Spirit Realty 10Q 2020 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2020

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

For the transition period from to

Commission file number


Spirit Realty Capital, Inc.		001-36004
Spirit Realty, L.P.	333-216815-01

SPIRIT REALTY CAPITAL, INC.

SPIRIT REALTY, L.P.

(Exact name of registrant as specified in its charter)


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

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

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.05 per share	SRC	New York Stock Exchange
6.000% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share	SRC-A	New York Stock Exchange

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


Spirit Realty Capital, Inc. Yes ☒ No □	Spirit Realty, L.P. Yes ☒ No □

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).


Spirit Realty Capital, Inc. Yes ☒ No □	Spirit Realty, L.P. Yes ☒ No □

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

Spirit Realty Capital, Inc.


Large accelerated filer ☒	Accelerated filer □	Non-accelerated filer □


Smaller reporting company ☐	Emerging growth company ☐

Spirit Realty, L.P.


Large accelerated filer □	Accelerated filer □	Non-accelerated filer ☒


Smaller reporting company ☐	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.


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

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


Spirit Realty Capital, Inc. Yes ☐ No ☒	Spirit Realty, L.P. Yes ☐ No ☒

As of October 29, 2020, there were 108,779,254 shares of common stock, par value $0.05, of Spirit Realty Capital, Inc. outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the three and nine months ended September 30, 2020 of Spirit Realty Capital, Inc., a Maryland corporation, and Spirit Realty, L.P., a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” or the “Company” refer to Spirit Realty Capital, Inc. together with its consolidated subsidiaries, including Spirit Realty, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Spirit Realty, L.P. together with its consolidated subsidiaries.

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

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

•

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

•

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

•

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

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

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

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

In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, or the Exchange Act, and 18 U.S.C. §1350, this report also includes separate “Part 1―Financial Information, Item 4. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our Operating Partnership.

INDEX


Glossary			4
PART I — FINANCIAL INFORMATION			6
	Item 1.	Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
	Item 4.	Controls and Procedures	59
PART II — OTHER INFORMATION			60
	Item 1.	Legal Proceedings	60
	Item 1A.	Risk Factors	60
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
	Item 3.	Defaults Upon Senior Securities	62
	Item 4.	Mine Safety Disclosures	62
	Item 5.	Other Information	62
	Item 6.	Exhibits	63
		Signatures	64

GLOSSARY

2015 Credit Agreement	Revolving credit facility agreement between the Operating Partnership and certain lenders dated March 31, 2015, as amended or otherwise modified from time to time, providing for an $800.0 million unsecured credit facility
2015 Term Loan Agreement	Term loan agreement between the Operating Partnership and certain lenders dated November 3, 2015, as amended or otherwise modified from time to time, providing for a $420.0 million unsecured term loan facility
2017 Tax Legislation	Tax Cuts and Jobs Act of 2017
2019 Credit Facility	$800.0 million unsecured revolving credit facility pursuant to the 2019 Revolving Credit and Term Loan Agreement
2019 Facilities Agreements	2019 Revolving Credit and Term Loan Agreement and A-2 Term Loans
2019 Notes	$402.5 million convertible notes of the Corporation settled in 2019
2019 Revolving Credit and Term Loan Agreement	Revolving credit and term loan agreement between the Operating Partnership and certain lenders dated January 14, 2019, as amended or otherwise modified from time to time
2020 Term Loans	$400.0 million senior unsecured term facility pursuant to the 2020 Term Loan Agreement
2020 Term Loan Agreement	Term loan agreement between the Operating Partnership and certain lenders dated April 2, 2020, as amended or otherwise modified from time to time
2021 Notes	$345.0 million convertible notes of the Corporation due in 2021
2026 Senior Notes	$300.0 million aggregate principal amount of senior notes issued in August 2016
2027 Senior Notes	$300.0 million aggregate principal amount of senior notes issued in September 2019
2029 Senior Notes	$400.0 million aggregate principal amount of senior notes issued in June 2019
2030 Senior Notes	$500.0 million aggregate principal amount of senior notes issued in September 2019
2031 Senior Notes	$450.0 million aggregate principal amount of senior notes issued in August 2020
A-1 Term Loans	$420.0 million unsecured term loan facility pursuant to the 2019 Revolving Credit and Term Loan Agreement
A-2 Term Loans	$400.0 million unsecured term loan facility pursuant to a term loan agreement between the Operating Partnership and certain lenders dated January 14, 2019, as amended or otherwise modified from time to time
Adjusted Debt	Adjusted Debt is a non-GAAP financial measure. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Adjusted EBITDAre	Adjusted EBITDAre is a non-GAAP financial measure. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
AFFO	Adjusted Funds From Operations. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Amended Incentive Award Plan	Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan, as amended
Annualized Base Rent (ABR)	Represents Base Rent and earned income from direct financing leases from the final month of the reporting period, adjusted to exclude amounts from properties sold during that period and to include a full month of rental income for properties acquired during that period. The total is then multiplied by 12. We use ABR when calculating certain metrics that are useful to evaluate portfolio credit and diversification and to manage risk.
AOCL	Accumulated Other Comprehensive Loss
ASC	Accounting Standards Codification
Asset Management Agreement	Asset Management Agreement between Spirit Realty, L.P. and Spirit MTA REIT dated May 31, 2018, subsequently assigned by Spirit Realty, L.P. to Spirit Realty AM Corporation on April 1, 2019 and terminated effective as of September 20, 2019
ASU	Accounting Standards Update
ATM Program	At the Market equity distribution program, pursuant to which the Corporation may offer and sell registered shares of common stock from time to time
Base Rent	Represents rental income for the period, including amounts deferred or abated and excluding contingent rents, from our owned properties recognized during the month. We use Base Rent to monitor cash collection and to evaluate past due receivables.
Base Cash Rent	Represents Base Rent reduced for amounts abated and rent deemed not probable of collection.
CMBS	Commercial Mortgage-Backed Securities
Code	Internal Revenue Code of 1986, as amended
Company	The Corporation and its consolidated subsidiaries
Convertible Notes	The 2019 Notes and 2021 Notes, together

Corporation	Spirit Realty Capital, Inc., a Maryland corporation
CPI	Consumer Price Index
EBITDAre	EBITDAre is a non-GAAP financial measure and is computed in accordance with standards established by NAREIT. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FFO	Funds From Operations. See definition in Management's Discussion and Analysis of Financial Condition and Results of Operations
GAAP	Generally Accepted Accounting Principles in the United States
Interim Management Agreement	Interim Management Agreement between Spirit Realty AM Corporation, a wholly-owned subsidiary of the Company, and Spirit MTA REIT dated June 2, 2019, which was effective from September 20, 2019 through September 4, 2020
LIBOR	London Interbank Offered Rate
Master Trust 2013	The net-lease mortgage securitization trust established in December 2013
Master Trust 2014	The net-lease mortgage securitization trust established in 2005 and amended and restated in 2014
Master Trust Notes	Master Trust 2013 and Master Trust 2014, together
Master Trust Release	Proceeds from the sale of assets securing the Master Trust Notes held in restricted accounts until a qualifying substitution is made or until used for principal reduction
NAREIT	National Association of Real Estate Investment Trusts
Occupancy	The number of economically yielding owned properties divided by total owned properties
OP Holdings	Spirit General OP Holdings, LLC, a Delaware limited liability company
Operating Partnership	Spirit Realty, L.P., a Delaware limited partnership
Property Management and Servicing Agreement	Second amended and restated agreement governing the management services and special services provided to Master Trust 2014 by Spirit Realty, L.P., dated as of May 20, 2014, as amended, supplemented, amended and restated or otherwise modified and terminated effective September 20, 2019
Real Estate Investment Value	The gross acquisition cost, including capitalized transaction costs, plus improvements and less impairments, if any
REIT	Real estate investment trust
S&P	S&P's Global Ratings
SEC	Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Senior Unsecured Notes	2026 Senior Notes, 2027 Senior Notes, 2029 Senior Notes, 2030 Senior Notes, and 2031 Senior Notes, collectively
Series A Preferred Stock	6,900,000 shares of 6.000% Cumulative Redeemable Preferred Stock issued October 3, 2017, with a liquidation preference of $25.00 per share
Shopko	Specialty Retail Shops Holding Corp. and certain of its affiliates
SMTA	Spirit MTA REIT, a Maryland real estate investment trust, or SMTA Liquidating Trust, a Maryland common law trust, as the context dictates. On January 1, 2020, Spirit MTA REIT transferred all of its assets (subject to all of its liabilities) to SMTA Liquidating Trust.
Spin-Off	Creation of an independent, publicly traded REIT, SMTA, through our contribution of properties leased to Shopko, assets that collateralize Master Trust 2014 and other additional assets to SMTA followed by the distribution by us to our stockholders of all of the common shares of beneficial interest in SMTA.
SubREIT	Spirit MTA SubREIT, Inc., previously a wholly-owned subsidiary of SMTA. SubREIT was dissolved on October 1, 2019
Total Debt	Principal debt outstanding before discounts, premiums or deferred financing costs
TSR	Total Shareholder Return
U.S.	United States
Vacant	Owned properties which are not economically yielding

Unless otherwise indicated or unless the context requires otherwise, all references to the “registrant, the "Company," "Spirit Realty Capital," "we," "us" or "our" refer to the Corporation and its consolidated subsidiaries, including the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references to the "Operating Partnership" refer to Spirit Realty, L.P. and its consolidated subsidiaries.

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, 2020			December 31, 2019
Assets
Investments:
Real estate investments:
Land and improvements	$	1,995,780		$	1,910,287
Buildings and improvements		4,022,944			3,840,220
Total real estate investments		6,018,724			5,750,507
Less: accumulated depreciation		(810,215	)		(717,097	)
		5,208,509			5,033,410
Loans receivable, net		—			34,465
Intangible lease assets, net		349,347			385,079
Real estate assets under direct financing leases, net		7,444			14,465
Real estate assets held for sale, net		33,885			1,144
Net investments		5,599,185			5,468,563
Cash and cash equivalents		116,814			14,492
Deferred costs and other assets, net		149,820			124,006
Goodwill		225,600			225,600
Total assets	$	6,091,419		$	5,832,661

Liabilities and stockholders’ equity
Liabilities:
Revolving credit facilities	$	—		$	116,500
Term loans, net		177,170			—
Senior Unsecured Notes, net		1,926,752			1,484,066
Mortgages and notes payable, net		213,479			216,049
Convertible Notes, net		188,216			336,402
Total debt, net		2,505,617			2,153,017
Intangible lease liabilities, net		121,066			127,335
Accounts payable, accrued expenses and other liabilities		132,555			139,060
Total liabilities		2,759,238			2,419,412
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, 2020 and December 31, 2019		166,177			166,177
Common stock, $0.05 par value, 175,000,000 shares authorized: 105,884,703 and 102,476,152 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		5,294			5,124
Capital in excess of common stock par value		5,813,128			5,686,247
Accumulated deficit		(2,643,063	)		(2,432,838	)
Accumulated other comprehensive loss		(9,355	)		(11,461	)
Total stockholders’ equity		3,332,181			3,413,249
Total liabilities and stockholders’ equity	$	6,091,419		$	5,832,661

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues:
Rental income	$	112,916		$	109,511		$	351,469		$	320,084
Interest income on loans receivable		189			843			998			2,749
Earned income from direct financing leases		131			267			439			971
Related party fee income		178			54,795			678			68,971
Other income		327			1,531			1,401			2,510
Total revenues		113,741			166,947			354,985			395,285
Expenses:
General and administrative		10,931			12,727			36,396			39,741
Termination of interest rate swaps		—			12,461			—			12,461
Property costs (including reimbursable)		5,049			4,407			18,219			13,968
Deal pursuit costs		597			330			1,630			574
Interest		26,404			24,675			77,858			76,462
Depreciation and amortization		52,170			43,907			157,566			126,598
Impairments		8,106			5,932			69,929			13,231
Total expenses		103,257			104,439			361,598			283,035
Other income:
Loss on debt extinguishment		(7,252	)		(5,580	)		(7,252	)		(11,473	)
Gain on disposition of assets		10,763			32,254			11,809			70,760
Preferred dividend income from SMTA		—			3,302			—			10,802
Total other income		3,511			29,976			4,557			70,089
Income (loss) before income tax expense		13,995			92,484			(2,056	)		182,339
Income tax expense		(197	)		(11,190	)		(406	)		(11,730	)
Net income (loss)		13,798			81,294			(2,462	)		170,609
Dividends paid to preferred shareholders		(2,587	)		(2,587	)		(7,763	)		(7,763	)
Net income (loss) attributable to common stockholders	$	11,211		$	78,707		$	(10,225	)	$	162,846

Net income (loss) per share attributable to common stockholders:
Basic	$	0.11		$	0.87		$	(0.11	)	$	1.85
Diluted	$	0.11		$	0.87		$	(0.11	)	$	1.85

Weighted average shares of common stock outstanding:
Basic		102,750,120			90,040,353			102,553,798			87,529,786
Diluted		102,938,860			90,396,797			102,553,798			87,784,477

Dividends declared per common share issued	$	0.6250		$	0.6250		$	1.8750		$	1.8750

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020			2019
Net income (loss) attributable to common stockholders	$	11,211	$	78,707	$	(10,225	)	$	162,846
Other comprehensive income (loss):
Net reclassification of amounts from (to) AOCL		702		8,772		2,106			(5,003	)
Total comprehensive income (loss)	$	11,913	$	87,479	$	(8,119	)	$	157,843

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Stockholders' Equity

(In Thousands, Except Share Data)

(Unaudited)

Nine Months Ended September 30, 2020	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			AOCL			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 loss		—		—		—			—			—			(15,847	)		—			(15,847	)
Dividends declared on preferred stock		—		—		—			—			—			(2,588	)		—			(2,588	)
Net loss attributable to common stockholders				—					—			—			(18,435	)		—			(18,435	)
Other comprehensive income		—		—		—			—			—			—			702			702
Dividends declared on common stock		—		—		—			—			—			(64,338	)		—			(64,338	)
Tax withholdings related to net stock settlements		—		—		(44,488	)		(2	)		—			(2,347	)		—			(2,349	)
Issuance of shares of common stock, net		—		—		362,481			18			17,580			—			—			17,598
Stock-based compensation, net		—		—		148,017			7			3,444			(470	)		—			2,981
Balances, March 31, 2020		6,900,000	$	166,177		102,942,162		$	5,147		$	5,707,271		$	(2,518,428	)	$	(10,759	)	$	3,349,408
Net loss		—		—		—			—			—			(413	)		—			(413	)
Dividends declared on preferred stock		—		—		—			—			—			(2,588	)		—			(2,588	)
Net loss attributable to common stockholders				—					—			—			(3,001	)		—			(3,001	)
Other comprehensive income		—		—		—			—			—			—			702			702
Dividends declared on common stock		—		—		—			—			—			(64,402	)		—			(64,402	)
Tax withholdings related to net stock settlements		—		—		(73,055	)		(4	)		—			(2,027	)		—			(2,031	)
Issuance of shares of common stock, net		—		—		—			—			(185	)		—			—			(185	)
Stock-based compensation, net		—		—		174,163			9			3,300			8			—			3,317
Balances, June 30, 2020		6,900,000	$	166,177		103,043,270		$	5,152		$	5,710,386		$	(2,587,850	)	$	(10,057	)	$	3,283,808
Net income		—		—		—			—			—			13,798			—			13,798
Dividends declared on preferred stock		—		—		—			—			—			(2,587	)		—			(2,587	)
Net income available to common stockholders				—					—			—			11,211			—			11,211
Other comprehensive income		—		—		—			—			—			—			702			702
Dividends declared on common stock		—		—		—			—			—			(66,171	)		—			(66,171	)
Issuance of shares of common stock, net		—		—		2,844,178			142			99,776			—			—			99,918
Stock-based compensation, net		—		—		(2,745	)		—			2,966			(253	)		—			2,713
Balances, September 30, 2020		6,900,000	$	166,177		105,884,703		$	5,294		$	5,813,128		$	(2,643,063	)	$	(9,355	)	$	3,332,181

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Stockholders' Equity

(In Thousands, Except Share Data)

(Unaudited)

Nine Months Ended September 30, 2019	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			AOCL			Total Stockholders’ Equity
Balances, December 31, 2018		6,900,000	$	166,177		85,787,355		$	4,289		$	4,995,697		$	(2,357,255	)	$	(7,159	)	$	2,801,749
Net income		—		—		—			—			—			43,578			—			43,578
Dividends declared on preferred stock		—		—		—			—			—			(2,588	)		—			(2,588	)
Net income attributable to common stockholders				—					—			—			40,990			—			40,990
Other comprehensive loss		—		—		—			—			—			—			(5,021	)		(5,021	)
Dividends declared on common stock		—		—		—			—			—			(54,254	)		—			(54,254	)
Tax withholdings related to net stock settlements		—		—		(17,800	)		(1	)		—			(703	)		—			(704	)
Issuance of shares of common stock, net		—		—		893,526			45			32,641			—			—			32,686
Other		—		—		—			—			(79	)		—			—			(79	)
Stock-based compensation, net		—		—		148,705			8			3,570			(309	)		—			3,269
Balances, March 31, 2019		6,900,000	$	166,177		86,811,786		$	4,341		$	5,031,829		$	(2,371,531	)	$	(12,180	)	$	2,818,636
Net income		—		—		—			—			—			45,737			—			45,737
Dividends declared on preferred stock		—		—		—			—			—			(2,588	)		—			(2,588	)
Net income attributable to common stockholders				—					—			—			43,149			—			43,149
Other comprehensive loss		—		—		—			—			—			—			(8,754	)		(8,754	)
Dividends declared on common stock		—		—		—			—			—			(56,318	)		—			(56,318	)
Tax withholdings related to net stock settlements		—		—		(16,367	)		(1	)		—			(677	)		—			(678	)
Issuance of shares of common stock, net		—		—		3,292,102			165			129,685			—			—			129,850
Stock-based compensation, net		—		—		23,206			1			3,882			(308	)		—			3,575
Balances, June 30, 2019		6,900,000	$	166,177		90,110,727		$	4,506		$	5,165,396		$	(2,385,685	)	$	(20,934	)	$	2,929,460
Net income		—		—		—			—			—			81,294			—			81,294
Dividends declared on preferred stock		—		—		—			—			—			(2,587	)		—			(2,587	)
Net income available to common stockholders				—					—			—			78,707			—			78,707
Other comprehensive income		—		—		—			—			—			—			8,772			8,772
Dividends declared on common stock		—		—		—			—			—			(62,322	)		—			(62,322	)
Tax withholdings related to net stock settlements		—		—		(24,229	)		(1	)		—			(1,157	)		—			(1,158	)
Issuance of shares of common stock, net		—		—		9,646,430			482			375,240			—			—			375,722
Stock-based compensation, net		—		—		(2,855	)		—			3,534			65			—			3,599
Balances, September 30, 2019		6,900,000	$	166,177		99,730,073		$	4,987		$	5,544,170		$	(2,370,392	)	$	(12,162	)	$	3,332,780

See accompanying notes.

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
Operating activities
Net (loss) income	$	(2,462	)	$	170,609
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		157,566			126,598
Impairments		69,929			13,231
Amortization of deferred financing costs		4,048			5,155
Amortization of debt discounts		3,504			5,805
Amortization of deferred losses on interest rate swaps		2,106			156
Loss on termination of interest rate swaps		—			12,461
Payment for termination of interest rate swaps		—			(24,843	)
Stock-based compensation expense		9,726			10,995
Loss on debt extinguishment		7,252			11,473
Gain on dispositions of real estate and other assets		(11,809	)		(70,760	)
Non-cash revenue		(6,800	)		(13,581	)
Bad debt expense and other		210			184
Changes in operating assets and liabilities:
Deferred costs and other assets, net		(19,414	)		4,560
Accounts payable, accrued expenses and other liabilities		(7,332	)		7,310
Net cash provided by operating activities		206,524			259,353
Investing activities
Acquisitions of real estate		(433,354	)		(719,081	)
Capitalized real estate expenditures		(9,917	)		(32,902	)
Proceeds from redemption of preferred equity investment		—			150,000
Collections from investment in Master Trust 2014		—			33,535
Collections of principal on loans receivable		31,771			9,303
Proceeds from dispositions of real estate and other assets, net		58,734			230,529
Net cash used in investing activities		(352,766	)		(328,616	)
Financing activities
Borrowings under revolving credit facilities		1,123,000			744,700
Repayments under revolving credit facilities		(1,239,500	)		(891,000	)
Repayments under mortgages and notes payable		(3,039	)		(198,645	)
Borrowings under term loans		400,000			820,000
Repayments under term loans		(222,000	)		(1,240,000	)
Repayments under Convertible Notes		(154,574	)		(402,500	)
Borrowings under Senior Unsecured Notes		445,509			1,198,264
Debt extinguishment costs		(4,057	)		(12,590	)
Deferred financing costs		(6,509	)		(20,230	)
Proceeds from issuance of common stock, net of offering costs		117,331			538,003
Repurchase of shares of common stock, including tax withholdings related to net stock settlements		(4,380	)		(2,540	)
Common stock dividends paid		(194,310	)		(164,191	)
Preferred stock dividends paid		(7,763	)		(7,763	)
Net cash provided by financing activities		249,708			361,508
Net increase in cash, cash equivalents and restricted cash		103,466			292,245
Cash, cash equivalents and restricted cash, beginning of period		26,023			77,421
Cash, cash equivalents and restricted cash, end of period	$	129,489		$	369,666

Cash paid for interest	$	75,208		$	61,755
Cash paid for income taxes	$	967		$	1,121

SPIRIT REALTY CAPITAL, INC.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

Supplemental Disclosures of Non-Cash Activities:	Nine Months Ended September 30,
	2020		2019
Dividends declared and unpaid	$	66,178	$	62,322
Relief of debt through sale or foreclosure of real estate properties		—		10,368
Net real estate and other collateral assets sold or surrendered to lender		—		654
Cash flow hedge changes in fair value		—		18,593
Accrued interest capitalized to principal ⁽¹⁾		—		251
Accrued market-based award dividend rights		715		847
Accrued capitalized costs		1,383		2,065
Accrued deferred financing costs		138		2,048
Right-of-use lease assets		—		6,143
Lease liabilities		—		6,143
Reclass of residual value from direct financing lease to operating lease		6,831		5,841
Receivable for disposal of real estate property		2,000		—

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

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Balance Sheets

(In Thousands, Except Unit and Per Unit Data)

(Unaudited)

	September 30, 2020			December 31, 2019
Assets
Investments:
Real estate investments:
Land and improvements	$	1,995,780		$	1,910,287
Buildings and improvements		4,022,944			3,840,220
Total real estate investments		6,018,724			5,750,507
Less: accumulated depreciation		(810,215	)		(717,097	)
		5,208,509			5,033,410
Loans receivable, net		—			34,465
Intangible lease assets, net		349,347			385,079
Real estate assets under direct financing leases, net		7,444			14,465
Real estate assets held for sale, net		33,885			1,144
Net investments		5,599,185			5,468,563
Cash and cash equivalents		116,814			14,492
Deferred costs and other assets, net		149,820			124,006
Goodwill		225,600			225,600
Total assets	$	6,091,419		$	5,832,661

Liabilities and partners' capital
Liabilities:
Revolving credit facilities	$	—		$	116,500
Term loans, net		177,170			—
Senior Unsecured Notes, net		1,926,752			1,484,066
Mortgages and notes payable, net		213,479			216,049
Notes payable to Spirit Realty Capital, Inc., net		188,216			336,402
Total debt, net		2,505,617			2,153,017
Intangible lease liabilities, net		121,066			127,335
Accounts payable, accrued expenses and other liabilities		132,555			139,060
Total liabilities		2,759,238			2,419,412
Commitments and contingencies (see Note 6)
Partners' capital:
Partnership units
General partner's capital: 797,644 units issued and outstanding as of both September 30, 2020 and December 31, 2019		20,818			22,389
Limited partners' preferred capital: 6,900,000 units issued and outstanding as of both September 30, 2020 and December 31, 2019		166,177			166,177
Limited partners' common capital: 105,087,059 and 101,678,508 units issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		3,145,186			3,224,683
Total partners' capital		3,332,181			3,413,249
Total liabilities and partners' capital	$	6,091,419		$	5,832,661

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Operations

(In Thousands, Except Unit and Per Unit Data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues:
Rental income	$	112,916		$	109,511		$	351,469		$	320,084
Interest income on loans receivable		189			843			998			2,749
Earned income from direct financing leases		131			267			439			971
Related party fee income		178			54,795			678			68,971
Other income		327			1,531			1,401			2,510
Total revenues		113,741			166,947			354,985			395,285
Expenses:
General and administrative		10,931			12,727			36,396			39,741
Termination of interest rate swaps		—			12,461			—			12,461
Property costs (including reimbursable)		5,049			4,407			18,219			13,968
Deal pursuit costs		597			330			1,630			574
Interest		26,404			24,675			77,858			76,462
Depreciation and amortization		52,170			43,907			157,566			126,598
Impairments		8,106			5,932			69,929			13,231
Total expenses		103,257			104,439			361,598			283,035
Other income:
Loss on debt extinguishment		(7,252	)		(5,580	)		(7,252	)		(11,473	)
Gain on disposition of assets		10,763			32,254			11,809			70,760
Preferred dividend income from SMTA		—			3,302			—			10,802
Total other income		3,511			29,976			4,557			70,089
Income (loss) before income tax expense		13,995			92,484			(2,056	)		182,339
Income tax expense		(197	)		(11,190	)		(406	)		(11,730	)
Net income (loss)		13,798			81,294			(2,462	)		170,609
Preferred distributions		(2,587	)		(2,587	)		(7,763	)		(7,763	)
Net income (loss) after preferred distributions	$	11,211		$	78,707		$	(10,225	)	$	162,846

Net income (loss) attributable to the general partner	$	87		$	703		$	(79	)	$	1,477
Net income (loss) attributable to the limited partners	$	13,711		$	80,591		$	(2,383	)	$	169,132

Net income (loss) per partnership unit:
Basic	$	0.11		$	0.87		$	(0.11	)	$	1.85
Diluted	$	0.11		$	0.87		$	(0.11	)	$	1.85

Weighted average partnership units outstanding:
Basic		102,750,120			90,040,353			102,553,798			87,529,786
Diluted		102,938,860			90,396,797			102,553,798			87,784,477

Dividends declared per partnership unit issued	$	0.6250		$	0.6250		$	1.8750		$	1.8750

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020			2019
Net income (loss) after preferred distributions	$	11,211	$	78,707	$	(10,225	)	$	162,846
Other comprehensive income (loss):
Net reclassification of amounts from (to) AOCL		702		8,772		2,106			(5,003	)
Total comprehensive income (loss)	$	11,913	$	87,479	$	(8,119	)	$	157,843

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Partners' Capital

(In Thousands, Except Unit Data)

(Unaudited)

Nine Months Ended September 30, 2020	Preferred Units				Common Units
	Limited Partners' Capital ⁽¹⁾				General Partner's Capital ⁽²⁾					Limited Partners' Capital ⁽¹⁾						Total Partnership
	Units		Amount		Units		Amount			Units			Amount			Capital
Balances, December 31, 2019		6,900,000	$	166,177		797,644	$	22,389			101,678,508		$	3,224,683		$	3,413,249
Net loss		—		—		—		(143	)		—			(15,704	)		(15,847	)
Partnership distributions declared on preferred units		—		—		—		—			—			(2,588	)		(2,588	)
Net loss after preferred distributions				—				(143	)					(18,292	)		(18,435	)
Other comprehensive income		—		—		—		5			—			697			702
Partnership distributions declared on common units		—		—		—		(499	)		—			(63,839	)		(64,338	)
Tax withholdings related to net settlement of common units		—		—		—		—			(44,488	)		(2,349	)		(2,349	)
Issuance of common units, net		—		—		—		—			362,481			17,598			17,598
Stock-based compensation, net		—		—		—		—			148,017			2,981			2,981
Balances, March 31, 2020		6,900,000	$	166,177		797,644	$	21,752			102,144,518		$	3,161,479		$	3,349,408
Net loss		—		—		—		(23	)		—			(390	)		(413	)
Partnership distributions declared on preferred units		—		—		—		—			—			(2,588	)		(2,588	)
Net loss after preferred distributions				—				(23	)					(2,978	)		(3,001	)
Other comprehensive income		—		—		—		5			—			697			702
Partnership distributions declared on common units		—		—		—		(498	)		—			(63,904	)		(64,402	)
Tax withholdings related to net settlement of common units		—		—		—		—			(73,055	)		(2,031	)		(2,031	)
Issuance of common units, net		—		—		—		—			—			(185	)		(185	)
Stock-based compensation, net		—		—		—		—			174,163			3,317			3,317
Balances, June 30, 2020		6,900,000	$	166,177		797,644	$	21,236			102,245,626		$	3,096,395		$	3,283,808
Net income		—		—		—		87			—			13,711			13,798
Partnership distributions declared on preferred units		—		—		—		—			—			(2,587	)		(2,587	)
Net income after preferred distributions				—				87						11,124			11,211
Other comprehensive income		—		—		—		6			—			696			702
Partnership distributions declared on common units		—		—		—		(511	)		—			(65,660	)		(66,171	)
Issuance of common units, net		—		—		—		—			2,844,178			99,918			99,918
Stock-based compensation, net		—		—		—		—			(2,745	)		2,713			2,713
Balances, September 30, 2020		6,900,000	$	166,177		797,644	$	20,818			105,087,059		$	3,145,186		$	3,332,181

SPIRIT REALTY, L.P.

Consolidated Statements of Partners' Capital

(In Thousands, Except Unit Data)

(Unaudited)

Nine Months Ended September 30, 2019	Preferred Units				Common Units
	Limited Partners' Capital ⁽¹⁾				General Partner's Capital ⁽²⁾					Limited Partners' Capital ⁽¹⁾						Total Partnership
	Units		Amount		Units		Amount			Units			Amount			Capital
Balances, December 31, 2018		6,900,000	$	166,177		797,644	$	23,061			84,989,711		$	2,612,511		$	2,801,749
Net income		—		—		—		380			—			43,198			43,578
Partnership distributions declared on preferred units		—		—		—		—			—			(2,588	)		(2,588	)
Net income after preferred distributions				—				380						40,610			40,990
Other comprehensive loss		—		—		—		(47	)		—			(4,974	)		(5,021	)
Partnership distributions declared on common units		—		—		—		(504	)		—			(53,750	)		(54,254	)
Tax withholdings related to net settlement of common units		—		—		—		—			(17,800	)		(704	)		(704	)
Issuance of common units, net		—		—		—		—			893,526			32,686			32,686
Other		—		—		—		(1	)		—			(78	)		(79	)
Stock-based compensation, net		—		—		—		—			148,705			3,269			3,269
Balances, March 31, 2019		6,900,000	$	166,177		797,644	$	22,889			86,014,142		$	2,629,570		$	2,818,636
Net income		—		—		—		394			—			45,343			45,737
Partnership distributions declared on preferred units		—		—		—		—			—			(2,588	)		(2,588	)
Net income after preferred distributions				—				394						42,755			43,149
Other comprehensive loss		—		—		—		(80	)		—			(8,674	)		(8,754	)
Partnership distributions declared on common units		—		—		—		(513	)		—			(55,805	)		(56,318	)
Tax withholdings related to net settlement of common units		—		—		—		—			(16,367	)		(678	)		(678	)
Issuance of common units, net		—		—		—		—			3,292,102			129,850			129,850
Stock-based compensation, net		—		—		—		—			23,206			3,575			3,575
Balances, June 30, 2019		6,900,000	$	166,177		797,644	$	22,690			89,313,083		$	2,740,593		$	2,929,460
Net income		—		—		—		703			—			80,591			81,294
Partnership distributions declared on preferred units		—		—		—		—			—			(2,587	)		(2,587	)
Net income after preferred distributions				—				703						78,004			78,707
Other comprehensive income		—		—		—		82			—			8,690			8,772
Partnership distributions declared on common units		—		—		—		(551	)		—			(61,771	)		(62,322	)
Tax withholdings related to net settlement of common units		—		—		—		—			(24,229	)		(1,158	)		(1,158	)
Issuance of common units		—		—		—		—			9,646,430			375,722			375,722
Stock-based compensation, net		—		—		—		—			(2,855	)		3,599			3,599
Balances, September 30, 2019		6,900,000	$	166,177		797,644	$	22,924			98,932,429		$	3,143,679		$	3,332,780

⁽¹⁾	Consists of limited partnership interests held by the Corporation and Spirit Notes Partner, LLC.

⁽²⁾	Consists of general partnership interests held by OP Holdings.

See accompanying notes.

SPIRIT REALTY, L.P.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
Operating activities
Net (loss) income	$	(2,462	)	$	170,609
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		157,566			126,598
Impairments		69,929			13,231
Amortization of deferred financing costs		4,048			5,155
Amortization of debt discounts		3,504			5,805
Amortization of deferred losses on interest rate swaps		2,106			156
Loss on termination of interest rate swaps		—			12,461
Payment for termination of interest rate swaps		—			(24,843	)
Stock-based compensation expense		9,726			10,995
Loss on debt extinguishment		7,252			11,473
Gain on dispositions of real estate and other assets		(11,809	)		(70,760	)
Non-cash revenue		(6,800	)		(13,581	)
Bad debt expense and other		210			184
Changes in operating assets and liabilities:
Deferred costs and other assets, net		(19,414	)		4,560
Accounts payable, accrued expenses and other liabilities		(7,332	)		7,310
Net cash provided by operating activities		206,524			259,353
Investing activities
Acquisitions of real estate		(433,354	)		(719,081	)
Capitalized real estate expenditures		(9,917	)		(32,902	)
Proceeds from redemption of preferred equity investment		—			150,000
Collections from investment in Master Trust 2014		—			33,535
Collections of principal on loans receivable		31,771			9,303
Proceeds from dispositions of real estate and other assets, net		58,734			230,529
Net cash used in investing activities		(352,766	)		(328,616	)
Financing activities
Borrowings under revolving credit facilities		1,123,000			744,700
Repayments under revolving credit facilities		(1,239,500	)		(891,000	)
Repayments under mortgages and notes payable		(3,039	)		(198,645	)
Borrowings under term loans		400,000			820,000
Repayments under term loans		(222,000	)		(1,240,000	)
Repayments under Convertible Notes		(154,574	)		(402,500	)
Borrowings under Senior Unsecured Notes		445,509			1,198,264
Debt extinguishment costs		(4,057	)		(12,590	)
Deferred financing costs		(6,509	)		(20,230	)
Proceeds from issuance of partnership units, net of offering costs		117,331			538,003
Repurchase of partnership units, including tax withholdings related to net settlement of common units		(4,380	)		(2,540	)
Common distributions paid		(194,310	)		(164,191	)
Preferred distributions paid		(7,763	)		(7,763	)
Net cash provided by financing activities		249,708			361,508
Net increase in cash, cash equivalents and restricted cash		103,466			292,245
Cash, cash equivalents and restricted cash, beginning of period		26,023			77,421
Cash, cash equivalents and restricted cash, end of period	$	129,489		$	369,666

Cash paid for interest	$	75,208		$	61,755
Cash paid for income taxes	$	967		$	1,121

SPIRIT REALTY, L.P.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

Supplemental Disclosures of Non-Cash Activities:	Nine Months Ended September 30,
	2020		2019
Distributions declared and unpaid	$	66,178	$	62,322
Relief of debt through sale or foreclosure of real estate properties		—		10,368
Net real estate and other collateral assets sold or surrendered to lender		—		654
Cash flow hedge changes in fair value		—		18,593
Accrued interest capitalized to principal ⁽¹⁾		—		251
Accrued market-based award dividend rights		715		847
Accrued capitalized costs		1,383		2,065
Accrued deferred financing costs		138		2,048
Right-of-use lease assets		—		6,143
Lease liabilities		—		6,143
Reclass of residual value from direct financing lease to operating lease		6,831		5,841
Receivable for disposal of real estate property		2,000		—

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

See accompanying notes.

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

Notes to Consolidated Financial Statements

September 30, 2020

(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 and deliver sustainable and attractive returns for stockholders by primarily investing in and managing a portfolio of single-tenant, operationally essential real estate throughout the U.S. that is generally leased on a long-term, triple-net basis to tenants operating within retail, industrial, office and other property types. Single tenant, operationally essential real estate generally refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.

The Company’s operations are generally carried out through 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 the assets that collateralized Master Trust 2014, properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). The Company formed Spirit Realty AM Corporation (“SRAM”), a wholly-owned taxable REIT subsidiary. The rights and obligations of the Asset Management Agreement were transferred to SRAM on April 1, 2019, which was subsequently terminated and simultaneously replaced by the Interim Management Agreement between SRAM and SMTA, which was effective from September 20, 2019 through September 4, 2020. The Company allocated personnel and other general and administrative costs to SRAM for management services provided to SMTA.

NOTE 2. SUMMARY OF SIGNIFICANT ACOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The results for interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements pursuant to SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2019.

The consolidated financial statements of the Company include the accounts of the Corporation and its wholly-owned subsidiaries. The consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. All expenses incurred by the Company have been allocated to the Operating Partnership in accordance with the Operating Partnership's first amended and restated agreement of limited partnership, which management determined to be a reasonable method of allocation. Therefore, expenses incurred would not be materially different if the Operating Partnership had operated as an unaffiliated entity.

These 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, 2020 and December 31, 2019, net assets totaling $350.4 million and $375.5 million, respectively, were held, and net liabilities totaling $216.7 million and $231.7 million, respectively, were owed by these encumbered special purpose entities and are included in the accompanying consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.

Segment Reporting

The Company views its operations as 1 segment, which consists of net leasing operations. The Company has no other reportable segments.

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 Company does not include options to extend, terminate or purchase in its evaluation for lease classification purposes or for recognizing rental income unless the Company is reasonably certain the tenant will exercise the option. Another component of lease classification that requires judgment is the residual value of the property at the end of the lease term. For acquisitions, the Company assumes a value that is equal to the tangible value of the property at the date of the assessment. For lease modifications, the Company generally uses sales comparables or a direct capitalization approach to determine fair value.

The Company’s leases generally provide for rent escalations throughout the term of the lease. For leases with fixed rent escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. Accordingly, accrued rental revenue, calculated as the aggregate difference between the rental revenue recognized on a straight-line basis and scheduled rents, represents unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the initial term of the leases. For leases with contingent rent escalators, rental income typically increases at a multiple of any increase in the CPI over a specified period and may adjust over a one-year period or over multiple-year periods. Because of the volatility and uncertainty with respect to 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 at each rent adjustment date during the entire term of these leases, increases in rental revenue from leases with this type of escalator 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 change in the factor on which the contingent lease payment is based actually occurs.

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 expenses and certain other recoverable expenses, which are non-lease components. The Company has 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 as revenue in the period in which the related expenses are incurred, with the related expenses included in property costs (including reimbursable) on the Company’s 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

Initial direct costs associated with the origination of a lease are deferred and amortized as an adjustment to rental revenue. Above-market and below-market lease intangibles are amortized as a decrease and increase, respectively, to rental revenue. In-place lease intangibles are amortized on a straight-line basis and included in depreciation and amortization expense. All lease intangibles are amortized over the remaining term of the respective leases, which includes the initial term of the lease and may also include the renewal periods if the Company believes it is reasonably certain the tenant will exercise the renewal option. If the Company subsequently determines it is reasonably certain that the tenant will not exercise the renewal option, the unamortized portion of any related lease intangible is accelerated over the remaining initial term of the lease. If the Company believes the intangible balance is no longer recoverable, the unamortized portion of any related lease intangible is immediately recognized in impairments in the Company’s consolidated statements 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 investments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):

	September 30, 2020		December 31, 2019		September 30, 2019
Cash and cash equivalents	$	116,814	$	14,492	$	358,440
Restricted cash:
Collateral deposits ⁽¹⁾		460		347		469
Tenant improvements, repairs and leasing commissions ⁽²⁾		12,215		10,877		10,431
Other ⁽³⁾		0		307		326
Total cash, cash equivalents and restricted cash	$	129,489	$	26,023	$	369,666

⁽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.

⁽³⁾ Funds held in lender-controlled accounts released after scheduled debt service requirements are met.

Tenant Receivables

The Company reviews its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the tenant operates. If the collectability of a receivable with respect to any tenant is not probable of collection, a direct write-off of the specific receivable will be made. The Company had accounts receivable balances of $28.5 million and $7.7 million at September 30, 2020 and December 31, 2019, respectively, after the impact of $14.3 million and $3.8 million of receivables, respectively, were deemed not probable of collection. Receivables are recorded within deferred cost and other assets, net in the accompanying consolidated balance sheets.

For receivable balances related to the straight-line method of reporting rental revenue, the collectability is generally assessed in conjunction with the evaluation of rental income as described above. The Company had straight-line rent receivables of $89.3 million and $83.6 million at September 30, 2020 and December 31, 2019, respectively, after the impact of $11.0 million and $0.4 million of receivables, respectively, were deemed not probable of collection. These receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.

Goodwill

Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the Step 2 requirement to calculate the implied fair value of goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 effective January 1, 2020. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. NaN 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. 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. The rights and obligations of the Asset Management Agreement were transferred to SRAM, a wholly-owned taxable REIT subsidiary of Spirit, on April 1, 2019, which was subsequently terminated and simultaneously replaced by the Interim Management Agreement between SRAM and SMTA, effective from September 20, 2019 through September 4, 2020. Accordingly, all asset management fees earned from April 1, 2019 through September 4, 2020, including the termination fee income earned in September 2019, were subject to income tax.

The components of income taxes are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
US Federal income tax	$	38	$	10,402	$	81	$	10,500
State income tax		159		788		325		1,230
Total income tax	$	197	$	11,190	$	406	$	11,730

The federal income tax related to SRAM for the three and nine months ended September 30, 2019 was $10.4 and $10.5 million, respectively, and the state income tax for both the three and nine months ended September 30, 2019 was $0.7 million. Income tax expense for SRAM attributable to income before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate of 21% to income before income taxes. The difference between the statutory rate and reported amount for SRAM was caused by non-deductible executive compensation expenses totaling $0.7 million and the impact of state income taxes, net of federal income tax benefit, totaling $0.2 million. SRAM had 0 material deferred income taxes and liabilities as of September 30, 2019.

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, therefore 0 provision has been made for federal income taxes in the accompanying 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 a partnership. Franchise taxes are included in general and administrative expenses on the accompanying consolidated statements of operations.

New Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. ASU 2016-13 requires financial assets (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and as such, the Company adopted ASU 2016-13 effective January 1, 2020. Per the subsequently issued ASU 2018-19, receivables arising from operating leases are not within the scope of ASU 2016-13. As such, the Company reviewed receivables within the scope of ASU 2016-13 totaling $40.3 million, which were comprised of loans receivable and real estate assets held under direct financing lease. The Company determined the key credit quality indicator was the credit rating of the borrower, coupled with remaining time to maturity. As a result, the adoption of the new guidance resulted in the recognition of a loss of $0.3 million on January 1, 2020, which is recorded in impairments on the accompanying consolidated statement of operations.

In April 2020, the FASB released a Staff Q&A regarding the accounting for lease concessions related to the effects of the COVID-19 pandemic. The FASB noted that the underlying premise in requiring a modified lease to be accounted for as if it were a new lease under ASC 842 is that the modified terms and conditions affect the economics of the lease for the remainder of the lease term. As such, the FASB staff clarified that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). The Company made this election and accounts for rent deferrals by increasing the rent receivables as receivables accrue and continuing to recognize income during the deferral period, resulting in $1.8 million and $24.1 million of deferrals being recognized in rental income for the three and nine months ended September 30, 2020, respectively. The deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 13 months. 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. Management continues to evaluate any amounts recognized for collectability, regardless of whether accounted for as a lease modification or not, and records a provision for losses against 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.

NOTE 3. INVESTMENTS

Owned Properties

As of September 30, 2020, the Company's gross investment in owned real estate properties totaled approximately $6.4 billion. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 48 states with Texas, at 11.5%, 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 nine months ended September 30, 2020, the Company had the following real estate activity, net of accumulated depreciation and amortization (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, 2019		1,750			2			1,752		$	6,140,775		$	1,223		$	6,141,998
Acquisitions/improvements ⁽¹⁾		47			0			47			443,960			0			443,960
Dispositions of real estate ⁽²⁾		(14	)		(7	)		(21	)		(49,885	)		(4,975	)		(54,860	)
Transfers to Held for Sale		(18	)		18			0			(47,916	)		47,916			0
Impairments ⁽³⁾		0			0			0			(65,308	)		(4,621	)		(69,929	)
Reset of gross balances⁽⁴⁾		0			0			0			(37,807	)		(2,204	)		(40,011	)
Other		0			0			0			(1,339	)		0			(1,339	)
Gross balance, September 30, 2020		1,765			13			1,778			6,382,480			37,339			6,419,819
Accumulated depreciation and amortization											(938,246	)		(3,454	)		(941,700	)
Net balance, September 30, 2020 ⁽⁵⁾										$	5,444,234		$	33,885		$	5,478,119

⁽¹⁾	Includes investments of $8.6 million in revenue producing capitalized expenditures, as well as $1.8 million of non-revenue producing capitalized expenditures during the nine months ended September 30, 2020.

⁽²⁾	For the nine months ended September 30, 2020, the total gain on disposal of assets for properties held in use and held for sale was $10.1 million and $1.9 million, respectively.

⁽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 which have been fully amortized.

⁽⁵⁾	Reconciliation of total owned investments to the accompanying consolidated balance sheet at September 30, 2020 is as follows:

Operating lease held in use land and buildings, net	$	5,208,509
Intangible lease assets, net		349,347
Real estate assets under direct financing leases, net		7,444
Real estate assets held for sale, net		33,885
Intangible lease liabilities, net		(121,066	)
Net balance	$	5,478,119

Operating Leases

As of September 30, 2020 and December 31, 2019, the Company held 1,765 and 1,745 properties under operating leases, respectively. The following table summarizes the components of rental income recognized on these operating leases in the accompanying consolidated statements of operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Base Cash Rent⁽¹⁾	$	108,398	$	100,962	$	335,110	$	296,179
Variable cash rent (including reimbursables)		3,051		2,823		8,843		9,403
Straight-line rent, net of uncollectible reserve⁽²⁾		899		4,770		6,385		12,162
Amortization of above- and below- market lease intangibles, net ⁽³⁾		568		956		1,131		2,340
Total rental income	$	112,916	$	109,511	$	351,469	$	320,084

⁽¹⁾	Includes net impact of (amounts not deemed probable of collection)/amounts recovered of $(6.5 million) and $(0.2 million) for the three months ended September 30, 2020 and 2019, respectively, and $(12.1 million) and $0.8 million for the nine months ended September 30, 2020 and 2019, respectively.

⁽²⁾	Includes net impact of amounts not deemed probable of collection of $4.3 million for the three months ended September 30, 2020, and $11.0 million and $0.3 million for the nine months ended September 30, 2020 and 2019, respectively.

⁽³⁾

Excludes amortization of in-place leases of $8.4 million and $7.2 million for the three months ended September 30, 2020 and 2019, respectively, and $25.9 million and $20.4 million for the nine months ended September 30, 2020 and 2019, respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations.

Scheduled minimum future rent to be received under the remaining non-cancellable term of these operating leases (including contractual fixed rent increases occurring on or after October 1, 2020) at September 30, 2020 are as follows (in thousands):

	September 30, 2020
Remainder of 2020	$	120,598
2021		477,810
2022		463,790
2023		445,749
2024		423,521
Thereafter		3,266,987
Total future minimum rentals	$	5,198,455

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

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

	September 30, 2020			December 31, 2019
In-place leases	$	448,147		$	457,616
Above-market leases		83,809			95,002
Less: accumulated amortization		(182,609	)		(167,539	)
Intangible lease assets, net	$	349,347		$	385,079

Below-market leases	$	175,644		$	176,816
Less: accumulated amortization		(54,578	)		(49,481	)
Intangible lease liabilities, net	$	121,066		$	127,335

Direct Financing Leases

As of September 30, 2020, the Company held 1 property under a direct financing lease, which was held in use. As of September 30, 2020, this property had $3.7 million in scheduled minimum future payments to be received under its remaining non-cancellable lease term. The Company evaluated the collectability of the amounts receivable under the direct financing lease and recorded a reserve for uncollectible amounts totaling $0.3 million in the first quarter of 2020, primarily as a result of the borrower’s credit rating being non-investment grade and the initial term extending until 2027. The Company reversed $0.2 million of the reserve in the third quarter of 2020 as a result of improvement in the borrower’s credit and, as of September 30, 2020, there was a remaining reserve of $0.1 million against the net investment balance of $7.6 million.

Loans Receivable

As of September 30, 2020, all of the Company’s first-priority mortgage loans had been fully paid off. The Company had evaluated the collectability of the amounts receivable under the loans receivable and recorded an allowance for loan losses of $0.3 million in the first quarter of 2020, primarily driven by the borrowers’ having investment grade credit ratings and maturities in 2020. The Company reversed $0.2 million of the reserve in the second quarter of 2020 due to the shorter time to maturity and no change in the borrower’s credit ratings. The remaining $0.1 million of the reserve was reversed during the third quarter of 2020 due to the repayment of the remaining loans.

Impairments and Allowance for Credit Losses

The following table summarizes total impairments and allowance for credit losses recognized in the accompanying consolidated statements of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020		2019
Real estate and intangible asset impairment	$	8,341		$	5,932	$	69,777	$	13,231
(Reversal)/allowance for credit losses on direct financing leases		(152	)		0		152		0
Reversal for credit losses on loans receivable		(83	)		0		0		0
Total impairment loss	$	8,106		$	5,932	$	69,929	$	13,231

NOTE 4. DEBT

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

	Weighted Average Effective Interest Rates ⁽¹⁾	Weighted Average Stated Interest Rates ⁽²⁾		Weighted Average Remaining Years to Maturity⁽³⁾		September 30, 2020			December 31, 2019
Revolving credit facilities	5.12%		—		2.5	$	—		$	116,500
Term loans	3.19%	1.66%			1.5		178,000			—
Senior Unsecured Notes	3.81%	3.61%			8.5		1,950,000			1,500,000
CMBS	5.79%	5.47%			3.1		215,297			218,338
Convertible Notes	5.52%	3.75%			0.6		190,426			345,000
Total debt	4.08%	3.64%			6.9		2,533,723			2,179,838
Debt discount, net							(8,642	)		(9,272	)
Deferred financing costs, net ⁽⁴⁾							(19,464	)		(17,549	)
Total debt, net						$	2,505,617		$	2,153,017

⁽¹⁾

The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs, facility fees, and non-utilization fees, where applicable, calculated for the nine months ended September 30, 2020 and based on the average principal balance outstanding during the period.

⁽²⁾	Represents the weighted average stated interest rate based on the outstanding principal balance as of September 30, 2020.

⁽³⁾	Represents the weighted average remaining years to maturity based on the outstanding principal balance as of September 30, 2020.

⁽⁴⁾	The Company records deferred financing costs for its revolving credit facilities in deferred costs and other assets, net on its consolidated balance sheets.

Revolving Credit Facilities

On January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, comprised of the 2019 Credit Facility and the A-1 Term Loans, which replaced the 2015 Credit Agreement and 2015 Term Loan Agreement, respectively. The 2019 Credit Facility is comprised of $800.0 million of aggregate revolving commitments and an accordion feature providing for an additional $400.0 million of revolving borrowing capacity, subject to satisfying certain requirements and obtaining additional lender commitments. The 2019 Credit Facility has an initial maturity date of March 31, 2023 and includes 2 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 LIBOR breakage fees, if any.

As of September 30, 2020, the 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 each case, based on the Operating Partnership's credit rating, which was upgraded to BBB by S&P in May 2019. Prior to the upgrade, the 2019 Credit Facility bore interest at LIBOR plus an applicable margin of 1.10% per annum and the aggregate revolving commitments incurred a facility fee of 0.25% per annum.

Deferred financing costs incurred in connection with entering into the 2019 Credit Facility are being amortized to interest expense over its remaining initial term. The unamortized deferred financing costs were $2.9 million as of September 30, 2020, compared to $3.7 million as of December 31, 2019, and are recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.

As of September 30, 2020, the full $800.0 million of borrowing capacity was available under the 2019 Credit Facility. NaN outstanding letters of credit existed under the agreement as of September 30, 2020. The Operating Partnership's ability to borrow under the 2019 Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of September 30, 2020, the Company and the Operating Partnership were in compliance with these financial covenants.

Term Loans

On April 2, 2020, the Operating Partnership entered into the 2020 Term Loan Agreement, which provided for $200 million of unsecured term loans and has a maturity date of April 2, 2022. The 2020 Term Loan Agreement also had an accordion feature to increase the available term loans up to an aggregate of $400 million, which the Operating Partnership fully exercised in the second quarter of 2020 to borrow an additional $200 million of term loans. As of September 30, 2020, the 2020 Term Loans bore interest at LIBOR plus an applicable margin of 1.5% per annum, based on the Operating Partnership’s credit rating. If any 2020 Term Loans are outstanding after April 2, 2021, the Operating Partnership will be required to pay a one-time fee in an amount equal to 0.20% of the outstanding principal amount of the loans. In connection with entering into the 2020 Term Loan Agreement, the Company incurred $2.5 million in deferred financing costs, which are being amortized to interest expense over the 2020 Term Loans’ remaining initial term.

On August 6, 2020, as a result of the issuance of the 2031 Senior Unsecured Notes described below, the Company triggered a mandatory prepayment under the 2020 Term Loan Agreement. As such, the Company repaid $222.0 million of the 2020 Term Loans and recognized a loss on debt extinguishment of $1.1 million during the three months ended September 30, 2020 as a result of write-offs of unamortized deferred financing costs. As of September 30, 2020, the unamortized deferred financing costs were $0.8 million and are recorded net against the Term loan principal balance on the accompanying consolidated balance sheets.

The Company and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants in relation to the borrowings under the 2020 Term Loan Agreement. As of September 30, 2020, the Company and the Operating Partnership were in compliance with these financial covenants.

Senior Unsecured Notes

The Senior Unsecured Notes were issued by the Operating Partnership and guaranteed by the Company. The following is a summary of the Senior Unsecured Notes outstanding (dollars in thousands):

	Maturity Date	Stated Interest Rate	September 30, 2020		December 31, 2019
2026 Senior Notes	September 15, 2026	4.45%	$	300,000	$	300,000
2027 Senior Notes	January 15, 2027	3.20%		300,000		300,000
2029 Senior Notes	July 15, 2029	4.00%		400,000		400,000
2030 Senior Notes	January 15, 2030	3.40%		500,000		500,000
2031 Senior Notes	February 15, 2031	3.20%		450,000		—
Total Senior Unsecured Notes		3.61%	$	1,950,000	$	1,500,000

On August 6, 2020, the Operating Partnership issued $450.0 million aggregate principal amount of senior notes, which are guaranteed by the Company. The 2031 Senior Unsecured Notes were issued at 98.352% of their principal face amount, resulting in net proceeds of $441.3 million, after deducting the debt discount and transaction fees and expenses. In connection with the offering, the Operating Partnership incurred $4.2 million in deferred financing costs and an offering discount of $4.5 million. The 2031 Senior Unsecured Notes accrue interest at a rate of 3.20% per annum and mature on February 15, 2031.

The Senior Unsecured Notes are payable on January 15 and July 15 of each year, except for the 2026 Senior Notes, which are payable on March 15 and September 15 of each year, and the 2031 Senior Notes, which are payable on February 15 and August 15 of each year. 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) prior to their respective maturity dates, the redemption price will not include a make-whole premium.

Deferred financing costs and offering discounts incurred in connection with the issuance the Senior Unsecured Notes are being amortized to interest expense over the lives of the respective Senior Unsecured Notes. As of September 30, 2020 and December 31, 2019, the unamortized deferred financing costs were $16.0 million and $12.9 million, respectively, and the unamortized discount was $7.2 million and $3.0 million, respectively. Both the deferred financing costs and offering discount are recorded net against the Senior Unsecured Notes principal balance on the accompanying consolidated balance sheets.

In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of September 30, 2020, the Company and the Operating Partnership were in compliance with these financial covenants.

CMBS

As of September 30, 2020, indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under 5 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, 2020 for the loans ranged from 5.23% to 6.00%, with a weighted average stated rate of 5.47%. As of September 30, 2020, the loans were secured by 88 properties. As of September 30, 2020 and December 31, 2019, the unamortized deferred financing costs associated with the CMBS loans were $2.1 million and $2.6 million, respectively, and the unamortized net offering premium was $0.3 million as of both periods. Both the deferred financing costs and offering premium were recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets and are being amortized to interest expense over the term of the respective loans.

Convertible Notes

In May 2014, the Company issued $402.5 million aggregate principal amount of 2.875% convertible notes due in 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes due in 2021. Proceeds from the issuance were contributed to the Operating Partnership and are recorded as a note payable to Spirit Realty Capital, Inc. on the consolidated balance sheets of the Operating Partnership. The 2019 Notes matured on May 15, 2019 and were settled in cash. The 2021 Notes will mature on May 15, 2021 and interest is payable semi-annually in arrears on May 15 and November 15 of each year.

The 2021 Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Corporation’s common stock, or a combination thereof. The conversion rate is subject to adjustment for certain anti-dilution events, including special distributions and regular quarterly cash dividends exceeding a current threshold of $0.73026 per share. As of September 30, 2020, the conversion rate was 17.4458 per $1,000 principal note, which reflects the adjustment from the SMTA dividend distribution related to the Spin-Off, in addition to the other regular dividends declared during the life of the Convertible Notes. Earlier conversion may be triggered if shares of the Corporation’s common stock trade higher than the established thresholds, if the 2021 Notes trade below established thresholds, or certain corporate events occur. During the three months ended September 30, 2020, the Company repurchased $154.6 million of the 2021 Notes in cash, resulting in a loss on debt extinguishment of $6.2 million.

Offering discount and deferred financing costs incurred in connection with the issuance of the Convertible Notes are being amortized to interest expense over the term of the respective Convertible Notes and, as such, the amounts related to the 2019 Notes were fully amortized in May 2019. As of September 30, 2020 and December 31, 2019, the unamortized discount on the 2021 Notes was $1.7 million and $6.5 million, respectively. As of September 30, 2020 and December 31, 2019, the unamortized deferred financing costs were $0.5 million and $2.1 million, respectively. These amounts are shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature was $55.1 million as of both September 30, 2020 and December 31, 2019 and is recorded in capital in excess of par value in the accompanying consolidated balance sheets, net of financing transaction costs.

Debt Extinguishment

During the nine months ended September 30, 2020, the Company extinguished a total of $222.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $1.1 million. Additionally, the Company extinguished a total of $154.6 million aggregate principal amount of the 2021 Convertible Notes, resulting in a loss on debt extinguishment of $6.2 million.

During the nine months ended September 30, 2019, the Company repaid and terminated the A-1 Term Loans and the A-2 Term Loans, resulting in a loss on debt extinguishment of $5.3 million. The Company also retired the Master Trust 2013 notes, resulting in a loss on debt extinguishment of $15.0 million. Additionally, the Company extinguished a total of $10.4 million aggregate principal amount of CMBS indebtedness on 1 defaulted loan, which was secured by 1 property. The loan had a default interest rate of 9.85% and resulted in a gain on debt extinguishment of $9.5 million. Finally, as a result of the termination of the 2015 Credit Agreement and the 2015 Term Loan Agreement, the Company recognized a loss on debt extinguishment of $0.7 million.

Debt Maturities

As of September 30, 2020, scheduled debt maturities, including balloon payments, were as follows (in thousands):

	Scheduled Principal		Balloon Payment		Total
Remainder of 2020	$	1,059	$	—	$	1,059
2021		4,365		190,426		194,791
2022		4,617		178,000		182,617
2023		3,074		197,912		200,986
2024		590		—		590
Thereafter		3,610		1,950,070		1,953,680
Total	$	17,315	$	2,516,408	$	2,533,723

Interest Expense

The following table is a summary of the components of interest expense related to the Company's borrowings (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest expense – revolving credit facilities ⁽¹⁾	$	409	$	473	$	3,269	$	4,449
Interest expense – term loans		1,128		5,779		2,799		15,448
Interest expense – Senior Unsecured Notes		16,188		8,446		44,163		15,299
Interest expense – mortgages and notes payable		3,016		3,637		9,027		15,168
Interest expense – Convertible Notes ⁽²⁾		2,473		3,234		8,942		14,010
Interest expense – interest rate swaps/other		—		421		—		972
Non-cash interest expense:
Amortization of deferred financing costs		1,450		1,350		4,048		5,155
Amortization of debt discount, net		1,038		1,179		3,504		5,805
Amortization of net losses related to interest rate swaps		702		156		2,106		156
Total interest expense	$	26,404	$	24,675	$	77,858	$	76,462

⁽¹⁾	Includes facility fees of approximately $0.4 million for both the three months ended September 30, 2020 and 2019, and $1.2 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively.

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

NOTE 5. STOCKHOLDERS’ EQUITY AND PARTNERS' CAPITAL

Common Stock

During the nine months ended September 30, 2020, portions of awards of restricted common stock and market-based share awards granted to certain of the Company's officers and other employees vested. The vesting of these awards, granted pursuant to the Amended Incentive Award Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Amended Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender 117.5 thousand shares of common stock valued at $4.4 million, solely to pay the associated statutory tax withholdings during the nine months ended September 30, 2020.

In June 2020, the Company entered into forward sale agreements with certain financial institutions acting as forward purchasers 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. The Company did not receive any proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering. The forward sale price that the Company will receive upon physical settlement of the agreements, which was initially $35.856 per share, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As of September 30, 2020, the Company had physically settled 2.8 million of these shares, generating gross proceeds of $106.2 million.

In November 2016, the Board of Directors approved a $500 million ATM Program. The agreement provides for the offer and sale of shares of the Corporation’s common stock having an aggregate gross sales price of up to $500.0 million through the agents, as its sales agents or, if applicable, as forward sellers for forward purchasers, or directly to the agents acting as principals. The Company may sell shares in amounts and at times to be determined by the Company but has no obligation to sell any shares in the ATM program. Since inception of the ATM Program through September 30, 2020, 5.9 million shares of the Corporation’s common stock have been sold, of which 0.7 million were sold during the nine months ended September 30, 2020. Of total shares sold since inception, 4.1 million were through forward sales agreements, including all 0.7 million shares sold during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, 0.4 million of the shares were physically settled at a weighted average price per share of $49.30 for $17.9 million in gross proceeds. There were 0.3 million shares remaining under open forward sales agreements as of September 30, 2020. Assuming the full physical settlement of those open forward sales agreements, aggregate gross proceeds capacity of $234.8 million remained available under the program as of September 30, 2020.

Preferred Stock

As of September 30, 2020, the Company had 6.9 million shares of 6.00% Series A Preferred Stock outstanding. The Series A Preferred Stock pays cumulative cash dividends at the rate of 6.00% per annum on the liquidation preference of $25.00 per share (equivalent to $0.375 per share on a quarterly basis and $1.50 per share on an annual basis).

Dividends Declared

For the nine months ended September 30, 2020, 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 27, 2020	$	0.625	March 31, 2020	$	64,338	April 15, 2020
May 22, 2020	$	0.625	June 30, 2020	$	64,402	July 15, 2020
August 25, 2020	$	0.625	September 30, 2020	$	66,171	October 15, 2020
Preferred Stock
February 27, 2020	$	0.375	March 13, 2020	$	2,588	March 31, 2020
May 22, 2020	$	0.375	June 15, 2020	$	2,588	June 30, 2020
August 25, 2020	$	0.375	September 15, 2020	$	2,587	September 30, 2020

The common stock dividend declared on August 25, 2020 is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets as of September 30, 2020.

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 is contingently liable for $5.7 million of debt owed by 1 of its former tenants until the maturity of the debt on March 15, 2022. The Company has accrued the full $5.7 million liability in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of both September 30, 2020 and December 31, 2019.

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, 2020, 0 accruals have been made.

As of September 30, 2020, there were 0 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 September 30, 2020, the Company had commitments totaling $27.3 million, of which $7.3 million relates to future acquisitions, with the remainder to fund improvements on properties the Company currently owns. Commitments related to acquisitions contain standard cancellation clauses contingent on the results of due diligence. $18.1 million of these commitments are expected to be funded during fiscal year 2020, with the remainder to be funded by the end of 2021.

Lessee Contracts

The Company leases its current corporate office space and certain office equipment, which are classified as operating leases. 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 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 is also a lessee under five long-term, non-cancellable ground leases under which it is obligated to pay monthly rent as of September 30, 2020. For all 5 of the ground leases, rental expenses are reimbursed by unrelated third parties, and the corresponding rental revenue is recorded in rental income on the accompanying consolidated statements of operations. All leases are classified as operating leases and have a weighted average remaining lease term of 7.0 years.

As of September 30, 2020, the Company had a right-of-use lease asset balance of $4.8 million and total operating lease liabilities of $6.6 million for these lessee contracts.

NOTE 7. DERIVATIVE AND HEDGING ACTIVITIES

The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in AOCL and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the consolidated statement 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 counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of 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 December 2018, the Company entered into interest rate swap agreements. In the third quarter of 2019, the Company terminated its interest rate swaps and accelerated the reclassification of a loss of $12.5 million from AOCL 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 will be amortized over the remaining initial term of the interest rate swaps, which ends March 31, 2024. As of September 30, 2020, the unamortized portion of loss in AOCL related to terminated interest rate swaps was $9.4 million.

The following table provides information about the amounts recorded in AOCL, as well as the loss recorded in operations, when reclassified out of AOCL or recognized in earnings immediately (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020		2019
Gross amount of loss recognized in AOCL on derivatives	$	—	$	(4,267	)	$	—	$	(18,593	)
Amount of loss reclassified from AOCL to termination of interest rate swaps		—		12,462			—		12,462
Amount of loss reclassified from AOCL to interest⁽¹⁾		702		577			2,106		1,128
Net reclassification of amounts from (to) AOCL	$	702	$	8,772		$	2,106	$	(5,003	)

⁽¹⁾	Interest expense was $26.4 million and $77.9 million for the three and nine months ended September 30, 2020, respectively, and $24.7 million and $76.5 million for the three and nine months ended September 30, 2019, respectively.

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.

NOTE 8. FAIR VALUE MEASUREMENTS

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 or non-operating, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements (“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. Based on these inputs, the Company determined that its valuation of the impaired real estate and intangible assets falls within Level 3 of the fair value hierarchy. 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 September 30, 2020
Impaired at March 31, 2020	$	41,171	$	0	$	0	$	41,171
Impaired at June 30, 2020	$	8,055	$	0	$	0	$	8,055
Impaired at September 30, 2020	$	18,097	$	0	$	0	$	18,097

Assets held at December 31, 2019
Impaired at June 30, 2019	$	1,893	$	0	$	0	$	1,893
Impaired at September 30, 2019	$	1,093	$	0	$	0	$	1,093
Impaired at December 31, 2019	$	11,594	$	0	$	0	$	11,594

As of September 30, 2020, the Company held 27 properties that were impaired during 2020. As of December 31, 2019, the Company held 16 properties that were impaired during 2019. For 1 of the properties held at September 30, 2020, the Company estimated fair value using a capitalization rate of 10.06% based on comparative capitalization rates from market comparables. For 1 of the properties held at December 31, 2019, the Company estimated fair value using a capitalization rate of 9.62% based on comparative capitalization rates from market comparables. For the remaining properties, the Company estimated property fair value using price per square foot from unobservable inputs and, for the properties valued using comparable properties during 2020, the price per square foot includes a discount of 0-10% to account for the market impact of COVID-19. 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
September 30, 2020
Comparable Properties	Retail		14	$4.35 - $320.89	$49.77		573,784
PSA, LOI or BOV	Retail		11	$28.62 - $331.67	$50.41		418,139
PSA, LOI or BOV	Office		1	$71.23	$71.23		4,310

December 31, 2019
Comparable Properties	Retail		4	$34.45 - $740.74	$104.84		35,885
PSA, LOI or BOV	Retail		10	$24.78 - $323.00	$50.71		165,773
PSA, LOI or BOV	Office		1	$99.37	$99.37		4,310

Estimated Fair Value of Financial Instruments

Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash and escrow deposits, and accounts receivable and payable. Generally, these assets and liabilities are short-term in duration and are recorded at cost, which approximates fair value, on the accompanying consolidated balance sheets.

In addition, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair values. The fair values of financial instruments are estimates based upon market conditions and perceived risks at September 30, 2020 and December 31, 2019. 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 that are not active or (ii) discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 of the fair value hierarchy. The following table discloses fair value information for these financial instruments (in thousands):

	September 30, 2020				December 31, 2019
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Loans receivable, net	$	—	$	—	$	34,465	$	35,279
2019 Credit Facility		—		—		116,500		119,802
2020 Term Loans, net⁽¹⁾		177,170		177,938		—		—
Senior Unsecured Notes, net⁽¹⁾		1,926,752		1,965,922		1,484,066		1,543,919
Mortgages and notes payable, net⁽¹⁾		213,479		227,384		216,049		235,253
Convertible Notes, net⁽¹⁾		188,216		193,995		336,402		356,602

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

NOTE 9. INCENTIVE AWARD PLAN

Restricted Shares of Common Stock

During the nine months ended September 30, 2020, the Company granted 148 thousand restricted shares under the Amended Incentive Award Plan to certain executive officers, directors and employees. The Company recorded $6.9 million in deferred compensation associated with these grants. Deferred compensation for restricted shares will be recognized in expense over the requisite service period. As of September 30, 2020, there were approximately 283 thousand unvested restricted shares outstanding.

Market-Based Awards

During the nine months ended September 30, 2020, the Board of Directors, or committee thereof, approved target grants of 88 thousand market-based awards to executive officers of the Company. The performance period of these grants runs primarily through December 31, 2022. 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 300%. 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. Significant inputs for the calculation were expected volatility of the Company of 25.2% and expected volatility of the Company's peers, ranging from 18.1% to 27.3%, with an average volatility of 21.7% and a risk-free interest rate of 1.07%. The fair value of the market-based award per share was $67.30 as of the grant date. Stock-based compensation expense associated with unvested market-based share awards is recognized on a straight-line basis over the minimum required service period, which is generally three years.

Approximately $1.9 million and $2.7 million in dividend rights have been accrued as of September 30, 2020 and December 31, 2019, respectively. For outstanding non-vested awards at September 30, 2020, 0.3 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

For the three months ended September 30, 2020 and 2019, the Company recognized $3.0 million and $3.5 million, respectively, in stock-based compensation expense, and for the nine months ended September 30, 2020 and 2019, the Company recognized $9.7 million and $11.0 million, respectively. These amounts are included in general and administrative expenses in the accompanying consolidated statements of operations. As of September 30, 2020, the remaining unamortized stock-based compensation expense totaled $15.4 million, comprised of $8.1 million related to restricted stock awards and $7.3 million related to market-based awards. As of December 31, 2019, the unamortized stock-based compensation expense totaled $12.6 million, comprised of $6.6 million related to restricted stock awards and $6.0 million related to market-based awards. Amortization is recognized on a straight-line basis over the service period of each applicable award.

NOTE 10. INCOME PER SHARE AND PARTNERSHIP UNIT

Income per share and unit has been computed using the two-class method, which is computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of shares of common stock outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both shares of common stock and participating securities based on the weighted average shares outstanding during the period. Classification of the Company's unvested restricted stock, which contain rights to receive nonforfeitable dividends, are deemed participating securities under the two-class method. Under the two-class method, earnings attributable to unvested restricted shares are deducted from income from continuing operations in the computation of net income attributable to common stockholders.

The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net (loss) income per share and unit computed using the two-class method (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Basic and diluted income (loss):
Income (loss) from continuing operations	$	13,798		$	81,294		$	(2,462	)	$	170,609
Less: dividends paid to preferred stockholders		(2,587	)		(2,587	)		(7,763	)		(7,763	)
Less: dividends attributable to unvested restricted stock		(169	)		(260	)		(561	)		(714	)
Net income (loss) attributable to common stockholders used in basic and diluted income (loss) per share	$	11,042		$	78,447		$	(10,786	)	$	162,132

Basic weighted average shares of common stock outstanding:
Weighted average shares of common stock outstanding		103,041,547			90,416,248			102,858,498			87,934,906
Less: unvested weighted average shares of restricted stock		(291,427	)		(375,895	)		(304,700	)		(405,120	)
Basic weighted average shares of common stock outstanding		102,750,120			90,040,353			102,553,798			87,529,786
Net income (loss) per share attributable to common stockholders - basic	$	0.11		$	0.87		$	(0.11	)	$	1.85

Diluted weighted average shares of common stock outstanding: ⁽¹⁾
Plus: unsettled shares under open forward equity contracts		61,175			—			—			—
Plus: unvested market-based awards		127,565			356,444			—			254,691
Diluted weighted average shares of common stock outstanding		102,938,860			90,396,797			102,553,798			87,784,477
Net income (loss) per share attributable to common stockholders - diluted	$	0.11		$	0.87		$	(0.11	)	$	1.85

Potentially dilutive shares of common stock
Unvested shares of restricted stock, less shares assumed repurchased at market		36,333			172,686			56,724			210,729
Unsettled shares under open forward equity contracts		—			—			382,738			—
Unvested shares of market-based awards		—			—			196,213			—

⁽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.

The Corporation intends to satisfy its exchange obligation for the principal amount of the 2021 Convertible Notes to the note holders entirely in cash; therefore, the "if-converted" method does not apply and the treasury stock method is being used. For the nine months ended September 30, 2020 and 2019, the Corporation’s average stock price was below the conversion price, resulting in 0 potentially dilutive shares related to the conversion spread of the 2021 Convertible Notes.

Note 11. Related Party Transactions and Arrangements

Continuing Involvement

From the Spin-Off through September 4, 2020, the Company had continuing involvement with SMTA through related party agreements. The Company had cash inflows from SMTA of $1.1 million and cash outflows to SMTA of $0.3 million for the nine months ended September 30, 2020. The Company had cash inflows from SMTA of $271.2 million and cash outflows to SMTA of $49.8 million for the nine months ended September 30, 2019.

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 provide a framework for the relationship between the Company and SMTA after the Spin-Off, by which Spirit may incur certain expenses on behalf of SMTA that must 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.

Asset Management Agreement and Interim Management Agreement

In conjunction with the Spin-Off, the Company entered into the Asset Management Agreement pursuant to which the Operating Partnership provided various management services to SMTA. On June 2, 2019, concurrently with SMTA’s entry into an agreement to sell Master Trust 2014, the Company entered into a termination agreement of the Asset Management Agreement, which became effective on September 20, 2019. Pursuant to the termination agreement, SMTA paid the Company a termination fee of $48.2 million and the Company waived its right to receive any promote as otherwise provided for under the Asset Management Agreement. On June 2, 2019, the Company and SMTA also entered into an Interim Management Agreement, which became effective on September 20, 2019, and which provided that the Company was entitled to an annual management fee of $1 million for the initial one-year term thereof and $4 million per annum for any renewal term, in each case plus certain cost reimbursements. The Interim Management Agreement was terminated effective September 4, 2020. Management fees of $0.2 million and $0.7 million were earned during the three and nine months ended September 30, 2020, respectively, compared to $4.4 million and $14.4 million during the three and nine months ended September 30, 2019, respectively, and are included in related party fee income in the consolidated statements of operations. Also, under the terms of the Asset Management Agreement, the Company recognized related party fee income of $0.5 million and $0.9 million, which was fully offset by general and administrative expense, for other compensation awarded by SMTA to an employee of Spirit for the three and nine months ended September 30, 2019, respectively.

Property Management and Servicing Agreement

Prior to September 20, 2019, the Operating Partnership provided property management services and special services for Master Trust 2014. The property management fees accrued daily at 0.25% per annum of the collateral value of the Master Trust 2014 collateral pool less any specially serviced assets, and the special servicing fees accrued daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced per the terms of the Property Management and Servicing Agreement dated May 20, 2014. Property management fees of $1.3 million and $4.3 million were earned during the three and nine months ended September 30, 2019, respectively, and special servicing fees of $0.4 million and $1.2 million were earned during the three and nine months ended September 30, 2019, respectively. These fees are included in related party fee income in the consolidated statements of operations. In conjunction with SMTA’s sale of Master Trust 2014 on September 20, 2019, the notes were retired and the Property Management and Servicing Agreement was terminated.

NOTE 12. SUBSEQUENT EVENTS

Subsequent to September 30, 2020, the Company issued 2.9 million shares to physically settle certain of its open forward equity sale agreements entered into in connection with its June 2020 public offering. The Company settled these shares at a forward price per share of $34.525, generating net proceeds of $100.0 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-looking Statements

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

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).

The following 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:

•

industry and economic conditions;

•

volatility and uncertainty in the financial markets, including potential fluctuations in the CPI;

•

our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate, integrate and manage diversifying acquisitions or investments;

•

the financial performance of our retail tenants and the demand for retail space, particularly with respect to challenges being experienced by general merchandise retailers;

•

our ability to diversify our tenant base;

•

the nature and extent of future competition;

•

increases in our costs of borrowing as a result of changes in interest rates and other factors;

•

our ability to access debt and equity capital markets;

•

our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;

•

our ability and willingness to renew our leases upon expiration and to reposition our properties on the same or better terms upon expiration in the event such properties are not renewed by tenants or we exercise our rights to replace existing tenants upon default;

•

the impact of any financial, accounting, legal or regulatory issues or litigation that may affect us or our major tenants;

•

our ability to manage our expanded operations;

•

our ability and willingness to maintain our qualification as a REIT;

•

the impact on our business and those of our tenants from epidemics, pandemics or other outbreaks of illness, disease or virus (such as the strain of coronavirus known as COVID-19); and

•

other risks inherent in the real estate business, including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments and potential damages from natural disasters.

The factors included in this quarterly report, including the documents incorporated by reference, and documents we subsequently file with the SEC and incorporate by reference, are not exhaustive and additional factors could adversely affect our business and financial performance. Additional factors that may cause risks and uncertainties include those discussed in the sections entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K and this report and subsequent filings with the SEC. All forward-looking statements are based on information that was available, and speak only, to the date on which they were made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

Overview

Spirit Realty Capital, Inc. is a New York Stock Exchange listed company under the ticker symbol "SRC." We are a self-administered and self-managed REIT with in-house capabilities including acquisition, credit research, asset management, portfolio management, real estate research, legal, finance and accounting functions. We primarily invest in single-tenant real estate assets throughout the U.S., which are generally acquired through sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high quality tenants with business operations within retail, industrial, office and other industries.

Single tenant, operationally essential real estate consists of properties that are generally free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. 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.

As of September 30, 2020, our owned real estate represented investments in 1,778 properties. Our properties are leased to 296 tenants across 48 states and 28 retail industries. As of September 30, 2020, our owned properties were approximately 99.3% occupied (based on the number of economically yielding properties).

Our operations are carried out through the Operating Partnership. OP Holdings, one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of the Operating Partnership. Although the Operating Partnership is wholly-owned by us, in the future, we may issue partnership interests in the Operating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in the Operating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in the Operating Partnership are issued.

We have elected to be taxed as a REIT for federal income tax purposes and believe we have been organized and have operated in a manner that allows us to qualify as a REIT for federal income tax purposes.

On May 31, 2018, we completed a Spin-Off of all our interests in the assets that collateralized Master Trust 2014, our properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, SMTA. In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA, pursuant to which the Company acted as external asset manager for SMTA for an annual management fee of $20.0 million. In September 2019, SMTA sold the assets held in Master Trust 2014 and approved a plan of liquidation. The Asset Management Agreement was terminated, and the Interim Management Agreement with SMTA became effective. Pursuant to the Interim Management Agreement, we were entitled to receive $1 million during the initial one-year term and $4 million for any renewal one-year term, plus certain cost reimbursements, to manage and liquidate the remaining SMTA assets. The Interim Management Agreement was terminated effective September 4, 2020 and we have no further continuing involvement with SMTA.

Given the timing of the onset in the U.S., the COVID-19 pandemic had a minimal impact on our first quarter 2020 results and increased impact on our second quarter 2020 results as certain of our tenants experienced business disruption, especially those in industries considered “non-essential” under varying state “shelter-in-place” and “stay-at-home” orders and other restrictions. As a result, many of our tenants requested rent deferrals (and other forms of relief). During the third quarter of 2020, the impact of the COVID-19 pandemic has reduced as certain restrictions on our tenants’ operations have been lifted. As such, the majority of the impact to our third quarter 2020 results relates to relief granted during the second quarter of 2020. Our discussions with tenants requesting relief substantially focused on industries that have been directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, particularly health and fitness, movie theaters, quick service and casual dining restaurants, entertainment, car washes, dealerships, home décor, home furnishings, department stores and education. These and other industries may be further impacted in the future depending on various factors, including the duration of the COVID-19 pandemic, the reinstitution of restrictions intended to prevent its spread or the imposition of new, more restrictive measures. Even after certain of such restrictions are lifted or reduced, the willingness of customers to visit our tenants’ businesses may be reduced due to lingering concerns regarding the continued risk of COVID-19 transmission and heightened sensitivity to risks associated with the transmission of other diseases. We are not able to predict the duration of such customer behavior or the COVID-19 pandemic.

As of October 26, 2020, we have collected approximately 90% of third quarter 2020 Base Rent of $118.2 million, deferred approximately 7% and abated approximately 1%. We currently expect to see continued reductions in the impact of COVID-19 on our fourth quarter 2020 results, with expected rent deferrals of $3.7 million (including the maximum impact of arrangements that have a sliding scale based on performance of the underlying property) and rent abatements of $0.1 million. For the deferred rent, the deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 13 months. Of the tenants who we have granted rent deferrals, 22% are public companies and the weighted average remaining lease term of leases with deferrals is 10.3 years (based on Base Rent). Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period. Refer to “Part II—Other Information, Item 1A. Risk Factors” for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and various other assumptions deemed reasonable under the circumstances. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019. We have not made any material changes to these policies during the periods covered by this quarterly report.

Results of Operations

Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019

	Three Months Ended September 30,
(In Thousands)	2020			2019			Change			% Change
Revenues:
Rental income	$	112,916		$	109,511		$	3,405			3.1	%
Interest income on loans receivable		189			843			(654	)		(77.6	)%
Earned income from direct financing leases		131			267			(136	)		(50.9	)%
Related party fee income		178			54,795			(54,617	)		(99.7	)%
Other income		327			1,531			(1,204	)		(78.6	)%
Total revenues		113,741			166,947			(53,206	)		(31.9	)%
Expenses:
General and administrative		10,931			12,727			(1,796	)		(14.1	)%
Termination of interest rate swaps		—			12,461			(12,461	)		(100.0	)%
Property costs (including reimbursable)		5,049			4,407			642			14.6	%
Deal pursuit costs		597			330			267			80.9	%
Interest		26,404			24,675			1,729			7.0	%
Depreciation and amortization		52,170			43,907			8,263			18.8	%
Impairments		8,106			5,932			2,174			36.6	%
Total expenses		103,257			104,439			(1,182	)		(1.1	)%
Other income:
Loss on debt extinguishment		(7,252	)		(5,580	)		(1,672	)		30.0	%
Gain on disposition of assets		10,763			32,254			(21,491	)		(66.6	)%
Preferred dividend income from SMTA		—			3,302			(3,302	)		(100.0	)%
Total other income		3,511			29,976			(26,465	)		(88.3	)%
Income before income tax expense		13,995			92,484			(78,489	)		(84.9	)%
Income tax expense		(197	)		(11,190	)		10,993			(98.2	)%
Net income	$	13,798		$	81,294		$	(67,496	)		(83.0	)%

REVENUES

Rental income

	Three Months Ended September 30,
(In Thousands)	2020		2019
Base Cash Rent	$	108,398	$	100,962
Variable cash rent (including reimbursables)		3,051		2,823
Straight-line rent, net of uncollectible reserve		899		4,770
Amortization of above- and below- market lease intangibles, net		568		956
Total rental income	$	112,916	$	109,511

We were a net acquirer of income-producing real estate over the trailing twelve-month period, resulting in an increase in our Base Cash Rent period-over-period. During the trailing twelve months ended September 30, 2020, we acquired 186 properties, with a Real Estate Investment Value of $1.0 billion, and disposed of 31 properties, of which 15 were income producing, with a Real Estate Investment Value of $98.1 million. The increase was partially offset by an increase in net amounts deemed not probable of collection driven by tenant credit issues from the COVID-19 pandemic from $0.2 million for the three months ended September 30, 2019 to $6.5 million for three months ended September 30, 2020. The increase period-over-period was also reduced by $1.7 million of rent abatements for the three months ended September 30, 2020, executed as relief due to the COVID-19 pandemic. Finally, included in the Base Cash Rent for the three months ended September 30, 2020 are rent deferrals deemed probable of collection of $1.8 million, related to the effects of the COVID-19 pandemic.

The primary component of variable cash rent is tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, and non-cash rental income. Tenant reimbursement income was $2.7 million and $2.8 million for the three months ended September 30, 2020 and 2019, respectively, and was driven by the tenant reimbursable property costs described below. These amounts represented approximately 2.4% and 2.5% of rental income for the three months ended September 30, 2020 and 2019, respectively.

Non-cash rental income consists of straight-line rental revenue, amortization of above- and below-market lease intangibles and bad debt expense. Non-cash rental income decreased period-over-period primarily as a result of a $4.3 million increase in reserves on straight-line rental revenue due to increased tenant credit issues.

Related party fee income

In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provided a management team responsible for implementing SMTA ’s business strategy and performing certain services for SMTA. Under this agreement, we recognized $4.4 million of revenues during the three months ended September 30, 2019. Additionally, under the terms of this agreement, we recognized $0.5 million of stock compensation awarded by SMTA to an employee of Spirit for the three months ended September 30, 2019, which was fully offset by $0.5 million in general and administrative expenses recognized for other compensation. This agreement was terminated in conjunction with SMTA’s sale of Master Trust 2014 on September 20, 2019, resulting in a termination fee of $48.2 million. We entered into an Interim Management Agreement for an initial annual fee of $1.0 million, under which we agreed to manage and liquidate the remaining SMTA assets. Under this agreement, we recognized $0.2 million of revenues for the three months ended September 30, 2020. The Interim Management Agreement was terminated effective September 4, 2020.

Additionally, we provided property management services and special services for Master Trust 2014, which was contributed to SMTA as part of the Spin-Off. As a result, for the three months ended September 30, 2019, we recognized $1.7 million in revenue under the terms of the Property Management and Servicing Agreement. This agreement was terminated in the third quarter of 2019 in conjunction with SMTA’s sale of Master Trust 2014.

EXPENSES

General and administrative

Period-over-period general and administrative expenses decreased, driven by a decrease in compensation expenses of $1.7 million, primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a decrease of $0.3 million in professional fees and a decrease of $0.2 million in travel expenses. These decreases were partially offset by $0.7 million of expenses recognized during the three months ended September 30, 2020 related to the COVID-19 pandemic, primarily as a result of increased legal fees for executing rent deferral or abatement agreements.

Property costs (including reimbursable)

For the three months ended September 30, 2020, property costs were $5.0 million (including $3.4 million of tenant reimbursable expenses), compared to $4.4 million (including $3.6 million of tenant reimbursable expenses) for the same period in 2019. As such, reimbursable property costs remained relatively flat period-over-period. The increase in non-reimbursable costs of $0.8 million was driven primarily by an increase in carrying costs of vacant properties of $0.7 million due to an increase in vacant properties over the comparative period.

Interest

The increase in interest expense was driven by the issuance of:

•

the 2027 Senior Notes and 2030 Senior Notes in the third quarter of 2019,

•

the 2020 Term Loans in the second quarter of 2020 and

•

the 2031 Senior Notes in the third quarter of 2020.

The increase was partially offset by:

•

the repayment and termination of the A-1 Term Loans and A-2 Term Loans in the third quarter of 2019,

•

the termination of the interest rate swaps in the third quarter of 2019, and

•

the partial early repayment of $154.6 million of the Convertible 2021 Notes in the third quarter of 2020.

The following table summarizes our interest expense on related borrowings:

	Three Months Ended September 30,
(In Thousands)	2020		2019
Interest expense – revolving credit facilities ⁽¹⁾	$	409	$	473
Interest expense – term loans		1,128		5,779
Interest expense – Senior Unsecured Notes		16,188		8,446
Interest expense – mortgages and notes payable		3,016		3,637
Interest expense – Convertible Notes		2,473		3,234
Interest expense – interest rate swaps/other		—		421
Non-cash interest expense		3,190		2,685
Total interest expense	$	26,404	$	24,675

⁽¹⁾	Includes facility fees of approximately $0.4 million for both the three months ended September 30, 2020 and 2019.

Depreciation and amortization

We were a net acquirer during the trailing twelve-month period of $909.9 million of Real Estate Investment Value, resulting in an increase period-over-period in depreciation and amortization. The following table summarizes our depreciation and amortization expense:

	Three Months Ended September 30,
(In Thousands)	2020		2019
Depreciation of real estate assets	$	43,551	$	36,525
Amortization of lease intangibles		8,473		7,239
Other depreciation		146		143
Total depreciation and amortization	$	52,170	$	43,907

Impairments

During the three months ended September 30, 2020, we recorded impairment losses of $8.1 million. Impairment of $5.6 million was recorded on Vacant properties, comprised of $2.6 million on two Vacant properties held for use and $3.0 million on one Vacant property held for sale. Impairment of $2.8 million was recorded on underperforming properties, comprised of $1.2 million on three underperforming properties held for use and $1.6 million on four underperforming properties held for sale. Finally, we reversed $0.1 million of previously recorded allowance for loan loss as a result of our loans being repaid in full and reversed $0.2 million of previously recorded allowance for credit loss on our direct financing lease as a result of improved credit metrics of the borrower.

During the three months ended September 30, 2019, we recorded impairment losses of $5.9 million. Impairment of $5.6 million was recorded on six underperforming properties held for use. Impairment of $0.3 million was recorded on Vacant properties, comprised of $0.2 million on two Vacant properties held for sale and $0.1 million on one Vacant property held for use.

Loss on debt extinguishment

During the three months ended September 30, 2020, we recorded a loss on debt extinguishment of $6.2 million as a result of the partial early repayment of $154.6 million aggregate principal amount of the Convertible 2021 Notes, comprised of $4.1 million of cash premiums paid and $2.1 million of write-offs of unamortized debt discounts and deferred financing costs related to the debt. Additionally, we recorded a loss on debt extinguishment of $1.1 million for the write-off of unamortized deferred financing costs as a result of the partial repayment of the 2020 Term Loans.

During the three months ended September 30, 2019, we recorded a loss on debt extinguishment of $5.3 million as a result of terminating the A-1 Term Loans and A-2 Term Loans, which were repaid primarily with proceeds from the issuance of the 2027 Senior Unsecured Notes and 2030 Senior Unsecured Notes. Additionally, we recorded an additional $0.3 million of loss on debt extinguishment on the retirement of the Master Trust 2013 notes, as a result of additional legal fees.

Gain on disposition of assets

During the three months ended September 30, 2020, we disposed of 11 properties, resulting in net gains of $10.8 million. There were net gains of $11.3 million on the sales of seven active properties and net losses of $0.5 million on the sales of four Vacant properties. For the same period in 2019, we disposed of nine properties, resulting in net gains of $32.3 million. There were net gains of $32.3 million on the sales of eight active properties and a negligible gain on the sale of one Vacant property.

Preferred dividend income from SMTA

As part of the Spin-Off, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of $150.0 million. For the three months ended September 30, 2019, we recognized preferred dividend income of $3.3 million from these shares. In September 2019, in conjunction with SMTA’s sale of Master Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference.

Income tax expense

Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes. As such, income earned by a taxable wholly-owned subsidiary of Spirit pursuant to the Asset Management Agreement was considered non-REIT activity and subject to federal and state income tax. There was a decrease in income tax expense period-over-period of $11.0 million, primarily as a result of the taxable termination fee income of $48.2 million recorded in the third quarter of 2019.

Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019

	Nine Months Ended September 30,
(In Thousands)	2020			2019			Change			% Change
Revenues:
Rental income	$	351,469		$	320,084		$	31,385			9.8	%
Interest income on loans receivable		998			2,749			(1,751	)		(63.7	)%
Earned income from direct financing leases		439			971			(532	)		(54.8	)%
Related party fee income		678			68,971			(68,293	)		(99.0	)%
Other income		1,401			2,510			(1,109	)		(44.2	)%
Total revenues		354,985			395,285			(40,300	)		(10.2	)%
Expenses:
General and administrative		36,396			39,741			(3,345	)		(8.4	)%
Termination of interest rate swaps		—			12,461			(12,461	)		(100.0	)%
Property costs (including reimbursable)		18,219			13,968			4,251			30.4	%
Deal pursuit costs		1,630			574			1,056		NM
Interest		77,858			76,462			1,396			1.8	%
Depreciation and amortization		157,566			126,598			30,968			24.5	%
Impairments		69,929			13,231			56,698		NM
Total expenses		361,598			283,035			78,563			27.8	%
Other income:
Loss on debt extinguishment		(7,252	)		(11,473	)		4,221			(36.8	)%
Gain on disposition of assets		11,809			70,760			(58,951	)		(83.3	)%
Preferred dividend income from SMTA		—			10,802			(10,802	)		(100.0	)%
Total other income		4,557			70,089			(65,532	)		(93.5	)%
(Loss) income before income tax expense		(2,056	)		182,339			(184,395	)	NM
Income tax expense		(406	)		(11,730	)		11,324			(96.5	)%
Net (loss) income	$	(2,462	)	$	170,609		$	(173,071	)	NM

NM - Percentages over 100% are not displayed.

REVENUES

Rental income

	Nine Months Ended September 30,
(In Thousands)	2020		2019
Base Cash Rent	$	335,110	$	296,179
Variable cash rent (including reimbursables)		8,843		9,403
Straight-line rent, net of uncollectible reserve		6,385		12,162
Amortization of above- and below- market lease intangibles, net		1,131		2,340
Total rental income	$	351,469	$	320,084

We were a net acquirer of income-producing real estate over the trailing twelve-month period, resulting in an increase in our Base Cash Rent period-over-period. During the trailing twelve months ended September 30, 2020, we acquired 186 properties, with a Real Estate Investment Value of $1.0 billion, and disposed of 31 properties, of which 15 were income producing, with a Real Estate Investment Value of $98.1 million. The increase was partially offset by an increase in net amounts deemed not probable of collection driven by tenant credit issues from the COVID-19 pandemic from a net recovery of $0.8 million for the nine months ended September 30, 2019 to a net reduction of $12.1 million for nine months ended September 30, 2020. The increase period-over-period was also reduced by $4.1 million of rent abatements for the nine months ended September 30, 2020, executed as relief due to the COVID-19 pandemic. Finally, included in the Base Cash Rent for the nine months ended September 30, 2020 are rent deferrals deemed probable of collection of $24.1 million, related to the effects of the COVID-19 pandemic.

The primary component of variable cash rent is tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, and non-cash rental income. Tenant reimbursement income was $8.2 million and $9.1 million for the nine months ended September 30, 2020 and 2019, respectively, and was driven by the tenant reimbursable property costs described below. These amounts represented approximately 2.3% and 2.8% of rental income for the nine months ended September 30, 2020 and 2019, respectively.

Non-cash rental income consists of straight-line rental revenue, amortization of above- and below-market lease intangibles and bad debt expense. Non-cash rental income decreased period-over-period primarily as a result of a $10.7 million increase in reserves on straight-line rental revenue due to increased tenant credit issues.

Related party fee income

In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provided a management team responsible for implementing SMTA ’s business strategy and performing certain services for SMTA. Under this agreement, we recognized $14.4 million of revenues during the nine months ended September 30, 2019. Additionally, under the terms of this agreement, we recognized $0.9 million of stock compensation awarded by SMTA to an employee of Spirit for the nine months ended September 30, 2019, which was fully offset by $0.9 million in general and administrative expenses recognized for other compensation. This agreement was terminated in conjunction with SMTA’s sale of Master Trust 2014 on September 20, 2019, resulting in a termination fee of $48.2 million. We entered into an Interim Management Agreement for an initial annual fee of $1.0 million, under which we agreed to manage and liquidate the remaining SMTA assets. Under this agreement, we recognized $0.7 million of revenues for the nine months ended September 30, 2020. The Interim Management Agreement was terminated effective September 4, 2020.

Additionally, we provided property management services and special services for Master Trust 2014, which was contributed to SMTA as part of the Spin-Off. As a result, for the three months ended September 30, 2019, we recognized $5.5 million in revenue under the terms of the Property Management and Servicing Agreement. This agreement was terminated in the third quarter of 2019 in conjunction with SMTA’s sale of Master Trust 2014.

EXPENSES

General and administrative

Period-over-period general and administrative expenses decreased, driven by a decrease in compensation expenses of $4.2 million, primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a decrease of $0.5 million in travel expenses as a result of the COVID-19 pandemic. These decreases were partially offset by $1.4 million of expenses recognized during the nine months ended September 30, 2020 related to the COVID-19 pandemic, primarily as a result of increased legal fees for executing rent deferral or abatement agreements.

Property costs (including reimbursable)

For the nine months ended September 30, 2020, property costs were $18.2 million (including $10.0 million of tenant reimbursable expenses) compared to $14.0 million (including $11.2 million of tenant reimbursable expenses) for the same period in 2019. As such, reimbursable property costs decreased period-over-period, primarily due to certain property taxes no longer being considered recoverable. The increase in non-reimbursable costs of $5.4 million was driven primarily by an increase in non-reimbursable property taxes of $3.6 million due to tenant credit issues from the COVID-19 pandemic, as well as carrying costs of vacant properties of $1.4 million due to an increase in vacant properties over the comparative period.

Interest

The increase in interest expense was driven by the issuance of:

•

the 2029 Senior Notes in the second quarter of 2019,

•

the 2027 Senior Notes and 2030 Senior Notes in the third quarter of 2019,

•

the 2020 Term Loans in the second quarter of 2020, and

•

the 2031 Senior Notes in the third quarter of 2020.

The increase was partially offset by:

•

the extinguishment of $10.4 million aggregate principal amount of CMBS indebtedness on one defaulted loan in the first quarter of 2019,

•

the maturity and repayment of the Convertible 2019 Notes in the second quarter of 2019,

•

the early repayment of the Master Trust 2013 notes in the second quarter of 2019,

•

the repayment and termination of the A-1 Term Loans and A-2 Term Loans in the third quarter of 2019,

•

the termination of the interest rate swaps in the third quarter of 2019, and

•

the partial early repayment of $154.6 million of the Convertible 2021 Notes in the third quarter of 2020.

The following table summarizes our interest expense on related borrowings:

	Nine Months Ended September 30,
(In Thousands)	2020		2019
Interest expense – revolving credit facilities ⁽¹⁾	$	3,269	$	4,449
Interest expense – term loans		2,799		15,448
Interest expense – Senior Unsecured Notes		44,163		15,299
Interest expense – mortgages and notes payable		9,027		15,168
Interest expense – Convertible Notes		8,942		14,010
Interest expense – interest rate swaps/other		—		972
Non-cash interest expense		9,658		11,116
Total interest expense	$	77,858	$	76,462

⁽¹⁾	Includes facility fees of approximately $1.2 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Depreciation and amortization

	Nine Months Ended September 30,
(In Thousands)	2020		2019
Depreciation of real estate assets	$	131,187	$	105,731
Amortization of lease intangibles		25,942		20,441
Other depreciation		437		426
Total depreciation and amortization	$	157,566	$	126,598

Impairments

During the nine months ended September 30, 2020, we recorded impairment losses of $69.9 million. Impairment of $7.6 million was recorded on Vacant properties, comprised of $4.6 million on seven Vacant properties held for use and $3.0 million on one Vacant property held for sale. Impairment of $44.0 million was recorded on underperforming properties, comprised of $42.4 million on 22 underperforming properties held for use and $1.6 million on five underperforming properties held for sale. Impairment of $18.2 million was recorded on lease intangible assets, primarily as a result of a tenant bankruptcy that had credit issues prior to the COVID-19 pandemic that resulted in the termination of the lease for four properties. Finally, we recorded an allowance for credit loss on our direct financing lease of $0.1 million.

During the nine months ended September 30, 2019, we recorded impairment losses of $13.2 million. Impairment of $11.9 million was recorded on underperforming properties, comprised of $8.1 million recorded on 11 underperforming properties held for use and $3.8 million recorded on nine underperforming properties held for sale. Impairment of $1.5 million was recorded on Vacant properties, comprised of $0.3 million recorded on two Vacant held for use properties and $1.2 million recorded on three Vacant held for sale properties. These impairment charges were partially offset by $0.2 million of net impairment on lease intangible liabilities.

Loss on debt extinguishment

During the nine months ended September 30, 2020, we recorded a loss on debt extinguishment of $6.2 million as a result of the partial early repayment of $154.6 million aggregate principal amount of the Convertible 2021 Notes, comprised of $4.1 million of cash premiums paid and $2.1 million of write-offs of unamortized debt discounts and deferred financing costs related to the debt. Additionally, we recorded a loss on debt extinguishment of $1.1 million for the write-off of unamortized deferred financing costs as a result of the partial repayment of the 2020 Term Loans.

During the nine months ended September 30, 2019, we recorded a net loss on debt extinguishment of $11.5 million, comprised of:

•

a $15.0 million loss on the retirement of the Master Trust 2013 notes, primarily as a result of early repayment penalties,

•

a $9.5 million gain on the extinguishment of $10.4 million aggregate principal amount of CMBS indebtedness on one defaulted loan, which was secured by one property,

•

a $5.3 million loss on the termination of the A-1 Term Loans and A-2 Term Loans, which were repaid primarily with proceeds from the issuance of the 2027 Senior Unsecured Notes and 2030 Senior Unsecured Notes, and

•

a $0.7 million loss on the termination of the 2015 Credit Agreement and 2015 Term Loan Agreement in conjunction with entering into the 2019 Revolving Credit and Term Loan Agreement.

Gain on disposition of assets

During the nine months ended September 30, 2020, we disposed of 21 properties, resulting in net gains of $11.8 million. There were net gains of $11.3 million on the sales of 11 active properties and net gains of $0.9 million on the sales of ten Vacant properties. These gains were partially offset by a $0.2 million loss recorded on the sale of a notes receivable and $0.2 million in other net losses.

For the same period in 2019, we disposed of 34 properties, resulting in net gains of $70.8 million. There were net gains of $69.6 million on the sales of 20 active properties and net gains of $1.2 million on the sales of 11 Vacant properties. One property was returned to the lender in conjunction with CMBS debt extinguishment and two properties were leasehold interests that were surrendered to the lessors, which did not result in a gain/loss on disposition.

Preferred dividend income from SMTA

As part of the Spin-Off, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of $150.0 million. For the nine months ended September 30, 2019, we recognized preferred dividend income of $10.8 million from these shares. In September 2019, in conjunction with SMTA’s sale of Master Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference.

Income tax expense

Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes. As such, income earned by a taxable wholly-owned subsidiary of Spirit pursuant to the Asset Management Agreement was considered non-REIT activity and subject to federal and state income tax. There was a decrease in income tax expense period-over-period of $11.3 million, primarily as a result of the taxable termination fee income of $48.2 million recorded in the third quarter of 2019.

Property Portfolio Information



1,778	99.3%	48	296	28
Owned Properties	Occupancy	States	Tenants	Retail Industries

Diversification By Tenant

The following table sets forth a summary of tenant concentration for our owned real estate properties as of September 30, 2020:

Tenant ⁽¹⁾	Number of Properties		Total Square Feet (in thousands)		Percent of ABR
Cajun Global LLC		166		238		2.7	%
The Home Depot, Inc.		7		848		2.3	%
At Home Group Inc.		13		1,597		2.3	%
Alimentation Couche-Tard, Inc.		76		230		2.3	%
Walgreen Co.		34		487		2.1	%
GPM Investments, LLC		112		305		2.1	%
Life Time Fitness, Inc		5		588		2.0	%
Dollar Tree, Inc.		106		927		2.0	%
BJ's Wholesale Club, Inc.		7		789		2.0	%
CVS Caremark Corporation		33		409		1.8	%
Other		1,207		30,215		78.4	%
Vacant		12		594		—
Total		1,778		37,227		100.0	%

⁽¹⁾ Tenants represent legal entities ultimately responsible for obligations under the lease agreements or affiliated entities. Other tenants may operate the same or similar business concepts or brands set forth above.

Lease Expirations

The following table sets forth a summary of lease expirations for our owned real estate as of September 30, 2020. As of September 30, 2020, the weighted average remaining non-cancelable initial term of our leases (based on ABR) was 9.9 years. The information set forth in the table assumes that tenants do not exercise renewal options and or any early termination rights:

Leases Expiring In:	Number of Properties		ABR (in thousands) ⁽¹⁾		Total Square Feet (in thousands)		Percent of ABR
Remainder of 2020		3	$	738		165		0.2	%
2021		55		18,832		1,817		3.9	%
2022		40		16,075		1,529		3.3	%
2023		112		31,753		2,936		6.6	%
2024		47		17,899		1,557		3.7	%
2025		52		19,115		1,527		4.0	%
2026		101		32,186		2,298		6.7	%
2027		130		40,222		2,954		8.3	%
2028		106		28,685		1,798		5.9	%
2029		323		42,651		2,840		8.8	%
Thereafter		797		235,153		17,212		48.6	%
Vacant		12		—		594		—
Total owned properties		1,778	$	483,309		37,227		100.0	%

⁽¹⁾ ABR is not adjusted for the impact of abatements provided as relief due to the COVID-19 pandemic. As of the date of this report, SRC has agreed to a total of $0.2 million of abatements for the period from October 1, 2020 – September 30, 2021.

Diversification By Asset Type and Tenant Industry

The following table sets forth a summary of asset types, and for retail assets the tenant industry concentration, for our owned properties as of September 30, 2020:

Asset Type	Tenant Industry	Number of Properties		Total Square Feet (in thousands)		Percent of ABR
Retail			1,660		25,517		79.8	%
	Convenience Stores		331		1,047		8.0	%
	Health and Fitness		42		2,185		6.9	%
	Restaurants - Quick Service		366		798		6.7	%
	Restaurants - Casual Dining		134		945		6.0	%
	Movie Theaters		37		1,953		5.4	%
	Drug Stores / Pharmacies		77		991		4.6	%
	Dealerships		27		925		4.4	%
	Entertainment		24		1,022		3.6	%
	Grocery		38		1,752		3.5	%
	Car Washes		65		308		3.3	%
	Dollar Stores		168		1,538		3.2	%
	Home Improvement		14		1,595		3.1	%
	Home Décor		16		2,159		2.9	%
	Warehouse Club and Supercenters		13		1,420		2.6	%
	Specialty Retail		53		1,142		2.4	%
	Automotive Service		69		578		2.3	%
	Department Stores		14		1,281		2.0	%
	Home Furnishings		18		783		1.7	%
	Sporting Goods		14		739		1.7	%
	Early Education		35		384		1.6	%
	Automotive Parts		55		388		1.2	%
	Office Supplies		16		351		0.8	%
	Other		9		294		0.7	%
	Medical Office		5		65		0.5	%
	Pet Supplies and Service		4		133		0.4	%
	Apparel		5		151		0.3	%
	Vacant		11		590		0.0	%
Industrial			75		9,695		12.6	%
Office and Other			43		2,015		7.6	%
	Total		1,778		37,227		100.0	%

Diversification By Geography

The following map and table set forth a summary of geographic concentration for our owned real estate properties as of September 30, 2020:

Location	Number of Properties		Total Square Feet (in thousands)		Percent of ABR			Location (continued)	Number of Properties		Total Square Feet (in thousands)		Percent of ABR
Texas		254		4,421		11.7	%	Louisiana		23		368		1.3	%
Florida		125		2,371		8.8	%	Utah		18		333		1.2	%
Georgia		122		1,983		6.3	%	Pennsylvania		20		488		1.2	%
Ohio		86		2,396		5.4	%	Alaska		9		319		1.1	%
California		24		1,236		4.6	%	New Hampshire		16		640		1.1	%
Tennessee		104		1,762		4.1	%	Idaho		16		273		1.0	%
Michigan		86		1,612		4.0	%	Kansas		17		341		0.8	%
New York		30		1,895		3.6	%	Connecticut		5		686		0.8	%
Illinois		50		1,258		3.6	%	Wisconsin		10		391		0.7	%
Arizona		45		824		3.0	%	Washington		8		185		0.6	%
South Carolina		44		771		2.8	%	Maine		26		76		0.5	%
Alabama		94		715		2.6	%	Nebraska		9		221		0.4	%
Virginia		44		1,335		2.6	%	West Virginia		13		202		0.4	%
North Carolina		59		1,229		2.6	%	Montana		3		152		0.4	%
Maryland		9		714		2.5	%	Massachusetts		2		131		0.4	%
Missouri		65		966		2.4	%	Iowa		12		194		0.4	%
Minnesota		25		936		2.3	%	North Dakota		3		105		0.3	%
Colorado		25		978		2.1	%	Rhode Island		3		95		0.3	%
Mississippi		51		670		1.9	%	Oregon		3		104		0.3	%
New Mexico		28		583		1.7	%	Wyoming		1		35		0.1	%
Kentucky		43		538		1.7	%	U.S. V.I.		1		38		0.1	%
Indiana		39		830		1.6	%	South Dakota		1		20		0.1	%
Oklahoma		50		446		1.6	%	Delaware		1		5		0.1	%
Arkansas		42		637		1.5	%	Vermont		1		2	*
New Jersey		13		717		1.4	%

*	Less than 0.1%

Liquidity and Capital Resources

FORWARD EQUITY OFFERING

In June 2020, we entered into forward sale agreements with certain financial institutions acting as forward purchasers 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. The forward purchasers borrowed and sold an aggregate of 9.2 million shares of common stock in the offering. We did not receive any proceeds from the sale of our shares of common stock by the forward purchasers at the time of the offering. We intend (subject to our right to elect cash or net share settlement subject to certain conditions) to deliver, upon physical settlement of the forward sale agreements on one or more dates specified by us occurring no later than December 8, 2021, an aggregate of 9.2 million shares of our common stock to the forward purchasers in exchange for cash proceeds per share equal to the applicable forward sale price. The forward sale price that we will receive upon physical settlement of the agreements, which was initially $35.856 per share, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As of September 30, 2020, we had physically settled 2.8 million of these shares for net proceeds of $99.7 million.

ATM PROGRAM

In November 2016, the Board of Directors approved a $500.0 million ATM Program. In February 2019, we updated the ATM Program, pursuant to which we may from time to time offer and sell shares of our common stock having an aggregate gross sales price of up to $500.0 million through the agents, as our sales agents or, if applicable, as forward sellers, or directly to the agents acting as principals. Sales of shares of our common stock under the ATM Program may be made in sales deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act.

The ATM Program contemplates that, in addition to the issuance and sale by us of shares of our common stock to or through the agents, we may enter into separate forward sale agreements with one of the agents or one of their respective affiliates (in such capacity, each, a “forward purchaser” and, collectively, the “forward purchasers”). When we enter into a forward sale agreement with any forward purchaser, we expect that such forward purchaser will attempt to borrow from third parties and sell, through the relevant agent, acting as sales agent for such forward purchaser, shares of our common stock to hedge such forward purchaser's exposure under such forward sale agreement. We will not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller.

We currently expect to fully physically settle any forward sale agreement with the relevant forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. However, subject to certain exceptions, we may also elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which case we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser.

As of September 30, 2020, 5.9 million shares of our common stock have been sold under the ATM Program, of which 0.7 million shares were sold during the nine months ended September 30, 2020. Of total shares sold since inception, 4.1 million of the sales were sold by forward purchasers through agents under the ATM Program and pursuant to forward sales agreements, including all shares sold during the nine months ended September 30, 2020. The forward sale price that we received upon physical settlement of the agreements was subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. During the nine months ended September 30, 2020, 0.4 million of the shares were physically settled for net proceeds of $17.6 million. As of September 30, 2020, there were 0.3 million shares remaining under open forward sales agreements. Assuming the full physical settlement of those open forward sales agreements, we had remaining capacity to sell common stock having an aggregate gross sales price of up to $234.8 million under the ATM Program as of September 30, 2020.

SHORT-TERM LIQUIDITY AND CAPITAL RESOURCES

On a short-term basis, our principal demands for funds will be for operating expenses, acquisitions, distributions to stockholders and payment of interest and principal on current and any future debt financings. We expect to fund these demands primarily through cash provided by operating activities, borrowings under the 2019 Credit Facility and, when market conditions warrant, issuances of equity securities, including shares of our common stock under our ATM program. As of September 30, 2020, available liquidity was comprised of $116.8 million in cash and cash equivalents, $800.0 million of borrowing capacity under the 2019 Credit Facility and $12.7 million in restricted cash and restricted cash equivalents. Assuming the full physical settlement of open forward sale agreements under our ATM Program, we also had remaining capacity to sell common stock having an aggregate gross sales price of up to $234.8 million under our ATM Program as of September 30, 2020 and $231.1 million of expected proceeds available assuming the full physical settlement of our open forward equity contracts. We believe that this available liquidity makes us well positioned to navigate any macroeconomic uncertainty resulting from the COVID-19 pandemic restrictions intended to prevent its spread.

LONG-TERM LIQUIDITY AND CAPITAL RESOURCES

We plan to meet our long-term capital needs, including long-term financing of property acquisitions, by issuing registered debt or equity securities, by obtaining asset level financing and by issuing fixed-rate secured or unsecured notes and bonds. In the future, some of our property acquisitions could be made by issuing partnership interests of our Operating Partnership in exchange for property owned by third parties. These partnership interests would be exchangeable for cash or, at our election, shares of our common stock. We continually evaluate financing alternatives and believe that we can obtain financing on reasonable terms. However, we cannot be sure that we will have access to the capital markets at times and on terms that are acceptable to us. Refer to “Part II, Item 1A. Risk Factors” for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders. We expect that our primary uses of capital will be for property and other asset acquisitions, the payment of tenant improvements, operating expenses, debt service payments and distributions to our stockholders.

DESCRIPTION OF CERTAIN DEBT

The following descriptions of debt should be read in conjunction with Note 4 to the consolidated financial statements herein.

2019 Credit Facility

As of September 30, 2020, the aggregate gross commitment under the 2019 Credit Facility was $800.0 million, which may be increased up to $1.2 billion by exercising an accordion feature, subject to satisfying certain requirements and obtaining additional lender commitments. The 2019 Credit Facility has a maturity of March 31, 2023 and includes two six-month extensions that can be exercised at our option.

We may voluntarily prepay the 2019 Credit Facility, in whole or in part, at any time without premium or penalty. Payment of the 2019 Credit Facility is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions (as defined in the 2019 Facilities Agreements). As of September 30, 2020, there were no subsidiaries that met this requirement.

As of September 30, 2020, the 2019 Credit Facility bore interest at 1-Month LIBOR plus 0.90%, with no borrowings outstanding, and a ratings-based facility fee in the amount of 0.20% per annum. As of September 30, 2020, there were no letters of credit outstanding.

Term Loans

As of September 30, 2020, $178.0 million was outstanding under the 2020 Term Loan Agreement. The 2020 Term Loans have a maturity of April 2, 2022 and bear interest at a rate of LIBOR plus an applicable margin of 1.50% per annum. If any loans are outstanding after April 2, 2021, the Operating Partnership will be required to pay a one-time fee in an amount equal to 0.20% of the outstanding principal amount of the loans.

Senior Unsecured Notes

As of September 30, 2020, we had the following Senior Unsecured Notes outstanding (dollars in thousands):

	Maturity Date	Stated Interest Rate	September 30, 2020
2026 Senior Notes	September 15, 2026	4.45%	$	300,000
2027 Senior Notes	January 15, 2027	3.20%	$	300,000
2029 Senior Notes	July 15, 2029	4.00%	$	400,000
2030 Senior Notes	January 15, 2030	3.40%	$	500,000
2031 Senior Notes	February 15, 2031	3.20%	$	450,000
Total Senior Unsecured Notes		3.61%	$	1,950,000

The Senior Unsecured Notes are payable on January 15 and July 15 of each year, except for the 2026 Senior Notes, which are payable on March 15 and September 15 of each year, and the 2031 Senior Notes, which are payable on February 15 and August 15 of each year. The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the 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 calculated in accordance with the respective indenture. Notwithstanding the foregoing, 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) prior to their respective maturity dates, the redemption price will not include a make-whole premium.

CMBS

In general, the obligor of our asset level debt is a special purpose entity that holds the real estate and other collateral securing the indebtedness. Each special purpose entity is a bankruptcy remote separate legal entity and is the sole owner of its assets and solely responsible for its liabilities other than typical non-recurring covenants.

As of September 30, 2020, we had five fixed-rate CMBS loans with $215.3 million of aggregate outstanding principal, a weighted-average contractual interest rate of 5.47% and a weighted-average maturity of 3.1 years. Approximately 86.99% of this debt is partially amortizing and requires a balloon payment at maturity. The following table shows the scheduled principal repayments, including amortization, of the CMBS fixed-rate loans as of September 30, 2020 (dollars in thousands):

Year of Maturity	Number of Loans		Number of Properties		Stated Interest Rate Range	Weighted Average Stated Rate			Scheduled Principal		Balloon		Total
Remainder of 2020		—		—	—%		—	%	$	1,059	$	—	$	1,059
2021		—		—	—%		—			4,365		—		4,365
2022		—		—	—%		—			4,617		—		4,617
2023		3		86	5.23%-5.50%		5.46			3,074		197,912		200,986
2024		—		—	—%		—			590		—		590
Thereafter		2		2	5.80%-6.00%		5.83			3,610		70		3,680
Total		5		88			5.47	%	$	17,315	$	197,982	$	215,297

Convertible Notes

As of September 30, 2020, the Convertible Notes were comprised of $190.4 million aggregate principal amount of 3.75% convertible notes maturing on May 15, 2021. Interest on the 2021 Notes is payable semiannually in arrears on May 15 and November 15 of each year.

Holders may convert the 2021 Notes prior to November 15, 2020 only under specific circumstances: (1) if the closing price of our common stock for each of at last 20 trading days (whether or not consecutive) during the last 30 consecutive trading days in the quarter is greater than or equal to 130% of the conversion price for the Convertible Notes; (2) during the five business day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last closing price of our common stock and the conversion rate for the Convertible Notes; (3) if we call any or all of the Convertible Notes for redemption prior to the redemption date; or (4) upon the occurrence of specified corporate events as described in the Convertible Notes prospectus supplement. On or after November 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes, holders may convert the 2021 Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver cash, shares of common stock or a combination of cash and shares of common stock, at our election.

The conversion rate is subject to adjustment for some events, including dividends paid in excess of threshold amounts stipulated in the agreement, but will not be adjusted for any accrued and unpaid interest. As of September 30, 2020, the conversion rate was 17.4458 per $1,000 principal note. If we undergo a fundamental change (as defined in the 2021 Notes’ supplemental indenture), holders may require us to repurchase all or any portion of their notes at a repurchase price equal to 100% of the principal amount of such notes to be repurchased, plus accrued and unpaid interest.

DEBT MATURITIES

Future principal payments due on our various types of debt outstanding as of September 30, 2020 (in thousands):

	Total		Remainder of 2020		2021		2022		2023		2024		Thereafter
2019 Credit Facility	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2020 Term Loans		178,000		—		—		178,000		—		—		—
Senior Unsecured Notes		1,950,000		—		—		—		—		—		1,950,000
CMBS		215,297		1,059		4,365		4,617		200,986		590		3,680
Convertible Notes		190,426		—		190,426		—		—		—		—
	$	2,533,723	$	1,059	$	194,791	$	182,617	$	200,986	$	590	$	1,953,680

CONTRACTUAL OBLIGATIONS

As discussed above, during the nine months ended September 30, 2020, we entered into the 2020 Term Loan Agreement to reduce the amounts drawn under the 2019 Credit Facility. Additionally, we issued the 2031 Senior Unsecured Notes and used proceeds to partially repay borrowings outstanding under the 2020 Term Loans and to partially redeem the 2021 Convertible Notes. There were no other material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC.

We may enter into commitments to purchase goods and services in connection with the operations of our properties. Those commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures.

DISTRIBUTION POLICY

Distributions from our current or accumulated earnings are generally classified as ordinary income, whereas distributions in excess of our current and accumulated earnings, to the extent of a stockholder’s federal income tax basis in our common stock, are generally characterized as a return of capital. Under the 2017 Tax Legislation, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Distributions in excess of a stockholder’s federal income tax basis in our common stock are generally characterized as capital gain.

We are required to distribute 90% of our taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and are required to pay federal income tax at regular corporate rates to the extent we distribute less than 100% of our taxable income (including capital gains).

We intend to make distributions that will enable us to meet the distribution requirements applicable to REITs and to eliminate or minimize our obligation to pay corporate-level federal income and excise taxes.

Any distributions will be at the sole discretion of our Board of Directors, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable laws and such other factors as our Board of Directors deems relevant. Refer to “Part II, Item 1A. Risk Factors” for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders.

Cash Flows

The following table presents a summary of our cash flows for the nine months ended September 30, 2020 and September 30, 2019, respectively (in thousands):

	Nine Months Ended September 30,
	2020			2019			Change
Net cash provided by operating activities	$	206,524		$	259,353		$	(52,829	)
Net cash used in investing activities		(352,766	)		(328,616	)		(24,150	)
Net cash provided by financing activities		249,708			361,508			(111,800	)
Net increase in cash, cash equivalents and restricted cash	$	103,466		$	292,245		$	(188,779	)

As of September 30, 2020, we had $129.5 million of cash, cash equivalents and restricted cash as compared to $26.0 million as of December 31, 2019 and $369.7 million as of September 30, 2019.

Operating Activities

Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent and the level of our operating expenses and other general and administrative costs.

The decrease in net cash provided by operating activities was primarily attributable to the following:

•

a decrease in related party fee income of $70.3 million, which was primarily attributable to the $48.2 million termination fee received in connection with the termination of the Asset Management Agreement in September 2019, which was replaced by the Interim Management Agreement,

•

a decrease in preferred dividends received from SMTA of $14.6 million as a result of SMTA repurchasing the preferred shares in September 2019, and

•

an increase in cash interest paid of $13.5 million driven by the issuance of the 2027 Senior Notes, 2029 Senior Notes and 2030 Senior Notes.

The decrease was partially offset by the following:

•

termination fee costs of $24.8 million paid for the termination of interest rate swaps in 2019, and

•

a net increase in cash rental revenue of $20.3 million, driven by net acquisitions over the trailing twelve month period, partially offset by $24.1 million of rent deferred and $4.1 million of rent abated during the nine months ended September 30, 2020 as a result of the COVID-19 pandemic.

Investing Activities

Cash used in investing activities is generally used to fund property acquisitions, for investments in loans receivable and for capital expenditures. Cash provided by investing activities generally relates to the disposition of real estate and other assets.

Net cash used in investing activities during the nine months ended September 30, 2020 included $433.4 million for the acquisition of 47 properties and $9.9 million of capitalized real estate expenditures. These outflows were partially offset by the $58.7 million in net proceeds from the disposition of 21 properties and the sale of one loan receivable. Additionally, the outflows were further offset by the collection of $31.8 million of principal on loans receivable, which includes $28.7 million for the paydown of the outstanding loan balances.

During the same period in 2019, net cash used in investing activities included $719.1 million for the acquisition of 195 properties and $32.9 million of capitalized real estate expenditures. These outflows were partially offset by $230.5 million in net proceeds from the disposition of 34 properties, $150.0 million in proceeds from the redemption of preferred equity investment in SMTA and $42.8 million in collections of principal on loans receivable.

Financing Activities

Generally, our net cash provided by or used in financing activities is impacted by our borrowings under our revolving credit facilities and term loans, issuances of net-lease mortgage notes, common stock and debt offerings and repurchases and dividend payments on our common and preferred stock.

Net cash provided by financing activities during the nine months ended September 30, 2020 was primarily attributable to borrowings of $445.5 million under senior unsecured notes, net borrowings of $178.0 million under term loans and net proceeds from the issuance of common stock of $117.3 million. These amounts were partially offset by payment of dividends to equity owners of $202.1 million, repayment of $154.6 million on convertible notes, net repayments of $116.5 million on our revolving credit facilities, deferred financing costs of $6.5 million, common stock repurchases for employee tax withholdings totaling $4.4 million, debt extinguishment costs of $4.1 million and repayment of $3.0 million on mortgages and notes payable

During the same period in 2019, net cash provided by financing activities was primarily attributable to borrowings of $1,198.3 million under senior unsecured notes and net proceeds from the issuance of common stock of $538.0 million. These amounts were partially offset by the net repayment of $420.0 million of Term Loans, payment of dividends to equity owners of $172.0 million, repayment of $198.6 million on mortgages and notes payable, net repayments of $146.3 million on our revolving credit facilities, repayment of $402.5 million on convertible notes, deferred financing costs of $20.2 million, debt extinguishment costs of $12.6 million and common stock share repurchases for employee tax withholdings totaling $2.5 million

Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any material off-balance sheet arrangements.

New Accounting Pronouncements

See Note 2 to the consolidated financial statements herein.

Non-GAAP Financial Measures

FFO: We calculate FFO in accordance with the standards established by NAREIT. FFO represents net income (loss) attributable to common stockholders (computed in accordance with GAAP), excluding real estate-related depreciation and amortization, impairment charges and net (gains) losses from property dispositions. We use FFO as a supplemental performance measure because we believe that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate-related depreciation and amortization, impairment charges and net (gains) losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other equity REITs. However, because FFO excludes depreciation and amortization and does not capture the changes in the value of our properties that result from use or market conditions, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited.

AFFO: AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. We adjust FFO to eliminate the impact of certain items that we believe are not indicative of our core operating performance, such as debt extinguishment gains (losses), costs associated with termination of interest rate swaps, costs related to the COVID-19 pandemic and certain non-cash items. These certain non-cash items include non-cash revenues (comprised of straight-line rents net of bad debt expense and amortization of lease and loan receivable intangibles), non-cash interest expense (comprised of amortization of deferred financing costs and debt discounts/premiums) and non-cash compensation expense. Other equity REITs may not calculate FFO and AFFO as we do, and, accordingly, our FFO and AFFO may not be comparable to such other equity REITs’ FFO and AFFO. FFO and AFFO do not represent cash generated from operating activities determined in accordance with GAAP, are not necessarily indicative of cash available to fund cash needs and should only be considered a supplement, and not an alternative, to net income (loss) attributable to common stockholders (computed in accordance with GAAP) as a performance measure.

Adjusted Debt: Adjusted Debt represents interest bearing debt (reported in accordance with GAAP) adjusted to exclude unamortized debt discount/premium and deferred financing costs and reduced by cash and cash equivalents and cash reserves on deposit with lenders as additional security. The result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition.

EBITDAre: EBITDAre is computed in accordance with standards established by NAREIT. EBITDAre is computed as net income (loss) (computed in accordance with GAAP), plus interest expense, income tax expense (if any), depreciation and amortization, impairments of depreciated property and plus/(minus) losses/(gains) on the disposition of depreciated property.

Adjusted EBITDAre: Adjusted EBITDAre represents EBITDAre as adjusted for revenue producing acquisitions and dispositions for the quarter as if such acquisitions and dispositions had occurred as of the beginning of the quarter and for certain items that we believe are not indicative of our core operating performance, such as debt extinguishment gains (losses) and costs related to the COVID-19 pandemic. We believe that excluding these items, which are not key drivers of our investment decisions and may cause short-term fluctuations in net income, provides a useful supplemental measure to investors and analysts in assessing the net earnings contribution of our real estate portfolio. Because these measures do not represent net income (loss) that is computed in accordance with GAAP, they should only be considered a supplement, and not an alternative, to net income (loss) (computed in accordance with GAAP) as a performance measure.

Annualized Adjusted EBITDAre: Annualized Adjusted EBITDAre is calculated as Adjusted EBITDAre for the quarter, adjusted for items where annualization would not be appropriate, multiplied by four. Our computation of Adjusted EBITDAre and Annualized Adjusted EBITDAre may differ from the methodology used by other equity REITs to calculate these measures and, therefore, may not be comparable to such other REITs.

Adjusted Debt to Annualized Adjusted EBITDAre: Adjusted Debt to Annualized Adjusted EBITDAre is a supplemental non-GAAP financial measure we use to evaluate the level of borrowed capital being used to increase the potential return of our real estate investments, and a proxy for a measure we believe is used by many lenders and ratings agencies to evaluate our ability to repay and service our debt obligations over time. We believe the ratio is a beneficial disclosure to investors as a supplemental means of evaluating our ability to meet obligations senior to those of our equity holders. Our computation of this ratio may differ from the methodology used by other equity REITs, and, therefore, may not be comparable to such other REITs.

FFO and AFFO

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2020			2019			2020			2019
Net income (loss) attributable to common stockholders	$	11,211		$	78,707		$	(10,225	)	$	162,846
Portfolio depreciation and amortization		52,024			43,764			157,129			126,171
Portfolio impairments		8,106			5,932			69,929			13,231
Gain on disposition of assets		(10,763	)		(32,254	)		(11,809	)		(70,760	)
FFO attributable to common stockholders	$	60,578		$	96,149		$	205,024		$	231,488
Loss on debt extinguishment		7,252			5,580			7,252			11,473
Deal pursuit costs		597			330			1,630			574
Non-cash interest expense		3,190			2,685			9,658			11,116
Accrued interest and fees on defaulted loans		—			—			—			285
Straight-line rent, net of related bad debt expense		(899	)		(4,770	)		(6,385	)		(12,162	)
Other amortization and non-cash charges		(383	)		(574	)		(213	)		(1,169	)
Non-cash compensation expense		2,967			3,534			9,726			10,995
Termination of interest rate swaps		—			12,461			—			12,461
Costs related to COVID-19⁽¹⁾		702			—			1,440			—
AFFO attributable to common stockholders ⁽²⁾	$	74,004		$	115,395		$	228,132		$	265,061

Net income (loss) per share of common stock - Diluted	$	0.11		$	0.87		$	(0.11	)	$	1.85
FFO per share of common stock - Diluted ⁽³⁾	$	0.59		$	1.06		$	1.98		$	2.63
AFFO per share of common stock - Diluted ⁽³⁾	$	0.72		$	1.27		$	2.21		$	3.01
AFFO per share of common stock - Diluted, excluding AM termination fee income, net of tax⁽⁴⁾	$	0.72		$	0.87		$	2.21		$	2.59

Weighted average shares of common stock outstanding - Diluted		102,938,860			90,396,797			102,553,798			87,784,477
Weighted average shares of common stock outstanding for non-GAAP measures - Diluted⁽³⁾		102,938,860			90,396,797			103,132,749			87,784,477

⁽¹⁾	Costs related to COVID-19 are included in general and administrative expense and primarily relate to legal fees for executing rent deferral or abatement agreements.

⁽²⁾	AFFO for the three and nine months ended September 30, 2020 includes $1.8 million and $24.1 million, respectively, of deferred rental income recognized in conjunction with the FASB’s relief for deferral agreements extended as a result of the COVID-19 pandemic.

⁽³⁾

Weighted average shares of common stock for non-GAAP measures includes unvested market-based awards and unsettled forward equity contracts for the nine months ended September 30, 2020, which are dilutive for the non-GAAP calculations. Dividends paid and undistributed earnings allocated, if any, to unvested restricted stockholders are deducted from FFO and AFFO for the computation of the per share amounts. The following amounts were deducted:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
FFO	$0.2 million	$0.3 million	$0.6 million	$1.0 million
AFFO	$0.2 million	$0.4 million	$0.7 million	$1.1 million

⁽⁴⁾

AFFO attributable to common stockholders for the three months ended September 30, 2019, excluding $48.2 million of termination fee income, net of $11.2 million in income tax expense. The termination fee was received in conjunction with SMTA’s sale of Master Trust 2014 in September 2019 and termination of the Asset Management Agreement on September 20, 2019. On September 20, 2019, the Company entered into the Interim Management Agreement with SMTA. AFFO attributable to common stockholders has not been adjusted to exclude the following:

asset management fees of $4.4 million and $14.4 million earned during the three and nine months ended September 30, 2019, respectively;

property management and servicing fees of $1.7 million and $5.5 million earned during the three and nine months ended September 30, 2019, respectively;

preferred dividend income from SMTA of $3.3 million and $10.8 million earned during the three and nine months ended September 30, 2019, respectively;

interest income on related party notes receivable of $0.3 million and $1.1 million earned during the three and nine months ended September 30, 2019, respectively, and an early repayment premium of $0.9 million earned during the three and nine months ended September 30, 2019; and

interest expense on related party loans payable of $58 thousand and $0.2 million incurred during the three and nine months ended September 30, 2019, respectively.

Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre

	September 30,
(Dollars in thousands)	2020			2019
Revolving credit facilities	$	—		$	—
Term loans		177,170			—
Senior Unsecured Notes, net		1,926,752			1,483,491
Mortgages and notes payable, net		213,479			259,113
Convertible Notes, net		188,216			334,904
Total debt, net		2,505,617			2,077,508
Unamortized debt discount, net		8,642			10,664
Unamortized deferred financing costs		19,464			18,569
Cash and cash equivalents		(116,814	)		(358,440	)
Restricted cash balances held for the benefit of lenders		(12,675	)		(11,226	)
Adjusted Debt	$	2,404,234		$	1,737,075

	Three Months Ended September 30,
(Dollars in thousands)	2020			2019
Net income	$	13,798		$	81,294
Interest		26,404			24,675
Depreciation and amortization		52,170			43,907
Income tax expense		197			11,190
Gain on disposition of assets		(10,763	)		(32,254	)
Portfolio impairments		8,106			5,932
EBITDAre	$	89,912		$	134,744
Adjustments to revenue producing acquisitions and dispositions		2,688			3,599
Deal pursuit costs		597			330
Loss on debt extinguishment		7,252			5,580
Costs related to COVID-19⁽¹⁾		702			—
Termination of interest rate swaps		—			12,461
Termination of Asset Management Agreement		—			(48,156	)
Adjusted EBITDAre	$	101,151		$	108,558
Adjustments related to straight-line rent ⁽²⁾		4,942			—
Other adjustments for Annualized EBITDAre ⁽³⁾		1,453			(244	)
Annualized Adjusted EBITDAre	$	430,184		$	433,256
Adjusted Debt / Annualized Adjusted EBITDAre ⁽⁴⁾	5.6x				4.0	x

⁽¹⁾

Costs related to COVID-19 are included in general and administrative expense and primarily relate to legal fees for executing rent deferral or abatement agreements.

⁽²⁾

Adjustment relates to $6.2 million of gross bad debt expense on straight-line rent receivable balances, where only $1.3 million of the expense relates to straight-line rent that would have been recognized during the three months ended September 30, 2020. As such, annualization of the $4.9 million of bad debt expense related to straight-line rental revenue recognized in previous periods would not be appropriate.

⁽³⁾

Adjustments for the three months ended September 30, 2020 are comprised of certain other property costs, general and administrative expenses, prior period rent recoveries, abatements and bad debt expenses related to rental revenue in previous periods where annualization would not be appropriate. Adjustments for the three months ended September 20, 2019 are comprised of certain other income where annualization would not be appropriate.

⁽⁴⁾Adjusted Debt / Annualized Adjusted EBITDAre would be 5.1x if the 6.7 million shares under open forward sales agreements had been settled as of September 30, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including interest rate risk. Interest rates and other factors, such as occupancy, rental rates and the financial condition of our tenants, influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. As described above, we generally offer leases that provide for payments of base rent with scheduled increases and, to a lesser extent, contingent rent based on a percentage of the tenant’s gross sales to help mitigate the effect of inflation. Because the properties in our portfolio are generally leased to tenants under triple-net leases, our exposure to rising property operating costs due to inflation is mitigated.

Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and global economic and political conditions, which are beyond our control. Our operating results depend heavily on the difference between the revenue from our assets and the interest expense incurred on our borrowings. We may incur additional variable rate debt in the future, including amounts that we may borrow under our 2019 Credit Facility. In addition, decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments, which may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected. Significant increases in interest rates may also have an adverse impact on our earnings if we are unable to acquire real estate with rental rates high enough to offset the increase in interest rates on our borrowings.

In the event interest rates rise significantly or there is an economic downturn, defaults may increase and result in credit losses, which may adversely affect our liquidity and operating results. In a decreasing interest rate environment, borrowers are generally more likely to prepay their loans in order to obtain financing at lower interest rates. However, the vast majority of our mortgage notes payable have prepayment clauses that make refinancing during a decreasing interest rate environment uneconomical. Investments in our mortgage loans receivable also have significant prepayment protection in the form of yield maintenance provisions, which provide us with substantial yield protection in a decreasing interest rate environment with respect to this portion of our investment portfolio.

As of September 30, 2020, our assets were primarily long-term, fixed-rate leases (though most have scheduled rental increases during the terms of the leases). As of September 30, 2020, $2.4 billion of our indebtedness outstanding was fixed-rate, consisting of our Senior Unsecured Notes, mortgages and notes payable and Convertible Notes, with a weighted average stated interest rate of 3.85%, excluding amortization of deferred financing costs and debt discounts/premiums. As of September 30, 2020, $178.0 million of our indebtedness was variable-rate, consisting of our 2020 Term Loans, with a stated interest rate of 1.66%.

The estimated fair values of our debt instruments have been derived based on market quotes for comparable instruments or discounted cash flow analysis using estimates of the amount and timing of future cash flows, market rates and credit spreads. The debt instrument balances as of September 30, 2020 are as follows (in thousands):

	Carrying Value		Estimated Fair Value
2019 Credit Facility	$	—	$	—
2020 Term Loans, net ⁽¹⁾		177,170		177,938
Senior Unsecured Notes, net ⁽¹⁾		1,926,752		1,965,922
Mortgages and notes payable, net ⁽¹⁾		213,479		227,384
Convertible Notes, net ⁽¹⁾		188,216		193,995

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

Item 4. Controls and Procedures

SPIRIT REALTY CAPITAL, INC.

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of Spirit Realty Capital, Inc.'s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness as of September 30, 2020 of the design and operation of Spirit Realty Capital, Inc.'s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

There were no changes to Spirit Realty Capital, Inc.'s internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, Spirit Realty Capital, Inc.'s internal control over financial reporting.

SPIRIT REALTY, L.P.

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of Spirit Realty, L.P.'s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness as of September 30, 2020 of the design and operation of Spirit Realty, L.P.'s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

There were no changes to Spirit Realty, L.P.'s internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, Spirit Realty, L.P.'s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

From time-to-time, we may be subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. We are not currently a party as plaintiff or defendant to any legal proceedings that we believe to be material or that individually or in the aggregate would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to us.

Item 1A. Risk Factors.

There have been no material changes to the risk factors as disclosed in Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K, other than as set forth below, which supplements the above referenced risk factors disclosed in our most recent Annual Report on Form 10-K.

Actual or perceived threats associated with epidemics, pandemics or public health crises, including the ongoing COVID-19 pandemic, could have a material adverse effect on our and our tenants’ businesses, financial condition, results of operations, cash flow, liquidity and ability to access the capital markets and satisfy debt service obligations and make distributions to our stockholders.

Epidemics, pandemics or other public health crises, including the ongoing COVID-19 pandemic, that impact economic and market conditions, particularly in markets where our properties are located, and preventative measures taken to alleviate any public health crises, including “shelter-in-place” or “stay-at-home” orders, density limitations or social distancing measures, issued by local, state or federal authorities, may have a material adverse effect on our and our tenants’ businesses, financial condition, results of operations, liquidity and ability to access capital markets and satisfy our debt service obligations and make distributions to our stockholders, and may affect our ability as a net-lease real estate investment trust to acquire properties or lease properties to our tenants, who may be unable, as a result of any economic downturn occasioned by public health crises, to make rental payments when due.

The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, has already had a significant adverse impact on economic and market conditions around the world during 2020, including the United States and the markets in which we own properties. Certain of our tenants, especially those in industries considered “non-essential” under varying state and local “shelter-in-place” and “stay-at-home” orders and other restrictions on types of business that may continue to operate, have experienced and continue to experience challenges or even closures as a result of the COVID-19 pandemic, which has had, and we anticipate will continue to have, an impact on their financial condition, results of operations, liquidity, ability to pay rent and creditworthiness. That impact has directly resulted, and may continue to result, in a reduction in our rental income and/or an increase in our property costs and impairments. In addition, that impact has resulted, and may continue to result, in an increase in our general and administrative expenses, as we have incurred and may continue to incur costs to negotiate rent deferrals, lease restructures and/or lease terminations and/or enforce our contractual rights (including through litigation), as we deem appropriate on a case-by-case basis. Although some state governments and other authorities were in varying stages of lifting or modifying some of these measures, some have already been forced to, and others may in the future, reinstitute these measures or impose new, more restrictive measures, if the risks, or the perception of the risks, related to the COVID-19 pandemic worsen at any time. As of the date of this report, our discussions with tenants requesting rent deferrals (and other forms of relief) have been substantially focused on industries that are directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, particularly health and fitness, movie theaters, quick service and casual dining restaurants, entertainment, car washes, dealerships, home décor, home furnishings, department stores and education. These and other industries may be further impacted in the future depending on various factors, including the duration of the COVID-19 pandemic, the reinstitution of restrictions intended to prevent its spread or the imposition of new, more restrictive measures, and even after certain of such restrictions are lifted or modified, the willingness of customers to visit our tenants’ businesses may be reduced due to lingering concerns regarding the continued risk of COVID-19 transmission and heightened sensitivity to risks associated with the transmission of other diseases. We are not able to predict the duration of such customer behavior.

As of October 26, 2020, we have collected approximately 90% of third quarter 2020 Base Rent of $118.2 million, deferred approximately 7% and abated approximately 1%. Additionally, for the fourth quarter of 2020, we have deferred an additional $3.7 million of rent and abated $0.1 million. The deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 13 months. Of the tenants who we have granted rent deferrals, 22% are public companies and the weighted average remaining lease term of leases with deferrals is 10.3 years (based on Base Rent). Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period.

The ongoing COVID-19 pandemic and related restrictions could trigger a period of sustained global and U.S. economic downturn or recession. Moreover, the ongoing COVID-19 pandemic and restrictions intended to prevent its spread could have significant adverse impacts on our business, financial condition, results of operations, cash flows, liquidity and ability to access the capital markets and satisfy our debt service obligations and make distributions to our stockholders in a variety of ways that are difficult to predict. Such adverse impacts could depend on, among other factors:

•

the financial condition and viability of our tenants – many of which are in the retail industry – and their ability or willingness to pay rent in full on a timely basis;

•

state, local, federal and industry-initiated efforts that may adversely affect landlords, including us, and their ability to collect rent and/or enforce remedies for the failure to pay rent;

•

our need to restructure leases with our tenants and our ability to do so on favorable terms or at all;

•

our ability to renew leases or re-lease available space in our properties on favorable terms or at all in the event of nonrenewal or in the event we exercise our right to replace an existing tenant, and obligations we may incur in connection with the replacement of an existing tenant, including as a result of a general decrease in demand for our retail space, deterioration in the economic and market conditions in markets where our properties are located or due to restrictions intended to prevent the spread of COVID-19 that frustrate our leasing activities, particularly in light of the adverse impact to the financial health of many of our tenants or potential tenants that has occurred and continues to occur as a result of the COVID-19 pandemic and the significant uncertainty as to when and the conditions under which potential tenants will be able to operate in future;

•

a severe and prolonged disruption and instability in the global financial markets, including the debt and equity capital markets, all of which have already experienced and may continue to experience significant volatility, or deteriorations in credit and financing conditions, as well as the recent significant decline in our share price from prices prior to the spread of the COVID-19 pandemic, may affect our or our tenants’ ability to access capital necessary to fund our respective business operations or retire, replace or renew maturing liabilities on a timely basis, on attractive terms or at all and may adversely affect the valuation of financial assets and liabilities, any of which could affect our and/or our tenants’ ability to meet liquidity and capital expenditure requirements;

•

a refusal or failure of one or more lenders under the 2019 Revolving Credit and Term Loan Agreement to fund their respective financing commitment to us may affect our ability to access capital necessary to fund our business operations and to meet our liquidity and capital expenditure requirements;

•

the broader impact of the severe economic contraction due to the COVID-19 pandemic and restrictions intended to prevent its spread, the resulting increase in unemployment that has occurred and its effect on consumer behavior, and negative consequences that will occur if these trends are not timely reversed;

•

complete or partial shutdowns of one or more of our tenants’ facilities or distribution centers, temporary or long-term disruptions in our tenants’ supply chains from local, national and international suppliers or delays in the delivery of products, services or other materials necessary for our tenants’ operations, which could force our tenants’ to reduce, delay or eliminate offerings of their products and services, reduce or eliminate their revenues and liquidity and/or result in their bankruptcy or insolvency;

•

the further utilization of e-commerce in certain industries as a result of the temporary closure of many retail properties, which may lead to the closure of underperforming properties by retailers;

•

our and our tenants’ ability to manage our respective businesses to the extent our and their management or personnel (including on-site employees) are impacted in significant numbers by the COVID-19 pandemic and are otherwise not willing, available or allowed to conduct work; and

•

our and our tenants’ ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during the COVID-19 pandemic.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic or restrictions intended to prevent its spread, and we are not able to predict whether other epidemics, pandemics or other public health crises will occur in the future that may have similar impacts. Nevertheless, the ongoing COVID-19 pandemic and restrictions intended to prevent its spread and the current financial, economic and capital markets environment and future developments in these and other areas present material risks and uncertainties with respect to our business, financial condition, results of operations, cash flows, liquidity and ability to access the capital markets and satisfy our debt service obligations and make distributions to our stockholders and could also have a material adverse effect on the market value of our securities. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in this “Risk Factors” section and in the section entitled “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit No.	Description

3.1	Articles of Restatement of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Registration Statement on Form S-3 on November 8, 2013 and incorporated herein by reference.
3.2	Articles of Amendment of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Form 8-K on May 13, 2014 and incorporated herein by reference.
3.3	Articles Supplementary of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Current Report on Form 8-K on March 3, 2017 and incorporated herein by reference.
3.4	Fifth Amended and Restated Bylaws of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company’s Form 8-K on August 15, 2017 and incorporated herein by reference.
3.5	Second Amended and Restated Agreement of Limited Partnership of Spirit Realty, L.P. filed as Exhibit 3.1 to the Operating Partnership's Form 8-K on October 3, 2017 and incorporated herein by reference.
3.6	Articles Supplementary designating Spirit Realty Capital, Inc.'s 6.000% Series A Cumulative Redeemable Preferred Stock filed as Exhibit 3.4 to the Company's Registration Statement on Form 8-A on October 2, 2017 and incorporated herein by reference.
3.7	Certificate of Limited Partnership of Spirit Realty, L.P. dated September 25, 2012, filed as Exhibit 4.5 to the Company's Form S-4 on March 20, 2017 and incorporated herein by reference.
3.8	Articles of Amendment of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Form 8-K on April 29, 2019 and incorporated herein by reference.
4.1	Fifth Supplemental Indenture, dated as of August 6, 2020, among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the Notes and the Guarantee, filed as Exhibit 4.2 to the Company’s Form 8-K on August 6, 2020 and incorporated herein by reference.
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Spirit Realty Capital, Inc.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Spirit Realty Capital, Inc.
31.3*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Spirit Realty, L.P.
31.4*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Spirit Realty, L.P.
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Spirit Realty Capital, Inc.
32.2*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Spirit Realty, L.P.
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*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

	SPIRIT REALTY CAPITAL, INC.
	(Registrant)

	By:		/s/ Prakash J. Parag
	Name:		Prakash J. Parag
	Title:		Senior Vice President and Chief Accounting Officer
			(Principal Accounting Officer)

	SPIRIT REALTY, L.P.
	(Registrant)

	By:		Spirit Realty Capital, Inc. in its capacity as sole member of Spirit General OP Holdings, LLC, as general partner and behalf of Spirit Realty, L.P.

			/s/ Prakash J. Parag
			Prakash J. Parag
			Senior Vice President and Chief Accounting Officer
			(Principal Accounting Officer)

Date: November 2, 2020

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Spirit Realty 10-Q2020 Q3 Quarterly report

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