Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-36004
_______________________________________________
SPIRIT REALTY CAPITAL, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________
Maryland
 
20-1676382
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
2727 North Harwood Street, Suite 300, Dallas, Texas 75201
 
(972) 476-1900
(Address of principal executive offices; zip code)
 
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o    No x
As of November 4, 2016, there were 483,566,341 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.
 




SPIRIT REALTY CAPITAL, INC.
INDEX

Glossary
 
 
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
Consolidated Statements of Operations for the three and nine month periods ended September 30, 2016 and 2015
Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2016 and 2015
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2016
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
 

 

2


GLOSSARY
Definitions:
 
1031 Exchange
Tax-deferred like-kind exchange of properties held for business or investment purposes, pursuant to Section 1031 of the Code
2013 Credit Facility
$400.0 million secured credit facility pursuant to the credit agreement between the Operating Partnership and certain lenders dated July 17, 2013
2015 Credit Facility
$800.0 million unsecured credit facility pursuant to the Credit Agreement
2019 Notes
$402.5 million convertible notes of the Corporation due in 2019
2021 Notes
$345.0 million convertible notes of the Corporation due in 2021
AFFO
Adjusted Funds From Operations
Amended Incentive Award Plan
Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM Program
At the Market equity distribution program, pursuant to which the Corporation may offer and sell registered shares of common stock from time to time
CMBS
Commercial Mortgage Backed Securities
Code
Internal Revenue Code of 1986, as amended
Cole II
Cole Credit Property Trust II, Inc.
Cole II Merger
Acquisition on July 17, 2013 of Cole II by the Company, in which the Company merged with and into the Cole II legal entity
Collateral Pools
Pools of collateral assets that are pledged to the indenture trustee for the benefit of the noteholders and secure obligations of issuers under the Spirit Master Funding Program
Company
The Corporation and its consolidated subsidiaries
Convertible Notes
The 2019 Notes and 2021 Notes, together
Corporation
Spirit Realty Capital, Inc., a Maryland corporation
CPI
Consumer Price Index
Credit Agreement
2015 credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015, or otherwise modified from time to time
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
Fitch
Fitch Ratings, Inc
FFO
Funds From Operations
GAAP
Generally Accepted Accounting Principles in the United States
LIBOR
London Interbank Offered Rate
Line of Credit
$40.0 million secured revolving credit facility pursuant to the loan agreement between an indirect wholly-owned subsidiary of the Corporation and a certain lender dated March 27, 2013, as amended
Master Trust 2013
The net-lease mortgage securitization trust established in December 2013 under the Spirit Master Funding Program
Master Trust 2014
The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014 under the Spirit Master Funding Program
Master Trust Notes
The Master Trust 2013 and Master Trust 2014 notes, together
Master Trust Release
Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made
Moody's
Moody's Investor Services
NAREIT
National Association of Real Estate Investment Trusts

3


Definitions:
 
Normalized Rental Revenue
Total rental revenues and earned income from direct financing leases from our owned properties during the final month of the reporting period normalized to exclude total rental revenues and earned income from direct financing leases from our owned properties during the final month of the reporting period contributed by properties sold during that period
Normalized Revenue
Total revenues normalized to exclude total revenues contributed by properties sold during that period
OP Holdings
Spirit General OP Holdings, LLC
Operating Partnership
Spirit Realty, L.P., a Delaware limited partnership
REIT
Real Estate Investment Trust
Revolving Credit Facilities
The 2013 Credit Facility, the 2015 Credit Facility and Line of Credit, together
S&P
Standard & Poor's Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Senior Unsecured Notes
$300 million aggregate principal amount of senior notes issued in August 2016
Shopko
Specialty Retail Shops Holding Corp. and certain of its affiliates
Spirit Master Funding Program
The Company's asset-backed securitization program that comprises Master Trust 2013 and Master Trust 2014
Term Loan
$370.0 million senior unsecured term facility pursuant to the Term Loan Agreement
Term Loan Agreement
Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015, as amended or otherwise modified from time to time
Total Debt
Principal debt outstanding before discounts, premiums or deferred financing costs
TSR
Total Shareholder Return
U.S.
United States

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

4


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
 
 
 
(Restated)
Assets



Investments:



Real estate investments:



Land and improvements
$
2,769,045


$
2,710,888

Buildings and improvements
4,877,955


4,816,481

Total real estate investments
7,647,000


7,527,369

Less: accumulated depreciation
(974,859
)

(860,954
)

6,672,141


6,666,415

Loans receivable, net
69,218


104,003

Intangible lease assets, net
484,600


526,718

Real estate assets under direct financing leases, net
36,013


44,324

Real estate assets held for sale, net
118,425


84,259

Net investments
7,380,397


7,425,719

Cash and cash equivalents
13,184


21,790

Deferred costs and other assets, net
160,949


179,180

Goodwill
256,470


264,350

Total assets
$
7,811,000


$
7,891,039

Liabilities and stockholders’ equity



Liabilities:



Revolving Credit Facilities
$
105,000


$

Term Loan, net
368,400

 
322,902

Senior Unsecured Notes, net
295,215

 

Mortgages and notes payable, net
2,241,783


3,079,787

Convertible Notes, net
699,465


690,098

Total debt, net
3,709,863

 
4,092,787

Intangible lease liabilities, net
186,935


193,903

Accounts payable, accrued expenses and other liabilities
148,267


142,475

Total liabilities
4,045,065


4,429,165

Commitments and contingencies (see Note 7)





Stockholders’ equity:



Common stock, $0.01 par value, 750,000,000 shares authorized: 483,566,341 and 441,819,964 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
4,836


4,418

Capital in excess of par value
5,174,706


4,721,323

Accumulated deficit
(1,413,599
)

(1,262,839
)
Accumulated other comprehensive loss
(8
)

(1,028
)
Total stockholders’ equity
3,765,935

 
3,461,874

Total liabilities and stockholders’ equity
$
7,811,000

 
$
7,891,039

See accompanying notes.

5


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


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
(Restated)
 
 
 
(Restated)
Revenues:
 
 
 
 
 
 
 
Rentals
$
161,765

 
$
159,183

 
$
484,090

 
$
473,308

Interest income on loans receivable
1,042

 
1,764

 
4,326

 
5,216

Earned income from direct financing leases
660

 
725

 
2,082

 
2,299

Tenant reimbursement income
3,469

 
3,780

 
10,493

 
11,903

Other income and interest from real estate transactions
5,572

 
2,973

 
11,600

 
5,920

Total revenues
172,508

 
168,425

 
512,591

 
498,646

Expenses:
 
 
 
 
 
 
 
General and administrative
15,112

 
12,165

 
40,611

 
36,737

Restructuring charges
3,264

 
100

 
5,726

 
100

Property costs
6,916

 
6,496

 
20,854

 
20,317

Real estate acquisition costs
1,056

 
576

 
2,092

 
2,122

Interest
47,653

 
54,673

 
149,842

 
168,754

Depreciation and amortization
65,300

 
64,493

 
194,227

 
195,460

Impairments
15,407

 
21,027

 
41,396

 
56,998

Total expenses
154,708

 
159,530

 
454,748

 
480,488

Income from continuing operations before other (expense) income and income tax expense
17,800

 
8,895

 
57,843

 
18,158

Other (expense) income:
 
 
 
 
 
 
 
(Loss) gain on debt extinguishment
(8,349
)
 
342

 
326

 
2,489

Total other (expense) income
(8,349
)
 
342

 
326

 
2,489

Income from continuing operations before income tax expense
9,451

 
9,237

 
58,169

 
20,647

Income tax expense
(12
)
 
(184
)
 
(932
)
 
(707
)
Income from continuing operations
9,439

 
9,053

 
57,237

 
19,940

Discontinued operations:
 
 
 
 

 

(Loss) income from discontinued operations

 
(41
)
 

 
90

Gain on disposition of assets

 

 

 
590

(Loss) income from discontinued operations

 
(41
)
 

 
680

Income before gain on disposition of assets
9,439

 
9,012

 
57,237

 
20,620

Gain on disposition of assets
17,960

 
5,991

 
39,221

 
66,291

Net income attributable to common stockholders
$
27,399

 
$
15,003

 
$
96,458

 
$
86,911

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

 
$
0.03

 
$
0.21

 
$
0.20

Discontinued operations

 

 

 

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

 
$
0.03

 
$
0.21

 
$
0.20

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

 
$
0.03

 
$
0.21

 
$
0.20

Discontinued operations

 

 

 

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

 
$
0.03

 
$
0.21

 
$
0.20

Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
479,554,362

 
440,205,348

 
457,263,526

 
429,387,707

Diluted
480,598,610

 
440,353,965

 
457,301,623

 
429,738,776

Dividends declared per common share issued
$
0.17500

 
$
0.17000

 
$
0.52500

 
$
0.51000

See accompanying notes.

6


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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
(Restated)
 
 
 
(Restated)
Net income attributable to common stockholders
$
27,399

 
$
15,003

 
$
96,458

 
$
86,911

Other comprehensive income:
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on cash flow hedges
28

 
(797
)
 
(1,145
)
 
(1,608
)
Net cash flow hedge losses reclassified to operations

 
277

 
2,165

 
974

Total comprehensive income
$
27,427

 
$
14,483

 
$
97,478

 
$
86,277

See accompanying notes.


7


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

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

 
$
4,418

 
$
4,721,323

 
$
(1,262,839
)
 
$
(1,028
)
 
$
3,461,874

Net income

 

 

 
96,458

 

 
96,458

Other comprehensive income

 

 

 

 
1,020

 
1,020

Dividends declared on common stock

 

 

 
(246,141
)
 

 
(246,141
)
Repurchase of shares of common stock
(193,558
)
 
(2
)
 

 
(737
)
 

 
(739
)
Issuance of shares of common stock, net
40,835,360

 
408

 
446,205

 

 

 
446,613

Stock-based compensation, net
1,104,575

 
12

 
7,178

 
(340
)
 

 
6,850

Balances, September 30, 2016
483,566,341

 
$
4,836

 
$
5,174,706

 
$
(1,413,599
)
 
$
(8
)
 
$
3,765,935

See accompanying notes.

8


SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Operating activities
 
 
(Restated)
Net income attributable to common stockholders
$
96,458

 
$
86,911

Adjustments to reconcile net income attributable to common stockholders to net cash provided by operating activities:
 
 
 
Depreciation and amortization
194,227

 
195,460

Impairments
41,396

 
57,032

Amortization of deferred financing costs
6,706

 
5,893

Payment to terminate interest rate swaps
(1,724
)
 
(64
)
Derivative interest rate amortization and other interest rate swap losses (gains)
1,809

 
(31
)
Amortization of debt discounts
3,354

 
1,670

Stock-based compensation expense
7,190

 
10,757

Gain on debt extinguishment
(326
)
 
(2,489
)
Debt extinguishment costs
(25,344
)
 
(3,760
)
Gains on dispositions of real estate and other assets, net
(39,221
)
 
(66,881
)
Non-cash revenue
(16,155
)
 
(15,947
)
Other
(1,514
)
 
165

Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets, net
(8,911
)
 
(4,935
)
Accounts payable, accrued expenses and other liabilities
1,346

 
7,433

Net cash provided by operating activities
259,291

 
271,214

Investing activities
 
 
 
Acquisitions of real estate
(424,468
)
 
(703,106
)
Capitalized real estate expenditures
(8,307
)
 
(7,449
)
Investments in corporate leasehold improvements
(2,839
)
 

Investments in loans receivable

 
(4,020
)
Collections of principal on loans receivable and real estate assets under direct financing leases
6,331

 
4,450

Proceeds from dispositions of real estate and other assets
245,921

 
397,325

Transfers of net sales proceeds from (to) restricted accounts pursuant to 1031 Exchanges
58,194

 
(2,489
)
Transfers of net sales proceeds (to) from Master Trust Release
(3,953
)
 
40,126

Net cash used in investing activities
(129,121
)
 
(275,163
)
Financing activities
 
 
 
Borrowings under Revolving Credit Facilities
828,000

 
535,000

Repayments under Revolving Credit Facilities
(723,000
)
 
(475,181
)
Repayments under mortgages and notes payable
(790,224
)
 
(347,242
)
Borrowings under Term Loan
746,000

 

Repayments under Term Loan
(701,000
)
 

Borrowings under Senior Unsecured Notes
298,134

 

Deferred financing costs
(4,017
)
 
(3,782
)
Proceeds from issuance of common stock, net of offering costs
446,613

 
347,211

Proceeds from exercise of stock options

 
46

Repurchase of shares of common stock
(739
)
 
(1,700
)
Dividends paid to equity owners
(238,926
)
 
(216,231
)
Transfers from reserve/escrow deposits with lenders
383

 
17,857

Net cash used in financing activities
(138,776
)
 
(144,022
)
Net decrease in cash and cash equivalents
(8,606
)
 
(147,971
)
Cash and cash equivalents, beginning of period
21,790

 
176,181

Cash and cash equivalents, end of period
$
13,184

 
$
28,210

See accompanying notes.

9


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
September 30, 2016
(Unaudited)



Note 1. Organization
Company Organization and Operations
The Company operates as a self-administered and self-managed REIT that seeks to generate and deliver sustainable and attractive returns for stockholders by investing primarily in and managing a portfolio of single-tenant, operationally essential real estate throughout the U.S. that is generally leased on a long-term, triple-net basis to tenants operating within predominantly retail, but also office and industrial property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.
The Company’s operations are generally carried out through the Operating Partnership. OP Holdings, one of the Corporation's wholly-owned subsidiaries, is the sole general partner and owns 1.0% of the Operating Partnership. The Corporation and a wholly-owned subsidiary are the only limited partners and together own the remaining 99.0% of the Operating Partnership.
As of September 30, 2016, our undepreciated investment in real estate and loans totaled approximately $8.39 billion, representing investments in 2,705 properties, including properties or other related assets securing mortgage loans made by the Company. Of this amount, 99.2% consisted of our $8.32 billion investment in real estate, representing ownership of 2,630 properties, and the remaining 0.8% consisted of $69.2 million in commercial mortgage and other loans receivable, primarily secured by the remaining 75 properties or other related assets.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the unaudited consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s restated audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K/A for the year ended December 31, 2015.
The unaudited consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has formed numerous special purpose entities to acquire and hold real estate encumbered by indebtedness (see Note 4). As a result, the majority of the Company’s consolidated assets are held in these wholly-owned special purpose entities. Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted under their governing documents. At September 30, 2016 and December 31, 2015, net assets totaling $3.08 billion and $4.57 billion, respectively, were held, and net liabilities totaling $2.34 billion and $3.19 billion, respectively, were owed by these special purpose entities and are included in the accompanying consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.

10


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Segment Reporting
The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Allowance for Doubtful Accounts
The Company provided for reserves for uncollectible amounts related to its rent and other tenant receivables totaling $14.7 million and $11.5 million at September 30, 2016 and December 31, 2015, respectively, against accounts receivable balances of $32.8 million and $26.3 million, respectively. Receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
The Company established a reserve for losses of $12.2 million at both September 30, 2016 and December 31, 2015, against deferred rental revenue receivables of $79.8 million and $68.0 million, respectively. Deferred rental revenue receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Restricted Cash and Escrow Deposits
Restricted cash and deposits in escrow, classified within deferred costs and other assets, net in the accompanying consolidated balance sheets consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Collateral deposits (1)
$
12,078

 
$
14,475

Tenant improvements, repairs, and leasing commissions (2)
9,282

 
8,362

Master Trust Release (3)
16,044

 
12,091

1031 Exchange proceeds, net
6

 
39,869

Loan impounds (4)
763

 
1,025

Other (5)
864

 
1,823

 
$
39,037

 
$
77,645

(1) Funds held in reserve by lenders which can be applied at their discretion to the repayment of debt (any funds remaining on deposit after the debt is paid in full are released to the borrower). During the nine months ended September 30, 2016, $2.3 million of lender reserves were surrendered to lenders in connection with the extinguishment of certain loans in default.
(2) Deposits held as additional collateral support by lenders to fund tenant improvements, repairs and leasing commissions incurred to secure a new tenant.
(3) Proceeds from the sale of assets pledged as collateral under the Spirit Master Funding Program, which are held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
(4) Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses.
(5) Funds held in lender controlled accounts released after scheduled debt service requirements are met.
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.
When the Company classifies a real estate asset that constitutes a business under GAAP as held for sale (typically real estate assets with an in-place lease), the proportionate amount of goodwill attributable to the real estate asset should be considered in determining the amount of impairment, if any. The portion of goodwill attributed is derived from the proportionate fair value of the real estate asset considered to be a business to the fair value of the Company’s reporting unit.
When the Company disposes of a real estate asset that constitutes a business under GAAP (typically real estate assets with an in-place lease), a portion of goodwill is allocated to the carrying value of the real estate asset considered to

11


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

be a business to determine the gain/loss on the disposal. The portion of goodwill allocated is derived from the proportionate fair value of the business to the fair value of the Company’s reporting unit.
Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of its assets, the amounts distributed to its stockholders, and the ownership of Company stock. Management believes the Company has qualified and will continue to qualify as a REIT and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Company qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.
Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiaries are subject to federal, state, and local taxes, which are not material.
Restatement
The Company amended and restated its previously issued audited consolidated financial statements and other financial information contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and the previously issued interim financial statements and other financial information contained in the Company’s Quarterly Reports on Form 10-Q for the fiscal periods ended March 31, 2015, June 30, 2015, September 30, 2015, March 31, 2016 and June 30, 2016. The restatement resulted from the Company's accounting for goodwill subsequent to the Cole II Merger. Previously, the Company did not allocate goodwill to the disposal of real estate assets or held for sale real estate assets that met the definition of a business under GAAP, as required by ASC 350 “Intangibles - Goodwill and Other” in order to determine gain on disposition of assets or impairments, if any, respectively. See the Company's Current Report on Form 8-K filed with the SEC on October 19, 2016 and the restated financial statements filed with the SEC on October 31, 2016 for additional details.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or the SEC that are adopted by the Company as of the specified effective date. Unless discussed below, these new accounting pronouncements entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore will have minimal, if any, impact on the Company's financial position or results of operations upon adoption.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies many aspects of accounting for share-based payment transactions under ASC Topic 718, Compensation - Stock Compensation, including income tax consequences, classification of awards as either equity or liability, forfeiture rate calculations and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the guidance under ASU 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2016-12 is effective for annual reporting periods beginning after December 15, 2017 with early application permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

12


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. ASU 2016-13 requires financial assets (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
Note 3. Investments
Real Estate Investments

As of September 30, 2016, the Company's gross investment in real estate properties and loans totaled approximately $8.39 billion, representing investments in 2,705 properties, including 75 properties or other related assets securing mortgage loans. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with only one state, Texas, with a real estate investment of 12.3%, accounting for more than 10.0% of the total dollar amount of the Company’s real estate investment portfolio.

The properties that the Company owns are leased to tenants under long-term operating leases that typically include one or more renewal options. The leases are generally triple-net, which provides that the lessee is responsible for the payment of all property operating expenses, including property taxes, maintenance and repairs, and insurance costs. Therefore, the Company is generally not responsible for repairs or other capital expenditures related to its properties, unless the property is not subject to a triple-net lease agreement or becomes vacant. Generally, the Company's single-tenant leases contain contractual provisions increasing the rental revenue over the term of the lease at specified dates by: (1) a fixed amount or (2) increases in CPI over a specified period (typically subject to ceilings) or (b) a fixed percentage.

During the nine months ended September 30, 2016, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:
 
Number of Properties
 
Dollar Amount of Investments
 
Owned (4)
 
Financed
 
Total
 
Owned
 
Financed
 
Total
 
 
 
 
 
 
 
(In Thousands)
Gross balance, December 31, 2015
2,485

 
144

 
2,629

 
$
8,198,685

 
$
104,003

 
$
8,302,688

Acquisitions/improvements (1) (3) (5)
227

 

 
227

 
459,384

 

 
459,384

Dispositions of real estate (2) (3)
(82
)
 

 
(82
)
 
(281,474
)
 

 
(281,474
)
Principal payments and payoffs (5)

 
(69
)
 
(69
)
 

 
(32,875
)
 
(32,875
)
(Impairments)/recoveries

 

 

 
(41,699
)
 
324

 
(41,375
)
Write-off of gross assets

 

 

 
(15,556
)
 

 
(15,556
)
Loan premium amortization and other

 

 

 
(64
)
 
(2,234
)
 
(2,298
)
Gross balance, September 30, 2016
2,630

 
75

 
2,705

 
8,319,276

 
69,218

 
8,388,494

Accumulated depreciation and amortization
 
 
 
 
 
 
(1,197,104
)
 

 
(1,197,104
)
Other non-real estate assets held for sale
 
 
 
 
 
 
2,072

 

 
2,072

Net balance, September 30, 2016
 
 
 
 
 
 
$
7,124,244

 
$
69,218

 
$
7,193,462

(1) Includes investments of $5.4 million in revenue producing capitalized expenditures, as well as $2.9 million of non-revenue producing capitalized maintenance expenditures. Capitalized maintenance expenditures are not included in the Company's investment in real estate disclosed elsewhere.
(2) The total accumulated depreciation and amortization associated with dispositions of real estate was $48.6 million.
(3) During the nine months ended September 30, 2016, pursuant to 1031 Exchanges, the Company sold 6 properties for $43.7 million. This amount, along with $39.9 million of 2015 proceeds, was used to partially fund 33 property acquisitions.
(4) At September 30, 2016 and December 31, 2015, 43 and 36, of the Company's properties, respectively, were vacant and in the Company’s possession; of these vacant properties, 11 and 12, respectively, were held for sale.
(5) During the nine months ended September 30, 2016, the Company transferred cash and mortgage notes receivable secured by 69 properties to acquire the fee simple interest of those properties.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases at September 30, 2016 (in thousands):
Remainder of 2016
$
151,256

2017
607,742

2018
594,423

2019
577,854

2020
557,730

Thereafter
4,535,935

Total future minimum rentals
$
7,024,940

Because lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum rentals do not include any contingent rentals based on a percentage of the lessees' gross sales or lease escalations based on future changes in the CPI or other stipulated reference rate.
Certain of the Company’s leases contain purchase options. Most of these options are at or above fair market value at the time the option is exercisable, and none of these purchase options represent bargain purchase options.

13


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Loans Receivable
The following table details loans receivable, net of premium and allowance for loan losses (in thousands):
 
September 30,
2016
 
December 31,
2015
Mortgage loans - principal
$
57,422

 
$
90,096

Mortgage loans - premium
7,752

 
9,986

Mortgages loans, net
65,174

 
100,082

Other note receivables - principal
4,044

 
4,245

Allowance for loan losses

 
(324
)
Other note receivables, net
4,044

 
3,921

Total loans receivable, net
$
69,218

 
$
104,003

The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are two other notes receivable, of which one $3.8 million note is secured by tenant assets and stock and the other is unsecured.
Allowance for Loan Losses

At September 30, 2016, there was no allowance for loan losses compared to an allowance for loan losses on an unsecured note receivable of $0.3 million at December 31, 2015. At September 30, 2016, there were no mortgages or notes receivable on non-accrual status compared to no mortgage loans and one note receivable with a balance of $0.3 million on non-accrual status at December 31, 2015.
Lease Intangibles, Net
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
September 30,
2016
 
December 31,
2015
In-place leases
$
640,108

 
$
649,182

Above-market leases
90,645

 
98,056

Less: accumulated amortization
(246,153
)
 
(220,520
)
Intangible lease assets, net
$
484,600

 
$
526,718

 
 
 
 
Below-market leases
$
237,667

 
$
238,039

Less: accumulated amortization
(50,732
)
 
(44,136
)
Intangible lease liabilities, net
$
186,935

 
$
193,903

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases were $4.7 million and $4.3 million for the nine months ended September 30, 2016 and 2015, respectively, and $1.8 million and $1.5 million for the three months ended September 30, 2016 and 2015, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $35.1 million and $37.8 million for the nine months ended September 30, 2016 and 2015, respectively, and $11.6 million and $12.4 million for the three months ended September 30, 2016 and 2015, respectively.

14


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Real Estate Assets Under Direct Financing Leases
The components of real estate investments held under direct financing leases were as follows (in thousands):
 
September 30,
2016
 
December 31,
2015
Minimum lease payments receivable
$
10,124

 
$
12,702

Estimated residual value of leased assets
35,640

 
43,789

Unearned income
(9,751
)
 
(12,167
)
Real estate assets under direct financing leases, net
$
36,013

 
$
44,324

Real Estate Assets Held for Sale
The following table shows the activity in real estate assets held for sale for the nine months ended September 30, 2016 (dollars in thousands):
 
Number of Properties
 
Carrying
Value
Balance, December 31, 2015
36

 
$
84,259

Transfers from real estate investments
47

 
146,107

Sales
(44
)
 
(106,317
)
Transfers to real estate investments
(3
)
 
(5,624
)
Balance, September 30, 2016
36

 
$
118,425

Impairments

The following table summarizes total impairment losses recognized in continuing and discontinued operations on the accompanying consolidated statements of operations (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Real estate and intangible asset impairment
$
13,894

 
$
19,919

 
$
35,236

 
$
55,273

Write-off of lease intangibles, net
1,491

 
713

 
6,463

 
1,268

Loans receivable impairment (recovery)

 
338

 
(324
)
 
338

Total impairments from real estate investment net assets
15,385

 
20,970

 
41,375

 
56,879

Other impairment
22

 
57

 
21

 
153

Total impairment loss in continuing and discontinued operations
$
15,407

 
$
21,027

 
$
41,396

 
$
57,032



15


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Note 4. Debt
The Company's debt is summarized below:
 
Weighted Average Effective
Interest Rates
(1)
 
Weighted Average
Stated
Rates (2)
 
Weighted Average Maturity (3)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving Credit Facilities
3.44
%
 
1.79
%
 
2.5

 
$
105,000

 
$

Term Loan
2.17
%
 
1.88
%
 
2.1

 
370,000

 
325,000

Senior Unsecured Notes
4.64
%
 
4.45
%
 
10.0

 
300,000

 

Master Trust Notes
5.58
%
 
5.03
%
 
6.5

 
1,677,660

 
1,692,094

CMBS - fixed-rate
4.91
%
 
5.63
%
 
3.7

 
603,490

 
1,360,215

CMBS - variable-rate (4)

 

 

 

 
61,758

Convertible Notes
5.31
%
 
3.28
%
 
3.5

 
747,500

 
747,500

Total debt
4.94
%
 
4.34
%
 
5.2

 
3,803,650

 
4,186,567

Debt discount, net
 
 
 
 
 
 
(54,975
)
 
(52,203
)
Deferred financing costs, net (5)
 
 
 
 
 
 
(38,812
)
 
(41,577
)
Total debt, net
 
 
 
 
 
 
$
3,709,863

 
$
4,092,787

(1) The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs and credit facility fees, where applicable, calculated for the three months ended September 30, 2016 and based on the average principal balance outstanding during the period.
(2) Represents the weighted average stated interest rate based on the outstanding principal balance as of September 30, 2016.
(3) Represents the weighted average maturity based on the outstanding principal balance as of September 30, 2016.
(4) Variable-rate notes were predominantly hedged with interest rate swaps (see Note 5).
(5) The Company records deferred financing costs for its 2015 Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.
Revolving Credit Facilities
2015 Credit Facility
On March 31, 2015, the Operating Partnership entered into the Credit Agreement that established a new $600.0 million unsecured credit facility and terminated its secured $400.0 million 2013 Credit Facility. The 2015 Credit Facility matures on March 31, 2019 (extendable at the Operating Partnership's option to March 31, 2020, subject to satisfaction of certain requirements) and includes an accordion feature to increase the committed facility size up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments. On April 27, 2016, the Company expanded the borrowing capacity under the 2015 Credit Facility from $600.0 million to $800.0 million by partially exercising the accordion feature under the terms of the Credit Agreement. The 2015 Credit Facility also includes a $50.0 million sub-limit for swing-line loans and up to $60.0 million available for issuances of letters of credit. Swing-line loans and letters of credit reduce availability under the 2015 Credit Facility on a dollar-for-dollar basis. On November 3, 2015, the Company entered into a first amendment to the Credit Agreement. The amendment conforms certain of the terms and covenants to those in the Term Loan Agreement, including limiting the requirement of subsidiary guarantees to material subsidiaries (as defined in the Credit Agreement) meeting certain conditions. At September 30, 2016, there were no subsidiaries meeting this requirement.
Borrowings bear interest at either a specified base rate or LIBOR plus an applicable margin, at the Operating Partnership's option. Per the amendment, the Operating Partnership’s election to change the grid pricing from leverage based to credit rating based pricing initially requires at least two credit ratings of BBB- or better from S&P or Fitch or Baa3 or better from Moody’s. In April 2016, the Corporation received a first time rating of BBB- from Fitch and was upgraded to a BBB- corporate issuer rating by S&P. As a result, the Operating Partnership elected to change the interest rate grid from leverage based pricing to credit rating based pricing in the second quarter of 2016. Under credit rating based pricing, the 2015 Credit Facility bears interest at a rate equal to LIBOR plus 0.875% to 1.55% per annum or a specified base rate plus 0.0% to 0.55% and requires a facility fee in an amount equal to the aggregate revolving credit

16


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

commitments (whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum, in each case depending on the Corporation's credit rating. As of September 30, 2016, the 2015 Credit Facility bore interest at LIBOR plus 1.25% based on the Company's credit rating and incurred a facility fee of 0.25% per annum.
The Operating Partnership may voluntarily prepay the 2015 Credit Facility, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees, if any. Payment of the 2015 Credit Facility is unconditionally guaranteed by the Corporation and material subsidiaries that meet certain conditions (as defined in the Credit Agreement). The 2015 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.
As a result of entering into the 2015 Credit Facility and expanding the borrowing capacity, the Company incurred costs of $4.8 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the 2015 Credit Facility. The unamortized deferred financing costs relating to the 2015 Credit Facility were $3.2 million as of both September 30, 2016 and December 31, 2015, and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.
As of September 30, 2016, $105.0 million was outstanding, $0.3 million of letters of credit were issued and $694.7 million of borrowing capacity was available under the 2015 Credit Facility. The Operating Partnership's ability to borrow under the 2015 Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of September 30, 2016, the Corporation and the Operating Partnership were in compliance with these financial covenants.
2013 Credit Facility
On March 31, 2015, the secured 2013 Credit Facility was terminated and its outstanding borrowings were repaid with proceeds from the 2015 Credit Facility. Properties securing this facility became unencumbered upon its termination. The 2013 Credit Facility's borrowing margin was LIBOR plus 2.50% based on the Company's leverage, with an unused fee of 0.35%. Upon terminating the 2013 Credit Facility, the Company recognized debt extinguishment costs of $2.0 million, resulting from the write-off of unamortized deferred financing costs.
Line of Credit
A special purpose entity indirectly owned by the Corporation had access to a $40.0 million secured revolving line of credit, which expired on March 27, 2016.
Term Loan
On November 3, 2015, the Company entered into a Term Loan Agreement among the Operating Partnership, as borrower, the Company as guarantor and the lenders that are parties thereto. The Term Loan Agreement provides for a $325.0 million senior unsecured term facility that has an initial maturity date of November 2, 2018, which may be extended at the Company's option pursuant to two one-year extension options, subject to the satisfaction of certain conditions and payment of an extension fee. In addition, an accordion feature allows the facility to be increased up to $600.0 million, subject to obtaining additional lender commitments. During the fourth quarter of 2015, upon obtaining additional lender commitments, the Company increased the term facility from $325.0 million to $370.0 million.
The Term Loan Agreement provides that borrowings bear interest at either LIBOR plus 1.35% to 1.80% per annum or a specified base rate plus 0.35% to 0.80% per annum, at the Operating Partnership's option. In each case, the applicable margin is determined based upon the Corporation’s leverage ratio. If the Corporation obtains at least two credit ratings on its senior unsecured long-term indebtedness of BBB- from S&P or Fitch or Baa3 from Moody's, the Operating Partnership may make an irrevocable election to have the margin based upon the Corporation's credit ratings. In April 2016, the Corporation received a first time rating of BBB- from Fitch and was upgraded to a BBB- corporate issuer rating by S&P. As a result, the Operating Partnership elected to change the interest rate grid from leverage based pricing to credit rating based pricing in the second quarter of 2016. Under credit rating based pricing, borrowings bear interest at either LIBOR plus 0.90% to 1.75% per annum or a specified base rate plus 0.0% to 0.75% per annum, in each case depending on the Corporation’s credit ratings. As of September 30, 2016, the Term Loan bore interest at LIBOR plus 1.35% based on the Company's credit rating.

17


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

The Operating Partnership may voluntarily prepay the Term Loan, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees. Borrowings may be repaid without premium or penalty, and may be re-borrowed within 30 days up to the then available loan commitment and subject to occurrence limitations within any twelve-month period. Payment of the Term Loan is unconditionally guaranteed by the Corporation and, under certain circumstances, by one or more material subsidiaries (as defined in the Term Loan Agreement) of the Corporation. The obligations of the Corporation and any guarantor under the Term Loan are full recourse to the Corporation and each guarantor.
As a result of entering into the Term Loan, the Company incurred origination costs of $2.3 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Term Loan. As of September 30, 2016 and December 31, 2015, the unamortized deferred financing costs relating to the Term Loan were $1.6 million and $2.1 million, respectively, and recorded net against the principal balance of the Term Loan on the accompanying consolidated balance sheets.
As of September 30, 2016, the Term Loan was fully drawn. The Operating Partnership's ability to borrow under the Term Loan is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. The Corporation has unconditionally guaranteed all obligations of the Operating Partnership under the Term Loan Agreement. As of September 30, 2016, the Corporation and the Operating Partnership were in compliance with these financial covenants.
Senior Unsecured Notes
On August 18, 2016, the Operating Partnership completed a private placement of $300.0 million aggregate principal amount of senior notes, which are guaranteed by the Corporation. The Senior Unsecured Notes were issued at 99.378% of their principal amount, resulting in net proceeds of $296.2 million, after deducting transaction fees and expenses. The Senior Unsecured Notes accrue interest at a rate of 4.450% per year, payable on March 15 and September 15 of each year, until the maturity date of September 15, 2026. The Company has agreed to file with the SEC and cause to become effective a registration statement pursuant to which the Company will offer to exchange the Senior Unsecured Notes for substantially similar registered notes.
The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed on or after June 15, 2026 (three months prior to the maturity date of the Senior Unsecured Notes), the redemption price will not include a make-whole premium.  
In connection with the offering, the Operating Partnership incurred $3.0 million in deferred financing costs. This amount is being amortized to interest expense over the life of the Senior Unsecured Notes. As of September 30, 2016, the unamortized deferred financing costs relating to the Senior Unsecured Notes were $2.9 million and recorded net against the Senior Unsecured Notes principal balance on the accompanying consolidated balance sheets.
In connection with the issuance of the Senior Unsecured Notes, the Corporation and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of September 30, 2016, the Corporation and the Operating Partnership were in compliance with these financial covenants.
Master Trust Notes
The Company has access to an asset-backed securitization platform, the Spirit Master Funding Program, to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. The Spirit Master Funding Program consists of two separate securitization trusts, Master Trust 2013 and Master Trust 2014, each of which have one or multiple bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. Each issuer is an indirect wholly-owned special purpose entity of the Corporation.

18


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

The Master Trust Notes are summarized below:
 
Stated
Rates (1)
 
Maturity
 
September 30,
2016
 
December 31,
2015
 
 
 
(in Years)
 
(in Thousands)
Series 2014-1 Class A1
5.1
%
 
3.7
 
$
56,759

 
$
65,027

Series 2014-1 Class A2
5.4
%
 
3.8
 
253,300

 
253,300

Series 2014-2
5.8
%
 
4.5
 
227,150

 
229,674

Series 2014-3
5.7
%
 
5.5
 
311,936

 
312,276

Series 2014-4 Class A1
3.5
%
 
3.3
 
150,000

 
150,000

Series 2014-4 Class A2
4.6
%
 
13.3
 
360,000

 
360,000

Total Master Trust 2014 notes
5.1
%
 
6.8
 
1,359,145

 
1,370,277

Series 2013-1 Class A
3.9
%
 
2.2
 
125,000

 
125,000

Series 2013-2 Class A
5.3
%
 
7.2
 
193,515

 
196,817

Total Master Trust 2013 notes
4.7
%
 
5.3
 
318,515

 
321,817

Total Master Trust Notes
 
 
 
 
1,677,660

 
1,692,094

Debt discount, net
 
 
 
 
(19,829
)
 
(22,909
)
Deferred financing costs, net
 
 
 
 
(17,138
)
 
(19,345
)
Total Master Trust Notes, net
 
 
 
 
$
1,640,693

 
$
1,649,840

(1) Represents the individual series stated interest rate as of September 30, 2016 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of September 30, 2016.
As of September 30, 2016, the Master Trust 2014 notes were secured by 863 owned and financed properties issued by five indirect wholly-owned subsidiaries of the Corporation. The notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within this trust. As of September 30, 2016, the Master Trust 2013 notes were secured by 307 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Corporation.
CMBS
As of September 30, 2016, indirect wholly-owned special purpose entity subsidiaries of the Corporation were borrowers under 30 fixed-rate non-recourse loans, excluding one loan in default, which have been securitized into CMBS and are secured by the borrowers' respective leased properties and related assets. The stated interest rates of the loans as of September 30, 2016, excluding the defaulted loan, ranged from 3.90% to 6.52% with a weighted average stated interest rate of 5.91%. As of September 30, 2016, these fixed-rate loans were secured by 139 properties. As of September 30, 2016 and December 31, 2015, the unamortized deferred financing costs associated with these fixed-rate loans were $4.9 million and $5.5 million, respectively, and recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets. The deferred financing costs are being amortized to interest expense over the term of the respective loans.
As of September 30, 2016, a borrower was in default under the loan agreement relating to one CMBS fixed-rate loan where the three properties securing the respective loan were no longer generating sufficient revenue to pay the scheduled debt service. These properties with either be sold or foreclosed. The default interest rate on this loan was 9.85%. The borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligations. As of September 30, 2016, the aggregate principal balance under the defaulted loan was $28.6 million, which includes $8.8 million of interest added to principal. In addition, approximately $10.5 million of lender controlled restricted cash is being held in connection with this loan that may be applied to reduce amounts owed.

19


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Convertible Notes
In May 2014, the Corporation issued $402.5 million aggregate principal amount of 2.875% convertible notes due in 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes due in 2021. Interest on the Convertible Notes is payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes will mature on May 15, 2019 and the 2021 Notes will mature on May 15, 2021.
The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Corporation's common stock, or a combination thereof. The initial conversion rate applicable to each series is 76.3636 per $1,000 principal note (equivalent to an initial conversion price of $13.10 per share of common stock, representing a 22.5% premium above the public offering price of the common stock offered concurrently at the time the Convertible Notes were issued). The conversion rate is subject to adjustment for certain anti-dilution events, including special distributions and regular quarterly cash dividends exceeding $0.16625 per share. As of September 30, 2016, the conversion rate was 76.7079 per $1,000 principal note. Earlier conversion may be triggered if shares of the Corporation's common stock trades higher than the established thresholds, if the Convertible Notes trade below established thresholds, or certain corporate events occur.
In connection with the issuance of the Convertible Notes, the Company recorded a discount of $56.7 million, which represents the estimated value of the embedded conversion feature for each of the Convertible Notes. The discount is being amortized to interest expense using the effective interest method over the term of each of the 2019 Notes and 2021 Notes. As of September 30, 2016 and December 31, 2015, the unamortized discount was $35.8 million and $42.7 million, respectively. The discount is shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature is recorded in capital in excess of par value in the accompanying consolidated balance sheets, net of financing transaction costs.
In connection with the offering, the Company also incurred $19.6 million in deferred financing costs. This amount has been allocated on a pro-rata basis to each of the Convertible Notes and is being amortized to interest expense over the term of each note. As of September 30, 2016 and December 31, 2015, the unamortized deferred financing costs relating to the Convertible Notes were $12.2 million and $14.7 million, respectively, and recorded net against the Convertible Notes principal balance on the accompanying consolidated balance sheets.

20


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Debt Extinguishment
During the nine months ended September 30, 2016, the Company extinguished a total of $817.3 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.02%. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $0.3 million. The gain was primarily attributable to the extinguishment of seven defaulted mortgage loans upon transferring the properties collateralizing these loans to the lender.
During the nine months ended September 30, 2015, the Company extinguished a total of $378.6 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 5.64% and terminated the 2013 Credit Facility. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $2.5 million. The gain was primarily attributable to the write-off of net debt premiums and the reduction of $17.5 million of debt using net sale proceeds of $14.0 million from the sale of four properties securing a portion of a defaulted CMBS loan, partially offset by defeasance fees.
Debt Maturities
As of September 30, 2016, scheduled debt maturities of the Company’s Revolving Credit Facilities, Term Loan, Senior Unsecured Notes, mortgages and notes payable and Convertible Notes, including balloon payments, are as follows (in thousands):
 
Scheduled
Principal
 
Balloon
Payment
 
Total
Remainder of 2016 (1)
$
6,004

 
$
28,557

 
$
34,561

2017
26,115

 
233,386

 
259,501

2018
42,115

 
552,779

 
594,894

2019
44,325

 
517,500

 
561,825

2020
39,096

 
413,206

 
452,302

Thereafter
249,792

 
1,650,775

 
1,900,567

Total
$
407,447

 
$
3,396,203

 
$
3,803,650

(1) The balloon payment balance in 2016 includes $28.6 million, including $8.8 million of capitalized interest, for the acceleration of principal payable following an event of default under one non-recourse CMBS loan with a stated maturity in 2017.

21


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Interest expense – Revolving Credit Facilities (1)
$
1,155

 
$
608

 
$
2,507

 
$
1,997

Interest expense – Term Loan
1,307

 

 
3,376

 

Interest expense – Senior Unsecured Notes
1,595

 

 
1,595

 

Interest expense – mortgages and notes payable
33,291

 
45,460

 
113,837

 
140,731

Interest expense – Convertible Notes
6,127

 
6,127

 
18,382

 
18,382

Non-cash interest expense:
 
 
 
 
 
 
 
Amortization of deferred financing costs
2,303

 
1,920

 
6,706

 
5,893

Amortization of net losses related to interest rate swaps
28

 
27

 
85

 
81

Amortization of debt (premium)/discount, net
1,847

 
531

 
3,354

 
1,670

Total interest expense
$
47,653

 
$
54,673

 
$
149,842

 
$
168,754

(1) Includes facility fees of approximately $0.5 million and $0.4 million for the three months ended September 30, 2016 and 2015, respectively, and approximately $1.5 million and $1.2 million for the nine months ended September 30, 2016 and 2015, respectively.
Note 5. Derivative and Hedging Activities
The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using regression analysis and the measurement of hedge ineffectiveness is based on the hypothetical derivative method. The effective portion of changes in fair value are recorded in AOCL and subsequently reclassified to earnings when the hedged transactions affect earnings. The ineffective portion is recorded immediately in earnings in general and administrative expenses.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.

22


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

The following table summarizes the notional amount and fair value of the Company’s derivative instruments (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Liability
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Notional
Amount
 
Fixed
Interest
Rate
 
Effective
Date
 
Maturity
Date
 
September 30,
2016
 
December 31,
2015
Interest Rate Swaps(1)
 
Accounts payable, accrued expenses and other liabilities
 
$
61,758

 
5.14
%
 
01/02/14
 
12/13/18
 
$

 
$
(934
)
 
 
 
 
 
 
 
 
 
 
 
 
$

 
$
(934
)
(1) Represents a tranche of eight individual interest rate swap agreements with notional amounts ranging from $7.6 million to $7.9 million. The payment terms, stated interest rate, effective date, and maturity date of these swaps are consistent with the terms of the debt.
During June 2016, the Company terminated the remaining interest rate swap agreements upon the repayment of eight CMBS variable-rate loans. The Company paid $1.7 million to terminate these interest rate swap agreements and recognized a loss of $1.7 million, which is included in general and administrative expenses.
The following tables provide information about the amounts recorded in AOCL, as well as the loss recorded in operations, when reclassified out of AOCL or recognized in earnings immediately, for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands):
 
 
Amount of Gain or (Loss) Recognized
in AOCL on Derivative
(Effective Portion)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Derivatives in Cash Flow Hedging Relationships
 
2016
 
2015
 
2016
 
2015
Interest rate swaps
 
$
28

 
$
(797
)
 
$
(1,145
)
 
$
(1,608
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Loss Reclassified from
AOCL into Operations
(Effective Portion)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Location of Loss Reclassified from AOCL into Operations
 
2016
 
2015
 
2016
 
2015
Interest expense
 
$

 
$
(277
)
 
$
(459
)
 
$
(898
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Loss Recognized in
Operations on Derivative
(Ineffective Portion) (1)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Location of Loss Recognized in Operations on Derivatives
 
2016
 
2015
 
2016
 
2015
General and administrative expense
 
$

 
$

 
$
(1,706
)
 
$
(78
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Loss Recognized in
Operations on Derivative
Derivatives Not Designated as Hedging instruments
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Location of Loss Recognized in Operations on Derivatives
 
2016
 
2015
 
2016
 
2015
General and administrative expense
 
$

 
$

 
$
(18
)
 
$

(1) Amounts for the nine months ended September 30, 2016 and 2015, respectively, include losses of $1.7 million and $76.0 thousand that were reclassified from accumulated other comprehensive loss in the balance sheet resulting from hedged transactions that were no longer probable of occurring as the swaps were terminated prior to their respective maturity dates.

23


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Approximately $8 thousand of the remaining balance in AOCL is estimated to be reclassified as an increase to interest expense during the next twelve months. The Company does not enter into derivative contracts for speculative or trading purposes.
Note 6. Stockholders’ Equity
Issuance of Common Stock
On April 15, 2016, the Company completed an underwritten public offering of 34.5 million shares of its common stock, at $11.15 per share, including 4.5 million shares sold pursuant to the underwriters' option to purchase additional shares, for gross proceeds of approximately $384.7 million. Net proceeds were approximately $368.9 million after deducting underwriter discounts and offering costs paid by the Company. The net proceeds were initially used to reduce amounts outstanding under the Term Loan.
During the nine months ended September 30, 2016, portions of awards of restricted common stock and performance share awards granted to certain of the Company's officers and other employees vested. The vesting of these awards, granted pursuant to the Amended Incentive Award Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Amended Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender 0.2 million shares of common stock valued at $0.7 million, solely to pay the associated minimum statutory tax withholdings during the nine months ended September 30, 2016. The Company records its repurchased shares of common stock using the cost method. Shares repurchased are considered retired under Maryland law and the cost of the stock repurchased is recorded as a reduction to common stock and accumulated deficit on the consolidated balance sheets.
ATM Program
During the nine months ended September 30, 2016, the Corporation sold 6.3 million shares of its common stock under its ATM Program, at a weighted average share price of $12.47, for aggregate gross proceeds of $79.0 million and aggregate net proceeds of $77.7 million after payment of commissions and other issuance costs of $1.3 million. The net proceeds were used to fund acquisitions, repay borrowings under the Revolving Credit Facilities and for general corporate purposes. As of September 30, 2016, $24.5 million in gross proceeds capacity remained available under the ATM Program.
Stock Repurchase Program
In February 2016, the Company's Board of Directors approved a stock repurchase program, which authorizes the Company to purchase up to $200 million of its common stock in the open market or through private transactions from time to time over the next 18 months. The stock repurchase program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company's discretion. The Company intends to fund any repurchases with the net proceeds from asset sales, cash flows from operations, existing cash on the balance sheet and other sources. During the nine months ended September 30, 2016, no stock was repurchased under the stock repurchase program.
Dividends Declared
For the nine months ended September 30, 2016, the Corporation's Board of Directors declared the following dividends:
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
 
Payment Date
 
 
 
 
 
 
(in thousands)
 
 
March 15, 2016
 
$
0.17500

 
March 31, 2016
 
$
77,596

 
April 15, 2016
June 15, 2016
 
$
0.17500

 
June 30, 2016
 
$
83,939

 
July 15, 2016
September 15, 2016
 
$
0.17500

 
September 30, 2016
 
$
84,606

 
October 14, 2016
The dividend declared on September 15, 2016 was paid on October 14, 2016 and is included in accounts payable, accrued expenses and other liabilities as of September 30, 2016.

24


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

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

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

During the second quarter of 2016, the bankruptcy court approved a settlement agreement, by and between our subsidiary, the Debtors and Albertson’s LLC, which provides for (a) the partial assignment of the existing Haggen Operations Holdings, LLC master lease to Albertson’s LLC with respect to four of the five properties under the master lease, (b) the rejection of the leasehold with respect to the one store not included in the master lease assignment, (c) the execution of a new lease or leases between the subsidiary of the Company and Albertson’s LLC with respect to the four assigned stores, including a $0.35 million annual rent reduction for one store, and (d) the reimbursement of certain of the Company's fees, expenses and cure amounts solely with respect to the assigned stores. In return for the rent concession, Albertson’s LLC paid the Company $3.0 million upon execution of the amended leases and the Debtors have agreed to grant the Company an allowed administrative claim of $0.8 million. The $3.0 million payment has been recorded to other liabilities on the balance sheet and will be amortized to rent over the remaining lease term. In return for the rejected store, the Company has been granted an incremental allowed unsecured claim of $2.6 million, of which $1.8 million is entitled to administrative priority, against each of Haggen Operations Holdings, LLC and Haggen Holdings, LLC.

Pursuant to the terms of the settlement agreement, the Company collected and recognized $2.5 million of the $21.0 million original stipulated damages claim following the property assignments to Albertsons's LLC, and the remaining amounts will be recognized when collected. The amount of the settlement claim was negotiated based on lost rent relating to rejected properties and below market rents on properties assigned to new operators through bankruptcy. As a result, a portion of the collections are recorded in interest income and other in the income statement, and the remainder is recorded in other liabilities on the balance sheet and amortized to rent over the remaining lease term. Of the $2.5 million noted above, $1.8 million was recognized as lease termination income with the remainder recorded on the balance sheet. As of September 30, 2016, the bankruptcy proceeding remains ongoing and there is no guaranty that the remaining claims will be paid or otherwise satisfied in full.
As of September 30, 2016, there were no outstanding claims against the Company that are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of September 30, 2016, the Company had commitments totaling $58.0 million, of which $24.7 million relates to future acquisitions with the remainder to fund improvements on properties the Company currently owns. Commitments related to acquisitions contain standard cancellation clauses contingent on the results of due diligence. Of the total commitments of $58.0 million, $43.6 million is expected to be funded during fiscal year 2016. In addition, the Company is contingently liable for $5.7 million of debt owed by one of its tenants and is indemnified by that tenant for any payments the Company may be required to make on such debt.

25


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

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

Note 8. Fair Value Measurements
Recurring Fair Value Measurements
The Company’s assets and liabilities that are required to be measured at fair value in the accompanying consolidated financial statements are summarized below. The following table sets forth the Company’s financial liabilities that were accounted for at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Hierarchy Level
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
December 31, 2015
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(934
)
 
$

 
$
(934
)
 
$

The interest rate swaps are measured using a market approach, using prices obtained from a nationally recognized pricing service and pricing models with market observable inputs such as interest rates and volatilities. These measurements are classified as Level 2 of the fair value hierarchy.

26


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis (in thousands):
 
 
 
 
 
Fair Value Hierarchy Level
 
Impairment
Charges (1)
Description
Fair Value
 
Dispositions
 
Level 1
 
Level 2
 
Level 3
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Retail
$
7,772

 
$

 
$

 
$

 
$
7,772

 
$
(12,612
)
Industrial
3,753

 

 

 

 
3,753

 
(5,432
)
Long-lived assets held and used by asset type
11,525

 

 

 

 
11,525

 
(18,044
)
Lease intangible assets
5,059

 

 

 

 
5,059

 
(8,403
)
Other assets

 

 

 

 

 
301

Long-lived assets held for sale
9,746

 
(33,668
)
 

 

 
43,414

 
(15,250
)
 
 
 
 
 
 
 
 
 
 
 
$
(41,396
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Retail
$
29,626

 
$
(3,207
)
 
$

 
$

 
$
32,833

 
$
(20,727
)
Industrial
9,598

 

 

 

 
9,598

 
(16,182
)
Office
21,074

 

 

 

 
21,074

 
(14,093
)
Long-lived assets held and used by asset type
60,298

 
(3,207
)
 

 

 
63,505

 
(51,002
)
Lease intangible assets
3,843

 

 

 

 
3,843

 
(3,825
)
Other assets

 

 

 

 

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

 
(33,563
)
 

 

 
49,520

 
(15,578
)
 
 
 
 
 
 
 
 
 
 
 
$
(70,729
)
(1) Impairment charges are presented for the nine months ended September 30, 2016 and for the year ended December 31, 2015.
The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; judicial foreclosure price; sales prices for comparable properties; estimates of cash flow, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, and expenses based upon market conditions; and expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate and intangible assets falls within Level 3 of the fair value hierarchy.

During the nine months ended September 30, 2016 and for the year ended December 31, 2015, we determined that seven and eighteen long-lived assets held and used, respectively, were impaired. The Company estimated the fair value of these properties using weighted average sales price per square foot of comparable properties for all of the impaired properties during the nine months ended September 30, 2016 and for thirteen of the eighteen impaired properties during the year ended December 31, 2015.


27


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

The following table provides information about the weighted average sales price per square foot of comparable properties used to estimate fair value (price per square foot in dollars):
 
September 30, 2016
 
December 31, 2015
 
Range
 
Weighted Average
 
Square Footage
 
Range
 
Weighted Average
 
Square Footage
Long-lived assets held and used by asset type
 
 
 
 
 
 
 
 
 
 
Retail
$62.84 - $214.29
 
$
110.54

 
91,817

 
$41.21 - $168.30
 
$
79.90

 
153,008

Industrial
$2.50 - $38.15
 
$
21.59

 
160,477

 
$17.77 - $22.00
 
$
19.40

 
375,076

Office
N/A
 
N/A
 
N/A
 
$58.17 - $133.61
 
$
104.53

 
204,936

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 September 30, 2016 and December 31, 2015. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
The estimated fair value of the loans receivable is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using contractual loan payments. The current replacement rates are determined by using yield curves calculated by aggregating comparably rated USD denominated U.S. corporate debt or the index to which these financial instruments are tied. The Revolving Credit Facilities, Term Loan, Senior Unsecured Notes, mortgages and notes payable and Convertible Notes were measured using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. 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): 
 
September 30, 2016
 
December 31, 2015
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Loans receivable, net
$
69,218

 
$
75,749

 
$
104,003

 
$
110,019

Revolving Credit Facilities
105,000

 
107,841

 

 

Term Loan, net (1)
368,400

 
378,223

 
322,902

 
338,366

Senior Unsecured Notes, net (1)
295,215

 
300,186

 

 

Mortgages and notes payable, net (1)
2,241,783

 
2,401,124

 
3,079,787

 
3,220,239

Convertible Notes, net (1)
699,465

 
837,650

 
690,098

 
713,095

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


28


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Note 9. Significant Credit and Revenue Concentration
As of September 30, 2016 and December 31, 2015, the Company’s real estate investments are operated by 452 and 438 tenants, respectively, that operate within retail, office and industrial property types across various industries throughout the U.S. Shopko operates in the general merchandise industry and is the Company’s largest tenant as a percentage of Normalized Revenue. Total rental revenues from properties leased to Shopko for the three months ended September 30, 2016 and 2015, contributed 8.0% and 9.9% of the Company's Normalized Revenue from continuing operations, respectively. No other tenant contributed 4% or more of the Company’s Normalized Revenue during any of the periods presented. As of September 30, 2016 and December 31, 2015, the Company's net investment in Shopko properties represents approximately 6.1% and 6.9%, respectively, of the Company’s total assets and the Company's real estate investment in Shopko represents approximately 8.0% and 9.0%, respectively, of the Company's total real estate investment portfolio.
Note 10. Supplemental Cash Flow Information
The following table presents the supplemental cash flow disclosures (in thousands):
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
Reduction of debt through sale of certain real estate properties
$

 
$
30,555

Reduction of debt in exchange for collateral assets
47,780

 
7,904

Real estate acquired in exchange for loans receivable
26,609

 

Net real estate and other collateral assets surrendered to lender
22,728

 
7,384

Accrued interest capitalized to principal (1)
3,584

 
4,686

Accrued performance share dividend rights
340

 
459

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

Note 11. Incentive Award Plan
On May 11, 2016, the stockholders of the Company approved the Amended Incentive Award Plan, which increased the number of shares of common stock reserved for issuance thereunder by 5.5 million shares. As of September 30, 2016, 5.7 million shares remained available for award under the Amended Incentive Award Plan.
Restricted Shares of Common Stock
During the nine months ended September 30, 2016, the Company granted 0.9 million restricted shares under the Amended Incentive Award Plan to certain executive officers and employees. The Company recorded $11.7 million in deferred compensation associated with these grants, which will be recognized in expense over the service period of the awards. As of September 30, 2016, there were approximately 1.0 million unvested restricted shares outstanding.
Performance Share Awards
During the nine months ended September 30, 2016, the Board of Directors or committee thereof approved an initial target grant of 0.3 million performance shares, net of forfeitures of 0.1 million, to executive officers of the Company. The performance period of this grant runs from January 1, 2016 through December 31, 2018. Potential shares of the Corporation's common stock that each participant is eligible to receive is based on the initial target number of shares granted multiplied by a percentage range between 0% and 250%. Grant date fair value was calculated using the Monte Carlo simulation model, which incorporated stock price correlation, projected dividend yields and other variables over the time horizons matching the performance periods. Stock-based compensation expense associated with unvested performance share awards is recognized on a straight-line basis over the minimum required service period, which is generally three years. Based on the grant date fair value, the Corporation expects to recognize $4.1 million in compensation expense on a straight-line basis over the requisite service period associated with this market-based grant.
Approximately $0.4 million and $0.2 million in dividend rights have been accrued for non-vested performance share awards outstanding as of September 30, 2016 and December 31, 2015, respectively. For outstanding non-vested awards at September 30, 2016, 0.8 million shares would have been released based on the Corporation's TSR relative to the specified peer groups through that date. During the nine months ended September 30, 2016, 0.2 million shares were released at target in connection with qualifying terminations of participants.

29


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Stock-based Compensation Expense
For the three months ended September 30, 2016 and 2015, the Company recognized $3.4 million and $3.5 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations. For the nine months ended September 30, 2016 and 2015, the Company recognized $7.2 million and $10.8 million, respectively, in stock-based compensation expense.
As of September 30, 2016, the remaining unamortized stock-based compensation expense, including amounts relating to the performance share awards, totaled $16.7 million, including $11.2 million related to restricted stock awards and $5.5 million related to performance share awards, which is recognized as the greater of the amount amortized on a straight-line basis over the service period of each applicable award or the amount vested over the vesting periods.

30


SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
September 30, 2016
(Unaudited)

Note 12. Income Per Share
Income per share has been computed using the two-class method. Income per common share under the two-class method is computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of shares of common stock outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both shares of common stock and participating securities based on the weighted average shares outstanding during the period. Classification of the Company's unvested restricted stock, which contain rights to receive non-forfeitable dividends, are deemed participating securities under the two-class method. Under the two-class method, earnings attributable to unvested restricted shares are deducted from income from continuing operations in the computation of net income attributable to common stockholders. The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share computed using the two-class method (dollars in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Basic and diluted income:
 
 
 
 
 
 
 
Income from continuing operations
$
9,439

 
$
9,053

 
$
57,237

 
$
19,940

Gain on disposition of assets
17,960

 
5,991

 
39,221

 
66,291

Less: income attributable to unvested restricted stock
(192
)
 
(132
)
 
(430
)
 
(566
)
Income used in basic and diluted income per share from continuing operations
27,207

 
14,912

 
96,028

 
85,665

(Loss) income from discontinued operations

 
(41
)
 

 
680

Net income attributable to common stockholders used in basic and diluted income per share
$
27,207

 
$
14,871

 
$
96,028

 
$
86,345

 
 
 
 
 
 
 
 
Basic weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
480,326,857

 
441,512,930

 
457,992,378

 
430,650,925

Less: unvested weighted average shares of restricted stock
(772,495
)
 
(1,307,582
)
 
(728,852
)
 
(1,263,218
)
Weighted average shares of common stock outstanding used in basic income per share
479,554,362

 
440,205,348

 
457,263,526

 
429,387,707