Edgar Filing: SPIRIT REALTY CAPITAL, INC.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number

Spirit Realty Capital, Inc. 001-36004

Spirit Realty, L.P. 333-216815-01

___________________________________________________________

SPIRIT REALTY CAPITAL, INC.

SPIRIT REALTY, L.P.

(Exact name of registrant as specified in its charter)

_______________________________________________



Spirit Realty Capital, Inc.	Maryland	20-1676382
Spirit Realty, L.P.	Delaware	20-1127940
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

	2727 North Harwood Street, Suite 300, Dallas, Texas 75201	(972) 476-1900
	(Address of principal executive offices; zip code)	(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

__________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Spirit Realty Capital, Inc. Yes x No o	Spirit Realty, L.P. Yes o No x

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).



Spirit Realty Capital, Inc. Yes x No o	Spirit Realty, L.P. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” or an emerging growth company. See definitions of "large accelerated filer,", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Spirit Realty Capital, Inc.



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o



Smaller reporting company o	Emerging growth company o

Spirit Realty, L.P.



Large accelerated filer o	Accelerated filer o	Non-accelerated filer x



Smaller reporting company o	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Spirit Realty Capital, Inc. o	Spirit Realty, L.P. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Spirit Realty Capital, Inc. Yes o No x	Spirit Realty, L.P. Yes o No x

As of August 1, 2017, there were 458,402,592 shares of common stock, par value $0.01, of Spirit Realty Capital, Inc. outstanding.

Explanatory Note

This report combines the quarterly reports on Form 10-Q for the three and six months ended June 30, 2017 of Spirit Realty Capital, Inc., a Maryland corporation, and Spirit Realty, L.P., a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or the “Company” refer to Spirit Realty Capital, Inc. together with its consolidated subsidiaries, including Spirit Realty, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Spirit Realty, L.P. together with its consolidated subsidiaries.

Spirit General OP Holdings, LLC ("OP Holdings") is the sole general partner of the Operating Partnership. The Company is a real estate investment trust, or REIT, and the sole member of OP Holdings, as well as the special limited partner of the Operating Partnership. As sole member of the general partner of our Operating Partnership, our Company has the full, exclusive and complete responsibility for our Operating Partnership’s day-to-day management and control.

We believe combining the quarterly reports on Form 10-Q of our Company and Operating Partnership into a single report results in the following benefits:


•	enhancing investors’ understanding of our Company and Operating Partnership by enabling investors to view the business as a whole, reflective of how management views and operates the business;


•	eliminating duplicative disclosure and providing a streamlined presentation as a substantial portion of the disclosures apply to both our Company and Operating Partnership; and


•	creating time and cost efficiencies by preparing one combined report in lieu of two separate reports.

There are a few differences between our Company and Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand these differences in the context of how we operate as an interrelated, consolidated company. Our Company is a REIT, the only material assets of which are the partnership interests in our Operating Partnership. As a result, our Company does not conduct business itself, other than acting as the sole member of the general partner of our Operating Partnership, issuing equity from time to time and guaranteeing certain debt of our Operating Partnership. Our Operating Partnership holds substantially all the assets of our Company. Our Company issued convertible notes and guarantees some of the debt of our Operating Partnership, see footnote 4 to the consolidated financial statements included herein for further discussion. Our Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from the issuance of convertible notes and equity issuances by our Company, which are generally contributed to our Operating Partnership in exchange for partnership units of our Operating Partnership, our Operating Partnership generates the capital required by our Company’s business through our Operating Partnership’s operations or our Operating Partnership’s incurrence of indebtedness.

The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our Operating Partnership. The partnership units in our Operating Partnership are accounted for as partners’ capital in our Operating Partnership’s consolidated financial statements. There are no non-controlling interests in the Company or the Operating Partnership.

To help investors understand the significant differences between our Company and our Operating Partnership, this report presents the consolidated financial statements separately for our Company and our Operating Partnership. All other sections of this report, including “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our Operating Partnership.

In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act, and 18 U.S.C. §1350, this report also includes separate “Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our Operating Partnership.

SPIRIT REALTY CAPITAL, INC.

INDEX



Glossary	3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	61
Item 4. Controls and Procedures	62
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	63
Item 1A. Risk Factors	63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3. Defaults Upon Senior Securities	64
Item 4. Mine Safety Disclosures	64
Item 5. Other Information	64
Item 6. Exhibits	65
Signatures	70

GLOSSARY



Definitions:
1031 Exchange	Tax-deferred like-kind exchange of properties held for business or investment purposes, pursuant to Section 1031 of the Code
2019 Notes	$402.5 million convertible notes of the Corporation due in 2019
2021 Notes	$345.0 million convertible notes of the Corporation due in 2021
AFFO	Adjusted Funds From Operations
Amended Incentive Award Plan	Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan
AOCL	Accumulated Other Comprehensive Loss
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
ATM Program	At the Market equity distribution program, pursuant to which the Corporation may offer and sell registered shares of common stock from time to time
CMBS	Commercial Mortgage Backed Securities
Code	Internal Revenue Code of 1986, as amended
Cole II	Cole Credit Property Trust II, Inc.
Cole II Merger	Acquisition on July 17, 2013 of Cole II by the Company, in which the Company merged with and into the Cole II legal entity
Collateral Pools	Pools of collateral assets that are pledged to the indenture trustee for the benefit of the noteholders and secure obligations of issuers under the Spirit Master Funding Program
Company	The Corporation and its consolidated subsidiaries
Contractual Rent	Monthly contractual cash rent and earned income from direct financing leases, excluding percentage rents, from our Owned Properties recognized during the final month of the reporting period, adjusted to exclude amounts received from properties sold during that period and adjusted to include a full month of contractual rent for properties acquired during that period.
Convertible Notes	The 2019 Notes and 2021 Notes, together
Corporation	Spirit Realty Capital, Inc., a Maryland corporation
CPI	Consumer Price Index
Credit Agreement	Revolving credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015, as amended or otherwise modified from time to time
EBITDA	Earnings Before Interest, Taxes, Depreciation and Amortization
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FFO	Funds From Operations
Fitch	Fitch Ratings, Inc.
GAAP	Generally Accepted Accounting Principles in the United States
LIBOR	London Interbank Offered Rate
Master Trust 2013	The net-lease mortgage securitization trust established in December 2013 under the Spirit Master Funding Program
Master Trust 2014	The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014 under the Spirit Master Funding Program
Master Trust Notes	Master Trust 2013 and Master Trust 2014 notes, together
Master Trust Release	Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made or until used for principal reduction
Moody's	Moody's Investor Services
NAREIT	National Association of Real Estate Investment Trusts
OP Holdings	Spirit General OP Holdings, LLC



Definitions:
Operating Partnership	Spirit Realty, L.P., a Delaware limited partnership
REIT	Real Estate Investment Trust
Revolving Credit Facility	$800.0 million unsecured credit facility pursuant to the Credit Agreement
S&P	Standard & Poor's Rating Services
SEC	Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Senior Unsecured Notes	$300 million aggregate principal amount of senior notes issued in August 2016
Shopko	Specialty Retail Shops Holding Corp. and certain of its affiliates
Spirit Master Funding Program	The Company's asset-backed securitization program that comprises Master Trust 2013 and Master Trust 2014
Term Loan	$420.0 million senior unsecured term facility pursuant to the Term Loan Agreement
Term Loan Agreement	Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015, as amended or otherwise modified from time to time
TSR	Total Shareholder Return
U.S.	United States

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SPIRIT REALTY CAPITAL, INC.

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

(Unaudited)



	June 30, 2017			December 31, 2016
Assets
Investments:
Real estate investments:
Land and improvements	$	2,652,512		$	2,704,010
Buildings and improvements	4,748,049			4,775,221
Total real estate investments	7,400,561			7,479,231
Less: accumulated depreciation	(1,001,057		)	(940,005		)
	6,399,504			6,539,226
Loans receivable, net	66,415			66,578
Intangible lease assets, net	457,580			470,276
Real estate assets under direct financing leases, net	27,373			36,005
Real estate assets held for sale, net	133,166			160,570
Net investments	7,084,038			7,272,655
Cash and cash equivalents	11,246			10,059
Deferred costs and other assets, net	169,699			140,917
Goodwill	254,340			254,340
Total assets	$	7,519,323		$	7,677,971
Liabilities and stockholders’ equity
Liabilities:
Revolving Credit Facility	$	320,000		$	86,000
Term Loan, net	418,880			418,471
Senior Unsecured Notes, net	295,135			295,112
Mortgages and notes payable, net	2,103,425			2,162,403
Convertible Notes, net	709,183			702,642
Total debt, net	3,846,623			3,664,628
Intangible lease liabilities, net	169,831			182,320
Accounts payable, accrued expenses and other liabilities	147,036			148,915
Total liabilities	4,163,490			3,995,863
Commitments and contingencies (see Note 7)
Stockholders’ equity:
Common stock, $0.01 par value, 750,000,000 shares authorized: 457,902,592 and 483,624,120 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively	4,579			4,836
Capital in excess of par value	5,188,514			5,177,086
Accumulated deficit	(1,837,260		)	(1,499,814		)
Accumulated other comprehensive income	—			—
Total stockholders’ equity	3,355,833			3,682,108
Total liabilities and stockholders’ equity	$	7,519,323		$	7,677,971

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues:
Rentals	$	160,487		$	160,506		$	319,707		$	322,325
Interest income on loans receivable	874			1,625			1,766			3,284
Earned income from direct financing leases	518			698			1,130			1,422
Tenant reimbursement income	4,480			3,200			8,445			7,024
Other income	2,276			5,697			3,009			6,028
Total revenues	168,635			171,726			334,057			340,083
Expenses:
General and administrative	22,862			13,850			36,280			25,499
Restructuring charges	—			1,813			—			2,462
Transaction costs	485			—			485			—
Property costs	9,632			6,611			18,683			13,938
Real estate acquisition costs	424			979			577			1,036
Interest	46,826			49,172			93,449			102,189
Depreciation and amortization	64,220			64,263			129,214			128,927
Impairments	15,996			13,371			50,372			25,989
Total expenses	160,445			150,059			329,060			300,040
Income before other income/(expense) and income tax expense	8,190			21,667			4,997			40,043
Other income (expense):
Gain (loss) on debt extinguishment	8			14,016			(22		)	8,675
Total other income (expense)	8			14,016			(22		)	8,675
Income before income tax expense	8,198			35,683			4,975			48,718
Income tax expense	(265		)	(839		)	(430		)	(920		)
Income before gain on disposition of assets	7,933			34,844			4,545			47,798
Gain on disposition of assets	15,273			11,115			31,490			21,261
Net income attributable to common stockholders	$	23,206		$	45,959		$	36,035		$	69,059

Net income per share attributable to common stockholders—basic	$	0.05		$	0.10		$	0.07		$	0.15

Net income per share attributable to common stockholders—diluted	$	0.05		$	0.10		$	0.07		$	0.15

Weighted average shares of common stock outstanding:
Basic	479,102,268			473,161,125			480,845,051			457,263,526
Diluted	479,102,268			473,164,386			480,845,622			457,267,015

Dividends declared per common share issued	$	0.18000		$	0.17500		$	0.36000		$	0.35000

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016
Net income attributable to common stockholders	$	23,206	$	45,959		$	36,035	$	69,059
Other comprehensive income:
Change in net unrealized losses on cash flow hedges	—		(317		)	—		(1,173		)
Net cash flow hedge losses reclassified to operations	—		1,930			—		2,165
Total comprehensive income	$	23,206	$	47,572		$	36,035	$	70,051

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statement of Stockholders’ Equity

(In Thousands, Except Share Data)

(Unaudited)



	Common Stock
	Shares		Par Value			Capital in Excess of Par Value		Accumulated Deficit			Total Stockholders’ Equity
Balances, December 31, 2016	483,624,120		$	4,836		$	5,177,086	$	(1,499,814	)	$	3,682,108
Net income	—		—			—		36,035			36,035
Dividends declared on common stock	—		—			—		(169,544		)	(169,544		)
Tax withholdings related to net stock settlements	(412,219	)	(4		)	—		(3,297		)	(3,301		)
Repurchase of common shares	(26,337,295	)	(263		)			(200,263		)	(200,526		)
Stock-based compensation, net	1,027,986		10			11,428		(377		)	11,061
Balances, June 30, 2017	457,902,592		$	4,579		$	5,188,514	$	(1,837,260	)	$	3,355,833

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



	Six Months Ended June 30,
	2017			2016
Operating activities
Net income attributable to common stockholders	$	36,035		$	69,059
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	129,214			128,927
Impairments	50,372			25,989
Amortization of deferred financing costs	4,823			4,402
Payment to terminate interest rate swaps	—			(1,724		)
Derivative net settlements, amortization and terminations	—			1,781
Amortization of debt discounts	6,304			1,507
Stock-based compensation expense	11,438			3,790
Loss (gain) on debt extinguishment	22			(8,675		)
Debt extinguishment costs	—			(10,625		)
Gains on dispositions of real estate and other assets, net	(31,490		)	(21,261		)
Non-cash revenue	(14,275		)	(11,954		)
Other	2,716			210
Changes in operating assets and liabilities:
Deferred costs and other assets, net	(2,074		)	(179		)
Accounts payable, accrued expenses and other liabilities	2,893			(3,620		)
Accrued restructuring charges	—			(647		)
Net cash provided by operating activities	195,978			176,980
Investing activities
Acquisitions of real estate	(218,117		)	(235,342		)
Capitalized real estate expenditures	(23,327		)	(5,978		)
Investments in loans receivable	(3,000		)	—
Collections of principal on loans receivable and real estate assets under direct financing leases	2,074			16,783
Proceeds from dispositions of real estate and other assets	239,077			189,023
Transfers of net sales proceeds from restricted accounts pursuant to 1031 Exchanges	—			39,867
Transfers of net sales proceeds to Master Trust Release	(19,633		)	(3,862		)
Net cash (used in) provided by investing activities	(22,926		)	491



	Six Months Ended June 30,
	2017			2016
Financing activities
Borrowings under Revolving Credit Facility	568,200			357,000
Repayments under Revolving Credit Facility	(334,200		)	(357,000		)
Repayments under mortgages and notes payable	(26,759		)	(460,766		)
Borrowings under Term Loan	—			451,000
Repayments under Term Loan	—			(406,000		)
Deferred financing costs	(192		)	(1,077		)
Proceeds from issuance of common stock, net of offering costs	—			401,953
Repurchase of shares of common stock	(203,827		)	(739		)
Dividends paid	(174,693		)	(154,982		)
Transfers (from) to reserve/escrow deposits with lenders	(394		)	760
Net cash used in financing activities	(171,865		)	(169,851		)
Net increase in cash and cash equivalents	1,187			7,620
Cash and cash equivalents, beginning of period	10,059			21,790
Cash and cash equivalents, end of period	$	11,246		$	29,410

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

(Unaudited)



	June 30, 2017			December 31, 2016
Assets
Investments:
Real estate investments:
Land and improvements	$	2,652,512		$	2,704,010
Buildings and improvements	4,748,049			4,775,221
Total real estate investments	7,400,561			7,479,231
Less: accumulated depreciation	(1,001,057		)	(940,005		)
	6,399,504			6,539,226
Loans receivable, net	66,415			66,578
Intangible lease assets, net	457,580			470,276
Real estate assets under direct financing leases, net	27,373			36,005
Real estate assets held for sale, net	133,166			160,570
Net investments	7,084,038			7,272,655
Cash and cash equivalents	11,246			10,059
Deferred costs and other assets, net	169,699			140,917
Goodwill	254,340			254,340
Total assets	$	7,519,323		$	7,677,971
Liabilities and partners' capital
Liabilities:
Revolving Credit Facility	$	320,000		$	86,000
Term Loan, net	418,880			418,471
Senior Unsecured Notes, net	295,135			295,112
Mortgages and notes payable, net	2,103,425			2,162,403
Notes payable to Spirit Realty Capital, Inc., net	709,183			702,642
Total debt, net	3,846,623			3,664,628
Intangible lease liabilities, net	169,831			182,320
Accounts payable, accrued expenses and other liabilities	147,036			148,915
Total liabilities	4,163,490			3,995,863
Commitments and contingencies (see Note 7)
Partners' capital:
Partnership units
General partner's capital: 3,988,218 units issued and outstanding as of both June 30, 2017 and December 31, 2016	25,484			26,586
Limited partners' capital: 453,914,374 and 479,635,902 units issued and outstanding as of June 30, 2017 and December 31, 2016, respectively	3,330,349			3,655,522
Total partners' capital	3,355,833			3,682,108
Total liabilities and partners' capital	7,519,323			7,677,971

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Operations

(In Thousands, Except Unit and Per Unit Data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues:
Rentals	$	160,487		$	160,506		$	319,707		$	322,325
Interest income on loans receivable	874			1,625			1,766			3,284
Earned income from direct financing leases	518			698			1,130			1,422
Tenant reimbursement income	4,480			3,200			8,445			7,024
Other income	2,276			5,697			3,009			6,028
Total revenues	168,635			171,726			334,057			340,083
Expenses:
General and administrative	22,862			13,850			36,280			25,499
Restructuring charges	—			1,813			—			2,462
Transaction costs	485			—			485			—
Property costs	9,632			6,611			18,683			13,938
Real estate acquisition costs	424			979			577			1,036
Interest	46,826			49,172			93,449			102,189
Depreciation and amortization	64,220			64,263			129,214			128,927
Impairments	15,996			13,371			50,372			25,989
Total expenses	160,445			150,059			329,060			300,040
Income before other income/(expense) and income tax expense	8,190			21,667			4,997			40,043
Other income (expense):
Gain (loss) on debt extinguishment	8			14,016			(22		)	8,675
Total other income (expense)	8			14,016			(22		)	8,675
Income before income tax expense	8,198			35,683			4,975			48,718
Income tax expense	(265		)	(839		)	(430		)	(920		)
Income before gain on disposition of assets	7,933			34,844			4,545			47,798
Gain on disposition of assets	15,273			11,115			31,490			21,261
Net income	$	23,206		$	45,959		$	36,035		$	69,059
Net income attributable to the general partner	$	188		$	389		297			585
Net income attributable to the limited partners	$	23,018		$	45,570		$	35,738		$	68,474

Net income per partnership unit - basic	$	0.05		$	0.10		$	0.07		$	0.15

Net income per partnership unit - diluted	$	0.05		$	0.10		$	0.07		$	0.15

Weighted average partnership units outstanding:
Basic	479,102,268			473,161,125			480,845,051			457,263,526
Diluted	479,102,268			473,164,386			480,845,622			457,267,015

Distributions declared per partnership unit issued	$	0.18000		$	0.17500		$	0.36000		$	0.35000

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016
Net income	$	23,206	$	45,959		$	36,035	$	69,059
Other comprehensive income:
Change in net unrealized losses on cash flow hedges	—		(317		)	—		(1,173		)
Net cash flow hedge losses reclassified to operations	—		1,930			—		2,165
Total comprehensive income	$	23,206	$	47,572		$	36,035	$	70,051

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Partners' Capital

(In Thousands, Except Unit Data)

(Unaudited)



	General Partner's Capital ⁽¹⁾				Limited Partners' Capital ⁽²⁾					Total Partnership Capital
	General Partner's Capital ⁽¹⁾				Limited Partners' Capital ⁽²⁾
	Units	Amount			Units		Amount
Balances, December 31, 2016	3,988,218	$	26,586		479,635,902		$	3,655,522		$	3,682,108
Net income	—	297			—		35,738			36,035
Partnership distributions declared	—	(1,399		)	—		(168,145		)	(169,544		)
Tax withholdings related to net partnership unit settlements	—	—			(412,219	)	(3,301		)	(3,301		)
Repurchase of partnership units	—	—			(26,337,295	)	(200,526		)	(200,526		)
Stock-based compensation	—	—			1,027,986		11,061			11,061
Balances, June 30, 2017	3,988,218	$	25,484		453,914,374		$	3,330,349		$	3,355,833

⁽¹⁾ Consists of general partnership interests held by OP Holdings.

⁽²⁾ Consists of limited partnership interests held by the Corporation and Spirit Notes Partner, LLC.

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)



	Six Months Ended June 30,
	2017			2016
Operating activities
Net income attributable to partners	$	36,035		$	69,059
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	129,214			128,927
Impairments	50,372			25,989
Amortization of deferred financing costs	4,823			4,402
Payment to terminate interest rate swaps	—			(1,724		)
Derivative net settlements, amortization and terminations	—			1,781
Amortization of debt discounts	6,304			1,507
Stock-based compensation expense	11,438			3,790
Loss (gain) on debt extinguishment	22			(8,675		)
Debt extinguishment costs	—			(10,625		)
Gains on dispositions of real estate and other assets, net	(31,490		)	(21,261		)
Non-cash revenue	(14,275		)	(11,954		)
Other	2,716			210
Changes in operating assets and liabilities:
Deferred costs and other assets, net	(2,074		)	(179		)
Accounts payable, accrued expenses and other liabilities	2,893			(3,620		)
Accrued restructuring charges	—			(647		)
Net cash provided by operating activities	195,978			176,980
Investing activities
Acquisitions of real estate	(218,117		)	(235,342		)
Capitalized real estate expenditures	(23,327		)	(5,978		)
Investments in loans receivable	(3,000		)	—
Collections of principal on loans receivable and real estate assets under direct financing leases	2,074			16,783
Proceeds from dispositions of real estate and other assets	239,077			189,023
Transfers of net sales proceeds from restricted accounts pursuant to 1031 Exchanges	—			39,867
Transfers of net sales proceeds to Master Trust Release	(19,633		)	(3,862		)
Net cash (used in) provided by investing activities	(22,926		)	491



	Six Months Ended June 30,
	2017			2016
Financing activities
Borrowings under Revolving Credit Facility	568,200			357,000
Repayments under Revolving Credit Facility	(334,200		)	(357,000		)
Repayments under mortgages and notes payable	(26,759		)	(460,766		)
Borrowings under Term Loan	—			451,000
Repayments under Term Loan	—			(406,000		)
Deferred financing costs	(192		)	(1,077		)
Proceeds from issuance of common stock, net of offering costs	—			401,953
Repurchase of partnership units	(203,827		)	(739		)
Dividends paid	(174,693		)	(154,982		)
Transfers (from) to reserve/escrow deposits with lenders	(394		)	760
Net cash used in financing activities	(171,865		)	(169,851		)
Net increase in cash and cash equivalents	1,187			7,620
Cash and cash equivalents, beginning of period	10,059			21,790
Cash and cash equivalents, end of period	$	11,246		$	29,410

See accompanying notes.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements

June 30, 2017

(Unaudited)

Note 1. Organization

Company Organization and Operations

Spirit Realty Capital, Inc. (the "Corporation" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate and deliver sustainable and attractive returns for stockholders by investing primarily in and managing a portfolio of single-tenant, operationally essential real estate throughout the U.S. that is generally leased on a long-term, triple-net basis to tenants operating within predominantly retail, but also office and industrial property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.The Company began operations through a predecessor legal entity in 2003.

The Company’s operations are generally carried out through Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC ("OP Holdings"), one of the Corporation's wholly-owned subsidiaries, is the sole general partner and owns approximately 1.0% of the Operating Partnership. The Corporation and a wholly-owned subsidiary ("Spirit Notes Partner, LLC") are the only limited partners and together own the remaining 99.0% of the Operating Partnership.

Note 2. Summary of Significant Accounting Policies

Basis of Accounting and Principles of Consolidation

The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2016.

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. The consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

All expenses incurred by the Company have been allocated to the Operating Partnership in accordance with the Operating Partnership's first amended and restated agreement of limited partnership, which management determined to be a reasonable method of allocation. Therefore, expenses incurred would not be materially different if the Operating Partnership had operated as an unaffiliated entity.

The Company has formed numerous special purpose entities to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted under their governing documents. At June 30, 2017 and December 31, 2016, net assets totaling $2.83 billion and $2.95 billion, respectively, were held, and net liabilities totaling $2.20 billion and $2.26 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. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Segment Reporting

The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.

Allowance for Doubtful Accounts

The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. 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 $10.2 million and $6.4 million at June 30, 2017 and December 31, 2016, respectively, against accounts receivable balances of $23.8 million and $25.3 million, respectively. Receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets. Receivables are written off against the reserves for uncollectible amounts when all possible means of collection have been exhausted.

For deferred rental revenues related to the straight-line method of reporting rental revenue, the collectability 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. The Company established a reserve for losses of $4.3 million at June 30, 2017 and $7.7 million at December 31, 2016, against deferred rental revenue receivables of $76.6 million and $71.1 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):



	June 30, 2017		December 31, 2016
Collateral deposits ⁽¹⁾	$	1,587	$	1,374
Tenant improvements, repairs, and leasing commissions ⁽²⁾	10,392		9,739
Master Trust Release ⁽³⁾	34,045		14,412
Loan impounds ⁽⁴⁾	347		670
Other ⁽⁵⁾	5,906		644
	$	52,277	$	26,839

⁽¹⁾Funds held in reserve by lenders which can be applied at their discretion to the repayment of debt (any funds remaining on deposit after the debt is paid in full are released to the borrower). Balance changes are reflected in financing activities within the Statement of Cash Flows.

⁽²⁾Deposits held as additional collateral support by lenders to fund tenant improvements, repairs and leasing commissions incurred to secure a new tenant. Balance changes are reflected in financing activities within the Statement of Cash Flows.

⁽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. Balance changes are reflected in investing activities within the Statement of Cash Flows.

⁽⁴⁾ Funds held in lender controlled accounts generally used to meet future debt service or certain property operating expenses. Balance changes are reflected in financing activities within the Statement of Cash Flows.

⁽⁵⁾Funds held in lender controlled accounts released after scheduled debt service requirements are met. Balance changes are reflected in operating activities within the Statement of Cash Flows.

Goodwill

Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.

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. These new accounting pronouncements entail technical corrections to existing guidance or affect guidance related to specialized industries or entities. There are no updates to our prior disclosures regarding adoption of pronouncements that are not yet effective. Additionally, we have evaluated new accounting pronouncements issued subsequent to our most recent Annual Report on Form 10-K and have concluded that they are either not applicable or will not have a material impact on the Company's financial position or results of operations.

Changes in Accounting Principle

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies many aspects of accounting for share-based payment transactions under ASC Topic 718, Compensation - Stock Compensation, including income tax consequences, classification of awards as either equity or liability, forfeiture rate calculations and classification on the statement of cash flows. The Company adopted this new guidance effective January 1, 2017 and made an accounting policy election to recognize stock-based compensation forfeitures as they occur, whereas previously stock-based compensation forfeitures were estimated and recognized based on historical forfeiture rates. This change in accounting principle has been applied prospectively and the change in accounting principle had no material impact on the financial statements of the Company.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which narrows the definition of a business. The Company early adopted the guidance effective January 1, 2017 and application is on a prospective basis. Under the new guidance, the acquisition of a property with an in-place lease generally will no longer be accounted for as an acquisition of a business, but instead as an asset acquisition, meaning the transaction costs of such an acquisition will now be capitalized instead of expensed. Further, dispositions of properties generally no longer qualify as a disposition of a business and therefore will not generate allocated goodwill when determining gain or loss on sale.

Note 3. Investments

Real Estate Investments

As of June 30, 2017, the Company's gross investment in real estate properties and loans totaled approximately $8.1 billion, representing investments in 2,549 properties, including 74 properties or other related assets securing mortgage loans. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with only one state, Texas, with a real estate investment of 12.3%, accounting for more than 10% of the total dollar amount of the Company’s real estate investment portfolio.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

During the six months ended June 30, 2017, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:



	Number of Properties					Dollar Amount of Investments
	Owned		Financed	Total		Owned			Financed			Total
						(In Thousands)
Gross balance, December 31, 2016	2,541		74	2,615		$	8,181,076		$	66,578		$	8,247,654
Acquisitions/improvements ⁽¹⁾	39		—	39		241,444			3,000			244,444
Dispositions of real estate ⁽²⁾	(105	)	—	(105	)	(276,302		)	—			(276,302		)
Principal payments and payoffs	—		—	—		—			(2,074		)	(2,074		)
Impairments	—		—	—		(50,372		)	—			(50,372		)
Write-off of gross lease intangibles	—		—	—		(26,228		)	—			(26,228		)
Loan premium amortization and other	—		—	—		32			(1,090		)	(1,058		)
Gross balance, June 30, 2017	2,475		74	2,549		8,069,650			66,414			8,136,064
Accumulated depreciation and amortization						(1,222,536		)	—			(1,222,536		)
Other						679			—			679
Net balance, June 30, 2017						$	6,847,793		$	66,414		$	6,914,207

⁽¹⁾ Includes investments of $22.7 million in revenue producing capitalized expenditures, as well as $0.7 million of non-revenue producing capitalized expenditures as of June 30, 2017.

⁽²⁾ The total accumulated depreciation and amortization associated with dispositions of real estate was $21.4 million as of June 30, 2017.

Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases (including realized rent increases occurring after July 1, 2017) at June 30, 2017 (in thousands):



	June 30, 2017
Remainder of 2017	$	307,551
2018	607,263
2019	591,855
2020	573,638
2021	544,344
Thereafter	4,152,237
Total future minimum rentals	$	6,776,888

Because lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum rentals do not include any contingent rentals based on a percentage of the lessees' gross sales or lease escalations based on future changes in the CPI or other stipulated reference rate.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Loans Receivable

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



	June 30, 2017			December 31, 2016
Mortgage loans - principal	$	53,482		$	55,410
Mortgage loans - premium, net of amortization	6,105			7,194
Mortgages loans, net	59,587			62,604
Other note receivables - principal	7,328			4,474
Allowance for loan losses	(500		)	(500		)
Other note receivables, net	6,828			3,974
Total loans receivable, net	$	66,415		$	66,578

The mortgage loans are secured by single-tenant commercial properties and generally have fixed interest rates over the term of the loans. There are four other notes receivable, of which two notes totaling $6.6 million are secured by tenant assets and stock and the remaining two notes are unsecured.

Lease Intangibles, Net

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



	June 30, 2017			December 31, 2016
In-place leases	$	623,638		$	624,723
Above-market leases	92,536			88,873
Less: accumulated amortization	(258,594		)	(243,320		)
Intangible lease assets, net	$	457,580		$	470,276

Below-market leases	$	228,065		$	236,008
Less: accumulated amortization	(58,234		)	(53,688		)
Intangible lease liabilities, net	$	169,831		$	182,320

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases were $3.4 million and $3.0 million for the six months ended June 30, 2017 and 2016, respectively and $1.6 million and $1.5 million for the three months ended June 30, 2017 and 2016, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $22.1 million and $23.5 million for the six months ended June 30, 2017 and 2016, respectively, and $10.9 million and $11.6 million for the three months ended June 30, 2017 and 2016, respectively.

Real Estate Assets Under Direct Financing Leases

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



	June 30, 2017			December 31, 2016
Minimum lease payments receivable	$	8,307		$	9,456
Estimated residual value of leased assets	27,027			35,640
Unearned income	(7,961		)	(9,091		)
Real estate assets under direct financing leases, net	$	27,373		$	36,005

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Real Estate Assets Held for Sale

The following table shows the activity in real estate assets held for sale for the six months ended June 30, 2017 (dollars in thousands):



	Number of Properties		Carrying Value
Balance, December 31, 2016	44		$	160,570
Transfers from real estate investments held and used	67		157,839
Sales	(49	)	(112,101		)
Transfers to real estate investments held and used	(7	)	(58,667		)
Impairments			(14,475		)
Balance, June 30, 2017	55		$	133,166

Impairments

The following table summarizes total impairment losses recognized on the accompanying consolidated statements of operations (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Real estate and intangible asset impairment	$	14,657	$	8,707	$	49,877	$	21,337
Write-off of lease intangibles, net	1,339		4,663		495		4,972
Loans receivable recovery	—		—		—		(324		)
Total impairments from real estate investment net assets	15,996		13,370		50,372		25,985
Other impairment	—		1		—		4
Total impairment loss	$	15,996	$	13,371	$	50,372	$	25,989

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Note 4. Debt

The debt of the Company and the Operating Partnership are the same, except for the presentation of the Convertible Notes. The Convertible Notes were issued by the Company. Subsequently, an intercompany note between the Company and the Operating Partnership was executed with terms identical to those of the Convertible Notes. Therefore, in the consolidated balance sheet of the Operating Partnership, the amounts related to the Convertible Notes are reflected as notes payable to Spirit Realty Capital, Inc., net. The Company's debt is summarized below:



	Weighted Average Effective Interest Rates ⁽¹⁾		Weighted Average Stated Rates ⁽²⁾		Weighted Average Maturity ⁽³⁾	June 30, 2017			December 31, 2016
					(in Years)	(In Thousands)
Revolving Credit Facility	4.84	%	2.41	%	1.7	$	320,000		$	86,000
Term Loan	2.64	%	2.57	%	1.3	420,000			420,000
Senior Unsecured Notes	4.70	%	4.45	%	9.2	300,000			300,000
Master Trust Notes	5.58	%	5.03	%	5.7	1,662,578			1,672,706
CMBS fixed-rate	5.87	%	5.75	%	3.7	476,364			528,427
Convertible Notes	5.32	%	3.28	%	2.8	747,500			747,500
Total debt	5.13	%	4.26	%	4.4	3,926,442			3,754,633
Debt discount, net						(46,687		)	(52,894		)
Deferred financing costs, net ⁽⁴⁾						(33,132		)	(37,111		)
Total debt, net						$	3,846,623		$	3,664,628

⁽¹⁾ The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs and credit facility fees, where applicable, calculated for the three months ended June 30, 2017 and based on the average principal balance outstanding during the period.

⁽²⁾ Represents the weighted average stated interest rate based on the outstanding principal balance as of June 30, 2017.

⁽³⁾Represents the weighted average maturity based on the outstanding principal balance as of June 30, 2017.

⁽⁴⁾ The Company records deferred financing costs for its Revolving Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.

Revolving Credit Facility

On March 31, 2015, the Operating Partnership entered into the Credit Agreement that established a new $600.0 million unsecured credit facility. The Revolving Credit Facility matures on March 31, 2019 (extendable at the Operating Partnership's option to March 31, 2020, subject to satisfaction of certain requirements) and includes an accordion feature to increase the committed facility size up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments. On April 27, 2016, the Company expanded the borrowing capacity under the Revolving Credit Facility from $600.0 million to $800.0 million by partially exercising the accordion feature under the terms of the Credit Agreement. The Revolving Credit Facility also includes a $50.0 million sub-limit for swing-line loans and up to $60.0 million available for issuances of letters of credit. Swing-line loans and letters of credit reduce availability under the Revolving Credit Facility on a dollar-for-dollar basis. On November 3, 2015, the Company entered into a first amendment to the Credit Agreement. The amendment conforms certain of the terms and covenants to those in the Term Loan Agreement, including limiting the requirement of subsidiary guarantees to material subsidiaries (as defined in the Credit Agreement) meeting certain conditions. At June 30, 2017, there were no subsidiaries meeting this requirement.

Borrowings bear interest at either a specified base rate or LIBOR plus an applicable margin, at the Operating Partnership's option. The Revolving Credit Facility bears interest at a rate equal to LIBOR plus 0.875% to 1.55% per annum or a specified base rate plus 0.00% to 0.55% 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, in each case depending on the Corporation's credit rating. As of June 30, 2017, the Revolving Credit Facility bore interest at LIBOR plus 1.25% based on the Company's credit rating and incurred a facility fee of 0.25% per annum.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

The Operating Partnership may voluntarily prepay the Revolving 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 Revolving Credit Facility is unconditionally guaranteed by the Corporation and material subsidiaries that meet certain conditions (as defined in the Credit Agreement). The Revolving Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.

As a result of entering into the Revolving Credit Facility and expanding the borrowing capacity, the Company incurred costs of $4.8 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Revolving Credit Facility. The unamortized deferred financing costs relating to the Revolving Credit Facility were $2.3 million and $2.9 million as of June 30, 2017 and December 31, 2016, respectively, and recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.

As of June 30, 2017, $320.0 million was outstanding, no letters of credit were issued and $480.0 million of borrowing capacity was available under the Revolving Credit Facility. The Operating Partnership's ability to borrow under the Revolving Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of June 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.

Term Loan

On November 3, 2015, the Company entered into a Term Loan Agreement among the Operating Partnership, as borrower, the Company as guarantor and the lenders that are parties thereto. The Term Loan Agreement provides for a $325.0 million senior unsecured term facility that has an initial maturity date of November 2, 2018, which may be extended at the Company's option pursuant to two one-year extension options, subject to the satisfaction of certain conditions and payment of an extension fee. In addition, an accordion feature allows the facility to be increased up to $600.0 million, subject to obtaining additional lender commitments. During the fourth quarter of 2015 and 2016, the Company exercised the accordion feature under the Credit Agreement and increased the term facility borrowing capacity from $325.0 million to $370.0 million and $420.0 million, respectively.

The Term Loan Agreement provides that borrowings bear interest at either LIBOR plus 1.35% to 1.80% per annum or a specified base rate plus 0.35% to 0.80% per annum, at the Operating Partnership's option. The borrowings bear interest at either LIBOR plus 0.90% to 1.75% per annum or a specified base rate plus 0.00% to 0.75% per annum, in each case depending on the Corporation’s credit ratings. As of June 30, 2017, the Term Loan bore interest at LIBOR plus 1.35% based on the Company's credit rating.

The Operating Partnership may voluntarily prepay the Term Loan, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees. Borrowings may be repaid without premium or penalty, and may be re-borrowed within 30 days up to the then available loan commitment and subject to occurrence limitations within any twelve-month period. Payment of the Term Loan is unconditionally guaranteed by the Corporation and, under certain circumstances, by one or more material subsidiaries (as defined in the Term Loan Agreement) of the Corporation. The obligations of the Corporation and any guarantor under the Term Loan are full recourse to the Corporation and each guarantor.

As a result of entering into the Term Loan, the Company incurred origination costs of $2.4 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the Term Loan. As of June 30, 2017 and December 31, 2016, the unamortized deferred financing costs relating to the Term Loan were $1.1 million and $1.5 million, respectively, and recorded net against the principal balance of the Term Loan on the accompanying consolidated balance sheets.

As of June 30, 2017, the Term Loan was fully drawn. The Operating Partnership's ability to borrow under the Term Loan is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. The Corporation has unconditionally guaranteed all obligations of the Operating Partnership under the Term Loan Agreement. As of June 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Senior Unsecured Notes

On August 18, 2016, the Operating Partnership completed a private placement of $300.0 million aggregate principal amount of senior notes, which are guaranteed by the Corporation. The Senior Unsecured Notes were issued at 99.378% of their principal amount, resulting in net proceeds of $296.2 million, after deducting transaction fees and expenses. The Senior Unsecured Notes accrue interest at a rate of 4.45% per year, payable on March 15 and September 15 of each year, until the maturity date of September 15, 2026. The Company filed a registration statement with the SEC to exchange the private Senior Unsecured Notes for registered Senior Unsecured Notes with substantially identical terms, which became effective April 14, 2017. All $300.0 million aggregate principal amount of private Senior Unsecured Notes were tendered in the exchange for registered Senior Unsecured Notes.

The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed on or after June 15, 2026 (three months prior to the maturity date of the Senior Unsecured Notes), the redemption price will not include a make-whole premium.

In connection with the offering, the Operating Partnership incurred $3.4 million in deferred financing costs. This amount is being amortized to interest expense over the life of the Senior Unsecured Notes. As of both June 30, 2017 and December 31, 2016, the unamortized deferred financing costs relating to the Senior Unsecured Notes were $3.1 million, and recorded net against the Senior Unsecured Notes principal balance on the accompanying consolidated balance sheets.

In connection with the issuance of the Senior Unsecured Notes, the Corporation and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of June 30, 2017, the Corporation and the Operating Partnership were in compliance with these financial covenants.

Master Trust Notes

The Company has access to an asset-backed securitization platform, the Spirit Master Funding Program, to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. The Spirit Master Funding Program consists of two separate securitization trusts, Master Trust 2013 and Master Trust 2014, each of which have one or multiple bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. Each issuer is an indirect wholly-owned special purpose entity of the Corporation.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

The Master Trust Notes are summarized below:



	Stated Rates ⁽¹⁾		Maturity	June 30, 2017			December 31, 2016
			(in Years)	(in Thousands)
Series 2014-1 Class A1	5.1	%	3.0	$	48,111		$	53,919
Series 2014-1 Class A2	5.4	%	3.1	253,300			253,300
Series 2014-2	5.8	%	3.7	224,510			226,283
Series 2014-3	5.7	%	4.7	311,581			311,820
Series 2014-4 Class A1	3.5	%	2.6	150,000			150,000
Series 2014-4 Class A2	4.6	%	12.6	360,000			360,000
Total Master Trust 2014 notes	5.1	%	6.0	1,347,502			1,355,322
Series 2013-1 Class A	3.9	%	1.5	125,000			125,000
Series 2013-2 Class A	5.3	%	6.5	190,076			192,384
Total Master Trust 2013 notes	4.7	%	4.5	315,076			317,384
Total Master Trust notes				1,662,578			1,672,706
Debt discount, net				(16,679		)	(18,787		)
Deferred financing costs, net				(14,832		)	(16,376		)
Total Master Trust Notes, net				$	1,631,067		$	1,637,543

⁽¹⁾ Represents the individual series stated interest rate as of June 30, 2017 and the weighted average stated rate of the total Master Trust Notes, based on the collective series outstanding principal balances as of June 30, 2017.

As of June 30, 2017, the Master Trust 2014 notes were secured by 836 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 June 30, 2017, the Master Trust 2013 notes were secured by 303 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Corporation.

CMBS

As of June 30, 2017, indirect wholly-owned special purpose entity subsidiaries of the Corporation were borrowers under 17 fixed-rate non-recourse loans, excluding four loans in default, which have been securitized into CMBS and are secured by the borrowers' respective leased properties and related assets. The stated interest rates of the loans as of June 30, 2017, excluding the defaulted loans, ranged from 3.90% to 6.52% with a weighted average stated interest rate of 5.32%. As of June 30, 2017, these fixed-rate loans were secured by 120 properties. As of June 30, 2017 and December 31, 2016, the unamortized deferred financing costs associated with these fixed-rate loans were $4.4 million and $4.7 million, respectively, and recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets. The deferred financing costs are being amortized to interest expense over the term of the respective loans.

As of June 30, 2017, certain borrowers were in default under the loan agreements relating to four separate CMBS fixed-rate loans, where six properties securing the respective loans were no longer generating sufficient revenue to pay the scheduled debt service. The default interest rate on these loans was between 7.53% and 10.62%. Each defaulted borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligations. As of June 30, 2017, the aggregate principal balance under the defaulted loans was $53.6 million, which includes $10.7 million of interest capitalized to the principal balance.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Convertible Notes

In May 2014, the Corporation issued $402.5 million aggregate principal amount of 2.875% convertible notes due in 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes due in 2021. Interest on the Convertible Notes is payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes will mature on May 15, 2019 and the 2021 Notes will mature on May 15, 2021.

The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Corporation's common stock, or a combination thereof. The initial conversion rate applicable to each series is 76.3636 per $1,000 principal note (equivalent to an initial conversion price of $13.10 per share of common stock, representing a 22.5% premium above the public offering price of the common stock offered concurrently at the time the Convertible Notes were issued). The conversion rate is subject to adjustment for certain anti-dilution events, including special distributions and regular quarterly cash dividends exceeding $0.16625 per share. As of June 30, 2017, the conversion rate was 77.0592 per $1,000 principal note. Earlier conversion may be triggered if shares of the Corporation's common stock trades higher than the established thresholds, if the Convertible Notes trade below established thresholds, or certain corporate events occur.

In connection with the issuance of the Convertible Notes, the Company recorded a discount of $56.7 million, which represents the estimated value of the embedded conversion feature for each of the Convertible Notes. The discount is being amortized to interest expense using the effective interest method over the term of each of the 2019 Notes and 2021 Notes. As of June 30, 2017 and December 31, 2016, the unamortized discount was $28.6 million and $33.5 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 sheets, net of financing transaction costs.

In connection with the offering, the Company also incurred $19.6 million in deferred financing costs. This amount has been allocated on a pro-rata basis to each of the Convertible Notes and is being amortized to interest expense over the term of each note. As of June 30, 2017 and December 31, 2016, the unamortized deferred financing costs relating to the Convertible Notes were $9.7 million and $11.4 million, respectively, and recorded net against the Convertible Notes principal balance on the accompanying consolidated balance sheets.

Debt Extinguishment

During the six months ended June 30, 2017, the Company extinguished a total of $51.2 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 5.69%. As a result of these transactions, the Company recognized a de minimis net loss. Payment of any premium is included in debt extinguishment costs within operating activities in the consolidated statement of cash flows.

During the six months ended June 30, 2016, the Company extinguished a total of $495.2 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.28%. As a result of these transactions, the Company recognized a net gain on debt extinguishment of approximately $8.7 million.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Debt Maturities

As of June 30, 2017, scheduled debt maturities of the Company’s Revolving Credit Facility, Term Loan, Senior Unsecured Notes, Master Trust Notes, CMBS and Convertible Notes, including balloon payments, are as follows (in thousands):



	Scheduled Principal		Balloon Payment		Total
Remainder of 2017 ⁽¹⁾	$	13,840	$	138,149	$	151,989
2018 ⁽²⁾	42,115		602,779		644,894
2019 ⁽³⁾	44,325		732,500		776,825
2020	39,096		413,206		452,302
2021	30,658		554,753		585,411
Thereafter	219,000		1,096,021		1,315,021
Total	$	389,034	$	3,537,408	$	3,926,442

⁽¹⁾ The balloon payment balance in 2017 includes $53.6 million, including $10.7 million of capitalized interest, for the acceleration of principal payable following an event of default under four non-recourse CMBS loans with a stated maturity in 2017.

⁽²⁾ 2018 includes $420 million unsecured Term Loan that is extendible at borrower's option pursuant to two one-year extension options.

⁽³⁾ 2019 includes the Revolving Credit Facility which is extendible for one year at the borrower's option.

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 June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Interest expense – Revolving Credit Facility ⁽¹⁾	$	1,325	$	895	$	2,557	$	1,352
Interest expense – Term Loan	2,511		322		4,757		2,069
Interest expense – Senior Unsecured Notes	3,338		—		6,675		—
Interest expense – mortgages and notes payable	27,860		38,817		56,078		80,547
Interest expense – Convertible Notes ⁽²⁾	6,127		6,128		12,255		12,255
Non-cash interest expense:
Amortization of deferred financing costs	2,423		2,236		4,823		4,402
Amortization of net losses related to interest rate swaps	—		27		—		57
Amortization of debt discount, net	3,242		747		6,304		1,507
Total interest expense	$	46,826	$	49,172	$	93,449	$	102,189

⁽¹⁾ Includes facility fees of approximately $0.5 million for both of the three month periods ended June 30, 2017 and 2016, and approximately $1.1 million and $1.0 million for the six month periods ended June 30, 2017 and 2016, respectively.

⁽²⁾ Included in interest expense on the Operating Partnership's consolidated statements of operations are amounts paid to the Corporation by the Operating Partnership related to the notes payable to Spirit Realty Capital, Inc.

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 does not enter into derivatives contracts for speculative or trading purposes.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

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.

The Company has terminated all existing derivative contracts as of June 30, 2016 and has not entered into any new derivative contracts as of June 30, 2017.

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 six months ended June 30, 2016 (in thousands):



	Amount of Loss Recognized in AOCL on Derivative (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	Three Months Ended			Six Months Ended
Derivatives in Cash Flow Hedging Relationships	June 30, 2016
Interest rate swaps	$	(317	)	$	(1,173	)

	Amount of Loss Reclassified from AOCL into Operations (Effective Portion)
Location of Loss Reclassified from AOCL into Operations	Three Months Ended			Six Months Ended
Location of Loss Reclassified from AOCL into Operations	June 30, 2016
Interest expense	$	(224	)	$	(459	)

	Amount of Loss Recognized in Operations on Derivative (Ineffective Portion)
Location of Loss Recognized in Operations on Derivatives	Three Months Ended			Six Months Ended
Location of Loss Recognized in Operations on Derivatives	June 30, 2016
General and administrative expense	$	(1,706	)	$	(1,706	)

	Derivatives Not Designated as Hedging Instruments
Location of Loss Recognized in Operations on Derivatives	Three Months Ended			Six Months Ended
Location of Loss Recognized in Operations on Derivatives	June 30, 2016
General and administrative expense	$	(18	)	$	(18	)

Note 6. Stockholders’ Equity and Partners' Capital

Issuance of Common Stock

During the six months ended June 30, 2017, portions of awards of restricted common stock and performance share awards granted to certain of the Company's officers and other employees vested. The vesting of these awards, granted pursuant to the Amended Incentive Award Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Amended Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender 0.4 million shares of common stock valued at $3.3 million, solely to pay the associated statutory tax withholdings during the six months ended June 30, 2017.

ATM Program

In November 2016, the Company's Board of Directors approved a new ATM Program and the Company terminated its existing program. As of June 30, 2017, no shares of the Company's common stock had been sold under the new ATM Program and $500.0 million in gross proceeds capacity remained available.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

Stock Repurchase Program

In February 2016, the Company's Board of Directors approved a stock repurchase program, which authorizes the Company to repurchase up to $200.0 million of its common stock. These purchases can be made in the open market or through private transactions from time to time over the 18 month time period following authorization, depending on prevailing market conditions and applicable legal and regulatory requirements. Purchase activity will be dependent on various factors, including the Company's capital position, operating results, funds generated by asset sales, dividends that may be required by those sales, and investment options that may be available, including acquiring new properties or retiring debt. The stock repurchase program does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at the Company's discretion. During the six months ended June 30, 2017, 26,337,295 shares of the Company's outstanding common stock were repurchased in open market transactions under the stock repurchase program, at a weighted average price of $7.59 per share, equivalent to the full $200.0 million authorized. Fees associated with the share repurchase of $0.5 million are included in retained earnings.

Dividends Declared

For the six months ended June 30, 2017, the Corporation's Board of Directors declared the following dividends:



Declaration Date	Dividend Per Share		Record Date	Total Amount		Payment Date
				(in thousands)
March 15, 2017	$	0.18000	March 31, 2017	$	87,122	April 14, 2017
June 15, 2017	$	0.18000	June 30, 2017	$	82,422	July 14, 2017

The dividend declared on June 15, 2017 was paid on July 14, 2017 and is included in accounts payable, accrued expenses and other liabilities as of June 30, 2017.

Note 7. Commitments and Contingencies

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

On September 8, 2015, Haggen Holdings, LLC and a number of its affiliates, including Haggen Operations Holdings, LLC (collectively, the "Debtors"), filed petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. At the time of the filing, Haggen Operations Holdings, LLC ("Haggen") leased 20 properties on a triple net basis from a subsidiary of the Company under a master lease.


•	On November 25, 2015, Haggen and Spirit restructured the master lease in an initial settlement agreement with approved claims of $21.0 million.


•	On April 1, 2016, Spirit entered into a second settlement agreement with both Haggen and Albertsons, LLC for $3.4 million and $3.0 million, respectively.


•	As a result of the settlements, the leases for seven locations were rejected and the leases for thirteen locations were assumed by the Debtors and assigned to the following tenants: five locations to Albertsons, LLC, five locations to Smart & Final, LLC, two locations to Gelson’s Markets and one location to Safeway, Inc.


•	As of June 30, 2017, the Company had sold six of the properties for total proceeds of $56.6 million, including four of the original seven rejected locations, resulting in 11 locations with leases in-place under substantially the same terms and rent (inclusive of the $3.0 million settlement related to rent reduction for an amended lease with Albertsons, LLC) and three locations that remain vacant.


•	To date, the Company has collected $5.5 million of the total claims and there is no guaranty that the remaining claims will be paid or otherwise satisfied in full.

As of June 30, 2017, 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.

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.

Notes to Consolidated Financial Statements - (continued)

June 30, 2017

(Unaudited)

As of June 30, 2017, the Company had commitments totaling $97.2 million, of which $50.0 million relates to future acquisitions with the majority of the remainder to fund revenue generating improvements on properties the Company currently owns. Commitments related to acquisitions contain standard cancellation clauses contingent on the results of due diligence. Of the total commitments of $97.2 million, $95.6 million is expected to be funded during fiscal year 2017. 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 did not have any assets or liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016.

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):