Edgar Filing: Spirit Realty Capital, Inc.

10-Q

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, 2015



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	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 2, 2015, there were 441,394,341 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.

SPIRIT REALTY CAPITAL, INC.

INDEX



Glossary	3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014	5
Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (Unaudited)	6
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014 (Unaudited)	7
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2015 (Unaudited)	8
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (Unaudited)	9
Notes to Consolidated Financial Statements (Unaudited)	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	60
Item 4. Controls and Procedures	61
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	61
Item 1A. Risk Factors	61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3. Defaults Upon Senior Securities	61
Item 4. Mine Safety Disclosures	61
Item 5. Other Information	61
Item 6. Exhibits	63
Signatures	67

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	$600.0 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
Additional Collateral Deposit	A cash reserve deposit or letter of credit in the amount of $8.0 million required pursuant to an amendment of a certain CMBS loan agreement
AFFO	Adjusted Funds From Operations
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
CAM	Tenant Common Area Maintenance costs
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, as amended on November 3, 2015
EBITDA	Earnings Before Interest, Taxes, Depreciation and Amortization
Excess Cash	Rent received in excess of debt service obligations
Exchange Act	Securities Exchange Act of 1934, as amended
Exchange Offer	Offer to exchange the outstanding principal balance of three series of existing net-lease mortgage notes for three series of newly issued Master Trust 2014 notes in May 2014
FASB	Financial Accounting Standards Board
FFO	Funds From Operations
GAAP	Generally Accepted Accounting Principles
Incentive Award Plan	Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
IPO	Initial Public Offering
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



Definitions:
Master Trust Exchange Costs	Legal, accounting and financial advisory services costs incurred in connection with the Exchange Offer
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
Normalized Rental Revenue	Total rental revenue normalized to exclude rental revenues contributed by properties sold during a given period
Normalized Revenue	Total revenue normalized to exclude revenues contributed by properties sold during a given 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
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	$325.0 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
Total Debt	Principal debt outstanding before discounts or premiums
TSR	Total Shareholder Return
Walgreens	Walgreen Company

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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SPIRIT REALTY CAPITAL, INC.

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)



	September 30, 2015			December 31, 2014
	(Unaudited)
Assets
Investments:
Real estate investments:
Land and improvements	$	2,702,922		$	2,614,630
Buildings and improvements	4,779,228			4,579,166
Total real estate investments	7,482,150			7,193,796
Less: accumulated depreciation	(826,280		)	(752,210		)
	6,655,870			6,441,586
Loans receivable, net	106,944			109,425
Intangible lease assets, net	543,620			590,073
Real estate assets under direct financing leases, net	44,353			56,564
Real estate assets held for sale, net	78,007			119,912
Net investments	7,428,794			7,317,560
Cash and cash equivalents	28,210			176,181
Deferred costs and other assets, net	143,808			185,507
Goodwill	291,421			291,421
Total assets	$	7,892,233		$	7,970,669
Liabilities and stockholders’ equity
Liabilities:
Revolving Credit Facilities	$	75,000		$	15,114
Mortgages and notes payable, net	3,242,922			3,629,998
Convertible Notes, net	687,062			678,190
Total debt, net	4,004,984			4,323,302
Intangible lease liabilities, net	200,601			205,968
Accounts payable, accrued expenses and other liabilities	131,426			123,298
Total liabilities	4,337,011			4,652,568
Commitments and contingencies (see Note 7)
Stockholders’ equity:
Common stock, $0.01 par value; 442,054,205 issued shares and 441,411,091 outstanding shares at September 30, 2015 and 411,824,039 issued shares and 411,350,440 outstanding shares at December 31, 2014	4,421			4,118
Capital in excess of par value	4,718,765			4,361,320
Accumulated deficit	(1,159,685		)	(1,041,392		)
Accumulated other comprehensive loss	(1,717		)	(1,083		)
Treasury stock, at cost	(6,562		)	(4,862		)
Total stockholders’ equity	3,555,222			3,318,101
Total liabilities and stockholders’ equity	$	7,892,233		$	7,970,669

See accompanying notes.

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,
	2015			2014			2015			2014
Revenues:
Rentals	$	159,183		$	145,591		$	473,308		$	426,212
Interest income on loans receivable	1,764			1,805			5,216			5,463
Earned income from direct financing leases	725			837			2,299			2,521
Tenant reimbursement income	3,780			3,308			11,903			9,548
Other income and interest from real estate transactions	2,973			754			5,920			4,312
Total revenues	168,425			152,295			498,646			448,056
Expenses:
General and administrative	12,265			11,995			36,837			33,496
Finance restructuring costs	—			(11		)	—			13,022
Property costs	6,496			5,357			20,317			17,215
Real estate acquisition costs	576			865			2,122			2,372
Interest	54,673			53,535			168,754			163,926
Depreciation and amortization	64,493			62,069			195,460			184,586
Impairments	20,832			12,727			56,222			42,061
Total expenses	159,335			146,537			479,712			456,678
Income (loss) from continuing operations before other income (expense) and income tax expense	9,090			5,758			18,934			(8,622		)
Other income (expense):
Gain (loss) on debt extinguishment	342			212			2,489			(64,496		)
Total other income (expense)	342			212			2,489			(64,496		)
Income (loss) from continuing operations before income tax expense	9,432			5,970			21,423			(73,118		)
Income tax expense	(184		)	(242		)	(707		)	(586		)
Income (loss) from continuing operations	9,248			5,728			20,716			(73,704		)
Discontinued operations:
(Loss) income from discontinued operations	(41		)	288			90			3,621
Gain on disposition of assets	—			403			590			488
(Loss) income from discontinued operations	(41		)	691			680			4,109
Income (loss) before gain on disposition of assets	9,207			6,419			21,396			(69,595		)
Gain on disposition of assets	7,960			1,251			81,986			1,683
Net income (loss) attributable to common stockholders	$	17,167		$	7,670		$	103,382		$	(67,912	)
Net income (loss) per share of common stock—basic:
Continuing operations	$	0.04		$	0.02		$	0.24		$	(0.19	)
Discontinued operations	—			—			—			0.01
Net income (loss) per share attributable to common stockholders—basic	$	0.04		$	0.02		$	0.24		$	(0.18	)
Net income (loss) per share of common stock—diluted:
Continuing operations	$	0.04		$	0.02		$	0.24		$	(0.19	)
Discontinued operations	—			—			—			0.01
Net income (loss) per share attributable to common stockholders—diluted	$	0.04		$	0.02		$	0.24		$	(0.18	)
Weighted average shares of common stock outstanding:
Basic	440,205,348			396,807,656			429,387,707			382,525,614
Diluted	440,353,965			397,613,583			429,738,776			382,525,614
Dividends declared per common share issued	$	0.17000		$	0.16625		$	0.51000		$	0.49875

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Net income (loss) attributable to common stockholders	$	17,167		$	7,670	$	103,382		$	(67,912	)
Other comprehensive income (loss):
Change in net unrealized (losses) gains on cash flow hedges	(797		)	237		(1,608		)	(1,040		)
Net cash flow hedge losses reclassified to operations	277			333		974			987
Total comprehensive income (loss)	$	16,647		$	8,240	$	102,748		$	(67,965	)

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

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, 2014	411,824,039	$	4,118	$	4,361,320	$	(1,041,392	)	$	(1,083	)	(473,599	)	$	(4,862	)	$	3,318,101
Net income	—	—		—		103,382			—			—		—			103,382
Other comprehensive loss	—	—		—		—			(634		)	—		—			(634		)
Dividends declared on common stock	—	—		—		(221,216		)	—			—		—			(221,216		)
Repurchase of shares of common stock	—	—		—		—			—			(169,515	)	(1,700		)	(1,700		)
Issuance of shares of common stock, net	29,610,100	296		346,915		—			—			—		—			347,211
Exercise of stock options	5,000	—		46		—			—			—		—			46
Stock-based compensation, net	615,066	7		10,484		(459		)	—			—		—			10,032
Balances, September 30, 2015	442,054,205	$	4,421	$	4,718,765	$	(1,159,685	)	$	(1,717	)	(643,114	)	$	(6,562	)	$	3,555,222

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2015			2014
Operating activities
Net income (loss) attributable to common stockholders	$	103,382		$	(67,912	)
Adjustments to reconcile net income (loss) attributable to common stockholders to net cash provided by operating activities:
Depreciation and amortization	195,460			184,586
Impairments	56,256			42,061
Amortization of deferred financing costs	5,893			4,084
Derivative net settlements, amortization and other interest rate hedge losses	(95		)	(83		)
Amortization of debt discounts (premiums)	1,670			(821		)
Stock-based compensation expense	10,757			8,503
(Gain) loss on debt extinguishment	(2,489		)	64,496
Debt extinguishment costs	(3,760		)	(59,069		)
Gains on dispositions of real estate and other assets, net	(82,576		)	(2,171		)
Non-cash revenue	(15,947		)	(12,877		)
Other	165			274
Changes in operating assets and liabilities:
Deferred costs and other assets, net	(4,935		)	(3,111		)
Accounts payable, accrued expenses and other liabilities	7,433			(3,248		)
Net cash provided by operating activities	271,214			154,712
Investing activities
Acquisitions of real estate	(703,106		)	(569,806		)
Capitalized real estate expenditures	(7,449		)	(3,244		)
Investments in loans receivable	(4,020		)	—
Collections of principal on loans receivable and real estate assets under direct financing leases	4,450			4,641
Proceeds from dispositions of real estate and other assets	397,325			37,886
Transfers of net sales proceeds (to) from restricted accounts pursuant to 1031 Exchanges	(2,489		)	20,784
Transfers of net sales proceeds from (to) Master Trust Release	40,126			(20,240		)
Net cash used in investing activities	(275,163		)	(529,979		)
Financing activities
Borrowings under Revolving Credit Facilities	535,000			515,535
Repayments under Revolving Credit Facilities	(475,181		)	(425,219		)
Borrowings under Convertible Notes	—			757,500
Repayments under mortgages and notes payable	(347,242		)	(562,104		)
Deferred financing costs	(3,782		)	(20,011		)
Proceeds from issuance of common stock, net of offering costs	347,211			287,454
Proceeds from exercise of stock options	46			183
Offering costs paid on equity component of Convertible Notes	—			(1,609		)
Purchase of treasury stock	(1,700		)	(2,920		)
Dividends paid/distributions to equity owners	(216,231		)	(189,510		)
Transfers from (to) reserve/escrow deposits with lenders	17,857			(490		)
Net cash (used in) provided by financing activities	(144,022		)	358,809
Net decrease in cash and cash equivalents	(147,971		)	(16,458		)
Cash and cash equivalents, beginning of period	176,181			66,588
Cash and cash equivalents, end of period	$	28,210		$	50,130

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

September 30, 2015

(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 United States 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, 2015, our undepreciated investment in real estate and loans totaled approximately $8.26 billion, representing investments in 2,634 properties, including properties securing mortgage loans made by the Company. Of this amount, 98.7% consisted of our $8.15 billion investment in real estate, representing ownership of 2,489 properties, and the remaining 1.3% consisted of $106.9 million in commercial mortgage and other loans receivable, primarily secured by the remaining 145 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 audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2014.

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, 2015 and December 31, 2014, net assets totaling $4.76 billion and $5.68 billion, respectively, were held, and net liabilities totaling $3.37 billion and $3.77 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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

Reclassifications

Certain reclassifications have been made to prior period balances to conform to the current period presentation. During the quarter ended March 31, 2015, the Company elected to early adopt ASU 2015-03 described below under "New Accounting Pronouncements." Under ASU 2015-03, capitalized deferred financing costs, previously recorded in deferred costs and other assets on the consolidated balance sheet, are presented as a direct deduction from the carrying amount of the debt liability to which these costs relate, and this presentation is retrospectively applied to prior periods. For capitalized deferred financing costs that have been incurred relating to the 2013 Credit Facility and 2015 Credit Facility, the Company continues to present these costs in deferred costs and other assets, net on the accompanying consolidated balance sheets as amounts can be drawn and repaid periodically, which is in accordance with ASU 2015-15. As of December 31, 2014, unamortized deferred financing costs of approximately $46.3 million were previously presented in deferred costs and other assets, net on the consolidated balance sheet and are now included as a reduction of debt (see Note 4).

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 $9.6 million and $8.4 million at September 30, 2015 and December 31, 2014, respectively, against accounts receivable balances of $27.3 million and $20.5 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 $10.5 million and $10.9 million at September 30, 2015 and December 31, 2014, respectively, against deferred rental revenue receivables of $62.2 million and $48.3 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, 2015		December 31, 2014
Collateral deposits ⁽¹⁾	$	14,249	$	29,483
Tenant improvements, repairs, and leasing commissions ⁽²⁾	9,360		13,427
Master Trust Release ⁽³⁾	12,943		53,069
1031 Exchange proceeds, net	2,489		—
Loan impounds ⁽⁴⁾	663		794
Other ⁽⁵⁾	969		3,571
	$	40,673	$	100,344

⁽¹⁾Funds held in reserve by lenders which can be applied by lenders to the repayment of debt (any funds remaining on deposit after the debt is paid in full are released to the borrower).

⁽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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

⁽⁵⁾Funds held in lender controlled accounts released after debt service requirements are met.

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.

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 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 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that deferred financing costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company early adopted the provisions of ASU 2015-03 beginning with the period ended March 31, 2015, and has applied the provisions retrospectively.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09, Revenue from Contracts with Customers, for all entities by one year. With the deferral, ASU 2014-09 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 financial statement impact of this ASU.

Also in August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after adoption of ASU 2015-03. ASU 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line- of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company has applied the provisions of ASU 2015-15 to the capitalized deferred financing costs related to its 2013 Credit Facility and 2015 Credit Facility.

Note 3. Investments

Real Estate Investments

As of September 30, 2015, the Company's investment in real estate and loans totaled approximately $8.26 billion, representing investments in 2,634 properties, including 145 properties securing mortgage loans. The 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 12.1%, accounting for more than 10.0% of the total dollar amount of the Company’s real estate investment portfolio.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

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, 2015, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:



	Number of Properties					Dollar Amount of Investments, Net
	Owned ⁽⁴⁾		Financed	Total		Owned			Financed			Total
						(In Thousands)
Gross balance, December 31, 2014	2,364		145	2,509		$	7,934,938		$	109,425		$	8,044,363
Acquisitions/improvements ^{(1) (3)}	198		—	198		710,555			4,020			714,575
Dispositions of real estate ^{(2) (3)}	(72	)	—	(72	)	(433,412		)	—			(433,412		)
Principal payments and payoffs	—		—	—		—			(4,308		)	(4,308		)
Impairments	—		—	—		(55,765		)	(338		)	(56,103		)
Write-off of gross lease intangibles	—		—	—		(6,655		)	—			(6,655		)
Loan premium amortization and other	(1	)	—	(1	)	(142		)	(1,855		)	(1,997		)
Gross balance, September 30, 2015	2,489		145	2,634		$	8,149,519		$	106,944		$	8,256,463
Accumulated depreciation and amortization						(1,029,332		)	—			(1,029,332		)
Other non-real estate assets held for sale						1,062			—			1,062
Net balance, September 30, 2015						$	7,121,249		$	106,944		$	7,228,193

⁽¹⁾ Includes investments of $6.7 million in revenue producing capitalized expenditures, as well as $0.7 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 these dispositions of real estate was $86.2 million.

⁽³⁾During the nine months ended September 30, 2015, pursuant to 1031 Exchanges, the Company sold 26 properties for $235.4 million and used $233.0 million of this amount to partially fund 97 property acquisitions.

⁽⁴⁾At both September 30, 2015 and December 31, 2014, 37 of the Company's properties were vacant and in the Company’s possession; of these vacant properties, 14 and 8, respectively, were held for sale.

Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases at September 30, 2015 (in thousands):



Remainder of 2015	$	148,183
2016	578,651
2017	563,507
2018	548,796
2019	531,047
Thereafter	4,432,365
Total future minimum rentals	$	6,802,549

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

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

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.

Loans Receivable

The following table details loans receivable, net of premium and allowance for loan losses (in thousands):



	September 30, 2015			December 31, 2014
Mortgage loans - principal	$	92,374		$	96,594
Mortgage loans - premium, net	10,598			12,452
Mortgages loans, net	102,972			109,046
Other note receivables - principal	4,310			379
Allowance for loan losses	(338		)	—
Other note receivables, net	3,972			379
Total loans receivable, net	$	106,944		$	109,425

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, one $4.0 million note is secured by tenant assets and stock and the other is unsecured.

Allowance for Loan Losses

At September 30, 2015, there was an allowance for loan losses on an unsecured note receivable of $0.3 million compared to no allowance for loan losses at December 31, 2014. At September 30, 2015, one note receivable was on non-accrual status and no mortgage loans were on non-accrual status compared to no mortgage loans or note receivables on non-accrual status at December 31, 2014.

Lease Intangibles, Net

The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):



	September 30, 2015			December 31, 2014
In-place leases	$	656,217		$	676,665
Above-market leases	98,806			100,568
Less: accumulated amortization	(211,403		)	(187,160		)
Intangible lease assets, net	$	543,620		$	590,073

Below-market leases	$	242,336		$	237,593
Less: accumulated amortization	(41,735		)	(31,625		)
Intangible lease liabilities, net	$	200,601		$	205,968

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases were $4.3 million and $4.6 million for the nine months ended September 30, 2015 and 2014, respectively, and $1.5 million and $1.6 million for the three months ended September 30, 2015 and 2014, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $37.8 million and $40.0 million for the nine months ended September 30, 2015 and 2014, respectively, and $12.4 million and $13.1 million for the three months ended September 30, 2015 and 2014, respectively.

Real Estate Assets Under Direct Financing Leases

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

The components of real estate investments held under direct financing leases were as follows (in thousands):



	September 30, 2015			December 31, 2014
Minimum lease payments receivable	$	13,456		$	15,897
Estimated residual value of leased assets	43,789			55,858
Unearned income	(12,892		)	(15,191		)
Real estate assets under direct financing leases, net	$	44,353		$	56,564

Real Estate Assets Held for Sale

The following table shows the activity in real estate assets held for sale, for continuing and discontinued operations, for the nine months ended September 30, 2015:



	Number of Properties						Carrying Value
	Continuing Operations		Discontinued Operations		Total		Continuing Operations			Discontinued Operations			Total
							(In Thousands)
Balance, December 31, 2014	19		5		24		$	110,918		$	8,994		$	119,912
Transfers from real estate investments	43		—		43		162,869			(34		)	162,835
Sales	(35	)	(2	)	(37	)	(200,265		)	(4,475		)	(204,740		)
Balance, September 30, 2015	27		3		30		$	73,522		$	4,485		$	78,007

Properties included in discontinued operations as of September 30, 2015 are collateral assets under the 2014 Master Trust securitization. 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 accompanying consolidated balance sheets (in thousands):



	September 30, 2015			December 31, 2014
Assets
Land and improvements	$	2,922		$	5,351
Buildings and improvements	2,916			5,798
Total real estate investments	5,838			11,149
Less: accumulated depreciation	(1,202		)	(2,167		)
Intangible lease assets, net	297			460
Total assets	$	4,933		$	9,442

Liabilities
Intangible lease liabilities, net	$	448		$	448
Total liabilities	$	448		$	448

Net assets	$	4,485		$	8,994

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

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,
	2015		2014		2015		2014
Real estate and intangible asset impairment	$	19,724	$	10,783	$	54,497	$	37,030
Write-off of lease intangibles due to lease terminations, net	713		1,910		1,268		4,509
Loans receivable impairment	338		—		338		—
Total impairments from real estate investment net assets	20,775		12,693		56,103		41,539
Other impairment	57		34		153		522
Total impairment loss in continuing and discontinued operations	$	20,832	$	12,727	$	56,256	$	42,061

Note 4. Debt

The Company's debt is summarized below:



	Weighted Average Effective Interest Rates ⁽¹⁾		Weighted Average Stated Rates ⁽²⁾		Weighted Average Term ⁽³⁾	September 30, 2015			December 31, 2014
					(in Years)	(In Thousands)
Revolving Credit Facilities	NM		1.74	%	3.5	$	75,000		$	15,181
Master Trust Notes	5.44	%	5.03	%	7.5	1,696,766			1,710,380
CMBS - fixed-rate	5.40	%	5.89	%	2.7	1,512,777			1,836,181
CMBS - variable-rate⁽⁴⁾	3.14	%	3.56	%	2.9	68,305			110,685
Convertible Notes	4.88	%	3.28	%	4.5	747,500			747,500
Unsecured fixed rate promissory note ⁽⁵⁾	—		—		0.0	—			1,293
Total debt	5.32	%	4.95	%	5.0	4,100,348			4,421,220
Debt discount, net						(54,181		)	(51,586		)
Deferred financing costs, net ⁽⁶⁾						(41,183		)	(46,332		)
Total debt, net						$	4,004,984		$	4,323,302

⁽¹⁾ The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs and non-utilization fees, where applicable, calculated for the three months ended September 30, 2015 and based on the average principal balance outstanding during the period. The average outstanding principal balance of the Revolving Credit Facilities was not significant during the three months ended September 30, 2015, resulting in an effective interest rate that was not meaningful.

⁽²⁾ Represents the weighted average stated interest rate based on the outstanding principal balance as of September 30, 2015.

⁽³⁾Represents the weighted average time to maturity based on the outstanding principal balance as of September 30, 2015.

⁽⁴⁾ Variable-rate notes are predominantly hedged with interest rate swaps (see Note 5).

⁽⁵⁾ During the three months ended September 30, 2015, the Company repaid the outstanding balance of the unsecured fixed rate promissory note prior to maturity and recognized a loss on debt extinguishment of $0.1 million.

⁽⁶⁾ The Company early adopted ASU 2015-03 requiring deferred financing costs to be presented as a direct deduction from the carrying amount of the related indebtedness. The Company records deferred financing costs for its 2013 Credit Facility and 2015 Credit Facility in deferred costs and other assets, net on its consolidated balance sheets, which is in accordance with ASU 2015-15.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

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). The 2015 Credit Facility 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. The 2015 Credit Facility includes a $50.0 million sublimit for swingline loans and up to $60.0 million available for issuances of letters of credit. Swingline loans and letters of credit reduce availability under the 2015 Credit Facility on a dollar-for-dollar basis.

During the quarter ended September 30, 2015, the 2015 Credit Facility bore interest at LIBOR plus 1.55% based on the Company's leverage and incurred non-utilization fees of 0.25% per annum. If the Corporation obtains an investment grade rating of its senior unsecured long-term indebtedness of at least BBB- or Baa3 from S&P or Moody's, respectively, the Operating Partnership may make an irrevocable election to change the grid pricing from leverage based to credit rating based pricing. Upon such an event, the 2015 Credit Facility will bear interest at a rate equal to LIBOR plus 0.875% to 1.55% per annum and requires a facility fee in an amount equal to the aggregate revolving credit commitments (whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum, depending on the credit rating for the Corporation.

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 certain of its existing and future subsidiaries that are not currently securing or anticipated to secure other indebtedness. 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, the Company incurred origination costs of $3.7 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the 2015 Credit Facility. As of September 30, 2015, the unamortized deferred financing costs relating to the 2015 Credit Facility were $3.2 million and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.

As of September 30, 2015, $75.0 million of borrowings were outstanding, $18.0 million of letters of credit were issued and $507.0 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, 2015, 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 has access to a $40.0 million secured revolving 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. As of September 30, 2015, the Line of Credit was undrawn and had $40.0 million of borrowing capacity available. The ability to borrow under the Line of Credit is subject to the Operating Partnership and special purpose entity's ongoing compliance with a number of customary financial covenants. As of September 30, 2015, the Operating Partnership and, if applicable, the special purpose entity were in compliance with these financial covenants.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

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 subsidiary of the Corporation.

The Master Trust Notes are summarized below:



	Effective Interest Rates ⁽¹⁾		Stated Rates ⁽²⁾		Remaining Term	September 30, 2015			December 31, 2014
					(in Years)	(in Thousands)
Series 2014-1 Class A1	6.0	%	5.1	%	4.7	$	67,701		$	75,489
Series 2014-1 Class A2	6.0	%	5.4	%	4.8	253,300			253,300
Series 2014-2	6.1	%	5.8	%	5.5	230,490			232,867
Series 2014-3	6.0	%	5.7	%	6.5	312,385			312,705
Series 2014-4 Class A1	3.9	%	3.5	%	4.3	150,000			150,000
Series 2014-4 Class A2	4.8	%	4.6	%	14.3	360,000			360,000
Total Master Trust 2014 notes	5.5	%	5.1	%	7.7	1,373,876			1,384,361
Series 2013-1 Class A	4.6	%	3.9	%	3.2	125,000			125,000
Series 2013-2 Class A	5.6	%	5.3	%	8.2	197,890			201,019
Total Master Trust 2013 notes	5.3	%	4.7	%	6.3	322,890			326,019
Total Master Trust Notes						1,696,766			1,710,380
Debt discount, net						(23,919		)	(26,903		)
Deferred financing costs, net						(20,080		)	(22,113		)
Total Master Trust Notes, net						$	1,652,767		$	1,661,364

⁽¹⁾ The effective interest rates include amortization of debt discount and amortization of deferred financing costs calculated for the three months ended September 30, 2015 based on the average principal balance outstanding during the period.

⁽²⁾ Represents the individual series stated interest rate as of September 30, 2015 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of September 30, 2015.

As of September 30, 2015, the Master Trust 2014 notes were secured by 955 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, 2015, the Master Trust 2013 notes were secured by 316 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Corporation.

CMBS

As of September 30, 2015, indirect wholly-owned special purpose entity subsidiaries of the Corporation were borrowers under 149 fixed and 9 variable-rate non-recourse loans, excluding the defaulted loans, which have been securitized into CMBS and are secured by the borrowers' respective leased properties and related assets. The stated interest rates as of September 30, 2015 for these fixed-rate notes, excluding the defaulted loans, ranged from 3.90% to 8.39%. The stated interest rates as of September 30, 2015 for the variable-rate notes ranged from 3.20% to 3.60%. As of September 30, 2015, these fixed and variable-rate loans were secured by 468 and 86 properties, respectively. The Company entered into interest rate swaps that effectively fixed the interest rates at approximately 5.2% on a significant portion of the variable-rate debt (see Note 5). As of September 30, 2015 and December 31, 2014, the unamortized

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

deferred financing costs relating to certain of the CMBS loans were $5.6 million and $6.4 million, respectively. The deferred financing costs are being amortized to expense over the term of the respective loans.

As of September 30, 2015, certain borrowers were in default under the loan agreements relating to four separate CMBS fixed-rate loans where the ten properties securing the respective loans are no longer generating sufficient revenue to pay the scheduled debt service. The default interest rate on these loans was between 9.67% and 10.88%. Each defaulted borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligations. As of September 30, 2015, the aggregate principal balance under the defaulted CMBS loans was $80.1 million, which includes $6.9 million of interest added to principal. In addition, approximately $12.2 million of lender controlled reserves, within restricted cash, are being held in connection with these loans that may be applied to reduce amounts owed. During the nine months ended September 30, 2015, defaulted loan balances aggregating $25.4 million, which included $0.4 million of capitalized interest, were retired upon the disposition of 5 properties and the application of $3.6 million of lender reserves securing these defaulted loans. One of the properties disposed was surrendered to the lender pursuant to a consensual foreclosure and release of the debt. The remaining four properties were sold by the Company to third parties pursuant to an amendment to the loan agreement, which provided for a specified reduction in principal balance associated with the sale of those individual properties.

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). 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, 2015 and December 31, 2014, the unamortized discount was $45.0 million and $51.5 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 sheet, 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 of the 2019 Notes and 2021 Notes. As of September 30, 2015 and December 31, 2014, the unamortized deferred financing costs relating to the Convertible Notes were $15.5 million and $17.8 million, respectively.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

Debt Extinguishment

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 sales proceeds of $14.0 million from the sale of four properties securing a portion of a defaulted CMBS note, partially offset by defeasance costs.

Net proceeds raised from the concurrent registered offerings of Convertible Notes and common stock in May 2014 were partially used to retire the senior mortgage notes payable encumbering the Shopko properties with an aggregate principal balance of $488.7 million, redeem $18.0 million of net-lease mortgage notes that were not tendered in connection with the Exchange Offer and repay all amounts then drawn against the 2013 Credit Facility. During the nine months ended September 30, 2014, the Company extinguished a total of $532.8 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.53%. As a result of these transactions, the Company recognized a loss on debt extinguishment during the nine months ended September 30, 2014 of approximately $64.5 million primarily from costs incurred related to the defeasance of the Shopko indebtedness.

Debt Maturities

As of September 30, 2015, 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 2015 ⁽¹⁾	$	7,212	$	80,127	$	87,339
2016	28,012		273,059		301,071
2017	27,782		773,309		801,091
2018	42,115		244,537		286,652
2019	44,325		527,000		571,325
Thereafter	288,888		1,763,982		2,052,870
Total	$	438,334	$	3,662,014	$	4,100,348

⁽¹⁾ The balloon payment balance in 2015 includes $80.1 million, including $6.9 million of capitalized interest, for the acceleration of principal payable following an event of default under four separate non-recourse CMBS loans with stated maturities in 2015 and 2017 of $25.3 million and $54.8 million, respectively.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(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,
	2015		2014		2015		2014
Interest expense – Revolving Credit Facilities ⁽¹⁾	$	608	$	538	$	1,997	$	2,358
Interest expense – mortgages and notes payable	45,460		44,858		140,731		149,231
Interest expense – Convertible Notes	6,127		6,098		18,382		8,970
Interest expense – other	—		—		—		6
Non-cash interest expense:
Amortization of deferred financing costs	1,920		1,787		5,893		4,084
Amortization of net losses related to interest rate swaps	27		32		81		98
Amortization of debt (premium)/discount, net	531		222		1,670		(821		)
Total interest expense	$	54,673	$	53,535	$	168,754	$	163,926

⁽¹⁾ Includes interest expense associated with non-utilization fees of approximately $0.4 million for both the three months ended September 30, 2015 and 2014 and approximately $1.2 million and $0.9 million for the nine months ended September 30, 2015 and 2014, 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. As of September 30, 2015 and December 31, 2014, there were no termination events or events of default related to the interest rate swaps.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(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, 2015			December 31, 2014
Interest Rate Swap ⁽¹⁾	Accounts payable, accrued expenses and other liabilities	$	10,741	4.62	%	06/28/12	07/06/17	$	—		$	(46	)
Interest Rate Swap	Accounts payable, accrued expenses and other liabilities	$	6,547	5.75	%	07/17/13	03/01/16	(68		)	(180		)
Interest Rate Swap ⁽¹⁾	Accounts payable, accrued expenses and other liabilities	$	32,400	3.15	%	07/17/13	09/05/15	—			(93		)
Interest Rate Swaps⁽²⁾	Accounts payable, accrued expenses and other liabilities	$	61,758	5.14	%	01/02/14	12/13/18	(1,594		)	(803		)
								$	(1,662	)	$	(1,122	)

⁽¹⁾During June 2015, the Company terminated certain interest rate swap agreements upon the repayment of two CMBS variable-rate loans. The Company paid $0.1 million to terminate these swaps and recognized a loss of $0.1 million, which is included in general and administrative expenses.

⁽²⁾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, 2015 and 2014, 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	2015			2014			2015			2014
Interest rate swaps	$	(797	)	$	237		$	(1,608	)	$	(1,040	)

	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	2015			2014			2015			2014
Interest expense	$	(277	)	$	(333	)	$	(898	)	$	(987	)

	Amount of Gain or (Loss) Recognized in Operations on Derivative (Ineffective Portion) ⁽¹⁾
	Three Months Ended September 30,						Nine Months Ended September 30,
Location of Gain or (Loss) Recognized in Operations on Derivatives	2015			2014			2015			2014
General and administrative expense	$	—		$	5		$	(78	)	$	2

⁽¹⁾ Nine months ended September 30, 2015 includes a loss of $76 thousand that was 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.

Approximately $0.9 million 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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

Note 6. Stockholders’ Equity

Issuance of Common Stock

On April 14, 2015, the Company completed an underwritten public offering of 23.0 million shares of its common stock, at $11.85 per share, including 3.0 million shares sold pursuant to the underwriter’s option to purchase additional shares. Gross proceeds raised were approximately $272.6 million; net proceeds were approximately $268.8 million after deducting the underwriting discounts and offering costs paid by the Company. The net proceeds from the common stock offering were used to repay the outstanding balances under the 2015 Credit Facility and Line of Credit. The remaining net proceeds were retained to fund potential future acquisitions and for general corporate purposes (including additional repayments of borrowings outstanding from time to time under the Revolving Credit Facilities).

ATM Program

During the nine months ended September 30, 2015, the Corporation sold 6.6 million shares of its common stock under its ATM Program, at a weighted average share price of $12.07, for aggregate gross proceeds of $79.8 million and aggregate net proceeds of $78.5 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. During the three months ended September 30, 2015, no shares were sold under our ATM program. As of September 30, 2015, $103.6 million in gross proceeds capacity remained available under the ATM Program.

Treasury Shares

During the nine months ended September 30, 2015, portions of awards of restricted common stock granted to certain of the Company's officers and other employees vested. The vesting of these shares, granted pursuant to the Incentive Award Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender 0.2 million shares of common stock, valued at $1.7 million, solely to pay 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, 2015, the Corporation's Board of Directors declared the following dividends:



Declaration Date	Dividend Per Share		Record Date	Total Amount ⁽¹⁾		Payment Date
				(in thousands)
March 16, 2015	$	0.17000	March 31, 2015	$	71,123	April 15, 2015
June 15, 2015	$	0.17000	June 30, 2015	$	75,054	July 15, 2015
September 15, 2015	$	0.17000	September 30, 2015	$	75,039	October 15, 2015

⁽¹⁾ Net of estimated forfeitures of approximately $1,000 and $9,000 during the three and nine months ended September 30, 2015, respectively, for dividends declared on employee restricted stock awards that are reported in general and administrative on the accompanying consolidated statements of operations.

The dividend declared on September 15, 2015 was paid on October 15, 2015 and is included in accounts payable, accrued expenses and other liabilities as of September 30, 2015.

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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

On September 8, 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC, filed petitions for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. Haggen Operations Holdings, LLC leases 20 properties on a triple net basis from a subsidiary of the Company under a master lease with current 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. As of September 30, 2015, the debtors had not determined whether to assume or reject the unexpired master lease in the bankruptcy proceeding. While the Company cannot predict the final outcome of the bankruptcy proceedings, it does not currently believe the debtor’s rejection of the master lease or the court’s refusal to uphold its terms would result in a material impact on the Company’s financial position or results of operations in future periods.

As of September 30, 2015, 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, 2015, the Company had commitments totaling $186.7 million, of which $180.6 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. All commitments are expected to be funded during fiscal year 2015. 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.

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
September 30, 2015
Derivatives:
Interest rate swaps financial liabilities	$	(1,662	)	$	—	$	(1,662	)	$	—
December 31, 2014
Derivatives:
Interest rate swaps financial liabilities	$	(1,122	)	$	—	$	(1,122	)	$	—

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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(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		Impairment Charges ⁽¹⁾
September 30, 2015
Long-lived assets held and used	$	37,589	$	(3,207	)	$	—	$	—	$	40,796	$	(41,294	)
Lease intangible assets	4,294		—			—		—		4,294		(3,730		)
Other assets	—		—			—		—		—		(338		)
Long-lived assets held for sale	18,583		(30,954		)	—		—		49,537		(10,894		)
												$	(56,256	)
December 31, 2014
Long-lived assets held and used	$	37,278	$	—		$	—	$	—	$	37,278	$	(20,679	)
Lease intangible assets	10,013		—			—		—		10,013		4,317
Long-lived assets held for sale	65,958		(26,721		)	—		—		92,679		(20,074		)
												$	(36,436	)

⁽¹⁾ Impairment charges are presented for the nine months ended September 30, 2015 and for the year ended December 31, 2014.

The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; recently quoted bid or ask prices, or market prices for comparable properties; estimates of 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.

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, 2015 and December 31, 2014. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

The estimated fair values of the loans receivable, Revolving Credit Facilities, Convertible Notes and the fixed-rate mortgages and notes payable 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. The loans receivable, Revolving Credit Facilities, Convertible Notes and mortgages and notes payable were measured using a market approach from nationally recognized financial institutions with market observable inputs such as interest rates and credit analytics. 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, 2015				December 31, 2014
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Loans receivable, net	$	106,944	$	112,999	$	109,425	$	115,747
Revolving Credit Facilities, net ⁽¹⁾	75,000		79,067		15,114		15,254
Mortgages and notes payable, net ⁽²⁾	3,242,922		3,435,150		3,629,998		3,899,950
Convertible Notes, net ⁽²⁾	687,062		690,975		678,190		729,231

⁽¹⁾As of September 30, 2015, only amounts under the 2015 Credit Facility were outstanding. As of December 31, 2014, only amounts under the Line of Credit were outstanding and net of unamortized deferred financing costs.

⁽²⁾ The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.

Note 9. Significant Credit and Revenue Concentration

As of September 30, 2015 and December 31, 2014, the Company’s real estate investments are leased to 435 and 454 tenants, respectively, which operate within retail, office and industrial property types across various industries throughout the United States. 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, 2015 and 2014, contributed 9.9% and 14.3% of the Company's Normalized Revenue from continuing operations, respectively. No other tenant contributed 5% or more of the Company’s Normalized Revenue during any of the periods presented. As of September 30, 2015 and December 31, 2014, the Company's net investment in Shopko properties represents approximately 7.7% and 10.7%, respectively, of the Company’s total assets and the Company's real estate investment in Shopko represents approximately 9.9% and 13.1%, respectively, of the Company's total real estate investment portfolio.

Note 10. Discontinued Operations

Properties that were reported as held for sale as of December 31, 2013, will be presented in discontinued operations until the properties are disposed of. As a result, net gains or losses from the disposition of these properties, as well as the current and prior period operations, will continue to be reclassified to discontinued operations. The following sets forth the results of discontinued operations (dollars in thousands):

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015		2014
Revenues:
Rent	$	56		$	300	$	391	$	917
Non-cash rent	—			27		—		—
Other	1			3		17		2,953
Total revenues	57			330		408		3,870
Expenses:
General and administrative	1			1		3		13
Property costs	97			41		281		236
Impairments	—			—		34		—
Total expenses	98			42		318		249
Income from discontinued operations	(41		)	288		90		3,621
Gain on disposition of assets	—			403		590		488
Total discontinued operations	$	(41	)	$	691	$	680	$	4,109
Number of properties disposed of during period	—			1		2		6

Note 11. Supplemental Cash Flow Information

The following table presents the supplemental cash flow disclosures (in thousands):



	Nine Months Ended September 30,
	2015		2014
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Reduction of debt through sale of certain real estate properties	$	30,555	$	5,001
Reduction of debt in exchange for collateral assets	7,904		—
Net real estate and other collateral assets surrendered to lender	7,384		—
Accrued interest capitalized to principal ⁽¹⁾	4,686		997
Accrued performance share dividend rights	459		420

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

Note 12. Incentive Award Plan

As of September 30, 2015, 1.9 million shares remained available for award under the Incentive Award Plan.

Restricted Shares of Common Stock

During the nine months ended September 30, 2015, the Company granted 0.5 million restricted shares under the Incentive Award Plan to certain officers and employees. The Company recorded $5.6 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, 2015, there were approximately 0.8 million unvested restricted shares outstanding.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

Performance Share Awards

During the nine months ended September 30, 2015, the Compensation Committee of the Board of Directors approved an initial target grant of 279,199 performance shares to certain executive officers of the Company. The performance period of this grant runs from January 1, 2015 through December 31, 2017. Pursuant to the performance share award agreement, each participant is eligible to vest in and receive shares of the Corporation'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 TSR of the Corporation compared to certain specified peer groups 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 were declared during the performance period as if the shares had been issued and outstanding on each dividend record date. 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.

As of September 30, 2015, under each separate annual performance share award, the Corporation's TSR compared to the specified peer groups during the performance periods would have resulted in the release of 0.7 million shares, in the aggregate. In addition, approximately $1.1 million in dividend rights have been accrued. The projected shares to be released are not considered issued under the Incentive Award 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-based Compensation Expense

For the three months ended September 30, 2015 and 2014, the Company recognized $3.5 million and $3.0 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, 2015 and 2014, the Company recognized $10.8 million and $8.5 million, respectively, in stock-based compensation expense.

As of September 30, 2015, the remaining unamortized stock-based compensation expense, including amounts relating to the performance share awards, totaled $11.4 million, 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.

SPIRIT REALTY CAPITAL, INC.

Notes to Consolidated Financial Statements - (continued)

September 30, 2015

(Unaudited)

Note 13. Income (Loss) Per Share

Income (loss) per share has been computed using the two-class method. Income (loss) 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 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 (loss) from continuing operations in the computation of net income (loss) attributable to common stockholders. The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted income (loss) per share (dollars in thousands):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Basic and diluted income (loss):
Income (loss) from continuing operations