9.30.14 - SRC 10Q
 
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, 2014
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)
 
 
 
16767 North Perimeter Drive, Suite 210, Scottsdale, Arizona 85260
 
(480) 606-0820
(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
o
 
Accelerated filer
o
Non-accelerated filer
x
(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 3, 2014, there were 398,566,183 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.
 

Table of Contents

SPIRIT REALTY CAPITAL, INC.
INDEX
 
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013 (Unaudited)
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2014 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (Unaudited)
 

 

2

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SPIRIT REALTY CAPITAL, INC.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)

 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Real estate investments:
 
 
 
Land and improvements
$
2,503,857

 
$
2,330,510

Buildings and improvements
4,447,082

 
4,188,783

Total real estate investments
6,950,939

 
6,519,293

Less: accumulated depreciation
(723,777
)
 
(590,067
)
 
6,227,162

 
5,929,226

Loans receivable, net
111,409

 
117,721

Intangible lease assets, net
599,875

 
618,121

Real estate assets under direct financing leases, net
56,654

 
58,760

Real estate assets held for sale, net
54,120

 
19,611

Net investments
7,049,220

 
6,743,439

Cash and cash equivalents
50,130

 
66,588

Deferred costs and other assets, net
156,485

 
129,597

Goodwill
291,421

 
291,421

Total assets
$
7,547,256

 
$
7,231,045

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Revolving credit facilities
$
125,436

 
$
35,120

Mortgages and notes payable, net
3,188,547

 
3,743,098

Convertible senior notes, net
693,845

 
—

Intangible lease liabilities, net
219,626

 
220,114

Accounts payable, accrued expenses and other liabilities
115,564

 
114,679

Total liabilities
4,343,018

 
4,113,011

Commitments and contingencies (see Note 8)


 


Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 399,039,782 shares issued; 398,566,183 outstanding shares at September 30, 2014 and 370,570,565 shares issued; 370,363,803 outstanding shares at December 31, 2013
3,990

 
3,706

Capital in excess of par value
4,211,235

 
3,859,823

Accumulated deficit
(1,005,434
)
 
(742,915
)
Accumulated other comprehensive loss
(691
)
 
(638
)
Treasury stock, at cost
(4,862
)
 
(1,942
)
Total stockholders’ equity
3,204,238

 
3,118,034

Total liabilities and stockholders’ equity
$
7,547,256

 
$
7,231,045

See accompanying notes.


3

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


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rentals
$
145,591

 
$
131,526

 
$
426,212

 
$
271,352

Interest income on loans receivable
1,805

 
1,796

 
5,463

 
4,037

Earned income from direct financing leases
837

 
708

 
2,521

 
708

Tenant reimbursement income
3,308

 
2,316

 
9,548

 
2,316

Interest income and other
754

 
501

 
4,312

 
1,816

Total revenues
152,295

 
136,847

 
448,056

 
280,229

Expenses:
 
 
 
 
 
 
 
General and administrative
11,995

 
9,946

 
33,496

 
26,064

Finance restructuring costs
(11
)
 
—

 
13,022

 
—

Merger costs
—

 
45,071

 
—

 
56,629

Property costs
5,357

 
5,067

 
17,215

 
6,334

Real estate acquisition costs
865

 
470

 
2,372

 
688

Interest
53,535

 
50,386

 
163,926

 
126,376

Depreciation and amortization
62,069

 
48,243

 
184,586

 
104,882

Impairments (recoveries)
12,727

 
—

 
42,061

 
(185
)
Total expenses
146,537

 
159,183

 
456,678

 
320,788

Income (loss) from continuing operations before other income (expense) and income tax expense
5,758

 
(22,336
)
 
(8,622
)
 
(40,559
)
Other income (expense):
 
 
 
 
 
 
 
Gain (loss) on debt extinguishment
212

 
—

 
(64,496
)
 
—

Total other income (expense)
212

 
—

 
(64,496
)
 
—

Income (loss) from continuing operations before income tax expense
5,970

 
(22,336
)
 
(73,118
)
 
(40,559
)
Income tax expense
242

 
803

 
586

 
946

Income (loss) from continuing operations
5,728

 
(23,139
)
 
(73,704
)
 
(41,505
)
Discontinued operations:
 
 
 
 

 

Income (loss) from discontinued operations
288

 
(6
)
 
3,621

 
(1,630
)
Gain on dispositions of assets
403

 
1,237

 
488

 
1,226

Income (loss) from discontinued operations
691

 
1,231

 
4,109

 
(404
)
Income (loss) before dispositions of assets
6,419

 
(21,908
)
 
(69,595
)
 
(41,909
)
Gain on dispositions of assets
1,251

 
—

 
1,683

 
—

Net income (loss)
$
7,670

 
$
(21,908
)
 
$
(67,912
)
 
$
(41,909
)
Net income (loss) per share of common stock—basic and diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.02

 
$
(0.07
)
 
$
(0.19
)
 
$
(0.19
)
Discontinued operations
—

 
—

 
0.01

 
—

Net income (loss) per share
$
0.02

 
$
(0.07
)
 
$
(0.18
)
 
$
(0.19
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
396,807,656

 
329,527,874

 
382,525,614

 
216,749,378

Diluted
397,613,583

 
329,527,874

 
382,525,614

 
216,749,378

Dividends declared per common share issued
$
0.16625

 
$
0.16410

 
$
0.49875

 
$
0.49220

See accompanying notes.

4

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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
7,670

 
$
(21,908
)
 
$
(67,912
)
 
$
(41,909
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized gains or (losses) on cash flow hedges
237

 
(320
)
 
(1,040
)
 
149

Net cash flow hedge losses reclassified to operations
333

 
120

 
987

 
331

Total comprehensive income (loss)
$
8,240

 
$
(22,108
)
 
$
(67,965
)
 
$
(41,429
)
See accompanying notes.


5

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

 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
Shares
 
Par Value
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 Shares
 
 Value
 
Total
Stockholders’
Equity
Balances, December 31, 2013
370,570,565

 
$
3,706

 
$
3,859,823

 
$
(742,915
)
 
$
(638
)
 
(206,762
)
 
$
(1,942
)
 
$
3,118,034

Net loss
—

 
—

 
—

 
(67,912
)
 
—

 
—

 
—

 
(67,912
)
Other comprehensive loss
—

 
—

 
—

 
—

 
(53
)
 
—

 
—

 
(53
)
Dividends declared on common stock
—

 
—

 
—

 
(194,187
)
 
—

 
—

 
—

 
(194,187
)
Repurchase of common shares
—

 
—

 
—

 
—

 
—

 
(266,837
)
 
(2,920
)
 
(2,920
)
Issuance of common shares
28,024,320

 
280

 
287,174

 
—

 
—

 
—

 
—

 
287,454

Embedded conversion premium of convertible notes
—

 
—

 
55,131

 
—

 
—

 
—

 
—

 
55,131

Exercise of stock options
20,000

 
—

 
183

 
—

 
—

 
—

 
—

 
183

Stock-based compensation, net
424,897

 
4

 
8,924

 
(420
)
 
—

 
—

 
—

 
8,508

Balances, September 30, 2014
399,039,782

 
$
3,990

 
$
4,211,235

 
$
(1,005,434
)
 
$
(691
)
 
(473,599
)
 
$
(4,862
)
 
$
3,204,238

See accompanying notes.

6

SPIRIT REALTY CAPITAL, INC.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(67,912
)
 
$
(41,909
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
184,586

 
108,336

Impairments
42,061

 
5,668

Amortization of deferred financing costs
4,084

 
12,457

Amortization of interest rate hedge losses and derivative net settlements
(83
)
 
(101
)
Amortization of debt (premiums) discounts
(821
)
 
5,588

Stock-based compensation expense
8,503

 
6,901

Loss (gain) on debt extinguishment
64,496

 
(1,028
)
Debt extinguishment costs
(59,069
)
 
—

Gains on dispositions of real estate and other assets, net
(2,171
)
 
(1,467
)
Non-cash revenue
(12,877
)
 
(15,191
)
Other
274

 
(41
)
Changes in operating assets and liabilities:
 
 
 
Deferred costs and other assets
(3,111
)
 
(8,262
)
Accounts payable, accrued expenses and other liabilities
(3,248
)
 
(1,826
)
Net cash provided by operating activities
154,712

 
69,125

Investing activities
 
 
 
Acquisitions/investments in real estate
(546,373
)
 
(176,080
)
Collections of principal on loans receivable and real estate assets under direct financing leases
4,641

 
13,878

Proceeds from dispositions of real estate and other assets
31,993

 
135,270

Cash acquired in connection with merger
—

 
9,400

Transfers of sale proceeds and loan principal collections (to) from restricted account
(20,240
)
 
7,018

Net cash used in investing activities
(529,979
)
 
(10,514
)
Financing activities
 
 
 
Borrowings under lines of credit
515,535

 
266,705

Repayments under lines of credit
(425,219
)
 
(115,197
)
Repayment of line of credit previously belonging to Cole II
—

 
(324,111
)
Borrowings under Convertible Notes and mortgages and notes payable
757,500

 
238,140

Repayments under mortgages and notes payable
(562,104
)
 
(33,339
)
Deferred financing costs
(20,011
)
 
(20,041
)
Proceeds from issuance of common stock, net of offering costs
287,454

 
(518
)
Proceeds from exercise of stock options
183

 
—

Offering costs paid on equity component of convertible debt
(1,609
)
 
—

Purchase of treasury stock
(2,920
)
 
(1,942
)
Consent fees paid to lenders
—

 
(5,449
)
Dividends paid to stockholders
(189,510
)
 
(85,897
)
Transfers to escrow deposits with lenders
(490
)
 
(8,155
)
Net cash provided by (used in) financing activities
358,809

 
(89,804
)
Net decrease in cash and cash equivalents
(16,458
)
 
(31,193
)
Cash and cash equivalents, beginning of period
66,588

 
73,568

Cash and cash equivalents, end of period
$
50,130

 
$
42,375

See accompanying notes.

7

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2014
(Unaudited)



Note 1. Organization
Company Organization and Operations
Spirit Realty Capital, Inc. (the "Company") is a Maryland corporation and 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 United States that is generally leased on a long-term, triple-net basis predominately to tenants engaged in retail, service and distribution industries. 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.
On July 17, 2013, the Company merged with and into Cole Credit Property Trust II, Inc. ("Cole II"), a Maryland Corporation, pursuant to the Merger Agreement between parties dated January 22, 2013 ("Merger").
The Company’s operations are carried out through its operating partnership, Spirit Realty, L.P. (the “Operating Partnership”). Spirit General OP Holdings, LLC ("OP Holdings"), one of the Company’s wholly owned subsidiaries, is the sole general partner and owns 1.0% of the Operating Partnership. The Company 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, 2014, our undepreciated gross investment in real estate and loans totaled approximately $7.71 billion, representing investments in 2,408 properties, including properties securing our mortgage loans. Of this amount, 98.6% consisted of our gross investment in real estate, representing ownership of 2,263 properties, and the remaining 1.4% consisted of commercial mortgage loans receivable secured by the remaining 145 properties or other related assets.
Recent Developments

Common Stock and Convertible Notes Offerings

On May 20, 2014, the Company completed a registered offering of 26,450,000 shares of the Company’s common stock, par value $0.01 per share, pursuant to an underwriting agreement dated May 14, 2014 (the "Common Stock Offering"). The shares sold in the offering included 3,450,000 shares sold to the underwriters pursuant to their 30-day option to purchase additional shares, which was exercised in full on May 16, 2014.

Concurrent with the Common Stock Offering, on May 20, 2014, the Company registered offerings of $402.5 million aggregate principal amount of 2.875% Convertible Senior Notes due 2019 (the “2019 Notes”) and $345.0 million aggregate principal amount 3.75% Convertible Senior Notes due 2021 (the “2021 Notes” and, together with the 2019 Notes, the “Convertible Notes”), pursuant to an underwriting agreement dated May 14, 2014 ( the "Convertible Notes Offering"). The Convertible Notes sold in the offering include $52.5 million of the 2019 Notes and $45.0 million of the 2021 Notes sold to the underwriters pursuant to their 30-day option to purchase additional Convertible Notes, which was exercised in full on May 16, 2014.

The resulting net proceeds to the Company from the Common Stock Offering and Convertible Notes Offering were approximately $271.2 million and $726.2 million, respectively, after deducting the underwriting discount and other transaction costs paid by the Company. Net proceeds raised from the concurrent public offerings were partially used to extinguish senior mortgage notes payable with an aggregate principal balance of $509.8 million, redeem $18.0 million of net-lease mortgage notes which were not tendered in connection with the Exchange Offer (defined below), repay all amounts drawn against the Credit Facility as of May 20, 2014 and to fund future acquisitions and for general corporate purposes.






8

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Spirit Master Funding Notes Exchange Offer

On May 20, 2014 (the “Settlement Date”), the Company completed its offer to exchange (the "Exchange Offer") any and all of certain net-lease mortgage notes, (the “Old Notes”) issued by indirectly-owned special purpose, bankruptcy remote subsidiaries of the Company, for new notes under an amended trust indenture and property management agreement (the “New Master Funding Notes” or "Master Funding Notes"). The Exchange Offer was subject to a minimum tender condition of at least 98% of the outstanding principal of Old Notes. Of the $912.4 million of Old Notes outstanding on the Settlement Date, $894.4 million or 98% elected to exchange their Old Notes for New Master Funding Notes and $18.0 million of the Old Notes not tendered were redeemed.

The New Master Funding Notes will maintain generally similiar structural terms as the Old Notes. The New Master Funding Notes bear interest at the same rate, amortize at a slower rate and have a 17 year extension of the legal final payment date (although the anticipated repayment date remains the same). The New Master Funding Notes are not insured by third party financial guaranty insurance as the Old Notes were, and the associated insurance premium was eliminated. The New Master Funding Notes are secured by substantially all of the assets owned by the issuer entities.

Debt Defeasance
On June 5, 2014, two indirectly owned subsidiaries of the Company defeased the loans outstanding under a master loan agreement. The original amount under the loan agreement was $545.7 million bearing interest at a fixed rate of 6.59% with a maturity date of June 5, 2016. On the defeasance date, the principal balance outstanding under the loan agreement was approximately $488.7 million. Prior to the defeasance date, the obligations under the loan agreement had been secured by 112 properties and rents therefrom leased to a significant tenant, which collateral had an aggregate gross book value of approximately $917.7 million. The Company funded the defeasance using a portion of the proceeds from the Convertible Notes Offering.
At the Market Common Stock Offering Program
On April 15, 2014, in connection with the commencement of a continuous equity offering, the Company filed with the Securities and Exchange Commission ("SEC") a prospectus supplement under which the Company may sell up to an aggregate of $350.0 million of shares of its common stock from time to time in “at the market” offerings (the “ATM Program”). The Company may sell the shares in amounts and at times to be determined by the Company, but has no obligation to sell any of the shares in the ATM Program. The ATM Program will operate pursuant to an equity distribution agreement entered into by the Company and the Operating Partnership with a number of sales agents for the offer and sale of the shares. During the second quarter of 2014, the Company sold 1,574,320 shares under the program, raising net proceeds of approximately $16.3 million. No shares were sold under the ATM Program during the third quarter of 2014.

Acquisitions and dispositions

During the nine months ended September 30, 2014, the Company purchased 241 properties, representing an aggregate gross investment in real estate properties of $572.2 million, which includes $2.4 million in revenue producing follow on investments in existing properties. During the same period, the Company sold 19 properties for $44.9 million in gross sales proceeds. See Note 3 for additional discussion of the Company's investments.

9

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Note 2. Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of Spirit Realty Capital, Inc. and its consolidated subsidiaries have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the unaudited condensed 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 accounting principles generally accepted in the United States (“GAAP”), have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The unaudited condensed consolidated financial statements include the accounts of Spirit Realty Capital, Inc. 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 subject to mortgage notes payable (see Note 5). As a result, the vast majority of the Company’s consolidated assets are held in these wholly owned special purpose entities, and are subject to debt. 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 owner or affiliate of the special purpose entity. At September 30, 2014 and December 31, 2013, assets totaling $5.5 billion and $6.1 billion, respectively, were held, and liabilities totaling $3.3 billion and $3.8 billion, respectively, were owed by these special purpose entities and are included in the accompanying condensed 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.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation (see Note 11).
Segment Reporting
Accounting Standards Codification Topic (“ASC”) 280, Segment Reporting, established standards for the manner in which public enterprises report information about operating segments. The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Real Estate Investments
Purchase Accounting and Acquisition of Real Estate - When acquiring a property for investment purposes, the Company allocates the purchase price (including acquisition and closing costs) to land, building, improvements, and equipment based on their relative fair values. For properties acquired with in-place leases, the Company allocates the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values, and acquisition costs are expensed as incurred. In making estimates of fair values for this purpose, the Company uses a number of sources, including independent appraisals and information obtained about each property as a result of its pre-acquisition due diligence and its marketing and leasing activities.
Lease Intangibles - Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above- or below-market leases. For real estate acquired subject to existing lease agreements, in-place lease intangibles are valued based on the Company’s estimates of costs related to tenant

10

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition, and are amortized on a straight-line basis over the remaining initial term of the related lease. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease. Capitalized above-market lease intangibles are amortized over the remaining initial terms of the respective leases as a decrease to rental revenue. Below-market lease intangibles are amortized as an increase in rental revenue over the remaining initial terms of the respective leases plus any fixed-rate renewal periods on those leases. Should a lease terminate early, the unamortized portion of any related lease intangible is immediately recognized in the Company’s condensed consolidated statements of operations.
Allowance for Doubtful Accounts
The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area where the property is located. In the event that the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made. The Company provided for reserves for uncollectible amounts totaling $9.0 million and $7.9 million at September 30, 2014 and December 31, 2013, respectively, against accounts receivable balances of $20.1 million and $17.6 million, respectively; receivables are recorded within deferred costs and other assets, net in the accompanying condensed consolidated balance sheets. For deferred rental revenues related to the straight-line method of reporting rental revenue, the Company performs a periodic review of receivable balances and established a provision for losses of $11.3 million and $9.6 million at September 30, 2014 and December 31, 2013, respectively, against deferred rental revenue receivables of $45.9 million and $35.3 million, respectively. The Company's periodic review includes management’s estimates of amounts that will not be realized and an assessment of the risks inherent in the portfolio, giving consideration to historical experience and industry default rates for long-term receivables.
Loans Receivable
Impairment and Allowance for Loan Losses - The Company periodically evaluates the collectability of its loans receivable, including accrued interest, by analyzing the underlying property-level economics and trends, collateral value and quality, and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted. There was no allowance for loan losses at September 30, 2014 or December 31, 2013.
A loan is placed on nonaccrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received. As of September 30, 2014 and December 31, 2013, there were no mortgages or notes on nonaccrual status.

11

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Restricted Cash and Escrow Deposits

Restricted cash and deposits in escrow, classified within deferred costs and other assets, net in the accompanying condensed consolidated balance sheets consisted of the following at September 30, 2014 and December 31, 2013:
 
September 30,
2014
 
December 31,
2013
Collateral deposits (1)
$
21,597

 
$
21,816

Tenant improvements, repairs, and leasing commissions (2)
13,176

 
10,297

Master trust release / title company escrow (3)
21,350

 
21,893

Loan impounds (4)
1,114

 
2,018

Other (5)
1,400

 
2,667

 
$
58,637

 
$
58,691

(1) Funds held in reserve by lenders which, at their sole discretion, can be applied to the repayment of debt.  Any funds remaining on deposit after the debt is paid in full are released to the borrower. Included in this total is $8.2 million of lender controlled restricted cash held on the four defaulted CMBS loans (see Note 5).
(2) Deposits held by lenders that are reserved to fund tenant improvements/repairs on collateral properties or when leasing commissions are incurred to secure a new tenant. Included in this total is $5.3 million in restricted cash held on the four defaulted CMBS loans (see Note 5).
(3) Includes net sales proceeds from property dispositions held as collateral that can be released upon qualified re-investment.
(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 within the following month after debt service requirements are met. Included in this total is $0.2 million in restricted cash held on the four defaulted CMBS loans (see Note 5).

A significant amount of these reserves were established in connection with obtaining lender consents relating to our initial public offering during 2012 and Merger during 2013.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. 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 condensed 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 condensed consolidated statements of operations. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary is subject to federal, state, and local taxes, which are not material.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or the SEC that are adopted by the Company as of the specified effective date. Unless otherwise discussed, 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 April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's

12

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The Company has early adopted the provisions of ASU 2014-08 beginning with the period ended March 31, 2014, and has applied the provisions prospectively.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This new guidance establishes a principles-based approach for accounting for revenue from contracts with customers. Lease contracts covered by Topic 840, Leases, are excluded from the scope of this new guidance. This new standard is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of this new standard on its financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years beginning after December 15, 2015. The Company does not anticipate this standard will have a material impact on its financial statements upon adoption.





















13

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Note 3. Investments
Real Estate Investments
At September 30, 2014 and December 31, 2013, the Company’s gross investment in real estate properties and loans, including real estate assets held for sale, totaled approximately $7.71 billion and $7.24 billion, respectively. These investments are comprised of 2,408 and 2,186, respectively, owned or financed properties that are geographically dispersed throughout 49 states. Only one state, Texas, with a 12.9% investment, accounted for more than 10% of the total dollar amount of the Company’s investment portfolio. At September 30, 2014 and December 31, 2013, respectively, the Company’s gross investment portfolio was comprised of 2,263 and 2,041 owned properties. The Company also held mortgage loans receivable secured by 145 properties with aggregate carrying amounts of $111.0 million and $117.3 million as of September 30, 2014 and December 31, 2013, respectively. Other unsecured loans receivable with aggregate carrying amounts of $0.4 million were also held as of September 30, 2014 and December 31, 2013.
During the nine months ended September 30, 2014, the Company had the following gross real estate and loan activity:
 
Number of
Properties
Owned or
Financed
 
Dollar
Amount of
Investments (1)
 
 
 
(In Thousands)
Balance, December 31, 2013
2,186

 
$
7,235,732

Acquisitions/improvements
241

 
573,050

Dispositions of real estate(2) (Note 11)
(19
)
 
(46,744
)
Principal payments and payoffs
—

 
(4,416
)
Impairments
—

 
(41,539
)
Write off of gross lease intangibles
—

 
(8,472
)
Loan premium amortization and other
—

 
(2,121
)
Balance, September 30, 2014
2,408

 
$
7,705,490

(1) 
The dollar amount of investments includes the gross investment in land, buildings and lease intangibles, as adjusted for any impairment, related to properties owned and the carrying amount of loans receivable and real estate assets held under direct financing leases.
(2) The total accumulated depreciation and amortization associated with dispositions of real estate was $6.7 million for the nine months ended September 30, 2014.

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 lease agreement. At September 30, 2014, 40 of the Company’s properties were vacant, not subject to a lease and in the Company’s possession; seven of these properties were held for sale. At December 31, 2013, 21 properties were vacant, not subject to a lease and in the Company’s possession; six of these properties were held for sale.
Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of operating leases at September 30, 2014 (in thousands):

14

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Scheduled Future Rental Payments
September 30,
2014
Remainder of 2014
$
143,982

2015
570,225

2016
553,461

2017
538,290

2018
523,022

Thereafter
3,820,618

Total future minimum rentals
$
6,149,598

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 consumer price index ("CPI").
Certain of the Company’s leases contain tenant 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 under GAAP.
Loans Receivable
The following table details loans receivable, net of premium, as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30,
2014
 
December 31,
2013
Mortgage - principal
$
97,935

 
$
102,315

Mortgage - premium
13,081

 
14,976

    Mortgages, net
111,016

 
117,291

Other notes - principal
393

 
430

Total loans receivable, net
$
111,409

 
$
117,721

Real Estate Assets Under Direct Financing Leases
The components of investment assets held under direct financing leases as of September 30, 2014 and December 31, 2013 were as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Minimum lease payments receivable
$
16,809

 
$
19,555

Estimated residual value of leased assets
55,858

 
57,739

Unearned income
(16,013
)
 
(18,534
)
Total
$
56,654

 
$
58,760


15

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

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, 2014:
 
Number of
Properties
 
Carrying
Value
 
 
 
(In Thousands)
Balance, December 31, 2013
11

 
$
19,611

Transfers from real estate investments
19

 
59,372

Sales (Note 11)
(10
)
 
(24,863
)
Balance, September 30, 2014 (a)
20

 
$
54,120

(a) Includes 15 properties with a net carrying amount of $44.6 million in which its operating results are reported in continuing operations.
The following table is a reconciliation of the major classes of assets and liabilities from discontinued operations included in real estate assets held for sale on the condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Land and improvements
$
5,557

 
$
10,003

Buildings and improvements
6,009

 
14,178

Total real estate investments
11,566

 
24,181

Less: Accumulated depreciation
(2,167
)
 
(4,819
)
Intangible lease assets, net
460

 
697

  Other
86

 
—

Total assets
$
9,945

 
$
20,059

 
 
 
 
Liabilities
 
 
 
Intangible lease liabilities, net
$
448

 
$
448

Total liabilities
$
448

 
$
448

Impairments
The following table summarizes total impairment losses recognized for the three and nine months ended September 30, 2014 and 2013 (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Real estate and intangible asset impairment
$
10,783

 
$
1,963

 
$
37,030

 
$
5,547

Write-off of lease intangibles due to lease terminations
1,910

 
—

 
4,509

 
488

Loans receivable recovery
—

 
—

 
—

 
(367
)
Other impairment
34

 
—

 
522

 
—

Total impairment loss continuing and discontinued operations
$
12,727

 
$
1,963

 
$
42,061

 
$
5,668



16

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Note 4. Lease Intangibles, net
The following table details lease intangible assets and liabilities, net of accumulated amortization, as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30,
2014
 
December 31,
2013
In-place leases
$
675,926

 
$
663,027

Above-market leases
100,112

 
95,118

Less: accumulated amortization
(176,163
)
 
(140,024
)
Intangible lease assets, net
$
599,875

 
$
618,121

 
 
 
 
Below-market leases
$
254,034

 
$
243,237

Less: accumulated amortization
(34,408
)
 
(23,123
)
Intangible lease liabilities, net
$
219,626

 
$
220,114

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases was $4.6 million and $1.4 million for the nine months ended September 30, 2014 and 2013 and $1.6 million and $0.7 million for the three months ended September 30, 2014 and 2013, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $40.0 million and $19.8 million for the nine months ended September 30, 2014 and 2013 and $13.1 million and $10.9 million for the three months ended September 30, 2014 and 2013, respectively. The increase in above- and below-market lease and lease-in-place amortization was primarily attributable to the properties acquired in connection with the Merger.

Note 5. Debt
The Company's debt is summarized below:
 

Weighted Average Effective
Interest Rates (1)
 
Weighted Average Stated Interest Rate (2)
 
Weighted Average Maturity (4)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
(in Years)
 
(In Thousands)
Revolving credit facilities
NM

 
2.81
%
 
1.7
 
$
125,436

 
$
35,120

Master Trust Notes
5.81
%
 
5.35
%
 
6.8
 
1,204,787

 
1,241,437

CMBS - fixed-rate
5.34
%
 
5.84
%
 
3.1
 
1,868,518

 
2,387,532

CMBS - variable-rate (3)
3.50
%
 
3.28
%
 
2.4
 
110,771

 
111,018

Unsecured fixed rate promissory note
9.12
%
 
7.00
%
 
7.3
 
1,340

 
1,442

Convertible Notes
4.80
%
 
3.28
%
 
5.5
 
747,500

 
—

 
 
 
 
 
 
 
 
 
 
Total debt before net debt (discount) or premium
5.40
%
 
5.06
%
 
4.7
 
4,058,352

 
3,776,549

Unamortized net debt (discount) or premium
 
 
 
 
 
 
(50,524
)
 
1,669

Total debt, net
 
 
 
 
 
 
$
4,007,828

 
$
3,778,218


(1) The effective interest rates include amortization of debt discount/premium and amortization of deferred financing costs calculated for the three months ended September 30, 2014.
(2) Represents the weighted average stated interest rate based on the outstanding principal balance as of September 30, 2014.
(3) Variable-rate notes are predominately hedged with interest rate swaps (see Note 6).
(4) Represents the weighted average maturity based on the outstanding principal balance as of September 30, 2014.

17

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Revolving Credit Facilities
$400 million Credit Facility - On July 17, 2013, the Operating Partnership and various affiliates thereof, entered into a three-year credit agreement ("Credit Facility") with various lenders and terminated the Company's previous $100.0 million secured revolving credit facility. The Operating Partnership may obtain loans and/or extensions of credit in an aggregate amount not to exceed $400.0 million. The initial term expires on July 17, 2016 and may be extended for an additional 12 months subject to the satisfaction of specified requirements. The Credit Facility bears interest, at the Operating Partnership’s option, of either (i) the “Base Rate” (as defined in the Credit Facility) plus 1.00% to 2.00%; or (ii) LIBOR plus 2.00% to 3.00%, depending on the Operating Partnership’s leverage ratio. The Operating Partnership is also required to pay a fee on the unused portion of the Credit Facility at a rate of either 0.25% or 0.35% per annum, based on percentage thresholds for the average daily unused balance during a fiscal quarter, which amounted to $0.4 million and $0.9 million for the three and nine months ended September 30, 2014, respectively.
As a result of entering into the Credit Facility, the Company incurred origination costs of $4.5 million. These costs are being amortized to interest expense, on a straight-line basis, over the remaining initial term of the Credit Facility. At September 30, 2014, $2.7 million of the $4.5 million is included in deferred costs and other assets, net on the accompanying condensed consolidated balance sheet. The interest rate, excluding the impact of non-cash amortization of deferred financing costs and non-utilization fee of the Credit Facility, was 2.65% for the three months ended September 30, 2014. As of September 30, 2014, there was $110.0 million outstanding on the Credit Facility and $290.0 million of borrowing capacity available.
The Company guarantees the Operating Partnership's obligations under the Credit Facility and, to the extent not prohibited by law, all of its assets and the Operating Partnership's assets, other than interests in subsidiaries that are contractually prohibited from being pledged, are pledged as collateral for obligations under the Credit Facility.
The ability to borrow under the Credit Facility is subject to the Operating Partnerships' ongoing compliance with a number of customary financial covenants. As of September 30, 2014, the Operating Partnership was in compliance with these financial covenants.
Line of Credit - As of September 30, 2014, a special purpose entity indirectly owned by the Company had access to a $40.0 million secured revolving credit facility (“Line of Credit”). The initial term of the Line of Credit expires in March 2016, and each advance under the Line of Credit has a 24-month term. The interest rate is determined on the date of each advance and is the greater of (i) the stated prime rate or (ii) the floor rate, which was amended and reduced during the third quarter 2014, equal to 3.50%. The interest rate with respect to each advance resets on the annual anniversary date of each advance, and is subject to the same terms as above. As of September 30, 2014, $15.4 million was outstanding on the Line of Credit under three separate advances, secured by 3 properties, at a weighted average stated rate of 3.9% and an effective interest rate for the three months ended September 30, 2014 of 4.20%. Each advance under the Line of Credit is secured by those assets specified as collateral for such advance. The ability to borrow under the Line of Credit is subject to the Company's and special purposes entity's ongoing compliance with a number of customary financial covenants. As of September 30, 2014, the Company and if applicable the special purpose entity were in compliance with these financial covenants.

Master Trust Notes

On May 20, 2014, the Company completed its Exchange Offer for the outstanding principal balance of the Old Notes issued by indirect wholly-owned subsidiaries Spirit Master Funding, LLC, Spirit Master Funding II, LLC and Spirit Master Funding III, LLC, under the Company's Spirit Master Funding program. The terms of the New Master Funding Notes remain generally similar to the Old Notes including the interest rate and anticipated final repayment dates; however, the Master Funding Notes generally amortize more slowly than the Old Notes and have a legal final payment date that is 17 years later than the Old Notes. The Master Funding Notes are not insured by third party financial guaranty insurance as were the Old Notes and the Company no longer pays the associated insurance premium. The revisions to the Spirit Master Funding Program, in connection with the issuance of the Master Funding Notes, also generally provide the Company more administrative flexibility as property manager and special servicer. The Master Funding Notes are cross collateralized by the assets of the issuers and are non-recourse.

18

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

As of September 30, 2014, the Master Funding Notes had an outstanding principal balance of $877.8 million and were secured by 714 properties, including 82 properties securing mortgage loans. The Master Funding Notes have a weighted average stated interest rate of 5.58% and weighted average maturity of 6.6 years as of September 30, 2014.
In December 2013, Spirit Master Funding VII, LLC ("SMF VII") issued $330.0 million net-lease mortgage notes under a new Spirit Master Funding securitization trust, with substantially similar terms to the existing Spirit Master Funding trust. The issue was comprised of $125.0 million of 3.89% Series 2013-1 Class A interest only, net-lease mortgage notes expected to be repaid in December 2018 and $205.0 million of 5.27% Series 2013-2 Class A amortizing net-lease mortgage notes expected to be repaid in December 2023. The two series of notes are cross collateralized and are collectively referred to as the "SMF Notes" and together with the Master Funding Notes, the "Master Trust Notes". The SMF Notes are secured by all of the assets of SMF VII and are non-recourse. As of September 30, 2014, the SMF Notes had an outstanding balance of $327.0 million and were secured by 316 properties, including 77 properties securing mortgage loans. The SMF Notes carried an investment grade rating at issuance and have a weighted average stated interest rate of 4.74% and a weighted average maturity of 7.3 years as of September 30, 2014.
CMBS
As of September 30, 2014, indirectly owned subsidiaries of the Company were borrowers under 232 fixed and 26 variable rate non-recourse loans that had been securitized into commercial mortgage backed securities ("CMBS") that are secured by the borrowers' respective leased properties and related assets. The stated interest rates as of September 30, 2014 for the fixed rate notes ranged from 3.90% to 10.88% with a weighted average stated rate of 5.84%. The variable rate notes ranged from 2.66% to 3.66% with a weighted average stated rate of 3.28%. As of September 30, 2014, the fixed and variable rate loans have balances outstanding of $1.9 billion and $110.8 million, respectively, and are secured by 735 and 123 properties, respectively.

During the quarter ended September 30, 2014, the servicer of one such CMBS loan notified the Company that conditions exist under covenants contained in the loan agreement that permit the servicer to retain rents in excess of debt service requirements (“Excess Cash”) as additional deposited collateral beginning as of September 30, 2013. As of September 30, 2014, the Excess Cash amount is approximately $0.6 million per month. In the event the servicer requires the return of previously distributed Excess Cash, such funds would be classified as additional collateral deposits in restricted cash in the accompanying condensed consolidated balance sheet.

19

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

As of September 30, 2014, certain borrowers were in default under the loan agreements relating to four separate CMBS loans where the collateral securing the respective loans was no longer generating sufficient revenue to pay the required debt service. Each defaulted borrower is a special purpose entity and the sole owner of the collateral securing the loan obligations. As of September 30, 2014, the aggregate principal balance under the defaulted CMBS loans was $74.0 million, which includes $1.0 million of interest capitalized to principal and $0.2 million of interest payable reflected in accounts payable, accrued expenses and other liabilities on the accompanying condensed consolidated balance sheet. The following table provides key elements of the defaulted mortgage loans (dollars in thousands):
Industry
 
Properties
 
Net Book Value
 
Monthly Base Rent
 
Outstanding Principal
 
Restricted Cash (4)
 
Stated Rate
 
Default Rate
 
Accrued Interest
 
Drug Stores / Pharmacies
 
1
 
$
1,040

 
$
—

 
$
1,227

 
$
78

 
5.67
%
 
9.67
%
 
$
30

(1) 
Home Furnishings
 
1
 
3,331

 
36

 
16,732

 
3,537

 
6.88
%
 
10.88
%
 
807

(1) 
Sporting Goods
 
1
 
3,397

 
—

 
4,067

 
609

 
5.52
%
 
9.52
%
 
161

(1) 
Manufacturing
 
9
 
39,595

 
83

 
51,963

 
9,497

 
5.85
%
 
9.85
%
 
219

(2) 
 
 
12
 
$
47,363

 
$
119

 
$
73,989

 
$
13,721

 
6.06
%
(3) 
10.06
%
(3) 
$
1,217

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Interest capitalized to principal
 
 
 
 
 
 
 
 
 
(2) Interest in accounts payable, accrued expenses and other liabilities
 
 
 
 
 
(3) Weighted average interest rate
 
 
 
 
 
 
 
 
 
(4) Represents restricted cash controlled by the lender that may be applied to reduce the outstanding principal balance
Convertible Senior Notes
On May 20, 2014, the Company completed registered offerings of $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, beginning on November 15, 2014. The 2019 Notes will mature on May 15, 2019 and the 2021 Notes will mature on May 15, 2021. The Company loaned the net proceeds from the Convertible Notes Offering to the Operating Partnership in exchange for promissory notes with substantially the same terms as the Convertible Notes.
The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of Spirit Realty Capital'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). Earlier conversion may be triggered if shares of Spirit Realty Capital common stock trade higher than the 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 option feature for each of the Convertible Notes. The discount is shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying condensed consolidated balance sheets. The equity component of the conversion feature is recorded in additional paid-in-capital, net of financing costs. The discount will be 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, 2014, the unamortized discount was $53.7 million. The Company also incurred $19.6 million in deferred financing costs in connection with the Convertible Notes Offering. 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.


20

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Debt Extinguishment

Net proceeds raised from the concurrent registered Convertible Notes Offering and Common Stock Offerings in May 2014, were partially used to retire senior mortgage notes payable with an aggregate principal balance of $509.8 million, redeem $18.0 million of Old Notes that were not tendered in the Exchange Offer, and repay all amounts then drawn against the Credit Facility. The Company defeased approximately $488.7 million aggregate principal amount of senior mortgage indebtedness included in the total above. The defeased notes had contractual interest rates of 6.59% and upcoming maturities in 2016. During the third quarter of 2014, the Company recognized a $0.2 million gain on debt extinguishment resulting from a property sale, which was encumbered by CMBS debt assumed by the buyer. As a result of these transactions, the Company recognized a loss on extinguishment of debt of approximately $64.5 million during the nine months ended September 30, 2014.

Debt Maturities

As of September 30, 2014, scheduled debt maturities of the Company’s revolving credit facilities, mortgages and notes payable and Convertible Notes, including balloon payments, are as follows (in thousands):
 
Scheduled
Principal
 
Balloon
Payment
 
Total
Remainder of 2014 (1)
$
8,202

 
$
103,750

 
$
111,952

2015
31,783

 
245,782

 
277,565

2016
30,011

 
409,939

 
439,950

2017
28,331

 
829,778

 
858,109

2018
27,284

 
248,851

 
276,135

Thereafter
96,334

 
1,998,307

 
2,094,641

Total
$
221,945

 
$
3,836,407

 
$
4,058,352

(1) The balloon payment balance in 2014 includes $74.0 million for the acceleration of principal payable following an event of default under four separate CMBS loans.
Balloon payments subsequent to 2018 are as follows: $452.0 million due in 2019, $288.0 million due in 2020, $554.8 million due in 2021, $351.4 million due in 2022, $352.1 million due in 2023.

The following table summarizes interest expense on the related borrowings (in thousands):
 
Three Months 
 Ended September 30,
 
Nine Months 
 Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest expense – revolving credit facilities
$
538

 
$
1,196

 
$
2,358

 
$
1,572

Interest expense – mortgages and notes payable
44,858

 
47,196

 
149,231

 
106,284

Interest expense – Convertible Notes
6,098

 
—

 
8,970

 
—

Interest expense – other
32

 
8

 
104

 
475

Amortization of deferred financing costs
1,787

 
2,327

 
4,084

 
12,457

Amortization of debt (premium)/discount
222

 
(341
)
 
(821
)
 
5,588

Total interest expense
$
53,535

 
$
50,386

 
$
163,926

 
$
126,376

Debt (premium)/discount net is amortized to interest expense using the effective interest method over the terms of the related notes. The financing costs related to the establishment of debt are deferred and amortized to interest expense using the effective interest method over the term of the related debt instrument. Unamortized deferred financing costs totaled $39.7 million and $23.8 million at September 30, 2014 and December 31, 2013, respectively, and are included in deferred costs and other assets, net on the accompanying condensed consolidated balance sheets.

21

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Note 6. 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 in the accompanying condensed consolidated balance sheets. 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 accumulated other comprehensive loss (“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 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
 
Interest
Rate
 
Effective
Date
 
Maturity
Date
 
September 30,
2014
 
December 31,
2013
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
10,879

 
4.62
%
 
06/28/12
 
07/06/17
 
$
(23
)
 
$
(42
)
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
6,708

 
5.75
%
 
07/17/13
 
03/01/16
 
(215
)
 
(326
)
Interest Rate Swap
 
Accounts payable, accrued expenses and other liabilities
 
$
32,400

 
3.15
%
 
07/17/13
 
09/05/15
 
(125
)
 
(178
)
Interest Rate Swaps(a)
 
Accounts payable, accrued expenses and other liabilities
 
$
61,758

 
5.14
%
 
01/02/14
 
12/13/18
 
(399
)
 
(246
)
 
 
 
 
 
 
 
 
 
 
 
 
$
(762
)
 
$
(792
)
(a) Represents a tranche of eight individual interest rate swap agreements with notional amounts ranging from $7.6 million to $7.9 million. The swap agreements contain the same payment terms, stated interest rate, effective date, and maturity date.

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, 2014 and 2013, 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
 
2014
 
2013
 
2014
 
2013
Interest rate swaps
 
$
237

 
$
(320
)
 
$
(1,040
)
 
$
149

 
 
 
 
 
 
 
 
 
 
 
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
 
2014
 
2013
 
2014
 
2013
Interest expense
 
$
(333
)
 
$
(120
)
 
$
(987
)
 
$
(309
)
General and administrative expense
 
—

 
—

 
—

 
(22
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain or (Loss) Recognized in
Operations on Derivative
(Ineffective Portion)
 
 
Three Months 
 Ended September 30,
 
Nine Months 
 Ended September 30,
Location of Gain or (Loss) Recognized in Operations on Derivatives
 
2014
 
2013
 
2014
 
2013
General and administrative expense
 
$
5

 
$
(22
)
 
$
2

 
$
32

Approximately $1.1 million of the remaining balance in AOCL is estimated to be reclassified as an increase to interest expense during the next 12 months. The Company does not enter into derivative contracts for speculative or trading purposes.

22

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with counterparties it considers credit-worthy. As of September 30, 2014 and December 31, 2013, there were no termination events or events of default related to the interest rate swaps.

Note 7. Stockholders’ Equity

Issuance of Common Stock

In May 2014, the Company issued 26.5 million shares of common stock at a price of $10.69 per share, including 3.5 million shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After underwriting discounts and other offering costs paid by the Company, net proceeds totaled $271.2 million.

During the second quarter of 2014, the Company sold 1.6 million shares of its common stock at the weighted average share price of $10.70 under its ATM Program, for net proceeds of $16.3 million. No shares were sold under the ATM progam during the third quarter of 2014.

Treasury Shares

During the third quarter of 2014, portions of awards of restricted common stock granted to certain of the Company's officers and other employees vested. The vesting of these shares resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the incentive award plan (see Note 13), certain executive officers and employees elected to surrender 0.3 million shares valued at $2.9 million to pay some or all of the associated minimum statutory tax withholdings. The surrendered shares are held as treasury stock and included in stockholders' equity.
Dividends Declared
For the nine months ended September 30, 2014, our Board of Directors declared the following dividends:
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount (1)
 
Payment Date
 
 
 
 
 
 
(in thousands)
 
 
March 18, 2014
 
$
0.16625

 
March 31, 2014
 
$
61,629

 
April 15, 2014
June 16, 2014
 
$
0.16625

 
June 30, 2014
 
$
66,299

 
July 15, 2014
September 16, 2014
 
$
0.16625

 
September 30, 2014
 
$
66,259

 
October 15, 2014

(1) Excludes estimated forfeitures for dividends declared on employee restricted stock awards that are reported in general and administrative on the accompanying condensed consolidated statements of operations.
The dividend declared on September 16, 2014 was paid on October 15, 2014 and is included in accounts payable, accrued expenses and other liabilities as of September 30, 2014.

Note 8. Commitments and Contingencies
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are insured against such claims.
As of September 30, 2014, 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, 2014, the Company had commitments totaling $95.8 million, of which $93.4 million relates to future acquisitions and the remainder to fund improvements on properties the Company currently owns. The Company expects $94.4 million of these commitments will be funded by December 31, 2014. In addition, the Company is

23

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2014
(Unaudited)


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.
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 financial statements.

Note 9. Fair Value Measurements
The Company’s assets and liabilities that are required to be measured at fair value in the accompanying condensed consolidated financial statements are summarized below.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
 
 
 
Fair Value Hierarchy Level
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2014
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(762
)
 
$
—

 
$
(762
)
 
$
—

December 31, 2013
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps financial liabilities
$
(792
)
 
$
—

 
$
(792
)
 
$
—

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 equity index levels. These measurements are classified as Level 2 of the fair value hierarchy.
The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
 
 
 
 
 
Fair Value Hierarchy Level
 
Impairment
Charges (1)
Description
Fair Value
 
Dispositions
 
Level 1
 
Level 2
 
Level 3
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
$
38,270

 
$
—

 
$
—

 
$
—

 
$
38,270

 
$
(21,474
)
Lease intangible assets
720

 
—

 
—

 
—

 
720

 
(5,546
)
Long-lived assets held for sale
31,018

 
(9,264
)
 
—

 
—

 
40,282

 
(15,041
)
 
 
 
 
 
 
 
 
 
 
 
$
(42,061
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Lease intangible assets
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(182
)
Long-lived assets held for sale
11,198

 
(26,832
)
 
—

 
—

 
38,030

 
(7,134
)
 
 
 
 
 
 
 
 
 
 
 
$
(7,316
)
(1) Impairment charges are presented for the nine months ended September 30, 2014 and for the year ended December 31, 2013.
The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; recently

24

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

quoted bid or ask prices, or market 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.
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, 2014 and December 31, 2013. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
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 fair value on the accompanying condensed consolidated balance sheets.
The estimated fair values of the fixed-rate mortgage and other loans receivable, revolving credit facilities, fixed-rate mortgages and notes payable and Convertible Notes have been derived based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These financial instruments were measured using a market approach from nationally recognized financial institutions with market observable inputs such as interest rates and credit analytics, which 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, 2014
 
December 31, 2013
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Loans receivable, net
$
111,409

 
$
118,044

 
$
117,721

 
$
131,587

Revolving credit facilities
125,436

 
125,334

 
35,120

 
34,911

Mortgages and notes payable, net
3,188,547

 
3,359,620

 
3,743,098

 
3,892,621

Convertible Notes, net (1)
693,845

 
728,013

 
—

 
—

(1) The carrying amount of the Convertible Notes is net of an embedded conversion premium totaling $53.7 million.

Note 10. Significant Credit and Revenue Concentration

As of September 30, 2014 and December 31, 2013, the Company’s real estate investments are leased to 421 and 377 tenants, respectively, that engage in retail, service and distribution activities across various industries throughout the United States. Shopko Stores/Shopko Hometown (“Shopko”), operates in the general merchandise industry and is the Company’s largest tenant as a percentage of total revenue. Total revenues from Shopko for the three months ended September 30, 2014 and 2013, contributed 14.3% and 14.4% of the Company's total revenues (from both continuing and discontinued operations), respectively. No other tenant contributed 10% or more of the Company’s total revenues during any of the periods presented. As of September 30, 2014 and December 31, 2013, the properties that are operated by Shopko represent approximately 13.5% and 14.4%, respectively, of the Company’s total investment portfolio.

Note 11. Discontinued Operations

In April 2014, the FASB issued ASU 2014-08, which amends the requirements for reporting discontinued operations (see Note 2). Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The Company has early adopted the provisions of ASU 2014-08 beginning with the period ended March 31, 2014, and will apply the provisions prospectively. Properties that were reported as held for sale as of December 31, 2013, will continue to be reported under the prior standards and will be presented in discontinued operations until they are disposed of.

25

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

As a result, net gains or losses from the disposition of these properties, as well as the current and prior period operations, of these properties will continue to be reclassified to discontinued operations. The results of discontinued operations for the three and nine months ended September 30, 2014 and 2013, are summarized below (dollars in thousands): 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rent
$
300

 
$
2,811

 
$
917

 
$
7,261

Non-cash rent
27

 
141

 
—

 
16

    Other
3

 
306

 
2,953

 
313

Total revenues
330

 
3,258

 
3,870

 
7,590

Expenses:
 
 
 
 
 
 
 
General and administrative
1

 
(11
)
 
13

 
5

Property costs
41

 
424

 
236

 
763

Interest
—

 
47

 
—

 
241

Depreciation and amortization
—

 
864

 
—

 
3,454

Impairments
—

 
1,963

 
—

 
5,853

Total expenses
42

 
3,287

 
249

 
10,316

Gain (loss) from discontinued operations before other income
288

 
(29
)
 
3,621

 
(2,726
)
Other income:
 
 
 
 
 
 
 
Gain on debt extinguishment
—

 
—

 
—

 
1,028

Other
—

 
23

 
—

 
68

Total other income
—

 
23

 
—

 
1,096

Income (loss) from discontinued operations
288

 
(6
)
 
3,621

 
(1,630
)
Gain on dispositions of assets
403

 
1,237

 
488

 
1,226

Total discontinued operations
$
691

 
$
1,231

 
$
4,109

 
$
(404
)
 Number of properties disposed of during period (a)
1

 
7

 
6

 
17

 
 
 
 
 
 
 
 
(a) During the nine months ended September 30, 2014, 19 properties were sold, but only six of them were held for sale at December 31, 2013 and not subject to early adoption of ASU 2014-08 and are recorded as discontinued operations.


26

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Note 12. Supplemental Cash Flow Information
 
Nine Months Ended September 30,
 
2014
 
2013
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
(in thousands)
Distributions declared and unpaid
$
(66,259
)
 
$
(50,194
)
Real estate properties acquired under 1031 exchange
26,677

 
—

Real estate properties sold under 1031 exchange
(5,893
)
 
—

Gross equity component of Convertible Notes
(56,740
)
 
—

Net assets acquired in Merger in exchange for common stock
—

 
1,735,682

Common stock registered in exchange for net assets acquired
—

 
(2,025,736
)
Reduction of debt included in consideration on sale of certain real estate properties
5,001

 
149,156

Reduction of debt, net of assets surrendered to lender
—

 
1,069

Accrued interest capitalized to principal (1)
997

 
—

Accrued performance share dividend rights
(420
)
 
(73
)
Accrued deferred financing costs
—

 
(1,057
)
(1) Accrued and overdue interest on certain CMBS notes that have been intentionally placed in default.
Note 13. Incentive Award Plan and Stock Option Plan
Under the Company’s Incentive Award Plan (the “Plan”), the Company may grant equity incentive awards to eligible employees, directors and other service providers. Awards under the Plan may be in the form of stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, performance awards, stock payment awards, performance share awards, LTIP units and other incentive awards. If an award under the Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the Plan. As of September 30, 2014, 2.5 million shares remained available for award under the Plan.
Restricted Shares of Common Stock
During the nine months ended September 30, 2014, the Company granted 0.4 million shares under the Plan to certain named executive officers and employees. The Company recorded $4.0 million in deferred compensation associated with these grants. As of September 30, 2014, there were approximately 1.3 million non-vested restricted shares outstanding.
Performance Share Awards
During the nine months ended September 30, 2014, in connection with the 2014 bonus program, the Compensation Committee of the Board of Directors approved an initial target grant of 242,883 performance shares to the named executive officers of the Company. The performance period of this grant runs from January 1, 2014 through December 31, 2016. Pursuant to the performance share award agreement, each participant is eligible to vest in and receive shares of the Company's common stock based on the initial target number of shares granted multiplied by a percentage range between 0% and 250%. The percentage range is based on the attainment of total shareholder return of the Company compared to a specified peer group of companies during the performance period. In addition, final shares issued under each performance share award entitle its holder to a cash payment equal to the aggregate dividends that would have been outstanding on each dividend record date over the performance period as if they had been issued and outstanding on those dates. Based on the grant date fair value, the Company expects to recognize $3.3 million in compensation expense on a straight-line basis over the requisite service period associated with this grant.
As of September 30, 2014, under each separate annual performance award, the Company's total shareholder return compared to the specified peer group during the performance periods would have resulted in the release of 1.5 million

27

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

shares, in the aggregate. In addition, approximately $0.6 million in dividend rights have been accrued. The projected shares to be released are not considered issued under the Plan until the performance period has ended and the actual number of shares to be released is determined. The performance shares and dividend rights are subject to forfeiture in the event of a non-qualifying termination of a participant prior to the performance period end date.
Stock compensation
For the three and nine months ended September 30, 2014, the Company recognized $3.0 million and $8.5 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. For the three and nine months ended September 30, 2013, the Company recognized $2.8 million and $6.9 million, respectively, in stock-based compensation expense.
As of September 30, 2014 and December 31, 2013, the remaining unamortized stock-based compensation expense, including amounts relating to the performance awards, totaled $14.7 million and $15.6 million, respectively, 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.


28

SPIRIT REALTY CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements - (continued)
September 30, 2014
(Unaudited)

Note 14. 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 common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares 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 nonforfeitable 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 and net income attributable to common stockholders in the computation of income per share for each. The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted income per share (dollars in thousands):
 
Three Months 
 Ended September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Basic and diluted income (loss):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
5,728

 
$
(23,139
)
 
$
(73,704
)
 
$
(41,505
)
Gain on dispositions of assets
1,251

 
—

 
1,683

 
—

Less: income attributable to unvested restricted stock
(215
)
 
(303
)
 
(882
)
 
(1,001
)
Income (loss) used in basic and diluted income (loss) per share from continuing operations
6,764

 
(23,442
)
 
(72,903
)
 
(42,506
)
Income (loss) from discontinued operations
691

 
1,231

 
4,109

 
(404
)
Net income (loss) attributable to common stockholders used in basic and diluted income (loss) per share
$
7,455

 
$
(22,211
)
 
$
(68,794
)
 
$
(42,910
)
 
 
 
 
 
 
 
 
Basic and diluted weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
398,799,661

 
331,946,412

 
384,485,286

 
219,005,588

Less: unvested weighted average shares of restricted stock
(1,992,005
)
 
(2,418,538
)
 
(1,959,672
)
 
(2,256,210
)
Weighted average number of shares outstanding used in basic income (loss) per share
396,807,656

 
329,527,874

 
382,525,614

 
216,749,378

 
 
 
 
 
 
 
 
Dilutive weighted average shares of common stock (a)
 
 
 
 
 
 
 
Unvested performance shares
800,717

 
—

 
—

 
—

Stock options
5,210

 
—

 
—

 
—

Weighted average number of shares of common stock used in dilutive income (loss) per share
397,613,583

 
329,527,874

 
382,525,614

 
216,749,378

 
 
 
 
 
 
 
 
Potentially dilutive shares of common stock
 
 
 
 
 
 
 
Unvested shares of restricted stock
761,523

 
607,505

 
787,546

 
761,617

Unvested performance shares
—

 
94,711

 
736,104

 
31,917

Stock options
—

 
—

 
5,033

 
—

Total
761,523

 
702,216

 
1,528,683

 
793,534

(a)  Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.
 
 
The Company intends to satisfy its exchange obligation for the principal amount of the Convertible Notes to the exchange note holders entirely in cash. As the Company intends to settle the principal amount of the Convertible Notes in cash, the "if-converted" method does not apply and the treasury stock method is being used. As the Company's stock price is below the conversion price, there are no potentially dilutive shares associated with the Convertible Notes.

29
Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Exchange Act. When used in this quarterly report, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•
general business and economic conditions;
•
continued volatility and uncertainty in the credit markets and broader financial markets, including potential fluctuations in the consumer price index;
•
our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate, integrate and manage diversifying acquisitions or investments;
•
the nature and extent of future competition;