United States
Securities
and Exchange Commission
Washington, D.C. 20549
Form
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging
growth company
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. ¨
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name
of Each Exchange On Which Registered | ||
Item 8.01 Other Events.
Financial Information of Spirit
As previously disclosed, on October 29, 2023, Realty Income Corporation, a Maryland corporation (“Realty Income”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Saints MD Subsidiary, Inc., a Maryland corporation and a direct wholly owned subsidiary of Realty Income (“Merger Sub”), and Spirit Realty Capital, Inc., a Maryland corporation (“Spirit”). Pursuant to the terms and conditions of the Merger Agreement, upon the closing, Spirit will be merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Merger”).
Realty Income is filing this Current Report on Form 8-K to provide certain financial information with respect to the proposed Merger. Specifically, this Current Report on Form 8-K provides: (1) the audited consolidated financial statements of Spirit as of December 31, 2022 and 2021, and for each of the years in the three year period ended December 31, 2022, attached hereto as Exhibit 99.1 and incorporated herein by reference, (2) the unaudited consolidated financial statements of Spirit as of September 30, 2023 and for the nine month periods ended September 30, 2023 and 2022, attached hereto as Exhibit 99.2 and incorporated herein by reference, and (3) Realty Income’s unaudited pro forma condensed combined balance sheet as of September 30, 2023 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and the year ended December 31, 2022, relating to the proposed Merger, attached hereto as Exhibit 99.3 and incorporated herein by reference. Such unaudited pro forma condensed combined financial statements have been prepared on the basis of certain assumptions and estimates and are subject to other uncertainties and do not purport to reflect what the actual results of operations or financial condition of the combined company would have been had the Merger been consummated on the dates assumed for purposes of such pro forma financial statements or to be indicative of the financial condition or results of operations of the combined company as of or for any future date or period. For further information, see Exhibit 99.3. The information in Exhibits 99.1 and 99.2 was provided by Spirit.
Supplemental Risk Factors
Realty Income is also filing this Current Report on Form 8-K to provide certain supplemental risk factors related to the Merger (the “Supplemental Risk Factors”), which are expected to be reflected in the Registration Statement on Form S-4 to be filed in connection with the Merger. The Supplemental Risk Factors are attached hereto as Exhibit 99.4 and incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
| (a) | Financial Statements of Businesses to be Acquired. |
The audited consolidated financial statements of Spirit as of December 31, 2022 and 2021, and for each of the years in the three year period ended December 31, 2022 are filed herewith as Exhibit 99.1 and incorporated in this Item 9.01(a) by reference.
The unaudited consolidated financial statements of Spirit as of September 30, 2023 and for the nine month periods ended September 30, 2023 and 2022 are filed herewith as Exhibit 99.2 and incorporated in this Item 9.01(a) by reference.
| (b) | Pro Forma Financial Information. |
The unaudited pro forma condensed combined balance sheet of Realty Income as of September 30, 2023 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and the year ended December 31, 2022, giving effect to the Merger, are filed herewith as Exhibit 99.3 and incorporated in this Item 9.01(b) by reference.
| (d) | Exhibits. |
Forward Looking Statements
This Current Report on Form 8-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements can be identified by the use of words and phrases such as “preliminary,” “expect,” “plan,” “will,” “estimate,” “project,” “intend,” “believe,” “guidance,” “approximately,” “anticipate,” “may,” “should,” “seek,” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate to historical matters but are meant to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management. These forward-looking statements are subject to known and unknown risks and uncertainties that you should not rely on as predictions of future events. Forward-looking statements depend on assumptions, data and/or methods which may be incorrect or imprecise, and Realty Income and/or Spirit may not be able to realize them. Neither Realty Income nor Spirit guarantee that the events described will happen as described (or that they will happen at all). The following risks and uncertainties, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: Realty Income’s or Spirit’s continued qualification as a REIT under the Internal Revenue Code of 1986, as amended; general domestic and foreign business, industry, economic, or financial conditions; competition; fluctuating interest and currency rates; inflation, including potential fluctuations in the Consumer Price Index, access to debt and equity capital markets and other sources of funding, and fluctuations in the available terms thereof; continued volatility and uncertainty in the credit markets and broader financial markets; other risks inherent in the real estate business, including client defaults under leases, increased client bankruptcies, potential liability relating to environmental matters, illiquidity of real estate investments, re-leasing uncertainties, and potential damages from natural disasters; competition, impairments in the value of real estate assets; changes in domestic and foreign income tax laws and rates; Realty Income’s or Spirit’s success in implementing its business strategy and its ability to identify, underwrite, finance, consummate, integrate and manage diversified acquisitions or investments; the impact of any financial, accounting, legal or regulatory issues or litigation that may affect Realty Income or Spirit or their major tenants, respectively; risks that the proposed Merger disrupts current plans and operations; the outcome of any legal proceedings related to the proposed Merger; the ability of Realty Income and Spirit to consummate the Merger on a timely basis or at all; the impacts of the announcement or consummation of the Merger on business relationships of Realty Income or Spirit; the satisfaction of the conditions precedent to consummation of the Merger; the anticipated cost related to the Merger; and the ability for the combined company to realize the anticipated synergies, or at all.
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. In connection with the proposed Merger, Realty Income intends to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 that will include a proxy statement of Spirit that also constitutes a prospectus of Realty Income. The proxy statement/prospectus will not be a part of or incorporated by reference in this Current Report on Form 8-K.
Additional Information and Where to Find It
In connection with the proposed Merger, Realty Income intends to file with the SEC a registration statement on Form S-4 that will include a proxy statement of Spirit that also constitutes a prospectus of Realty Income. Each of Spirit and Realty Income may also file other relevant documents with the SEC regarding the proposed Merger. This document is not a substitute for the proxy statement/prospectus or registration statement or any other document that Spirit or Realty Income may file with the SEC. The definitive proxy statement/prospectus (if and when available) will be mailed to the stockholders of Spirit. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT, PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS THAT MAY BE FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. Investors and security holders will be able to obtain free copies of the registration statement and proxy statement/prospectus (if and when available) and other documents containing important information about Spirit, Realty Income and the proposed Merger, once such documents are filed with the SEC, through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by Realty Income will be available free of charge on Realty Income’s website at www.realtyincome.com/investors or by contacting Realty Income’s Investor Relations department at 858-284-5000. Copies of the documents filed with the SEC by Spirit will be available free of charge on Spirit’s website at investors.spiritrealty.com or by contacting Spirit’s Investor Relations department by mail at Investor Relations, 2727 North Harwood Street, Suite 300, Dallas, TX.
Participants in the Solicitation
Realty Income, Spirit and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies in respect of the proposed Merger. Information about the directors and executive officers of Realty Income, including a description of their direct or indirect interests, by security holdings or otherwise, is set forth in Realty Income’s proxy statement for its 2023 Annual Meeting of Stockholders, which was filed with the SEC on March 31, 2023, and Realty Income’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 22, 2023. Information about the directors and executive officers of Spirit, including a description of their direct or indirect interests, by security holdings or otherwise, is set forth in Spirit’s proxy statement for its 2023 Annual Meeting of Stockholders, which was filed with the SEC on March 23, 2023, and Spirit’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 28, 2023. Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be filed with the SEC regarding the proposed Merger when such materials become available. Investors should read the proxy statement/prospectus carefully when it becomes available before making any voting or investment decisions. You may obtain free copies of these documents from Spirit or Realty Income using the sources indicated above.
No Offer or Solicitation
This communication and the information contained herein is not intended to and shall not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any securities, or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| REALTY INCOME CORPORATION | |||
| Date: | November 27, 2023 | By: | /s/ Michelle Bushore |
| Michelle Bushore Executive Vice President, Chief Legal Officer, General Counsel and Secretary | |||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-257510 on Form S-3 and Registration Statement Nos. 333-181227, 333-256254, 333-260648, and 333-266985 on Form S-8 of Realty Income Corporation of our report dated February 28, 2023, relating to the financial statements of Spirit Realty Capital, Inc. and the effectiveness of Spirit Realty Capital, Inc.’s internal control over financial reporting, appearing in this Current Report on Form 8-K of Realty Income Corporation.
/s/ Ernst & Young LLP
Dallas, Texas
November 27, 2023
Exhibit 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Financial Statements and Supplemental Data | ||
| Reports of Independent Registered Public Accounting Firm (PCAOB ID 42) | 2 | |
| Consolidated Balance Sheets as of December 31, 2022 and 2021 | 5 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 | 6 | |
| Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 | 7 | |
| Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 | 8 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 | 9 | |
| Notes to Consolidated Financial Statements | 11 |
| 1 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Spirit Realty Capital, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Spirit Realty Capital, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2022 consolidated financial statements of the Company and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 28, 2023
| 2 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spirit Realty Capital, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of Impairment on Real Estate Assets Held for Investment
| Description of the Matter | At December 31, 2022, the Company’s real estate investments (land, building, and improvements) held and used totaled $7.4 billion. As discussed in Note 2 to the consolidated financial statements, the Company reviews its real estate investments held and used periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, and market trends (such as the effects of leasing demand and competition) in assessing recoverability of these investments. Key assumptions used in estimating future cash flows and fair values include recently quoted bid or ask prices, market prices of comparable investments, contractual and comparable market rents, leasing assumptions, capitalization rates, and expectations for the use of the asset. A real estate investment held and used is considered impaired if its carrying value exceeds its estimated undiscounted cash flows, and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value. |
| 3 |
| Auditing management’s evaluation of impairment on real estate investments held and used is judgmental due to the estimation required in determining undiscounted cash flows that can be generated from the investment and determining estimated fair value when the investment is not deemed recoverable from those estimated future cash flows. In particular, the impairment evaluation is sensitive to the investment’s estimated residual value that is derived from the key assumptions stated above, which can be affected by expectations about future market or economic conditions, demand, and competition. | ||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s impairment evaluation process. This included controls over management’s review of the key assumptions underlying the undiscounted cash flows and the fair value determination. To test the Company’s evaluation of impairment of real estate investments, we performed audit procedures that included, among others, testing the key assumptions used by management in its recoverability analysis and in determining the fair value of investments that were impaired. We compared the key assumptions to observable market transaction information published by independent industry research sources to assess whether the assumptions were market supported. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of key assumptions to evaluate the changes in the valuation of certain properties that would result from changes in the assumptions or using alternative valuation techniques. | |
| In addition, we performed procedures to evaluate the completeness and accuracy of the data utilized in management’s impairment analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management. |
Purchase Accounting for Acquisitions of Real Estate Investments
| Description of the Matter | The Company recorded $1.4 billion in acquisition value of real estate investments during 2022. As discussed in Note 2 to the consolidated financial statements, the Company allocates the purchase price of real estate acquisitions to land, building, improvements, equipment, and intangibles for properties acquired with an in-place lease, based on their relative fair values. The Company considers certain key assumptions to estimate the fair value of the components of the tangible property acquired including comparable market values for land, building, and improvements. The determination of the value of intangible assets and liabilities primarily relates to the contractual lease terms, estimates of the fair market rental rates, discount rates, and estimates of costs to carry and obtain a tenant. | |
| Auditing management’s purchase accounting for the Company’s 2022 acquisitions of real estate investments is complex due to the judgmental nature of the assumptions made by management when determining the estimated fair value of the components of the tangible and intangible assets and liabilities acquired. | ||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s real estate investments acquisitions process. This included controls over management’s review of the key assumptions underlying the fair value estimates. To test the Company’s purchase accounting for acquisitions of real estate investments, we performed audit procedures that included, among others, reading the purchase agreements, evaluating the key assumptions and methods used in developing the estimated fair value of real estate acquisitions, and testing the recording of the assets and liabilities acquired. | |
| We evaluated, among other things, the key assumptions listed above, and the underlying data used by the Company in developing the tangible and intangible assets and liabilities. We compared the key assumptions to observable market transaction information published by independent industry research sources to assess whether the assumptions were market supported. We involved valuation specialists to assist in evaluating those assumptions to corroborate them with observable market information or other sources for selected acquisitions. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Dallas, Texas
February 28, 2023
| 4 |
SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
| December 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Investments: | ||||||||
| Real estate assets held for investment: | ||||||||
| Land and improvements | $ | 2,740,250 | $ | 2,516,715 | ||||
| Buildings and improvements | 5,892,117 | 4,962,203 | ||||||
| Less: accumulated depreciation | (1,211,061 | ) | (1,033,391 | ) | ||||
| Total real estate assets held for investment, net | 7,421,306 | 6,445,527 | ||||||
| Intangible lease assets, net | 423,870 | 426,972 | ||||||
| Real estate assets under direct financing leases, net | 7,427 | 7,442 | ||||||
| Real estate assets held for sale, net | 49,148 | 8,264 | ||||||
| Loans receivable, net | 23,023 | 10,450 | ||||||
| Total investments, net | 7,924,774 | 6,898,655 | ||||||
| Cash and cash equivalents | 8,770 | 17,799 | ||||||
| Deferred costs and other assets, net | 313,722 | 188,816 | ||||||
| Goodwill | 225,600 | 225,600 | ||||||
| Total assets | $ | 8,472,866 | $ | 7,330,870 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Liabilities: | ||||||||
| Revolving credit facilities | $ | 55,500 | $ | 288,400 | ||||
| Term loans, net | 792,309 | — | ||||||
| Senior Unsecured Notes, net | 2,722,514 | 2,718,641 | ||||||
| Mortgages payable, net | 4,986 | 5,551 | ||||||
| Total debt, net | 3,575,309 | 3,012,592 | ||||||
| Intangible lease liabilities, net | 118,077 | 128,077 | ||||||
| Accounts payable, accrued expenses and other liabilities | 218,164 | 190,402 | ||||||
| Total liabilities | 3,911,550 | 3,331,071 | ||||||
| Commitments and contingencies (see Note 6) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both December 31, 2022 and December 31, 2021, liquidation preference of $25.00 per share | 166,177 | 166,177 | ||||||
| Common stock, $0.05 par value, 350,000,000 shares authorized: 141,231,219 and 127,699,235 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | 7,062 | 6,385 | ||||||
| Capital in excess of common stock par value | 7,285,629 | 6,673,440 | ||||||
| Accumulated deficit | (2,931,640 | ) | (2,840,356 | ) | ||||
| Accumulated other comprehensive income (loss) | 34,088 | (5,847 | ) | |||||
| Total stockholders’ equity | 4,561,316 | 3,999,799 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,472,866 | $ | 7,330,870 | ||||
See accompanying notes.
| 5 |
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
| For the Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Revenues: | ||||||||||||
| Rental income | $ | 703,029 | $ | 606,099 | $ | 479,901 | ||||||
| Interest income on loans receivable | 1,884 | 29 | 998 | |||||||||
| Earned income from direct financing leases | 525 | 526 | 571 | |||||||||
| Related party fee income | — | — | 678 | |||||||||
| Other operating income | 4,191 | 1,736 | 1,469 | |||||||||
| Total revenues | 709,629 | 608,390 | 483,617 | |||||||||
| Expenses: | ||||||||||||
| General and administrative | 57,368 | 52,608 | 48,380 | |||||||||
| Property costs (including reimbursable) | 29,837 | 23,232 | 24,492 | |||||||||
| Deal pursuit costs | 4,655 | 1,136 | 2,432 | |||||||||
| Interest | 117,622 | 103,003 | 104,165 | |||||||||
| Depreciation and amortization | 292,985 | 244,624 | 212,620 | |||||||||
| Impairments | 37,156 | 23,760 | 81,476 | |||||||||
| Total expenses | 539,623 | 448,363 | 473,565 | |||||||||
| Other income: | ||||||||||||
| Loss on debt extinguishment | (172 | ) | (29,186 | ) | (7,227 | ) | ||||||
| Gain on disposition of assets | 110,900 | 41,468 | 24,156 | |||||||||
| Other income | 5,679 | — | — | |||||||||
| Total other income | 116,407 | 12,282 | 16,929 | |||||||||
| Income before income tax expense | 286,413 | 172,309 | 26,981 | |||||||||
| Income tax expense | (897 | ) | (607 | ) | (273 | ) | ||||||
| Net income | 285,516 | 171,702 | 26,708 | |||||||||
| Dividends paid to preferred stockholders | (10,350 | ) | (10,350 | ) | (10,350 | ) | ||||||
| Net income attributable to common stockholders | $ | 275,166 | $ | 161,352 | $ | 16,358 | ||||||
| Net income per share attributable to common stockholders: | ||||||||||||
| Basic | $ | 2.04 | $ | 1.36 | $ | 0.15 | ||||||
| Diluted | $ | 2.04 | $ | 1.35 | $ | 0.15 | ||||||
| Weighted average shares of common stock outstanding: | ||||||||||||
| Basic | 134,548,086 | 118,342,441 | 104,357,660 | |||||||||
| Diluted | 134,645,651 | 118,715,838 | 104,535,384 | |||||||||
See accompanying notes.
| 6 |
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
| For the Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Net income attributable to common stockholders | $ | 275,166 | $ | 161,352 | $ | 16,358 | ||||||
| Other comprehensive income: | ||||||||||||
| Net reclassification of amounts from AOCIL | 39,935 | 2,807 | 2,807 | |||||||||
| Total comprehensive income | $ | 315,101 | $ | 164,159 | $ | 19,165 | ||||||
See accompanying notes.
| 7 |
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Stockholders’ Equity
(In Thousands, Except Share Data)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||
| Shares | Par Value and Capital in Excess of Par Value | Shares | Par Value | Capital in Excess of Par Value | Accumulated Deficit | AOCIL | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balances, December 31, 2019 | 6,900,000 | $ | 166,177 | 102,476,152 | $ | 5,124 | $ | 5,686,247 | $ | (2,432,838 | ) | $ | (11,461 | ) | $ | 3,413,249 | ||||||||||||||||
| Net income | — | — | — | — | — | 26,708 | — | 26,708 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (10,350 | ) | — | (10,350 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | — | — | 16,358 | — | 16,358 | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 2,807 | 2,807 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (266,659 | ) | — | (266,659 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (117,543 | ) | (6 | ) | — | (4,375 | ) | — | (4,381 | ) | ||||||||||||||||||||
| Issuance of shares of common stock, net | — | — | 12,137,210 | 607 | 427,632 | — | — | 428,239 | ||||||||||||||||||||||||
| Stock-based compensation, net | — | — | 316,796 | 16 | 12,624 | (1,133 | ) | — | 11,507 | |||||||||||||||||||||||
| Balances, December 31, 2020 | 6,900,000 | $ | 166,177 | 114,812,615 | $ | 5,741 | $ | 6,126,503 | $ | (2,688,647 | ) | $ | (8,654 | ) | $ | 3,601,120 | ||||||||||||||||
| Net income | — | — | — | — | — | 171,702 | — | 171,702 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (10,350 | ) | — | (10,350 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | — | — | 161,352 | — | 161,352 | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 2,807 | 2,807 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (306,325 | ) | — | (306,325 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (206,597 | ) | (10 | ) | — | (4,385 | ) | — | (4,395 | ) | ||||||||||||||||||||
| Issuance of shares of common stock, net | — | — | 12,567,506 | 628 | 532,960 | — | — | 533,588 | ||||||||||||||||||||||||
| Stock-based compensation, net | — | — | 525,711 | 26 | 13,977 | (2,351 | ) | — | 11,652 | |||||||||||||||||||||||
| Balances, December 31, 2021 | 6,900,000 | $ | 166,177 | 127,699,235 | $ | 6,385 | $ | 6,673,440 | $ | (2,840,356 | ) | $ | (5,847 | ) | $ | 3,999,799 | ||||||||||||||||
| Net income | — | — | — | — | — | 285,516 | — | 285,516 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (10,350 | ) | — | (10,350 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | — | — | 275,166 | — | 275,166 | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 39,935 | 39,935 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (358,906 | ) | — | (358,906 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (41,016 | ) | (2 | ) | — | (6,485 | ) | — | (6,487 | ) | ||||||||||||||||||||
| Issuance of shares of common stock, net | — | — | 13,445,051 | 673 | 594,831 | — | 595,504 | |||||||||||||||||||||||||
| Stock-based compensation, net | — | — | 127,949 | 6 | 17,358 | (1,059 | ) | — | 16,305 | |||||||||||||||||||||||
| Balances, December 31, 2022 | 6,900,000 | $ | 166,177 | 141,231,219 | $ | 7,062 | $ | 7,285,629 | $ | (2,931,640 | ) | $ | 34,088 | $ | 4,561,316 | |||||||||||||||||
See accompanying notes.
| 8 |
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
| For the Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 285,516 | $ | 171,702 | $ | 26,708 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 292,985 | 244,624 | 212,620 | |||||||||
| Impairments | 37,156 | 23,760 | 81,476 | |||||||||
| Amortization of deferred financing costs | 5,410 | 3,942 | 5,278 | |||||||||
| Amortization of debt discounts | 1,269 | 2,140 | 4,343 | |||||||||
| Amortization of deferred losses on interest rate swaps | 2,807 | 2,807 | 2,807 | |||||||||
| Stock-based compensation expense | 17,364 | 14,003 | 12,640 | |||||||||
| Loss on debt extinguishment | 172 | 29,186 | 7,227 | |||||||||
| Gain on dispositions of real estate and other assets | (110,900 | ) | (41,468 | ) | (24,156 | ) | ||||||
| Non-cash revenue | (39,092 | ) | (47,605 | ) | (12,996 | ) | ||||||
| Other | 17 | 14 | 221 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Deferred costs and other assets, net | (1,734 | ) | 2,598 | (21,296 | ) | |||||||
| Accounts payable, accrued expenses and other liabilities | (4,520 | ) | 5,430 | 19,440 | ||||||||
| Net cash provided by operating activities | 486,450 | 411,133 | 314,312 | |||||||||
| Investing activities | ||||||||||||
| Acquisitions of real estate | (1,428,674 | ) | (1,235,861 | ) | (867,456 | ) | ||||||
| Capitalized real estate expenditures | (88,675 | ) | (21,957 | ) | (12,659 | ) | ||||||
| Investments in loans receivable | (12,700 | ) | (11,000 | ) | — | |||||||
| Collections of principal on loans receivable | — | — | 31,771 | |||||||||
| Proceeds from dispositions of real estate and other assets, net | 315,182 | 98,991 | 100,594 | |||||||||
| Net cash used in investing activities | (1,214,867 | ) | (1,169,827 | ) | (747,750 | ) | ||||||
| Financing activities | ||||||||||||
| Borrowings under revolving credit facilities | 1,441,800 | 1,077,500 | 1,155,000 | |||||||||
| Repayments under revolving credit facilities | (1,674,700 | ) | (789,100 | ) | (1,271,500 | ) | ||||||
| Repayments under mortgages payable | (525 | ) | (208,891 | ) | (4,101 | ) | ||||||
| Borrowings under term loans | 800,000 | — | 400,000 | |||||||||
| Repayments under term loans | — | (178,000 | ) | (222,000 | ) | |||||||
| Repayments under Convertible Notes | — | (190,426 | ) | (154,574 | ) | |||||||
| Borrowings under Senior Unsecured Notes | — | 794,842 | 445,509 | |||||||||
| Debt extinguishment costs | — | (26,685 | ) | (4,032 | ) | |||||||
| Deferred financing costs | (24,150 | ) | (7,071 | ) | (6,642 | ) | ||||||
| Proceeds from issuance of common stock, net of offering costs | 595,448 | 533,868 | 428,272 | |||||||||
| Repurchase of shares of common stock, including tax withholdings related to net stock settlements | (6,487 | ) | (4,395 | ) | (4,381 | ) | ||||||
| Common stock dividends paid | (348,465 | ) | (298,097 | ) | (260,488 | ) | ||||||
| Preferred stock dividends paid | (10,350 | ) | (10,350 | ) | (10,350 | ) | ||||||
| Net cash provided by financing activities | 772,571 | 693,195 | 490,713 | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 44,154 | (65,499 | ) | 57,275 | ||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 17,799 | 83,298 | 26,023 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 61,953 | $ | 17,799 | $ | 83,298 | ||||||
9
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
| For the Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Supplemental Cash Flow Disclosures: | ||||||||||||
| Cash paid for interest, net of interest capitalized | $ | 108,220 | $ | 89,866 | $ | 82,916 | ||||||
| Interest capitalized | 1,119 | — | — | |||||||||
| Cash paid for taxes | 752 | 657 | 801 | |||||||||
| Supplemental Disclosures of Non-Cash Activities: | ||||||||||||
| Dividends declared and unpaid | $ | 93,636 | $ | 81,380 | $ | 71,758 | ||||||
| Accrued market-based award dividend rights | 1,059 | 2,304 | 1,133 | |||||||||
| Accrued capitalized costs | 30,997 | 10,369 | 2,174 | |||||||||
| Derivative changes in fair value | 37,128 | — | — | |||||||||
| Reclass of residual value from direct financing lease to operating lease | — | — | 6,831 | |||||||||
| Receivable for disposal of real estate property | — | — | 2,000 | |||||||||
See accompanying notes.
10
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 1. ORGANIZATION
Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate sustainable and attractive returns for stockholders by primarily investing 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 retail, industrial and other property types. Single-tenant, operationally essential real estate 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 Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC, one of the Corporation’s wholly-owned subsidiaries, is the sole general partner and owns approximately 1% 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% of the Operating Partnership.
On May 31, 2018, the Company completed the spin-off (the "Spin-Off") of certain assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). The Company provided management services to SMTA until September 4, 2020.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Principles of Consolidation
The consolidated financial statements of the Company have been prepared on the accrual basis of accounting, in accordance with GAAP. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for fair statement of the information required to be set forth therein. The consolidated financial statements of the Company include the accounts of the Corporation and its wholly-owned subsidiaries, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements include certain special purpose entities that were formed to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of December 31, 2022 and 2021, net assets totaling $11.7 million and $12.3 million, respectively, were held, and net liabilities totaling $4.9 million and $5.5 million, respectively, were owed by these encumbered special purpose entities and are included in the consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations as one reportable segment, which consists of net leasing operations.
11
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Real Estate Investments
Purchase Accounting and Acquisition of Real Estate
When acquiring a property, the purchase price (including acquisition and closing costs) is allocated to land, building, improvements and equipment based on their relative fair values. The Company considers several assumptions to estimate the fair value of the components of the tangible property acquired including market assumptions for land, building and improvements. The determination of the intangible assets and liabilities primarily relate to the contractual lease terms, estimates of the fair market rental rates, discount rates, and estimates of costs to carry and obtain a tenant. For properties acquired with in-place leases, the purchase price of real estate is allocated to the tangible and intangible assets and liabilities acquired based on their relative fair values. In making estimates of fair values for this purpose, a number of sources are used, including independent appraisals and information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.
Carrying Value of Real Estate Investments
The Company’s real estate properties are recorded at cost and depreciated using the straight-line method over the estimated remaining useful lives of the properties, which generally range from 20 to 50 years for buildings and improvements and from 5 to 20 years for tenant and land improvements. Properties classified as held for sale are not depreciated and are recorded at the lower of their carrying value or their fair value, less anticipated selling costs.
Held for Sale
The Company is continually evaluating the portfolio of real estate assets and may elect to dispose of assets considering criteria including, but not limited to, tenant concentration, tenant credit quality, unit financial performance, local market conditions and lease rates, associated indebtedness, asset location, and tenant operation type (e.g., industry or concept/brand). Real estate assets held for sale are expected to be sold within twelve months.
Lease Intangibles
Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above- or below-market leases. In-place lease intangibles are valued based on the Company’s estimate of costs related to acquiring a tenant and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering costs to execute similar leases at the time of the acquisition and current market conditions. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.
Direct Financing Leases
For real estate property leases classified as direct financing leases, the building portion of the lease is accounted for as a direct financing lease, while the land portion is accounted for as an operating lease when certain criteria are met. For direct financing leases, the Company records an asset which represents the net investment that is determined by using the aggregate of the total amount of future minimum lease payments, the estimated residual value of the leased property and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are reviewed annually, represent the estimated amount the Company expects to receive at lease termination from the disposition of the leased property. Actual residual values realized could differ from these estimates.
Impairment
The Company reviews its real estate investments and related lease intangibles periodically for indicators of impairment, including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. For assets with indicators of impairment, the Company then evaluates if its carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.
12
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Impairment is calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, as the amount by which the carrying value exceeds fair value less costs to sell. Estimating fair values is highly subjective and such estimates could differ materially from actual results. Key assumptions used in estimating fair values include, but are not limited to: signed purchase and sale agreements or letters of intent; broker opinions of value; recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.
Gain or Loss on Disposition of Assets
When real estate properties are disposed of, the related net book value of the properties is removed and a gain or loss on disposition is recognized in the consolidated statements of operations as the difference between the proceeds from the disposition, net of any costs to sell, and the net book value. As leasing is the Company’s primary activity, the Company determined that its sales of real estate, which are nonfinancial assets, are sold to noncustomers and fall within the scope of ASC 610-20. The full gain or loss on the disposition of real estate properties is recognized at time of sale, provided that the Company has no (i) controlling financial interest in the real estate or (ii) continuing interest or obligation with respect to the disposed real estate.
Revenue Recognition
Rental Income: Cash and Straight-line Rent
The Company primarily leases real estate to its tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, the Company assesses the terms and conditions of the lease to determine the appropriate lease term. The majority of our operating leases include one or more options to extend, typically for a period of five to ten years per renewal option. Excluding Walgreen Co., less than 1% of the Company’s operating leases at both December 31, 2022 and 2021 include an option to terminate. Walgreen Co. leases are generally for fifty years or more and contain certain termination options after an initial non-cancellable term. Less than 10% of the Company’s operating leases at both December 31, 2022 and 2021 include an option to purchase, where the purchase option is generally determined based on fair market value of the underlying property. Options to extend, terminate or purchase are not included in the evaluation for lease classification or for recognition of rental income unless the Company is reasonably certain the tenant will exercise the option.
Evaluation of lease classification also requires an estimate of the residual value of the real estate at the end of the lease term. For acquisitions, the Company uses the tangible value of the property at the date of acquisition. For lease modifications, the Company generally uses sales comparables or a direct capitalization approach to determine residual value. The Company seeks to protect residual value through its underwriting of acquisitions, incorporating the proprietary Spirit Property Ranking Model which is real estate centric. Once a property is acquired, the lessee is responsible for maintenance of the property, including insurance protecting against any damage to the property. To further protect residual value, the Company supplements the tenant insurance policies with a master policy covering all properties owned by the Company. As an active manager, the Company will occasionally invest in capital improvements on properties, re-lease properties to new tenants or extend lease terms to protect residual value.
The Company elected to account for lease concessions related to the COVID-19 pandemic consistent with ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether they explicitly exist in the lease). As such, rent deferrals are recorded as an increase to rent receivables and recognized as income during the deferral period. For the years ended December 31, 2022, 2021 and 2020, $0.4 million, $13.4 million and $26.3 million, respectively, of deferrals were recognized in rental income. Lease concessions other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification.
Some of the Company’s leases also provide for contingent rent based on a percentage of the tenant’s gross sales, which is recognized as rental income when the factor on which the contingent lease payment is based has occurred.
13
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
The Company’s leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. Accordingly, the difference between rental income recognized on a straight-line basis and billed rents is recorded as rent receivables, which the Company will receive only if the tenant makes all rent payments required through the initial term of their lease. For leases with variable rent escalators, rental income typically increases at a multiple of any increase in the CPI over a specified period. Because of the volatility and uncertainty regarding future changes in the CPI and the Company’s inability to determine the extent to which any specific future change in the CPI is probable, increases from variable rent escalators are recognized when the changes in the rental rates have occurred.
Rental income is subject to an evaluation for collectability, which includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant’s payment history and financial condition. The Company does not recognize rental income for amounts that are not probable of collection. For lease concessions granted in conjunction with the COVID-19 pandemic, management reviewed all amounts recognized on a tenant-by-tenant basis for collectability.
Rental Income: Tenant Reimbursement Revenue
Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. Certain leases contain additional amounts recoverable from tenants for common area maintenance and certain other expenses, which are non-lease components. The Company elected to combine all its non-lease components, which were determined to have the same pattern of transfer as the related operating lease component, into a single combined lease component. Tenant reimbursement revenue is variable and is recognized in the period in which the related expenses are incurred, with the related expenses included in property costs (including reimbursable) on the consolidated statements of operations. Tenant reimbursements are recorded on a gross basis in instances when our tenants reimburse us for property costs which we incur. Tenant receivables are reduced for amounts that are not probable of collection.
Rental Income: Intangible Amortization
Amortization of above- and below-market lease intangibles are included as a decrease and increase, respectively, to rental revenue and amortization of in-place lease intangibles is included in depreciation and amortization expense in the consolidated statements of operations. All lease intangibles are amortized on a straight-line basis over the term of the lease, which includes any renewal options the Company is reasonably certain the tenant will exercise. If the Company subsequently determines it is reasonably certain that the tenant will not exercise the renewal options, the unamortized portion of any related lease intangible is accelerated over the remaining initial term of the lease. If the Company believes a lease intangible balance is no longer recoverable, the unamortized portion is immediately recognized in impairments in the consolidated statements of operations.
Other Income: Lease Termination Fees
Lease termination fees are included in other income on the consolidated statements of operations and are recognized when there is a signed termination agreement and all of the conditions of the agreement have been met. The Company recorded lease termination fees of $2 thousand, $19 thousand and $0.7 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Loans Receivable
Interest on loans receivable is recognized using the effective interest rate method. A loan is placed on non-accrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on non-accrual status, interest income is recognized only when received. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted.
The Company evaluates its loans receivable balance, including accrued interest, for potential credit losses by analyzing the credit of the borrower, the remaining time to maturity of the loan, collateral value and quality (if any), and other relevant factors. Allowance for credit losses are recorded in impairments on the consolidated statement of operations.
14
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term instruments. Restricted cash is classified within deferred costs and other assets, net in the consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 8,770 | $ | 17,799 | $ | 70,303 | ||||||
| Restricted cash: | ||||||||||||
| Collateral deposits (1) | — | — | 335 | |||||||||
| Tenant improvements, repairs and leasing commissions (2) | — | — | 12,660 | |||||||||
| 1031 Exchange proceeds | 53,183 | — | — | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 61,953 | $ | 17,799 | $ | 83,298 | ||||||
(1) Funds held in lender-controlled accounts generally used to meet future debt service or certain property operating expenses.
(2) Deposits held as additional collateral support by lenders to fund improvements, repairs and leasing commissions incurred to secure a new tenant.
Tenant Receivables
The Company reviews its rent and other tenant receivables for collectability on a regular basis, considering changes in factors such as the tenant’s payment history, the tenant’s financial condition, industry conditions in which the tenant operates and economic conditions in the geographic area in which the tenant operates. If a receivable is not probable of collection, a direct write-off of the receivable will be made. The Company had accounts receivable balances of $18.2 million and $21.7 million at December 31, 2022 and 2021, respectively, after the impact of $3.2 million and $3.9 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred cost and other assets, net in the consolidated balance sheets.
For receivable balances related to the straight-line method of recognizing rental income, the collectability is generally assessed in conjunction with the evaluation of rental income as described above. The Company had straight-line rent receivables of $167.1 million and $137.6 million at December 31, 2022 and 2021, respectively, after the impact of $1.3 million and $2.6 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred costs and other assets, net in the consolidated balance sheets.
Goodwill
Goodwill arises from business combinations as the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level annually or 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. The Company performs a qualitative assessment to determine if the quantitative impairment test is necessary. The quantitative impairment test, if deemed necessary, compares the fair value of each reporting unit with its carrying amount and impairment is recognized as the amount by which the carrying amount exceeds the reporting unit’s fair value. No impairment was recorded for the periods presented. Goodwill for the years ended December 31, 2022, 2021 and 2020 was $225.6 million, respectively.
Accounting for Derivative Financial Instruments and Hedging Activities
The Company may utilize derivative instruments such as interest rate swaps for purposes of hedging exposures to fluctuations in interest rates associated with certain of its financing transactions. At the inception of a hedge transaction, the Company enters into a contractual arrangement with the hedge counterparty and formally documents the relationship between the derivative instrument and the financing transaction being hedged, as well as its risk management objective and strategy for undertaking the hedge transaction. The fair value of the derivative instrument is recorded on the balance sheet as either an asset or liability. At inception and at least quarterly thereafter, a formal assessment is performed to determine whether the derivative instrument has been highly effective in offsetting changes in cash flows of the related financing transaction and whether it is expected to be highly effective in the future. The Company recognizes the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in AOCIL and amounts are subsequently reclassified to earnings when the hedged item affects earnings.
15
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Income Taxes
The Corporation has elected to be taxed as a REIT under the Code. As a REIT, the Corporation 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 the Company’s assets, the amounts distributed to the Corporation’s stockholders and the ownership of Corporation stock. Management believes the Corporation has qualified and will continue to qualify as a REIT and, therefore, no provision has been made for federal income taxes in the consolidated financial statements. Even if the Corporation 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.
Taxable income earned by any of the Company’s taxable REIT subsidiaries, including from non-REIT activities, is subject to federal, state and local taxes. See Note 12 for additional discussion.
Earnings Per Share
The Company’s unvested restricted common stock, which contains non-forfeitable rights to receive dividends, are considered participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on their respective weighted average shares outstanding during the period.
Under the terms of the Amended Incentive Award Plan, restricted stock awards are not allocated losses, including undistributed losses as a result of dividends declared exceeding net income. The Company uses net income (loss) attributable to common shareholders to determine whether potential common shares are dilutive or anti-dilutive and undistributed net income (loss) to determine whether undistributed earnings are allocable to participating securities.
Forward Equity Sale Agreements
The Corporation may enter into forward sale agreements for the sale and issuance of shares of our common stock, either through an underwritten public offering or through the 2021 ATM Program. These agreements may be physically settled in stock, settled in cash, or net share settled at the Company’s election. The Company evaluated the forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Corporation’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Corporation’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Corporation’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Corporation’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Corporation elects to physically settle or net share settle such forward sale agreement, delivery of the Corporation’s shares will result in dilution to the Company’s earnings per share.
Unaudited Interim Information
The consolidated quarterly financial data in Note 13 is unaudited. In the opinion of management, this financial information reflects all adjustments necessary for a fair presentation of the respective interim periods. All such adjustments are of a normal recurring nature.
16
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 3. INVESTMENTS
Owned Properties
As of December 31, 2022, the Company’s gross investment in owned real estate properties totaled $9.2 billion. The gross investment, as adjusted for any impairment, is comprised of land, buildings, lease intangible assets, lease intangible liabilities, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with Texas, at 14.5%, as the only state with a gross investment greater than 10.0% of the total gross investment of the Company’s entire portfolio.
During the years ended December 31, 2022 and 2021, the Company had the following real estate activity (dollars in thousands):
| Number of Properties | Dollar Amount of Investments | |||||||||||||||||||||||
| Held in Use | Held for Sale | Total | Held in Use | Held for Sale | Total | |||||||||||||||||||
| Gross balance, December 31, 2020 | 1,853 | 7 | 1,860 | $ | 6,777,673 | $ | 27,764 | $ | 6,805,437 | |||||||||||||||
| Acquisitions/improvements (1) | 166 | — | 166 | 1,256,983 | — | 1,256,983 | ||||||||||||||||||
| Dispositions of real estate (2) | (13 | ) | (10 | ) | (23 | ) | (42,472 | ) | (22,750 | ) | (65,222 | ) | ||||||||||||
| Transfers to Held for Sale | (9 | ) | 9 | — | (18,403 | ) | 18,403 | — | ||||||||||||||||
| Transfers from Held for Sale | 3 | (3 | ) | — | 11,300 | (11,300 | ) | — | ||||||||||||||||
| Impairments (3) | — | — | — | (21,474 | ) | (1,736 | ) | (23,210 | ) | |||||||||||||||
| Reset of gross balances (4) | — | — | — | (31,143 | ) | (2,019 | ) | (33,162 | ) | |||||||||||||||
| Other | — | — | — | 2,359 | — | 2,359 | ||||||||||||||||||
| Gross balance, December 31, 2021 | 2,000 | 3 | 2,003 | 7,934,823 | 8,362 | 7,943,185 | ||||||||||||||||||
| Acquisitions/improvements (1) | 172 | — | 172 | 1,546,808 | — | 1,546,808 | ||||||||||||||||||
| Dispositions of real estate (2) | (38 | ) | (22 | ) | (60 | ) | (198,865 | ) | (41,200 | ) | (240,065 | ) | ||||||||||||
| Transfers to Held for Sale | (37 | ) | 37 | — | (96,234 | ) | 96,234 | — | ||||||||||||||||
| Transfers from Held for Sale | 1 | (1 | ) | — | 1,529 | (1,529 | ) | — | ||||||||||||||||
| Impairments (3) | — | — | — | (36,894 | ) | (135 | ) | (37,029 | ) | |||||||||||||||
| Reset of gross balances (4) | — | — | — | (29,004 | ) | (151 | ) | (29,155 | ) | |||||||||||||||
| Gross balance, December 31, 2022 | 2,098 | 17 | 2,115 | $ | 9,122,163 | $ | 61,581 | $ | 9,183,744 | |||||||||||||||
| Accumulated depreciation and amortization | (1,387,637 | ) | (12,433 | ) | (1,400,070 | ) | ||||||||||||||||||
| Net balance, December 31, 2022 (5) | $ | 7,734,526 | $ | 49,148 | $ | 7,783,674 | ||||||||||||||||||
(1) Includes investments of $95.4 million and $15.4 million, respectively, in revenue producing capitalized expenditures, and $16.8 million and $10.7 million, respectively, of non-revenue producing capitalized expenditures for the years ended December 31, 2022 and 2021.
(2) The total net gain on disposition of properties held in use was $87.9 million, $37.3 million and $10.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The total gain on disposition of properties held for sale was $23.0 million, $2.2 million and $14.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. Additionally, there were $1.7 million of gains recognized on two asset substitutions within a master lease and $0.3 million in other gains recognized during the year ended December 31, 2021.
(3) Impairments on owned real estate is comprised of real estate and intangible asset impairment and allowance for credit losses on direct financing leases.
(4) Represents write-off of gross investment balances against the related accumulated depreciation and amortization balances as a result of basis reset due to impairment or intangibles and tenant improvements which have been fully amortized.
(5) Reconciliation of total owned investments to the consolidated balance sheet at December 31, 2022 is as follows:
| Real estate assets held for investment, net | $ | 7,421,306 | ||
| Intangible lease assets, net | 423,870 | |||
| Real estate assets under direct financing leases, net | 7,427 | |||
| Real estate assets held for sale, net | 49,148 | |||
| Intangible lease liabilities, net | (118,077 | ) | ||
| Net balance | $ | 7,783,674 |
17
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Operating Leases
As of December 31, 2022, 2021, and 2020, the Company held 2,111, 1,998 and 1,852 properties under operating leases, respectively. The following table summarizes the components of rental income recognized on these operating leases in the consolidated statements of operations (in thousands):
| For the Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Base Cash Rent (1) | $ | 638,340 | $ | 541,726 | $ | 453,013 | ||||||
| Variable cash rent (including reimbursables) | 25,597 | 16,768 | 13,176 | |||||||||
| Straight-line rent, net of uncollectible reserve (2) | 36,902 | 44,758 | 11,876 | |||||||||
| Amortization of above- and below- market lease intangibles, net (3) | 2,190 | 2,847 | 1,836 | |||||||||
| Total rental income | $ | 703,029 | $ | 606,099 | $ | 479,901 | ||||||
(1) Includes net impact of amounts (reserved)/recovered of $(0.5) million, $5.5 million and $(10.9) million for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) Includes net impact of amounts (reserved)/recovered of $(26) thousand, $10.9 million and $(14.9) million for the years ended December 31, 2022 2021 and 2020, respectively.
(3) Excludes amortization of in-place leases of $43.9 million, $38.5 million and $34.8 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in depreciation and amortization expense in the consolidated statements of operations.
Lease renewal periods are exercisable at the lessees’ option and, as such, minimum future rent only includes the remaining initial non-cancellable term of our operating leases. In addition, minimum future rent includes fixed rent escalations occurring on or after January 1, 2023, but does not include variable rent escalations, such as those based on CPI, or contingent rents. Minimum future rent at December 31, 2022 is as follows (in thousands):
| December 31, 2022 | ||||
| 2023 | $ | 679,645 | ||
| 2024 | 670,893 | |||
| 2025 | 659,867 | |||
| 2026 | 633,330 | |||
| 2027 | 589,881 | |||
| Thereafter | 4,706,694 | |||
| Total minimum future rent | $ | 7,940,310 | ||
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
| December 31, 2022 | December 31, 2021 | |||||||
| In-place leases | $ | 559,962 | $ | 536,344 | ||||
| Above-market leases | 101,594 | 100,837 | ||||||
| Less: accumulated amortization | (237,686 | ) | (210,209 | ) | ||||
| Intangible lease assets, net | $ | 423,870 | $ | 426,972 | ||||
| Below-market leases | $ | 179,187 | $ | 188,718 | ||||
| Less: accumulated amortization | (61,110 | ) | (60,641 | ) | ||||
| Intangible lease liabilities, net | $ | 118,077 | $ | 128,077 | ||||
The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was 12.4 years, 13.0 years, 18.2 years and 13.8 years, respectively, as of December 31, 2022. The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was 13.3 years, 13.7 years, 17.6 years and 14.3 years, respectively, as of December 31, 2021. During the year ended December 31, 2022, the Company acquired in-place lease intangible assets of $57.3 million, above-market lease intangible assets of $3.2 million and below-market lease intangible liabilities of $9.5 million. During the year ended December 31, 2021, the Company acquired in-place lease intangible assets of $84.8 million, above-market lease intangible assets of $23.1 million and below-market lease intangible liabilities of $16.8 million.
18
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Based on the intangible assets and liabilities at December 31, 2022, the net aggregate amortization expense for the next five years and thereafter is expected to be as follows (in thousands):
| December 31, 2022 | ||||
| 2023 | $ | 41,412 | ||
| 2024 | 39,365 | |||
| 2025 | 35,767 | |||
| 2026 | 32,490 | |||
| 2027 | 26,873 | |||
| Thereafter | 129,886 | |||
| Total future minimum amortization | $ | 305,793 | ||
Direct Financing Leases
As of December 31, 2022 and 2021, the Company held one property under a direct financing lease, which was held in use. As of December 31, 2022, this property had $2.5 million in scheduled minimum future payments to be received under its remaining non-cancellable lease term. As of December 31, 2022, the Company had a reserve of $0.1 million against the net investment balance of $7.5 million, which was initially recorded in 2020 as a result of the initial term of the direct financing lease extending until 2027.
Loans Receivable
During 2021, the Company issued a fixed-rate, uncollateralized loan receivable for $11.0 million. During 2022, the Company issued a fixed-rate, construction loan for $12.7 million. The Company evaluated the collectability of the amounts receivable under the loans and had a total allowance for credit losses of $0.7 million as of December 31, 2022.
During the years ended December 31, 2022 and 2021, the Company had the following loan activity (dollars in thousands):
| Mortgage Loans | Other Loans | Total | ||||||||||||||
| Properties | Investment | Investment | Investment | |||||||||||||
| Principal, December 31, 2020 | — | $ | — | $ | — | $ | — | |||||||||
| Issuance of loan | — | — | 11,000 | 11,000 | ||||||||||||
| Principal, December 31, 2021 | — | — | 11,000 | 11,000 | ||||||||||||
| Issuance of loan | — | — | 12,700 | 12,700 | ||||||||||||
| Principal, December 31, 2022 | — | $ | — | $ | 23,700 | $ | 23,700 | |||||||||
Impairments and Allowance for Credit Losses
The following table summarizes impairments and allowance for credit losses recognized in the consolidated statements of operations (in thousands):
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Real estate asset impairment | $ | 35,988 | $ | 22,120 | $ | 59,206 | ||||||
| Intangible net asset impairment | 1,041 | 1,090 | 22,118 | |||||||||
| Allowance for credit losses on direct financing leases | — | — | 152 | |||||||||
| Allowance for credit losses on loans receivable | 127 | 550 | — | |||||||||
| Total impairment loss | $ | 37,156 | $ | 23,760 | $ | 81,476 | ||||||
19
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 4. DEBT
The Company's debt is summarized below (dollars in thousands):
| 2022 Weighted Average Effective Interest Rates (1) | 2022 Weighted Average Stated Rates (2) | 2022 Weighted Average Remaining Years to Maturity (3) | December 31, 2022 | December 31, 2021 | ||||||||||||||||
| Revolving credit facilities | 2.85 | % | 5.17 | % | 3.2 | $ | 55,500 | $ | 288,400 | |||||||||||
| Term loans | 3.92 | % | 3.50 | % | 3.9 | 800,000 | — | |||||||||||||
| Senior Unsecured Notes | 3.42 | % | 3.25 | % | 6.4 | 2,750,000 | 2,750,000 | |||||||||||||
| Mortgages payable | 4.87 | % | 5.82 | % | 8.0 | 4,825 | 5,350 | |||||||||||||
| Total debt | 3.47 | % | 3.73 | % | 5.8 | 3,610,325 | 3,043,750 | |||||||||||||
| Debt discount, net | (9,556 | ) | (10,824 | ) | ||||||||||||||||
| Deferred financing costs, net (4) | (25,460 | ) | (20,334 | ) | ||||||||||||||||
| Total debt, net | $ | 3,575,309 | $ | 3,012,592 | ||||||||||||||||
(1) Includes amortization of debt discount/premium, amortization of deferred financing costs, facility fees, non-utilization fees and impact of cash flow hedges, where applicable, calculated for the year ended December 31, 2022 based on the average principal balance outstanding during the period.
(2) Based on the outstanding principal balance as of December 31, 2022. Term loans include the impact of cash flow hedges. Excluding the impact of cash flow hedges, the stated interest rate for the term loans was 5.29% as of December 31, 2022.
(3) Based on the outstanding principal balance as of December 31, 2022.
(4) Excludes deferred financing costs for the revolving credit facilities.
Deferred financing costs and offering discount/premium incurred in connection with entering into debt agreements are amortized to interest expense over the initial term of the respective agreement. Both deferred financing costs and offering discount/premium are recorded net against the principal debt balance on the consolidated balance sheets, except for deferred costs related to revolving credit facilities, which are recorded in deferred costs and other assets, net.
Revolving Credit Facilities
On January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, which included the 2019 Credit Facility with a borrowing capacity of $800.0 million. On March 30, 2022, the Operating Partnership amended and restated the 2019 Revolving Credit and Term Loan Agreement, increasing the borrowing capacity of the 2019 Credit Facility to $1.2 billion. The borrowing capacity can be further increased by $500.0 million through exercise of an accordion feature, subject to satisfying certain requirements. The 2019 Credit Facility has a maturity date of March 31, 2026 and includes two six-month extensions that can be exercised at the Company’s option. Borrowings may be repaid, in whole or in part, at any time, without premium or penalty, but subject to applicable breakage fees, if any. Payment is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions. The 2019 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.
As of December 31, 2022, outstanding loans under the 2019 Credit Facility bore interest at a 1-month adjusted SOFR rate plus an applicable margin of 0.775% per annum and the aggregate revolving commitments incurred a facility fee of 0.150% per annum, in each case, based on the Operating Partnership’s credit rating and leverage ratio (as defined in the agreement). Prior to March 30, 2022, outstanding loans under the 2019 Credit Facility bore interest at 1-month LIBOR plus an applicable margin of 0.90% per annum and the aggregate revolving commitments incurred a facility fee of 0.20% per annum.
In connection with the amendment and restatement of the 2019 Credit Facility, the Company wrote off $0.2 million in deferred financing costs and incurred deferred financing costs of $8.6 million. The unamortized deferred financing costs were $7.8 million as of December 31, 2022, compared to $1.4 million as of December 31, 2021.
As of December 31, 2022, $1.1 billion of borrowing capacity was available under the 2019 Credit Facility and there were no outstanding letters of credit. The Operating Partnership's ability to borrow under the 2019 Credit Facility is subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2022.
20
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Term Loans
On April 2, 2020, the Operating Partnership entered into the 2020 Term Loan Agreement, which provided for $200.0 million of unsecured term loans with a maturity date of April 2, 2022. The 2020 Term Loan Agreement included an accordion feature, which the Operating Partnership fully exercised in the second quarter of 2020 to borrow an additional $200.0 million of term loans. The 2020 Term Loans bore interest at LIBOR plus an applicable margin of 1.50% per annum, based on the Operating Partnership’s credit rating. In connection with entering into the 2020 Term Loan Agreement, the Company incurred $2.5 million in deferred financing costs.
On August 6, 2020, the issuance of the 2031 Senior Unsecured Notes triggered a mandatory prepayment under the 2020 Term Loan Agreement. As such, the Company repaid $222.0 million of the 2020 Term Loans and wrote-off $1.0 million of related unamortized deferred financing costs. On January 4, 2021, the Company repaid the 2020 Term Loan in full and wrote-off the remaining unamortized deferred financing costs.
On August 22, 2022, the Operating Partnership entered into the 2022 Term Loan Agreement, which provides for borrowings in an aggregate amount of $800.0 million comprised of a $300.0 million tranche with a maturity date of August 22, 2025 and a $500.0 million tranche with a maturity date of August 20, 2027. The Term Loan Agreement also includes an accordion feature to increase the available term loans by $200.0 million in aggregate, subject to satisfying certain requirements. As of December 31, 2022, the 2022 Term Loans bore interest at a 1-month adjusted SOFR rate plus an applicable margin of 0.850% per annum, based on the Operating Partnership’s credit rating. In conjunction with entering into the 2022 Term Loans, the Company entered into interest rate swaps as a cash flow hedge. See Note 7 for further detail. The Company incurred $8.4 million in deferred financing costs in connection with entering into the 2022 Term Loan Agreement, and the unamortized deferred financing costs were $7.7 million as of December 31, 2022.
On November 17, 2022, the Operating Partnership entered into the 2023 Term Loan Agreement, which provides for $500.0 million of unsecured term loans with a maturity date of June 16, 2025 and allows funds to be drawn up to July 2, 2023. The 2023 Term Loan Agreement also includes an accordion feature to increase the available term loans by $100.0 million, subject to satisfying certain requirements. The 2023 Term Loans will bear interest at a 1-month adjusted SOFR rate plus an applicable margin of 0.950% per annum, based on the Operating Partnership's credit rating as of December 31, 2022. The full $500.0 million of borrowing capacity was available under the 2023 Term Loan Agreements as of December 31, 2022.
In connection with the 2022 Term Loan Agreement and the 2023 Term Loan Agreement, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2022.
Senior Unsecured Notes
The Senior Unsecured Notes were issued by the Operating Partnership and are guaranteed by the Company. The following is a summary of the Senior Unsecured Notes outstanding (dollars in thousands):
| Maturity Date | Interest Payment Dates | Stated Interest Rate | December 31, 2022 | December 31, 2021 | ||||||||||||
| 2026 Senior Notes | September 15, 2026 | March 15 and September 15 | 4.45 | % | $ | 300,000 | $ | 300,000 | ||||||||
| 2027 Senior Notes | January 15, 2027 | January 15 and July 15 | 3.20 | % | 300,000 | 300,000 | ||||||||||
| 2028 Senior Notes | March 15, 2028 | March 15 and September 15 | 2.10 | % | 450,000 | 450,000 | ||||||||||
| 2029 Senior Notes | July 15, 2029 | January 15 and July 15 | 4.00 | % | 400,000 | 400,000 | ||||||||||
| 2030 Senior Notes | January 15, 2030 | January 15 and July 15 | 3.40 | % | 500,000 | 500,000 | ||||||||||
| 2031 Senior Notes | February 15, 2031 | February 15 and August 15 | 3.20 | % | 450,000 | 450,000 | ||||||||||
| 2032 Senior Notes | February 15, 2032 | February 15 and August 15 | 2.70 | % | 350,000 | 350,000 | ||||||||||
| Total Senior Unsecured Notes | 3.25 | % | $ | 2,750,000 | $ | 2,750,000 | ||||||||||
21
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
For the years ended December 31, 2022, 2021 and 2020, the Operating Partnership completed the following issuances of Senior Unsecured Notes:
| · | 2031 Senior Notes issued on August 6, 2020, resulting in net proceeds of $441.3 million, deferred financing costs of $4.2 million and an offering discount of $4.5 million and |
| · | 2028 Senior Notes and 2032 Senior Notes issued on March 3, 2021, resulting in net proceeds of $787.7 million, deferred financing costs of $7.1 million and an offering discount of $5.2 million. |
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: 100% of the principal amount of the respective 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. If any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
As of December 31, 2022 and 2021, the unamortized deferred financing costs were $17.8 million and $20.3 million, respectively, and the unamortized discount was $9.7 million and $11.0 million, respectively. In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2022.
Mortgages Payable
Indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under five fixed-rate non-recourse loans, which were securitized into CMBS and secured by the borrowers’ respective leased properties and related assets. In connection with the issuance of the 2028 and 2032 Senior Unsecured Notes, the Company repaid three of these loans in March 2021 and, as of December 31, 2022, had two non-defaulted loans with stated interest rates of 5.80% and 6.00%, respectively. Each loan was secured by one property. There were no unamortized deferred financing costs as of either December 31, 2022 and December 31, 2021, and the unamortized net premium as of both December 31, 2022 and 2021 was $0.2 million.
Convertible Notes
In May 2014, the Company issued $345.0 million aggregate principal amount of 3.75% convertible notes for which interest was payable semi-annually in arrears on May 15 and November 15. During the year ended December 31, 2020, the Company repurchased $154.6 million of the 2021 Convertible Notes in cash. As of December 31, 2020, the unamortized discount was $1.0 million and the unamortized deferred financing costs were $0.3 million. The remaining 2021 Convertible Notes matured on May 15, 2021 at which time they were settled in cash and the remaining discount and deferred financing costs were fully amortized.
Debt Extinguishment
During the year ended December 31, 2022, the Company recognized a loss on debt extinguishment of $0.2 million as a result of the amendment and restatement of the 2019 Revolving Credit and Term Loan Agreement.
During the year ended December 31, 2021, the Company extinguished the following debt:
| · | $207.4 million aggregate principal amount of CMBS indebtedness on three loans secured by 86 properties, resulting in a loss on debt extinguishment of $28.5 million, |
| · | $190.4 million of Convertible Notes upon their maturity, and |
| · | $178.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $0.7 million. |
During the year ended December 31, 2020, the Company extinguished the following debt:
| · | $222.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $1.0 million and |
| · | $154.6 million aggregate principal amount of the 2021 Convertible Notes, resulting in a loss on debt extinguishment of $6.2 million. |
22
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Debt Maturities
As of December 31, 2022, scheduled debt maturities, including balloon payments, were as follows (in thousands):
| Scheduled Principal | Balloon Payment | Total | ||||||||||
| 2023 | $ | 556 | $ | — | $ | 556 | ||||||
| 2024 | 590 | — | 590 | |||||||||
| 2025 | 610 | 300,016 | 300,626 | |||||||||
| 2026 | 469 | 355,500 | 355,969 | |||||||||
| 2027 | 497 | 800,000 | 800,497 | |||||||||
| Thereafter | 2,034 | 2,150,053 | 2,152,087 | |||||||||
| Total | $ | 4,756 | $ | 3,605,569 | $ | 3,610,325 | ||||||
Interest Expense
The components of interest expense were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Revolving credit facilities (1) | $ | 9,470 | $ | 2,930 | $ | 3,686 | ||||||
| Term loans (2) | 10,237 | 24 | 3,545 | |||||||||
| Senior Unsecured Notes | 89,252 | 85,996 | 61,750 | |||||||||
| Mortgages payable | 296 | 2,506 | 12,028 | |||||||||
| Convertible Notes | — | 2,658 | 10,728 | |||||||||
| Non-cash: | ||||||||||||
| Amortization of deferred financing costs | 5,410 | 3,942 | 5,278 | |||||||||
| Amortization of debt discount, net | 1,269 | 2,140 | 4,343 | |||||||||
| Amortization of net losses related to interest rate swaps | 2,807 | 2,807 | 2,807 | |||||||||
| Capitalized interest | (1,119 | ) | — | — | ||||||||
| Total interest expense | $ | 117,622 | $ | 103,003 | $ | 104,165 | ||||||
(1) Includes facility fees of approximately $2.1 million, $1.7 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) Includes impact of cash flow hedge.
NOTE 5. STOCKHOLDERS' EQUITY
Preferred Stock
On October 3, 2017, the Company completed an underwritten public offering of 6.9 million shares of Series A Preferred Stock. The Series A Preferred Stock pays cumulative cash dividends at the rate of 6.00% per annum on their liquidation preference of $25.00 per share (equivalent to $1.50 per share on an annual basis). Dividends are payable quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock trades on the NYSE under the symbol “SRC-A.”
Prior to October 3, 2022, the Company could not redeem the Series A Preferred Stock except in limited circumstances to preserve the Corporation’s status as a REIT or pursuant to a special optional redemption provision upon a change of control. On and after October 3, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends up to, but excluding, the redemption date.
Common Stock
In June 2020, the Company entered into forward sale agreements in connection with an offering of 9.2 million shares of common stock at an initial public offering price of $37.35 per share, before underwriting discounts and offering expenses. All 9.2 million of these shares were settled during 2020, generating net proceeds of $319.1 million.
23
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
In January 2022, the Company entered into forward sale agreements in connection with an offering of 9.4 million shares of common stock at an initial public offering price of $47.60 per share, before underwriting discounts and offering expenses. All 9.4 million of these shares were settled during 2022, generating net proceeds of $427.7 million.
ATM Program
An ATM Program provides for the offer and sale of shares of the Company’s common stock up to an approved aggregate gross sales price through sales agents, directly to principals, or through forward sellers. The Company can sell shares in amounts and at times to be determined by the Company, but has no obligation to sell shares under an ATM Program.
In November 2016, a $500.0 million 2016 ATM Program was approved and the prior ATM Program was terminated. From inception of the 2016 ATM Program through its termination in November 2020, 8.8 million shares of the Company’s common stock were sold, of which 7.0 million were sold through forward sales agreements. During the year ended December 31, 2020, 2.9 million of these shares were settled, generating net proceeds of $109.2 million. During the year ended December 31, 2021, 0.6 million of these shares were settled, generating net proceeds of $21.9 million.
In November 2020, a $500.0 million 2020 ATM Program was approved and the 2016 ATM Program was terminated. From inception of the 2020 ATM Program through its termination in November 2021, 9.3 million shares of the Company’s common stock were sold, all through forward sale agreements. All 9.3 million shares were settled during the year ended December 31, 2021, generating net proceeds of $391.4 million.
In November 2021, a $500.0 million 2021 ATM Program was approved and the 2020 ATM program was terminated. The following details the activity under the 2021 ATM Program since its inception (in thousands):
| 2021 ATM | Forward Shares | Regular Shares | Total Shares | Net Proceeds on Issuances | ||||||||||||
| Month ended 12/31/2021 | ||||||||||||||||
| Shares sold | 2,268 | 438 | 2,706 | |||||||||||||
| Shares issued | (2,212 | ) | (438 | ) | (2,650 | ) | $ | 120,286 | ||||||||
| Unsettled shares sold as of 12/31/2021 | 56 | — | 56 | |||||||||||||
| Year ended 12/31/2022 | ||||||||||||||||
| Shares sold | 2,434 | 1,525 | 3,959 | |||||||||||||
| Shares issued | (2,490 | ) | (1,525 | ) | (4,015 | ) | $ | 167,850 | ||||||||
| Unsettled shares sold as of 12/31/2022 | — | — | — | |||||||||||||
24
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Dividends Declared
In fiscal years 2022 and 2021, the Company's Board of Directors declared the following dividends:
| Declaration Date | Dividend Per Share | Record Date | Total Amount | Payment Date | ||||||||
| (in Thousands) | ||||||||||||
| 2022 | ||||||||||||
| Preferred Stock | ||||||||||||
| February 9, 2022 | $ | 0.375 | March 15, 2022 | $ | 2,588 | March 31, 2022 | ||||||
| May 18, 2022 | 0.375 | June 15, 2022 | 2,588 | June 30, 2022 | ||||||||
| August 8, 2022 | 0.375 | September 15, 2022 | 2,587 | September 30, 2022 | ||||||||
| November 4, 2022 | 0.375 | December 15, 2022 | 2,587 | December 30, 2022 | ||||||||
| Total Preferred Dividend | $ | 1.500 | $ | 10,350 | ||||||||
| Common Stock | ||||||||||||
| February 9, 2022 | $ | 0.638 | March 31, 2022 | $ | 85,688 | April 14, 2022 | ||||||
| May 18, 2022 | 0.638 | June 30, 2022 | 86,987 | July 15, 2022 | ||||||||
| August 8, 2022 | 0.663 | September 30, 2022 | 92,595 | October 14, 2022 | ||||||||
| November 4, 2022 | 0.663 | December 30, 2022 | 93,636 | January 13, 2023 | ||||||||
| Total Common Dividend | $ | 2.602 | $ | 358,906 | ||||||||
| 2021 | ||||||||||||
| Preferred Stock | ||||||||||||
| February 17, 2021 | $ | 0.375 | March 15, 2021 | $ | 2,588 | March 31, 2021 | ||||||
| May 19, 2021 | 0.375 | June 15, 2021 | 2,588 | June 30, 2021 | ||||||||
| July 29, 2021 | 0.375 | September 15, 2021 | 2,587 | September 30, 2021 | ||||||||
| November 17, 2021 | 0.375 | December 15, 2021 | 2,587 | December 31, 2021 | ||||||||
| Total Preferred Dividend | $ | 1.500 | $ | 10,350 | ||||||||
| Common Stock | ||||||||||||
| February 17, 2021 | $ | 0.625 | March 31, 2021 | $ | 71,837 | April 15, 2021 | ||||||
| May 19, 2021 | 0.625 | June 30, 2021 | 74,436 | July 15, 2021 | ||||||||
| July 29, 2021 | 0.638 | September 30, 2021 | 78,674 | October 15, 2021 | ||||||||
| November 17, 2021 | 0.638 | December 31, 2021 | 81,378 | January 14, 2022 | ||||||||
| Total Common Dividend | $ | 2.526 | $ | 306,325 | ||||||||
The common stock dividend declared on November 4, 2022 is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2022.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are typically insured against such claims. The Company was contingently liable for $5.7 million of debt owed by one of its former tenants, which was fully accrued in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2021. No payments were made in relation to this contingent liability. Therefore, upon the maturity of the tenant's debt on March 15, 2022, the Company reversed the full $5.7 million of the accrued liability, which is reflected as other income in the consolidated statement of operations.
25
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements. As of December 31, 2022, no accruals have been made.
As of December 31, 2022, 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.
Purchase and Capital Improvement Commitments
As of December 31, 2022, the Company had commitments totaling $111.1 million, of which $13.8 million relates to future acquisitions and the remainder relates to improvements on properties the Company already owns. Acquisition commitments contain standard cancellation clauses contingent on the results of due diligence. $35.1 million of the Company’s commitments are expected to be funded during 2023, with the remainder to be funded by the end of 2024.
Lessee Contracts
The Company leases its corporate office space, which is classified as an operating lease. The corporate office lease contains a variable lease cost related to the lease of parking spaces and a non-lease component related to the reimbursement of certain common area maintenance expenses, both of which are recognized as incurred. The Company elected to use the components expedient for all lessee operating leases, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same. As such, total rental expense, including variable rent, for the corporate office space amounted to $1.5 million for each of the years ended December 31, 2022, 2021 and 2020, respectively, and is included in general and administrative expense. The Company’s lease of its corporate office space has an initial term that expires on January 31, 2027 and is renewable at the Company’s option for two additional periods of five years each after the initial term.
The Company is also a lessee under long-term, non-cancellable ground leases under which it is obligated to pay monthly rent. There were four ground leases as of December 31, 2022 and 2021, respectively. Total rental expense included in property costs amounted to $0.3 million for each of the years ended December 31, 2022, 2021 and 2020, respectively. For all of the ground leases, rental expenses are reimbursed by tenants, and the corresponding rental revenue is recorded in rental income on the consolidated statements of operations. All leases are classified as operating leases and have a weighted average remaining lease term of 5.1 years.
The Company’s minimum aggregate rental commitments under all non-cancellable operating leases as of December 31, 2022 are as follows (in thousands):
| Ground Leases | Office Lease | Total | ||||||||||
| 2023 | $ | 285 | $ | 1,055 | $ | 1,340 | ||||||
| 2024 | 285 | 1,070 | 1,355 | |||||||||
| 2025 | 267 | 1,086 | 1,353 | |||||||||
| 2026 | 258 | 1,101 | 1,359 | |||||||||
| 2027 | 167 | 92 | 259 | |||||||||
| Thereafter | 107 | — | 107 | |||||||||
| Total | 1,369 | 4,404 | 5,773 | |||||||||
| Less: imputed interest | (241 | ) | (939 | ) | (1,180 | ) | ||||||
| Total operating lease liabilities | $ | 1,128 | $ | 3,465 | $ | 4,593 | ||||||
Imputed interest was calculated using a weighted-average discount rate of 4.19%. The discount rate is based on our estimated incremental borrowing rate, calculated as the treasury rate for the same period as the underlying lease term, plus a spread determined using factors including the Company's credit rating and REIT industry performance. The evaluation of the Company's right-of-use lease asset associated with the corporate office included the unamortized portion of a $1.7 million cash lease incentive paid at inception of the lease. As of December 31, 2022 and 2021, the Company had a right-of-use lease asset balance of $3.4 million and $3.7 million, respectively, which are included in deferred costs and other assets, net and an operating lease liability balance of $4.6 million and $5.1 million, respectively, which are included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets.
26
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 7. DERIVATIVE AND HEDGING ACTIVITIES
The Company may use 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 either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in AOCIL and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash activities in the consolidated statements of cash flows. Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates this risk through monitoring the creditworthiness of counterparties, which includes review of their debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.
In the third quarter of 2019, the Company terminated interest rate swaps which had been entered into in December 2018 and accelerated the reclassification of a loss of $12.5 million from AOCIL to termination of interest rate swaps as a result of a portion of the hedged forecasted transactions becoming probable not to occur. There were no events of default related to the interest rate swaps prior to their termination. Given that a portion of the hedged transactions remained probable to occur, $12.3 million of the loss was deferred in other comprehensive loss and is being amortized over the remaining initial term of the interest rate swaps, which ends January 31, 2024. As of December 31, 2022, the unamortized portion of loss in AOCIL related to terminated interest rate swaps was $3.0 million.
During the third quarter of 2022, the Company entered into new interest rate swaps, which were designated as cash flow hedge instruments and are recorded in deferred costs and other assets, net on the consolidated balance sheet. These instruments swap 1-month SOFR for a fixed payment. The following table summarizes the key terms and fair value of these instruments (in thousands):
| Fair Value of Asset | ||||||||||||||
| Interest Rate Swap Notional Amount | Fixed Interest Rate | Effective Date | Maturity Date | December 31, 2022 | ||||||||||
| $ | 300,000 | 2.501 | % | September 15, 2022 | August 22, 2027 | $ | 15,675 | |||||||
| $ | 200,000 | 2.507 | % | September 15, 2022 | August 22, 2027 | 10,349 | ||||||||
| $ | 300,000 | 2.636 | % | September 15, 2022 | August 22, 2025 | 11,104 | ||||||||
| $ | 37,128 | |||||||||||||
The following table provides information about the amounts recorded in AOCIL, as well as any amounts reclassified to operations (in thousands):
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Cash flow hedge derivatives | $ | 39,366 | $ | — | $ | — | ||||||
| Amount of gain reclassified from AOCIL to interest | (2,238 | ) | — | — | ||||||||
| Amount of loss reclassified from AOCIL to interest | 2,807 | 2,807 | 2,807 | |||||||||
| Total | $ | 39,935 | $ | 2,807 | $ | 2,807 | ||||||
During the next 12 months, we estimate that approximately $2.8 million will be reclassified as an increase to interest expense related to terminated hedges of existing floating-rate debt and $17.6 million will be reclassified as a decrease to interest expense related to cash flow hedge derivatives.
27
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 8. FAIR VALUE MEASUREMENTS
The fair value measurement framework specifies a hierarchy of valuation inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable:
| · | Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. |
| · | Level 3 – Inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. These types of inputs include the Company's own assumptions. |
Recurring Fair Value Measurements
The Company’s 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.
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis (in thousands):
| Fair Value Hierarchy Level | ||||||||||||||||
| Description | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Derivatives held at December 31, 2022 | ||||||||||||||||
| Interest rate swaps | $ | 37,128 | $ | — | $ | 37,128 | $ | — | ||||||||
Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. Real estate assets and their related intangible assets are evaluated for impairment based on certain indicators including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. The fair values of real estate and intangible assets were estimated using the following information, depending on availability, in order of preference: signed purchase and sale agreements (“PSA”) or letters of intent (“LOI”); broker opinions of value (“BOV”); recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.
The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of their respective measurement dates (in thousands):
| Fair Value Hierarchy Level | ||||||||||||||||
| Description | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets held at December 31, 2022 | ||||||||||||||||
| Impaired at March 31, 2022 | $ | — | $ | — | $ | — | $ | — | ||||||||
| Impaired at June 30, 2022 | $ | 4,700 | $ | — | $ | — | $ | 4,700 | ||||||||
| Impaired at September 30, 2022 | $ | 4,094 | $ | — | $ | — | $ | 4,094 | ||||||||
| Impaired at December 31, 2022 | $ | 29,636 | $ | — | $ | — | $ | 29,636 | ||||||||
| Assets held at December 31, 2021 | ||||||||||||||||
| Impaired at March 31, 2021 | $ | 1,739 | $ | — | $ | — | $ | 1,739 | ||||||||
| Impaired at June 30, 2021 | $ | 9,655 | $ | — | $ | — | $ | 9,655 | ||||||||
| Impaired at September 30, 2021 | $ | 3,479 | $ | — | $ | — | $ | 3,479 | ||||||||
| Impaired at December 31, 2021 | $ | 11,656 | $ | — | $ | — | $ | 11,656 | ||||||||
28
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
As of December 31, 2022, the Company held 18 properties that were impaired during 2022. As of December 31, 2021, the Company held 14 properties that were impaired during 2021. For one property held at December 31, 2021, the Company estimated fair value using a capitalization rate of 14.00% based on capitalization rates from market comparables. For the remaining properties, the Company estimated property fair value using price per square foot from unobservable inputs. The unobservable inputs for the remaining properties are as follows:
| Unobservable Input | Asset Type | Property Count | Price
Per Square Foot Range | Weighted
Average Price Per Square Foot | Square Footage | |||||||||||
| December 31, 2022 | ||||||||||||||||
| PSA, LOI or BOV | Retail | 12 | $30.00 - $384.88 | $ | 93.60 | 223,225 | ||||||||||
| PSA, LOI or BOV | Data Center | 1 | $24.94 | $ | 24.94 | 188,475 | ||||||||||
| Comparable Properties | Retail | 3 | $26.05 - $197.15 | $ | 56.36 | 100,195 | ||||||||||
| Comparable Properties | Office | 2 | $71.69 - $135.00 | $ | 98.97 | 73,000 | ||||||||||
| December 31, 2021 | ||||||||||||||||
| PSA, LOI or BOV | Retail | 6 | $63.83 - $418.57 | $ | 102.35 | 39,603 | ||||||||||
| PSA, LOI or BOV | Medical | 2 | $65.63 - $105.16 | $ | 75.60 | 41,496 | ||||||||||
| PSA, LOI or BOV | Data Center | 1 | $38.57 | $ | 38.57 | 188,475 | ||||||||||
| Comparable Properties | Retail | 3 | $29.35 - $483.09 | $ | 67.48 | 42,357 | ||||||||||
| Comparable Properties | Medical | 1 | $78.66 - $106.35 | $ | 95.00 | 15,974 | ||||||||||
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 consolidated balance sheets. In addition, 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 measurement date. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities. The estimated fair values of these financial instruments have been derived either based on (i) market quotes for identical or similar instruments in markets or (ii) discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. The estimated fair values of the Senior Unsecured Notes are classified as Level 1 of the fair value of the hierarchy, and the remaining estimates are classified as Level 2.
The following table discloses fair value information for these financial instruments (in thousands):
| December 31, 2022 | December 31, 2021 | |||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
| Loans receivable, net (1) | $ | 23,023 | $ | 23,462 | $ | 10,450 | $ | 11,381 | ||||||||
| 2019 Credit Facility | 55,500 | 55,502 | 288,400 | 288,549 | ||||||||||||
| 2022 Term Loans, net (2) | 792,309 | 802,363 | — | — | ||||||||||||
| Senior Unsecured Notes, net (2) | 2,722,514 | 2,310,547 | 2,718,641 | 2,865,187 | ||||||||||||
| Mortgages payable, net (2) | 4,986 | 4,685 | 5,551 | 5,748 | ||||||||||||
(1) The carrying value of the loans receivable are net of an allowance for credit losses.
(2) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.
| 29 |
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 9. INCENTIVE AWARD PLAN AND EMPLOYEE BENEFIT PLAN
Amended Incentive Award Plan
Under the Amended Incentive Award Plan, the Company may grant equity incentive awards to eligible employees, directors and other advisors of the Company. Awards under the Amended Incentive Award Plan may be in the form of stock options, restricted stock, dividend equivalents, stock appreciation rights, performance awards, stock payment awards, market-based awards, Operating Partnership units and other incentive awards. If an award under the Amended Incentive Award Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the Amended Incentive Award Plan. As of December 31, 2022, 4.8 million shares remained available for award under the Amended Incentive Award Plan.
Shares of common stock have been granted pursuant to the Amended Incentive Award Plan and, during the periods presented, portions of these awards vested. The vesting of these shares 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 shares of common stock during the years ended December 31, 2022, 2021 and 2020 valued at $6.5 million, $4.4 million and $4.4 million, respectively, solely to pay the associated statutory tax withholdings, which do not exceed the maximum statutory rate. Common shares repurchased are considered retired under Maryland law, and the cost of the stock repurchased is recorded as a reduction to common stock and accumulated deficit on the consolidated balance sheets. The Company has made an accounting policy election to recognize stock-based compensation forfeitures as they occur.
Restricted Shares of Common Stock
Restricted share awards have been granted to certain employees, including executive officers, and members of the Board of Directors. The requisite service period for the awards is generally three years for employees and one year for members of the Board of Directors. The following table summarizes the restricted share activity:
| 2022 | 2021 | 2020 | ||||||||||||||||||||||
| Number of Shares | Weighted Average Price (1) (per share) | Number of Shares | Weighted Average Price (1) (per share) | Number of Shares | Weighted Average Price (1) (per share) | |||||||||||||||||||
| Outstanding non-vested shares, beginning of year | 233,135 | $ | 42.22 | 279,912 | $ | 42.67 | 321,627 | $ | 40.66 | |||||||||||||||
| Shares granted | 128,367 | 45.73 | 118,996 | 39.22 | 148,045 | 46.42 | ||||||||||||||||||
| Shares vested | (145,723 | ) | 42.23 | (157,054 | ) | 40.83 | (182,653 | ) | 42.04 | |||||||||||||||
| Shares forfeited | (418 | ) | 46.30 | (8,719 | ) | 40.87 | (7,107 | ) | 45.77 | |||||||||||||||
| Outstanding non-vested shares, end of year | 215,361 | $ | 44.30 | 233,135 | $ | 42.22 | 279,912 | $ | 42.67 | |||||||||||||||
(1) Based on grant date fair values.
The Company recorded $5.9 million in deferred stock-based compensation associated with restricted shares granted during the year ended December 31, 2022. The fair value of the restricted stock grants was determined based on the Company's closing stock price on the date of grant. During the year ended December 31, 2022, restricted shares with an aggregate fair value of $6.7 million vested. The fair value of the vesting was determined based on the Company’s closing stock price on the date of vest. Outstanding non-vested awards as of December 31, 2022 have a remaining weighted average recognition period of 0.7 years.
| 30 |
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Market-Based Awards
Market-based awards have been granted to executive officers upon approval from the Board of Directors or committee thereof. These awards are granted at a target number of units and represent shares that are potentially issuable in the future. The market-based share awards vest based on the Company’s stock price, dividend performance, and TSR at the end of their respective performance periods relative to a group of industry peers. The performance periods generally begin on January 1st of the year of grant and end after three years on December 31st. Potential shares of the Corporation's common stock that each participant is eligible to receive is based on the initial target number of shares granted, multiplied by a percentage range between 0% and 375%. The following table summarizes the market-based award activity:
| 2022 | 2021 | 2020 | ||||||||||||||||||||||
| Number of Target Shares | Weighted Average Fair Value (per share) | Number of Target Shares | Weighted Average Fair Value (per share) | Number of Target Shares | Weighted Average Fair Value (per share) | |||||||||||||||||||
| Outstanding non-vested awards, beginning of year | 258,053 | $ | 74.08 | 201,468 | $ | 58.12 | 319,731 | $ | 49.49 | |||||||||||||||
| Grants at target | 166,307 | 93.26 | 170,307 | 77.57 | 87,746 | 67.30 | ||||||||||||||||||
| Earned above performance target | — | — | 154,312 | 50.92 | 83,259 | 54.57 | ||||||||||||||||||
| Vested | — | — | (266,319 | ) | 50.92 | (268,694 | ) | 54.57 | ||||||||||||||||
| Forfeited | (87,746 | ) | 67.30 | — | — | — | — | |||||||||||||||||
| Incremental Shares (1) | — | N/A | (1,715 | ) | N/A | (20,574 | ) | N/A | ||||||||||||||||
| Outstanding non-vested awards, end of year | 336,614 | $ | 85.32 | 258,053 | $ | 74.08 | 201,468 | $ | 58.12 | |||||||||||||||
(1) In 2018, in connection with the Spin-Off and in accordance with the rights granted per the Amended Incentive Award Plan, the Board of Directors made an equitable adjustment for all market-based awards outstanding, resulting in incremental shares. During the years ended December 31, 2021 and 2020, 1.7 thousand and 20.6 thousand, respectively, of these incremental shares were earned. Because the fair value of the outstanding market-based awards the day prior to and the day after the Spin-Off did not materially change, there was no change to unrecognized compensation expense and no incremental compensation expense related to the incremental shares.
Grant date fair value of the market-based share awards was calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the time horizons matching the performance periods. For market-based awards granted in 2022, significant inputs for the calculation were expected volatility of the Company of 39.5% and expected volatility of the Company's peers, ranging from 21.5% to 53.6%, with an average volatility of 35.7% and a risk-free interest rate of 1.59%. Expected volatility was determined using an equal weighting of implied volatility and historical volatility.
The projected shares to be awarded are not considered issued under the Amended Incentive Award Plan until the performance period has ended and the actual number of shares to be released is determined. The market-based 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. During the year ended December 31, 2022, zero market-based awards vested as the requisite performance conditions were not met. Outstanding non-vested awards as of December 31, 2022 have a remaining weighted average recognition period of 1.7 years and would have resulted in 0.2 million shares released based on the Corporation's TSR relative to the specified peer groups through that date.
In addition, final shares issued under each market-based share award entitle its holder to a cash payment equal to the aggregate dividends declared with record dates during the performance period, beginning on the grant date and ending the day before the awards are released. Approximately $2.5 million and $3.3 million in dividend rights have been accrued as of December 31, 2022 and 2021, respectively.
| 31 |
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
Stock-based Compensation Expense
For the years ended December 31, 2022, 2021 and 2020, the Company recognized $17.4 million, $14.0 million and $12.6 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the consolidated statements of operations. Stock-based compensation is recognized on a straight-line basis over the minimum required service period of each applicable award.
The following is a summary of remaining unamortized stock-based compensation expense (in thousands):
| December 31, 2022 | December 31, 2021 | |||||||
| Restricted share awards | $ | 4,727 | $ | 4,787 | ||||
| Market-based awards | 15,165 | 11,143 | ||||||
| Total unamortized stock-based compensation expense | $ | 19,892 | $ | 15,930 | ||||
401(k) Plan
The Company has a 401(k) Plan, which is available to employees on the first month following their date of hire with the Company. Currently, the Company provides a matching contribution equal to 100% of elective deferrals up to 4% of compensation, which vests immediately.
NOTE 10. INCOME PER SHARE
The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share computed using the two-class method (dollars in thousands):
| Years Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Basic and diluted income: | ||||||||||||
| Income from continuing operations | $ | 285,516 | $ | 171,702 | $ | 26,708 | ||||||
| Less: dividends paid to preferred stockholders | (10,350 | ) | (10,350 | ) | (10,350 | ) | ||||||
| Less: dividends and income attributable to unvested restricted stock | (555 | ) | (581 | ) | (728 | ) | ||||||
| Net income attributable to common stockholders used in basic and diluted income per share | $ | 274,611 | $ | 160,771 | $ | 15,630 | ||||||
| Basic weighted average shares of common stock outstanding: | ||||||||||||
| Weighted average shares of common stock outstanding | 134,768,664 | 118,587,722 | 104,656,242 | |||||||||
| Less: unvested weighted average shares of restricted stock | (220,578 | ) | (245,281 | ) | (298,582 | ) | ||||||
| Basic weighted average shares of common stock outstanding | 134,548,086 | 118,342,441 | 104,357,660 | |||||||||
| Net income per share attributable to common stockholders - basic | $ | 2.04 | $ | 1.36 | $ | 0.15 | ||||||
| Diluted weighted average shares of common stock outstanding: (1) | ||||||||||||
| Plus: unvested market-based awards | 97,565 | 373,396 | 175,952 | |||||||||
| Plus: unsettled shares under open forward equity contracts | — | 1 | 1,772 | |||||||||
| Diluted weighted average shares of common stock outstanding | 134,645,651 | 118,715,838 | 104,535,384 | |||||||||
| Net income per share attributable to common stockholders - diluted | $ | 2.04 | $ | 1.35 | $ | 0.15 | ||||||
| Potentially dilutive shares of common stock related to: | ||||||||||||
| Unvested restricted share awards | 67,206 | 95,411 | 62,448 | |||||||||
(1) Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.
| 32 |
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
NOTE 11. RELATED PARTY TRANSACTIONS
Asset Management Agreement and Interim Management Agreement
In conjunction with the Spin-Off, the Company entered into the Asset Management Agreement to provide various management services to SMTA. On June 2, 2019, the Company and SMTA entered into a termination agreement of the Asset Management Agreement and concurrently entered into the Interim Management Agreement, which was subsequently terminated September 4, 2020. Asset management fees of $0.7 million were earned during the year ended December 31, 2020 and are included in related party fee income in the consolidated statements of operations.
Cost Sharing Arrangements
In conjunction with the Spin-Off, the Company and SMTA entered into certain agreements, including the Separation and Distribution Agreement, Tax Matters Agreement, Registration Rights Agreement and Insurance Sharing Agreement. These agreements provided a framework for the relationship between the Company and SMTA after the Spin-Off, by which Spirit could incur certain expenses on behalf of SMTA that had to be reimbursed in a timely manner. These agreements, except for the Tax Matters Agreement, were terminated in conjunction with the termination of the Asset Management Agreement. The Tax Matters Agreement was terminated in conjunction with the termination of the Interim Management Agreement.
NOTE 12. INCOME TAXES
The Company’s total income tax expense was as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| State income tax | $ | 890 | $ | 605 | $ | 128 | ||||||
| Federal income tax | 7 | 2 | 145 | |||||||||
| Total income tax expense | $ | 897 | $ | 607 | $ | 273 | ||||||
The Operating Partnership is a partnership for federal income tax purposes. Partnerships are pass-through entities and are not subject to U.S. federal income taxes, and therefore, no provision has been made for federal income taxes in the consolidated financial statements. Although most states and cities where the Operating Partnership operates follow the U.S. federal income tax treatment, there are certain jurisdictions such as Texas, Tennessee and Ohio that impose income or franchise taxes on partnerships. The Company’s deferred income tax expense and its ending balance in deferred tax assets and liabilities, which are recorded within accounts payable, accrued expenses and other liabilities in the consolidated balance sheets, were immaterial as of December 31, 2022, 2021 and 2020.
The Operating Partnership transferred its rights and obligations under the Asset Management Agreement to Spirit Realty AM Corporation (“SRAM”), a wholly-owned taxable REIT subsidiary of Spirit, on April 1, 2019. This agreement was subsequently terminated and simultaneously replaced by the Interim Management Agreement, effective from September 20, 2019 through September 4, 2020. The Operating Partnership allocated personnel and other general and administrative costs to SRAM for management services provided to SMTA. Accordingly, all asset management fees earned from April 1, 2019 through September 4, 2020 were subject to income tax.
To the extent that the Company acquires property that has been owned by a C corporation in a transaction in which the tax basis of the property carries over, and the Company recognizes a gain on the disposition of such property during the subsequent recognition period, it will be required to pay tax at the regular corporate tax rate to the extent of such built-in gain. No properties subject to state built-in gain tax were sold during the years ended December 31, 2022, 2021 or 2020.
The Corporation has federal net operating loss carry-forwards for income tax purposes totaling $66.1 million for each of the years ended December 31, 2022, 2021 and 2020. These losses, which begin to expire in 2027 through 2034, are available to reduce future taxable income or distribution requirements, subject to certain ownership change limitations. The Corporation intends to make annual distributions at least equal to its taxable income and thus does not expect to utilize its net operating loss carryforwards in the foreseeable future.
| 33 |
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
The Company files federal, state and local income tax returns. Federal tax returns for years prior to 2019 are no longer subject to examination. Additionally, state tax returns for years prior to 2018 are generally no longer subject to examination. The Company recognizes any interest related to underpayment of income taxes as interest expense and recognizes any penalties as operating expenses. There was no material interest or penalties for the years ended December 31, 2022, 2021 and 2020. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
Common stock dividends paid were characterized for tax as follows (per share):
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Ordinary income | $ | 2.41 | $ | 1.37 | $ | 1.80 | ||||||
| Return of capital | 0.06 | 1.14 | 0.70 | |||||||||
| Capital gain | 0.11 | — | — | |||||||||
| Total | $ | 2.58 | $ | 2.51 | $ | 2.50 | ||||||
NOTE 13. CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited consolidated financial information for each of the four quarters included in the years ended December 31, 2022 and 2021 (in thousands, except share and per share data):
| 2022 | First | Second | Third | Fourth | ||||||||||||||||
| (Unaudited) | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
| Total operating revenues | $ | 168,396 | $ | 174,935 | $ | 182,904 | $ | 183,394 | $ | 709,629 | ||||||||||
| Depreciation and amortization | (69,108 | ) | (72,898 | ) | (74,600 | ) | (76,379 | ) | (292,985 | ) | ||||||||||
| Interest | (26,023 | ) | (27,594 | ) | (30,956 | ) | (33,049 | ) | (117,622 | ) | ||||||||||
| Other operating expenses | (23,593 | ) | (30,631 | ) | (24,010 | ) | (51,679 | ) | (129,913 | ) | ||||||||||
| Loss on debt extinguishment | (172 | ) | — | — | — | (172 | ) | |||||||||||||
| Gain on disposition of assets | 877 | 38,928 | 23,302 | 47,793 | 110,900 | |||||||||||||||
| Other income | 5,679 | — | — | — | 5,679 | |||||||||||||||
| Net income | 56,056 | 82,740 | 76,640 | 70,080 | 285,516 | |||||||||||||||
| Dividends paid to preferred stockholders | (2,588 | ) | (2,588 | ) | (2,587 | ) | (2,587 | ) | (10,350 | ) | ||||||||||
| Net income attributable to common stockholders | $ | 53,468 | $ | 80,152 | $ | 74,053 | $ | 67,493 | $ | 275,166 | ||||||||||
| Net income per share attributable to common stockholders - basic | $ | 0.42 | $ | 0.60 | $ | 0.54 | $ | 0.48 | $ | 2.04 | ||||||||||
| Net income per share attributable to common stockholders - diluted | $ | 0.42 | $ | 0.60 | $ | 0.54 | $ | 0.48 | $ | 2.04 | ||||||||||
| Dividends declared per common share | $ | 0.638 | $ | 0.638 | $ | 0.663 | $ | 0.663 | $ | 2.602 | ||||||||||
| 34 |
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2022
| 2021 | First | Second | Third | Fourth | ||||||||||||||||
| (Unaudited) | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
| Total operating revenues | $ | 135,141 | $ | 164,626 | $ | 152,568 | $ | 156,055 | $ | 608,390 | ||||||||||
| Depreciation and amortization | (57,087 | ) | (60,074 | ) | (63,061 | ) | (64,402 | ) | (244,624 | ) | ||||||||||
| Interest | (26,624 | ) | (26,170 | ) | (25,078 | ) | (25,131 | ) | (103,003 | ) | ||||||||||
| Other operating expenses | (25,558 | ) | (27,955 | ) | (24,005 | ) | (23,825 | ) | (101,343 | ) | ||||||||||
| (Loss) gain on debt extinguishment | (29,177 | ) | (10 | ) | 1 | — | (29,186 | ) | ||||||||||||
| Gain on disposition of assets | 1,836 | 37,507 | 453 | 1,672 | 41,468 | |||||||||||||||
| Net (loss) income | (1,469 | ) | 87,924 | 40,878 | 44,369 | 171,702 | ||||||||||||||
| Dividends paid to preferred stockholders | (2,588 | ) | (2,588 | ) | (2,587 | ) | (2,587 | ) | (10,350 | ) | ||||||||||
| Net (loss) income attributable to common stockholders | $ | (4,057 | ) | $ | 85,336 | $ | 38,291 | $ | 41,782 | $ | 161,352 | |||||||||
| Net (loss) income per share attributable to common stockholders - basic | $ | (0.04 | ) | $ | 0.74 | $ | 0.32 | $ | 0.34 | $ | 1.36 | |||||||||
| Net (loss) income per share attributable to common stockholders - diluted | $ | (0.04 | ) | $ | 0.74 | $ | 0.32 | $ | 0.34 | $ | 1.35 | |||||||||
| Dividends declared per common share | $ | 0.625 | $ | 0.625 | $ | 0.638 | $ | 0.638 | $ | 2.526 | ||||||||||
| 35 |
SPIRIT REALTY CAPITAL, INC.
Schedule III Real Estate and Accumulated Depreciation
(Amounts in thousands)
| Initial Cost (b) | Cost Capitalized / (Impaired) | Gross Amount at December 31, 2022 | |||||||||||||||||||||||||||||||
| Tenant Concept | Number
of Properties (a) | Encumbrances | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Total | Accumulated Depreciation | Construction Year | Date Acquired | Depreciable Life | ||||||||||||||||||||
| 24 Hour Fitness | 1 | (d) | $ | 6,982 | $ | 9,255 | $ | (3,817 | ) | $ | (5,674 | ) | $ | 3,165 | $ | 3,581 | $ | 6,746 | (549 | ) | 1987 | 05/07/2015 | 4 to 25 years | ||||||||||
| Aaron's | 25 | (d) | 11,215 | 24,883 | (1,112 | ) | (2,314 | ) | 10,103 | 22,569 | 32,672 | (7,675 | ) | 1957 - 2008 | 07/17/2013 | 1 to 49 years | |||||||||||||||||
| Academy Sports + Outdoors | 9 | (d) | 20,495 | 51,603 | — | 76 | 20,495 | 51,679 | 72,174 | (8,280 | ) | 1996 - 2015 | 07/17/2013 - 11/30/2021 | 9 to 37 years | |||||||||||||||||||
| Accel International | 3 | (d) | 8,691 | 22,860 | — | — | 8,691 | 22,860 | 31,551 | (5,427 | ) | 1990 - 2018 | 12/17/2014 - 06/03/2021 | 9 to 30 years | |||||||||||||||||||
| Advance Auto Parts | 54 | (d) | 27,610 | 49,920 | — | (76 | ) | 27,610 | 49,844 | 77,454 | (14,449 | ) | 1965 - 2008 | 07/17/2013 - 11/25/2019 | 4 to 50 years | ||||||||||||||||||
| Advanced Distributor Products | 1 | (d) | 2,134 | 17,583 | — | — | 2,134 | 17,583 | 19,717 | (573 | ) | 2017 | 01/28/2022 | 3 to 37 years | |||||||||||||||||||
| Alabama Clinics | 1 | (d) | 695 | 1,707 | — | 20 | 695 | 1,727 | 2,422 | (458 | ) | 2012 | 12/21/2016 | 1 to 40 years | |||||||||||||||||||
| Alaska Club | 5 | (d) | 14,160 | 46,839 | — | — | 14,160 | 46,839 | 60,999 | (8,968 | ) | 1972 - 2006 | 08/15/2018 | 10 to 43 years | |||||||||||||||||||
| Albertsons | 3 | (d) | 8,145 | 10,140 | — | (132 | ) | 8,145 | 10,008 | 18,153 | (3,962 | ) | 1983 - 1998 | 12/17/2013 - 04/01/2015 | 15 to 30 years | ||||||||||||||||||
| Alta Material Handling | 3 | (d) | 3,199 | 7,542 | — | — | 3,199 | 7,542 | 10,741 | (311 | ) | 1979 - 2005 | 03/29/2022 | 8 to 35 years | |||||||||||||||||||
| Aludyne | 8 | (d) | 7,112 | 35,843 | — | — | 7,112 | 35,843 | 42,955 | (1,612 | ) | 1969 - 2003 | 02/03/2021 - 09/22/2022 | 3 to 33 years | |||||||||||||||||||
| AMC Theatres | 4 | (d) | 12,027 | 44,079 | (2,405 | ) | (8,043 | ) | 9,622 | 36,036 | 45,658 | (13,756 | ) | 1997 - 2007 | 06/23/2004 - 07/17/2013 | 2 to 40 years | |||||||||||||||||
| America's Service Station | 2 | (d) | 2,157 | 2,825 | — | — | 2,157 | 2,825 | 4,982 | (324 | ) | 2000 - 2011 | 11/25/2019 | 10 to 42 years | |||||||||||||||||||
| Amigos United | 1 | (d) | 620 | 5,415 | — | (156 | ) | 620 | 5,259 | 5,879 | (2,027 | ) | 2000 | 08/25/2005 | 40 to 40 years | ||||||||||||||||||
| Amware Fulfillment | 1 | (d) | 1,731 | 12,990 | — | — | 1,731 | 12,990 | 14,721 | (1,402 | ) | 1969 | 11/10/2020 | 8 to 25 years | |||||||||||||||||||
| Andy's Frozen Custard | 4 | (d) | 3,081 | 902 | 317 | 3,198 | 3,398 | 4,100 | 7,498 | (773 | ) | 1995 - 2019 | 09/19/2014 - 09/12/2016 | 13 to 40 years | |||||||||||||||||||
| Ann Taylor / LOFT | 2 | (d) | 16,637 | 95,965 | — | — | 16,637 | 95,965 | 112,602 | — | 2014 - 2016 | 12/06/2022 | 4 to 29 years | ||||||||||||||||||||
| Anytime Fitness | 2 | (d) | 547 | 1,070 | — | — | 547 | 1,070 | 1,617 | (15 | ) | 2014 - 2018 | 07/28/2022 | 6 to 52 years | |||||||||||||||||||
| Applebee's | 23 | (d) | 25,368 | 43,959 | — | — | 25,368 | 43,959 | 69,327 | (14,185 | ) | 1990 - 2005 | 07/17/2013 - 11/25/2019 | 8 to 40 years | |||||||||||||||||||
| Arby's | 12 | (d) | 6,265 | 9,685 | 17 | (18 | ) | 6,282 | 9,667 | 15,949 | (3,040 | ) | 1980 - 2004 | 07/17/2013 - 11/25/2019 | 3 to 30 years | ||||||||||||||||||
| Armacell | 1 | (d) | 1,318 | 17,900 | — | — | 1,318 | 17,900 | 19,218 | (1,617 | ) | 2005 | 11/10/2020 | 6 to 30 years | |||||||||||||||||||
| Ashley HomeStore (f) | 7 | (d) | 13,582 | 30,681 | (728 | ) | (3,057 | ) | 12,854 | 27,624 | 40,478 | (5,442 | ) | 1947 - 2008 | 07/17/2013 - 07/21/2022 | 3 to 45 years | |||||||||||||||||
| At Home (f) | 16 | (d) | 70,855 | 125,450 | — | 134 | 70,855 | 125,584 | 196,439 | (23,418 | ) | 1965 - 2021 | 08/01/2016 - 05/26/2022 | 5 to 44 years | |||||||||||||||||||
| AT&T | 1 | (d) | 2,873 | 8,252 | — | (401 | ) | 2,873 | 7,851 | 10,724 | (1,690 | ) | 2002 | 07/17/2013 | 16 to 48 years | ||||||||||||||||||
| ATC Fitness | 1 | (d) | 1,187 | 1,817 | — | — | 1,187 | 1,817 | 3,004 | (615 | ) | 2014 | 09/17/2014 | 15 to 40 years | |||||||||||||||||||
| Auria St. Clair | 1 | (d) | 1,511 | 6,379 | — | — | 1,511 | 6,379 | 7,890 | (1,081 | ) | 1991 | 01/09/2020 | 9 to 26 years | |||||||||||||||||||
| Auto Driveaway | 1 | (d) | 2,526 | 543 | — | — | 2,526 | 543 | 3,069 | (64 | ) | 2020 | 10/11/2022 | 7 to 53 years | |||||||||||||||||||
| Avalon Flooring | 1 | (d) | 753 | 3,299 | — | — | 753 | 3,299 | 4,052 | (864 | ) | 2006 | 03/31/2015 | 11 to 40 years | |||||||||||||||||||
| Bagger Dave's Burger Tavern | 2 | (d) | 1,069 | 429 | — | — | 1,069 | 429 | 1,498 | (148 | ) | 1927 - 1985 | 11/25/2019 | 6 to 27 years | |||||||||||||||||||
| Bank of America | 1 | (d) | 13,131 | 74,628 | — | 1,312 | 13,131 | 75,940 | 89,071 | (7,895 | ) | 1974 | 09/26/2019 | 9 to 52 years | |||||||||||||||||||
| Best Buy (f) | 9 | (d) | 21,346 | 51,864 | — | 134 | 21,346 | 51,998 | 73,344 | (8,571 | ) | 1984 - 2002 | 07/17/2013 - 06/30/2022 | 4 to 41 years | |||||||||||||||||||
| Better Being Co. | 1 | (d) | 3,407 | 46,940 | — | — | 3,407 | 46,940 | 50,347 | (417 | ) | 2005 | 09/26/2022 | 11 to 30 years | |||||||||||||||||||
| Big Lots (f) | 2 | (d) | 3,498 | 3,398 | — | 7,499 | 3,498 | 10,897 | 14,395 | (1,227 | ) | 1987 - 1988 | 07/17/2013 - 05/13/2022 | 8 to 30 years | |||||||||||||||||||
| Big Sandy Furniture | 7 | (d) | 5,327 | 18,252 | — | 24 | 5,327 | 18,276 | 23,603 | (4,115 | ) | 1976 - 1998 | 11/25/2019 | 3 to 34 years | |||||||||||||||||||
| Binswanger Glass | 9 | (d) | 3,696 | 14,737 | — | — | 3,696 | 14,737 | 18,433 | (242 | ) | 1957 - 1983 | 08/23/2022 | 5 to 35 years | |||||||||||||||||||
| BJ's Wholesale Club | 11 | (d) | 58,082 | 162,530 | — | 229 | 58,082 | 162,759 | 220,841 | (27,524 | ) | 1993 - 2021 | 07/17/2013 - 08/12/2022 | 8 to 50 years | |||||||||||||||||||
| Black Box | 1 | (d) | 5,470 | 24,982 | — | — | 5,470 | 24,982 | 30,452 | (887 | ) | 1983 | 04/29/2022 | 6 to 26 years | |||||||||||||||||||
| BlueLinx | 3 | (d) | 37,932 | 71,290 | — | 52 | 37,932 | 71,342 | 109,274 | (8,841 | ) | 1988 - 1996 | 04/07/2021 | 7 to 27 years | |||||||||||||||||||
| Bob’s Discount Furniture | 1 | (d) | 3,776 | 8,024 | — | — | 3,776 | 8,024 | 11,800 | (224 | ) | 2008 | 01/31/2022 | 7 to 46 years | |||||||||||||||||||
| Books-A-Million | 1 | (d) | 575 | 2,568 | — | (6 | ) | 575 | 2,562 | 3,137 | (824 | ) | 2001 | 07/17/2013 | 7 to 45 years | ||||||||||||||||||
| Boscovs | 1 | (d) | 1,803 | 4,314 | — | — | 1,803 | 4,314 | 6,117 | (1,247 | ) | 1970 | 11/25/2019 | 3 to 25 years | |||||||||||||||||||
| Brookshire Brothers | 7 | (d) | 4,397 | 8,077 | — | (589 | ) | 4,397 | 7,488 | 11,885 | (6,016 | ) | 1971 - 2004 | 12/01/2005 - 03/31/2014 | 10 to 30 years | ||||||||||||||||||
| Buffalo Wild Wings | 5 | (d) | 8,282 | 5,665 | — | — | 8,282 | 5,665 | 13,947 | (2,413 | ) | 2003 - 2015 | 11/05/2014 - 11/25/2019 | 9 to 40 years | |||||||||||||||||||
| Builders FirstSource | 2 | (d) | 6,280 | 5,800 | — | 242 | 6,280 | 6,042 | 12,322 | (990 | ) | 1973 - 2005 | 05/13/2021 - 11/08/2021 | 3 to 39 years | |||||||||||||||||||
| Burger King | 15 | (d) | 8,939 | 9,665 | — | — | 8,939 | 9,665 | 18,604 | (3,949 | ) | 1976 - 1998 | 09/29/2006 - 11/25/2019 | 3 to 34 years | |||||||||||||||||||
| Burlington (f) | 1 | (d) | 5,741 | 12,303 | — | — | 5,741 | 12,303 | 18,044 | (324 | ) | 1966 | 06/30/2022 | 6 to 25 years | |||||||||||||||||||
| Caliber Collision | 3 | (d) | 4,587 | 6,250 | — | 65 | 4,587 | 6,315 | 10,902 | (1,720 | ) | 1986 - 2016 | 12/28/2016 - 11/25/2019 | 4 to 50 years | |||||||||||||||||||
| Camping World | 7 | (d) | 22,547 | 16,301 | — | 15,957 | 22,547 | 32,258 | 54,805 | (9,653 | ) | 2004 - 2016 | 03/27/2015 - 11/25/2019 | 9 to 40 years | |||||||||||||||||||
| Car Wash USA Express | 21 | (d) | 13,035 | 63,614 | — | — | 13,035 | 63,614 | 76,649 | (6,880 | ) | 1998 - 2018 | 09/27/2019 | 9 to 39 years | |||||||||||||||||||
| CarMax | 7 | (d) | 45,244 | 48,842 | — | (244 | ) | 45,244 | 48,598 | 93,842 | (12,620 | ) | 1994 - 2005 | 06/30/2005 - 11/25/2019 | 6 to 40 years | ||||||||||||||||||
| Chapala | 1 | (d) | 477 | 139 | — | — | 477 | 139 | 616 | (54 | ) | 1998 | 11/25/2019 | 3 to 20 years | |||||||||||||||||||
| Charleston's Restaurant | 2 | (d) | 2,620 | 6,455 | — | 12 | 2,620 | 6,467 | 9,087 | (1,328 | ) | 1992 - 2002 | 11/25/2019 | 2 to 20 years | |||||||||||||||||||
| Childcare Network | 20 | (d) | 9,432 | 18,736 | — | 36 | 9,432 | 18,772 | 28,204 | (6,121 | ) | 1949 - 2016 | 10/31/2014 - 02/23/2017 | 4 to 50 years | |||||||||||||||||||
| Childtime | 6 | (d) | 2,106 | 4,181 | — | — | 2,106 | 4,181 | 6,287 | (2,081 | ) | 1974 - 2010 | 07/17/2013 - 02/19/2015 | 8 to 40 years | |||||||||||||||||||
36
SPIRIT REALTY CAPITAL, INC.
Schedule III Real Estate and Accumulated Depreciation
(Amounts in thousands)
| Initial Cost (b) | Cost Capitalized / (Impaired) | Gross Amount at December 31, 2022 | ||||||||||||||||||||||||
| Tenant Concept | Number
of Properties (a) | Encumbrances | Land and Improvements | Buildings and Improvements | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Total | Accumulated Depreciation | Construction Year | Date Acquired | Depreciable Life | |||||||||||||
| Chili's | 3 | (d) | 2,628 | 3,337 | (735 | ) | — | 1,893 | 3,337 | 5,230 | (1,281 | ) | 1985 - 1999 | 07/17/2013 | 11 to 35 years | |||||||||||
| Chuck-A-Rama and Grub Steak | 12 | (d) | 8,406 | 23,314 | — | — | 8,406 | 23,314 | 31,720 | (4,123 | ) | 1964 - 2011 | 01/22/2019 | 9 to 37 years | ||||||||||||
| Church's Chicken | 160 | (d) | 65,562 | 77,569 | (304 | ) | (53 | ) | 65,258 | 77,516 | 142,774 | (37,301 | ) | 1965 - 2007 | 07/17/2013 | 3 to 40 years | ||||||||||
| Cinemark | 1 | (d) | 4,023 | 10,346 | — | 52 | 4,023 | 10,398 | 14,421 | (1,929 | ) | 2016 | 02/21/2017 | 15 to 50 years | ||||||||||||
| Circle K | 71 | (d) | 51,773 | 85,711 | (21 | ) | — | 51,752 | 85,711 | 137,463 | (42,690 | ) | 1950 - 2005 | 07/17/2013 | 3 to 38 years | |||||||||||
| City Electric Supply | 74 | (d) | 27,568 | 74,284 | 31 | 779 | 27,599 | 75,063 | 102,662 | (5,670 | ) | 1935 - 2017 | 11/30/2020 | 5 to 48 years | ||||||||||||
| Clean Freak | 10 | (d) | 13,899 | 16,644 | 152 | 3,133 | 14,051 | 19,777 | 33,828 | (3,287 | ) | 1970 - 2022 | 09/29/2016 - 07/07/2022 | 13 to 50 years | ||||||||||||
| Coastal Construction Products | 4 | (d) | 5,623 | 10,074 | — | 33 | 5,623 | 10,107 | 15,730 | (610 | ) | 1963 - 2007 | 03/30/2021 - 03/15/2022 | 5 to 39 years | ||||||||||||
| Coil Tubing Partners | 1 | (d) | 2,343 | 4,950 | — | — | 2,343 | 4,950 | 7,293 | (84 | ) | 2019 | 08/23/2022 | 4 to 43 years | ||||||||||||
| Colbert Packaging | 2 | (d) | 1,835 | 22,707 | — | — | 1,835 | 22,707 | 24,542 | — | 1989 - 2015 | 12/20/2022 | 5 to 33 years | |||||||||||||
| Columbus Fish Market | 1 | (d) | 2,164 | 1,165 | — | — | 2,164 | 1,165 | 3,329 | (847 | ) | 1960 | 07/17/2013 | 9 to 23 years | ||||||||||||
| Conney Safety | 1 | (d) | 1,189 | 11,451 | — | — | 1,189 | 11,451 | 12,640 | (1,724 | ) | 1986 | 01/09/2020 | 8 to 23 years | ||||||||||||
| Convergys | 1 | (d) | 808 | 6,045 | (266 | ) | (1,580 | ) | 542 | 4,465 | 5,007 | — | 2008 | 07/17/2013 | 3 to 42 years | |||||||||||
| Cost-U-Less | 1 | (d) | 2,132 | 5,992 | — | — | 2,132 | 5,992 | 8,124 | (2,133 | ) | 2005 | 07/17/2013 | 8 to 37 years | ||||||||||||
| Crash Champions | 24 | (d) | 30,873 | 43,757 | — | 5 | 30,873 | 43,762 | 74,635 | (2,960 | ) | 1976 - 2004 | 11/25/2019 - 11/16/2021 | 7 to 40 years | ||||||||||||
| Crème de la Crème | 5 | (d) | 10,538 | 18,955 | — | 61 | 10,538 | 19,016 | 29,554 | (2,219 | ) | 2007 - 2009 | 11/25/2019 | 7 to 41 years | ||||||||||||
| Crunch Fitness | 6 | (d) | 7,424 | 21,920 | — | 3,036 | 7,424 | 24,956 | 32,380 | (5,470 | ) | 1993 - 2017 | 11/29/2016 - 11/25/2019 | 8 to 44 years | ||||||||||||
| C-Store | 233 | (d) | 162,580 | 136,269 | (649 | ) | 3,464 | 161,931 | 139,733 | 301,664 | (66,376 | ) | 1945 - 2011 | 07/02/2007 - 06/28/2019 | 8 to 40 years | |||||||||||
| Curacao (f) | 1 | (d) | 9,470 | 13,326 | (2,049 | ) | (5,007 | ) | 7,421 | 8,319 | 15,740 | (1,265 | ) | 1968 | 12/30/2014 | 6 to 24 years | ||||||||||
| Curt Manufacturing | 2 | (d) | 4,582 | 13,044 | — | 130 | 4,582 | 13,174 | 17,756 | (1,848 | ) | 2009 - 2010 | 11/13/2020 | 9 to 29 years | ||||||||||||
| CVS | 30 | (d) | 29,087 | 82,977 | (301 | ) | (1,424 | ) | 28,786 | 81,553 | 110,339 | (25,682 | ) | 1994 - 2007 | 07/17/2013 | 7 to 43 years | ||||||||||
| Dairy Queen | 4 | (d) | 2,570 | 4,333 | — | 90 | 2,570 | 4,423 | 6,993 | (1,255 | ) | 1984 - 2010 | 02/16/2017 | 5 to 40 years | ||||||||||||
| Dave & Buster's / Main Event | 15 | (d) | 47,735 | 85,944 | 2,161 | 25,241 | 49,896 | 111,185 | 161,081 | (26,548 | ) | 1995 - 2021 | 09/30/2005 - 03/02/2022 | 7 to 50 years | ||||||||||||
| David's Bridal (f) | 2 | (d) | 1,461 | 4,727 | — | 54 | 1,461 | 4,781 | 6,242 | (1,285 | ) | 2005 - 2006 | 07/17/2013 | 11 to 48 years | ||||||||||||
| Davis-Standard | 2 | (d) | 3,181 | 15,331 | — | 71 | 3,181 | 15,402 | 18,583 | (3,562 | ) | 1969 - 1983 | 10/27/2016 | 5 to 40 years | ||||||||||||
| Deep Well Services | 2 | (d) | 2,406 | 5,938 | — | — | 2,406 | 5,938 | 8,344 | (89 | ) | 2018 - 2019 | 08/23/2022 | 3 to 43 years | ||||||||||||
| Defined Fitness | 7 | (d) | 16,187 | 35,280 | — | 6 | 16,187 | 35,286 | 51,473 | (7,473 | ) | 1972 - 2020 | 04/23/2015 - 11/24/2020 | 14 to 45 years | ||||||||||||
| Defy Trampoline Park (f) | 10 | (d) | 12,493 | 22,679 | 521 | 3,758 | 13,014 | 26,437 | 39,451 | (8,016 | ) | 1970 - 2018 | 09/30/2015 - 08/31/2018 | 9 to 40 years | ||||||||||||
| Denny's | 2 | (d) | 997 | 1,409 | (24 | ) | 25 | 973 | 1,434 | 2,407 | (422 | ) | 1995 - 1996 | 03/20/2015 - 11/25/2019 | 8 to 20 years | |||||||||||
| Dillon Tire | 1 | (d) | 1,144 | 2,935 | — | — | 1,144 | 2,935 | 4,079 | (1,224 | ) | 1972 | 11/25/2019 | 2 to 10 years | ||||||||||||
| Direct Shot Distributing | 1 | (d) | 6,447 | 20,390 | — | — | 6,447 | 20,390 | 26,837 | (1,874 | ) | 2020 | 11/10/2020 | 6 to 34 years | ||||||||||||
| Dollar General | 84 | (d) | 30,981 | 71,005 | — | 70 | 30,981 | 71,075 | 102,056 | (17,118 | ) | 1975 - 2021 | 07/17/2013 - 06/14/2022 | 5 to 44 years | ||||||||||||
| Dollar Tree / Family Dollar (f) | 132 | (d) | 52,675 | 102,122 | (486 | ) | (1,426 | ) | 52,189 | 100,696 | 152,885 | (16,522 | ) | 1921 - 2022 | 07/17/2013 - 11/30/2022 | 3 to 50 years | ||||||||||
| Drive Time | 2 | (d) | 2,158 | 2,071 | — | (46 | ) | 2,158 | 2,025 | 4,183 | (1,555 | ) | 1968 - 2005 | 11/25/2014 - 03/11/2015 | 10 to 40 years | |||||||||||
| Driver’s Edge | 5 | (d) | 5,737 | 5,766 | — | — | 5,737 | 5,766 | 11,503 | (512 | ) | 1999 - 2017 | 02/02/2021 | 11 to 38 years | ||||||||||||
| Duluth Trading Co. | 1 | (d) | 2,776 | 3,990 | — | 367 | 2,776 | 4,357 | 7,133 | (1,249 | ) | 2007 | 07/17/2013 | 10 to 47 years | ||||||||||||
| DWM Holdings, Inc. | 1 | (d) | 2,056 | 4,198 | — | — | 2,056 | 4,198 | 6,254 | (128 | ) | 1967 | 09/15/2022 | 7 to 22 years | ||||||||||||
| Eddie Merlot's | 1 | (d) | 1,184 | 2,776 | (885 | ) | (2,079 | ) | 299 | 697 | 996 | (107 | ) | 1997 | 11/25/2019 | 6 to 22 years | ||||||||||
| El Chico | 1 | (d) | 1,337 | 61 | (844 | ) | (39 | ) | 493 | 22 | 515 | (29 | ) | 1976 | 11/25/2019 | 6 to 14 years | ||||||||||
| Emagine Theaters | 13 | (d) | 31,129 | 36,424 | (419 | ) | 23,260 | 30,710 | 59,684 | 90,394 | (16,436 | ) | 1984 - 2013 | 07/29/2016 - 11/25/2019 | 3 to 36 years | |||||||||||
| EMCOR | 3 | (d) | 4,292 | 8,033 | — | — | 4,292 | 8,033 | 12,325 | (372 | ) | 1986 - 2009 | 04/21/2022 - 06/29/2022 | 4 to 40 years | ||||||||||||
| Everbrook Academy | 4 | (d) | 5,736 | 16,195 | — | 104 | 5,736 | 16,299 | 22,035 | (648 | ) | 1996 - 2020 | 09/30/2021 - 12/22/2021 | 10 to 44 years | ||||||||||||
| Exceptional Health | 3 | (d) | 4,495 | 12,652 | — | 6,648 | 4,495 | 19,300 | 23,795 | (3,086 | ) | 2014 - 2016 | 03/30/2016 - 12/01/2016 | 16 to 50 years | ||||||||||||
| FABco | 2 | (d) | 10,341 | 28,364 | — | 17 | 10,341 | 28,381 | 38,722 | (1,624 | ) | 1977 - 2015 | 12/14/2021 | 8 to 25 years | ||||||||||||
| Family Fare Supermarket | 1 | (d) | 2,198 | 3,328 | — | (67 | ) | 2,198 | 3,261 | 5,459 | (1,893 | ) | 1982 | 12/17/2013 | 15 to 20 years | |||||||||||
| Family Medical Center | 1 | (d) | 521 | 2,589 | — | 65 | 521 | 2,654 | 3,175 | (969 | ) | 1988 | 08/18/2014 | 7 to 30 years | ||||||||||||
| Fazoli's | 3 | (d) | 2,186 | 136 | — | — | 2,186 | 136 | 2,322 | (78 | ) | 1982 | 08/27/2009 - 11/25/2019 | 7 to 18 years | ||||||||||||
| FedEx | 6 | (d) | 33,331 | 67,662 | 631 | 426 | 33,962 | 68,088 | 102,050 | (16,844 | ) | 1996 - 2017 | 07/17/2013 - 09/29/2020 | 6 to 44 years | ||||||||||||
| Ferguson Enterprises | 7 | (d) | 19,992 | 54,454 | — | — | 19,992 | 54,454 | 74,446 | (28,930 | ) | 2006 - 2007 | 07/17/2013 | 8 to 46 years | ||||||||||||
| FHE | 2 | (d) | 3,236 | 14,281 | — | 11 | 3,236 | 14,292 | 17,528 | (1,644 | ) | 2007 - 2019 | 06/28/2019 | 10 to 45 years | ||||||||||||
| Fiesta Mart (f) | 1 | (d) | 3,975 | — | — | — | 3,975 | — | 3,975 | — | (e) | 07/17/2013 | (e) | |||||||||||||
| Finish Line Car Wash | 1 | (d) | 1,565 | 4,051 | — | 19 | 1,565 | 4,070 | 5,635 | (240 | ) | 2013 | 09/28/2021 | 13 to 36 years | ||||||||||||
| Fire King | 1 | (d) | 941 | 5,078 | — | 65 | 941 | 5,143 | 6,084 | (632 | ) | 1977 | 12/20/2019 | 9 to 30 years | ||||||||||||
| Flowers Foods | 1 | (d) | 262 | 1,607 | — | — | 262 | 1,607 | 1,869 | (27 | ) | 1975 | 08/30/2022 | 6 to 25 years | ||||||||||||
37
SPIRIT REALTY CAPITAL, INC.
Schedule III Real Estate and Accumulated Depreciation
(Amounts in thousands)
| Initial Cost (b) | Cost Capitalized / (Impaired) | Gross Amount at December 31, 2022 | ||||||||||||||||||||||||
| Tenant Concept | Number
of Properties (a) | Encumbrances | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Total | Accumulated Depreciation | Construction Year | Date Acquired | Depreciable Life | |||||||||||||
| Food City | 3 | (d) | 4,591 | 15,150 | — | — | 4,591 | 15,150 | 19,741 | (5,104 | ) | 1969 - 2001 | 09/30/2014 | 10 to 40 years | ||||||||||||
| Food Lion | 1 | (d) | 696 | 5,402 | — | — | 696 | 5,402 | 6,098 | (1,543 | ) | 1988 | 09/30/2014 | 10 to 40 years | ||||||||||||
| Forum Energy Technologies | 4 | (d) | 7,287 | 27,306 | — | — | 7,287 | 27,306 | 34,593 | — | 1979 - 2014 | 11/29/2022 | 10 to 33 years | |||||||||||||
| Fox Rehabilitation Services | 1 | (d) | 4,078 | 6,076 | — | — | 4,078 | 6,076 | 10,154 | (2,019 | ) | 1998 | 11/23/2016 | 9 to 30 years | ||||||||||||
| Freddy's Frozen Custard & Steakburgers | 1 | (d) | 594 | 1,196 | — | — | 594 | 1,196 | 1,790 | (199 | ) | 2016 | 06/28/2019 | 8 to 34 years | ||||||||||||
| Fresenius Medical Care | 1 | (d) | 482 | 1,139 | — | (91 | ) | 482 | 1,048 | 1,530 | (368 | ) | 2008 | 08/18/2014 | 7 to 22 years | |||||||||||
| General Aluminum Mfg. Company (f) | 1 | (d) | 2,124 | 10,152 | — | — | 2,124 | 10,152 | 12,276 | (401 | ) | 1963 | 02/04/2022 | 7 to 27 years | ||||||||||||
| Georgia Theatre | 4 | (d) | 9,034 | 33,747 | — | — | 9,034 | 33,747 | 42,781 | (8,395 | ) | 2001 - 2010 | 12/30/2014 | 15 to 40 years | ||||||||||||
| Golden Corral | 10 | (d) | 12,453 | 29,986 | — | — | 12,453 | 29,986 | 42,439 | (5,249 | ) | 1993 - 2011 | 07/17/2013 - 06/28/2022 | 5 to 35 years | ||||||||||||
| Gourmet Foods | 2 | (d) | 6,224 | 8,369 | — | — | 6,224 | 8,369 | 14,593 | (1,100 | ) | 1958 - 1986 | 10/11/2019 | 8 to 35 years | ||||||||||||
| GQT Riverview 14 GDX | 1 | (d) | 4,970 | 4,014 | — | 8,907 | 4,970 | 12,921 | 17,891 | (2,268 | ) | 2016 | 11/05/2015 | 12 to 50 years | ||||||||||||
| Grease Monkey | 29 | (d) | 8,374 | 15,376 | — | — | 8,374 | 15,376 | 23,750 | (9,507 | ) | 1968 - 1998 | 09/07/2007 - 11/25/2019 | 6 to 40 years | ||||||||||||
| Great Western Leasing & Sales | 1 | (d) | 2,114 | 5,251 | — | — | 2,114 | 5,251 | 7,365 | — | 2001 | 12/19/2022 | 9 to 24 years | |||||||||||||
| GTA Containers | 1 | (d) | 3,064 | 9,343 | — | — | 3,064 | 9,343 | 12,407 | (305 | ) | 2009 | 02/16/2022 | 13 to 38 years | ||||||||||||
| GXO Logistics (f) | 1 | (d) | 3,755 | 37,271 | — | — | 3,755 | 37,271 | 41,026 | (1,254 | ) | 2002 | 01/19/2022 | 4 to 32 years | ||||||||||||
| H&E Equipment Services | 1 | (d) | 1,790 | 1,267 | — | — | 1,790 | 1,267 | 3,057 | (954 | ) | 2014 | 09/30/2014 | 11 to 30 years | ||||||||||||
| Hardee's | 34 | (d) | 13,901 | 18,960 | — | — | 13,901 | 18,960 | 32,861 | (10,809 | ) | 1969 - 1999 | 12/21/2012 - 11/25/2019 | 5 to 30 years | ||||||||||||
| Harley Davidson | 1 | (d) | 908 | 4,691 | — | — | 908 | 4,691 | 5,599 | (142 | ) | 2000 | 05/11/2022 | 6 to 30 years | ||||||||||||
| Hartford Provision Company | 1 | (d) | 1,590 | 6,774 | — | 632 | 1,590 | 7,406 | 8,996 | (3,046 | ) | 1982 | 05/05/2015 | 7 to 20 years | ||||||||||||
| Hatch Stamping | 3 | (d) | 2,411 | 9,705 | — | — | 2,411 | 9,705 | 12,116 | (2,005 | ) | 1975 - 2001 | 06/17/2019 | 6 to 25 years | ||||||||||||
| Havana Farm and Home Supply | 1 | (d) | 526 | 813 | — | (32 | ) | 526 | 781 | 1,307 | (528 | ) | 2000 | 05/31/2006 | 15 to 30 years | |||||||||||
| Health Point Family Medicine | 1 | (d) | 159 | 1,124 | — | (24 | ) | 159 | 1,100 | 1,259 | (290 | ) | 2012 | 08/18/2014 | 15 to 40 years | |||||||||||
| Hobby Lobby (f) | 2 | (d) | 8,941 | 17,280 | — | 128 | 8,941 | 17,408 | 26,349 | (3,199 | ) | 2006 - 2021 | 07/17/2013 - 02/04/2022 | 4 to 50 years | ||||||||||||
| Home Depot (f) | 8 | (c), (d) | 59,098 | 67,982 | 13 | 535 | 59,111 | 68,517 | 127,628 | (26,382 | ) | 1978 - 2003 | 07/17/2013 - 06/28/2021 | 1 to 33 years | ||||||||||||
| HomTex | 5 | (d) | 5,307 | 21,799 | — | — | 5,307 | 21,799 | 27,106 | (434 | ) | 1960 - 1989 | 06/30/2022 - 10/04/2022 | 6 to 29 years | ||||||||||||
| Hy-Vee Food Store (f) | 1 | (d) | 648 | 379 | — | (100 | ) | 648 | 279 | 927 | (405 | ) | 1974 | 05/31/2006 | 15 to 20 years | |||||||||||
| IBM | 1 | (d) | 3,154 | 19,715 | — | 12,816 | 3,154 | 32,531 | 35,685 | (7,401 | ) | 1989 | 08/02/2017 | 5 to 30 years | ||||||||||||
| In-Shape | 2 | (d) | 3,146 | 7,985 | — | 2,244 | 3,146 | 10,229 | 13,375 | (3,184 | ) | 1964 - 2001 | 12/05/2014 - 09/04/2015 | 10 to 30 years | ||||||||||||
| Insurance Auto Auction | 3 | (d) | 15,741 | 3,162 | — | — | 15,741 | 3,162 | 18,903 | (3,644 | ) | 2012 - 2020 | 09/11/2018 - 11/30/2020 | 7 to 35 years | ||||||||||||
| Interstate Resources | 1 | (d) | 1,084 | 5,507 | — | 1,359 | 1,084 | 6,866 | 7,950 | (2,687 | ) | 1999 | 07/17/2013 | 8 to 26 years | ||||||||||||
| Invited Clubs | 21 | (d) | 153,144 | 48,864 | — | 4,492 | 153,144 | 53,356 | 206,500 | (15,263 | ) | 1959 - 2008 | 07/19/2021 - 09/27/2022 | 4 to 39 years | ||||||||||||
| J. Jill | 1 | (d) | 7,420 | 19,608 | — | — | 7,420 | 19,608 | 27,028 | (11,255 | ) | 1998 | 07/17/2013 | 8 to 25 years | ||||||||||||
| Jiffy Lube | 17 | (d) | 14,478 | 17,335 | — | 1,448 | 14,478 | 18,783 | 33,261 | (3,154 | ) | 1985 - 2002 | 03/19/2013 - 12/09/2021 | 9 to 43 years | ||||||||||||
| Jo-Ann's (f) | 3 | (d) | 5,425 | 8,958 | 151 | 376 | 5,576 | 9,334 | 14,910 | (3,430 | ) | 1998 - 2000 | 07/17/2013 | 7 to 43 years | ||||||||||||
| KFC | 18 | (d) | 9,506 | 12,023 | 109 | 118 | 9,615 | 12,141 | 21,756 | (5,019 | ) | 1966 - 2016 | 10/03/2011 - 12/23/2020 | 10 to 40 years | ||||||||||||
| KinderCare | 1 | (d) | 870 | 2,912 | — | — | 870 | 2,912 | 3,782 | (80 | ) | 2007 | 06/30/2022 | 5 to 30 years | ||||||||||||
| King’s Daughters Medical Center | 1 | (d) | 658 | 3,171 | — | — | 658 | 3,171 | 3,829 | (988 | ) | 2013 | 08/18/2014 | 9 to 40 years | ||||||||||||
| Kiolbassa | 2 | (d) | 4,088 | 9,105 | — | 2,122 | 4,088 | 11,227 | 15,315 | (937 | ) | 2004 - 2007 | 05/07/2020 | 8 to 30 years | ||||||||||||
| Kohl's | 15 | (d) | 42,634 | 85,795 | 200 | 743 | 42,834 | 86,538 | 129,372 | (21,262 | ) | 1994 - 2008 | 07/17/2013 - 06/16/2022 | 5 to 46 years | ||||||||||||
| Kroger | 1 | (d) | 972 | 8,435 | — | (28 | ) | 972 | 8,407 | 9,379 | (3,650 | ) | 1998 | 07/17/2013 | 9 to 25 years | |||||||||||
| L-3 Link Simulation & Training | 1 | (d) | 1,133 | 9,908 | — | 16 | 1,133 | 9,924 | 11,057 | (545 | ) | 1985 | 06/17/2021 | 8 to 40 years | ||||||||||||
| LA Fitness | 7 | (d) | 21,371 | 51,561 | (7,680 | ) | (10,901 | ) | 13,691 | 40,660 | 54,351 | (10,290 | ) | 1999 - 2009 | 07/17/2013 - 11/25/2019 | 1 to 43 years | ||||||||||
| Lamb's/Ramona Tire | 5 | (d) | 5,598 | 5,224 | — | — | 5,598 | 5,224 | 10,822 | (672 | ) | 1975 - 2012 | 09/27/2019 | 9 to 36 years | ||||||||||||
| La-Z-Boy | 8 | (d) | 13,026 | 36,142 | (1,374 | ) | (2,794 | ) | 11,652 | 33,348 | 45,000 | (2,866 | ) | 1987 - 2006 | 07/17/2013 - 07/25/2022 | 4 to 45 years | ||||||||||
| Lee's Famous Recipe Chicken | 5 | (d) | 1,506 | 1,352 | — | — | 1,506 | 1,352 | 2,858 | (625 | ) | 1970 - 1988 | 08/21/2015 | 15 to 30 years | ||||||||||||
| Levin Furniture | 1 | (d) | 2,042 | 3,808 | — | — | 2,042 | 3,808 | 5,850 | (160 | ) | 1991 | 06/07/2022 | 9 to 28 years | ||||||||||||
| Liberty Oilfield Services | 2 | (d) | 4,760 | 10,281 | — | — | 4,760 | 10,281 | 15,041 | (3,171 | ) | 1977 - 2001 | 12/30/2014 | 15 to 50 years | ||||||||||||
| Life Time Fitness | 12 | (d) | 99,585 | 308,399 | — | 173 | 99,585 | 308,572 | 408,157 | (25,997 | ) | 2002 - 2021 | 08/30/2018 - 05/13/2022 | 6 to 55 years | ||||||||||||
| Lincoln Manufacturing | 4 | (d) | 7,411 | 10,150 | — | — | 7,411 | 10,150 | 17,561 | (252 | ) | 1972 - 2012 | 11/15/2022 | 1 to 34 years | ||||||||||||
| Logan's Roadhouse | 2 | (d) | 2,553 | 4,074 | (1,822 | ) | (2,941 | ) | 731 | 1,133 | 1,864 | (221 | ) | 1996 - 2007 | 07/17/2013 | 5 to 34 years | ||||||||||
| Long John Silver's / A&W | 1 | (d) | 1,329 | — | — | — | 1,329 | — | 1,329 | — | (e) | 07/17/2013 | (e) | |||||||||||||
| Look Cinemas | 3 | (d) | 8,657 | 47,880 | — | 8,898 | 8,657 | 56,778 | 65,435 | (13,564 | ) | 1997 - 2000 | 09/30/2015 | 15 to 30 years | ||||||||||||
| Lowe's (f) | 5 | (d) | 39,205 | 37,533 | (7,896 | ) | (6,216 | ) | 31,309 | 31,317 | 62,626 | (13,206 | ) | 1991 - 1998 | 07/17/2013 | 8 to 36 years | ||||||||||
| Lutheran Health Physicians | 1 | (d) | 220 | 278 | 68 | (30 | ) | 288 | 248 | 536 | (168 | ) | 2007 | 08/18/2014 | 10 to 20 years | |||||||||||
38
SPIRIT REALTY CAPITAL, INC.
Schedule III Real Estate and Accumulated Depreciation
(Amounts in thousands)
| Initial Cost (b) | Cost Capitalized / (Impaired) | Gross Amount at December 31, 2022 | ||||||||||||||||||||||||
| Tenant Concept | Number
of Properties (a) | Encumbrances | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Total | Accumulated Depreciation | Construction Year | Date Acquired | Depreciable Life | |||||||||||||
| MAACO | 3 | (d) | 2,501 | 2,815 | (759 | ) | (63 | ) | 1,742 | 2,752 | 4,494 | (687 | ) | 1950 - 1999 | 03/31/2017 | 6 to 30 years | ||||||||||
| Mac Papers + Packaging | 12 | (d) | 14,377 | 63,823 | — | — | 14,377 | 63,823 | 78,200 | (6,448 | ) | 1956 - 2016 | 03/12/2020 - 08/07/2020 | 6 to 46 years | ||||||||||||
| Malibu Boats | 2 | (d) | 4,644 | 13,911 | — | — | 4,644 | 13,911 | 18,555 | (8,386 | ) | 1992 - 1998 | 03/31/2008 | 15 to 30 years | ||||||||||||
| Market Street | 2 | (d) | 3,559 | 10,834 | (10 | ) | (775 | ) | 3,549 | 10,059 | 13,608 | (6,115 | ) | 1997 - 1999 | 05/23/2005 | 20 to 40 years | ||||||||||
| Mattress Firm | 1 | (d) | 596 | 872 | — | 216 | 596 | 1,088 | 1,684 | (461 | ) | 1998 | 07/17/2013 | 9 to 45 years | ||||||||||||
| Michael's (f) | 1 | (d) | 1,114 | 6,726 | — | — | 1,114 | 6,726 | 7,840 | (2,746 | ) | 2002 | 07/17/2013 | 9 to 49 years | ||||||||||||
| Milo's | 9 | (d) | 5,260 | 7,074 | — | 475 | 5,260 | 7,549 | 12,809 | (3,405 | ) | 1977 - 2008 | 03/29/2013 - 11/25/2019 | 8 to 29 years | ||||||||||||
| Mister Car Wash | 22 | (d) | 41,796 | 48,845 | 536 | 285 | 42,332 | 49,130 | 91,462 | (16,466 | ) | 1956 - 2016 | 05/15/2013 - 11/16/2021 | 3 to 40 years | ||||||||||||
| Mojo Grill | 1 | (d) | 619 | 236 | — | 500 | 619 | 736 | 1,355 | (178 | ) | 1996 | 10/26/2018 | 8 to 23 years | ||||||||||||
| Monterey's Tex Mex | 1 | (d) | 818 | 670 | — | — | 818 | 670 | 1,488 | (147 | ) | 1988 | 11/25/2019 | 3 to 23 years | ||||||||||||
| Mountainside Fitness | 1 | (d) | 1,687 | 2,935 | — | 264 | 1,687 | 3,199 | 4,886 | (406 | ) | 2002 | 11/25/2019 | 3 to 35 years | ||||||||||||
| MPI | 4 | (d) | 2,212 | 15,217 | — | — | 2,212 | 15,217 | 17,429 | (472 | ) | 1963 - 2009 | 03/29/2022 | 5 to 34 years | ||||||||||||
| Mr. Clean/Jiffy Lube | 2 | (d) | 4,964 | 3,351 | — | — | 4,964 | 3,351 | 8,315 | (546 | ) | 1996 - 1998 | 09/11/2019 | 10 to 30 years | ||||||||||||
| NextCare Urgent Care | 1 | (d) | 271 | 728 | — | — | 271 | 728 | 999 | (218 | ) | 1985 | 08/18/2014 | 8 to 40 years | ||||||||||||
| NN, Inc. | 1 | (d) | 3,595 | 21,969 | — | 122 | 3,595 | 22,091 | 25,686 | (746 | ) | 2019 | 12/29/2021 | 12 to 39 years | ||||||||||||
| Northern Tool & Equipment | 1 | (d) | 1,728 | 3,437 | — | — | 1,728 | 3,437 | 5,165 | (1,117 | ) | 2006 | 07/17/2013 | 8 to 43 years | ||||||||||||
| NWN Carousel | 1 | (d) | 1,136 | 7,989 | — | — | 1,136 | 7,989 | 9,125 | — | 1970 | 12/28/2022 | 10 to 33 years | |||||||||||||
| Off Lease Only | 5 | (d) | 65,556 | 38,688 | — | 1,989 | 65,556 | 40,677 | 106,233 | (5,011 | ) | 1988 - 2021 | 09/09/2020 - 05/13/2022 | 14 to 45 years | ||||||||||||
| Office Depot (f) | 6 | (d) | 5,561 | 14,526 | — | 288 | 5,561 | 14,814 | 20,375 | (4,605 | ) | 1999 - 2009 | 07/17/2013 | 8 to 47 years | ||||||||||||
| Ojos Locos Sports Cantina | 1 | (d) | 1,725 | 1,470 | — | — | 1,725 | 1,470 | 3,195 | (532 | ) | 2014 | 04/15/2015 | 15 to 30 years | ||||||||||||
| Old Time Pottery | 3 | (d) | 6,071 | 12,093 | (506 | ) | (1,516 | ) | 5,565 | 10,577 | 16,142 | (5,117 | ) | 1985 - 1994 | 07/17/2013 - 05/08/2015 | 3 to 20 years | ||||||||||
| Ollie's (f) | 1 | (d) | 3,417 | 3,524 | — | — | 3,417 | 3,524 | 6,941 | — | 1988 | 11/22/2022 | 5 to 45 years | |||||||||||||
| O'Reilly Auto Parts | 1 | (d) | 161 | — | — | — | 161 | — | 161 | — | (e) | 11/25/2019 | (e) | |||||||||||||
| Party City | 3 | (d) | 11,849 | 116,669 | — | — | 11,849 | 116,669 | 128,518 | (11,132 | ) | 1991 - 2015 | 06/28/2019 | 9 to 42 years | ||||||||||||
| Pawn I | 2 | (d) | 1,440 | 3,684 | — | — | 1,440 | 3,684 | 5,124 | (767 | ) | 1994 - 2009 | 07/31/2015 | 15 to 50 years | ||||||||||||
| Pep Boys | 11 | (d) | 14,491 | 30,461 | (1,936 | ) | (5,997 | ) | 12,555 | 24,464 | 37,019 | (7,163 | ) | 1987 - 1998 | 07/17/2013 | 1 to 41 years | ||||||||||
| PetSmart | 3 | (d) | 4,247 | 10,208 | — | — | 4,247 | 10,208 | 14,455 | (3,110 | ) | 1996 - 1997 | 07/17/2013 | 8 to 44 years | ||||||||||||
| PetSuites Pet Resort & Spa | 1 | (d) | 1,563 | 2,679 | — | — | 1,563 | 2,679 | 4,242 | (375 | ) | 2018 | 03/29/2019 | 19 to 35 years | ||||||||||||
| Pioneer Seeds | 1 | (d) | 870 | 6,961 | — | 29 | 870 | 6,990 | 7,860 | (1,367 | ) | 2016 | 12/16/2016 | 9 to 40 years | ||||||||||||
| Planet Fitness | 3 | (d) | 2,704 | 5,612 | — | 22 | 2,704 | 5,634 | 8,338 | (2,154 | ) | 1978 - 1988 | 09/30/2014 - 04/15/2016 | 8 to 30 years | ||||||||||||
| Popeye's Chicken & Biscuits | 7 | (d) | 3,793 | 5,495 | — | — | 3,793 | 5,495 | 9,288 | (1,656 | ) | 1975 - 2004 | 11/25/2019 | 4 to 19 years | ||||||||||||
| PowerHome Solar | 1 | (d) | 894 | 3,733 | (429 | ) | (1,800 | ) | 465 | 1,933 | 2,398 | — | 1975 | 06/23/2022 | 7 to 27 years | |||||||||||
| Progressive Medical Center | 1 | (d) | 1,061 | 4,556 | — | 22 | 1,061 | 4,578 | 5,639 | (906 | ) | 1988 | 10/27/2016 | 2 to 40 years | ||||||||||||
| Quartz Health Solutions (f) | 1 | (d) | 2,252 | 15,544 | — | — | 2,252 | 15,544 | 17,796 | — | 2009 | 12/20/2022 | 5 to 32 years | |||||||||||||
| Rally's | 1 | (d) | 160 | 693 | (1 | ) | (4 | ) | 159 | 689 | 848 | (208 | ) | 1990 | 11/25/2019 | 6 to 12 years | ||||||||||
| Raymour & Flanigan Furniture | 2 | (d) | 2,825 | 19,295 | — | 25 | 2,825 | 19,320 | 22,145 | (2,022 | ) | 1978 - 2005 | 11/25/2019 | 7 to 43 years | ||||||||||||
| Red Lobster | 22 | (d) | 21,559 | 35,043 | — | — | 21,559 | 35,043 | 56,602 | (10,981 | ) | 1971 - 2009 | 12/23/2014 - 12/22/2016 | 11 to 40 years | ||||||||||||
| Red Mesa Grill | 3 | (d) | 947 | 3,140 | — | — | 947 | 3,140 | 4,087 | (873 | ) | 1997 - 2004 | 11/09/2015 | 15 to 30 years | ||||||||||||
| Regal Cinemas | 8 | (d) | 22,833 | 40,156 | (6,080 | ) | (788 | ) | 16,753 | 39,368 | 56,121 | (11,077 | ) | 1995 - 2006 | 12/30/2014 - 11/23/2016 | 1 to 40 years | ||||||||||
| Renaissance Food | 1 | (d) | 3,203 | 8,089 | — | 324 | 3,203 | 8,413 | 11,616 | (990 | ) | 2016 | 12/03/2019 | 11 to 38 years | ||||||||||||
| Repair One | 1 | (d) | 574 | 1,349 | — | — | 574 | 1,349 | 1,923 | (196 | ) | 1997 | 11/25/2019 | 10 to 25 years | ||||||||||||
| Residence Inn by Marriott | 1 | (d) | 4,627 | 28,368 | — | 4,729 | 4,627 | 33,097 | 37,724 | (3,324 | ) | 2006 | 03/28/2019 | 11 to 40 years | ||||||||||||
| Rite Aid | 11 | (d) | 9,115 | 25,899 | (378 | ) | (1,057 | ) | 8,737 | 24,842 | 33,579 | (7,518 | ) | 1993 - 2006 | 07/17/2013 | 4 to 43 years | ||||||||||
| Ross (f) | 1 | (d) | 2,631 | 7,710 | — | 301 | 2,631 | 8,011 | 10,642 | (2,447 | ) | 2006 | 07/17/2013 | 11 to 43 years | ||||||||||||
| Ruth's Chris Steakhouse | 2 | (d) | 3,558 | 3,428 | — | — | 3,558 | 3,428 | 6,986 | (1,386 | ) | 1964 - 2000 | 07/17/2013 | 10 to 30 years | ||||||||||||
| Ryerson | 8 | (d) | 13,674 | 46,403 | (140 | ) | 708 | 13,534 | 47,111 | 60,645 | (9,182 | ) | 1935 - 2002 | 12/20/2019 | 4 to 27 years | |||||||||||
| Sagebrush | 2 | (d) | 1,514 | 4,759 | — | 49 | 1,514 | 4,808 | 6,322 | (560 | ) | 1987 - 1993 | 11/23/2020 | 7 to 23 years | ||||||||||||
| Saisaki Asian Bistro and Sushi | 1 | (d) | 1,184 | 311 | — | — | 1,184 | 311 | 1,495 | (462 | ) | 1995 | 06/25/2004 | 10 to 25 years | ||||||||||||
| Saltgrass | 1 | (d) | 1,934 | 1,456 | — | — | 1,934 | 1,456 | 3,390 | (312 | ) | 1998 | 11/25/2019 | 7 to 20 years | ||||||||||||
| Same Day Delivery | 1 | (d) | 2,287 | 4,469 | (1,369 | ) | (2,277 | ) | 918 | 2,192 | 3,110 | (741 | ) | 2001 | 07/17/2013 | 4 to 30 years | ||||||||||
| Sam's Club (f) | 2 | (d) | 12,609 | 16,182 | 295 | 541 | 12,904 | 16,723 | 29,627 | (12,193 | ) | 1991 - 1993 | 07/17/2013 | 5 to 21 years | ||||||||||||
| Serrano's Mexican Restaurant | 2 | (d) | 1,031 | 2,161 | — | — | 1,031 | 2,161 | 3,192 | (774 | ) | 1990 - 2004 | 06/14/2013 | 15 to 40 years | ||||||||||||
| Sheffield Pharmaceuticals | 1 | (d) | 627 | 4,767 | — | 324 | 627 | 5,091 | 5,718 | (1,171 | ) | 1975 | 06/30/2016 | 4 to 30 years | ||||||||||||
| Shiloh Industries | 3 | (d) | 10,350 | 26,362 | — | 22 | 10,350 | 26,384 | 36,734 | (2,815 | ) | 1987 - 2014 | 02/03/2021 - 08/04/2021 | 6 to 54 years | ||||||||||||
| 39 |
SPIRIT REALTY CAPITAL, INC.
Schedule III Real Estate and Accumulated Depreciation
(Amounts in thousands)
| Initial Cost (b) | Cost Capitalized / (Impaired) | Gross Amount at December 31, 2022 | ||||||||||||||||||||||||
| Tenant Concept | Number
of Properties (a) | Encumbrances | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Total | Accumulated Depreciation | Construction Year | Date Acquired | Depreciable Life | |||||||||||||
| Shooters World | 2 | (d) | 4,238 | 15,646 | 390 | 5,508 | 4,628 | 21,154 | 25,782 | (2,720 | ) | 1990 - 2018 | 06/05/2015 - 01/26/2018 | 13 to 45 years | ||||||||||||
| Shutterfly | 1 | (d) | 7,867 | 24,085 | — | — | 7,867 | 24,085 | 31,952 | (1,853 | ) | 2020 | 09/15/2020 | 10 to 45 years | ||||||||||||
| Silgan Closures | 1 | (d) | 1,789 | 6,634 | — | — | 1,789 | 6,634 | 8,423 | (244 | ) | 1980 | 03/03/2022 | 7 to 36 years | ||||||||||||
| Skyline Chili | 2 | (d) | 1,437 | 1,073 | — | — | 1,437 | 1,073 | 2,510 | (280 | ) | 1998 | 11/25/2019 | 8 to 18 years | ||||||||||||
| Slim Chickens | 2 | (d) | 1,687 | 2,122 | — | — | 1,687 | 2,122 | 3,809 | (499 | ) | 2013 - 2015 | 03/31/2015 - 11/25/2019 | 7 to 40 years | ||||||||||||
| Smokey Bones Barbecue & Grill | 13 | (d) | 18,287 | 10,375 | (350 | ) | (261 | ) | 17,937 | 10,114 | 28,051 | (8,447 | ) | 1972 - 2006 | 12/31/2007 | 15 to 40 years | ||||||||||
| Smoothie King | 1 | (d) | 208 | 302 | — | (2 | ) | 208 | 300 | 508 | (175 | ) | 2007 | 07/17/2013 | 13 to 24 years | |||||||||||
| Sonic Drive-In | 39 | (d) | 23,233 | 17,930 | — | — | 23,233 | 17,930 | 41,163 | (7,586 | ) | 1976 - 2010 | 09/17/2013 - 06/24/2022 | 2 to 30 years | ||||||||||||
| Sonny's BBQ | 8 | (d) | 10,665 | 9,510 | — | 1,117 | 10,665 | 10,627 | 21,292 | (2,448 | ) | 1984 - 2006 | 12/28/2016 - 06/09/2017 | 6 to 40 years | ||||||||||||
| Southern Theatres | 2 | (d) | 10,335 | 13,237 | — | 2,500 | 10,335 | 15,737 | 26,072 | (5,522 | ) | 1999 - 2000 | 09/25/2014 | 15 to 30 years | ||||||||||||
| Southwest Airlines | 1 | (d) | 5,342 | 14,369 | — | — | 5,342 | 14,369 | 19,711 | (530 | ) | 2007 | 03/14/2022 | 9 to 35 years | ||||||||||||
| Specialists in Urology | 9 | (d) | 7,469 | 32,725 | (231 | ) | (680 | ) | 7,238 | 32,045 | 39,283 | (9,542 | ) | 1978 - 2012 | 08/30/2012 - 03/31/2016 | 9 to 50 years | ||||||||||
| Sportsman's Warehouse | 10 | (d) | 22,470 | 50,539 | — | 7 | 22,470 | 50,546 | 73,016 | (15,292 | ) | 1991 - 2019 | 10/15/2012 - 06/28/2022 | 7 to 50 years | ||||||||||||
| Staples | 7 | (d) | 5,652 | 18,091 | — | (22 | ) | 5,652 | 18,069 | 23,721 | (4,691 | ) | 1998 - 2006 | 07/17/2013 - 04/07/2022 | 8 to 48 years | |||||||||||
| Starbucks | 4 | (d) | 1,692 | 2,586 | — | (15 | ) | 1,692 | 2,571 | 4,263 | (1,126 | ) | 2007 | 07/17/2013 | 10 to 39 years | |||||||||||
| Stater Bros. Markets | 1 | (d) | 1,569 | 4,271 | — | (58 | ) | 1,569 | 4,213 | 5,782 | (1,580 | ) | 1983 | 12/17/2013 | 15 to 30 years | |||||||||||
| Strickland Brothers | 22 | (d) | 12,382 | 13,457 | 12 | 414 | 12,394 | 13,871 | 26,265 | (606 | ) | 1983 - 2018 | 12/07/2021 - 12/22/2021 | 5 to 39 years | ||||||||||||
| Studio Movie Grill | 1 | (d) | 2,930 | 7,616 | — | 267 | 2,930 | 7,883 | 10,813 | (1,774 | ) | 1987 | 03/15/2017 | 10 to 40 years | ||||||||||||
| SunOpta | 1 | (d) | 4,127 | 3,866 | 3,471 | 55,837 | 7,598 | 59,703 | 67,301 | (252 | ) | 2022 | 08/13/2021 | 20 to 50 years | ||||||||||||
| Surf's Up Car Wash | 16 | (d) | 31,245 | 64,259 | — | 184 | 31,245 | 64,443 | 95,688 | (2,691 | ) | 2008 - 2022 | 10/06/2021 - 05/18/2022 | 11 to 40 years | ||||||||||||
| Taco Bell | 3 | (d) | 1,343 | 2,642 | — | (12 | ) | 1,343 | 2,630 | 3,973 | (1,022 | ) | 1992 - 2012 | 03/29/2013 - 07/17/2013 | 7 to 35 years | |||||||||||
| Taco Bell / KFC | 1 | (d) | 389 | 1,425 | — | (6 | ) | 389 | 1,419 | 1,808 | (563 | ) | 2000 | 07/17/2013 | 10 to 30 years | |||||||||||
| Taco Bueno | 19 | (d) | 12,789 | 14,826 | — | (52 | ) | 12,789 | 14,774 | 27,563 | (4,771 | ) | 1977 - 2005 | 06/30/2016 - 11/25/2019 | 8 to 30 years | |||||||||||
| Ted's Cafe Escondido | 2 | (d) | 2,968 | 4,554 | — | — | 2,968 | 4,554 | 7,522 | (913 | ) | 2006 - 2013 | 11/25/2019 | 7 to 20 years | ||||||||||||
| Terra Mulch Products | 1 | (d) | 1,356 | 5,406 | — | — | 1,356 | 5,406 | 6,762 | (1,963 | ) | 2006 | 05/11/2015 | 10 to 30 years | ||||||||||||
| Tesla | 1 | (d) | 1,893 | 6,154 | — | 85 | 1,893 | 6,239 | 8,132 | (468 | ) | 1980 | 12/22/2020 | 10 to 35 years | ||||||||||||
| Texas Corral | 1 | (d) | 549 | 752 | — | — | 549 | 752 | 1,301 | (430 | ) | 2006 | 12/21/2007 | 15 to 50 years | ||||||||||||
| Texas Roadhouse | 1 | (d) | 1,214 | 1,412 | — | — | 1,214 | 1,412 | 2,626 | (209 | ) | 2005 | 11/25/2019 | 5 to 33 years | ||||||||||||
| The Children's Courtyard | 1 | (d) | 334 | 2,146 | — | 12 | 334 | 2,158 | 2,492 | (436 | ) | 2003 | 03/31/2017 | 15 to 30 years | ||||||||||||
| The Gerson Company | 1 | (d) | 6,381 | 30,134 | — | 161 | 6,381 | 30,295 | 36,676 | (1,676 | ) | 1960 | 12/09/2021 | 10 to 27 years | ||||||||||||
| The Toledo Hospital | 1 | (d) | 728 | 3,440 | — | — | 728 | 3,440 | 4,168 | (1,429 | ) | 2002 | 08/18/2014 | 9 to 30 years | ||||||||||||
| TI Group Automotive | 1 | (d) | 3,939 | 7,950 | — | — | 3,939 | 7,950 | 11,889 | (1,181 | ) | 2005 | 11/19/2020 | 9 to 32 years | ||||||||||||
| Tire Warehouse | 1 | (d) | 695 | 944 | — | 12 | 695 | 956 | 1,651 | (188 | ) | 1993 | 11/25/2019 | 5 to 22 years | ||||||||||||
| TJ Maxx (f) | 1 | (d) | 578 | 2,063 | — | 358 | 578 | 2,421 | 2,999 | (1,445 | ) | 1988 | 07/17/2013 | 5 to 20 years | ||||||||||||
| Topgolf | 2 | (d) | 9,337 | 9,595 | 3,450 | 6,572 | 12,787 | 16,167 | 28,954 | (2,474 | ) | 2018 | 12/10/2018 - 10/28/2022 | 11 to 45 years | ||||||||||||
| Tower Automotive | 1 | (d) | 5,344 | 28,900 | — | — | 5,344 | 28,900 | 34,244 | (3,992 | ) | 1990 | 01/28/2020 | 9 to 30 years | ||||||||||||
| Tractor Supply | 20 | (c), (d) | 22,622 | 37,122 | 575 | (108 | ) | 23,197 | 37,014 | 60,211 | (18,480 | ) | 1975 - 2011 | 07/17/2013 - 11/13/2015 | 2 to 48 years | |||||||||||
| Trilogy Plastics | 2 | (d) | 2,770 | 9,875 | — | — | 2,770 | 9,875 | 12,645 | (347 | ) | 1953 - 2005 | 05/24/2022 | 6 to 22 years | ||||||||||||
| Trinity Highway Products | 3 | (d) | 14,314 | 50,948 | — | 321 | 14,314 | 51,269 | 65,583 | (2,317 | ) | 1940 - 1992 | 12/31/2021 | 10 to 39 years | ||||||||||||
| Truck-Lite | 3 | (d) | 7,413 | 21,598 | — | — | 7,413 | 21,598 | 29,011 | (1,591 | ) | 1985 - 2020 | 05/27/2021 | 7 to 54 years | ||||||||||||
| Tupperware | 1 | (d) | 17,283 | 19,024 | — | 13 | 17,283 | 19,037 | 36,320 | (1,412 | ) | 2007 | 04/23/2021 | 10 to 35 years | ||||||||||||
| Tutor Time | 4 | (d) | 2,790 | 6,978 | — | (33 | ) | 2,790 | 6,945 | 9,735 | (1,131 | ) | 1985 - 2008 | 07/17/2013 - 12/29/2021 | 5 to 36 years | |||||||||||
| Twin Peaks | 1 | (d) | 1,112 | — | — | — | 1,112 | — | 1,112 | — | (e) | 11/25/2019 | (e) | |||||||||||||
| Twin Tiers Eye Care | 6 | (d) | 912 | 8,750 | — | — | 912 | 8,750 | 9,662 | (2,488 | ) | 1970 - 2002 | 04/30/2015 | 15 to 30 years | ||||||||||||
| United Ag & Turf | 10 | (d) | 5,130 | 12,405 | — | — | 5,130 | 12,405 | 17,535 | (1,442 | ) | 1975 - 2020 | 01/28/2020 - 09/14/2022 | 6 to 40 years | ||||||||||||
| United Supermarkets | 6 | (d) | 8,332 | 10,703 | — | (696 | ) | 8,332 | 10,007 | 18,339 | (4,211 | ) | 1988 - 1999 | 05/23/2005 - 08/29/2011 | 15 to 40 years | |||||||||||
| Universal Tax Systems (f) | 1 | (d) | 3,560 | 23,583 | — | 4,709 | 3,560 | 28,292 | 31,852 | (6,217 | ) | 1996 | 07/17/2013 | 8 to 45 years | ||||||||||||
| Vacant | 2 | (d) | 2,260 | 24,457 | (967 | ) | (16,410 | ) | 1,293 | 8,047 | 9,340 | (1,111 | ) | 1989 - 2004 | 07/17/2013 - 08/02/2017 | 5 to 40 years | ||||||||||
| Valley Surgical Center | 1 | (d) | 363 | 3,726 | — | — | 363 | 3,726 | 4,089 | (937 | ) | 2009 | 08/18/2014 | 14 to 40 years | ||||||||||||
| Value City Furniture | 1 | (d) | 1,465 | 6,860 | — | — | 1,465 | 6,860 | 8,325 | (323 | ) | 1986 | 01/18/2022 | 7 to 27 years | ||||||||||||
| VASA Fitness | 5 | (d) | 12,105 | 28,454 | — | 110 | 12,105 | 28,564 | 40,669 | (3,674 | ) | 1988 - 2000 | 11/20/2015 - 06/28/2022 | 8 to 45 years | ||||||||||||
| Verizon | 1 | (d) | 343 | 152 | — | (2 | ) | 343 | 150 | 493 | (183 | ) | 2007 | 07/17/2013 | 10 to 24 years | |||||||||||
| Virgin Parking Garage | 1 | (d) | 3,375 | 9,040 | — | — | 3,375 | 9,040 | 12,415 | (171 | ) | 2019 | 03/03/2022 | 15 to 44 years | ||||||||||||
| Walgreens (f) | 34 | (d) | 36,749 | 138,327 | — | (63 | ) | 36,749 | 138,264 | 175,013 | (36,439 | ) | 1994 - 2009 | 07/17/2013 - 09/27/2022 | 3 to 45 years | |||||||||||
| 40 |
SPIRIT REALTY CAPITAL, INC.
Schedule III Real Estate and Accumulated Depreciation
(Amounts in thousands)
| Initial Cost (b) | Cost Capitalized / (Impaired) | Gross Amount at December 31, 2022 | ||||||||||||||||||||||||
| Tenant Concept | Number
of Properties (a) | Encumbrances | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Land
and Improvements | Buildings
and Improvements | Total | Accumulated Depreciation | Construction Year | Date Acquired | Depreciable Life | |||||||||||||
| Walmart | 3 | (d) | 4,009 | 4,577 | — | (13 | ) | 4,009 | 4,564 | 8,573 | (3,255 | ) | 1987 - 1991 | 07/17/2013 - 01/08/2019 | 7 to 22 years | |||||||||||
| Warrior Manufacturing | 1 | (d) | 2,518 | 10,195 | — | 37 | 2,518 | 10,232 | 12,750 | (478 | ) | 2007 | 12/16/2021 | 14 to 30 years | ||||||||||||
| Way Interglobal | 1 | (d) | 7,996 | 50,626 | — | — | 7,996 | 50,626 | 58,622 | (295 | ) | 2022 | 11/15/2022 | 9 to 40 years | ||||||||||||
| Weatherford | 1 | (d) | 10,082 | 21,477 | — | — | 10,082 | 21,477 | 31,559 | (1,229 | ) | 2011 | 03/25/2022 | 5 to 32 years | ||||||||||||
| Wendy's | 1 | (d) | 336 | 773 | — | — | 336 | 773 | 1,109 | (138 | ) | 1985 | 11/25/2019 | 9 to 21 years | ||||||||||||
| Whirlpool | 1 | (d) | 10,183 | 23,664 | — | — | 10,183 | 23,664 | 33,847 | (2,463 | ) | 2020 | 11/10/2020 | 5 to 31 years | ||||||||||||
| Winco Foods | 1 | (d) | 3,108 | 12,817 | — | (16 | ) | 3,108 | 12,801 | 15,909 | (3,757 | ) | 1960 | 07/17/2013 | 9 to 40 years | |||||||||||
| Winsteads | 1 | (d) | 607 | 123 | — | — | 607 | 123 | 730 | (64 | ) | 2009 | 11/25/2019 | 7 to 21 years | ||||||||||||
| Worthington Steel | 2 | (d) | 7,303 | 29,831 | — | — | 7,303 | 29,831 | 37,134 | (2,494 | ) | 1997 - 2005 | 06/08/2021 | 9 to 35 years | ||||||||||||
| Yard House | 1 | (d) | 1,370 | 8,260 | (29 | ) | 21 | 1,341 | 8,281 | 9,622 | (811 | ) | 2013 | 11/25/2019 | 3 to 35 years | |||||||||||
| Yoke's Fresh Market | 2 | (d) | 5,518 | 9,882 | — | — | 5,518 | 9,882 | 15,400 | (3,041 | ) | 1999 - 2008 | 03/11/2015 - 03/12/2015 | 15 to 30 years | ||||||||||||
| Zaxby's | 3 | (d) | 2,259 | 4,964 | (69 | ) | — | 2,190 | 4,964 | 7,154 | (1,484 | ) | 2006 - 2010 | 07/01/2015 - 09/17/2015 | 15 to 30 years | |||||||||||
| Zips Car Wash | 39 | (d) | 51,457 | 85,255 | — | 20,374 | 51,457 | 105,629 | 157,086 | (8,014 | ) | 2001 - 2021 | 09/30/2015 - 08/04/2022 | 9 to 44 years | ||||||||||||
| 2,097 | 2,774,221 | 5,725,590 | (33,971 | ) | 166,527 | 2,740,250 | 5,892,117 | 8,632,367 | (1,211,061 | ) | ||||||||||||||||
| (a) | As of December 31, 2022, the Company held one direct finance lease property and 17 held for sale properties that are not included in the table above. |
| (b) | The aggregate cost of properties for federal income tax purposes is approximately $7.9 billion at December 31, 2022. |
| (c) | Includes one property collateralized with fixed CMBS debt. See Note 4 for further details. |
| (d) | Includes unencumbered properties. |
| (e) | Represents land only properties with no depreciation and therefore date of construction and estimated life for depreciation not applicable. |
| (f) | Includes one or more property where tenant is anchor tenant by rent in a multi-tenant property. |
| 2022 | 2021 | 2020 | ||||||||||
| Land, buildings, and improvements | ||||||||||||
| Balance at the beginning of the year | $ | 7,478,918 | $ | 6,392,596 | $ | 5,750,507 | ||||||
| Additions: | ||||||||||||
| Acquisitions, capital expenditures, and reclassifications from held for sale and deferred financing leases | 1,497,363 | 1,177,140 | 842,891 | |||||||||
| Deductions: | ||||||||||||
| Dispositions of land, buildings, and improvements | (198,280 | ) | (38,390 | ) | (50,853 | ) | ||||||
| Reclassifications to held for sale | (93,331 | ) | (17,047 | ) | (69,573 | ) | ||||||
| Impairments, basis reset due to impairment and other adjustments | (52,303 | ) | (35,381 | ) | (80,376 | ) | ||||||
| Gross Real Estate Balance at close of the year | $ | 8,632,367 | $ | 7,478,918 | $ | 6,392,596 | ||||||
| Accumulated depreciation and amortization | ||||||||||||
| Balance at the beginning of the year | $ | (1,033,391 | ) | $ | (850,320 | ) | $ | (717,097 | ) | |||
| Additions: | ||||||||||||
| Depreciation expense and reclassifications from held for sale | (248,858 | ) | (205,881 | ) | (177,268 | ) | ||||||
| Deductions: | ||||||||||||
| Dispositions of land, buildings, and improvements and other adjustments | 52,420 | 21,952 | 38,723 | |||||||||
| Reclassifications to held for sale | 18,768 | 858 | 5,322 | |||||||||
| Balance at close of the year | $ | (1,211,061 | ) | $ | (1,033,391 | ) | $ | (850,320 | ) | |||
| Net Real Estate Investment | $ | 7,421,306 | $ | 6,445,527 | $ | 5,542,276 | ||||||
| 41 |
SPIRIT REALTY CAPITAL, INC.
Schedule IV
Mortgage Loans on Real Estate
As of December 31, 2022
(In thousands)
| 2022 | 2021 | 2020 | ||||||||||
| Reconciliation of Mortgage Loans on Real Estate | ||||||||||||
| Balance January 1, | $ | — | $ | — | $ | 32,654 | ||||||
| Deductions during period | ||||||||||||
| Collections of principal | — | — | (31,733 | ) | ||||||||
| Amortization of premium | — | — | (921 | ) | ||||||||
| Mortgage loans receivable December 31, | — | — | — | |||||||||
| Other loans receivable | 23,023 | 10,450 | — | |||||||||
| Total loans receivable | $ | 23,023 | $ | 10,450 | $ | — | ||||||
| 42 |
Exhibit 99.2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Investments: | ||||||||
| Real estate assets held for investment: | ||||||||
| Land and improvements | $ | 2,742,072 | $ | 2,740,250 | ||||
| Buildings and improvements | 6,081,378 | 5,892,117 | ||||||
| Less: accumulated depreciation | (1,354,807 | ) | (1,211,061 | ) | ||||
| Total real estate assets held for investment, net | 7,468,643 | 7,421,306 | ||||||
| Intangible lease assets, net | 389,100 | 423,870 | ||||||
| Real estate assets under direct financing leases, net | 7,404 | 7,427 | ||||||
| Real estate assets held for sale, net | 61,545 | 49,148 | ||||||
| Loans receivable, net | 52,949 | 23,023 | ||||||
| Total investments, net | 7,979,641 | 7,924,774 | ||||||
| Cash and cash equivalents | 134,166 | 8,770 | ||||||
| Deferred costs and other assets, net | 310,801 | 313,722 | ||||||
| Goodwill | 225,600 | 225,600 | ||||||
| Total assets | $ | 8,650,208 | $ | 8,472,866 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Liabilities: | ||||||||
| Revolving credit facilities | $ | — | $ | 55,500 | ||||
| Term loans, net | 1,090,198 | 792,309 | ||||||
| Senior Unsecured Notes, net | 2,725,505 | 2,722,514 | ||||||
| Mortgages payable, net | 4,545 | 4,986 | ||||||
| Total debt, net | 3,820,248 | 3,575,309 | ||||||
| Intangible lease liabilities, net | 106,814 | 118,077 | ||||||
| Accounts payable, accrued expenses and other liabilities | 230,353 | 218,164 | ||||||
| Total liabilities | 4,157,415 | 3,911,550 | ||||||
| Commitments and contingencies (see Note 6) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both September 30, 2023 and December 31, 2022 | 166,177 | 166,177 | ||||||
| Common stock, $0.05 par value, 350,000,000 shares authorized: 141,331,218 and 141,231,219 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 7,067 | 7,062 | ||||||
| Capital in excess of common stock par value | 7,300,728 | 7,285,629 | ||||||
| Accumulated deficit | (3,036,475 | ) | (2,931,640 | ) | ||||
| Accumulated other comprehensive income | 55,296 | 34,088 | ||||||
| Total stockholders’ equity | 4,492,793 | 4,561,316 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,650,208 | $ | 8,472,866 | ||||
See accompanying notes.
3
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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Rental income | $ | 188,205 | $ | 180,296 | $ | 561,765 | $ | 520,930 | ||||||||
| Interest income on loans receivable | 1,506 | 521 | 3,919 | 1,362 | ||||||||||||
| Earned income from direct financing leases | 131 | 131 | 393 | 393 | ||||||||||||
| Other operating income | 3,533 | 1,956 | 4,888 | 3,550 | ||||||||||||
| Total revenues | 193,375 | 182,904 | 570,965 | 526,235 | ||||||||||||
| Expenses: | ||||||||||||||||
| General and administrative | 14,062 | 14,313 | 45,016 | 42,408 | ||||||||||||
| Property costs (including reimbursable) | 8,382 | 7,395 | 24,077 | 22,600 | ||||||||||||
| Deal pursuit costs | 342 | 470 | 1,174 | 1,490 | ||||||||||||
| Interest | 36,919 | 30,956 | 104,993 | 84,573 | ||||||||||||
| Depreciation and amortization | 79,370 | 74,600 | 236,527 | 216,606 | ||||||||||||
| Impairments | 19,258 | 1,571 | 36,052 | 11,096 | ||||||||||||
| Total expenses | 158,333 | 129,305 | 447,839 | 378,773 | ||||||||||||
| Other income: | ||||||||||||||||
| Loss on debt extinguishment | — | — | — | (172 | ) | |||||||||||
| Gain on disposition of assets | 3,661 | 23,302 | 66,450 | 63,107 | ||||||||||||
| Other income | — | — | — | 5,679 | ||||||||||||
| Total other income | 3,661 | 23,302 | 66,450 | 68,614 | ||||||||||||
| Income before income tax expense | 38,703 | 76,901 | 189,576 | 216,076 | ||||||||||||
| Income tax expense | (235 | ) | (261 | ) | (754 | ) | (640 | ) | ||||||||
| Net income | 38,468 | 76,640 | 188,822 | 215,436 | ||||||||||||
| Dividends paid to preferred shareholders | (2,587 | ) | (2,587 | ) | (7,763 | ) | (7,763 | ) | ||||||||
| Net income attributable to common stockholders | $ | 35,881 | $ | 74,053 | $ | 181,059 | $ | 207,673 | ||||||||
| Net income per share attributable to common stockholders: | ||||||||||||||||
| Basic | $ | 0.25 | $ | 0.54 | $ | 1.28 | $ | 1.56 | ||||||||
| Diluted | $ | 0.25 | $ | 0.54 | $ | 1.28 | $ | 1.56 | ||||||||
| Weighted average shares of common stock outstanding: | ||||||||||||||||
| Basic | 141,124,401 | 136,314,369 | 141,094,907 | 132,835,210 | ||||||||||||
| Diluted | 141,149,865 | 136,314,369 | 141,103,395 | 132,965,297 | ||||||||||||
| Dividends declared per common share issued | $ | 0.6696 | $ | 0.6630 | $ | 1.9956 | $ | 1.9390 | ||||||||
See accompanying notes.
4
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income attributable to common stockholders | $ | 35,881 | $ | 74,053 | $ | 181,059 | $ | 207,673 | ||||||||
| Other comprehensive income: | ||||||||||||||||
| Net reclassification of amounts from AOCIL | 8,260 | 40,204 | 21,208 | 41,608 | ||||||||||||
| Total comprehensive income | $ | 44,141 | $ | 114,257 | $ | 202,267 | $ | 249,281 | ||||||||
See accompanying notes.
5
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
(Unaudited)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | Shares | Par
Value and Capital in Excess of Par Value | Shares | Par
Value | Capital
in Excess of Par Value | Accumulated Deficit | AOCIL | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Balances, December 31, 2022 | 6,900,000 | $ | 166,177 | 141,231,219 | $ | 7,062 | $ | 7,285,629 | $ | (2,931,640 | ) | $ | 34,088 | $ | 4,561,316 | |||||||||||||||||
| Net income | — | — | — | — | — | 96,173 | — | 96,173 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (2,588 | ) | — | (2,588 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | 93,585 | — | 93,585 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (10,586 | ) | (10,586 | ) | ||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (93,675 | ) | — | (93,675 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (30,279 | ) | (2 | ) | — | (1,310 | ) | — | (1,312 | ) | ||||||||||||||||||||
| Stock-based compensation, net | — | — | 98,982 | 5 | 5,225 | (659 | ) | — | 4,571 | |||||||||||||||||||||||
| Balances, March 31, 2023 | 6,900,000 | $ | 166,177 | 141,299,922 | $ | 7,065 | $ | 7,290,854 | $ | (2,933,699 | ) | $ | 23,502 | $ | 4,553,899 | |||||||||||||||||
| Net income | — | — | — | — | — | 54,181 | — | 54,181 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (2,588 | ) | — | (2,588 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | 51,593 | — | 51,593 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 23,534 | 23,534 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (93,700 | ) | — | (93,700 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (3,825 | ) | — | — | (145 | ) | — | (145 | ) | |||||||||||||||||||||
| Stock-based compensation, net | — | — | 35,261 | 2 | 4,968 | 311 | — | 5,281 | ||||||||||||||||||||||||
| Balances, June 30, 2023 | 6,900,000 | $ | 166,177 | 141,331,358 | $ | 7,067 | $ | 7,295,822 | $ | (2,975,640 | ) | $ | 47,036 | $ | 4,540,462 | |||||||||||||||||
| Net income | — | — | — | — | — | 38,468 | — | 38,468 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (2,587 | ) | — | (2,587 | ) | ||||||||||||||||||||||
| Net income available to common stockholders | — | — | — | 35,881 | — | 35,881 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 8,260 | 8,260 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (94,635 | ) | — | (94,635 | ) | ||||||||||||||||||||||
| Stock-based compensation, net | — | — | (140 | ) | — | 4,906 | (2,081 | ) | — | 2,825 | ||||||||||||||||||||||
| Balances, September 30, 2023 | 6,900,000 | $ | 166,177 | 141,331,218 | $ | 7,067 | $ | 7,300,728 | $ | (3,036,475 | ) | $ | 55,296 | $ | 4,492,793 | |||||||||||||||||
6
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
(Unaudited)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Shares | Par Value and Capital in Excess of Par Value | Shares | Par Value | Capital in Excess of Par Value | Accumulated Deficit | AOCIL | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Balances, December 31, 2021 | 6,900,000 | $ | 166,177 | 127,699,235 | $ | 6,385 | $ | 6,673,440 | $ | (2,840,356 | ) | $ | (5,847 | ) | $ | 3,999,799 | ||||||||||||||||
| Net income | — | — | — | — | — | 56,056 | — | 56,056 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (2,588 | ) | — | (2,588 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | 53,468 | — | 53,468 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 702 | 702 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (85,688 | ) | — | (85,688 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (39,028 | ) | (2 | ) | — | (6,408 | ) | — | (6,410 | ) | ||||||||||||||||||||
| Issuance of shares of common stock, net | — | — | 6,559,406 | 328 | 299,440 | — | — | 299,768 | ||||||||||||||||||||||||
| Stock-based compensation, net | — | — | 86,888 | 4 | 4,021 | (496 | ) | — | 3,529 | |||||||||||||||||||||||
| Balances, March 31, 2022 | 6,900,000 | $ | 166,177 | 134,306,501 | $ | 6,715 | $ | 6,976,901 | $ | (2,879,480 | ) | $ | (5,145 | ) | $ | 4,265,168 | ||||||||||||||||
| Net income | — | — | — | — | — | 82,740 | — | 82,740 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (2,588 | ) | — | (2,588 | ) | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | 80,152 | — | 80,152 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 702 | 702 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (86,987 | ) | — | (86,987 | ) | ||||||||||||||||||||||
| Tax withholdings related to net stock settlements | — | — | (403 | ) | — | — | (17 | ) | — | (17 | ) | |||||||||||||||||||||
| Issuance of shares of common stock, net | — | — | 1,999,996 | 100 | 89,864 | — | — | 89,964 | ||||||||||||||||||||||||
| Stock-based compensation, net | — | — | 35,591 | 2 | 4,385 | (498 | ) | — | 3,889 | |||||||||||||||||||||||
| Balances, June 30, 2022 | 6,900,000 | $ | 166,177 | 136,341,685 | $ | 6,817 | $ | 7,071,150 | $ | (2,886,830 | ) | $ | (4,443 | ) | $ | 4,352,871 | ||||||||||||||||
| Net income | — | — | — | — | — | 76,640 | — | 76,640 | ||||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | (2,587 | ) | — | (2,587 | ) | ||||||||||||||||||||||
| Net income available to common stockholders | — | — | — | 74,053 | — | 74,053 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 40,204 | 40,204 | ||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | (92,595 | ) | — | (92,595 | ) | ||||||||||||||||||||||
| Issuance of shares of common stock, net | — | — | 3,320,559 | 166 | 141,702 | — | — | 141,868 | ||||||||||||||||||||||||
| Stock-based compensation, net | — | — | (418 | ) | — | 4,393 | (4 | ) | — | 4,389 | ||||||||||||||||||||||
| Balances, September 30, 2022 | 6,900,000 | $ | 166,177 | 139,661,826 | $ | 6,983 | $ | 7,217,245 | $ | (2,905,376 | ) | $ | 35,761 | $ | 4,520,790 | |||||||||||||||||
See accompanying notes.
7
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net income | $ | 188,822 | $ | 215,436 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 236,527 | 216,606 | ||||||
| Impairments | 36,052 | 11,096 | ||||||
| Amortization of deferred financing costs | 5,944 | 3,637 | ||||||
| Amortization of debt discounts, net | 982 | 947 | ||||||
| Amortization of deferred losses on interest rate swaps | 2,106 | 2,106 | ||||||
| Stock-based compensation expense | 15,106 | 12,805 | ||||||
| Loss on debt extinguishment | — | 172 | ||||||
| Gain on dispositions of real estate and other assets | (66,450 | ) | (63,107 | ) | ||||
| Non-cash revenue | (26,894 | ) | (30,165 | ) | ||||
| Other | 32 | 10 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Deferred costs and other assets, net | 3,798 | (1,683 | ) | |||||
| Accounts payable, accrued expenses and other liabilities | (22,477 | ) | (28,975 | ) | ||||
| Net cash provided by operating activities | 373,548 | 338,885 | ||||||
| Investing activities | ||||||||
| Acquisitions of real estate | (419,765 | ) | (1,118,290 | ) | ||||
| Capitalized real estate expenditures | (65,649 | ) | (55,318 | ) | ||||
| Investments in loans receivable | (13,672 | ) | (12,700 | ) | ||||
| Proceeds from dispositions of real estate and other assets | 249,028 | 183,767 | ||||||
| Net cash used in investing activities | (250,058 | ) | (1,002,541 | ) | ||||
| Financing activities | ||||||||
| Borrowings under revolving credit facilities | 424,000 | 1,267,800 | ||||||
| Repayments under revolving credit facilities | (479,500 | ) | (1,556,200 | ) | ||||
| Repayments under mortgages payable | (413 | ) | (391 | ) | ||||
| Borrowings under term loans | 300,000 | 800,000 | ||||||
| Deferred financing costs | (269 | ) | (17,028 | ) | ||||
| Proceeds from issuance of common stock, net of offering costs | — | 531,565 | ||||||
| Repurchase of shares of common stock, including tax withholdings related to net stock settlements | (1,457 | ) | (6,427 | ) | ||||
| Common stock dividends paid | (281,020 | ) | (255,870 | ) | ||||
| Preferred stock dividends paid | (7,763 | ) | (7,763 | ) | ||||
| Net cash (used in) provided by financing activities | (46,422 | ) | 755,686 | |||||
| Net increase in cash, cash equivalents and restricted cash | 77,068 | 92,030 | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | 61,953 | 17,799 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 139,021 | $ | 109,829 | ||||
| Cash paid for interest, net of interest capitalized | $ | 133,071 | $ | 99,575 | ||||
| Interest capitalized | 1,005 | 741 | ||||||
| Cash paid for income taxes | 919 | 676 | ||||||
8
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| Supplemental Disclosures of Non-Cash Activities: | 2023 | 2022 | ||||||
| Dividends declared and unpaid | $ | 94,635 | $ | 92,595 | ||||
| Accrued capitalized costs | 39,552 | 18,103 | ||||||
| Accrued market-based award dividend rights | 2,429 | 998 | ||||||
| Derivative changes in fair value | 19,104 | 39,502 | ||||||
| Financing provided in connection with disposition of assets | 33,000 | — | ||||||
| Right-of-use assets | 22,635 | — | ||||||
| Right-of-use liabilities | 22,635 | — | ||||||
See accompanying notes.
9
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
NOTE 1. ORGANIZATION
Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate sustainable and attractive returns for stockholders by primarily investing 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 retail, industrial and other property types. Single-tenant, operationally essential real estate 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 Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC, one of the Corporation’s wholly-owned subsidiaries, is the sole general partner and owns approximately 1% 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% of the Operating Partnership.
NOTE 2. SUMMARY OF SIGNIFICANT ACOUNTING POLICIES
Basis of Accounting
The consolidated financial statements of the Company have been prepared on the accrual basis of accounting, in accordance with GAAP. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for 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, 2022.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Corporation and its wholly-owned subsidiaries, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements include certain special purpose entities that were formed to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of September 30, 2023 and December 31, 2022, net assets totaling $11.1 million and $11.7 million, respectively, were held, and net liabilities totaling $4.5 million and $4.9 million, respectively, were owed by these encumbered special purpose entities and are included in the consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations as one reportable segment, which consists of net leasing operations.
Revenue Recognition
Rental Income: Cash and Straight-line Rent
The Company primarily leases real estate to its tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, the Company assesses the terms and conditions of the lease to determine the appropriate lease term. Options to extend, terminate or purchase are not included in the evaluation for lease classification or for recognition of rental income unless the Company is reasonably certain the tenant will exercise the option. Evaluation of lease classification also requires an estimate of the real estate's residual value at the end of the lease term. For acquisitions, the Company uses the tangible value of the property at the date of acquisition. For lease modifications, the Company generally uses sales comparables or a direct capitalization approach to estimate residual value.
The Company’s leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. Accordingly, the difference between rental income recognized on a straight-line basis and billed rents is recorded as rent receivables, which the Company will receive only if the tenant makes all rent payments required through the initial term of their lease. For leases with variable rent escalators, rental income typically increases at a multiple of any increase in the CPI over a specified period. Because of the volatility and uncertainty regarding future changes in the CPI and the Company’s inability to determine the extent to which any specific future change in the CPI is probable, increases from variable rent escalators are recognized when the changes in the rental rates have occurred.
Some of the Company’s leases also provide for contingent rent based on a percentage of the tenant’s gross sales, which is recognized as rental income when the factor on which the contingent lease payment is based has occurred.
Rental income is subject to an evaluation for collectability, which includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. The Company does not recognize rental income for amounts that are not probable of collection.
Rental Income: Tenant Reimbursement Revenue
Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. Certain leases contain additional amounts recoverable from tenants for common area maintenance and certain other expenses, which are non-lease components. The Company elected to combine all its non-lease components, which were determined to have the same pattern of transfer as the related operating lease component, into a single combined lease component. Tenant reimbursement revenue is variable and is recognized in the period in which the related expenses are incurred, with the related expenses included in property costs (including reimbursable) on the consolidated statements of operations. Tenant reimbursements are recorded on a gross basis in instances when our tenants reimburse us for property costs which we incur. Tenant receivables are reduced for amounts that are not probable of collection.
Rental Income: Intangible Amortization
Amortization of above- and below-market lease intangibles are included as a decrease and increase, respectively, to rental revenue and amortization of in-place lease intangibles is included in depreciation and amortization expense in the consolidated statements of operations. All lease intangibles are amortized on a straight-line basis over the term of the lease, which includes any renewal options the Company is reasonably certain the tenant will exercise. If the Company subsequently determines it is reasonably certain that the tenant will not exercise the renewal options, the unamortized portion of any related lease intangible is accelerated over the remaining initial term of the lease. If the Company believes a lease intangible balance is no longer recoverable, the unamortized portion is immediately recognized in impairments in the consolidated statements of operations.
Loans Receivable
Interest on loans receivable is recognized using the effective interest rate method. A loan is placed on non-accrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on non-accrual status, interest income is recognized only when received. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted.
The Company evaluates its loans receivable balance, including accrued interest, for potential credit losses by analyzing the credit of the borrower, the remaining time to maturity of the loan, collateral value and quality (if any), and other relevant factors. Allowance for credit losses are recorded in impairments on the consolidated statement of operations.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term instruments. Restricted cash is classified within deferred costs and other assets, net in the consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | September 30, 2022 | ||||||||||
| Cash and cash equivalents | $ | 134,166 | $ | 8,770 | $ | 109,829 | ||||||
| Restricted cash: | ||||||||||||
| 1031 Exchange proceeds | 4,210 | 53,183 | — | |||||||||
| Tenant security deposits | 645 | — | — | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 139,021 | $ | 61,953 | $ | 109,829 | ||||||
Tenant Receivables
The Company reviews its rent and other tenant receivables for collectability on a regular basis, considering changes in factors such as the tenant’s payment history, the tenant’s financial condition, industry conditions in which the tenant operates and economic conditions in the geographic area in which the tenant operates. If a receivable is not probable of collection, a direct write-off of the receivable will be made. The Company had accounts receivable balances of $13.1 million and $18.2 million at September 30, 2023 and December 31, 2022, respectively, after the impact of $2.3 million and $3.2 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred cost and other assets, net in the consolidated balance sheets.
For receivable balances related to the straight-line method of recognizing rental income, the collectability is generally assessed in conjunction with the evaluation of rental income as described above. The Company had straight-line rent receivables of $185.2 million and $167.1 million at September 30, 2023 and December 31, 2022, respectively, after the impact of $1.0 million and $1.3 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred costs and other assets, net in the consolidated balance sheets.
Goodwill
Goodwill arises from business combinations as the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level annually or 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. The Company performs a qualitative assessment to determine if the quantitative impairment test is necessary. The quantitative impairment test, if deemed necessary, compares the fair value of each reporting unit with its carrying amount and impairment is recognized as the amount by which the carrying amount exceeds the reporting unit’s fair value. No impairment was recorded for the periods presented.
Income Taxes
The Corporation has elected to be taxed as a REIT under the Code. As a REIT, the Corporation 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 the Company’s assets, the amounts distributed to the Corporation’s stockholders and the ownership of Corporation stock. Management believes the Corporation has qualified and will continue to qualify as a REIT and, therefore, no provision has been made for federal income taxes in the consolidated financial statements. Even if the Corporation 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.
Taxable income earned by any of the Company's taxable REIT subsidiaries, including from non-REIT activities, is subject to federal, state and local taxes. Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state and local taxes, which are not material.
Earnings Per Share
The Company’s unvested restricted common stock, which contains non-forfeitable rights to receive dividends, are considered participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on their respective weighted average shares outstanding during the period.
Under the terms of the Amended Incentive Award Plan, restricted stock awards are not allocated losses, including undistributed losses as a result of dividends declared exceeding net income. The Company uses net income attributable to common shareholders to determine whether potential common shares are dilutive or anti-dilutive and undistributed net income (loss) to determine whether undistributed earnings are allocable to participating securities.
Forward Equity Sale Agreements
The Corporation may enter into forward sale agreements for the sale and issuance of shares of our common stock, either through an underwritten public offering or through the 2021 ATM Program. These agreements may be physically settled in stock, settled in cash, or net share settled at the Company’s election. The Company evaluated the forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Corporation’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Corporation’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Corporation’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Corporation’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Corporation elects to physically settle or net share settle such forward sale agreement, delivery of the Corporation’s shares will result in dilution to the Company’s earnings per share. We had no outstanding forward sales agreements as of September 30, 2023.
NOTE 3. INVESTMENTS
Owned Properties
As of September 30, 2023, the Company's gross investment in owned real estate properties totaled $9.4 billion. The gross investment, as adjusted for any impairment, is comprised of land, buildings, lease intangible assets, lease intangible liabilities, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with Texas, at 15.7%, as the only state with a gross investment greater than 10.0% of the total gross investment of the Company's entire portfolio.
During the nine months ended September 30, 2023, the Company had the following real estate activity (dollars in thousands):
| Number of Properties | Dollar Amount of Investments | |||||||||||||||||||||||
| Held in Use | Held for Sale | Total | Held in Use | Held for Sale | Total | |||||||||||||||||||
| Gross balance, December 31, 2022 | 2,098 | 17 | 2,115 | $ | 9,122,163 | $ | 61,581 | $ | 9,183,744 | |||||||||||||||
| Acquisitions/improvements (1) | 30 | — | 30 | 497,876 | — | 497,876 | ||||||||||||||||||
| Dispositions of real estate (2) | (63 | ) | (45 | ) | (108 | ) | (138,326 | ) | (112,526 | ) | (250,852 | ) | ||||||||||||
| Transfers to Held for Sale | (69 | ) | 69 | — | (146,491 | ) | 146,491 | — | ||||||||||||||||
| Transfers from Held for Sale | 2 | (2 | ) | — | 3,675 | (3,675 | ) | — | ||||||||||||||||
| Impairments (3) | — | — | — | (10,738 | ) | (8,593 | ) | (19,331 | ) | |||||||||||||||
| Reset of gross balances (4) | — | — | — | (21,595 | ) | (4,748 | ) | (26,343 | ) | |||||||||||||||
| Gross balance, September 30, 2023 | 1,998 | 39 | 2,037 | 9,306,564 | 78,530 | 9,385,094 | ||||||||||||||||||
| Accumulated depreciation and amortization | (1,548,231 | ) | (16,985 | ) | (1,565,216 | ) | ||||||||||||||||||
| Net balance, September 30, 2023 (5) | $ | 7,758,333 | $ | 61,545 | $ | 7,819,878 | ||||||||||||||||||
(1) Includes investments of $66.2 million in revenue producing capitalized expenditures and $4.0 million of non-revenue producing capitalized expenditures during the nine months ended September 30, 2023.
(2) For the nine months ended September 30, 2023, the net gains on disposal of properties held in use and held for sale were $39.4 million and $27.1 million, respectively.
(3) Impairments on owned real estate is comprised of real estate and intangible asset/liability impairment.
(4) Represents write-off of gross investment balances against the related accumulated depreciation and amortization balances as a result of basis reset due to impairment or intangibles and tenant improvements which have been fully amortized.
(5) Reconciliation of total owned investments to the accompanying consolidated balance sheet at September 30, 2023 is as follows:
| Real estate assets held for investment, net | $ | 7,468,643 | ||
| Intangible lease assets, net | 389,100 | |||
| Real estate assets under direct financing leases, net | 7,404 | |||
| Real estate assets held for sale, net | 61,545 | |||
| Intangible lease liabilities, net | (106,814 | ) | ||
| Net balance | $ | 7,819,878 |
Operating Leases
As of September 30, 2023 and 2022, the Company held 2,028 and 2,113 properties under operating leases, respectively. The following table summarizes the components of rental income recognized on these operating leases in the consolidated statements of operations (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Base Cash Rent (1) | $ | 173,569 | $ | 162,467 | $ | 516,486 | $ | 471,052 | ||||||||
| Variable cash rent (including reimbursables) | 6,331 | 6,479 | 18,385 | 19,713 | ||||||||||||
| Straight-line rent, net of uncollectible reserve (2) | 8,227 | 10,875 | 26,127 | 28,465 | ||||||||||||
| Amortization of above- and below- market lease intangibles, net (3) | 78 | 475 | 767 | 1,700 | ||||||||||||
| Total rental income | $ | 188,205 | $ | 180,296 | $ | 561,765 | $ | 520,930 | ||||||||
(1) Includes net impact of amounts (reserved) of $(0.3) million and $(0.4) million for the three and nine months ended September 30, 2023, and $(0.6) million and $(0.5) million for the three and nine months ended September 30, 2022, respectively.
(2) Includes net impact of amounts (reserved)/recovered of $(2.1) million and $(4.1) million for the three and nine months ended September 30, 2023, respectively, and $1.2 million and $1.1 million for the three and nine months ended September 30, 2022, respectively.
(3) Excludes amortization of in-place leases of $10.7 million and $32.7 million for the three and nine months ended September 30, 2023, respectively, and $11.3 million and $32.6 million for the three and nine months ended September 30, 2022, respectively, which is included in depreciation and amortization expense in the consolidated statements of operations.
Lease renewal periods are exercisable at the lessees’ option and, as such, minimum future rent only includes the remaining initial non-cancellable term of our operating leases. In addition, minimum future rent includes fixed rent escalations occurring on or after October 1, 2023, but does not include variable rent escalations, such as those based on CPI, or contingent rents.
Minimum future rent at September 30, 2023 is as follows (in thousands):
| September 30, 2023 | ||||
| Remainder of 2023 | $ | 171,402 | ||
| 2024 | 686,874 | |||
| 2025 | 677,829 | |||
| 2026 | 653,584 | |||
| 2027 | 615,008 | |||
| Thereafter | 5,110,923 | |||
| Total future minimum rentals | $ | 7,915,620 | ||
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| In-place leases | $ | 536,730 | $ | 559,962 | ||||
| Above-market leases | 104,204 | 101,594 | ||||||
| Less: accumulated amortization | (251,834 | ) | (237,686 | ) | ||||
| Intangible lease assets, net | $ | 389,100 | $ | 423,870 | ||||
| Below-market leases | $ | 165,224 | $ | 179,187 | ||||
| Less: accumulated amortization | (58,410 | ) | (61,110 | ) | ||||
| Intangible lease liabilities, net | $ | 106,814 | $ | 118,077 | ||||
Direct Financing Leases
As of September 30, 2023, the Company held one property under a direct financing lease, which was held in use. As of September 30, 2023, this property had $2.1 million in scheduled minimum future payments to be received under its remaining non-cancellable lease term. As of September 30, 2023, the Company had a reserve of $0.1 million against the investment balance of $7.5 million, which was initially recorded in 2020 as a result of the initial term of the direct financing lease extending until 2027.
Loans Receivable
During the first quarter of 2023, the Company provided fixed-rate seller financing in conjunction with the sale of four single-tenant properties for $33.0 million, for which the properties serve as collateral. The Company also provided additional funding for an existing construction loan, for which we issued $12.7 million during 2022 and increased the principal amount of the loan by $0.8 million during the three months ended March 31, 2023. The Company evaluated the collectability of these amounts receivable and recorded an allowance for loan losses of $0.5 million during the three months ended March 31, 2023 due to the borrowers' financials and performance metrics.
During the second quarter of 2023, the Company issued a fixed-rate, uncollateralized loan for $5.0 million. Additionally, the Company purchased $10.0 million of term loans for $7.9 million, with $2.1 million being recorded to allowance for loan losses at time of purchase. The Company evaluated the collectability of these amounts receivable and recorded an additional allowance for loan losses of $0.8 million for the three months ended June 30, 2023. The Company also recorded an additional allowance for loan losses of $0.1 million during the three months ended June 30, 2023 on an existing loan due to changes in the borrower's macroeconomic environment.
During the third quarter of 2023, the Company recorded an additional allowance for loan losses of $15.3 million on existing loans due to changes in the borrower's financial position.
The following table details our loans receivable activity (in thousands):
| Principal Balance | Allowance for Credit Loss | Total | ||||||||||
| December 31, 2022 | $ | 23,700 | $ | (677 | ) | $ | 23,023 | |||||
| Loans issued | 48,750 | (18,799 | ) | 29,951 | ||||||||
| Loan payments received | (25 | ) | — | (25 | ) | |||||||
| September 30, 2023 | $ | 72,425 | $ | (19,476 | ) | $ | 52,949 | |||||
Impairments and Allowance for Credit Losses
The following table summarizes impairments and allowance for credit losses recognized in the consolidated statements of operations (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Real estate asset impairment | $ | 3,951 | $ | 1,632 | $ | 18,754 | $ | 10,535 | ||||||||
| Intangible net (liability)/asset impairment | (27 | ) | (61 | ) | 577 | 434 | ||||||||||
| Allowance for credit losses on loans receivable | 15,334 | — | 16,721 | 127 | ||||||||||||
| Total impairment loss | $ | 19,258 | $ | 1,571 | $ | 36,052 | $ | 11,096 | ||||||||
NOTE 4. DEBT
The Company's debt is summarized below (dollars in thousands):
| Weighted Average Effective Interest Rates (1) | Weighted Average Stated Interest Rates (2) | Weighted Average Remaining Years to Maturity (3) | September 30, 2023 | December 31, 2022 | ||||||||||||||||
| Debt: | ||||||||||||||||||||
| Revolving credit facilities | 12.18 | % | — | 2.5 | $ | — | $ | 55,500 | ||||||||||||
| Term loans | 4.01 | % | 3.86 | % | 2.8 | 1,100,000 | 800,000 | |||||||||||||
| Senior Unsecured Notes | 3.42 | % | 3.25 | % | 5.7 | 2,750,000 | 2,750,000 | |||||||||||||
| Mortgages payable | 4.89 | % | 5.82 | % | 7.3 | 4,410 | 4,825 | |||||||||||||
| Total debt | 3.68 | % | 3.42 | % | 4.8 | 3,854,410 | 3,610,325 | |||||||||||||
| Debt discount, net | (8,573 | ) | (9,556 | ) | ||||||||||||||||
| Deferred financing costs, net (4) | (25,589 | ) | (25,460 | ) | ||||||||||||||||
| Total debt, net | $ | 3,820,248 | $ | 3,575,309 | ||||||||||||||||
(1) Includes amortization of debt discount/premium, amortization of deferred financing costs, facility fees, non-utilization fees and impact of cash flow hedges, where applicable, calculated for the nine months ended September 30, 2023 based on the average principal balance outstanding during the period.
(2) Based on the outstanding principal balance as of September 30, 2023. Term loans include the impact of cash flow hedges. Excluding the impact of cash flow hedges, the stated interest rate for the term loans was 6.31% as of September 30, 2023.
(3) Based on the outstanding principal balance as of September 30, 2023.
(4) Excludes deferred financing costs for the revolving credit facilities.
Deferred financing costs and offering discount/premium incurred in connection with entering into debt agreements are amortized to interest expense over the initial term of the respective agreement. Both deferred financing costs and offering discount/premium are recorded net against the principal debt balance on the consolidated balance sheets, except for deferred costs related to revolving credit facilities, which are recorded in deferred costs and other assets, net.
Revolving Credit Facilities
On January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, which included the 2019 Credit Facility with a borrowing capacity of $800.0 million. On March 30, 2022, the Operating Partnership amended and restated the 2019 Revolving Credit and Term Loan Agreement, increasing the borrowing capacity of the 2019 Credit Facility to $1.2 billion. The borrowing capacity can be further increased to $1.7 billion through exercise of an accordion feature, subject to satisfying certain requirements. The 2019 Credit Facility has a maturity date of March 31, 2026 and includes two six-month extensions that can be exercised at the Company’s option. Borrowings may be repaid, in whole or in part, at any time, without premium or penalty, but subject to applicable breakage fees, if any.
As of September 30, 2023, outstanding loans under the 2019 Credit Facility bore interest at a 1-month adjusted SOFR rate plus an applicable margin of 0.775% per annum and the aggregate revolving commitments incurred a facility fee of 0.150% per annum, in each case, based on the Operating Partnership’s credit rating and leverage ratio (as defined in the agreement). Prior to March 30, 2022, outstanding loans under the 2019 Credit Facility bore interest at 1-month LIBOR plus an applicable margin of 0.90% per annum and the aggregate revolving commitments incurred a facility fee of 0.20% per annum.
In connection with the amendment and restatement of the 2019 Credit Facility, the Company wrote off $0.2 million in deferred financing costs and incurred deferred financing costs of $8.6 million. The unamortized deferred financing costs were $6.0 million as of September 30, 2023, compared to $7.8 million as of December 31, 2022.
As of September 30, 2023, $1.2 billion of borrowing capacity was available under the 2019 Credit Facility and there were no outstanding letters of credit. The Operating Partnership's ability to borrow under the 2019 Credit Facility is subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of September 30, 2023.
Term Loans
On August 22, 2022, the Operating Partnership entered into the 2022 Term Loan Agreement, which provides for borrowings in an aggregate amount of $800.0 million, comprised of a $300.0 million tranche which matures August 22, 2025 and a $500.0 million tranche which matures August 20, 2027. The 2022 Term Loan Agreement also includes an accordion feature to increase the available term loans by $200.0 million, subject to satisfying certain requirements. The Company incurred $8.4 million in deferred financing costs in connection with entering into the 2022 Term Loan Agreement, and the unamortized deferred financing costs were $6.2 million as of September 30, 2023, compared to $7.7 million as of December 31, 2022.
On November 17, 2022, the Operating Partnership entered into the 2023 Term Loan Agreement, which provides for $500.0 million of unsecured term loans with a maturity date of June 16, 2025. The 2023 Term Loan Agreement also includes an accordion feature to increase the available term loans by $100.0 million, subject to satisfying certain requirements. The Company incurred $4.3 million in deferred financing costs in connection with the $300.0 million drawn of the 2023 Term Loans, and the unamortized deferred financing costs were $3.6 million as of September 30, 2023. Borrowing capacity of $200.0 million was available under the 2023 Term Loan Agreements as of September 30, 2023, which may be drawn by December 29, 2023.
As of September 30, 2023, the 2022 Term Loans and 2023 Term Loans bore interest at a 1-month adjusted SOFR rate plus an applicable margin of 0.850% and 0.950% per annum, respectively, based on the Operating Partnership's credit rating. In conjunction with the Company's term loans, the Company entered into interest rate swaps as cash flow hedges (see Note 7).
In connection with the 2022 Term Loan Agreement and the 2023 Term Loan Agreement, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of September 30, 2023.
Senior Unsecured Notes
The Senior Unsecured Notes were issued by the Operating Partnership and are guaranteed by the Company. The following is a summary of the Senior Unsecured Notes outstanding (dollars in thousands):
| Maturity Date | Interest Payment Dates | Stated Interest Rate | September 30, 2023 | December 31, 2022 | ||||||||||||
| 2026 Senior Notes | September 15, 2026 | March 15 and September 15 | 4.45 | % | $ | 300,000 | $ | 300,000 | ||||||||
| 2027 Senior Notes | January 15, 2027 | January 15 and July 15 | 3.20 | % | 300,000 | 300,000 | ||||||||||
| 2028 Senior Notes | March 15, 2028 | March 15 and September 15 | 2.10 | % | 450,000 | 450,000 | ||||||||||
| 2029 Senior Notes | July 15, 2029 | January 15 and July 15 | 4.00 | % | 400,000 | 400,000 | ||||||||||
| 2030 Senior Notes | January 15, 2030 | January 15 and July 15 | 3.40 | % | 500,000 | 500,000 | ||||||||||
| 2031 Senior Notes | February 15, 2031 | February 15 and August 15 | 3.20 | % | 450,000 | 450,000 | ||||||||||
| 2032 Senior Notes | February 15, 2032 | February 15 and August 15 | 2.70 | % | 350,000 | 350,000 | ||||||||||
| Total Senior Unsecured Notes | 3.25 | % | $ | 2,750,000 | $ | 2,750,000 | ||||||||||
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 100% of the principal amount of the respective 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. If any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
As of September 30, 2023 and December 31, 2022, the unamortized deferred financing costs were $15.8 million and $17.8 million, respectively, and the unamortized discount was $8.7 million and $9.7 million, respectively. In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of September 30, 2023.
Mortgages Payable
Indirect wholly-owned special purpose entity subsidiaries of the Company are borrowers under two fixed-rate non-recourse 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, 2023 for the loans were 5.80% and 6.00%, respectively. Each loan was secured by one property. There were no unamortized deferred financing costs as of either September 30, 2023 and December 31, 2022, and the unamortized net premium as of September 30, 2023 and December 31, 2022 was $0.1 million and $0.2 million, respectively.
Debt Extinguishment
The Company did not extinguish any debt during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, the Company recognized a loss on debt extinguishment of $0.2 million as a result of the amendment and restatement of the 2019 Revolving Credit and Term Loan Agreement.
Debt Maturities
As of September 30, 2023, scheduled debt maturities, including balloon payments, were as follows (in thousands):
| Scheduled Principal | Balloon Payment | Total | ||||||||||
| Remainder of 2023 | $ | 141 | $ | — | $ | 141 | ||||||
| 2024 | 590 | — | 590 | |||||||||
| 2025 | 610 | 600,016 | 600,626 | |||||||||
| 2026 | 469 | 300,000 | 300,469 | |||||||||
| 2027 | 497 | 800,000 | 800,497 | |||||||||
| Thereafter | 2,034 | 2,150,053 | 2,152,087 | |||||||||
| Total | $ | 4,341 | $ | 3,850,069 | $ | 3,854,410 | ||||||
Interest Expense
The components of interest expense related to the Company's borrowings were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revolving credit facilities (1) | $ | 612 | $ | 3,550 | $ | 4,237 | $ | 8,520 | ||||||||
| Term loans (2) | 10,857 | 2,940 | 25,589 | 2,940 | ||||||||||||
| Senior Unsecured Notes | 22,313 | 22,313 | 66,939 | 66,939 | ||||||||||||
| Mortgages payable | 65 | 73 | 201 | 225 | ||||||||||||
| Non-cash: | ||||||||||||||||
| Amortization of deferred financing costs | 2,325 | 1,475 | 5,944 | 3,637 | ||||||||||||
| Amortization of debt discount, net | 330 | 318 | 982 | 947 | ||||||||||||
| Amortization of net losses related to interest rate swaps | 702 | 702 | 2,106 | 2,106 | ||||||||||||
| Capitalized interest | (285 | ) | (415 | ) | (1,005 | ) | (741 | ) | ||||||||
| Total interest expense | $ | 36,919 | $ | 30,956 | $ | 104,993 | $ | 84,573 | ||||||||
(1) Includes facility fees of approximately $0.6 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, and $0.5 million and $1.4 million for the three and nine months ended September 30, 2022, respectively.
(2) Includes impact of cash flow hedge.
NOTE 5. STOCKHOLDERS’ EQUITY
Common Stock
In January 2022, the Company entered into forward sale agreements in connection with an offering of 9.4 million shares of common stock at an initial public offering price of $47.60 per share, before underwriting discounts and offering expenses. All of these shares were settled during 2022, generating net proceeds of $427.7 million.
In November 2021, the Board of Directors approved a new $500.0 million ATM Program, and the Company terminated its 2020 ATM Program. The following details the activity under the 2021 ATM Program since its inception (in thousands):
| 2021 ATM | Forward Shares | Regular Shares | Total Shares | Net Proceeds on Issuances | |||||||||||||
| Month ended 12/31/2021 | |||||||||||||||||
| Shares sold | 2,268 | 438 | 2,706 | ||||||||||||||
| Shares issued | (2,212 | ) | (438 | ) | (2,650 | ) | $ | 120,286 | |||||||||
| Unsettled shares sold as of 12/31/2021 | 56 | — | 56 | ||||||||||||||
| Year ended 12/31/2022 | |||||||||||||||||
| Shares sold | 2,434 | 1,525 | 3,959 | ||||||||||||||
| Shares issued | (2,490 | ) | (1,525 | ) | (4,015 | ) | $ | 167,850 | |||||||||
| Unsettled shares sold as of 12/31/2022 | — | — | — | ||||||||||||||
| Nine months ended 9/30/2023 | |||||||||||||||||
| Shares sold | — | — | — | ||||||||||||||
| Shares issued | — | — | — | $ | — | ||||||||||||
| Unsettled shares sold as of 9/30/2023 | — | — | — | ||||||||||||||
As of September 30, 2023, approximately $208.7 million of capacity remained available under the 2021 ATM Program.
Preferred Stock
As of September 30, 2023, the Company had 6.9 million shares of Series A Preferred Stock outstanding, which pays cumulative cash dividends of 6.00% per annum on the liquidation preference of $25.00 per share (equivalent to $1.50 per share on an annual basis).
Dividends Declared
For the nine months ended September 30, 2023, the Company's Board of Directors declared the following dividends:
| Declaration Date | Dividend Per Share | Record Date | Total Amount (in thousands) | Payment Date | ||||||||
| Common Stock | ||||||||||||
| February 22, 2023 | $ | 0.6630 | March 31, 2023 | $ | 93,675 | April 14, 2023 | ||||||
| May 3, 2023 | $ | 0.6630 | June 30, 2023 | $ | 93,700 | July 14, 2023 | ||||||
| August 9, 2023 | $ | 0.6696 | September 29, 2023 | $ | 94,635 | October 13, 2023 | ||||||
| Preferred Stock | ||||||||||||
| February 22, 2023 | $ | 0.3750 | March 15, 2023 | $ | 2,588 | March 31, 2023 | ||||||
| May 3, 2023 | $ | 0.3750 | June 15, 2023 | $ | 2,588 | June 30, 2023 | ||||||
| August 9, 2023 | $ | 0.3750 | September 15, 2023 | $ | 2,587 | September 29, 2023 | ||||||
The common stock dividend declared on August 9, 2023 is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of September 30, 2023.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are typically insured against such claims. The Company had fully accrued a $5.7 million contingent liability related to debt owed by a tenant in 2018, however no payments were made by the Company. Therefore, upon the debt's maturity on March 15, 2022, the Company reversed the $5.7 million accrual, which is reflected as other income in the consolidated statement of operations.
As of September 30, 2023, there were no outstanding claims or litigation against the Company that are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements. As of September 30, 2023, no accruals have been made.
Purchase and Capital Improvement Commitments
As of September 30, 2023, the Company had commitments totaling $138.1 million, of which $12.2 million relates to future acquisitions and the remainder relates to improvements on properties the Company already owns. Acquisition commitments contain standard cancellation clauses contingent on the results of due diligence. $20.6 million of the Company’s commitments are expected to be funded by the end of 2023, with the remainder to be funded by the end of 2025.
NOTE 7. DERIVATIVE AND HEDGING ACTIVITIES
The Company may use 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 either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in AOCIL and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash activities in the consolidated statements of cash flows. Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates this risk through monitoring the creditworthiness of counterparties, which includes review of their debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.
In the third quarter of 2019, the Company terminated interest rate swaps which had been entered into in December 2018 and accelerated the reclassification of a loss of $12.5 million from AOCIL to termination of interest rate swaps as a result of a portion of the hedged forecasted transactions becoming probable not to occur. There were no events of default related to the interest rate swaps prior to their termination. Given that a portion of the hedged transactions remained probable to occur, $12.3 million of the loss was deferred in other comprehensive loss and is being amortized over the remaining initial term of the interest rate swaps, which ends January 31, 2024. As of September 30, 2023, the unamortized portion of loss in AOCIL related to terminated interest rate swaps was $0.9 million.
During the third quarter of 2022 and the first quarter of 2023, the Company entered into new interest rate swaps, which were designated as cash flow hedge instruments. Interest rate swaps that are in an asset position are recorded in deferred costs and other assets, net on the consolidated balance sheet, while interest rate swaps that are in a liability position are recorded in accounts payable, accrued expenses and other liabilities on the consolidated balance sheet. These instruments swap 1-month SOFR for a fixed payment. The following table summarizes the key terms and fair value of these instruments (in thousands):
| Interest Rate Swap | Fixed Interest | Fair Value of Asset | ||||||||||||
| Notional Amount | Rate | Effective Date | Maturity Date | September 30, 2023 | ||||||||||
| $ | 300,000 | 2.501 | % | September 15, 2022 | August 22, 2027 | $ | 20,340 | |||||||
| $ | 200,000 | 2.507 | % | September 15, 2022 | August 22, 2027 | 13,478 | ||||||||
| $ | 300,000 | 2.636 | % | September 15, 2022 | August 22, 2025 | 12,403 | ||||||||
| $ | 300,000 | 3.769 | % | June 15, 2023 | June 15, 2025 | 6,090 | ||||||||
| $ | 200,000 | 3.590 | % | December 15, 2023 | June 15, 2025 | 3,921 | ||||||||
| $ | 56,232 | |||||||||||||
The following table provides information about the amounts recorded in AOCIL, as well as any amounts reclassified to operations (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cash flow hedge derivatives | $ | 14,229 | $ | 39,606 | $ | 34,852 | $ | 39,606 | ||||||||
| Amount of gain reclassified from AOCIL to interest | (6,671 | ) | (104 | ) | (15,750 | ) | (104 | ) | ||||||||
| Amount of loss reclassified from AOCIL to interest | 702 | 702 | 2,106 | 2,106 | ||||||||||||
| Total | $ | 8,260 | $ | 40,204 | $ | 21,208 | $ | 41,608 | ||||||||
During the next 12 months, we estimate that approximately $0.9 million will be reclassified as an increase to interest expense related to terminated hedges of existing floating-rate debt and $28.8 million will be reclassified as a decrease to interest expense related to cash flow hedge derivatives.
NOTE 8. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The Company’s 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. The Company’s financial assets that were accounted for at fair value on a recurring basis were as follows (in thousands):
| Fair Value Hierarchy Level | ||||||||||||||||
| Description | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Derivatives held at September 30, 2023 | ||||||||||||||||
| Interest rate swap assets | $ | 56,232 | $ | — | $ | 56,232 | $ | — | ||||||||
| Derivatives held at December 31, 2022 | ||||||||||||||||
| Interest rate swap assets | $ | 37,128 | $ | — | $ | 37,128 | $ | — | ||||||||
Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. Real estate assets and their related intangible assets are evaluated for impairment based on certain indicators including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. The fair values of real estate and intangible assets were estimated using the following information, depending on availability, in order of preference: signed purchase and sale agreements (“PSA”) or letters of intent (“LOI”); broker opinions of value (“BOV”); recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate. The Company’s assets that were accounted for at fair value on a nonrecurring basis as of their respective measurement dates were as follows (in thousands):
| Fair Value Hierarchy Level | ||||||||||||||||
| Description | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets held at September 30, 2023 | ||||||||||||||||
| Impaired at March 31, 2023 | $ | 2,526 | $ | — | $ | — | $ | 2,526 | ||||||||
| Impaired at June 30, 2023 | $ | 5,826 | $ | — | $ | — | $ | 5,826 | ||||||||
| Impaired at September 30, 2023 | $ | 29,932 | $ | — | $ | — | $ | 29,932 | ||||||||
| Assets held at December 31, 2022 | ||||||||||||||||
| Impaired at June 30, 2022 | $ | 4,700 | $ | — | $ | — | $ | 4,700 | ||||||||
| Impaired at September 30, 2022 | $ | 4,094 | $ | — | $ | — | $ | 4,094 | ||||||||
| Impaired at December 31, 2022 | $ | 29,636 | $ | — | $ | — | $ | 29,636 | ||||||||
As of September 30, 2023, the Company held 15 properties that were impaired during 2023. As of December 31, 2022, the Company held 18 properties that were impaired during 2022. The Company estimated property fair value using price per square foot from unobservable inputs. The unobservable inputs for these properties are as follows:
| Unobservable Input | Asset Type | Property Count | Price Per Square Foot Range | Weighted Average Price Per Square Foot | Square Footage | |||||||||||||
| September 30, 2023 | ||||||||||||||||||
| PSA, LOI or BOV | Retail | 14 | $37.74 - $782.66 | $ | 208.91 | 175,779 | ||||||||||||
| Comparable Properties | Medical | 1 | $91.23 - $107.52 | $ | 100.33 | 15,804 | ||||||||||||
| December 31, 2022 | ||||||||||||||||||
| PSA, LOI or BOV | Retail | 12 | $30.00 - $384.88 | $ | 93.60 | 223,225 | ||||||||||||
| PSA, LOI or BOV | Data Center | 1 | $24.94 | $ | 24.94 | 188,475 | ||||||||||||
| Comparable Properties | Retail | 3 | $26.05 - $197.15 | $ | 56.36 | 100,195 | ||||||||||||
| Comparable Properties | Office | 2 | $71.69 - $135.00 | $ | 98.97 | 73,000 | ||||||||||||
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 consolidated balance sheets. In addition, 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 measurement date. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities. The estimated fair values of these financial instruments have been derived either based on (i) market quotes for identical or similar instruments in markets or (ii) discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. The estimated fair values of the Senior Unsecured Notes are classified as Level 1 of the fair value of the hierarchy, and the remaining estimates are classified as Level 2. The following table discloses fair value information for these financial instruments (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
| Loans receivable, net(1) | $ | 52,949 | $ | 51,747 | $ | 23,023 | $ | 23,462 | ||||||||
| 2019 Credit Facility | — | — | 55,500 | 55,502 | ||||||||||||
| Term loans, net (2) | 1,090,198 | 1,100,705 | 792,309 | 802,363 | ||||||||||||
| Senior Unsecured Notes, net (2) | 2,725,505 | 2,339,854 | 2,722,514 | 2,310,547 | ||||||||||||
| Mortgages payable, net (2) | 4,545 | 4,229 | 4,986 | 4,685 | ||||||||||||
(1) The carrying value of the loans receivable are net of an allowance for credit losses.
(2) The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.
NOTE 9. INCENTIVE AWARD PLAN
Amended Incentive Award Plan
Pursuant to the Amended Incentive Award Plan, restricted share awards and market-based awards are granted to certain of the Company’s officers, directors and other employees. The vesting of these awards results 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 shares of common stock valued at $1.5 million during the nine months ended September 30, 2023 solely to pay the associated statutory tax withholdings.
Restricted Share Awards
During the nine months ended September 30, 2023, the Company granted 139 thousand restricted shares under the Amended Incentive Award Plan to certain directors and employees and recorded $5.7 million in deferred compensation associated with these grants. Deferred compensation for restricted shares will be recognized in expense over the requisite service period, which is generally one to three years. As of September 30, 2023, there were approximately 207 thousand unvested restricted shares outstanding.
Market-Based Awards
During the nine months ended September 30, 2023, the Board of Directors, or committee thereof, approved target grants of 189 thousand market-based awards to executive officers of the Company. The performance period of these grants is generally three years. Potential shares of the Corporation’s common stock that each participant is eligible to receive is based on the initial target number of shares granted, multiplied by a percentage range between 0% and 375%. Grant date fair value of the market-based awards was calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the time horizons matching the performance periods. Significant inputs for the calculation for the grants approved in the nine months ended September 30, 2023 were expected volatility of the Company of 36.3% and expected volatility of the Company's peers, ranging from 26.0% to 52.7%, with an average volatility of 34.0% and a risk-free interest rate of 3.72%. Expected volatility was determined using an equal weighting of implied volatility and historical volatility. The fair value of the market-based award per share of these grants was $74.30 as of the grant date.
Approximately $4.9 million and $2.5 million in dividend rights have been accrued as of September 30, 2023 and December 31, 2022, respectively. For outstanding non-vested awards at September 30, 2023, 0.8 million shares would have been released based on the Corporation’s TSR relative to the specified peer groups through that date.
Stock-based Compensation Expense
Stock-based compensation is recognized on a straight-line basis over the minimum required service period of each award described above. The Company recorded stock-based compensation expense of $4.9 million and $15.1 million for the three and nine months ended September 30, 2023, respectively, and $4.4 million and $12.8 million for the three and nine months ended September 30, 2022, respectively. These amounts are included in general and administrative expenses in the consolidated statements of operations.
The following is a summary of remaining unamortized stock-based compensation expense (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Restricted share awards | $ | 5,700 | $ | 4,727 | ||||
| Market-based awards | 18,625 | 15,165 | ||||||
| Total unamortized stock-based compensation expense | $ | 24,325 | $ | 19,892 | ||||
NOTE 10. INCOME PER SHARE
The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share computed using the two-class method (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | 38,468 | $ | 76,640 | $ | 188,822 | $ | 215,436 | ||||||||
| Less: dividends paid to preferred stockholders | (2,587 | ) | (2,587 | ) | (7,763 | ) | (7,763 | ) | ||||||||
| Less: dividends and income attributable to unvested restricted stock | (138 | ) | (142 | ) | (412 | ) | (412 | ) | ||||||||
| Net income attributable to common stockholders used in basic and diluted income per share | $ | 35,743 | $ | 73,911 | $ | 180,647 | $ | 207,261 | ||||||||
| Weighted average shares of common stock outstanding | 141,331,332 | 136,530,530 | 141,317,480 | 133,058,487 | ||||||||||||
| Less: unvested weighted average shares of restricted stock | (206,931 | ) | (216,161 | ) | (222,573 | ) | (223,277 | ) | ||||||||
| Basic weighted average shares of common stock outstanding | 141,124,401 | 136,314,369 | 141,094,907 | 132,835,210 | ||||||||||||
| Plus: unvested market-based awards | 25,464 | — | 8,488 | 130,087 | ||||||||||||
| Diluted weighted average shares of common stock outstanding (1) | 141,149,865 | 136,314,369 | 141,103,395 | 132,965,297 | ||||||||||||
| Net income per share attributable to common stockholders - basic | $ | 0.25 | $ | 0.54 | $ | 1.28 | $ | 1.56 | ||||||||
| Net income per share attributable to common stockholders - diluted | $ | 0.25 | $ | 0.54 | $ | 1.28 | $ | 1.56 | ||||||||
| Potentially dilutive shares of common stock related to: | ||||||||||||||||
| Unvested restricted share awards | 42,806 | 51,338 | 61,354 | 65,060 | ||||||||||||
(1) Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.
NOTE 11. SUBSEQUENT EVENTS
On October 29, 2023, Spirit entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Realty Income Corporation, a Maryland corporation (“Realty Income”), and Saints MD Subsidiary, Inc., a Maryland corporation and wholly owned subsidiary of Realty Income (“Merger Sub”). Pursuant to the terms and conditions of the Merger Agreement, upon the closing, Spirit will be merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Merger”).
Pursuant to the terms and subject to the conditions of the Merger Agreement, at the date and time the Merger becomes effective, (i) each share of Spirit common stock, par value of $0.05 per share (the “Spirit Common Stock”) will automatically be converted into 0.762 of a newly issued share of common stock (the “Exchange Ratio”), par value of $0.01 per share, of Realty Income (the “Realty Income Common Stock”), and cash in lieu of fractional shares, and (ii) each outstanding share of Spirit’s 6.000% Series A Cumulative Redeemable Preferred Stock, par value of $0.01 per share (the “Spirit Series A Preferred Stock”), will be converted into the right to receive one share of newly issued Realty Income 6.000% Series A Cumulative Redeemable Preferred Stock, having substantially the same terms as the Spirit Series A Preferred Stock.
During the period between the signing of the Merger Agreement and the consummation of the Merger, Spirit is permitted to declare and pay regular quarterly cash dividends with respect to shares of Spirit Common Stock and Spirit Series A Preferred Stock.
The Merger Agreement contains customary representations, warranties and covenants by each party. The Merger is subject to certain conditions which are set forth in the Merger Agreement, including the approval of Spirit’s shareholders. The boards of directors of the Company and Realty Income have approved the Merger Agreement. The Merger is expected to close during the first quarter of 2024.
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements and notes thereto present the unaudited pro forma condensed combined balance sheet as of September 30, 2023 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and the year ended December 31, 2022. The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”, in order to give effect to the Pro Forma Transactions (as defined and described below) and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.
On October 29, 2023, Realty Income Corporation (“Realty Income”) entered into an Agreement and Plan of Merger (as amended from time to time, the “Merger Agreement”) with Saints MD Subsidiary, Inc., (“Merger Sub”) a Maryland corporation and direct wholly owned subsidiary of Realty Income, and Spirit Realty Capital, Inc. (“Spirit”). Pursuant to the terms and conditions of the Merger Agreement, upon the closing, Spirit will be merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Merger”). At the time the Merger becomes effective (the “Merger Effective Time”), (i) each outstanding share of Spirit common stock, par value $0.05 per share will be converted into 0.762 (the “Exchange Ratio”) shares of Realty Income common stock, par value $0.01 per share, and (ii) each outstanding share of Spirit Series A preferred stock, par value $0.01 per share will be converted into one share of newly created Realty Income Series A preferred stock, par value $0.01 per share having substantially the same terms as the Spirit Series A preferred stock. Holders of shares of Spirit common stock and Spirit Series A preferred stock (other than those held by Spirit, Realty Income or their respective affiliates) will receive cash in lieu of fractional shares. At the Merger Effective Time, each award of outstanding restricted Spirit common stock (a “Spirit Restricted Stock Award”), will be cancelled and automatically converted into Realty Income common stock using the Exchange Ratio as a multiplier and cash consideration in respect of any fractional shares, and each outstanding vested or unvested Spirit performance share award (a “Spirit Performance Share Award”) whether or not then vested, will be cancelled and automatically converted into Realty Income common stock in accordance with the Merger Agreement based on the greater of target level of achievement of the applicable performance goals and actual level of achievement of the applicable performance goals as of immediately prior to the Merger Effective Time, and cash consideration in lieu of any fractional share of Realty Income common stock, and the amount of any accrued and unpaid cash dividend equivalents corresponding to each such Spirit Performance Share Award.
The following unaudited pro forma condensed combined financial statements have been prepared by applying the acquisition method of accounting with Realty Income treated as the acquiror. The unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Realty Income and historical consolidated financial statements of Spirit as adjusted to give effect to the following (collectively referred to as the “Pro Forma Transactions”):
| · | The Merger; |
| · | Merger transaction costs specifically related to the Merger; and |
| · | Adjustments to reflect compensation expense as a result of the acceleration of certain pre-existing Spirit stock-based compensation awards in connection with the Merger. |
The unaudited pro forma condensed combined balance sheet as of September 30, 2023 gives effect to the Pro Forma Transactions as if they had occurred on September 30, 2023. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023, and the year ended December 31, 2022, give effect to the Pro Forma Transactions as if they had occurred on January 1, 2022.
These unaudited pro forma condensed combined financial statements are prepared for informational purposes only and are based on assumptions and estimates considered appropriate by Realty Income’s management. The unaudited pro forma adjustments represent Realty Income’s management’s estimates based on information available as of the date of the unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and additional analyses are performed. However, Realty Income’s management believes that the assumptions provide a reasonable basis for presenting the significant effects that are directly attributable to the Pro Forma Transactions, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to be indicative of what Realty Income’s financial condition or results of operations actually would have been if the Pro Forma Transactions had been consummated as of the dates indicated, nor do they purport to represent Realty Income’s financial position or results of operations for future periods.
Additionally, these unaudited pro forma condensed combined financial statements do not include any adjustments not otherwise described herein, including such adjustments associated with: (1) Realty Income or Spirit’s real estate acquisitions that have closed or may close after September 30, 2023 or the related financing of those acquisitions, (2) certain Realty Income or Spirit rental rate increases that occurred after September 30, 2023, (3) potential synergies that may be achieved following the Merger, including potential overall savings in general and administrative expense, or any strategies that Realty Income’s management may consider in order to continue to efficiently manage Realty Income’s operations, (4) any one-time integration and other costs (including any cash severance payments) related to the Merger that may be incurred following the Merger closing, including those that may be necessary to achieve the potential synergies, since the extent of such costs is not reasonably certain, (5) any debt or equity issuances, repayments, or redemptions, by Realty Income or Spirit, which may occur subsequent to September 30, 2023, but prior to the Merger closing, including Spirit’s contemplated additional $200 million term loan draw in December 2023, and (6) any hedge accounting assessment and redesignation related to the existing interest rate swaps of Spirit.
2
REALTY INCOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2023
(in thousands)
| Realty Income Historical | Spirit Historical, As Reclassified (Note 3) |
Pro Forma Adjustments (Note 4) | Item in Note 4 |
Pro Forma Combined | ||||||||||||||
| ASSETS | ||||||||||||||||||
| Real estate held for investment, at cost: | ||||||||||||||||||
| Land | $ | 14,408,324 | $ | 1,808,364 | $ | 49,088 | [1] | $ | 16,265,776 | |||||||||
| Buildings and improvements | 33,606,951 | 7,015,086 | (948,871 | ) | [1] | 39,673,166 | ||||||||||||
| Total real estate held for investment, at cost | 48,015,275 | 8,823,450 | (899,783 | ) | 55,938,942 | |||||||||||||
| Less accumulated depreciation and amortization | (5,781,056 | ) | (1,354,807 | ) | 1,354,807 | [2] | (5,781,056 | ) | ||||||||||
| Real estate held for investment, net | 42,234,219 | 7,468,643 | 455,024 | 50,157,886 | ||||||||||||||
| Real estate and lease intangibles held for sale, net | 19,927 | 61,545 | 31,255 | [3] | 112,727 | |||||||||||||
| Cash and cash equivalents | 344,129 | 134,166 | (156,656 | ) | [4] | 321,639 | ||||||||||||
| Accounts receivable, net | 678,441 | 199,826 | (185,245 | ) | [5] | 693,022 | ||||||||||||
| Lease intangible assets, net | 5,089,293 | 389,100 | 844,630 | [6] | 6,323,023 | |||||||||||||
| Goodwill | 3,731,478 | 225,600 | 245,485 | [7] | 4,202,563 | |||||||||||||
| Other assets, net | 3,239,433 | 171,328 | (11,785 | ) | [8] | 3,398,976 | ||||||||||||
| Total assets | $ | 55,336,920 | $ | 8,650,208 | $ | 1,222,708 | $ | 65,209,836 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||
| Distributions payable | $ | 187,288 | $ | 99,571 | $ | (99,571 | ) | [4] | $ | 187,288 | ||||||||
| Accounts payable and accrued expenses | 660,366 | 69,045 | 60,000 | [9] | 789,411 | |||||||||||||
| Lease intangible liabilities, net | 1,426,264 | 106,814 | 284,677 | [10] | 1,817,755 | |||||||||||||
| Other liabilities | 786,437 | 61,737 | - | 848,174 | ||||||||||||||
| Line of credit payable and commercial paper | 858,260 | - | - | 858,260 | ||||||||||||||
| Term loan, net | 1,287,995 | 1,090,198 | 10,507 | [11] | 2,388,700 | |||||||||||||
| Mortgages payable, net | 824,240 | 4,545 | (316 | ) | [11] | 828,469 | ||||||||||||
| Notes payable, net | 17,482,652 | 2,725,505 | (385,651 | ) | [11] | 19,822,506 | ||||||||||||
| Total liabilities | 23,513,502 | 4,157,415 | (130,354 | ) | 27,540,563 | |||||||||||||
| Commitments and contingencies | ||||||||||||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||||||||||||
| Preferred stock and paid-in capital | - | 166,177 | (6,166 | ) | [12] | 160,011 | ||||||||||||
| Common stock and paid-in capital | 38,031,829 | 7,307,795 | (1,543,717 | ) | [12] | 43,795,907 | ||||||||||||
| Distributions in excess of net income | (6,416,534 | ) | (3,036,475 | ) | 2,958,241 | [12] | (6,494,768 | ) | ||||||||||
| Accumulated other comprehensive income | 41,849 | 55,296 | (55,296 | ) | [12] | 41,849 | ||||||||||||
| Total stockholders’ equity | 31,657,144 | 4,492,793 | 1,353,062 | 37,502,999 | ||||||||||||||
| Noncontrolling interests | 166,274 | - | - | 166,274 | ||||||||||||||
| Total equity | 31,823,418 | 4,492,793 | 1,353,062 | 37,669,273 | ||||||||||||||
| Total liabilities and equity | $ | 55,336,920 | $ | 8,650,208 | $ | 1,222,708 | $ | 65,209,836 | ||||||||||
3
REALTY INCOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023
(in thousands, except per share data)
| Realty Income Historical | Spirit Historical, As Reclassified (Note 3) |
Pro Forma Adjustments (Note 4) | Item in Note 4 | Pro Forma Combined | ||||||||||||||
| REVENUE | ||||||||||||||||||
| Rental (including reimbursable) | $ | 2,929,440 | $ | 561,765 | $ | 24,244 | [13] | $ | 3,515,449 | |||||||||
| Other | 73,268 | 9,200 | 1,212 | [14] | 83,680 | |||||||||||||
| Total revenue | 3,002,708 | 570,965 | 25,456 | 3,599,129 | ||||||||||||||
| EXPENSES | ||||||||||||||||||
| Depreciation and amortization | 1,419,321 | 236,527 | 15,180 | [15] | 1,671,028 | |||||||||||||
| Interest | 522,110 | 104,993 | 63,066 | [16] | 690,169 | |||||||||||||
| Property (including reimbursable) | 235,081 | 24,077 | 72 | [17] | 259,230 | |||||||||||||
| General and administrative | 106,521 | 46,190 | - | 152,711 | ||||||||||||||
| Provisions for impairment | 59,801 | 36,052 | - | 95,853 | ||||||||||||||
| Merger and integration-related costs | 4,532 | - | - | 4,532 | ||||||||||||||
| Total expenses | 2,347,366 | 447,839 | 78,318 | 2,873,523 | ||||||||||||||
| Gain on sales of real estate | 19,675 | 66,450 | - | 86,125 | ||||||||||||||
| Foreign currency and derivative gain, net | 4,957 | - | - | 4,957 | ||||||||||||||
| Equity in income and impairment of investment in unconsolidated entities | 411 | - | - | 411 | ||||||||||||||
| Other income, net | 12,985 | - | - | 12,985 | ||||||||||||||
| Income before income taxes | 693,370 | 189,576 | (52,862 | ) | 830,084 | |||||||||||||
| Income taxes | (36,218 | ) | (754 | ) | - | (36,972 | ) | |||||||||||
| Net income | 657,152 | 188,822 | (52,862 | ) | 793,112 | |||||||||||||
| Net income attributable to noncontrolling interests | (3,248 | ) | - | - | (3,248 | ) | ||||||||||||
| Dividends paid to preferred stockholders | - | (7,763 | ) | - | (7,763 | ) | ||||||||||||
| Net income available to common stockholders | $ | 653,904 | $ | 181,059 | $ | (52,862 | ) | $ | 782,101 | |||||||||
| Amounts available to common stockholders per common share: | (Note 5) | |||||||||||||||||
| Net income, basic and diluted | $ | 0.96 | $ | 1.28 | $ | 0.99 | ||||||||||||
| Weighted average common shares outstanding: | (Note 5) | |||||||||||||||||
| Basic | 681,419 | 141,095 | 789,725 | |||||||||||||||
| Diluted | 682,129 | 141,103 | 790,435 | |||||||||||||||
4
REALTY INCOME CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2022
(in thousands, except per share data)
| Realty Income Historical |
Spirit Historical, (Note 3) |
Pro Forma (Note 4) | Item in Note 4 | Pro Forma Combined | ||||||||||||||
| REVENUE | ||||||||||||||||||
| Rental (including reimbursable) | $ | 3,299,657 | $ | 703,029 | $ | 36,775 | [13] | $ | 4,039,461 | |||||||||
| Other | 44,024 | 6,600 | 1,617 | [14] | 52,241 | |||||||||||||
| Total revenue | 3,343,681 | 709,629 | 38,392 | 4,091,702 | ||||||||||||||
| EXPENSES | ||||||||||||||||||
| Depreciation and amortization | 1,670,389 | 292,985 | 42,623 | [15] | 2,005,997 | |||||||||||||
| Interest | 465,223 | 117,622 | 86,643 | [16] | 669,488 | |||||||||||||
| Property (including reimbursable) | 226,330 | 29,837 | 96 | [17] | 256,263 | |||||||||||||
| General and administrative | 138,459 | 62,023 | - | 200,482 | ||||||||||||||
| Provisions for impairment | 25,860 | 37,156 | - | 63,016 | ||||||||||||||
| Merger and integration-related costs | 13,897 | - | 78,234 | [18] | 92,131 | |||||||||||||
| Total expenses | 2,540,158 | 539,623 | 207,596 | 3,287,377 | ||||||||||||||
| Gain on sales of real estate | 102,957 | 110,900 | - | 213,857 | ||||||||||||||
| Foreign currency and derivative (loss), net | (13,311 | ) | - | - | (13,311 | ) | ||||||||||||
| Gain (loss) on extinguishment of debt | 367 | (172 | ) | - | 195 | |||||||||||||
| Equity in income and impairment of investment in unconsolidated entities | (6,448 | ) | - | - | (6,448 | ) | ||||||||||||
| Other income, net | 30,511 | 5,679 | - | 36,190 | ||||||||||||||
| Income before income taxes | 917,599 | 286,413 | (169,204 | ) | 1,034,808 | |||||||||||||
| Income taxes | (45,183 | ) | (897 | ) | - | (46,080 | ) | |||||||||||
| Net income | 872,416 | 285,516 | (169,204 | ) | 988,728 | |||||||||||||
| Net income attributable to noncontrolling interests | (3,008 | ) | - | - | (3,008 | ) | ||||||||||||
| Dividends paid to preferred stockholders | - | (10,350 | ) | - | (10,350 | ) | ||||||||||||
| Net income available to common stockholders | $ | 869,408 | $ | 275,166 | $ | (169,204 | ) | $ | 975,370 | |||||||||
| Amounts available to common stockholders per common share: | (Note 5) | |||||||||||||||||
| Net income, basic and diluted | $ | 1.42 | $ | 2.04 | $ | 1.35 | ||||||||||||
| Weighted average common shares outstanding: | (Note 5) | |||||||||||||||||
| Basic | 611,766 | 134,548 | 720,072 | |||||||||||||||
| Diluted | 612,181 | 134,646 | 720,487 | |||||||||||||||
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The Realty Income and Spirit historical financial information has been derived from, in the case of Realty Income, its consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, and Annual Report on Form 10-K for the year ended December 31, 2022, and, in the case of Spirit, its consolidated financial statements included as Exhibits 99.1 and 99.2 to Realty Income’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on November 27, 2023 (the “Form 8-K”) of which this Exhibit 99.3 is a part. Certain historical amounts of Spirit have been reclassified to conform to Realty Income’s financial statement presentation, as discussed further in Note 3. The unaudited pro forma condensed combined financial statements should be read in conjunction with Realty Income’s and Spirit’s consolidated financial statements and the notes thereto. The unaudited pro forma condensed combined balance sheet gives effect to the Pro Forma Transactions as if they had been completed on September 30, 2023. The unaudited pro forma condensed combined statements of operations give effect to the Pro Forma Transactions as if they had been completed on January 1, 2022.
The historical financial statements of Realty Income and Spirit have been adjusted in the unaudited pro forma condensed combined financial statements to give pro forma effect to the accounting for the Pro Forma Transactions under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) (“Pro Forma Transactions Adjustments”). The unaudited pro forma condensed combined financial statements and related notes were prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification 805, Business Combinations (“ASC 805”), with Realty Income treated as the acquiror of Spirit. ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. For purposes of the unaudited pro forma condensed combined financial statements, the estimated preliminary purchase consideration in the Merger has been allocated to the assets acquired and liabilities assumed of Spirit based upon Realty Income management’s preliminary estimate of their fair values as of September 30, 2023. The allocations of the purchase price reflected in these unaudited pro forma condensed combined financial statements have not been finalized and are based upon the best available information at the current time. A final determination of the fair values of the assets and liabilities, which cannot be made prior to the completion of the Merger and which is anticipated to occur during the first quarter of 2024, will be based on the actual valuations of the tangible and intangible assets and liabilities that exist as of the date of completion of the Merger. The completion of the final valuations, the allocations of the purchase price, the impact of ongoing integration activities, the timing of the completion of the Merger and other changes in tangible and intangible assets and liabilities that occur prior to the completion of the Merger could cause material differences in the information presented.
The unaudited pro forma condensed combined financial statements and related notes herein present unaudited pro forma condensed combined financial condition and results of operations of Realty Income, after giving pro forma effect to the Pro Forma Transactions, which include the issuance of Realty Income common stock to Spirit stockholders, the assumption of Spirit’s outstanding debt, the conversion of each outstanding Spirit Series A preferred stock outstanding into newly issued shares of Realty Income Series A preferred stock, and related transactions.
The Merger, the Pro Forma Transactions and the related adjustments are described in these accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not reflect the impact of the potential incremental financing that may be obtained prior to the close of the Merger, nor incorporate the effectiveness of the application of any new hedge accounting redesignation related to the interest rate swaps currently held by Spirit and anticipated of being undertaken by Realty Income as these arrangements are still being evaluated as of the date of this filing. In the opinion of Realty Income’s management, all material adjustments have been made that are necessary to present fairly, in accordance with Article 11 of Regulation S-X of the SEC, the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to be indicative of the combined company’s financial position or results of operations of the combined company that would have occurred if the Pro Forma Transactions had been completed on the dates indicated, nor are they indicative of the combined company’s financial position or results of operations that may be expected for any future period or date. In addition, future results may vary significantly from those reflected in the unaudited pro forma condensed combined financial statements due to factors discussed in the “Supplemental Risk Factors” in Exhibit 99.4 to this Form 8-K.
6
Note 2 – Significant Accounting Policies
The accounting policies used in the preparation of these unaudited pro forma condensed combined financial statements are those set out in Realty Income’s audited consolidated financial statements as of and for the year ended December 31, 2022, and Realty Income’s unaudited consolidated financial statements as of and for the nine months ended September 30, 2023. During the preparation of this unaudited pro forma condensed combined financial information, management performed a preliminary analysis of Spirit’s financial information to identify differences in accounting policies as compared to those of Realty Income. With the information currently available, Realty Income’s management has determined that there were no significant accounting policy differences between Realty Income and Spirit and, therefore, no adjustments were made to conform Spirit’s financial statements to the accounting policies used by Realty Income in the preparation of the unaudited pro forma condensed combined financial statements. This conclusion is subject to change as further assessment will be performed and finalized for purchase accounting.
As part of the application of ASC 805, Realty Income will continue to conduct a more detailed review of Spirit’s accounting policies in an effort to determine if differences in accounting policies require further reclassification or adjustment of Spirit’s results of operations or reclassification or adjustment of assets or liabilities to conform to Realty Income’s accounting policies and classifications. Therefore, Realty Income may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information. In certain cases, the information necessary to evaluate the differences in accounting policies and the impacts thereof may not be available until after the Merger is completed.
Note 3 – Reclassification Adjustments
Spirit’s historical financial statement line items include the reclassification of certain historical balances to conform to the post-combination Realty Income presentation of these unaudited pro forma condensed combined financial statements, as described below. These reclassifications have no effect on previously reported total assets, total liabilities, stockholders’ equity or net income available to common stockholders of Spirit.
Balance Sheet
| ● | The components of Spirit’s September 30, 2023 Land and improvements on Spirit’s consolidated balance sheet have been reclassified to Realty Income’s (i) Land and (ii) Building and improvements, as follows (in thousands): |
| September 30, 2023 | ||||
| Land and improvements: | $ | 2,742,072 | ||
| Land (as presented) | 1,808,364 | |||
| Building and improvements | 933,708 | |||
| ● | Spirit’s September 30, 2023 balance of $1.4 billion previously classified as Accumulated depreciation on Spirit's consolidated balance sheet, has been reclassified to Realty Income’s Accumulated depreciation and amortization. |
| ● | Spirit’s September 30, 2023 balance of $61.5 million previously classified as Real estate assets held for sale, net on Spirit’s consolidated balance sheet, has been reclassified to Realty Income’s Real estate and lease intangibles held for sale, net. |
| ● | Spirit’s September 30, 2023 balances for the accounts previously classified as Loan receivables, net, components of Deferred costs and other assets, net (as shown in table below) and Real estate assets under direct financing leases, net have been reclassified to Realty Income’s Other assets, net, as follows (in thousands): |
7
| September 30, 2023 | ||||
| Loans receivable, net | $ | 52,949 | ||
| Portion of deferred costs and other assets, net | 110,975 | |||
| Real estate assets under direct financing leases, net | 7,404 | |||
| Other assets, net (as presented) | $ | 171,328 | ||
| ● | $199.8 million of Spirit’s September 30, 2023 receivables and straight-line rent previously classified by Spirit as Deferred costs and other assets, net have been reclassified from Deferred costs and other assets, net to Realty Income’s Account receivable, net. |
| ● | Spirit’s September 30, 2023 balance of $2.7 billion previously classified as Senior unsecured notes, net on Spirit’s consolidated balance sheet, has been reclassified to Realty Income’s Notes payable, net. |
| ● | The components of Spirit’s September 30, 2023 Accounts payable, accrued expenses and other liabilities on Spirit’s consolidated balance sheet, have been reclassified to Realty Income’s (i) Distributions payable, (ii) Accounts payable and accrued expenses, and (iii) Other liabilities, as follows (in thousands): |
| September 30, 2023 | ||||
| Accounts payable, accrued expenses and other liabilities: | $ | 230,353 | ||
| Distributions payable (as presented) | 99,571 | |||
| Accounts payable and accrued expenses (as presented) | 69,045 | |||
| Other liabilities (as presented) | 61,737 | |||
| ● | Spirit’s September 30, 2023 balance of $3.0 billion previously classified as Accumulated deficit has been reclassified to Realty Income’s Distributions in excess of net income. |
| ● | Spirit’s September 30, 2023 balances previously classified as Common stock and Capital in excess of common stock par value have been reclassified to Realty Income’s Common stock and paid-in capital, as follows (in thousands): |
| September 30, 2023 | ||||
| Common stock | $ | 7,067 | ||
| Capital in excess of common stock par value | 7,300,728 | |||
| Common stock and paid-in capital (as presented) | $ | 7,307,795 | ||
Income Statement
| ● | Spirit’s balances for Interest income on loans receivable, Earned income from direct financing leases and Other operating income previously classified as separate components of Spirit’s Revenues, have been reclassified to Realty Income’s Other revenue, as follows (in thousands): |
| For the nine months ended September 30, 2023 | For the year ended December 31, 2022 | |||||||
| Interest income on loans receivable | $ | 3,919 | $ | 1,884 | ||||
| Earned income from direct financing leases | 393 | 525 | ||||||
| Other operating income | 4,888 | 4,191 | ||||||
| Other revenue (as presented) | $ | 9,200 | $ | 6,600 | ||||
| ● | Spirit’s balances of Deal pursuit costs of $1.2 million and $4.7 million for the nine months ended September 30, 2023, and year ended December 31, 2022, respectively, have been reclassified to Realty Income’s General and administrative. |
| ● | Spirit’s balances for Gain on disposition of assets of $66.5 million and $110.9 million for the nine months ended September 30, 2023, and year ended December 31, 2022, respectively, have been reclassified to Realty Income’s Gain on sales of real estate. |
8
Note 4 – Preliminary Purchase Price Allocation and Pro Forma Transactions Adjustments
Estimated Preliminary Purchase Price
The unaudited pro forma condensed combined financial statements reflect the preliminary allocation of the purchase consideration to Spirit’s identifiable net assets acquired. The preliminary allocation of purchase consideration in these unaudited pro forma condensed combined financial statements is based upon an estimated preliminary purchase price of approximately $5.9 billion. The calculation of the estimated preliminary purchase price related to the Merger is as follows (in thousands, except share and per share data):
| Amount | ||||
| Shares of Spirit’s common stock to be exchanged (a) | 141,331,218 | |||
| Exchange Ratio | 0.762 | |||
| Shares of Realty Income common stock issued | 107,694,388 | |||
| Closing price of Realty Income common stock on November 20, 2023 | $ | 53.22 | ||
| Estimated fair value of Realty Income common stock to be issued to the former holders of Spirit common stock | $ | 5,731,495 | ||
| Shares of Realty Income Series A preferred stock issued in exchange for Spirit Series A preferred stock (b) | 6,900,000 | |||
| Closing price of Spirit Series A preferred stock on November 20, 2023 (b) | $ | 23.19 | ||
| Estimated fair value of Realty Income Series A preferred stock to be issued to the former holders of Spirit Series A preferred stock | $ | 160,011 | ||
| Estimated fair value of Spirit’s Performance Share Awards attributable to pre-combination services (c) | $ | 20,180 | ||
| Cash payment for accrued and unpaid dividend equivalents to Performance Share Award holders to be settled by Realty Income (d) | $ | 4,021 | ||
| Less: estimated fair value of Spirit Restricted Stock Awards attributable to post-combination costs (e) | $ | (5,831 | ) | |
| Total estimated preliminary purchase price | $ | 5,909,876 | ||
| a) | Includes 141,331,218 shares of Spirit common stock outstanding as of September 30, 2023, inclusive of 206,817 unvested Restricted Stock Awards which will be converted into Realty Income common stock at the Merger Effective Time. The portion of the converted unvested Restricted Stock Awards related to post-combination expense is removed in footnote (e) below. Under the Merger Agreement, these shares and units are to be converted to Realty Income common stock at an Exchange Ratio of 0.762 per share of Spirit’s common stock. |
| b) | Includes 6,900,000 shares of Spirit Series A preferred stock outstanding as of September 30, 2023. Under the Merger Agreement, these shares are to be converted to the newly issued Realty Income Series A preferred stock at an exchange ratio of 1.0 per share of Spirit Series A preferred stock at the Merger Effective Time. Given that Spirit Series A preferred stock is publicly traded, and it will be exchanged into a newly created class of Realty Income Series A preferred stock having substantially the same terms as the Spirit Series A preferred stock, the publicly traded price of Spirit Series A preferred stock is the best indicator of the preliminary fair value of Realty Income Series A preferred stock yet to be issued. |
| c) | Represents the estimated fair value of fully vested Spirit Performance Share Awards that will be converted into Realty Income common stock at the Merger Effective Time that are attributable to pre-combination services. |
| d) | Represents the amount of any accrued and unpaid cash dividend equivalents corresponding to each Performance Share Award that will be settled by Realty income in cash. |
| e) | Represents the estimated fair value of Spirit Restricted Stock Awards that will be accelerated and converted into Realty Income common stock upon the Merger Effective Time, reflecting the value attributable to post-combination services. |
9
The actual value of the Realty Income common stock and Realty Income Series A preferred stock to be issued in the Merger will depend on the market price of shares of Realty Income common stock and Realty Income Series A preferred stock at the closing date of the Merger, and therefore the actual purchase price will not be known until the Merger is consummated. As a result, the final purchase price could differ significantly from the current estimate, which could materially impact the unaudited pro forma condensed combined financial statements. A 10% difference in the Realty Income common stock and the Realty Income Series A preferred stock price from the assumptions set forth in the table above would change the purchase price by approximately $589 million, which would be recorded as an adjustment to the fair value of the assets and liabilities acquired, including goodwill as applicable. In addition, the outstanding number of shares of Spirit common stock, and the outstanding shares of Spirit Series A preferred stock may change prior to the closing of the Merger due to transactions in the ordinary course of business, including unknown changes in vesting of outstanding Spirit equity-based awards and any grants of new equity-based awards.
Preliminary Purchase Price Allocation
The preliminary purchase price allocation to assets acquired and liabilities assumed is provided throughout these notes to the unaudited pro forma condensed combined financial statements. The following table provides a summary of the preliminary purchase price allocation by major categories of assets acquired and liabilities assumed based on Realty Income management’s preliminary estimate of their respective fair values as of September 30, 2023 (in thousands):
| Amount | ||||
| Total estimated preliminary purchase price | $ | 5,909,876 | ||
| Assets: | ||||
| Real estate held for investment | $ | 7,923,667 | ||
| Real estate and lease intangibles held for sale | 92,800 | |||
| Lease intangible assets | 1,233,730 | |||
| Cash and cash equivalents (a) | 39,531 | |||
| Accounts receivable | 14,581 | |||
| Other assets | 159,543 | |||
| Total assets acquired | $ | 9,463,852 | ||
| Liabilities: | ||||
| Accounts payable and accrued expenses (b) | $ | 127,045 | ||
| Lease intangible liabilities | 391,491 | |||
| Other liabilities | 61,737 | |||
| Term loan | 1,100,705 | |||
| Mortgages payable | 4,229 | |||
| Notes payable | 2,339,854 | |||
| Total liabilities assumed | $ | 4,025,061 | ||
| Estimated preliminary fair value of net assets acquired | $ | 5,438,791 | ||
| Goodwill | $ | 471,085 | ||
| a) | This balance does not include $4.0 million of the Pro Forma Transactions Adjustments related to Realty Income’s cash payment for accrued and unpaid dividend equivalents to Performance Share Award holders, that is included in the Total estimated preliminary purchase price. The balance also does not include the Pro Forma Transactions Adjustment related to the settlement of $58.0 million of Spirit’s estimated transaction-related costs following the Merger Effective Time. |
| b) | This balance includes $58.0 million of estimated transaction-related costs to be incurred by Spirit which have not yet been reflected in the historical consolidated financial statements of Spirit and will be settled by Realty Income following the Merger Effective Time. |
10
The preliminary fair values of identifiable assets acquired, and liabilities assumed are based on an estimated valuation as of an assumed date upon which the Merger Effective Time would occur that was prepared by Realty Income with the assistance of a third-party valuation advisor. For the preliminary estimate of fair values of assets acquired and liabilities assumed of Spirit, Realty Income used publicly available benchmarking information as well as a variety of other assumptions, including market participant assumptions. The allocation is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the pro forma preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed, and such differences could be material. In particular, the fair values of the assets and liabilities were estimated, in part, based upon the allocation of real estate and intangible lease assets and liabilities, and adjusted to reflect reasonable estimations for above-market and below-market leases, in-place lease values, and avoided lease origination costs, and to incorporate estimates for the mark-to-market adjustments (i.e., discounts) of mortgages payable and notes payable to be assumed in the Merger, all of which are based on Realty Income’s historical experience with similar assets and liabilities. In determining the estimated fair value of Spirit’s assets and liabilities, Realty Income utilized customary methods, including the income, market, and cost approaches. Amounts allocated to land, buildings and improvements, tenant improvements, and lease intangible assets and liabilities were based on an analysis performed by third parties based on Realty Income’s, Spirit’s and other portfolios with similar property characteristics.
The purchase price allocation presented above is preliminary and it has not been finalized. The final determination of the allocation of the purchase price will be completed no later than twelve months following the Merger Effective Time. These final fair values will be determined based on Realty Income’s management’s judgment, which is based on various factors, including (1) market conditions, (2) the industry in which the client operates, (3) the characteristics of the real estate (i.e., location, size, demographics, value and comparative rental rates), (4) the client credit profile, (5) store profitability metrics and the importance of the location of the real estate to the operations of the client’s business, and/or (6) real estate valuations. The final determination of these estimated fair values, the assets’ useful lives and the depreciation and amortization methods are dependent upon certain valuations and other analyses that have not yet been completed, and as previously stated could differ materially from the amounts presented in the unaudited pro forma condensed combined financial statements. The final determination will be completed as soon as practicable but no later than one year after the consummation of the Merger. Any increase or decrease in the fair value of the net assets acquired, as compared to the information shown herein, could change the portion of the purchase consideration allocable to goodwill and could impact the operating results of the combined company following the Merger due to differences in the allocation of the purchase consideration, as well as changes in the depreciation and amortization related to some of the acquired assets.
Balance Sheet
The pro forma adjustments reflect the effect of the Pro Forma Transactions on Realty Income’s and Spirit’s historical consolidated balance sheets as if the Pro Forma Transactions occurred on September 30, 2023.
Assets
| 1) | The pro forma adjustments for Land and Buildings and improvements reflect: (i) the elimination of Spirit's historical carrying values of $1.8 billion for Land and $7.0 billion for Buildings and improvements, and (ii) the recognition of the fair value of these assets of $1.9 billion for Land and $6.1 billion for Buildings and improvements, based upon the preliminary valuation of the tangible real estate assets to be acquired. For information regarding the valuation methodology applied to the tangible real estate assets, refer to the Preliminary Purchase Price Allocation section of Note 4. The pro forma adjustments are presented as follows (in thousands): |
| Estimated fair value | Less: Elimination of historical gross carrying value | Total pro forma adjustment | ||||||||||
| Land | $ | 1,857,452 | $ | (1,808,364 | ) | $ | 49,088 | |||||
| Buildings and improvements | 6,066,215 | (7,015,086 | ) | (948,871 | ) | |||||||
| 2) | Accumulated depreciation and amortization were adjusted to eliminate Spirit’s historical accumulated depreciation balance of $1.4 billion. |
11
| 3) | Spirit's Real estate and lease intangibles held for sale, net was adjusted to remove the historical carrying value of $61.5 million, and reflect its assets at fair value, less estimated selling expenses, on those assets, totaling $92.8 million. The fair value was determined based on the contractual sale prices from executed sale agreements. |
| 4) | Pro forma adjustment to Cash and cash equivalents and Distributions Payable represents the payment of dividends declared, but not paid, as of the Merger Effective Date to Spirit’s common stock, restricted stock award, and performance stock award holders. The Cash and cash equivalents line also includes a settlement of Spirit’s estimated transaction-related costs of $58.0 million. |
| 5) | Accounts receivable, net was adjusted to eliminate Spirit’s historical straight-line rent receivable, net, of $185.2 million, which is not treated as a separately recognized asset on the combined company’s balance sheet. |
| 6) | The pro forma adjustments for Lease intangible assets, net reflect: (i) the elimination of Spirit’s historical carrying values for these assets, net of the associated accumulated amortization, of $389.1 million and (ii) the recognition of the fair value of these assets of $1.2 billion, based upon the preliminary valuation of the intangible real estate assets to be acquired. For information regarding the valuation methodology applied to the lease intangible assets, refer to the Preliminary Purchase Price Allocation section of Note 4. The following table summarizes the major classes of lease intangible assets acquired and the total pro forma adjustment to Lease intangible assets, net (in thousands): |
| Amount | ||||
| Preliminary allocation of fair value: | ||||
| In-place leases | $ | 803,589 | ||
| Leasing commissions, legal and marketing costs | 250,429 | |||
| Above-market lease assets | 179,712 | |||
| Less: Elimination of historical carrying value of lease intangible assets, net | (389,100 | ) | ||
| Total pro forma adjustment | $ | 844,630 | ||
| 7) | The pro forma adjustments for Goodwill reflect: (i) the elimination of Spirit’s historical goodwill balance of $225.6 million, and (ii) the recognition of the preliminary goodwill balance associated with the Merger of $471.1 million based on the preliminary purchase price allocation. For additional information, refer to the Preliminary Purchase Price Allocation section of Note 4. |
| 8) | Other assets, net was adjusted to reflect (i) the elimination of Spirit’s deferred financing costs, net and capitalized lease transaction costs of $9.2 million, (ii) the elimination of Spirit’s historical carrying value for Loans receivable, net of $52.9 million, and (iii) the recognition of the fair value of the loans receivable and ground leases right of use assets of $50.3 million. |
Liabilities
| 9) | The pro forma adjustment for Accounts payable and accrued expenses represents $60.0 million of estimated transaction-related costs to be incurred by Realty Income which have not yet been reflected in the historical consolidated financial statements of Realty Income. This line item also contains an accrual of $58.0 million of the estimated transaction-related costs to be incurred by Spirit which have not yet been reflected in the historical consolidated financial statements, as well as the assumed settlement of this amount. See Note 4 for additional details. |
| 10) | The pro forma adjustments for Lease intangible liabilities, net reflect: (i) the elimination of Spirit’s historical carrying values for the intangible lease liabilities, net of the associated accumulated amortization, of $106.8 million, and (ii) the recognition of the fair value of these intangible liabilities of $391.5 million, based upon the preliminary valuation of the intangible lease liabilities to be assumed. For information regarding the valuation methodology applied to the lease intangible liabilities, refer to the Preliminary Purchase Price Allocation section of Note 4. |
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| 11) | In connection with the Merger, Realty Income expects to assume $3.9 billion of Spirit’s total historical cost debt outstanding as of September 30, 2023, with a weighted average interest rate of 3.4% and weighted average remaining term of 4.8 years. The pro forma adjustments for Term loan, net, Mortgages payable, net and Notes payable, net reflect: (i) the elimination of Spirit’s historical carrying values of the Term loan, net, Mortgages payable, net and Notes payable, net including the associated unamortized deferred financing costs and net discounts, of $1.1 billion, $4.5 million and $2.7 billion for the Term loan, net, Mortgages payable, net and Notes payable, net respectively, and (ii) the recognition of the fair value of $1.1 billion, $4.2 million and $2.3 billion for the Term loan, net, Mortgages payable, net and Notes payable, net respectively, based upon the preliminary valuation of these liabilities. The preliminary fair value of Term loan, net, Mortgages payable, net and Notes payable, net derived either based on (i) market quotes for identical or similar instruments in markets or (ii) discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. The following table summarizes the pro forma adjustments to the Term loan, net, Mortgages payable, net and Notes payable, net (in thousands): |
| Term loan, net | Mortgages payable, net | Notes payable, net | ||||||||||
| Elimination of historical carrying value of the remaining debt instruments, including unamortized deferred financing costs and net discounts | $ | (1,090,198 | ) | $ | (4,545 | ) | $ | (2,725,505 | ) | |||
| Estimated pro forma fair value of liabilities assumed in the Merger | 1,100,705 | 4,229 | 2,339,854 | |||||||||
| Total pro forma adjustment | $ | 10,507 | $ | (316 | ) | $ | (385,651 | ) | ||||
Equity
| 12) | The following table summarizes the pro forma adjustments for equity (in thousands): |
| Preferred stock and paid-in capital | Common stock and paid-in capital | Distributions in excess of net income | Accumulated other comprehensive loss | |||||||||||||
| Issuance of Realty Income common stock (a) | $ | - | $ | 5,745,844 | $ | - | $ | - | ||||||||
| Issuance of Realty Income Series A preferred stock (b) | 160,011 | - | - | - | ||||||||||||
| Settlement of Spirit’s equity-based awards (c) | - | 18,234 | (18,234 | ) | - | |||||||||||
| Spirit transaction-related costs (d) | - | - | (58,000 | ) | - | |||||||||||
| Elimination of Spirit’s historical equity balances (e) | (166,177 | ) | (7,307,795 | ) | 3,094,475 | (55,296 | ) | |||||||||
| Realty Income transaction- related costs (f) | - | - | (60,000 | ) | - | |||||||||||
| Total pro forma adjustment | $ | (6,166 | ) | $ | (1,543,717 | ) | $ | 2,958,241 | $ | (55,296 | ) | |||||
| a) | The pro forma adjustment represents the issuance of Realty Income common stock as consideration for the Merger, as described in the Estimated Preliminary Purchase Price section of Note 4. The fair value of Realty Income common stock issued to former holders of Spirit’s common stock is based on the adjusted per share closing price of Realty Income common stock of $53.22 on November 20, 2023. |
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| b) | The pro forma adjustment represents the issuance of Realty Income Series A preferred stock as consideration for the Merger, as described in the Estimated Preliminary Purchase Price section of Note 4. The fair value of Realty Income Series A preferred stock issued to former holders of Spirit Series A preferred stock is based on the fair value of Spirit Series A preferred stock of $23.19 on November 20, 2023. |
| c) | Represents the estimated fair value of fully vested Spirit Restricted Stock Awards and Spirit Performance Share Award units of $18.2 million which will be converted into Realty Income common stock upon the Merger Effective Time. The vesting of these awards is to be discretionarily accelerated and they will be converted into Realty Income common stock upon the Merger Effective Time, reflecting the value attributable to the post-combination services. |
| d) | The pro forma adjustment to distributions in excess of net income includes $58.0 million of estimated transaction-related costs to be incurred by Spirit which have not yet been reflected in the historical consolidated financial statements of Spirit and which will be settled by Realty Income following the Merger Effective Time. |
| e) | The pro forma adjustment represents the elimination of Spirit’s historical equity balances and the $58.0 million of estimated transaction-related costs to be incurred by Spirit which have not yet been reflected in the historical consolidated financial statements of Spirit. Refer to note (d) above. |
| f) | The pro forma adjustment to distributions in excess of net income includes $60.0 million of estimated transaction costs to be incurred by Realty Income as a result of the Merger, which have not yet been reflected in Realty Income's historical consolidated financial statements. |
Statements of Operations
The pro forma adjustments reflect the effect of the Pro Forma Transactions on Realty Income’s and Spirit’s historical consolidated statements of operations as if the Pro Forma Transactions occurred on January 1, 2022.
Revenues
| 13) | Rental (including reimbursable) |
The historical rental revenues for Realty Income and Spirit represent contractual and straight-line rents and amortization of above-market and below-market lease intangibles associated with the leases in effect during the periods presented. The adjustments included in the unaudited pro forma condensed combined statements of operations are presented to: (i) eliminate the historical straight-line rents and amortization of above-market and below-market lease intangibles for the real estate properties of Spirit acquired as part of the Merger, and (ii) adjust contractual rental property revenue for the acquired properties to a straight-line basis and amortize above-market and below-market lease intangibles recognized as a result of the Merger.
The pro forma adjustment for the amortization of above-market and below-market lease intangibles recognized as a result of the Merger was estimated based on a straight-line methodology and the estimated remaining weighted average contractual, in-place lease term of 10.2 years. The lease intangible asset and liability fair values and estimated amortization expense may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to rental revenues do not purport to be indicative of the expected change in rental revenues of the combined company in any future periods.
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The following table summarizes the adjustments made to rental revenues for the nine months ended September 30, 2023, and year ended December 31, 2022 (in thousands):
| Elimination of historical amounts | Recognition of post-combination amounts(a) |
Total pro forma | ||||||||||
| For the nine months ended September 30, 2023 | ||||||||||||
| Straight-line rent, net | $ | (26,127 | ) | $ | 35,555 | $ | 9,428 | |||||
| Amortization of above-market and below-market lease intangibles and deferred lease incentives, net | (767 | ) | 15,583 | 14,816 | ||||||||
| Total pro forma adjustment | $ | (26,894 | ) | $ | 51,138 | $ | 24,244 | |||||
| For the year ended December 31, 2022 | ||||||||||||
| Straight-line rent, net | $ | (36,902 | ) | $ | 55,090 | $ | 18,188 | |||||
| Amortization of above-market and below-market lease intangibles and deferred lease incentives, net | (2,190 | ) | 20,777 | 18,587 | ||||||||
| Total pro forma adjustment | $ | (39,092 | ) | $ | 75,867 | $ | 36,775 | |||||
| a. | Recognition of post-combination amounts excludes amounts related to Spirit properties that were sold between January 1, 2022 and September 30, 2023, because such properties are not a part of the net assets acquired in the Merger. |
| 14) | The pro forma adjustment to Other revenue of $1.2 million and $1.6 million for the nine months ended September 30, 2023, and year ended December 31, 2022, respectively, reflects the impact of the Merger on the amount recognized in Spirit’s historical consolidated statements of operations for the periods presented from the amortization of the fair value adjustment on Spirit’s Loans Receivables to be assumed in the Merger. |
Expenses
| 15) | The adjustments included in the unaudited pro forma condensed combined statements of operations are presented to: (i) eliminate the historical depreciation and amortization of real estate properties of Spirit acquired as part of the Merger, and (ii) to recognize additional depreciation and amortization expense associated with the fair value of acquired real estate tangible and intangible assets. |
The pro forma adjustment for the depreciation and amortization of acquired assets is calculated using a straight-line methodology and is based on estimated useful lives for building and site improvements, the remaining contractual, in-place lease term for intangible lease assets, and the lesser of the estimated useful life and the remaining contractual, in-place lease term for tenant improvements. The useful life of a particular building depends upon a number of factors including the condition of the building upon acquisition. For purposes of the unaudited pro forma condensed combined statements of operations, the weighted average useful life for buildings and site improvements is 29.9 years; the weighted average useful life for tenant improvements is 10.2 years; and the weighted average remaining contractual, in-place lease term is 10.2 years. The fair value of acquired real estate tangible and intangible assets, estimated useful lives of such assets, and estimated depreciation and amortization expense may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to depreciation and amortization expense are not necessarily indicative of the expected change in depreciation and amortization expense of the combined company in any future periods.
The following table summarizes adjustments made to depreciation and amortization expense by asset category for Spirit’s real estate properties to be acquired as part of the Merger for the nine months ended September 30, 2023, and year ended December 31, 2022 (in thousands):
| For the nine months ended September 30, 2023 | For the year ended December 31, 2022 | |||||||
| Buildings and improvements (a) | $ | 150,215 | $ | 200,286 | ||||
| Tenant improvements (a) | 23,957 | 31,943 | ||||||
| In-place leases and leasing commissions and marketing costs (a) | 77,535 | 103,379 | ||||||
| Less: Elimination of historical depreciation and amortization | (236,527 | ) | (292,985 | ) | ||||
| Total pro forma adjustment | $ | 15,180 | $ | 42,623 | ||||
| a. | Recognition of post-combination amounts excludes amounts related to Spirit properties that were sold between January 1, 2022 and September 30, 2023, because such properties are not a part of the net assets acquired in the Merger. |
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| 16) | The pro forma adjustments to interest expense reflect the impact of the Merger on the amounts recognized in Spirit’s historical consolidated statements of operations for the periods presented from: (i) the elimination of historical deferred financing cost amortization, (ii) the elimination of historical amortization on net premiums/discounts, and (iii) the amortization of the fair value adjustment on Spirit’s interest swap assets, term loan, mortgages, and notes payable assumed in the Merger. The following table summarizes the pro forma adjustments to interest expense for the nine months ended September 30, 2023, and year ended December 31, 2022 (in thousands): |
| For the nine months ended September 30, 2023 | For the year ended December 31, 2022 | |||||||
| Elimination of Spirit historical deferred financing costs amortization | $ | (5,944 | ) | $ | (5,410 | ) | ||
| Elimination of Spirit historical amortization of net discounts | (982 | ) | (1,269 | ) | ||||
| Amortization of the fair value adjustment on swap assets, term loan, mortgages and notes payable | 69,992 | 93,322 | ||||||
| Total pro forma adjustment | $ | 63,066 | $ | 86,643 | ||||
The pro forma adjustments for the amortization of the fair value adjustment on Spirit’s interest rate swaps, term loan, mortgages and notes payable assumed in the Merger were estimated based on a straight-line approach and the weighted average remaining contractual term of 3.0 years for the interest rate swaps, 7.3 years for mortgages payable, remaining contractual term of 2.8 years for term loan and 5.7 years for notes payable. The fair value adjustment on Spirit’s interest rate swaps, term loan, mortgages and notes payable and estimated amortization expense may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to interest expense do not purport to be indicative of the expected change in interest expense of the combined company in any future periods.
| 17) | Represents an adjustment to increase ground leases rent expense by $0.1 million for the nine months ended September 30, 2023, and $0.1 million for the year ended December 31, 2022 as a result of the revaluation of operating lease right-of-use assets and recognition of the above-market and below-market ground lease intangible assets. The adjustment is computed based on a straight-line approach and using a weighted average remaining lease term of 16.1 years. The fair value adjustment on Spirit’s ground leases may differ materially from the preliminary determination within these unaudited pro forma condensed combined financial statements. The pro forma adjustments to property (including reimbursable) expense do not purport to be indicative of the expected change in ground rent expense of the combined company in any future periods. |
| 18) | Represents the adjustment to Merger and integration-related costs of $78.2 million for the year ended December 31, 2022 to recognize (i) additional post-combination compensation expense of $18.2 million associated with the fair value of Realty Income common stock issued to the holders of Spirit’s restricted stock awards and performance stock awards and (ii) estimated transaction-related costs of $60.0 million that are not currently reflected in the historical consolidated financial statements of Realty Income. These estimated transaction-related costs consist primarily of transfer taxes, advisor, legal, and accounting fees. It is assumed that these costs will not affect the combined statements of operations beyond twelve months after the closing date of the Merger. |
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Note 5 – Pro Forma Net Income Available to Common Stockholders per Common Share
The following table summarizes the unaudited pro forma net income from continuing operations per common share for the nine months ended September 30, 2023, and the year ended December 31, 2022, as if the Pro Forma Transactions occurred on January 1, 2022 (in thousands, except per share data):
| For the nine months ended September 30, 2023 | For the year ended December 31, 2022 | |||||||
| Numerator | ||||||||
| Pro forma net income available to common stockholders | $ | 782,101 | $ | 975,370 | ||||
| Denominator | ||||||||
| Realty Income historical weighted average common shares outstanding | 681,419 | 611,766 | ||||||
| Spirit’s common stock converted into Realty Income common stock (141,331 shares and units outstanding, multiplied by the Exchange Ratio of 0.762) | 107,694 | 107,694 | ||||||
| Spirit’s Performance Share Awards converted into Realty Income common stock (803 shares and units outstanding, multiplied by the Exchange Ratio of 0.762) | 612 | 612 | ||||||
| Pro forma weighted average common shares outstanding – basic | 789,725 | 720,072 | ||||||
| Realty Income historical weighted average dilutive shares | 710 | 415 | ||||||
| Pro forma weighted average Realty Income common shares outstanding – diluted | 790,435 | 720,487 | ||||||
| Pro forma amounts of net income available to common stockholders per common share: | ||||||||
| Basic and diluted | $ | 0.99 | $ | 1.35 | ||||
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Exhibit 99.4
Supplemental RISK FACTORS
The business and operations of Realty Income (as defined below) are subject to numerous risks and other uncertainties and you should carefully consider the following supplemental risk factors, the risks described under the captions “Forward-Looking Statements” in Item 8.01 of the Current Report on Form 8-K filed by Realty Income on November 27, 2023 (the “Form 8-K”) to which these supplemental risk factors are filed as Exhibit 99.4 and under the captions “Forward-Looking Statements” and “Risk Factors” in Realty Income’s most recent Annual Report on Form 10-K and its subsequent Quarterly Reports on Form 10-Q, and any amendments thereto filed with the Securities and Exchange Commission (the “SEC”), all of which are available on the SEC’s website (in each case excluding any portion thereof, information therein or exhibit thereto that is deemed to be “furnished” to, rather than “filed” with, the SEC). As used under this caption “Supplemental Risk Factors” in this Exhibit and under the captions “Risk Factors” in Realty Income’s most recent Annual Report on Form 10-K and its subsequent Quarterly Reports on Form 10-Q, and any amendments thereto filed with the SEC, references to Realty Income’s capital stock include both its common stock and any class or series of its preferred stock that it may issue, and references to Realty Income’s debt or indebtedness include its debt securities and other indebtedness, and references to Realty Income’s “clients” means its tenants, in each case unless otherwise expressly stated or the context otherwise requires.
Unless otherwise stated in these supplemental risk factors or the context otherwise requires, references in these supplemental risk factors to:
| ● | “Code” means the Internal Revenue Code of 1986, as amended; |
| ● | “combined company” means Realty Income and its subsidiaries, after giving effect to the consummation of the proposed Merger; |
| ● | “Effective Time” means the effective time of the Merger; |
| ● | “Merger” means the merger pursuant to the terms of the Merger Agreement, of Spirit with and into Merger Sub, with Merger Sub continuing as the surviving corporation; |
| ● | “Merger Agreement” means that certain Agreement and Plan of Merger, dated as of October 29, 2023, by and among Spirit, Realty Income and Merger Sub, as amended or supplemented from time to time; |
| ● | “Merger Sub” means Saints MD Subsidiary, Inc., a Maryland corporation and a wholly owned subsidiary of Realty Income. |
| ● | “Realty Income” means Realty Income Corporation, a Maryland corporation; |
| ● | “Realty Income common stock” means the common stock of Realty Income, par value $0.01 per share; |
| ● | “Realty Income Series A preferred stock” means the 6.000% Series A Cumulative Redeemable Preferred Stock of Realty Income, par value $0.01 per share to be issued in the Merger; |
| ● | “Spirit” means Spirit Realty Capital, Inc., a Maryland corporation; |
| ● | “Spirit common stock” means the common stock of Spirit, par value $0.05 per share; and |
| ● | “Spirit Series A preferred stock” means the 6.000% Series A Cumulative Redeemable Preferred Stock of Spirit, par value $0.01 per share. |
Risks Relating to the Merger
The Merger may not be completed on the terms or timeline currently contemplated, or at all. Completion of the Merger is subject to many conditions and if these conditions are not satisfied or waived, the Merger will not be completed, which could adversely affect the operations of Realty Income.
The completion of the Merger is subject to certain conditions, including: (1) approval by Spirit’s common stockholders; (2) approval for listing on the New York Stock Exchange (“NYSE”) of Realty Income common stock and Realty Income Series A preferred stock to be issued in the Merger or reserved for issuance in connection therewith; (3) no injunction or law prohibiting the Merger; (4) accuracy of each party’s representations, subject in most cases to materiality or material adverse effect qualifications; (5) material compliance with each party’s covenants; (6) receipt by each of Realty Income and Spirit of an opinion to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code; (7) receipt by Spirit of an opinion that Realty Income qualifies as a real estate investment trust (“REIT”) under the Code and receipt by Realty Income of an opinion that Spirit qualifies as a REIT under the Code; and (8) effectiveness of the registration statement filed with the SEC to register the shares of Realty Income common stock and Realty Income Series A preferred stock issuable in the Merger.
In addition, Realty Income or Spirit may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Merger is not completed by July 29, 2024.
Realty Income cannot provide assurance that these conditions to completing the Merger will be satisfied or waived, and accordingly, that the Merger will be completed on the terms or timeline that the parties anticipate or at all.
Failure to consummate the Merger may adversely affect Realty Income’s results of operations, financial condition and business prospects for many reasons, including, among others: (i) Realty Income will have incurred substantial costs relating to the Merger, such as legal, accounting, financial advisor, filing, printing fees and integration costs that have already been incurred or will continue to be incurred until the closing of the Merger, which could adversely affect its financial condition, results of operations and ability to make distributions to its stockholders and to pay the principal of and interest on its debt securities and other indebtedness; (ii) the Merger, whether or not it closes, will divert the attention of the management of Realty Income instead of enabling it to more fully pursue other opportunities that could be beneficial to Realty Income, without realizing any of the benefits of having completed the Merger; and (iii) any reputational harm due to the adverse perception of any failure to successfully complete the Merger.
The Exchange Ratio is fixed and will not be adjusted in the event of any change in the stock prices of either Realty Income or Spirit.
At the Effective Time, each share of Spirit common stock issued and outstanding will be converted into 0.762 newly issued shares (the “Exchange Ratio”) of Realty Income common stock, with cash paid in lieu of fractional shares. The Exchange Ratio is fixed in the Merger Agreement and, while it will be adjusted in certain limited circumstances, including a recapitalization, stock or unit split, stock or unit dividend or other distribution, reclassification, combination or exchange offer of shares or other similar transaction involving Realty Income or Spirit, the Exchange Ratio will not be adjusted for changes in the market price of either Realty Income common stock or Spirit common stock. Changes in the price of Realty Income common stock prior to the Merger will affect the market value of the Merger consideration that Spirit common stockholders will receive at the closing of the Merger. Stock price changes may result from a variety of factors (many of which are beyond the control of Realty Income and Spirit), including the following factors:
| ● | changes in the respective businesses, operations, assets, liabilities and prospects of either company; |
| ● | changes in market assessments of the business, operations, financial position and prospects of either company; |
| ● | market assessments of the likelihood that the Merger will be completed; |
| ● | interest rates, general market and economic conditions and other factors generally affecting the price of Realty Income common stock and Spirit common stock; |
| ● | federal, state and local legislation, governmental regulation and legal developments in the businesses in which Realty Income and Spirit operate; and |
| ● | other factors beyond the control of Realty Income or Spirit, including those described under this heading “Supplemental Risk Factors.” |
The price of Realty Income common stock at the closing of the Merger may vary from its price on the date the Merger Agreement was executed. As a result, the market value of the Merger consideration represented by the Exchange Ratio will also vary.
Because the Exchange Ratio is fixed:
| ● | if the price of Realty Income common stock increases between the date the Merger Agreement was signed and the closing of the Merger, Spirit stockholders will receive shares of Realty Income common stock that have a market value upon completion of the Merger that is greater than the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed; and |
| ● | if the price of Realty Income common stock declines between the date the Merger Agreement and the closing of the Merger, including for any of the reasons described above, Spirit stockholders will receive shares of Realty Income common stock that have a market value upon completion of the Merger that is less than the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed. |
Therefore, while the number of shares of Realty Income common stock to be issued per share of Spirit common stock is fixed, the aggregate market value of the shares as of the date the Merger is consummated may be different from their aggregate market value as of the date the Merger Agreement was signed.
Realty Income common stockholders will be significantly diluted by the Merger.
The Merger will significantly dilute the ownership position of Realty Income common stockholders. Upon completion of the Merger, based on the shares of Realty Income common stock and Spirit common stock outstanding as of the date of the Merger Agreement, we estimate that legacy Realty Income stockholders will own approximately 87% of the issued and outstanding shares of Realty Income common stock, and legacy Spirit stockholders will own approximately 13% of the issued and outstanding shares of Realty Income common stock. In addition, as a result of the Merger, Realty Income will issue one share of Realty Income Series A preferred stock for each outstanding share of Spirit Series A preferred stock, which, under certain circumstances, may be converted into Realty Income common stock. Realty Income may also issue additional shares of common stock (including in connection with the settlement of existing or future forward sale agreements) or preferred stock in the future, which would create further dilution. Consequently, Realty Income stockholders, as a general matter, will have less influence over the management and policies of Realty Income after the Effective Time than they currently exercise over the management and policies of Realty Income.
The pendency of the Merger could adversely affect the business and operations of Realty Income and Spirit.
In connection with the pending Merger, some clients of each of Realty Income and Spirit may delay or defer decisions, which could adversely affect the revenues, earnings, funds from operations, cash flows and expenses of Realty Income and Spirit, regardless of whether the Merger is completed, and of the combined company, if the Merger is completed. Similarly, current and prospective employees of Realty Income and Spirit may experience uncertainty about their future roles with Realty Income following the Merger, which may materially adversely affect the ability of each of Realty Income and Spirit to attract and retain key personnel during the pendency of the Merger. In addition, due to operating covenants in the Merger Agreement, each of Realty Income and Spirit may be unable (without the other party’s prior written consent), during the pendency of the Merger, to pursue strategic transactions, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
If the Merger is not consummated by July 29, 2024, either Realty Income or Spirit may terminate the Merger Agreement.
Either Realty Income or Spirit may terminate the Merger Agreement if the Merger has not been consummated by July 29, 2024. However, this termination right will not be available to a party who has materially breached any representation, warranty, covenant, or other agreement under the Merger Agreement and that material breach was the primary cause of, or resulted in, the failure of the Merger to occur on or before July 29, 2024. Any termination of the Merger Agreement may adversely affect Realty Income’s results of operations, financial condition and business for many reasons, including those discussed elsewhere under this caption “Supplemental Risk Factors.”
If the Merger does not qualify as a reorganization, there may be adverse tax consequences.
The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. The closing of the Merger is conditioned on the receipt by each of Realty Income and Spirit of an opinion of its respective counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. However, such opinions are not binding on the Internal Revenue Service (the “IRS”). If the Merger were to fail to qualify as a reorganization, then each Spirit stockholder generally would recognize gain or loss, as applicable, equal to the difference between (i) the sum of the fair market value of the shares of Realty Income common stock and cash in lieu of any fractional share of Realty Income common stock received by the Spirit stockholder in the Merger; and (ii) the Spirit stockholder’s adjusted tax basis in its Spirit common stock. In addition, failure of the Merger to qualify as a reorganization may damage Realty Income’s reputation and have other adverse impacts on Realty Income.
An adverse outcome in any litigation or other legal proceedings relating to the Merger Agreement, or the transactions contemplated thereby, could have a material adverse impact on the businesses of Realty Income and Spirit and their ability to consummate the transactions contemplated by the Merger Agreement.
Transactions like the Merger are frequently the subject of litigation or other legal proceedings, including actions alleging that either party’s board of directors breached their respective duties to their stockholders or other equity holders by entering into the Merger Agreement, by failing to obtain a greater value in the transaction for their stockholders or other equity holders or otherwise, or any other actions or claims (contractual or otherwise) arising out of the Merger or the transactions related thereto. If litigation or other legal proceedings are brought against Realty Income, Spirit or their respective boards of directors or subsidiaries in connection with the Merger Agreement, or the transactions contemplated thereby, the respective parties to the proceeding intend to defend against it but they might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on Realty Income’s or Spirit’s ability to consummate the Merger or their respective business, results of operation or financial position, including through the possible diversion of either company’s resources or distraction of key personnel.
Risks Relating to Realty Income after Completion of the Merger and the Transactions Contemplated by the Merger Agreement
Realty Income expects to incur substantial expenses related to the Merger and the transactions contemplated by the Merger Agreement.
Realty Income expects to incur substantial expenses in completing the Merger and integrating the businesses, operations, networks, systems, technologies, policies and procedures of Realty Income and Spirit. There are a number of systems that must be integrated or separated in connection with the Merger, including leasing, billing, management information, purchasing, accounting and finance, information technology, operational, sales, payroll and benefits, fixed asset, lease administration and regulatory compliance. While Realty Income has assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond its control that could affect the total amount or the timing of their integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. The expenses in connection with the Merger and the transactions contemplated by the Merger Agreement are expected to be significant, although the aggregate amount and timing of such charges are uncertain.
Following the Merger, Realty Income may be unable to integrate the business of Spirit successfully or realize the anticipated synergies and related benefits of the Merger and the transactions contemplated by the Merger Agreement or to do so within the anticipated time frame.
The Merger involves the combination of two companies which currently operate as independent public companies. Realty Income will be required to devote significant management attention and resources to integrating the business practices and operations of Spirit. Potential difficulties Realty Income and Spirit may encounter in the integration process include the following:
| ● | the inability to successfully combine the businesses of Realty Income and Spirit in a manner that permits the combined company to achieve the cost savings anticipated to result from the Merger, which would result in some anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all; |
| ● | lost sales and tenants as a result of certain tenants of either of Realty Income or Spirit deciding not to do business with the combined company; |
| ● | the complexities associated with managing the combined company out of multiple locations and integrating personnel from the two companies; |
| ● | the additional complexities of combining two companies with different histories, regulatory restrictions, markets and customer bases; |
| ● | the failure to retain key employees; |
| ● | potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger and the transactions contemplated by the Merger Agreement; and |
| ● | performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the Merger and integrating Realty Income’s and Spirit’s operations. |
For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of Realty Income’s or Spirit’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to maintain relationships with clients, customers, vendors, joint venture partners and employees or to achieve the anticipated benefits of the Merger, or could otherwise adversely affect the business and financial results of the combined company.
Following the Merger and the transactions contemplated by the Merger Agreement, Realty Income may be unable to retain key employees.
The success of Realty Income after the Merger will depend in part upon its ability to retain key employees. Key employees may depart either before or after the Merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Realty Income following the Merger. Accordingly, no assurance can be given that Realty Income, Spirit or, following the Merger, the combined company, will be able to retain key employees to the same extent as in the past.
The future results of Realty Income will suffer if Realty Income does not effectively manage its operations following the Merger and the transactions contemplated by the Merger Agreement.
Following the Merger, Realty Income may continue to expand its operations through additional acquisitions, development opportunities and other strategic transactions, some of which involve complex challenges. The future success of Realty Income will depend, in part, upon the ability of Realty Income to manage its expansion opportunities, which poses substantial challenges for Realty Income to integrate new operations into its existing business in an efficient and timely manner, to successfully monitor its operations, costs, regulatory compliance and service quality and to maintain other necessary internal controls. Realty Income cannot assure you that its expansion or acquisition opportunities will be successful, or that it will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
The trading price of shares of Realty Income common stock and Realty Income Series A preferred stock following the Merger may be affected by factors different from those affecting the price of shares of Realty Income common stock, Spirit common stock or Spirit Series A preferred stock before the Merger.
If the Merger is completed, based on the shares of Realty Income common stock and Spirit common stock outstanding as of the date of the Merger Agreement, legacy Realty Income common stockholders will become holders of approximately 87% of the outstanding shares of Realty Income common stock and legacy Spirit stockholders will become holders of approximately 13% of the outstanding shares of Realty Income common stock immediately after the Merger. The results of operations of Realty Income, as well as the trading price of Realty Income common stock and Realty Income Series A preferred stock, after the Merger may be affected by factors different from those currently affecting Realty Income’s or Spirit’s results of operations or the trading prices of Realty Income common stock, Spirit common stock and Spirit Series A preferred stock. These different factors include:
| ● | a greater number of shares of Realty Income common stock outstanding, as compared to the number of shares of Realty Income common stock currently outstanding; |
| ● | different stockholders in Realty Income; and |
| ● | Realty Income owning different assets and maintaining different capitalizations. |
Accordingly, the historical trading prices and financial results of Realty Income and Spirit may not be indicative of these matters for Realty Income after the Merger.
Counterparties to certain significant agreements with Spirit may exercise contractual rights under such agreements in connection with the Merger
Spirit is party to certain agreements that give the counterparty certain rights following a change of control or similar event, including in some cases the right to terminate the agreement. Under some such agreements, including certain of Spirit’s debt, management, servicing and real estate arrangements, the Merger may constitute a change of control or cause certain other triggering events and therefore the counterparty may exercise certain rights under the agreement upon the closing of the Merger, which may result in our loss of potential future revenue or the incurrence of liabilities or the loss or modification of rights that are material to our business. Any such counterparty may request modifications of its agreement as a condition to granting a waiver or consent under its agreement or it may terminate or seek to terminate its agreement with Spirit as a result of such change of control (if permitted to do so by the applicable agreement). In addition, certain indebtedness of Spirit may give the holders of that indebtedness the right to demand immediate repayment upon a change of control or similar event. There is no assurance that such counterparties will not exercise their rights under the agreements, including termination rights where available, that the exercise of any such rights will not result in a material adverse effect or that any modifications of such agreements will not result in a material adverse effect.
Realty Income’s anticipated level of indebtedness will increase upon completion of the Merger and may have the effect of heightening other risks we currently face.
Upon completion of the Merger, Realty Income intends to assume and/or refinance certain indebtedness of Spirit and, assuming that occurs, Realty Income’s consolidated indebtedness will increase substantially and it will be subject to increased risks associated with debt financing, including an increased risk that Realty Income’s cash flow could be insufficient to meet required payments on its debt securities or other indebtedness or to pay dividends on its common stock, the Realty Income Series A preferred stock or any other preferred stock it may issue. As of September 30, 2023, Realty Income had indebtedness of approximately $20.5 billion. Taking into account Realty Income’s existing indebtedness and the assumption of Spirit’s consolidated indebtedness in the Merger, the total principal indebtedness of the combined company, including joint venture indebtedness, as of September 30, 2023 would have been approximately $23.9 billion. For more information on how the pro forma amount of Realty Income’s consolidated indebtedness is calculated, see the pro forma condensed combined financial statements included in Exhibit 99.3 to the Form 8-K.
Realty Income’s increased indebtedness could have important consequences to holders of its common stock, the Realty Income Series A preferred stock, any other preferred stock it may issue, and its debt securities including:
| ● | increasing Realty Income’s vulnerability to general adverse economic and industry conditions; |
| ● | limiting Realty Income’s ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements; |
| ● | requiring the use of a substantial portion of Realty Income’s cash flow from operations for the payment of principal and interest on its indebtedness, thereby reducing its ability to use its cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements; |
| ● | limiting Realty Income’s flexibility in planning for, or reacting to, changes in its business and its industry; and |
| ● | putting Realty Income at a disadvantage compared to its competitors with less indebtedness. |
If Realty Income defaults under a debt instrument, it will automatically be in default under any other debt instrument that has cross-default provisions, the holders of all such indebtedness may be entitled to demand its immediate repayment and, in the case of secured indebtedness, Realty Income may lose any property securing that indebtedness.
Risks Relating to the Status of Realty Income and Spirit as REITs
Realty Income may incur adverse tax consequences if Realty Income or Spirit has failed or fails to qualify as a REIT for U.S. federal income tax purposes.
Realty Income believes that it and Spirit have each operated in a manner that has allowed it to qualify as a REIT for U.S. federal income tax purposes under the Code and intends to continue to do so through the time of the Merger. Realty Income intends to continue operating in such a manner following the Merger. Neither Realty Income nor Spirit has requested or plans to request a ruling from the IRS that it qualifies as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within the control of Realty Income or Spirit may affect each company’s ability to qualify as a REIT. In order to qualify as a REIT, each of Realty Income and Spirit must satisfy a number of requirements, including requirements regarding the ownership of its stock and the composition of its gross income and assets. Also, a REIT must make distributions to stockholders aggregating annually at least 90% of its net taxable income, excluding any net capital gains.
The closing of the Merger is conditioned on receipt by Realty Income of an opinion from Latham & Watkins LLP (or another nationally recognized REIT counsel reasonably acceptable to Realty Income and Spirit) to the effect that, for all taxable years commencing with Spirit’s taxable year ended December 31, 2016 and through the Effective Time, Spirit has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and receipt by Spirit of an opinion from Latham & Watkins LLP (or another nationally recognized REIT counsel reasonably acceptable to Realty Income and Spirit) to the effect that, for all taxable years commencing with Realty Income’s taxable year ended December 31, 2016, Realty Income has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and its proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code for its taxable year that includes the Effective Time and future taxable years. The foregoing REIT opinions, however, will be based on the factual representations provided by Realty Income and Spirit to counsel and limited by the assumptions set forth therein, and are not a guarantee that Realty Income or Spirit, in fact, has qualified, or, in the case of Realty Income, will continue to qualify as a REIT, nor are such opinions binding on the IRS. Moreover, as noted above, neither Realty Income nor Spirit has requested or plans to request a ruling from the IRS that it qualifies as a REIT.
If Realty Income loses its REIT status, or is determined to have lost its REIT status in a prior year, it will face serious tax consequences that would substantially reduce its cash available for distribution, including cash available to pay dividends to its stockholders and to pay the principal of and interest on its debt securities or other indebtedness, because:
| ● | it would be subject to U.S. federal corporate income tax on its net income for the years it did not qualify for taxation as a REIT (and, for such years, would not be allowed a deduction for dividends paid to stockholders in computing its taxable income); |
| ● | it could be subject to a federal alternative minimum tax and increased state and local taxes for such periods; |
| ● | unless it is entitled to relief under applicable statutory provisions, neither it nor any “successor” company could elect to be taxed as a REIT until the fifth taxable year following the year during which it was disqualified; and |
| ● | for five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, it could be subject to federal corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election. |
Even if Realty Income retains its REIT status, if Spirit is determined to have lost its REIT status for a taxable year ending on or before the Merger, Spirit would be subject to adverse tax consequences similar to those described above. This could substantially reduce Realty Income’s cash available for distribution, including cash available to pay dividends to its stockholders and to pay the principal of and interest on its debt securities or other indebtedness, because, assuming that Realty Income otherwise maintains its REIT qualification:
| ● | Realty Income generally would be subject to corporate level tax with respect to the built-in gain on each asset of Spirit existing at the time of the Merger if Realty Income were to dispose of the Spirit asset during the five-year period following the Merger; |
| ● | Realty Income would succeed to any earnings and profits accumulated by Spirit for taxable periods that it did not qualify as a REIT, and Realty Income would have to pay a special dividend and/or employ applicable deficiency dividend procedures (including interest payments to the IRS) to eliminate such earnings and profits (or if Realty Income does not timely distribute those earnings and profits, Realty Income could fail to qualify as a REIT); and |
| ● | if Spirit incurred any unpaid tax liabilities prior to the Merger, those tax liabilities would be transferred to Realty Income as a result of the Merger. |
If there is an adjustment to Spirit’s taxable income or dividends paid deductions, Realty Income could elect to use the deficiency dividend procedure in order to maintain Spirit’s REIT status. That deficiency dividend procedure could require Realty Income to make significant distributions to its stockholders and to pay significant interest to the IRS.
As a result of all these factors, Realty Income’s or Spirit’s failure to qualify as a REIT could impair Realty Income’s ability to expand its business and raise capital, and would materially adversely affect the value of its common stock, the Realty Income Series A preferred stock, any other preferred stock it may issue, and its debt securities. In addition, for years in which Realty Income does not qualify as a REIT, it would not otherwise be required to make distributions to stockholders.
Risks Relating to an Investment in Realty Income Capital Stock or Debt Securities
The market price of Realty Income capital stock and debt securities may decline as a result of the Merger and the transactions contemplated by the Merger Agreement.
The market price of Realty Income common stock, the Realty Income Series A preferred stock, any other preferred stock it may issue, and its debt securities may decline as a result of the Merger and the transactions contemplated by the Merger Agreement if, among other things, Realty Income does not achieve the perceived benefits of the Merger and the transactions contemplated by the Merger Agreement or the effect of the Merger and the transactions contemplated by the Merger Agreement on Realty Income’s results of operations or financial condition is not consistent with the expectations of financial or industry analysts. The market value of Realty Income’s common stock, the Realty Income Series A preferred stock, any other preferred stock it may issue, and its debt securities may also be adversely affected by the increase in its indebtedness that is expected to occur if the Merger is consummated on the terms currently contemplated and, as described above, the market value of Realty Income’s common stock may be adversely affected by the large number of shares of common stock it expects to issue in the Merger.
In addition, upon consummation of the Merger and the transactions contemplated by the Merger Agreement, Realty Income will operate an expanded business with a different mix of properties, risks and liabilities. Holders of Realty Income’s common stock, the Realty Income Series A preferred stock and any other preferred stock it may issue, and debt securities may not wish to continue to invest in Realty Income, or may wish to dispose of some or all of the Realty Income securities they own. If, following the Effective Time or while the Merger is pending, large amounts of Realty Income common stock, the Realty Income Series A preferred stock and any other preferred stock it may issue, or debt securities are sold, the market price of such Realty Income securities could decline, perhaps substantially.
Following the Merger and the transactions contemplated by the Merger Agreement, Realty Income may be unable to continue to pay dividends at or above the rate currently paid by Realty Income.
Following the Merger and the transactions contemplated by the Merger Agreement, dividends payable per share on Realty Income’s common stock may be lower than the dividends per share that were paid prior to the Merger for various reasons, including those discussed elsewhere under this caption “Supplemental Risk Factors” and the following:
| ● | Realty Income may not have enough cash to pay such dividends due to changes in Realty Income’s cash requirements, capital spending plans, cash flow or financial position and the increase in the number of outstanding shares of its common stock that will be issued if the Merger is consummated; |
| ● | decisions on whether, when and in what amounts to pay any future dividends will remain at all times entirely at the discretion of the Realty Income board of directors, which reserves the right to change Realty Income’s dividend practices at any time and for any reason; |
| ● | Realty Income’s ability to declare and pay dividends on its common stock will be subject to the preferential rights of Realty Income Series A preferred stock that is anticipated to be issued in connection with the Merger; and |
| ● | the amount of dividends that Realty Income’s subsidiaries may distribute to Realty Income may be subject to restrictions imposed by state law and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur. |
Stockholders of Realty Income will have no contractual or other legal right to dividends that have not been declared by the Realty Income board of directors.
Following the Merger, holders of the newly issued shares of Realty Income Series A preferred stock will have dividend and liquidation rights that are senior to those of the holders of Realty Income common stock.
Following the Merger, holders of Realty Income Series A preferred stock will have certain rights that holders of Realty Income common stock do not have. These include rights to dividends in priority to dividends on Realty Income common stock (including cumulative dividends) and a right to receive, upon a liquidation of Realty Income, a preference amount out of the assets available for distribution before any distribution can be made to holders of Realty Income common stock. In the event of a bankruptcy, holders of shares of Realty Income Series A preferred stock outstanding at that time would have a claim that is senior to any claim the holders of Realty Income common stock would have.
Other Risks
The unaudited pro forma condensed combined financial statements of Realty Income do not purport to be indicative of Realty Income’s results after the Merger and the transactions contemplated by the Merger Agreement, and accordingly, you have limited financial information on which to evaluate the impact of the Merger on Realty Income.
The unaudited pro forma condensed combined financial statements included in Exhibit 99.3 to the Form 8-K have been presented for informational purposes only and do not purport to be indicative of the financial position or results of operations that actually would have occurred had the Merger and the transactions contemplated by the Merger Agreement been completed as of the dates indicated, nor do they purport to be indicative of the future operating results or financial position of Realty Income after the Merger and the transactions contemplated by the Merger Agreement. The unaudited pro forma condensed combined financial statements are subject to numerous estimates and assumptions and other uncertainties. Among other things, they reflect adjustments, which are based upon preliminary estimates, to allocate the purchase price to Spirit’s assets and liabilities.
In addition, the unaudited pro forma condensed combined financial statements do not reflect other future events that may occur after the Merger and the transactions contemplated by the Merger Agreement, including the costs related to the planned integration of the two companies and any future nonrecurring charges resulting from the Merger and the transactions contemplated by the Merger Agreement, and do not consider potential impacts of current market conditions on revenues or expenses. The unaudited pro forma condensed combined financial statements are based in part on certain estimates and assumptions regarding the Merger and the transactions contemplated by the Merger Agreement and Realty Income cannot assure you that the estimates and assumptions will prove to be accurate.
The market price and trading volume of Realty Income’s capital stock and debt securities may be volatile.
The United States stock markets, including the NYSE, on which Realty Income common stock is listed under the symbol “O” and on which it is expected that the Realty Income Series A preferred stock will be listed, and the markets for preferred stock and debt securities have experienced significant price and volume fluctuations. As a result, the market price of Realty Income’s common stock, the Realty Income Series A preferred stock, any other preferred stock, and debt securities are likely to be similarly volatile, and investors in Realty Income common stock, the Realty Income Series A preferred stock, any other preferred stock, and debt securities may experience a decrease in the value of their investment, including decreases unrelated to Realty Income’s operating performance or prospects. Realty Income cannot assure you that the market price of its common stock, the Realty Income Series A preferred stock, any other preferred stock, and debt securities will not fluctuate or decline significantly in the future.
In addition to the other risks listed under this caption “Supplemental Risk Factors,” a number of factors could negatively affect the market value of Realty Income common stock, the Realty Income Series A preferred stock, any other preferred stock, and debt securities or result in fluctuations, which could be substantial, in the market price or trading volume of those securities, including:
| ● | the annual yield from distributions on Realty Income common stock as compared to yields on other financial instruments; |
| ● | equity issuances by Realty Income (including issuances of Realty Income common stock and Realty Income Series A preferred stock in the Merger and including issuances of Realty Income common stock in connection with the settlement of existing or future forward sale agreements), or future sales of substantial amounts of Realty Income common stock by its existing or future stockholders, or the perception that such issuances or future sales may occur; |
| ● | increases in market interest rates or a decrease in Realty Income’s distributions to stockholders that lead purchasers of Realty Income common stock to demand a higher yield; |
| ● | changes in market valuations of similar companies; |
| ● | fluctuations in stock market prices and volumes; |
| ● | additions or departures of key management personnel; |
| ● | Realty Income’s operating performance and the performance of other similar companies; |
| ● | actual or anticipated differences in Realty Income’s quarterly operating results; |
| ● | changes in expectations of future financial performance or changes in estimates of securities analysts; |
| ● | publication of research reports about Realty Income or its industry by securities analysts; |
| ● | failure to qualify as a REIT for federal income tax purposes; |
| ● | adverse market reaction to any indebtedness Realty Income incurs in the future, including indebtedness to be assumed or incurred in connection with the Merger; |
| ● | strategic decisions by Realty Income or its competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; |
| ● | the passage of legislation or other regulatory developments that adversely affect Realty Income or its industry or any failure by Realty Income to comply with regulatory requirements; |
| ● | the expiration or loss of local tax abatements, tax credit programs or other governmental incentives; |
| ● | the imposition of a penalty tax as a result of certain property transfers that may generate prohibited transaction income; |
| ● | the inability of Realty Income to sell properties if and when it would be appropriate to do so; |
| ● | risks and liabilities in connection with Realty Income’s co-investment ventures and investment in new or existing co-investment ventures, including that Realty Income’s property ownership through joint ventures may limit its ability to act exclusively in its interests and may depend on the financial performance of its co-venturers; |
| ● | speculation in the press or investment community; |
| ● | changes in Realty Income’s results of operations, financial condition or prospects; |
| ● | failure to satisfy the listing requirements of the NYSE; |
| ● | failure to comply with the requirements of the Sarbanes-Oxley Act; |
| ● | actions by institutional stockholders of Realty Income; |
| ● | changes in accounting principles; |
| ● | changes in environmental conditions or the potential impact of climate change; |
| ● | terrorist attacks or other acts of violence or war in areas in which Realty Income’s properties are located or markets on which Realty Income’s securities are traded; and |
| ● | general economic and/or market conditions, including factors unrelated to Realty Income’s performance. |
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert Realty Income’s management’s attention and resources, which could have a material adverse effect on Realty Income’s cash flows, its ability to execute its business strategy and Realty Income’s ability to make distributions to its stockholders and to pay the principal of and interest on its debt securities and other indebtedness.
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