real estate, net-leases and mortgage loans. Master Trust 2014 has five bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes.
During the three months ended March 31, 2019, scheduled principal payments of $8.6 million were made on the Master Trust 2014 notes. No pre-payments were made on the Master Trust 2014 notes during the same period.
On November 1, 2018, SMTA closed on variable funding notes ("VFN") within Master Trust 2014 with up to $50 million in borrowing capacity, which is secured by properties of Master Trust 2014 and has an anticipated repayment date of November 1, 2021. Borrowing capacity under the VFN is dependent on a number of factors, primarily including the appraised values of the Collateral Pool and aggregate principal amount of debt outstanding. Interest on the VFN is payable at a rate per annum equal to the CP Rate, Base Rate or Eurodollar Rate, each as defined in the Note Purchase Agreement and, as of March 31, 2019, the interest rate was 4.5%. There is a commitment fee on the unused portion of the VFN of 0.5% per annum. No funds were drawn on the VFN as of March 31, 2019 and there was $48.4 million available borrowing capacity under the VFN as of March 31, 2019.

16

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

The Master Trust 2014 notes are summarized below:
 
Stated
Rates 
(1)
 
Maturity
 
March 31, 2019
 
December 31, 2018
 
 
 
(in Years)
(in Thousands)
Series 2014-1 Class A2
5.37%
 
1.3
 
$
238,140

 
$
240,908

Series 2014-2
5.76%
 
2.0
 
228,477

 
229,516

Series 2014-3
5.74%
 
3.0
 
309,621

 
309,753

Series 2014-4 Class A1
3.50%
 
0.8
 
149,484

 
149,484

Series 2014-4 Class A2
4.63%
 
10.8
 
336,788

 
341,022

Series 2017-1 Class A
4.36%
 
3.7
 
538,248

 
538,705

Series 2017-1 Class B
5.49%
 
3.7
 
132,000

 
132,000

Series 2018-1 Class A VFN
4.50%
 
2.6
 

 

Total Master Trust 2014 notes
4.93%
 
4.1
 
1,932,758

 
1,941,388

Debt discount, net
 
 
 
(19,452
)
(21,155
)
Deferred financing costs, net
 
 
 
(14,067
)
(14,912
)
Total Master Trust 2014, net
 
 
 
 
$
1,899,239

 
$
1,905,321

(1) Represents the individual series stated interest rates as of March 31, 2019 and the weighted average stated rate of the total Master Trust 2014 notes, based on the collective series outstanding principal balances as of March 31, 2019.
As of March 31, 2019, the Master Trust 2014 notes were secured by 782 owned and financed properties. The notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within this trust.
CMBS
Academy CMBS
On January 22, 2018, the Company entered into a non-recourse loan agreement with Société Générale and Barclays Bank PLC as lenders, which is collateralized by a single distribution center property located in Katy, Texas. The loan has a stated interest rate of 5.14% and an effective interest rate of 5.42% as of March 31, 2019. As a result of the issuance, the Company received approximately $84.0 million in proceeds. The Company distributed all of the proceeds to Spirit. The loan had an outstanding principal balance of $82.7 million and $83.0 million as of March 31, 2019 and December 31, 2018, respectively, and unamortized deferred financing costs of $1.0 million and $1.1 million, respectively. As of March 31, 2019, the loan had a remaining maturity of 8.8 years.
Shopko CMBS
On November 1, 2018, SMTA, through four indirectly wholly-owned, property-owning subsidiaries, entered into a $165.0 million non-recourse mortgage loan agreement and, on November 27, 2018, $40.0 million of the loan was carved out into a separate mezzanine loan agreement. These Shopko CMBS Loan Agreements were secured by the equity of the entity that owns the four property-owning subsidiaries, which collectively held 85 assets (83 owned properties and two seller-financed notes on properties) that are leased to Shopko. As of December 31, 2018, the loans had an outstanding principal balance of $157.4 million, unamortized deferred financing costs of $5.9 million and a remaining maturity of 0.9 years.
On January 16, 2019, the Company's 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. Upon the default, the full balance of principal outstanding under the loans immediately became due and payable and interest began accruing at the default rate of LIBOR plus 12.50% on the $125.0 million portion and LIBOR plus 18.00% on the $40.0 million mezzanine portion. On March 1, 2019, the Shopko Lenders foreclosed on the equity of the entity that owns the four property-owning subsidiaries. As a result of the foreclosure, the Company recognized a loss on debt extinguishment of $21.3 million during the three months ended March 31, 2019. The components of the loss on debt extinguishment were $161.3 million of net investments and $21.2 million of restricted cash foreclosed, offset by $155.9 million of net debt and $5.3 million of accrued payables relieved.

17

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Debt Maturities
As of March 31, 2019, scheduled debt maturities of Master Trust 2014 and CMBS debt are as follows (in thousands):
 
Scheduled
Principal
 
 
Balloon
Payment
  
 
Total  
2019 Remainder
$
27,460

 
$

 
$
27,460

2020
40,738

 
364,645

 
405,383

2021
23,614

 
219,964

 
243,578

2022
23,221

 
971,453

 
994,674

2023
22,538

 

 
22,538

Thereafter
160,187

 
161,663

 
321,850

Total
$
297,758

 
$
1,717,725

 
$
2,015,483

Interest Expense
The following table is a summary of the components of interest expense related to the Company’s borrowings (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Interest expense
$
28,565

 
$
25,137

Non-cash interest expense:
 

 
 

Amortization of deferred financing costs
2,068

 
875

Amortization of debt discount
1,702

 
2,000

Total interest expense
$
32,335

 
$
28,012


Note 5. Shareholders' Equity and Redeemable Preferred Equity
The Company's declaration of trust authorizes it to issue 750,000,000 common shares of beneficial interest, $0.01 par value per share, and 20,000,000 preferred shares of beneficial interest, $0.01 par value per share. The Board of Trustees has the power, without shareholder approval, to increase or decrease the number of common shares the Company is authorized to issue.
Issuance of Common Shares
SMTA was originally capitalized on November 17, 2017 with the issuance of 10,000 common shares of beneficial interest ($0.01 par value per share) for a total of $10,000.
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, which was the record date. As a result, 42,851,010 SMTA common shares were issued on May 31, 2018.
During the three months ended March 31, 2019, the Company declared $14.2 million in SMTA common share dividends and had 43,085,751 common shares outstanding as of March 31, 2019.
Issuance of SMTA Preferred Shares
In conjunction with the Spin-Off, SMTA issued to the Manager and one of its affiliates, also a wholly-owned subsidiary of Spirit, 6.0 million Series A preferred shares with an aggregate liquidation preference of $150.0 million (the "SMTA Preferred Shares"). Redemption value of the SMTA Preferred Shares is equal to the liquidation preference plus any accrued and unpaid dividends and redemption is under the control of SMTA unless a change of control event occurs, as defined in the SMTA Preferred Shares agreements. Therefore, as redemption may occur outside the control of SMTA, the SMTA Preferred Shares are classified as temporary equity.

18

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

The SMTA Preferred Shares pay cash dividends at the rate of 10.0% per annum on the liquidation preference of $25.00 per share (equivalent to $0.625 per share on a quarterly basis and $2.50 per share on an annual basis). During the three months ended March 31, 2019, the Company paid $3.8 million in SMTA Preferred Shares dividends and had 6.0 million shares of 10.0% SMTA Preferred Shares outstanding as of March 31, 2019.
Issuance of SubREIT Preferred Shares
Prior to the Spin-Off, in exchange for property, SubREIT issued to the Manager 5,000 shares of Series A preferred shares with an aggregate liquidation preference of $5.0 million (the "SubREIT Preferred Shares"). The Series A SubREIT Preferred Shares pay cash dividends at the rate of 18.0% per annum on the liquidation preference of $1,000.00 per share (equivalent to $45.00 per share on a quarterly basis and $180.00 per share on an annual basis). On December 19, 2018, SubREIT issued 125 Shares of Series B SubREIT Preferred Shares with an aggregate liquidation preference of $125 thousand. Series B SubREIT Preferred Shares pay cash dividends at the rate of 12.0% per annum on the liquidation preference of $1,000.00 per share (equivalent to $30.00 per share on a quarterly basis and $120.00 per share on an annual basis).
Redemption value of the SubREIT Preferred Shares is equal to the liquidation preference plus any accrued and unpaid dividends and redemption is under the control of SubREIT unless a change of control event occurs, as defined in the SubREIT Preferred Shares agreements. Therefore, as redemption may occur outside the control of SubREIT, the SubREIT Preferred Shares are classified as temporary equity. In conjunction with the Spin-Off, the Manager sold the SubREIT Preferred Shares to a third-party.
During the three months ended March 31, 2019, the Company paid $225 thousand in SubREIT Preferred Shares dividends and had 5,125 shares of the SubREIT Preferred Shares outstanding as of March 31, 2019.
Share Repurchase Program
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 the Board of Trustees' assessment of the capital needs of the Company. No repurchases have been made under the program as of March 31, 2019.
Dividends Declared
During the three months ended March 31, 2019, the Company's Board of Trustees declared the following dividends for SMTA Preferred Shares and SMTA common shares, and SubREIT's Board of Directors declared the following dividends for SubREIT Preferred Shares:
 
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
(in thousands)
 
Payment Date
Preferred Shares
 
 
 
 
 
 
 
 
 
SMTA Preferred Shares
March 5, 2019
 
$
0.6250

 
March 15, 2019
 
$
3,750

 
March 29, 2019
SubREIT Preferred Shares
February 28, 2019
 
$
45.0000

 
March 15, 2019
 
$
225

 
March 29, 2019
 
 
 
 
 
 
 
 
 
 
Common Shares
March 5, 2019
 
$
0.3300

 
March 29, 2019
 
$
14,218

 
April 15, 2019
The common share dividend declared on March 5, 2019 was paid on April 15, 2019 and is included in accounts payable, accrued expenses and other liabilities as of March 31, 2019.
Note 6. Commitments and Contingencies
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are insured against such claims.

19

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

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 limited 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.
As of March 31, 2019, there were no outstanding claims against the Company that are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of March 31, 2019, the Company had commitments totaling $6.5 million, all of which relate to funding improvements and construction on properties the Company currently owns. The Company expects to fund $5.4 million of these commitments by the end of fiscal year 2019, with the remainder expected to be funded by the end of fiscal year 2020.
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements. As of March 31, 2019, no accruals have been made.
Note 7. Segments
Management views the operations of the Company as two separate segments—Master Trust 2014 and Other Properties—and makes operating decisions based on these two reportable segments.
Master Trust 2014 is an asset-backed securitization platform, see Note 4, with specific criteria for operating the Collateral Pool, including restrictions on use of Release Account cash, concentration thresholds which cannot be exceeded, and a minimum debt service coverage ratio which must be met. Operations for the Other Properties are focused on monetization of the assets through dispositions, or could include redevelopment or outparcel development where prudent.
Segment results are comprised of revenues, property management and servicing fees, property expenses (which include property costs, depreciation and amortization, and impairments), and interest expense. General and administrative expenses, asset management fees under the Asset Management Agreement, transaction costs, and income taxes are not allocated to individual segments for purposes of assessing segment performance. The Company believes that segment results serve as a useful supplement to net (loss) income because they allow investors and management to measure the Company's progress against its stated strategy.
The performance of the reportable segments is not comparable with the Company's consolidated results and is not necessarily comparable with similar information for any other REITs. Additionally, because of the interrelationship of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

20

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Segment results for the three months ended March 31, 2019 and 2018 are as follows (in thousands):
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
 
Master Trust 2014
 
Other Properties
 
Total
 
Master Trust 2014
 
Other Properties
 
Total
Segment Results:
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
45,094

 
$
7,958

 
$
53,052

 
$
44,786

 
$
14,822

 
$
59,608

Interest income on loans receivable
 
68

 
1,168

 
1,236

 
81

 

 
81

Other income
 
362

 
831

 
1,193

 
339

 
40

 
379

Property Management and Servicing Fees (1)
 
(1,927
)
 

 
(1,927
)
 
(1,730
)
 

 
(1,730
)
Property expenses (including reimbursable)
 
(1,255
)
 
(318
)
 
(1,573
)
 
(976
)
 
(437
)
 
(1,413
)
Depreciation and amortization
 
(16,066
)
 
(3,309
)
 
(19,375
)
 
(15,471
)
 
(5,522
)
 
(20,993
)
Impairment and allowance for loan losses
 
(4,224
)
 
(1,813
)
 
(6,037
)
 
(4,525
)
 
(300
)
 
(4,825
)
Interest expense
 
(26,553
)
 
(5,782
)
 
(32,335
)
 
(27,166
)
 
(846
)
 
(28,012
)
Loss on debt extinguishment
 

 
(21,267
)
 
(21,267
)
 
(255
)
 

 
(255
)
Gain (loss) on disposition of assets
 
245

 
233

 
478

 
(1,673
)
 
(21
)
 
(1,694
)
Segment (loss) income
 
$
(4,256
)
 
$
(22,299
)
 
$
(26,555
)
 
$
(6,590
)
 
$
7,736

 
$
1,146

Non-allocated expenses
 
 
 
 
 
(11,715
)
 
 
 
 
 
(8,725
)
Net loss
 
 
 
 
 
$
(38,270
)
 
 
 
 
 
$
(7,579
)
(1) Property Management and Servicing Fees are included in related party fees in the consolidated statements of operations and comprehensive income (loss). Asset Management Fees, the other component of related party fees, are included in non-allocated expenses.
Assets and liabilities by reportable segment are as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
 
Master Trust 2014
 
Other Properties
 
Total
 
Master Trust 2014
 
Other Properties
 
Total
Net investments
 
$
1,698,195

 
$
163,735

 
$
1,861,930

 
$
1,719,268

 
$
335,269

 
$
2,054,537

Restricted cash
 
27,790

 
1,062

 
28,852

 
25,683

 
18,404

 
44,087

Segment assets
 
$
1,725,985

 
$
164,797

 
$
1,890,782

 
$
1,744,951

 
$
353,673

 
$
2,098,624

Other assets
 
 
 
 
 
153,753

 
 
 
 
 
207,025

Total assets
 
 
 
 
 
$
2,044,535

 
 
 
 
 
$
2,305,649

 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgages and notes payable, net
 
$
1,899,239

 
$
81,700

 
$
1,980,939

 
$
1,905,322

 
$
233,482

 
$
2,138,804

Intangible lease liabilities, net
 
16,247

 
181

 
16,428

 
17,053

 
623

 
17,676

Segment liabilities
 
$
1,915,486

 
$
81,881

 
$
1,997,367

 
$
1,922,375

 
$
234,105

 
$
2,156,480

Other liabilities
 
 
 
 
 
37,367

 
 
 
 
 
83,629

Total liabilities
 
 
 
 
 
$
2,034,734

 
 
 
 
 
$
2,240,109

Dispositions by reportable segment are as follows (dollars in thousands):
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
 
Properties
 
Gross Proceeds
 
Properties
 
Gross Proceeds
Master Trust 2014
 
2

 
$
1,035

 
20

 
$
17,901

Other Properties (1)
 
84

 
4,400

 

 

Total
 
86

 
$
5,435

 
20

 
$
17,901

(1) Includes 83 properties disposed during the three months ended March 31, 2019 which relieved Shopko CMBS debt in lieu of generating cash proceeds. See Note 4 for further discussion.

21

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Note 8. Fair Value Measurements
Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. Real estate and the related intangible assets are evaluated for impairment based on certain indicators including, but not limited to: the asset being held for sale, vacant, non-operating or the lease on the asset expiring in 60 days or less. The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; recently quoted bid or ask prices, or market prices for comparable properties; estimates of cashflow, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, and expenses based upon market conditions; and expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate and intangible assets falls within Level 3 of the fair value hierarchy.
The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
Fair Value Hierarchy Level 
Description 
Fair Value
 
Level 1  
 
Level 2 
 
Level 3 
March 31, 2019
 
 
 
 
 
 
 
Long-lived assets held and used
$
10,812

 
$

 
$

 
$
10,812

Long-lived assets held for sale
$
4,250

 
$

 
$

 
$
4,250

Total
$
15,062

 
$

 
$

 
$
15,062

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 

 
 

 
 

Long-lived assets held and used
$
183,502

 
$

 
$

 
$
183,502

Long-lived assets held for sale
$
723

 
$

 
$

 
$
723

Total
$
184,225

 
$

 
$

 
$
184,225

$13.2 million of the fair value balance at March 31, 2019 was within the Master Trust 2014 segment, with the remaining $1.9 million within the Other Properties segment. $28.0 million of the fair value balance at December 31, 2018 was within the Master Trust 2014 segment, with the remaining $156.2 million within the Other Properties segment.
During the three months ended March 31, 2019 and for the year ended December 31, 2018, we determined that seven and 96 long-lived assets held and used, respectively, were impaired. The significant inputs for the fair values are described below.
Held and Used Impairment of Shopko assets
The Company utilized the income capitalization approach in determining the fair value of the Shopko assets, resulting in 77 impaired properties for the year ended December 31, 2018. Inputs utilized in determining the fair value included: vacancy period, vacancy costs, lease-up costs, market rent, expected collection losses and capitalization rates. The range of inputs used to determine the fair value are as follows:
Vacancy Period
 
Vacancy Costs
 
Leasing Commission
 
Tenant Improvement Allowance
 
Market Rent
 
Expected Collection Losses
 
Capitalization Rates
18 - 24 months
 
$1.68 - $5.52 psf
 
6% of Contractual Rent
 
$25 - $30 psf
 
$5.00 - $9.75 psf
 
1% of Contractual Rent
 
8% - 9.25%

22

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

Held and Used Impairment of other assets
For two of the held and used properties impaired during the three months ended March 31, 2019 and six of the held and used properties impaired during the year ended December 31, 2018, the Company estimated property fair value using the price per square foot of comparable properties. The following table provides information about the price per square foot of comparable properties used as inputs (price per square foot in dollars):
 
March 31, 2019
 
December 31, 2018
 
Range 
 
Weighted
Average
 
 
Square
Footage
 
 
Range 
 
Weighted
Average
 
 
Square
Footage
Long-lived assets held and used by asset type
Retail
$26.21 - $80.84
 

$39.51

 
138,575
 
$53.49 - $499.17
 

$112.85

 
54,341
For the five held and used properties impaired during the three months ended March 31, 2019 and 13 held and used properties impaired during the year ended December 31, 2018, the Company estimated property fair value using the price per square foot based on a listing price or a broker opinion of value. The following table provides information about the price per square foot based on a listing price and a broker opinion of value used as inputs (price per square foot in dollars):
 
March 31, 2019
 
December 31, 2018
 
Range 
 
Weighted
Average
 
 
Square
Footage
 
 
Range  
 
Weighted
Average
 
 
Square
Footage
 
Long-lived assets held and used by asset type
Retail
$73.17 - $207.84
 
$116.24
 
46,500
 
$57.50 - $125.03
 
$90.17
 
242,165
Held for Sale Impairment
For the three months ended March 31, 2019 and year ended December 31, 2018, we determined that two and one long-lived assets held for sale, respectively, were impaired. The Company estimated fair value of held for sale properties using price per square foot from signed purchase and sale agreements as follows (price per square foot in dollars):
 
March 31, 2019
 
December 31, 2018
 
Range  
 
Weighted
Average
 
 
Square
Footage
 
 
Range  
 
Weighted
Average
 
 
Square
Footage
 
Long-lived assets held for sale by asset type
Retail
$92.24 - $176.80
 
$107.34
 
39,594
 
$99.36
 
$99.36
 
7,800
Estimated Fair Value of Financial Instruments
Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash and escrow deposits, and accounts receivable and payable. Generally, these assets and liabilities are short-term in duration and are recorded at cost, which approximates fair value, on the accompanying consolidated balance sheets.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair values. The fair values of financial instruments are estimates based upon market conditions and perceived risks at March 31, 2019 and December 31, 2018. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

23

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

The estimated fair values of the following financial instruments have been derived based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 of the fair value hierarchy. The following table discloses fair value information for these financial instruments (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Carrying
Value
  
 
Estimated
Fair Value
 
 
Carrying
Value
 
 
Estimated
Fair Value
 
Loans receivable, net
$
27,148

 
$
24,139

 
$
30,093

 
$
26,852

Mortgages and notes payable, net (1)
$
1,980,939

 
$
2,060,077

 
$
2,138,804

 
$
2,219,119

(1) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.
Note 9. 2018 Incentive Award Plan
Restricted Common Shares
During the three months ended March 31, 2019, the Company granted approximately 90 thousand restricted shares under the 2018 Incentive Award Plan to the executive officer of the Company. The Company recorded $0.7 million in deferred compensation associated with these grants, which will be recognized over the service period of the awards. As of March 31, 2019, there were approximately 220 thousand unvested restricted shares outstanding and 3.4 million shares available for award under the Plan.
Market-Based Awards
During the three months ended March 31, 2019, the Company granted approximately 32 thousand market-based awards to the executive officer of the Company. The performance period of these grants runs through December 31, 2021. Awards vest in three annual tranches beginning December 31, 2019 and ending December 31, 2021. Potential common shares that the participant is eligible to receive is based on performance goals related to total shareholder return achieved by the Company during the performance period. Grant date fair value was calculated using the Monte Carlo simulation model, which incorporated stock price correlation and other variables over the time horizons matching the performance periods. The significant input for the calculation was expected volatility of the Company, estimated using the historical volatility of the Company's peers, ranging from 22.3% to 29.5%. Share-based compensation expense associated with unvested market-based awards is recognized on a straight-line basis over the required service period for each tranche.
Approximately $9 thousand of dividend rights have been accrued for non-vested market-based awards outstanding as of March 31, 2019. As of March 31, 2019, approximately 64 thousand shares for outstanding non-vested awards would have been released based on the Company's total shareholder return.
Share-based Compensation Expense
For the three months ended March 31, 2019, the Company recognized $0.8 million in share-based compensation expense from restricted share and market-based awards, which is included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.
As of March 31, 2019, the remaining unamortized share-based compensation expense totaled $0.9 million, including $0.7 million related to restricted share awards and $0.2 million related to market-based awards. As of December 31, 2018, the remaining unamortized share-based compensation expense totaled $0.8 million, all of which is related to restricted share awards. Amortization is recognized on a straight-line basis over the service period of the awards.
Note 10. Loss Per Share
Loss per share has been computed using the two-class method, which is computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and any participating securities based on the weighted average shares outstanding during the period. Under the two-class method, any earnings attributable to unvested restricted shares are deducted from loss from continuing operations in the computation of net loss attributable to common shareholders.

24

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

The common shares outstanding at the Spin-Off date are reflected as outstanding for all periods prior to the Spin-Off. The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net loss per share computed using the two-class method (dollars in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Basic and diluted loss:
 
 
 
Net loss and total comprehensive loss
$
(38,270
)
 
$
(7,579
)
Less: dividends paid to preferred shareholders
(3,975
)
 

Less: income attributable to unvested restricted shares
(73
)
 

Net loss attributable to common shareholders used in basic and diluted loss per share
$
(42,318
)
 
$
(7,579
)
 


 
 
Basic weighted average common shares outstanding:
 
 
 
Weighted average common shares outstanding
43,056,511

 
42,851,010

Less: Unvested weighted average restricted shares
(196,084
)
 

Weighted average common shares outstanding used in basic loss per share
42,860,427

 
42,851,010

 
 
 
 
Net loss per share attributable to common shareholders
$
(0.99
)
 
$
(0.18
)
 
 
 
 
Dilutive weighted average common shares (1):
 
 
 
Weighted average common shares outstanding used in diluted loss per share
42,860,427

 
42,851,010

Net loss per share attributable to common shareholders - diluted
$
(0.99
)
 
$
(0.18
)
 
 
 
 
Total potentially dilutive common shares (1)
19,403

 

(1) As of March 31, 2018, there were no adjustments to the weighted average number of common shares outstanding used in the diluted calculation given there were no potentially dilutive shares.
Note 11. Related Party Transactions
Cost Sharing Arrangements
In conjunction with the Spin-Off, the Company entered into certain agreements, including the Separation and Distribution Agreement, Tax Matters Agreement, Registration Rights Agreement and Insurance Sharing Agreement. These agreements provide a framework for the relationship between the Company and Spirit after the Spin-Off, by which Spirit may incur certain expenses on behalf of the Company that the Company must reimburse in a timely manner. In connection with these arrangements, the Company had accrued payable balances of $0.1 million to Spirit at both March 31, 2019 and December 31, 2018. Additionally, the Company had accrued receivable balances of $0.3 million and $1.8 million receivable from Spirit at March 31, 2019 and December 31, 2018, respectively, in connection with these arrangements.
Asset Management Agreement
In conjunction with the Spin-Off, the Company and the Manager entered into the Asset Management Agreement pursuant to which the Manager will provide various services subject to the supervision of SMTA's Board of Trustees, including, but not limited to: (i) performing all of SMTA's day-to-day functions, (ii) sourcing, analyzing and executing on investments and dispositions, (iii) determining investment criteria, (iv) performing investment and liability management duties, including financing and hedging, and (v) performing financial and accounting management. As compensation for these services, the Company will pay $20 million per annum, payable monthly in arrears. Additionally, the Manager may be entitled to, under certain circumstances, a promoted interest fee based on the total shareholder return of SMTA's common shares during the relevant period, as well as a termination fee. The fair value of the promote fee is evaluated quarterly using a Monte Carlo simulation model, which incorporated the initial 30-day volume weighted average share price of SMTA of $10.01, a projected volatility rate for SMTA, a risk-free rate, and other variables over the estimated remaining service period. The resulting total estimated fair value of the promote is $2.1 million and is amortized over the service period. The Company recognized $24 thousand in promote fee expense for the three months ended March 31, 2019. During the three months ended March 31, 2019, asset management fees of $5.0 million were

25

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

also incurred which are included in related party fees in the consolidated statements of operations and comprehensive income (loss). Asset management fees of $1.7 million were accrued at both March 31, 2019 and December 31, 2018 and promote fees of $0.9 million and $0.8 million were accrued at March 31, 2019 and December 31, 2018, respectively. These amounts are included in accounts payable, accrued expenses and other liabilities in the accompanying balance sheet.
Property Management and Servicing Agreement
The Manager provides property management services and special services for Master Trust 2014. The property management fees accrue daily at 0.25% per annum of the collateral value of the Master Trust 2014 Collateral Pool less any specially serviced assets, and the special servicing fees 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 dated May 20, 2014. During both the three months ended March 31, 2019 and 2018, property management fees of $1.5 million were incurred. Special servicing fees of $0.4 million and $0.2 million were incurred during the three months ended March 31, 2019 and 2018, respectively. The property management fees and special servicing fees are included in related party fees in the consolidated statements of operations and comprehensive income (loss). As of both March 31, 2019 and December 31, 2018, the Company had accrued payable balances of $0.5 million related to these fees.
Related Party Loans Receivable
The Company has four mortgage loans receivable where wholly-owned subsidiaries of Spirit are the borrower, and the loans are secured by six single-tenant commercial properties. These mortgage loans, which have a weighted average stated interest rate of 1.00%, were entered into by entities under common control of Spirit in conjunction with the issuance of the Series 2014 notes of Master Trust 2014 because the underlying properties did not qualify to be held directly as collateral by Master Trust 2014 under its governing agreements. In total, these mortgage notes had outstanding principal of $27.1 million and $27.9 million at March 31, 2019 and December 31, 2018, respectively, which is included in loans receivable, net on the consolidated balance sheets. The mortgage notes generated $68 thousand and $76 thousand of income for the three months ended March 31, 2019 and 2018, respectively, which is included in interest income on loans receivable in the consolidated statements of operations and comprehensive income (loss). These mortgage notes had a weighted average maturity of 8.9 years at March 31, 2019.
Related Party Notes Payable
In conjunction with the Series 2017-1 notes issuance completed in December 2017, the Manager, as sponsor of the issuance, retained a 5% economic interest in the Master Trust 2014 Series 2017-1 notes as required by the risk retention rules issued under 17 CFR Part 246. The principal amount due to the Manager under the notes was $33.5 million at both March 31, 2019 and December 31, 2018 and is included in mortgages and notes payable, net on the consolidated balance sheets. The notes have a weighted average stated interest rate of 4.58% with a weighted average term of 3.7 years to expected maturity as of March 31, 2019. Interest expense on the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2019 includes $0.4 million paid to the Manager in relation to these notes.
Related Party Transfers and Acquisitions
The financial statements include transfers of properties between the Company and Spirit and its wholly-owned subsidiaries prior to the Spin-Off. These transactions are reflected in the combined statements of cash flows as distribution to parent. For the three months ended March 31, 2018, the Company transferred three properties to Spirit with a net book value of $2.1 million. For these transactions, due to all entities being under common control, no gain or loss was recognized by the Company and transferred properties were accounted for by the Company at their historical cost basis to Spirit. There were no related party transfers during the three months ended March 31, 2019.
Expense Allocations
As described in Note 2, the accompanying consolidated financial statements present the operations of the Company as carved-out from the financial statements of Spirit through the date of the Spin-Off. General and administrative expenses and transaction costs were first specifically identified based on direct usage or benefit. The remaining general and administrative expenses and transaction costs for the period prior to the Spin-Off have been allocated to the Company based on relative property count, which the Company believes to be a reasonable methodology. These allocated expenses are centralized corporate costs borne by Spirit for management and other services, including, but

26

SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)

not limited to, executive oversight, asset management, property management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations, as well as transaction costs incurred in connection with the Spin-Off. A summary of the amounts allocated by property count is provided below:
 
Three Months Ended March 31,
 
2018
Allocated corporate expenses:
 
Cash compensation and benefits
$
2,663

Stock compensation
1,606

Professional fees
602

Other corporate expenses
650

Total corporate expenses
$
5,521

 
 
Transaction Costs
$
532

Corporate expenses have been included within general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
Note 12. Subsequent Events
Common Dividend Declared
On May 1, 2019, the Board of Trustees declared a special cash dividend of $0.33 per common share for the quarter ended June 30, 2019. The dividend is expected be paid on July 15, 2019 to holders of record as of June 28, 2019.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the meaning of the federal securities laws. When used in this quarterly report, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words 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; and
other risks inherent in the real estate business, including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments and potential damages from natural disasters.
The factors included in this quarterly report, including the documents incorporated by reference, and documents we subsequently file with the SEC and incorporate by reference, are not exhaustive and additional factors could adversely affect our business and financial performance. Additional factors that may cause risks and uncertainties include those discussed in the sections entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. All forward-looking statements are based on information that was available, and speak only, to the date on which they were made. 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.
OVERVIEW AND BASIS OF PRESENTATION
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 newly formed legal entities that held ten additional properties contributed to SMTA with an aggregate net book value of $44.9 million, a $35.0 million B-1 Term Loan with Shopko as borrower, and

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a cash contribution of $3.0 million. The activities of the newly formed legal entities are not reflected in the accompanying financial statement 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 one SMTA common share for every ten shares of Spirit common stock held by each of Spirit's stockholders as of May 18, 2018, which was 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 $20.0 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 continue 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).
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and various other assumptions deemed reasonable under the circumstances. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018. We have not made any material changes to the application of these policies during the three months ended March 31, 2019.

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RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2019 to the Three Months Ended March 31, 2018
 
Three Months Ended March 31,
(In Thousands)
2019
 
2018
 
Change 
 
% Change 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rentals
$
53,052

 
$
59,608

 
$
(6,556
)
 
(11.0
)%
Interest income on loans receivable
1,236

 
81

 
1,155

 
NM

Other income
1,193

 
379

 
814

 
NM

Total revenues
55,481

 
60,068

 
(4,587
)
 
(7.6
)%
Expenses:
 

 
 

 
 
 
 
General and administrative
6,052

 
5,651

 
401

 
7.1
 %
Related party fees
6,950

 
1,730

 
5,220

 
NM

Transaction costs
606

 
3,017

 
(2,411
)
 
(79.9
)%
Property costs (including reimbursable)
1,573

 
1,413

 
160

 
11.3
 %
Interest
32,335

 
28,012

 
4,323

 
15.4
 %
Depreciation and amortization
19,375

 
20,993

 
(1,618
)
 
(7.7
)%
Impairment and allowance for loan losses
6,037

 
4,825

 
1,212

 
25.1