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SRC Spirit Realty Capital

Filed: 19 Feb 21, 6:23am
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-K
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of exchange on which registered
Common Stock, $0.05 par value per share
 
SRC
 
New York Stock Exchange
6.000% Series A Cumulative Redeemable
Preferred Stock, $0.01 par value per
share
 
 
SRC-A
 
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
 
  
            Spirit Realty Capital, Inc.
  
None
   
  
            Spirit Realty, L.P.
  
None
   
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
                        Spirit Realty Capital, Inc.         Yes         
No         
                Spirit Realty, L.P.         Yes         
No        
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
                        Spirit Realty Capital, Inc.         Yes         
No         
                Spirit Realty, L.P.         Yes         
No        
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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
                        Spirit Realty Capital, Inc.         Yes        
No       
            Spirit Realty, L.P.       Yes        
No      
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 June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of Spirit Realty Capital, Inc.’s shares of common stock, $0.05 par value, held by
non-affiliates
of the Registrant, was $3.6 billion based on the last reported sale price of $34.86 per share on the New York Stock Exchange on June 30, 2020.
There is no public trading market for the common units of limited partnership interest of Spirit Realty, L.P. As a result, the aggregate market value of the common units of limited partnership interest held by
non-affiliates
of Spirit Realty, L.P. cannot be determined.
The number of outstanding shares of Spirit Realty Capital, Inc.’s common stock, $0.05 par value, as of February 16, 2021, was 114,861,919 shares.
Documents Incorporated by Reference
Certain specific portions of the definitive Proxy Statement for Spirit Realty Capital, Inc.’s 2021 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form
10-K.
Only those portions of the Proxy Statement which are specifically incorporated by reference herein shall constitute a part of this Annual Report on Form
10-K.
 
 
 

EXPLANATORY NOTE
This report combines the annual reports on Form
10-K
for the year ended December 31, 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 annual reports on Form
10-K
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 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 issuance of convertible notes and equity issuances by our Company, which are generally contributed to our Operating Partnership in exchange for partnership units of our Operating Partnership, our Operating Partnership generates the capital required by our Company’s business through our Operating Partnership’s operations or our Operating Partnership’s incurrence of indebtedness.
The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of our Company and those of our Operating Partnership. The partnership units in our Operating Partnership are accounted for as partners’ capital in our Operating Partnership’s consolidated financial statements. There are no
non-controlling
interests in the Company or the Operating Partnership.
To help investors understand the significant differences between our Company and our Operating Partnership, this report presents the consolidated financial statements separately for our Company and our Operating Partnership. All other sections of this report, including “Selected Financial Data,��� “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” are presented together for our Company and our Operating Partnership.
In order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that our Company and Operating Partnership are compliant with Rule
13a-15
or Rule
15d-15
of the Securities Exchange Act of 1934, or the Exchange Act, and 18 U.S.C. §1350, this report also includes separate “Item 9A. Controls and Procedures” sections and separate Exhibit 31 and 32 certifications for each of our Company and our Operating Partnership.

GLOSSARY
 
1031 Exchange  
Tax-deferred
like-kind exchange of properties held for business or investment purposes, pursuant to Section 1031 of the Code
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
2015 Credit Facility  
$800.0 million unsecured credit facility pursuant to the 2015 Credit Agreement
2015 Term Loan  
$420.0 million senior unsecured term facility pursuant to the 2015 Term Loan Agreement
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
2016 ATM Program  
At the market equity distribution program established in November 2016, which was terminated upon entry into the 2020 ATM Program
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 Loan
2019 Notes  
$402.5 million convertible notes of the Corporation due 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 ATM Program  
At the market equity distribution program established in November 2020, pursuant to which the Corporation may offer and sell registered shares of common stock 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
401(k) Plan  
Defined contribution retirement savings plan qualified under Section 401(k) of the Code
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
ACM  
Asbestos-Containing Materials
ADA  
Americans with Disabilities Act
Adjusted Debt  
Adjusted Debt is a
non-GAAP
financial measure. See definition in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adjusted EBITDA
re
  
Adjusted EBITDA
re
is a
non-GAAP
financial measure. See definition in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
AFFO  
Adjusted Funds From Operations. See definition in Item 7. 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 and subsequently assigned by Spirit Realty, L.P. to Spirit Realty AM Corporation on April 1, 2019
ASU  
Accounting Standards Update
ATM Program  
The 2016 ATM Program or the 2020 ATM Program, as applicable
Base Cash Rent  
Represents Base Rent reduced for amounts abated and rent deemed not probable of collection.
Base Rent  
Represents contractual rental income for the period, prior to deferral and abatement agreements, and excluding contingent rents. We use Base Rent to monitor cash collection and to evaluate past due receivables.
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
EBITDA  
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA
re
  
EBITDA
re
 is a
non-GAAP
financial measure and is computed in accordance with standards established by NAREIT. See definition in Item 7. 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 Item 7. 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 and effective September 20, 2019
IPO  
Initial Public Offering
IRS  
Internal Revenue Service
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
MGCL  
Maryland General Corporation Law
NAREIT  
National Association of Real Estate Investment Trusts
NYSE  
New York Stock Exchange
OP Holdings  
Spirit General OP Holdings, LLC
Operating Partnership  
Spirit Realty, L.P., a Delaware limited partnership
Porter’s Five Forces  
An analytical framework used to examine the attractiveness of an industry and potential for disruption in that industry based on: threats of new entrants, threats of substitutes, the bargaining power of customers, the bargaining power of suppliers and industry rivalry
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
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 Unsecured Notes, 2027 Senior Unsecured Notes, 2029 Senior Unsecured Notes, 2030 Senior Unsecured Notes and 2031 Senior Unsecured 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.
Spirit Heat Map  
An analysis of industries across Porter’s Five Forces and potential causes of technological disruption to identify tenant industries which Spirit believes to have good fundamentals for future performance
Spirit Property Ranking Model  
A proprietary model used annually to rank properties across twelve factors and weightings consisting of both real estate quality scores and credit underwriting criteria, in order to benchmark property quality, identify asset recycling opportunities and to enhance acquisition or disposition decisions
TRS  
Taxable REIT subsidiary, which is a corporation, other than a REIT, in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary and meets certain other requirements
TSR  
Total Shareholder Return
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.

INDEX
 
 
   Item 1.     7 
   Item 1A.     13 
   Item 1B.     28 
   Item 2.     29 
   Item 3.     31 
   Item 4.     31 
    
           
   Item 5.     32 
   Item 6.     34 
   Item 7.     35 
   Item 7A.     52 
   Item 8.     53 
    
           
   Item 9.     110 
   Item 9A.     110 
   Item 9B.     111 
   Item 10.     111 
   Item 11.     111 
   Item 12.     111 
   Item 13.     112 
   Item 14.     112 
    
           
   Item 15.     113 
   Item 16.     117 
  
   171 
 
5

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form
10-K
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 Annual 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.
You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form
10-K.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. 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.
 
6

PART I
 
Item 1.
  Business
Overview
 
 
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, operationally essential real estate assets throughout the United States, which are subsequently leased on a long-term,
triple-net
basis to high quality tenants with operations in retail, industrial, office and certain other industries.
As of December 31, 2020, Spirit owned a diversified portfolio of 1,860 properties with gross investment in real estate totaling approximately $6.8 billion and with
in-place
Annualized Base Rent of $509.6 million. See Item 2. “Properties - Our Real Estate Investment Portfolio” for further information on our portfolio diversification.
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.
Shares of our common stock are traded on the NYSE under the symbol “SRC.”
Business and Growth Strategies
 
 
Our objective is to maximize stockholder value by providing a growing stream of earnings and dividends generated by high quality, diversified commercial real estate. We seek to accomplish this objective by utilizing our proprietary tools and underwriting expertise to invest in and manage a high-quality portfolio of single tenant, operationally essential real estate throughout the United States, which generally consists of free-standing, commercial real estate facilities where our tenants conduct activities essential to the generation of their sales and profits. We then generate revenue
 
7

primarily by leasing these properties to tenants we believe possess attractive credit characteristics and operate in stable or growing industries. Our leases are typically structured as
triple-net
leases, whereby the tenant is 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.
 
STRONG OPERATING SYSTEMS
Spirit utilizes integrated tools that streamline key processes for acquisitions, tenant monitoring and managing our capital structure, forecasts and records. We believe the effective use of our technology platforms to inform portfolio management decisions provides efficiency, depth and scalability to our processes, allowing us to seamlessly execute our objectives. To enhance our operating systems, we have developed several proprietary tools to minimize risk and maximize returns for our stockholders:
 
 o
Spirit Property Ranking Model.
The Spirit Property Ranking Model is a core tool developed internally by Spirit that ranks every owned and acquired property across twelve criteria, with a higher weighting allocated to real estate characteristics. The criteria are: (i) replacement rent, assuming the property becomes vacant, (ii) real estate score based on the site’s location, access, visibility and overall desirability, (iii)
5-mile
population, (iv) remaining lease term, (v)
5-mile
house-hold income,
(vi) pre-overhead
unit coverage,
(vii) pre-overhead
master lease coverage, (viii) corporate coverage, (ix) U.S. State ranking, (x) rent escalation characteristics, (xi) lease structure and (xii) tenant industry ranking. We believe that the higher the overall score assigned to a property, the lower the risk of a residual loss given a tenant default. Through acquisitions, dispositions, lease renewals and
re-lets,
we seek to continually improve the weighted-average property ranking of our portfolio.
 
 o
The Spirit Heat Map.
The Spirit Heat Map is used to analyze tenant industries across Porter’s Five Forces and for potential causes of technological disruption. The data is then used to predict the long-term future performance of those industries. The Spirit Heat Map is updated regularly to incorporate changes in business and market conditions, changes in technology and other trends. Using this tool, coupled with our intensive credit and real estate analysis, lease structuring and ongoing portfolio management, we seek to achieve superior risk-adjusted returns by focusing our investments within industries that we believe will be healthy and viable prospectively and disposing of properties within industries that have less favorable outlooks.
 
 o
Spirit Business Intelligence Tools.
Our business intelligence tools capture and bring together critical information across Spirit’s databases, including Spirit Property Ranking Model data, industry data and tenant credit data, allowing the information to be efficiently analyzed. Spirit uses these tools to compare potential acquisitions and dispositions to the existing portfolio and quantify improvements in key metrics including industry concentration, tenant concentration, weighted-average lease term, weighted-average Spirit property ranking and credit metrics.
 
OUTSTANDING PEOPLE
We have implemented sound social, human capital management and environmental practices and policies throughout the operation of our business, demonstrating our solid commitment to be responsible and conscientious in everything that we do as we strive to both drive long-term stakeholder value and make the communities in which we operate a better place to live and work. We have documented these commitments in our Social Responsibility and Environmental Sustainability Policy and our Code of Business Conduct and Ethics, each of which can be accessed on the Investor Relations page of our website at www.spiritrealty.com. One of these key pillars is human capital management. We believe attracting, developing and retaining a team of highly talented and motivated employees is critical to reflecting our “all one team” motto and delivering strong financial results:
 
 o
Talent acquisition and development.
To ensure we retain top talent, we provide competitive compensation and benefits, including stock awards for all employees. We aim to develop our employees by providing internal training, leadership coaching programs and providing tuition assistance and course reimbursement for career-enhancing education and licensure requirements. We encourage both formal and informal mentorship to provide employees with critical developmental feedback and all employees have direct access to the executive team, including through monthly “Town Hall” meetings hosted by our CEO. Goals are set annually for each employee and performance is measured at least twice a year on these goals, as well as on each of our core competencies: managing resources, leadership, communication, accountability and teamwork. We look first to promote from within, but when external hires are needed to fill open positions, we use a thorough hiring
 
8

 
process which includes multiple levels of interviews, cultural surveys, and technical skill testing, when appropriate, to ensure candidates will be an appropriate fit.
 
 o
Diversity and inclusion.
We provide equal employment opportunities to all individuals and seek to cultivate an inclusive culture that respects and appreciates diversity of experience, ideas and opinions. Our employee population is very diverse: approximately half of our employees are female, 27% are from racial or ethnic minority groups, and we have well-rounded age diversity. To promote inclusivity, our Diversity and Inclusion Committee is tasked with providing educational and social programming for all affinity groups, as well as directing support to charitable organizations in line with our diversity efforts. Under the Diversity and Inclusion Committee, we have a Women’s Leadership Council, which focuses specifically on empowering the women of Spirit in personal and professional growth. With the support of our Board of Directors, we continue to explore additional diversity and inclusion initiatives.
 
 o
Employee wellness.
The physical and mental well-being of our employees is an important piece of our business and overall success. We have implemented numerous wellness initiatives, including wellness screenings and guided meditation sessions. Our offices were designed with employee health and well-being in mind
(sit-stand
desks, ergonomic chairs, healthy snack options, maximized natural light in all workspaces, designated creative and collaborative workspaces). In response to the
COVID-19
pandemic, we took a number of actions to ensure the health and safety of our employees, including enabling all employees to work from home, enhancing safety measures in our offices for voluntary return to office (including increasing cleaning and sanitizing procedures, temperature screening upon entering the office, providing personal protective equipment, installing plexiglass wellness screens and initiating social distancing measures), and instituted a special
COVID-19
pandemic leave policy for illness or caretaking.
 
 o
Workplace culture.
We actively seek to create a
best-in-class
workplace culture through corporate culture workshops and conducting employee surveys. Results of the surveys are communicated to all employees, as well as to our Board of Directors, to provide transparency and continuous improvement. We also seek to acknowledge employee successes through recognition at monthly “Town Hall” meetings. We firmly believe that regular social and team building events for our employees encourage socialization, collaboration, and relationship building – all things that are vital for employee engagement and result in a high performing “all one team” culture. We promote social engagement through our Spirit One Committee (comprised of employees across all levels and departments who collaborate to create social programming), annual company-wide events (including a virtual holiday season party in 2020), and department team building events throughout the year.
As of December 31, 2020, we had 82 employees, as compared to 85 employees as of December 31, 2019. None of these employees are represented by a labor union.
 
DEFINED AND DISCIPLINED INVESTMENT STRATEGY
During the year ended December 31, 2020, we purchased 146 properties, representing an aggregate gross investment of $868.2 million, and invested $10.0 million in revenue producing capital expenditures to fund improvements on properties we already owned. During the same period, we sold 38 properties with an undepreciated gross investment of $86.0 million. We selectively make acquisitions and dispositions that we believe will contribute to our business objectives. We believe there will be ample acquisition opportunities in the single-tenant market fitting our underwriting and acquisition criteria.
 
 o
Sourcing acquisitions.
We believe a multi-channel approach drives acquisition volume and are focused on building and growing partnerships with a diverse base of tenants and brokers. Over time, our target is a balanced mix of opportunities sourced from direct relationships with existing tenants, direct relationships with new tenants and broker relationships. These channels are built through current relationships with key members of our acquisitions and asset management teams, partner appreciation events, attendance at critical conferences and conventions and reliable execution.
 
 o
Evaluating acquisitions.
Each acquisition opportunity is evaluated against our acquisition criteria, which includes, but is not limited to: accretive capitalization rate, long-term lease structure containing rent escalations, favorable tenant industries based on the Spirit Heat Map, favorable Spirit property ranking, attractive tenant credit characteristics and overall portfolio diversification impact. As part of our acquisition strategy, we target tenants that are publicly listed, as we believe those tenants possess certain attractive characteristics, including continual access to capital, generally lower leverage, audited financial statements and governance scrutiny.
 
9

 
While we consider the foregoing when making investments, we have made investments that do not meet one or more of these criteria, and we may make additional investments that do not meet one or more of these criteria if we believe the opportunity is sufficiently attractive. Acquisition opportunities go through a rigorous evaluation process culminating in review and approval by our Investment Committee. The Investment Committee includes representation from the acquisitions, asset management, credit, legal and finance departments.
 
 o
Evaluating tenant credit.
We believe extensive credit underwriting is important to minimizing tenant financial risk and protecting stockholder value. Our credit department, which is independent from our acquisitions department, underwrites all acquisition, disposition and capital investment opportunities and monitors the financial health of our existing portfolio. We use our underwriting capabilities to identify tenants with attractive credit characteristics and stable operating histories and to dispose of tenants with weakening characteristics.
 
HIGH-QUALITY PORTFOLIO
We believe that portfolio diversification and leases with structures aligned with our business and growth strategies are the cornerstones to managing the inherent risk associated with investing in real estate. The following portfolio qualities help maintain the stability of our rental revenue and maximize our long-term return on our investments:
 
 o
Diverse and granular portfolio.
We seek to maintain a portfolio that (i) derives no more than 5.0% of its ABR from any single tenant, (ii) derives no more than 2.0% of its ABR from any single property, (iii) is leased to tenants operating in various industries aligned with our Spirit Heat Map and (iv) is located across the U.S. without significant geographic concentration. As of December 31, 2020, our largest single tenant exposure equaled 3.0%, our largest single property exposure equaled 1.4%, our largest industry concentration equaled 7.7%, and our largest geographic concentration by state equaled 11.1%, in each case based on ABR. Our portfolio is also well diversified between investment and
non-investment
grade rated tenants with 51.0% of our ABR from public issuers. See Item 2. “Properties - Our Real Estate Investment Portfolio” for further information on our portfolio composition as of December 31, 2020.
 
 o
Leases for operationally essential real estate.
We seek to own properties that are operationally essential to our tenants, thereby reducing the risk that the tenant would choose not to renew an expiring lease or reject a lease in bankruptcy.
 
 o
Leases with contractual rental growth.
We seek leases that contain contractual provisions to increase rental revenue over the term of the lease. Approximately 89.8% of our ABR as of December 31, 2020 is subject to rent escalations which, generally, increase rent at specified dates by: (i) a fixed amount; or (ii) the lesser of (a) 1 to 2 times any increase in the CPI over a specified period, (b) a fixed percentage, or (c) a fixed schedule.
 
 o
Leases with relatively long terms.
We seek leases with relatively long terms, typically with
non-cancellable
initial terms of 10 to 20 years and tenant renewal options for additional terms with attractive rent escalation provisions. As of December 31, 2020, our weighted average remaining lease term based on ABR was 10.1 years.
 
 o
Leases with a master lease structure.
Where appropriate, we seek master leases whereby we lease multiple properties to a single tenant on an “all or none” basis. In a master lease structure, a tenant is responsible for a single lease payment relating to the entire portfolio of leased properties, as opposed to separate lease payments relating to each individually leased property. The master lease structure hinders a tenant’s ability to “cherry pick” locations, where it unilaterally gives up underperforming properties while maintaining its leasehold interest in well-performing properties. Approximately 42.0% of our ABR as of December 31, 2020 is subject to a master lease structure.
Since our inception, our occupancy has never fallen below 96.1%, despite the economic downturns of 2008 through 2010 and the
COVID-19
pandemic. While the onset in the U.S. of the
COVID-19
pandemic resulted in requests for relief from a number of our tenants, the majority of these requests came in the form of rent deferrals, and we believe the diversity and strength of our portfolio helped to limit the impact of the
COVID-19
pandemic on our 2020 operating results. 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 movie theaters, casual dining restaurants, entertainment, health and fitness, and hotels. For the year ended December 31, 2020, we deferred $31.9 million of rent and abated $6.3 million of rent. For the year ended December 31, 2021, we expect to
 
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see significant reductions in the impact of
COVID-19
and have currently granted additional rent deferrals of $9.2 million and abatements of $1.0 million. The deferral periods range, generally, from one to six months, with an average deferral period of four months and an average repayment period of 12 months. The majority of the relief granted to tenants in 2021 relates to tenants in the movie theater industry. 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 may request future rent relief, we can provide no assurance that such efforts will be successful, particularly in the event that the
COVID-19
pandemic and restrictions intended to prevent its spread continue for a prolonged period.
 
FORTRESS BALANCE SHEET
Our long-term financing strategy is to maintain a leverage profile that creates operational flexibility and generates superior risk-adjusted returns for our stockholders. We finance our operations and investments using a variety of methods, including available unrestricted cash balances, property operating revenue, proceeds from property dispositions, available borrowings under our credit facilities, common and preferred stock issuances, and debt securities issuances, including mortgage indebtedness and senior unsecured debt. We determine the amount of equity and debt financing to be used when acquiring an asset by evaluating our cost of equity capital, terms available in the credit markets (such as interest rate, repayment provisions and maturity) and our assessment of the particular asset’s risk.
In October 2020, we renewed our shelf registration statement with the SEC, which became immediately effective upon filing and will expire in October 2023, unless renewed before. Under this shelf registration statement, we may offer shares of our common or preferred stock or debt securities in amounts, at prices, and on terms to be announced when, and if, such shares are offered. The specifics of any future offerings, along with the use of proceeds from any such offerings, will be described in detail in a prospectus supplement or other offering materials at the time of such offerings.
 
 o
Issuance of common stock.
We may issue common stock when we believe that our share price is at a level that allows the offering proceeds to be accretively invested into additional properties, to permanently finance properties that were financed by our credit facilities, or to repay outstanding debt at or before maturity.
 
 o
Issuance of debt securities.
We have issued senior unsecured debt securities and have obtained other senior unsecured debt at the Operating Partnership level. In addition, our debt historically has also consisted of some long-term borrowings secured by specific real estate assets or, more typically, pools of real estate assets. To the extent practicable, we expect to maintain a well-balanced debt profile with manageable and staggered maturities.
 
 o
Cash provided by operations.
In addition to cash provided by the issuance of common stock and debt securities, we expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions, payment of principal and interest on our outstanding indebtedness, property improvements,
re-leasing
costs, and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities and borrowings under our available credit facilities.
We anticipate that we will continue to use a number of different sources to finance our acquisitions and operations going forward; however, we cannot assure you that we will have access to the capital and credit markets at times and at terms that are acceptable to us.
Competition
We face competition for acquisitions from investors, including traded and
non-traded
public REITs, private equity funds and institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such. This competition will increase if investments in real estate become more attractive relative to other forms of investment.
As a landlord, we compete in the multi-billion dollar commercial real estate market with numerous developers and owners of properties, many of which own properties similar to ours in the same markets in which our properties are located. In operating and managing our portfolio, we compete for tenants based on a number of factors, including
 
11

location, rental rates and flexibility. Some of our competitors have greater economies of scale, have lower cost of capital, have access to more resources, and have greater name recognition than we do. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose our tenants or prospective tenants and we may be pressured to reduce our rental rates or to offer substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options in order to retain tenants when our leases expire.
Regulation
GENERAL
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of our properties has the necessary permits and approvals.
AMERICANS WITH DISABILITIES ACT
Pursuant to the ADA, our properties are required to meet federal requirements related to access and use by persons with disabilities. Compliance with the ADA, as well as a number of additional federal, state and local laws and regulations, may require modifications to properties we currently own and any properties we purchase, or may restrict renovations of those properties. Noncompliance with these laws or regulations could result in fines or an award of damages to private litigants, as well as the incurrence of costs to make modifications to attain compliance. Although our tenants are generally responsible for compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the property for a failure of one of our tenants to comply with such laws or regulations.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations regulate releases of hazardous or toxic substances into the environment. Some of our properties contain, have contained, or are adjacent to or near properties that contain or have contained storage tanks for petroleum products or other hazardous or toxic substances. Similarly, some of our properties are or were used for commercial or industrial purposes that involve or involved the use of hazardous or toxic substances or are adjacent to or near properties that are of have been used for such purposes. Under certain of these laws and regulations, a current or previous owner, operator or tenant may be required to investigate and
clean-up
hazardous or toxic substances or petroleum product releases or threats of releases, and may be held liable to a government entity or third parties for property damage and for investigation,
clean-up
and monitoring costs incurred by those parties in connection with actual or threatened contamination. These laws typically impose
clean-up
responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the contamination. The liability may be joint and several for the full amount of the investigation,
clean-up
and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may seek contributions from other identified, solvent, responsible parties for their fair share toward these costs. In addition, strict environmental laws regulate a variety of activities that can occur on a property, including the storage of petroleum products or other hazardous or toxic substances, air emissions and water discharges. Such laws may impose fines or penalties for violations.
Environmental laws also govern ACM. Federal regulations require building owners and those exercising control over a building’s management to identify and warn, through signs and labels, of potential hazards posed by workplace exposure to ACM in their building. The regulations also have employee training, record keeping and due diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations and we could be subject to lawsuits if personal injury from exposure to ACM occurs. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of ACM when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for improper handling or a release into the environment of ACM and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with ACM.
In addition, our properties may contain or develop harmful mold or other airborne contaminants. The presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly
 
12

remediation to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. Further, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs.
Before completing an acquisition, we obtain environmental assessments carried out in accordance with the Standard Practice for Environmental Site Assessments as set by ASTM International. These assessments generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historical aerial photographs and other information on past uses of the property. These assessments are limited in scope, however, if recommended in the initial assessments, we may undertake additional assessments such as soil and/or groundwater samplings, other limited subsurface investigations and ACM or mold surveys. A prior owner or operator of a property or historic operations at our properties may have created a material environmental condition that is not known to us or the independent consultants preparing the site assessments. Generally, our leases provide that the lessee will indemnify us for any loss or expense we incur as a result of the presence, use or release of hazardous materials on our property. However, if environmental concerns are not satisfactorily resolved in any initial or additional assessments, we may obtain environment insurance policies to insure against potential environmental risk or loss depending on the type of property, the availability and cost of the insurance and various other factors we deem relevant (i.e., an environmental occurrence affects one of our properties where our lessee may not have the financial capability to honor its indemnification obligations to us).
Available Information
Our Annual Report on Form
10-K,
Quarterly Reports on Form
10-Q,
our Current Reports on Form
8-K,
and the Section 16 filings of our directors and officers, as well as any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website www.spiritrealty.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Also available on our website, free of charge, are corporate governance documents, including our corporate governance guidelines and our code of business conduct and ethics. We intend to disclose on our website under “Corporate Responsibility—Corporate Governance” any amendment to, or waiver of, any provisions of our code of business conduct and ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the SEC or the NYSE. Information contained on or hyperlinked from our website is not incorporated by reference into, and should not be considered part of, this Annual Report on Form
10-K
or our other filings with the SEC. A copy of this Annual Report on Form
10-K
is also available without charge upon written request to: Investor Relations, Spirit Realty Capital, Inc., 2727 North Harwood Street, Suite 300, Dallas, Texas 75201.
Item 1A. Risk Factors
Set forth below are some (but not all) of the risk factors that could adversely affect our business, 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 (which we refer to collectively as “materially and adversely affecting” us or having “a material adverse effect” on us and comparable phrases) and the market price of our securities. Because we operate in a highly competitive and rapidly changing environment, new risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
RISKS RELATED TO OUR BUSINESS AND PROPERTIES
Risks related to commercial real estate ownership could reduce the value of our properties.
Our core business is the ownership of retail, industrial and office real estate that is leased to companies on a
triple-net
basis. Accordingly, our performance is subject to risks inherent to the ownership of commercial real estate, including:
  
inability to collect rent from tenants due to financial hardship, including bankruptcy;
  
changes in local real estate markets resulting in the lack of availability or demand for single-tenant retail space;
  
changes in consumer trends and preferences that reduce the demand for products/services of our tenants;
  
inability to lease or sell properties upon expiration or termination of existing leases;
 
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environmental risks related to the presence of hazardous or toxic substances or materials on our properties;
  
subjectivity of real estate valuations and changes in such valuations over time;
  
illiquid nature of real estate compared to most other financial assets;
  
changes in laws and regulations, including those governing real estate usage and zoning;
  
changes in interest rates and the availability of financing; and
  
changes in the general economic and business climate.
The occurrence of any of the risks described above may cause the value of our real estate to decline.
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 us.
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, may have a material adverse effect on us and our tenants, 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 had a significant adverse impact on economic and market conditions in 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, a material adverse impact on them. 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.
The ongoing
COVID-19
pandemic 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, it 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. For the year ended December 31, 2020, we deferred $31.9 million of rent and abated $6.3 million of rent. For the year ended December 31, 2021, we have currently granted additional rent deferrals of $9.2 million and abatements of $1.0 million. The deferral periods range generally from one to six months, with an average deferral period of four months and an average repayment period of 12 months. Of the tenants who we have granted rent deferrals, 19% are public companies and the weighted average remaining lease term of leases with deferrals is 10.2 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.
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 the adverse impacts on us. Such adverse impacts could depend on, among other factors:
  
the financial condition and viability of our tenants – many of which are in retail industries – 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;
 
14

  
a severe and prolonged disruption and instability in the global financial markets 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;
  
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;
  
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;
  
disruptions in our tenants’ supply chains or delays in the delivery of products, services or other materials necessary for their 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.
We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth, or our future acquisitions may not yield the returns we expect.
Our ability to expand through acquisitions requires us to identify and complete investment opportunities on favorable terms that are compatible with our growth strategy. Our ability to acquire properties on favorable terms and successfully operate them may be constrained by the following significant risks:
  
competition from other real estate investors, including REITs and institutional investment funds, which may be able to accept more risk, including higher acquisition prices, than we can prudently manage;
  
competition from other real estate investors across our acquisition sourcing channels (including brokers, existing tenant relationships, prospective tenant relationships, etc.) that may significantly reduce our acquisition volume or increase the purchase price for a property we acquire;
  
financing for an acquisition may not be available on favorable terms or at all for potential acquisitions;
  
significant costs and management attention diverted to evaluate and negotiate potential acquisitions, including ones that we may not subsequently complete;
  
acquisition of properties that are not and may not become accretive to our results;
  
cash flow from an acquired property may be insufficient to meet our required principal and interest payments with respect to debt used to finance the acquisition of such property;
  
necessary improvements or renovations to acquired properties may exceed budgeted amounts;
  
market conditions may result in higher than expected vacancy rates and lower than expected rental rates; or
  
properties acquired may be subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as
clean-up
of undisclosed environmental contamination or claims by tenants, vendors or other persons dealing with the former owners of the properties.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
The real estate investments made, and expected to be made, by us are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more of our properties in response to changing economic, financial or investment conditions is limited. We may be unable to dispose of properties by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of the jurisdiction in which a property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our
 
15

properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms.
Dispositions of real estate assets could change the holding period assumption in our valuation analyses, which could result in material impairment losses and adversely affect our financial results.
We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If we change our intended holding period due to our intention to sell or otherwise dispose of an asset, we must reevaluate whether that asset is impaired under GAAP. Depending on the carrying value of the property at the time we change our intention and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our financial results.
In the future, we may choose to acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in the Operating Partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
High geographic concentration of our properties could magnify the effects of adverse economic or regulatory developments in such geographic areas on our operations and financial condition.
As of December 31, 2020, 11.1% of our portfolio (as a percentage of ABR) was located in Texas, representing the highest concentration of our assets. We are susceptible to adverse developments in the economic or regulatory environments of the geographic areas in which we concentrate (or in which we may develop a substantial concentration of assets in the future), such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes or costs of complying with governmental regulations.
Our tenants may fail to successfully operate their businesses, which could adversely affect us.
The success of our investments is materially dependent on the financial stability of our tenants’ financial condition and leasing practices. At any given time, our tenants may experience a downturn in their business, including as a result of adverse economic conditions, that may weaken the operating results and financial condition of individual properties or of their business as whole. We depend on our tenants to operate the properties we own in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage and pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status. Although our occupied properties are generally essential to the tenant’s generation of sales and profits, this does not guarantee that a tenant’s operations at a particular property will be successful or that the tenant will be able to meet all of its obligations to us. As a result, a tenant may delay lease commencement, decline to extend a lease upon its expiration, fail to make rental payments when due, become insolvent or declare bankruptcy.
Single-tenant leases involve particular and significant risks related to tenant default.
Our strategy focuses primarily on investing in single-tenant
triple-net
leased properties throughout the United States. The financial failure of, or default in payment by, a single tenant under its lease is likely to cause a significant reduction in, or elimination of, our rental revenue from that property and a reduction in the value of the property. We may also experience difficulty or a significant delay in
re-leasing
or selling such property. This risk is magnified in situations where we lease multiple properties to a single tenant under a master lease. The failure or default of a tenant under a master lease could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master lease structure may be beneficial to us because it restricts the ability of tenants to individually remove underperforming properties from the portfolio of properties leased from us, there is no guarantee that a tenant will not default in its obligations to us or decline to renew its master lease upon expiration.
 
 
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The bankruptcy or insolvency of any of our tenants could result in the termination of such tenant’s lease and material losses to us.
The bankruptcy or insolvency of any of our tenants could diminish the income we receive from that tenant’s lease or leases. A substantial portion our properties are leased to unrated tenants, which may increase the risk that a tenant bankruptcy or insolvency will occur. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. In addition, any claim we have for unpaid past rent, if any, may not be paid in full. We may also be unable to
re-lease
a terminated or rejected space or to
re-lease
it on comparable or more favorable terms.
Moreover, tenants who are considering filing for bankruptcy protection may request amendments of their master leases to remove certain of the properties they lease from us under such master leases. We cannot guarantee that we will be able to sell or
re-lease
such properties or that lease termination fees, if any, received in exchange for such releases will be sufficient to make up for the rental revenues lost as a result of such lease amendments.
We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties.
We compete with numerous developers, owners and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments in order to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties.
Decrease in demand for traditional retail and restaurant space may materially and adversely affect us.
As of December 31, 2020, leases representing approximately 30.0% and 12.2% of our ABR were with tenants in traditional retail and restaurant industries, respectively, and we may acquire additional properties in the future leased to traditional retail and restaurant tenants. The market for traditional retail and restaurant space has previously been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retail and restaurant companies, the ongoing consolidation in the traditional retail and restaurant industries, the excess amount of traditional retail and restaurant space in a number of markets and, in the case of the traditional retail industry, increasing consumer purchases over the Internet. To the extent that these conditions continue, they are likely to negatively affect market rents for traditional retail and restaurant space.
We may be unable to renew leases, lease vacant space or
re-lease
space as leases expire on favorable terms or at all.
Our results of operations depend on our ability to strategically lease space in our properties (by renewing or
re-leasing
expiring leases and leasing vacant space), optimize our tenant mix or lease properties on more economically favorable terms. As of December 31, 2020, leases representing approximately 2.6% of our ABR will expire during 2021. As of December 31, 2020, seven of our properties, representing approximately 0.4% of our total properties, were vacant. Current tenants may decline, or may not have the financial resources available, to renew current leases and we cannot guarantee that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew the leases as they expire, we will have to find new tenants to lease our properties and there is no guarantee that we will be able to find new tenants or that our properties will be
re-leased
at rental rates equal to or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights, below-market renewal options or other lease incentive payments will not be offered to attract new tenants. Many of the leases we enter into or acquire are for properties that are specially suited to the particular business of our tenants. Because these properties have been designed or physically modified for a particular tenant, in addition to increasing the difficulties described above associated with releasing such space, in the event we are required to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed or modified. This potential illiquidity
 
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may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions, including tenant demand. We may experience significant costs in connection with renewing, leasing or
re-leasing
a significant number of our properties.
Our ability to realize future rent increases will vary depending on changes in the CPI.
As of December 31, 2020, approximately 17.5% of our ABR is subject to rent escalators which increase rent by a multiple of any increases in the CPI or the lesser of (a) 1 to 2 times any increase in the CPI over a specified period, (b) a fixed percentage, or (c) a fixed schedule. If the product of any increase in the CPI multiplied by the applicable factor is less than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on a fixed percentage. Therefore, during periods of low inflation or deflation, small increases or decreases in the CPI subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on fixed percentages or amounts. Conversely, if the product of any increase in the CPI multiplied by the applicable factor is more than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on an increase in CPI. Therefore, periods of high inflation subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on CPI increases.
We may be vulnerable to security breaches or cyber-attacks which could disrupt our operations and have a material adverse effect on our financial performance and operating results.
Security breaches, cyber-attacks, or disruption, of our or our third-party service providers’ physical or information technology infrastructure, networks and related management systems could result in, among other things, a breach of our networks and information technology infrastructure, the misappropriation of our or our tenants’ proprietary or confidential information, interruptions or malfunctions in our or our tenants’ operations, delays or interruptions to our ability to meet tenant needs, breach of our legal, regulatory or contractual obligations, inability to access or rely upon critical business records, unauthorized access to our facilities or other disruptions in our operations. Numerous sources can cause these types of incidents, including: physical or electronic security breaches; viruses, ransomware or other malware; hardware vulnerabilities such as Meltdown and Spectre; accident or human error by our own personnel or third parties; criminal activity or malfeasance (including by our own personnel); fraud or impersonation scams perpetrated against us or our partners or tenants; or security events impacting our third-party service providers or our partners or tenants. Our exposure to cybersecurity threats and negative consequences of cybersecurity breaches will likely increase as we store an increasing amount of tenant data.
We recognize the increasing volume of cyber-attacks and employ commercially practical efforts to provide reasonable assurance such attacks are appropriately mitigated. We may be required to expend significant financial resources to protect against or respond to such breaches. Techniques used to breach security change frequently and are generally not recognized until launched against a target, so we may not be able to promptly detect that a security breach or unauthorized access has occurred. We also may not be able to implement security measures in a timely manner or, if and when implemented, we may not be able to determine the extent to which these measures could be circumvented. As we provide assurances to our tenants that we provide a high level of security, if an actual or perceived security breach occurs, the market’s perception of our security measures could be harmed and we could lose current and potential tenants, and such a breach could be harmful to our brand and reputation. Any breaches that may occur could expose us to increased risk of lawsuits, material monetary damages, potential violations of applicable privacy and other laws, penalties and fines, harm to our reputation and increases in our security and insurance costs. In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the data. We cannot guarantee that any backup systems, regular data backups, security protocols, network protection mechanisms and other procedures currently in place, or that may be in place in the future, will be adequate to prevent network and service interruption, system failure, damage to one or more of our systems or data loss in the event of a security breach or attack.
In addition, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the United States. We may not be able to limit our liability or damages in the event of such a loss. Data protection legislation is becoming increasingly common in the United States at both the federal and state level and may require us to further modify our data processing practices and policies. For example, the California
 
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Consumer Privacy Act of 2018, which took effect on January 1, 2020 and is expected to provide California residents with increased privacy rights and protections with respect to their personal information. Compliance with existing, proposed and recently enacted laws and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, fines and penalties, or damage to our reputation and credibility.
Inflation may materially and adversely affect us and our tenants.
Increased inflation could have a negative impact on variable-rate debt we currently have or that we may incur in the future. Our leases typically contain provisions designed to mitigate the adverse impact of inflation on our results of operations. Because tenants are typically required to pay all property operating expenses, increases in property-level expenses at our leased properties generally do not affect us. However, increased operating expenses at vacant properties and the limited number of properties that are not subject to full
triple-net
leases could cause us to incur additional operating expenses, which could increase our exposure to inflation. Additionally, the increases in rent provided by many of our leases may not keep up with the rate of inflation. Increased costs may also have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us.
The market price and trading volume of shares of our common stock may fluctuate or decline.
The market price and trading volume of our common stock may fluctuate widely due to various factors, including:
  
broad market fluctuations unrelated to our or our competitors’ operating performances;
  
actual or anticipated variations in our or our competitors’ quarterly operating results or distributions;
  
publication of research reports about us, our competitors or the real estate industry;
  
market reaction to any additional indebtedness we incur or debt or equity securities we issue in the future;
  
additions or departures of key management personnel;
  
changes in our credit ratings;
  
the financial condition, performance and prospects of our tenants;
  
changes in market interest rates in comparison to the distribution yield on shares of our common stock; and
  
the realization of any of the other risk factors presented in this Annual Report on Form
10-K.
We may issue shares of our common stock or other securities without stockholder approval, including shares issued to satisfy REIT distribution requirements. The Operating Partnership may issue partnership interests to third parties, and such partnership interests would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when partnership interests in the Operating Partnership are issued. Our existing stockholders have no preemptive rights to acquire any of these securities, and any issuance of equity securities by us or the Operating Partnership may dilute stockholder investment.
If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately and timely report our financial results.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. We are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.
Any failure to maintain effective controls or timely effect any necessary improvement of our internal control over financial reporting controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect the listing of our common stock on the NYSE. Ineffective internal control over financial reporting and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the per share trading price of our common stock.
Loss of our key personnel could materially impair our ability to operate successfully.
Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel, particularly our President and Chief Executive Officer, Jackson Hsieh, who has extensive market knowledge and relationships and exercises substantial influence over our operational, financing, acquisition and
 
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disposition activity. Many of our other key executive personnel, particularly our executive and senior vice presidents, also have extensive experience and strong reputations in the real estate industry and have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel and arranging necessary financing. In particular, the extent and nature of the relationships that these individuals have developed with financial institutions and existing and prospective tenants is critically important to the success of our business. The loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry personnel, which could materially and adversely affect us.
Costs of compliance with, or liabilities related to, environmental laws may materially and adversely affect us.
The properties we own or have owned in the past may subject us to known and unknown environmental liabilities. Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages, which may be substantial, resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate, clean up such contamination and liability for harm to natural resources. We may face liability regardless of:
•  our knowledge of the contamination;
•  the timing of the contamination;
 
•  the cause of the contamination; or
•  the party responsible for the contamination of the property.
The presence of hazardous substances on a property may adversely affect our ability to sell, lease or improve the property or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or businesses may be operated, and these restrictions may require substantial expenditures.
Although we may obtain insurance for environmental liability for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies.
Insurance on our properties may not cover all losses, which could materially and adversely affect us.
Our tenants are required to maintain liability and property insurance coverage for the properties they lease from us pursuant to
triple-net
leases. Pursuant to such leases, our tenants are generally required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or
co-payments
that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged.
Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Furthermore, in the event we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.
 
 
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Compliance with the ADA and fire, safety and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.
Our properties are subject to the ADA, fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases and financing agreements to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, our tenants’ ability to cover the costs could be adversely affected. We may be required to expend our own funds to comply with the provisions of the ADA. We may be required to make substantial capital expenditures to comply with these requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.
To maintain our qualification as a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we are subject to federal corporate income tax to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including acquisition financing, from operating cash flow and may have to rely on third-party sources. We may not be able to obtain the financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:
  
general market conditions;
  
the market’s perception of our growth potential;
  
our current debt levels;
  
our current and expected future earnings;
  
our cash flow and cash distributions; and
  
the market price per share of our common stock.
 
If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
In recent history, we have raised a significant amount of debt through senior unsecured debt securities. We have generally used the proceeds from these financings to repay debt and fund real estate acquisitions. No assurance can be given that we will have access to the capital markets in the future at times and on terms that are acceptable to us, whether to refinance existing debt or to raise additional debt capital.
We have significant indebtedness outstanding, which may expose us to risk of default under our debt obligations, limit our ability to obtain additional financing or affect the market price of our common stock or debt securities.
As of December 31, 2020, the total principal balance outstanding on our indebtedness was approximately $2.5 billion, of which the $178.0 million outstanding under the 2020 Term Loan Agreement incurs interest at a variable rate. We may also incur significant additional debt to finance future investment activities. Payments of principal and interest on borrowings may leave us with insufficient cash resources to meet our cash needs or make the distributions to our common stockholders necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
  
our cash flow may be insufficient to meet our required principal and interest payments;
  
cash interest expense and financial covenants relating to our indebtedness may limit or eliminate our ability to make distributions to our common stockholders;
  
we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon acquisition opportunities or meet operational needs;
 
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we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
  
increases in interest rates could increase our interest expense for our variable interest rate debt;
  
we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;
  
we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;
  
we may default on our obligations and the lenders may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases;
  
we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;
  
we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and
  
our default under any loan with cross-default provisions could result in a default on other indebtedness.
Changes in our leverage ratios may also negatively impact the market price of our equity or debt securities. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
The agreements governing our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our preferred and common stockholders.
The agreements governing our indebtedness contain restrictions and covenants that limit or will limit our ability to operate our business. These covenants, as well as any additional covenants to which we may be subject in the future because of additional indebtedness, could cause us to forgo investment opportunities, reduce or eliminate distributions to our preferred and common stockholders or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. In addition, the agreements may have cross-default provisions, which provide that a default under one of our financing agreements would lead to a default on some or all of our debt financing agreements. The covenants and other restrictions under our debt agreements affect, among other things, our ability to:
  
incur indebtedness;
  
create liens on assets;
  
sell or substitute assets;
  
modify certain terms of our leases;
  
prepay debt with higher interest rates;
  
manage our cash flows; and
  
make distributions to equity holders.
 
Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.
Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all.
The credit markets can experience significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances could materially impact liquidity in the financial markets, making financing terms for borrowers less attractive, and in certain cases, result in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness. We primarily use external financing to fund acquisitions and to refinance indebtedness as it matures. Reductions in our available borrowing capacity or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us, and we could be forced to limit our acquisition activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact our acquisition yields, earnings per share and cash flow as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us. Total debt service, including scheduled principal maturities and interest, for 2021 and 2022 is $280.7 million and $87.7 million, respectively. Debt service includes the final balloon repayment of $190.4 million for the 2021 Notes in 2021.
 
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Changes in market interest rates may adversely impact our variable debt expenses.
The 2019 Credit Facility incurs interest at a variable rate using LIBOR and, as such, our interest expense will increase with increases in LIBOR. Further, in 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. If LIBOR ceases to exist after 2021, a comparable or successor reference rate as approved under the 2019 Revolving Credit and Term Loan Agreement will apply or such other reference rate as may be agreed by the Company and the lenders under the respective agreements will apply. To the extent these interest rates are less favorable than LIBOR, our interest expense will increase.
Some of our financing arrangements involve balloon payment obligations.
Some of our financings require us to make a
lump-sum
or “balloon” payment at maturity, including $190.4 million in 2021. Our ability to make any balloon payment is uncertain and may depend on our ability to obtain additional financing or our ability to sell our properties. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell our properties at a price sufficient to make the balloon payment, if at all. If the balloon payment is refinanced at a higher rate, it will reduce or eliminate any income from our properties. In addition, if we are unable to refinance these maturities or otherwise retire the indebtedness, we could be forced to relinquish the related collateral.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction, even if such a change in control may be in the interest of our stockholders.
Our charter contains certain restrictions on ownership and transfer of our stock.
Our charter contains various provisions that are intended to preserve our qualification as a REIT and, subject to certain exceptions, authorize our directors to take such actions as are necessary or appropriate to preserve our qualification as a REIT. For example, our charter prohibits the actual, beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock. Our Board of Directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our stock may:
  
discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; or
  
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
We could increase the number of authorized shares of stock, classify and reclassify
un-issued
stock and issue stock without stockholder approval
. Our Board of Directors, without stockholder approval, has the power under our charter to amend our charter to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue, to authorize us to issue authorized but
un-issued
shares of our common stock or preferred stock and to classify or reclassify any
un-issued
shares of our common stock or preferred stock into one or more classes or series of stock and to set the terms of such newly classified or reclassified shares. As a result, we may issue one or more series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of our common stockholders. Although our Board of Directors has no such intention at the present time, it could establish a class or series of common stock or preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interest.
Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
  
“business combination” provisions that, subject to certain limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or
 
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more of the voting power of our shares or of an affiliate of ours or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within a
two-year
period immediately prior to the date in question) or any affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose fair price and/or super-majority and stockholder voting requirements on these combinations; and
  
“control share” provisions that provide that a holder of “control shares” of our Company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of outstanding “control shares”) has no voting rights with respect to those shares except to the extent approved by our stockholders by the affirmative vote of at least
two-thirds
of all the votes entitled to be cast on the matter, excluding all interested shares.
As permitted by the MGCL, we have elected, by resolution of our Board of Directors, to opt out of the business combination provisions of the MGCL and, pursuant to a provision in our bylaws, to exempt any acquisition of our stock from the control share provisions of the MGCL. However, our Board of Directors may by resolution elect to repeal the exemption from the business combination provisions of the MGCL and may by amendment to our bylaws opt into the control share provisions of the MGCL at any time in the future, whether before or after an acquisition of control shares.
Certain provisions of the MGCL set forth in Title 3, Subtitle 8 of the MGCL (“Subtitle 8”) permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could be in the best interests of our stockholders. Our charter contains a provision whereby we have elected, at such time as we became eligible to do so, to be subject to the provisions of Subtitle 8 relating to the filling of vacancies on our Board of Directors only by the remaining directors. Our Board of Directors has adopted a resolution prohibiting us from electing to be subject to the provisions of Subtitle 8 relating to a classified board unless such election is first approved by our stockholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
As permitted by Maryland law, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
  
actual receipt of an improper benefit or profit in money, property or services; or
  
active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our company, our stockholders’ and our ability to recover damages from such director or officer may be limited. In addition, our charter authorizes us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law.
RISKS RELATED TO TAXES AND OUR STATUS AS A REIT
Failure to qualify as a REIT would materially and adversely affect us and the value of our common stock.
We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2005 and we intend to continue operating in such a manner. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT and the statements in this Annual Report on Form
10-K
are not binding on the IRS or any court. Therefore, we cannot guarantee that we have qualified as a REIT or that we will remain qualified as such in the future. If we lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders for each of the years involved because:
  
we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to regular U.S. federal corporate income tax;
 
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we could be subject to the federal alternative minimum tax for tax years prior to 2018 and increased state and local taxes; and
  
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and adversely affect the trading price of our common stock.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and requirements regarding the sources of our income. Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains.
In addition, legislation, new regulations, administrative interpretations or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our TRSs will be subject to income tax as regular corporations in the jurisdictions in which they operate.
If SMTA failed to qualify as a REIT, we could cease to qualify as a REIT and suffer other adverse consequences.
If SMTA failed to qualify as a REIT for any taxable year, such failure to qualify as a REIT could adversely affect our ability to qualify as a REIT. If SMTA failed to qualify as a REIT during the year of the
Spin-Off,
the income recognized by us in connection with the
Spin-Off
would not have constituted qualifying income for purposes of the 75% gross income test, which could have adversely affected our ability to qualify as a REIT for such year. In addition, if SMTA failed to qualify as a REIT for any period, the SMTA Preferred Stock would not have qualified as a real estate asset for purposes of the REIT asset tests or produced qualifying income for purposes of the REIT 75% gross income test for such period. In such case, our ownership of the SMTA Preferred Stock during such period could adversely affect our ability to qualify as a REIT, unless we are entitled to relief under an applicable cure provision.
If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe the Operating Partnership is currently treated as a partnership for federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, such partner’s share of its income. We cannot assure you that the IRS will not challenge the status of the Operating Partnership or any other subsidiary partnership or limited liability company in which we own an interest as a disregarded entity or partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership or any such other subsidiary partnership or limited liability company as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of the Operating Partnership or any subsidiary partnerships or limited liability company to qualify as a disregarded entity or partnership for applicable income tax purposes could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners or members, including us.
 
 
25

Our ownership of TRSs is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our TRSs are not conducted on
arm’s-length
terms.
We own securities in TRSs and may acquire securities in additional TRSs in the future. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or
non-customary
services to tenants of its parent REIT. A TRS is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an
arm’s-length
basis.
A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets may be represented by securities (including securities of TRSs), other than those securities includable in the 75% asset test, and not more than 20% of the value of our total assets may be represented by securities of TRSs. We anticipate that the aggregate value of the stock and securities of any TRS and other nonqualifying assets that we own will be less than 25% (or 20%, as applicable) of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with any TRSs that we own to ensure that they are entered into on
arm’s-length
terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the above limitations or to avoid application of the 100% excise tax.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.
The IRS may take the position that specific sale-leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so
re-characterized,
we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of
re-characterization
unless we elect to make an additional distribution to maintain our REIT status. The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of our REIT taxable income and could cause us to fail the REIT distribution test that requires a REIT to distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all stockholders at the time of declaration rather than the stockholders existing in the taxable year affected by the
re-characterization.
We may be forced to borrow funds to maintain our REIT status, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding any net capital gains, and we will be subject to regular corporate income taxes on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other things, differences in timing between the actual receipt of cash and recognition of income for federal income tax purposes, or the effect of
non-deductible
capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our common stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect our financial condition, results of operations, cash flow, cash available for distributions to our stockholders, and per share trading price of our common stock.
 
 
26

Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends, which may negatively affect the value of our shares.
Dividends treated as “qualified dividend income” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates, currently at a maximum federal rate of 20%. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Under the 2017 Tax Legislation, however, 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. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of
non-REIT
corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common stock.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.
Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.
If we acquire C corporations in carry-over basis transactions, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits.
From time to time, we have and may continue to acquire C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.
If we acquire any asset from a corporation that is or has been a C corporation in a carry-over basis transaction, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we will be required to pay tax at the regular corporate tax rate on this gain to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our stockholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a carry-over basis transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any
non-REIT
earnings and profits by the close of the taxable year in which such transaction occurs. Any adjustments to the acquired
 
27

corporation’s income for taxable years ending on or before the date of the transaction, including as a result of an examination of the corporation’s tax returns by the IRS, could affect the calculation of the corporation’s earnings and profits. If the IRS were to determine that we acquired
non-REIT
earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the carry-over basis transaction occurred, we could avoid disqualification as a REIT by paying a “deficiency dividend.” Under these procedures, we generally would be required to distribute any such
non-REIT
earnings and profits to our stockholders within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement and may require that we borrow funds to make the distribution even if the then-prevailing market conditions are not favorable for borrowings. In addition, payment of the statutory interest charge could materially and adversely affect us.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
The 2017 Tax Legislation significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. The legislation remains unclear in many respects and has been and may continue to be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase the impact of the legislation.
Item 1B. Unresolved Staff Comments
None.
 
28

Item 2.     Properties
PROPERTY PORTFOLIO DIVERSIFICATION
 
1,860  99.6%  48  301  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 December 31, 2020:
 
Tenant
(1)
  
Number of
Properties
   
Total
Square Feet
(in thousands)
   
Percent of
ABR
 
Life Time Fitness, Inc.
   7    685    3.0
Cajun Global LLC
   163    234    2.5
BJ’s Wholesale Club, Inc.
   8    912    2.2
The Home Depot, Inc.
   7    848    2.2
At Home Group, Inc.
   13    1,597    2.2
Alimentation Couche-Tard, Inc.
   76    230    2.1
Walgreen Co.
   34    487    2.0
GPM Investments, LLC
   110    304    2.0
Dollar Tree, Inc.
   106    927    1.9
CVS Caremark Corporation
   33    409    1.7
Other
   1,296    33,405    78.2
Vacant
   7    641     
Total
  
 
1,860
 
  
 
40,679
 
  
 
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 as those set forth above.
Lease Expirations
The following table sets forth a summary of lease expirations for our owned real estate as of December 31, 2020. As of December 31, 2020, the weighted average remaining
non-cancellable
initial term of our leases (based on ABR) was 10.1 years. The information set forth in the table assumes that tenants do not exercise renewal options or any early termination rights:
 
Leases Expiring In:
  
Number of
Properties
   
ABR
(in thousands) 
(1)
   
Total Square
Feet
(in thousands)
   
Percent of
ABR
 
2021
   47   $13,028    1,363    2.6
2022
   40    16,548    1,599    3.2
2023
   113    32,049    3,034    6.3
2024
   47    17,916    1,557    3.5
2025
   52    19,334    1,517    3.8
2026
   108    38,149    3,724    7.5
2027
   131    40,635    2,984    8.0
2028
   106    28,727    1,798    5.6
2029
   320    42,692    2,836    8.4
2030
   77    22,022    2,220    4.3
Thereafter
   812    238,516    17,406    46.8
Vacant
   7        641     
Total owned properties
  
 
1,860
 
  
$
509,616
 
  
 
40,679
 
  
 
100
 
(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 $1.0 million of abatements for the period from January 1, 2021 - December 31, 2021.
 
29

Diversification By Geography
The following table sets forth a summary of geographic concentration for our owned real estate properties as of December 31, 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
  247   4,413   11.1  New Jersey  13   717   1.3
Florida
  154   2,533   8.8  Utah  18   333   1.2
Georgia
  138   2,583   6.8  Pennsylvania  20   483   1.1
Ohio
  86   2,396   5.1  Alaska  9   319   1.0
California
  23   1,199   4.2  New Hampshire  17   645   1.0
Tennessee
  107   1,846   4.0  Wisconsin  12   696   0.9
Michigan
  86   1,700   3.9  Idaho  16   273   0.9
Illinois
  52   1,295   3.8  Kansas  17   341   0.8
New York
  33   1,924   3.5  Connecticut  5   686   0.7
Missouri
  67   1,552   3.2  Maine  27   85   0.5
Arizona
  47   835   2.9  Washington  7   125   0.4
South Carolina
  55   852   2.9  West Virginia  13   202   0.4
North Carolina
  68   1,312   2.7  Delaware  2   128   0.4
Alabama
  94   715   2.5  Nebraska  8   218   0.4
Virginia
  44   1,335   2.5  Montana  3   152   0.4
Maryland
  10   721   2.4  Massachusetts  2   131   0.4
Minnesota
  24   902   2.2  Iowa  11   190   0.3
Colorado
  27   991   2.0  North Dakota  3   105   0.3
Oklahoma
  54   935   2.0  Rhode Island  3   95   0.3
Mississippi
  53   753   2.0  Oregon  3   105   0.3
Indiana
  39   1,517   1.9  South Dakota  2   30   0.2
New Mexico
  29   622   1.8  Wyoming  1   35   0.1
Kentucky
  43   538   1.6  U.S. Virgin Islands  1   38   0.1
Arkansas
  42   637   1.4  Vermont  1   2   * 
Louisiana
  24   439   1.4               
 
*
Less than 0.1%
 
30

Diversification By Asset Type and Tenant Industry
The following table sets forth a summary of concentration by asset types and, for retail assets, the tenant industry of our owned properties as of December 31, 2020:
 
Asset Type
 
Tenant Industry
  
Number of
Properties
   
Total
Square Feet
(in thousands)
   
Percent of
ABR
 
Retail
   
 
1,660
 
  
 
26,059
 
  
 
77.9
 Health and Fitness   44    2,329    7.7
 Convenience Stores   329    1,046    7.6
 Restaurants - Quick Service   361    791    6.4
 Restaurants - Casual Dining   134    940    5.8
 Movie Theaters   37    1,953    5.1
 Dealerships   29    953    4.4
 Drug Stores / Pharmacies   77    991    4.4
 Entertainment   24    1,022    3.4
 Car Washes   65    308    3.2
 Dollar Stores   172    1,576    3.1
 Grocery   36    1,654    3.0
 Home Improvement   14    1,595    2.9
 Warehouse Club and Supercenters   14    1,543    2.8
 Home Décor   16    2,147    2.7
 Specialty Retail   53    1,142    2.3
 Sporting Goods   18    1,026    2.2
 Automotive Service   69    578    2.2
 Department Stores   15    1,334    1.9
 Home Furnishings   18    783    1.7
 Early Education   35    384    1.5
 Automotive Parts   55    388    1.1
 Office Supplies   16    351    0.7
 Other   9    294    0.7
 Medical Office   5    65    0.5
 Pet Supplies and Service   4    133    0.4
 Apparel   4    92    0.2
 Vacant   7    641     
Industrial
   
 
158
 
  
 
12,609
 
  
 
14.9
Office and Other
   
 
42
 
  
 
2,011
 
  
 
7.2
Total
    
 
1,860
 
  
 
40,679
 
  
 
100.0
 
Item 3.
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. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.
 
Item 4.
Mine Safety Disclosure
None.
 
31

PART II
Item 5.      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION FOR COMMON STOCK, HOLDERS OF RECORD AND DIVIDEND POLICY
Spirit Realty Capital, Inc.
Our common stock is traded on the NYSE under the symbol “SRC.” As of February 16, 2021, there were approximately 2,139 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
We intend to pay regular quarterly dividends to our stockholders, although all future distributions will be declared and paid at the discretion of the Board of Directors and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant.
Spirit Realty, L.P.
Spirit Realty Capital, Inc. directly or indirectly owns all of Spirit Realty, L.P.’s partnership units. Therefore, there is no established trading market for Spirit Realty, L.P.’s partnership units.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES
Spirit Realty Capital, Inc.
No sales of unregistered securities. Gross proceeds of $330.2 million from sales of registered securities during the fourth quarter of 2020 were used for funding acquisitions, operating expenses and payment of interest and principal on current debt financings.
Spirit Realty, L.P.
None.
ISSUER PURCHASES OF EQUITY SECURITIES
Spirit Realty Capital, Inc.
None.
Spirit Realty, L.P.
None.
EQUITY COMPENSATION PLAN INFORMATION
Our equity compensation plan information required by this item will be included in the Proxy Statement to be filed relating to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
 
32

PERFORMANCE GRAPH
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation
S-K,
or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The following graph shows our cumulative total stockholder return for the five most recent fiscal years, with stock prices retroactively adjusted for the
Spin-Off
of SMTA. The graph assumes a $100 investment in each of the indices on December 31, 2015 and the reinvestment of all cash dividends. Our stock price performance shown in the following graph is not indicative of future stock price performance.
 
 
 
   
Period Ended
 
Index:
  
 
12/31/2015
 
  
 
12/31/2016  
 
  
 
12/31/2017  
 
  
 
12/31/2018  
 
  
 
12/31/2019  
 
  
 
12/31/2020      
 
Spirit Realty Capital, Inc.
  $100.00   $115.82   $100.46   $99.82   $147.33   $129.70     
S&P 500
  $100.00   $109.54   $130.81   $122.65   $158.07   $183.77     
NAREIT US Equity REIT Index
  $100.00   $108.52   $114.19   $108.91   $137.23   $126.25     
 
33

Item 6.       Selected Financial Data
The following tables set forth, on a historical basis, selected financial and operating data for the Company. The following data should be read in conjunction with our financial statements and notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form
10-K.
 
     
Years Ended December 31,
    
(Dollars in thousands, except per share data)
 
2020
  
2019
  
2018
  
2017
  
2016
 
Statement of Operations Data:
     
Rental income
 $479,901  $438,691  $402,321  $424,260  $420,003 
Related party fee income
  678   69,218   15,838       
General and administrative
  48,380   52,424   52,993   54,998   48,651 
Property costs (including reimbursable)
  24,492   18,637   21,066   28,487   26,045 
Interest
  104,165   101,060   97,548   113,394   118,690 
Income from continuing operations
  26,708   175,266   148,491   40,428   28,638 
Net income attributable to common stockholders
  16,358   164,916   121,700   74,618   97,446 
Net income from continuing operations per common share—diluted
  0.15   1.81   1.58   0.40   0.30 
Dividends declared per common share issued
(1)
  2.50   2.50   3.05   3.60   3.53 
Weighted average shares of common stock outstanding—diluted
(1)
  104,535,384   90,869,312   86,476,449   93,588,560   93,849,250 
Other Data:
     
FFO
(2)
 $285,716  $305,052  $322,359  $367,296  $394,952 
AFFO
(2)
  309,447   341,731   346,323   398,148   412,999 
Number of properties at period end
  1,860   1,795   1,514   2,480   2,615 
Owned properties occupancy at period end (based on number of properties)
  99.6  99.7  99.7  99.2  98.2
(1) 
Adjusted for the reverse stock split effected in 2018.
 
(2) 
See the definitions and reconciliation of
non-GAAP
measures in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Non-GAAP
Financial Measures.”
 
       
December 31,
     
(Dollars in thousands)
  
2020
   
2019
   
2018
   
2017
(1)
   
2016
(1)
 
Balance Sheet Data:
          
Gross investments, including related lease intangibles
  $6,805,437   $6,175,703   $5,123,631   $7,903,025   $8,247,654 
Net investments, including related lease intangibles
   5,821,628    5,341,228    4,396,098    6,614,025    7,090,335 
Cash and cash equivalents
   70,303    14,492    14,493    8,798    10,059 
Total assets
   6,396,786    5,832,661    5,096,316    7,263,511    7,677,971 
Total debt, net
   2,506,341    2,153,017    2,054,637    3,639,680    3,664,628 
Total liabilities
   2,795,666    2,419,412    2,294,567    3,943,902    3,995,863 
Total stockholders’ equity
   3,601,120    3,413,249    2,801,749    3,319,609    3,682,108 
(1) 
Balances include assets and liabilities of both continuing operations and discontinued operations. Reference Note 12 to the accompanying consolidated financial statements for additional information.
 
34

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 United States, 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 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 December 31, 2020, our owned real estate represented investments in 1,860 properties. Our properties are leased to 301 tenants across 48 states and 28 retail industries. As of December 31, 2020, our owned properties were approximately 99.6% 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 commencing with our taxable year ended December 31, 2005. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in such a manner.
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 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 onset of the
COVID-19
pandemic in 2020, many of our tenants requested rent deferrals or other forms of relief. 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 movie theaters, casual dining restaurants, entertainment, health and fitness and hotels. 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 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.
For the year ended December 31, 2020, we deferred $31.9 million of rent, of which we recognized $26.3 million in rental income (the remaining $5.6 million was deemed not probable of collection), and abated $6.3 million of rent. As of December 31, 2020, we had an accounts receivable balance of $20.2 million related to deferred rent. For the year
 
35

ended December 31, 2021, we expect to see significant reductions in the impact of
COVID-19
and have currently granted additional rent deferrals of $9.2 million and abatements of $1.0 million. For rent deferrals, the deferral periods range generally from one to six months, with an average deferral period of four months and an average repayment period of 12 months. Of the tenants who we have granted rent deferrals, 19% are public companies and the weighted average remaining lease term of leases with deferrals is 10.2 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 I, 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
Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. See Notes 2 and 8 to the consolidated financial statements for additional details.
Purchase Accounting and Acquisition of Real Estate; Lease Intangibles
We evaluate a number of factors in estimating fair value of real estate acquisitions, including building age, building location, building condition, rent comparables from similar properties, and terms of
in-place
leases, if any. Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of
in-place
leases and above or below-market leases.
In-place
lease intangibles are valued based on our estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. We then allocate the purchase price (including acquisition and closing costs) to land, building, improvements and equipment based on their relative fair values. For properties acquired with
in-place
leases, we allocate the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values. Above and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and our estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.
Rental Income: Cash and Straight-line Rent
We primarily lease real estate to our tenants under long-term,
triple-net
leases that are classified as operating leases. To evaluate lease classification, we assess the terms and conditions of the lease to determine the appropriate lease term and do not include options to extend, terminate or purchase in our evaluation for lease classification purposes or for recognizing rental income unless we are reasonably certain the tenant will exercise the option. Lease classification also requires an estimation of the residual value of the property at the end of the lease term. For acquisitions, we use the estimated tangible fair value of the property at the date of acquisition. For lease modifications, we generally use sales comparables or a direct capitalization approach to determine fair value.
Our 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. For leases with contingent rent escalators, increases in rental revenue are recognized when the changes in the rental rates have occurred. Some of our leases also provide for contingent rent based on a percentage of the tenant’s gross sales, which is recognized when the change in the factor on which the contingent lease payment is based actually occurs.
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, noting that the underlying premise in requiring a modified lease to be accounted for as if it
 
36

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). We made this election and account for rent deferrals by increasing the rent receivables as receivables accrue and continuing to recognize income during the deferral period. 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.
Rental income, including deferred rent, is subject to an evaluation for collectability, which includes our 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. We do not recognize rental income for amounts that are not probable of collection.
Impairment
We review our real estate investments and related lease intangibles periodically for indicators of impairment 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. For assets with indicators of impairment, we then evaluate if its carrying amount may not be recoverable. We consider factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.
Impairment is calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, the amount by which the carrying value exceeds fair value less costs to sell. Estimating future cash flows and fair values is highly subjective and such estimates could differ materially from actual results. The fair values of real estate and intangible assets are determined using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; broker opinions of value; market prices for comparable properties; estimates of residual value; and expectations for the use of the real estate.
REIT Status
We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT commencing with such taxable year, and we intend to continue operating in such a manner. To maintain our REIT status, we are required to annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate level federal income tax on the earnings distributed to our stockholders that we derive from our REIT qualifying activities. We are still subject to state and local income and franchise taxes and to federal income and excise tax on our undistributed income. If we fail to qualify as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal corporate tax, including any applicable alternative minimum tax for taxable years beginning before January 1, 2018. Unless entitled to relief under specific statutory provisions, we would be ineligible to elect to be treated as a REIT for the four taxable years following the year for which we lose our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief.
 
37

RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form
10-K
for the year ended December 31, 2019.
 
   
Years Ended December 31,
 
(In Thousands)  
    2020
  
    2019
  
    Change
  
    % Change
 
Revenues:
     
Rental income
   $    479,901   $    438,691   $       41,210   9.4
Interest income on loans receivable
   998   3,240   (2,242  (69.2)% 
Earned income from direct financing leases
   571   1,239   (668  (53.9)% 
Related party fee income
   678   69,218   (68,540  (99.0)% 
Other income
   1,469   4,039   (2,570  (63.6)% 
Total revenues
  
 
483,617
 
 
 
516,427
 
 
 
(32,810
 
 
(6.4
)% 
Expenses:
     
General and administrative
   48,380   52,424   (4,044  (7.7)% 
Termination of interest rate swaps
      12,461   (12,461  (100.0)% 
Property costs (including reimbursable)
   24,492   18,637   5,855   31.4
Deal pursuit costs
   2,432   844   1,588   NM 
Interest
   104,165   101,060   3,105   3.1
Depreciation and amortization
   212,620   175,465   37,155   21.2
Impairments
   81,476   24,091   57,385   NM 
Total expenses
  
 
473,565
 
 
 
384,982
 
 
 
88,583
 
 
 
23.0
Other income:
     
Loss on debt extinguishment
   (7,227  (14,330  7,103   (49.6)% 
Gain on disposition of assets
   24,156   58,850   (34,694  (59.0)% 
Preferred dividend income from SMTA
      10,802   (10,802  (100.0)% 
Total other income
  
 
16,929
 
 
 
55,322
 
 
 
(38,393
 
 
(69.4
)% 
Income before income tax expense
  
 
26,981
 
 
 
186,767
 
 
 
(159,786
 
 
(85.6
)% 
Income tax expense
   (273  (11,501  11,228   (97.6)% 
Net income
  
 
$      26,708
 
 
 
$    175,266
 
 
 
$    (148,558
 
 
(84.8
)% 
NM - Percentages over 100% are not displayed.
Changes related to operating properties
Rental income; Property costs (including reimbursable); Depreciation and amortization
The components of rental income are summarized below:
 
   
Years Ended December 31,
 
(In Thousands)
  
2020
   
2019   
 
Base Cash Rent
  $453,013   $404,720 
Variable cash rent (including reimbursables)
   13,176    12,737 
Straight-line rent, net of uncollectible reserve
   11,876    16,924 
Amortization of above- and below- market lease intangibles, net
   1,836    4,310 
Total rental income
  
$
            479,901
 
  
$
            438,691
 
The increase in Base Cash Rent, the largest component of rental income, year-over-year was driven by our net acquisitions, which also was the driver for the increase in depreciation and amortization. We acquired 146 properties
 
38

during 2020 with a total of $58.4 million of annual
in-place
rent (monthly fixed rent at date of transaction multiplied by 12). During the same period, we disposed of 38 properties, 20 of which were vacant and the remaining 18 had annual
in-place
rents of $4.5 million. Our acquisition and disposition activity for the year ended December 31, 2020 is summarized below (in thousands):
 
 
The increase in Base Cash Rent due to net acquisitions was partially offset by an increase in amounts deemed not probable of collection, driven by tenant credit issues from the
COVID-19
pandemic, from a net recovery of $0.4 million for the year ended December 31, 2019 to a net reduction of $10.9 million for the year ended December 31, 2020. A majority of these tenant credit issues relate to tenants in the movie theater industry and we expect movie theater operators to continue to face headwinds in 2021. The increase year-over-year was also reduced by $6.3 million of rent abatements for the year ended December 31, 2020, which were executed as relief due to the
COVID-19
pandemic.
Variable cash rent is primarily comprised of tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, less reimbursements we deem not probable of collection. As such, the change in variable cash rent is driven by the change in property costs year-over-year. For the year ended December 31, 2020, property costs included $14.5 million of reimbursable expenses, compared to $14.9 million for 2019. As such, variable cash rent and reimbursable property costs remained relatively flat year-over-year. The remaining $10.0 million of property costs for the year ended December 31, 2020 were
non-reimbursable,
compared to $3.7 million for 2019. The increase in
non-reimbursable
costs of $6.3 million was driven by an increase in
non-reimbursable
property taxes of $3.7 million due to tenant credit issues from the
COVID-19
pandemic, as well as an increase in carrying costs of vacant properties of $2.2 million due to a decreased average occupancy during 2020 compared to 2019.
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 $14.7 million increase in straight-line rental revenue deemed not probable of collection, driven by tenant credit issues from the
COVID-19
pandemic. This was partially offset by an increase in straight-line rental revenue of $9.7 million year-over-year as a result of acquisitions and lease modifications.
Impairments
Impairments increased year-over-year on underperforming properties, with $49.0 million of impairments recorded on 28 properties for the year ended December 31, 2020, compared to $18.6 million of impairments recorded on 27 properties in the comparative year. The increase was driven by multi-tenant properties, as well as single occupant properties with tenants in the health and fitness, casual dining and movie theater industries, all of which were significantly impacted by the
COVID-19
pandemic.
Impairments also increased year-over-year on Vacant properties, with $14.2 million of impairments recorded on eight properties for the year ended December 31, 2020, compared to $5.5 million of impairments recorded on seven properties in the comparative year.
Finally, the increase in impairments year-over-year was caused by $18.2 million of impairments recorded on lease intangible assets, primarily as a result of a tenant bankruptcy that had credit issues prior to the
COVID-19
pandemic which resulted in the termination of the lease for four properties, and $0.1 million of credit loss allowance on our direct financing lease during the year ended December 31, 2020, with no comparable impairments recognized in 2019.
 
39

Gain on disposition of assets
Gain on disposition of assets decreased year-over-year. During the year ended December 31, 2020, we disposed of 38 properties and recorded net gains totaling $24.2 million. There were $23.2 million in net gains on the sale of 18 active properties and $1.3 million in net gains on the sale of 20 Vacant properties. These gains were partially offset by a $0.2 million loss recorded on the sale of a notes receivable and $0.1 million in other net losses.
During the year ended December 31, 2019, we disposed of 44 properties and recorded net gains totaling $58.9 million. There were $69.1 million in net gains on the sale of 23 active properties and $1.5 million in net gains on the sale of 18 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 or loss on disposition. Additionally, one building in a multi-tenant property was sold, resulting in a net loss of $11.7 million, and the remaining stand-alone occupied building of this property was retained.
Changes related to debt
Interest expense; Loss on debt extinguishment; Termination of interest rate swaps
Our debt as of December 31, 2019 and 2020 is summarized below (in thousands):
 
 
In January 2019, we terminated the 2015 Credit Agreement and the 2015 Term Loan Agreement, resulting in a loss on debt extinguishment of $0.7 million, and entered into the 2019 Revolving Credit and Term Loan Agreement, comprised of the 2019 Credit Facility and
A-1
Term Loans. We also simultaneously entered into delayed draw
A-2
Term Loans, which were drawn in May 2019 to repurchase the 2019 Convertible Notes at their maturity.
In June 2019, we issued the 2029 Senior Notes and extinguished the Master Trust 2013 notes, resulting in a loss on debt extinguishment of $15.0 million. In September 2019, we issued the 2027 Senior Notes and the 2030 Senior Notes. Proceeds from these issuances were primarily utilized to terminate the
A-1
Term Loans and
A-2
Term Loans, which resulted in a loss on debt extinguishment of $5.3 million. Additionally, during 2019, we extinguished two CMBS loans, resulting in a net gain on debt extinguishment of $6.7 million.
During the first half of 2020, we entered into the 2020 Term Loans. In August 2020, we issued $450.0 million of 2031 Senior Notes, which triggered a mandatory repayment of $222.0 million of the 2020 Term Loans that resulted in a loss on debt extinguishment of $1.0 million. Remaining proceeds from the 2031 Senior Notes issuance were primarily utilized to repurchase $154.6 million of Convertible 2021 Notes, resulting in a loss on debt extinguishment of $6.2 million. Subsequent to December 31, 2020, we repaid the remaining 2020 Term Loans in full and expect to settle the remaining 2021 Convertible Notes in cash during 2021.
 
40

These changes in our debt structure resulted in an overall increase in our total debt outstanding, but with a reduction in our weighted average interest rate from 3.85% at December 31, 2019 to 3.64% at December 31, 2020. As such, we had a slight increase in total interest expense year-over-year:
 
   
Years Ended December 31,
 
(In Thousands)
  
       2020
   
2019       
 
Interest expense – revolving credit facilities
  $3,686   $5,201 
Interest expense – term loans
   3,545    15,448 
Interest expense – Senior Unsecured Notes
   61,750    29,286 
Interest expense – mortgages and notes payable
   12,028                 18,733 
Interest expense – Convertible Notes
               10,728    17,245 
Interest expense – interest rate swaps
       972 
Non-cash
interest expense
   12,428    14,175 
Total interest expense
  
$
104,165
 
  
$
101,060
 
Finally, in September 2019, we terminated our interest rate swaps, which were entered into as a hedge against our variable-rate debt, in conjunction with the repayment of the
A-1
Term Loans and
A-2
Term Loans. This termination resulted in a fee of $24.8 million. As we continued to hold variable-rate debt at time of termination, a portion of the hedged transactions remained probable to occur. Therefore, only $12.5 million was initially expensed and the remainder of the termination fee is being amortized over the remaining initial term of the interest rate swaps to interest expense.
Changes related to SMTA
Related party fee income; Preferred dividend income from SMTA; Income tax expense
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. We also provided property management services and special services for Master Trust 2014, which was contributed to SMTA as part of the
Spin-Off.
Upon SMTA’s sale of Master Trust 2014 in September 2019, both the Asset Management Agreement and the Property Management and Servicing Agreement were terminated. We simultaneously entered into the Interim Management Agreement at a reduced annual rate, under which we agreed to manage and liquidate the remaining SMTA assets until its termination effective September 4, 2020. The following table summarizes our related party fee income under these agreements:
 
   
Years Ended December 31,
 
(In Thousands)
  
2020
   
2019   
 
Management fees
(1)
  $678   $15,635 
Property management and special services fees
       5,427 
Termination fee related to the Asset Management Agreement
       48,156 
Total related party fee income
  
$
            678
 
  
$
            69,218
 
 
(1)
Includes $0.9 million of stock compensation awarded by SMTA to an employee of Spirit for the year ended December 31, 2019, which was fully offset by $0.9 million in general and administrative expenses.
Related party fee income was earned through a wholly-owned TRS and was subject to federal and state income tax. As such, the termination fee income earned in the third quarter of 2019 resulted in an increased income tax expense for the year ended December 31, 2019.
Additionally, as part of the
Spin-Off,
SMTA issued to us 10% Series A preferred shares, which generated $10.8 million of preferred dividend income for the year ended December 31, 2019. In September 2019, in conjunction with SMTA’s sale of Master Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference of $150.0 million.
 
41

Changes related to general and administrative expenses
Year-over-year general and administrative expenses decreased by $4.0 million, driven by a decrease in compensation expenses of $4.7 million, primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a $0.7 million decrease in travel expenses as a result of the
COVID-19
pandemic. Decreases year-over-year were partially offset by $1.7 million of expenses recognized during the year ended December 31, 2020 related to the
COVID-19
pandemic, mainly as a result of increased legal fees for executing rent deferral and abatement agreements.
LIQUIDITY AND CAPITAL RESOURCES
Forward equity issuance
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. The forward sale price that we received upon physical settlement of the agreements, which was initially $35.856 per share, 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. As of December 31, 2020, we had physically settled all 9.2 million of these shares for net proceeds of $319.1 million.
ATM Program
In November 2020, the Board of Directors approved a new $500.0 million ATM program, and we terminated the 2016 ATM Program. Sales of shares of our common stock under the 2020 ATM Program may be made in sales deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act.
The 2020 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.
During the year ended December 31, 2020, 7.1 million shares were sold under the ATM Programs, comprised of 3.6 million under the 2016 ATM Program and 3.5 million sold under the 2020 ATM Program. All of these sales were sold by forward purchasers through agents under the applicable ATM Program and pursuant to forward sales agreements. The forward sale price that we will receive upon physical settlement of the agreements is 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 year ended December 31, 2020, 2.9 million of these shares were physically settled for net proceeds of $109.2 million. As of December 31, 2020, there were 4.1 million shares remaining under open forward sales agreements. Assuming the full physical settlement of those open forward sales agreements, we have remaining capacity of $369.7 million under the 2020 ATM Program as of December 31, 2020.
 
42

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 2020 ATM program. As of December 31, 2020, available liquidity was comprised of $70.3 million in cash and cash equivalents, $800.0 million of borrowing capacity under the 2019 Credit Facility and $13.0 million in restricted cash and restricted cash equivalents. Also, as of December 31, 2020, we had $151.5 million of expected proceeds available assuming the full physical settlement of our open forward equity contracts and remaining capacity of $369.7 million under our 2020 ATM Program. 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 I, 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 December 31, 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 December 31, 2020, there were no subsidiaries that met this requirement.
As of December 31, 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 December 31, 2020, there were no letters of credit outstanding.
Amounts available for borrowing under the 2019 Credit Facility remained subject to compliance with certain customary restrictive covenants including:
 
  
Maximum leverage ratio (defined as consolidated total indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.60:1.00;
 
  
Minimum fixed charge coverage ratio (defined as EBITDA of the Company, to fixed charges) of 1.50:1.00;
 
  
Maximum secured indebtedness leverage ratio (defined as consolidated secured indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.50:1:00;
 
43

  
Minimum unsecured interest coverage ratio (defined as consolidated net operating income from unencumbered properties, to unsecured interest expense) of 1.75:1.00; and
 
  
Maximum unencumbered leverage ratio (defined as consolidated unsecured indebtedness of the Company, net of certain cash and cash equivalents, to total unencumbered asset value) of 0.60:1:00.
In addition to these covenants, the 2019 Credit Agreement also included other customary affirmative and negative covenants, such as (i) limitation on liens and negative pledges; (ii) transactions with affiliates; (iii) limitation on mergers, consolidations and sales of all or substantially all assets; (iv) maintenance of status as a REIT and listing on any national securities exchange; and (v) material modifications to organizational documents. As of December 31, 2020, the Corporation and the Operating Partnership were in compliance with these covenants.
2020 Term Loans
As of December 31, 2020, $178.0 million was outstanding under the 2020 Term Loan Agreement. On January 4, 2021, we repaid the 2020 Term Loans in full. The 2020 Term Loans had a maturity of April 2, 2022 and bore interest at a rate of LIBOR plus an applicable margin of 1.50% per annum.
Senior Unsecured Notes
As of December 31, 2020, we had the following Senior Unsecured Notes outstanding (dollars in thousands):
 
   
Maturity Date
  
  Stated Interest  
Rate
  
  December 31,  
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
 
Interest on the Senior Unsecured Notes is payable on January 15 and July 15 of each year, except for the 2026 Senior Notes, for which interest is payable on March 15 and September 15 of each year, and the 2031 Senior Notes, for which interest is 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.
The indentures governing the Senior Unsecured Notes subject the Corporation and Operating Partnership to certain customary restrictive covenants that limit their ability to incur additional indebtedness, including:
 
  
Maximum leverage ratio (defined as consolidated total indebtedness, to total consolidated undepreciated real estate assets plus the Company’s other assets, excluding accounts receivable and
non-real
estate intangibles) of 0.60:1.00;
 
  
Minimum unencumbered asset coverage ratio (defined as total consolidated undepreciated real estate assets plus the Company’s other assets, excluding accounts receivable and
non-real
estate intangibles, to consolidated total unsecured indebtedness) of 1.50:1:00;
 
  
Maximum secured indebtedness leverage ratio (defined as consolidated total secured indebtedness, to total consolidated undepreciated real estate assets plus the Company’s other assets, excluding accounts receivable and
non-real
estate intangibles) of 0.40:1.00; and
 
  
Minimum fixed charge coverage ratio (defined as consolidated income available for debt service, to the annual service charge) of 1.50:1.0.
 
44

The indentures governing the Senior Unsecured Notes also include other customary affirmative and negative covenants, including (i) maintenance of the Corporation’s existence; (ii) payment of all taxes, assessments and governmental charges levied against the Corporation; (iii) reporting on financial information; and (iv) maintenance of properties and insurance. As of December 31, 2020, the Corporation and the Operating Partnership were in compliance with these covenants.
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 December 31, 2020, we had five fixed-rate CMBS loans with $214.2 million of aggregate outstanding principal, a weighted-average contractual interest rate of 5.47% and a weighted-average maturity of 2.8 years. Approximately 86.93% 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 December 31, 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
 
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 
2025
   1    1   6.00%   6.00   610    16    626 
Thereafter
   1    1   5.80%   5.80   3,000    53    3,053 
Total
  
 
5
 
  
 
88
 
     
 
5.47
 
    $
      16,256
 
  
    $
    197,981
 
  
    $
    214,237
 
Convertible Notes
As of December 31, 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 semi-annually 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: (i) if the closing price of our common stock for each of the 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; (ii) 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; (iii) if we call any or all of the Convertible Notes for redemption prior to the redemption date; or (iv) upon the occurrence of specified corporate events as described in the Convertible Notes prospectus supplement. From November 15, 2020 to 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 December 31, 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.
 
45

Debt Maturities
Future principal payments due on our various types of debt outstanding as of December 31, 2020 (in thousands):
 
  
Total
  
2021
  
2022
  
2023
  
2024
  
2025
  
Thereafter
 
2019 Credit Facility
 $  $  $  $  $  $  $ 
2020 Term Loans
  178,000      178,000             
Senior Unsecured Notes
  1,950,000                  1,950,000 
CMBS
  214,237   4,365   4,617   200,986   590   626   3,053 
Convertible Notes
  190,426   190,426                
  
$
  2,532,663
 
 
$
  194,791
 
 
$
  182,617
 
 
$
  200,986
 
 
$
  590
 
 
$
  626
 
 
$
  1,953,053
 
Contractual Obligations
The following table provides information with respect to our commitments, including acquisitions under contract, as of December 31, 2020 (in thousands):
 
Contractual Obligations
  
Payment due by period
 
   
Total
   
Less than 1 year
   
1-3
years
   
3-5
years
   
More than 5 years
 
Debt - Principal
  $2,532,663   $194,791   $383,603   $1,216   $1,953,053 
Debt - Interest
 (1)
   606,997    85,958    160,908    141,125    219,006 
Acquisitions Under Contract
 (2)
   47,985    47,985             
Capital Improvements
   12,655    12,404    251         
Operating Lease Obligations
   7,818    1,301    2,457    2,476    1,584 
Total
  
$
  3,208,118
 
  
$
  342,439
 
  
$
  547,219
 
  
$
  144,817
 
  
$
  2,173,643
 
 
(1) 
Debt - Interest has been calculated based on outstanding balances as of December 31, 2020 through their respective maturity dates and excludes unamortized
non-cash
deferred financing costs of $18.5 million and unamortized debt discount, net of $7.8 million.
 
(2) 
Contracts contain standard cancellation clauses contingent on results of due diligence.
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 I, 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.
 
46

CASH FLOWS
In this section, we discuss our cash flows for the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form
10-K
for the year ended December 31, 2019.
The following table presents a summary of our cash flows for the years ended December 31, 2020 and 2019 (in thousands):
 
   
Years Ended December 31,
    
   
2020
  
2019
  
Change
 
Net cash provided by operating activities
  $      314,312  $      339,053  $(24,741
Net cash used in investing activities
   (747,750  (894,999        147,249 
Net cash provided by financing activities
   490,713   504,548   (13,835
Net increase (decrease) in cash, cash equivalents and restricted cash
  
$
57,275
 
 
$
(51,398
 
$
108,673
 
As of December 31, 2020, we had $83.3 million of cash, cash equivalents, and restricted cash as compared to $26.0 million as of December 31, 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 $70.5 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 $9.4 million driven by the issuance of the 2027 Senior Notes, 2029 Senior Notes, 2030 Senior Notes, and 2031 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,
  
a decrease in cash taxes paid of $11.0 million primarily driven by the net decrease in taxable income in 2020 and sale of MTA, and
  
a net increase in cash rental revenue of $30.2 million, driven by net acquisitions over the trailing twelve month period, partially offset by $26.3 million of rent deferred and $6.3 million of rent abated during the year ended December 31, 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 year ended December 31, 2020 included $867.5 million for the acquisition of 146 properties and $12.7 million of capitalized real estate expenditures. These outflows were partially offset by $100.6 million in net proceeds from the disposition of 38 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 $1.3 billion for the acquisition of 334 properties and $47.7 million of capitalized real estate expenditures. These outflows were partially offset by
 
47

$253.6 million in net proceeds from the disposition of 44 properties, $150.0 million in proceeds from redemption of preferred equity investment in SMTA, $33.5 million in collections of the Master Trust Notes and $11.0 million in collections of principal on loans receivable and real estate assets under direct financing leases.
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 year ended December 31, 2020 was primarily attributable to borrowings of $445.5 million under senior unsecured notes, net proceeds from the issuance of common stock of $428.3 million and net borrowings of $178.0 million under term loans. These amounts were partially offset by payment of dividends to equity owners of $270.8 million, repayment of $154.6 million on convertible notes, net repayments of $116.5 million on our revolving credit facilities, deferred financing costs of $6.6 million, common stock repurchases for employee tax withholdings totaling $4.4 million, repayment of $4.1 million on mortgages and notes payable and debt extinguishment costs of $4.0 million.
During the same period in 2019, net cash provided by financing activities was primarily attributable to borrowings of $1.2 billion under senior unsecured notes and net proceeds from the issuance of common stock of $677.4 million. These amounts were partially offset by net payments on the convertible notes, term loans, mortgages and notes payable, and revolving credit facilities of $402.5 million, $420.0 million, $242.0 million, and $29.8 million, respectively. Additionally, there were debt extinguishment costs of $15.3 million and deferred financing costs of $22.1 million during 2019. Payment of dividends to equity owners during 2019 was $236.9 million, and the common stock share repurchase for employee tax withholdings totaled $2.5 million.
Non-GAAP
Financial Measures
FFO AND AFFO
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. FFO is a supplemental
non-GAAP
financial measure. 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, gains and losses from property dispositions and impairment charges, 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 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 transactions costs associated with our
Spin-Off,
default interest and fees on
non-recourse
mortgage indebtedness, debt extinguishment gains (losses), costs associated with termination of interest rate swaps, costs associated with performing on a guarantee of a former tenant’s debt, and certain
non-cash
items. These certain
non-cash
items include
non-cash
revenues (comprised of straight-line rents net of bad debt expense, amortization of lease intangibles, and amortization of net premium/discount on loans receivable),
non-cash
interest expense (comprised of amortization of deferred financing costs and amortization of net debt discount/premium) and
non-cash
compensation expense.
 
 
48

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, deferred financing costs, and reduced by cash and cash equivalents and cash reserves on deposit with lenders as additional security. By excluding these amounts, 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.
EBITDA
re,
Adjusted EBITDA
re
and Annualized Adjusted EBITDA
re
EBITDAre is a
non-GAAP
financial measure and is computed in accordance with standards established by NAREIT. EBITDAre is computed as net income (loss) (computed in accordance with GAAP), plus interest expense, plus income tax expense (if any), plus depreciation and amortization, plus (minus) losses and gains on the disposition of depreciated property, plus impairments of depreciated property.
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 transactions costs associated with our
Spin-Off,
debt extinguishment gains (losses), and costs associated with performing on a guarantee of a former tenant’s debt. We focus our business plans to enable us to sustain increasing shareholder value. Accordingly, 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 is calculated as Adjusted EBITDAre for the quarter, adjusted for amounts deemed not probable of collection (recoveries) for straight-line rent related to prior periods and 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 EBITDA
re
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. A reconciliation of interest-bearing debt (computed in accordance with GAAP) to Adjusted Debt is included in the financial information accompanying this report.
 
49

FFO and AFFO
 
  
Years Ended December 31,
 
(Dollars in thousands, except per share data)
 
 
2020
 
 
 
2019
 
 
 
2018
 
Net income attributable to common stockholders
 
$
16,358
 
 
$
164,916
 
 
$
121,700
 
Portfolio depreciation and amortization
  212,038   174,895   197,346 
Portfolio impairments
  81,476   24,091   17,668 
Gain on disposition of assets
  (24,156  (58,850  (14,355
FFO attributable to common stockholders
 
$
285,716
 
 
$
305,052
 
 
$
322,359
 
Loss (gain) on debt extinguishment
  7,227   14,330   (26,729
Deal pursuit costs
  2,432   844   549 
Transaction costs
        21,391 
Non-cash
interest expense
  12,428   14,175   22,866 
Accrued interest and fees on defaulted loans
     285   1,429 
Straight-line rent, net of related bad debt expense
  (11,876  (16,924  (15,382
Other amortization and
non-cash
charges
  (918  (2,769  (2,434
Swap termination costs
     12,461    
Non-cash
compensation expense
  12,640   14,277   15,114 
Other G&A costs associated with
Spin-Off
        1,841 
Other expense
        5,319 
Costs related to
COVID-19
 (1)
  1,798       
AFFO attributable to common stockholders
 (2)
 
$
309,447
 
 
$
341,731
 
 
$
346,323
 
   
Net income per share of common stock - diluted
 $0.15  $1.81  $1.39 
   
FFO per share of common stock - diluted
 (3)
 $2.73  $3.34  $3.71 
   
AFFO per share of common stock - diluted
 (3)
 $2.95  $3.75  $3.99 
   
AFFO per share of common stock, excluding AM termination fee and Haggen settlement
 (3)(4)
 $2.95  $3.34  $3.78 
   
Weighted average shares of common stock outstanding - diluted
  104,535,384   90,869,312   86,476,449 
 
(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 year ended December 31, 2020 includes $26.3 million 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) 
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:
 
   
Years Ended December 31,
 
   
2020
   
2019
   
2018
 
FFO  $0.8 million   $1.2 million   $1.4 million 
AFFO  $0.9 million   $1.4 million   $1.5 million 
 
(4) 
AFFO attributable to common stockholders for the year ended December 31, 2019, excluding $48.2 million of termination fee income, net of $11.3 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. AFFO attributable to common stockholders has not been adjusted to exclude the following amounts for the year ended December 31, 2019: (i) asset management fees of $14.7 million; (ii) property management and servicing fees of $5.4 million; (iii) preferred dividend income from SMTA $10.8 million; (iv) interest income on related party notes receivable of $1.1 million and an early repayment premium of $0.9 million; and (v) interest expense on related party loans payable of $0.2 million.
 
  
AFFO attributable to common stockholders for the year ended December 31, 2018 excludes proceeds from the Haggen settlement of $19.1 million.
 
50

Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
 
   
December 31,
 
(Dollars in thousands)
  
2020
  
2019
 
Revolving credit facilities
  $  $116,500 
Term loans
   177,309    
Senior Unsecured Notes, net
   1,927,348   1,484,066 
Mortgages and notes payable, net
   212,582   216,049 
Convertible Notes, net
   189,102   336,402 
Total debt, net
   2,506,341   2,153,017 
Unamortized debt discount, net
   7,807   9,272 
Unamortized deferred financing costs
   18,515   17,549 
Cash and cash equivalents
   (70,303  (14,492
Restricted cash balances held for the benefit of lenders
   (12,995  (11,531
Adjusted Debt
  
$
        2,449,365
 
 
$
        2,153,815
 
 
   
Three Months
Ended December 31,
 
(Dollars in thousands)
  
2020
  
2019
 
Net income
  $29,170  $4,657 
Interest
   26,307   24,598 
Depreciation and amortization
   55,054   48,867 
Income tax benefit
   (133  (229
(Gain) loss on disposition of assets
   (12,347  11,910 
Portfolio impairments
   11,547   10,860 
EBITDA
re
  
$
        109,598
 
 
$
        100,663
 
Adjustments to revenue producing acquisitions and dispositions
   4,596   6,881 
Deal pursuit costs
   802   270 
(Gain) loss on debt extinguishment
   (25  2,857 
Costs related to
COVID-19
 (1)
   358    
Adjusted EBITDA
re
  
$
115,329
 
 
$
110,671
 
Adjustments related to straight-line rent
(2)
   (506   
Other adjustments for Annualized Adjusted EBITDA
re
(3)
   397   58 
Annualized Adjusted EBITDA
re
  
$
460,880
 
 
$
442,916
 
Adjusted Debt / Annualized Adjusted EBITDA
re
 (4)
  
 
5.3x
 
 
 
4.9x
 
 
(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 recoveries on straight-line rent receivable balances deemed not probable of collection in previous periods.
 
(3) 
Adjustments for the three months ended December 31, 2020 for amounts where annualization would not be appropriate are comprised of certain recoveries related to prior period amounts (rent deemed not probable of collection, abatements, property costs and tax expenses) and certain general and administrative expenses. For the same period in 2019, adjustments are composed of certain other income,
write-off
of intangibles and other compensation-related adjustments where annualization would not be appropriate.
 
(4) 
Adjusted Debt / Annualized Adjusted EBITDA
re
would be 5.0x if the 4.1 million shares under open forward sales agreements had been settled as of December 31, 2020.
 
51

Item 7A.
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.
As of December 31, 2020, our assets were primarily long-term, fixed-rate leases (though most have scheduled rental increases during the terms of the leases). As of December 31, 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 3.79%, excluding amortization of deferred financing costs and debt discounts/premiums. As of December 31, 2020, $178.0 million of our indebtedness was variable-rate, consisting of our 2020 Term Loans with a stated interest rate of 1.65%. There were no borrowings outstanding under our 2019 Credit Facility at December 31, 2020. If
one-month
LIBOR as of December 31, 2020 increased by 12.5 basis points, or 0.125%, the resulting increase in annual interest expense with respect to the $178.0 million outstanding under the variable-rate obligations would impact our future earnings and cash flows by $0.2 million.
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 December 31, 2020 are as follows (in thousands):
 
   
Carrying
Value
   
Estimated
Fair Value
 
2019 Credit Facility
  $   $—   
2020 Term Loans, net
 (1)
   177,309    177,884   
Senior Unsecured Notes, net
 (1)
           1,927,348                2,122,409   
Mortgages and notes payable, net 
(1)
   212,582    226,240   
Convertible Notes, net 
(1)
   189,102    194,124   
 
 
 
(1) 
The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.
 
52

Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Financial Statements and Supplemental Data
  
 
 
  
    54 
    61 
 Consolidated Statements of Operations of Spirit Realty Capital, Inc. for the Years Ended December 31, 2020, 2019 and 2018   62 
 Consolidated Statements of Comprehensive Income of Spirit Realty Capital, Inc. for the Years Ended December 31, 2020, 2019 and 2018   63 
 Consolidated Statements of Stockholders’ Equity of Spirit Realty Capital, Inc. for the Years Ended December 31, 2020, 2019 and 2018   64 
 Consolidated Statements of Cash Flows of Spirit Realty Capital, Inc. for the Years Ended December 31, 2020, 2019 and 2018   65 
    67 
 Consolidated Statements of Operations of Spirit Realty, L.P. for the Years Ended December 31, 2020, 2019 and 2018   68 
 Consolidated Statements of Comprehensive Income of Spirit Realty, L.P. for the Years Ended December 31, 2020, 2019 and 2018   70 
 Consolidated Statements of Partners’ Capital of Spirit Realty, L.P. for the Years Ended December 31, 2020, 2019 and 2018   71 
 Consolidated Statements of Cash Flows of Spirit Realty, L.P. for the Years Ended December 31, 2020, 2019 and 2018   72 
    74 
 
 
53

Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Spirit Realty Capital, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Spirit Realty Capital, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated February 19, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 19, 2021
 
54

Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spirit Realty Capital, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
 
55

Evaluation of Impairment on Real Estate Investments Held and Used
 
Description of the Matter
  
At December 31, 2020, the Company’s real estate investments (land, building, and improvements) held and used totaled $5.5 billion. As discussed in Note 2 to the consolidated financial statements, the Company reviews its real estate investments held and used periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, and market trends (such as the effects of leasing demand and competition) in assessing recoverability of these investments. Key assumptions used in estimating future cash flows and fair values include recently quoted bid or ask prices, market prices of comparable investments, contractual and comparable market rents, leasing assumptions, capitalization rates, and expectations for the use of the asset. A real estate investment held and used is considered impaired if its carrying value exceeds its estimated undiscounted cash flows, and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value.
  
Auditing management’s evaluation of impairment on real estate investments held and used is judgmental due to the estimation required in determining undiscounted cash flows that can be generated from the investment and determining estimated fair value when the investment is not deemed recoverable from those estimated future cash flows. In particular, the impairment evaluation is sensitive to the investment’s estimated residual value that is derived from the key assumptions stated above, which can be affected by expectations about future market or economic conditions, demand, and competition.
How We Addressed
the Matter in Our
Audit
  
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s impairment evaluation process. This included controls over management’s review of the key assumptions underlying the undiscounted cash flows and the fair value determination. To test the Company’s evaluation of impairment of real estate investments, we performed audit procedures that included, among others, testing the key assumptions used by management in its recoverability analysis and in determining the fair value of investments that were impaired. We compared the key assumptions to observable market transaction information published by independent industry research sources to assess whether the assumptions were market supported. We involved a valuation specialist to assist in evaluating the key assumptions listed above. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of key assumptions to evaluate the changes in the valuation of certain properties that would result from changes in the assumptions or using alternative valuation techniques.
 
In addition, we performed procedures to evaluate the completeness and accuracy of the data utilized in management’s impairment analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management.
 
56

Collectability of Lease Payments
 
Description of the Matter
  
The Company recorded $479.9 million in rental income for the year ended December 31, 2020. As discussed in Note 2 to the consolidated financial statements, the Company evaluates the collectability of lease payments on a regular basis. The Company considers certain key factors in assessing collectability, including: tenant’s payment history and financial condition, business conditions in the industry in which the tenant operates, economic conditions of the geographic location in which the tenant operates, as well as other relevant tenant specific circumstances.
 
Auditing management’s evaluation of collectability of lease payments requires judgement as the assessment is based on tenant specific circumstances and expectations of future economic and market conditions. In particular, the longer-term nature of repayments of
COVID-19
induced deferrals, the absence of cash receipts during the deferral period, and the current market environment requires the judgement of management in evaluating the collectability of billed and unbilled tenant receivables. Given the tenant specific nature of this evaluation and the uncertainty associated with future economic and market conditions, the related reserves against revenue are sensitive to the economic and geographic considerations of individual tenants described above and management’s judgment in evaluating the collectability conclusion.
How We Addressed
the Matter in Our
Audit
  
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s lease payment collectability process. To test the Company’s assessment of collectability, our audit procedures included, among others, evaluating tenant specific financial information, current and historical tenant payment collection, and changes in the collectability conclusions made during the year.
 
In addition, we tested the completeness and accuracy of the data used in management’s collectability analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Dallas, Texas
February 19, 2021
 
57

Report of Independent Registered Public Accounting Firm
To the Partners of Spirit Realty, L.P. and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spirit Realty, L.P. (the Operating Partnership) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, partners’ capital and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Operating Partnership at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Operating Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
 
58

Evaluation of Impairment on Real Estate Investments Held and Used
 
Description of the Matter
  
At December 31, 2020, the Operating Partnership’s real estate investments (land, building, and improvements) held and used totaled $5.5 billion. As discussed in Note 2 to the consolidated financial statements, the Operating Partnership reviews its real estate investments held and used periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Operating Partnership considers factors such as expected future undiscounted cash flows, estimated residual value, and market trends (such as the effects of leasing demand and competition) in assessing recoverability of these investments. Key assumptions used in estimating future cash flows and fair values include recently quoted bid or ask prices, market prices of comparable investments, contractual and comparable market rents, leasing assumptions, capitalization rates, and expectations for the use of the asset. A real estate investment held and used is considered impaired if its carrying value exceeds its estimated undiscounted cash flows, and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value.
  
Auditing management’s evaluation of impairment on real estate investments held and used is judgmental due to the estimation required in determining undiscounted cash flows that can be generated from the investment and determining estimated fair value when the investment is not deemed recoverable from those estimated future cash flows. In particular, the impairment evaluation is sensitive to the investment’s estimated residual value that is derived from the key assumptions stated above, which can be affected by expectations about future market or economic conditions, demand, and competition.
How We Addressed
the Matter in Our
Audit
  
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Operating Partnership’s impairment evaluation process. This included controls over management’s review of the key assumptions underlying the undiscounted cash flows and the fair value determination. To test the Operating Partnership’s evaluation of impairment of real estate investments, we performed audit procedures that included, among others, testing the key assumptions used by management in its recoverability analysis and in determining the fair value of investments that were impaired. We compared the key assumptions to observable market transaction information published by independent industry research sources to assess whether the assumptions were market supported. We involved a valuation specialist to assist in evaluating the key assumptions listed above. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of key assumptions to evaluate the changes in the valuation of certain properties that would result from changes in the assumptions or using alternative valuation techniques.
 
In addition, we performed procedures to evaluate the completeness and accuracy of the data utilized in management’s impairment analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management.
 
59

Collectability of Lease Payments
 
Description of the Matter
  
The Operating Partnership recorded $479.9 million in rental income for the year ended December 31, 2020. As discussed in Note 2 to the consolidated financial statements, the Operating Partnership evaluates the collectability of lease payments on a regular basis. The Operating Partnership considers certain key factors in assessing collectability, including: tenant’s payment history and financial condition, business conditions in the industry in which the tenant operates, economic conditions of the geographic location in which the tenant operates, as well as other relevant tenant specific circumstances.
 
Auditing management’s evaluation of collectability of lease payments requires judgement as the assessment is based on tenant specific circumstances and expectations of future economic and market conditions. In particular, the longer-term nature of repayments of
COVID-19
induced deferrals, the absence of cash receipts during the deferral period, and the current market environment requires the judgement of management in evaluating the collectability of billed and unbilled tenant receivables. Given the tenant specific nature of this evaluation and the uncertainty associated with future economic and market conditions, the related reserves against revenue are sensitive to the economic and geographic considerations of individual tenants described above and management’s judgment in evaluating the collectability conclusion.
How We Addressed
the Matter in Our
Audit
  
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Operating Partnership’s lease payment collectability process. To test the Operating Partnership’s assessment of collectability, our audit procedures included, among others, evaluating tenant specific financial information, current and historical tenant payment collection, and changes in the collectability conclusions made during the year.
 
In addition, we tested the completeness and accuracy of the data used in management’s collectability analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management.
/s/ Ernst & Young LLP
We have served as the Operating Partnership’s auditor since 2016.
Dallas, Texas
February 19, 2021
 
60

SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
 
   
December 31,

2020
   
December 31,

2019
 
Assets
          
Investments:
          
Real estate investments:
          
Land and improvements
  $        2,090,592     $        1,910,287   
Buildings and improvements
   4,302,004      3,840,220   
           
Total real estate investments
   6,392,596      5,750,507   
Less: accumulated depreciation
   (850,320)
  
    (717,097)   
           
    5,542,276      5,033,410   
Loans receivable, net
   —      34,465   
Intangible lease assets, net
   367,989      385,079   
Real estate assets under direct financing leases, net
   7,444      14,465   
Real estate assets held for sale, net
   25,821      1,144   
           
Net investments
   5,943,530      5,468,563   
Cash and cash equivalents
   70,303      14,492   
Deferred costs and other assets, net
   157,353      124,006   
Goodwill
   225,600      225,600   
           
Total assets
  $6,396,786     $5,832,661   
           
   
Liabilities and stockholders’ equity
          
Liabilities:
          
Revolving credit facilities
  $—     $116,500   
Term loans, net
   177,309      —   
Senior Unsecured Notes, net
   1,927,348      1,484,066   
Mortgages and notes payable, net
   212,582      216,049   
Convertible Notes, net
   189,102      336,402   
           
Total debt, net
   2,506,341      2,153,017   
Intangible lease liabilities, net
   121,902      127,335   
Accounts payable, accrued expenses and other liabilities
   167,423      139,060   
           
Total liabilities
   2,795,666      2,419,412   
Commitments and contingencies (see Note 6)
   0    0 
Stockholders’ equity:
          
Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both December 31, 2020 and December 31, 2019, liquidation preference of $25.00 per share
   166,177      166,177   
Common stock, $0.05 par value, 175,000,000 shares authorized: 114,812,615 and 102,476,152 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively
   5,741      5,124   
Capital in excess of common stock par value
   6,126,503      5,686,247   
Accumulated deficit
   (2,688,647)      (2,432,838)   
Accumulated other comprehensive loss
   (8,654)      (11,461)   
           
Total stockholders’ equity
   3,601,120      3,413,249   
           
Total liabilities and stockholders’ equity
  $6,396,786      $5,832,661   
           
See accompanying notes.
 
61

SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
 
   
For the Year Ended December 31,
 
   
2020
   
2019
   
2018
 
Revenues:
               
Rental income
  $479,901     $438,691     $402,321   
Interest income on loans receivable
   998      3,240      3,447   
Earned income from direct financing leases
   571      1,239      1,814   
Related party fee income
   678      69,218      15,838   
Other income
   1,469      4,039      21,705   
                
Total revenues
   483,617      516,427      445,125   
Expenses:
               
General and administrative
   48,380       52,424      52,993   
Termination of interest rate swaps
   —      12,461      —   
Property costs (including reimbursable)
   24,492      18,637      21,066   
Deal pursuit costs
   2,432      844
 
 
 
    210   
Interest
   104,165      101,060      97,548   
Depreciation and amortization
   212,620      175,465      162,452   
Impairments
   81,476      24,091      6,725   
                
Total expenses
   473,565       384,982      340,994   
                
Other income:
               
(Loss) gain on debt extinguishment
   (7,227)     (14,330)     27,092   
Gain on disposition of assets
   24,156      58,850      14,629   
Preferred dividend income from SMTA
   —      10,802      8,750   
Other expense
   —      —      (5,319)  
                
Total other income
   16,929      55,322      45,152   
                
Income from continuing operations before income tax expense
   26,981      186,767      149,283   
Income tax expense
   (273)     (11,501)     (792)  
                
Income from continuing operations
   26,708      175,266      148,491   
Loss from discontinued operations
   —      
 
 
    (16,439)  
                
Net Income
   26,708      175,266      132,052   
Dividends paid to preferred stockholders
   (10,350)     (10,350)     (10,352)  
                
Net income attributable to common stockholders
  $16,358     $164,916     $121,700   
                
                
Net income per share attributable to common stockholders - basic:
               
Continuing operations
  $0.15     $1.81     $1.59   
Discontinued operations
   —      —      (0.19)  
                
Net income per share attributable to common stockholders - basic
  $0.15     $1.81     $1.40   
                
Net income per share attributable to common stockholders - diluted:
               
Continuing operations
  $0.15     $1.81     $1.58   
Discontinued operations
   —      —      (0.19)  
                
Net income per share attributable to common stockholders - diluted
  $0.15     $1.81     $1.39   
                
Weighted average shares of common stock outstanding:
               
Basic
   104,357,660      90,621,808      86,321,268   
Diluted
   104,535,384      90,869,312      86,476,449   
See accompanying notes.
 
62

SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
 
   
For the Year Ended December 31,
 
   
2020
   
2019
  
2018
Net income attributable to common stockholders
  $16,358   $164,916  $121,700 
Other comprehensive income (loss):              
 Net reclassification of amounts from (to) AOCL
   2,807    (4,302  (7,159
               
Total comprehensive income
  $          19,165   $        160,614  $        114,541   
               
See accompanying notes.
 
63

SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Stockholders’ Equity
(In Thousands, Except Share Data)
 
  
Preferred Stock
 
Common Stock
      
  
Shares
 
Par

Value and
Capital in
Excess of

Par Value
 
Shares
 
Par
Value
 
Capital in

Excess of

Par Value
 
Accumulated

Deficit
 
AOCL
 
Total

Stockholders’

Equity
Balances, December 31, 2017
 
 
6,900,000
 
 
$
166,193
 
 
 
89,774,135
 
 
$
4,489
 
 
$
5,193,631
 
 
$
(2,044,704
 
$
0
 
 
$
3,319,609
 
                                 
Net income
                 132,052      132,052 
Dividends declared on preferred stock
                 (10,352     (10,352
                                 
Net income available to common stockholders
                 121,700      121,700 
Other comprehensive loss
                    (7,159  (7,159
Cost associated with preferred stock
     (16                 (16
Dividends declared on common stock
                 (262,887     (262,887
Tax withholdings related to net stock settlements
        (57,679  (3     (2,400     (2,403
Issuance of shares of common stock, net
        92,458   5   2,967         2,972 
Repurchase of common shares
        (4,244,446  (212     (167,953     (168,165
SMTA dividend distribution
              (216,005        (216,005
Stock-based compensation, net
        222,887   10   15,104   (1,011     14,103 
                                 
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
                 175,266      175,266 
Dividends declared on preferred
stock
                 (10,350     (10,350
                                 
Net income available to common
stockholders
                 164,916      164,916 
Other comprehensive loss
                    (4,302  (4,302
Dividends declared on common stock
                 (236,943     (236,943
Tax withholdings related to net stock settlements
        (58,445  (3     (2,539     (2,542
Issuance of shares of common stock, net
        16,578,423   829   676,361         677,190 
Stock-based compensation, net
        168,819   9   14,268   (1,017     13,260 
Other
              (79        (79
                                 
Balances, December 31, 2019
 
 
6,900,000
 
 
$
166,177
 
 
 
102,476,152
 
 
$
5,124
 
 
$
5,686,247
 
 
$
(2,432,838
 
$
(11,461
 
$
3,413,249
 
                                 
Net income
                 26,708      26,708 
Dividends declared on preferred stock
                 (10,350     (10,350
                                 
Net income available to common stockholders
                 16,358      16,358 
Other comprehensive income
                    2,807   2,807 
Dividends declared on common stock
                 (266,659     (266,659
Tax withholdings related to net stock settlements
        (117,543  (6     (4,375     (4,381
Issuance of shares of common stock, net
        12,137,210   607   427,632         428,239 
Stock-based compensation, net
        316,796   16   12,624   (1,133     11,507 
                                 
Balances, December 31, 2020
 
 
6,900,000
 
 
$
166,177
 
 
 
114,812,615
 
 
$
5,741
 
 
$
6,126,503
 
 
$
(2,688,647
 
$
(8,654
 
$
3,601,120
 
                                
See accompanying notes.
 
64

SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
 
   
For the Year Ended December 31,
   
2020
 
2019
 
2018
Operating activities
             
Net income
  $26,708  $175,266  $132,052 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   212,620   175,465   197,913 
Impairments
   81,476   24,091   17,668 
Amortization of deferred financing costs
   5,278   6,289   9,306 
Amortization of debt discounts
   4,343   7,028   13,560 
Amortization of deferred losses on interest rate swaps
   2,807   858    
Loss on termination of interest rate swaps
      12,461    
Payment for termination of interest rate swaps
      (24,843   
Stock-based compensation expense
   12,640   14,277   15,114 
Loss (gain) on debt extinguishment
   7,227   14,330   (26,729
Gain on dispositions of real estate and other assets
   (24,156  (58,850  (14,355
Non-cash
revenue
   (12,996  (19,943  (18,878
Bad debt expense and other
   221   189   2,313 
Changes in operating assets and liabilities:
             
Deferred costs and other assets, net
   (21,296  2,953   (1,396
Accounts payable, accrued expenses and other liabilities
   19,440   9,482   9,797 
              
Net cash provided by operating activities
   314,312   339,053   336,365 
Investing activities
             
Acquisitions of real estate
   (867,456  (1,295,545  (257,712
Capitalized real estate expenditures
   (12,659  (47,652  (52,390
Investments in loans receivable
         (35,450
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   11,037   30,427 
Proceeds from dispositions of real estate and other assets, net
   100,594   253,626   94,663 
              
Net cash used in investing activities
   (747,750  (894,999  (220,462
Financing activities
             
Borrowings under revolving credit facilities
   1,155,000   1,047,200   826,000 
Repayments under revolving credit facilities
   (1,271,500  (1,077,000  (791,700
Borrowings under mortgages and notes payable
         104,247 
Repayments under mortgages and notes
payable
   (4,101  (242,049  (170,519
Borrowings under term loans
   400,000   820,000   420,000 
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
   (4,032  (15,277  (2,968
Deferred financing costs
   (6,642  (22,105  (1,981
Cash, cash equivalents and restricted cash held by SMTA at
Spin-Off
         (73,081
Sale of SubREIT preferred shares
         5,000 
Proceeds from issuance of common stock, net of offering costs
   428,272   677,428   2,972 
Proceeds from issuance of preferred stock, net of offering costs
         (16
 
65

SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows - (continued)
(In Thousands)
 
   
For the Year Ended December 31,
   
2020
 
2019
 
2018
Repurchase of shares of common stock, including tax withholdings related to net stock settlements
   (4,381  (2,541  (170,568
Common stock dividends paid
   (260,488  (226,522  (290,223
Preferred stock dividends paid
   (10,350  (10,350  (10,352
              
Net cash provided by (used in) financing activities
   490,713   504,548   (153,189
              
Net increase (decrease) in cash, cash equivalents and restricted cash
   57,275   (51,398  (37,286
Cash, cash equivalents and restricted cash, beginning of period
   26,023   77,421   114,707 
              
Cash, cash equivalents and restricted cash, end of period
  $83,298  $26,023  $77,421 
              
The following table presents the supplemental cash flow disclosures (in thousands):
 
Supplemental Disclosures of
Non-Cash
Activities:
  
For the Year Ended December 31,
   
      2020      
  
      2019      
  
      2018      
Distributions declared and unpaid
  $       71,758   $64,049   $53,617 
Relief of debt through sale or foreclosure of real estate properties
   0    10,368    56,119 
Net real estate and other collateral assets sold or surrendered to lender
   0    654    28,271 
Accrued interest capitalized to principal 
(1)
   0    251    1,967 
Accrued market-based award dividend rights
   1,133    1,017    1,011 
Accrued capitalized costs
   2,174    2,230    695 
Financing provided in connection with disposition of assets
       0    2,888 
Right-of-use
lease assets
   0    6,143     
Lease liabilities
   0    6,143     
Reclass of residual value from direct financing lease to operating lease
   6,831    5,841    4,455 
Investment in preferred shares
       0    150,000 
Non-cash
distribution to SMTA, net
       0    142,924 
Cash flow hedge changes in fair value
       18,593    7,159 
Receivable for disposal of real estate property
   2,000         
Supplemental Cash Flow Disclosures:
               
Cash paid for interest
  $82,916   $         73,530   $         118,329 
Cash paid for taxes
   801    11,826    1,099 
 
 
(1)
 
    Accrued and overdue interest on certain CMBS notes that have been intentionally placed in default.
See accompanying notes.
 
66

SPIRIT REALTY, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit and Per Unit Data)
 
   
    December 31,    

2020
  
    December 31,    

2019
 
Assets
         
Investments:
         
Real estate investments:
         
Land and improvements
  $2,090,592  $1,910,287   
Buildings and improvements
   4,302,004   3,840,220   
          
Total real estate investments
   6,392,596   5,750,507   
Less: accumulated depreciation
   (850,320  (717,097)  
          
    5,542,276   5,033,410   
Loans receivable, net
   0   34,465   
Intangible lease assets, net
   367,989   385,079   
Real estate assets under direct financing leases, net
   7,444   14,465   
Real estate assets held for sale, net
   25,821   1,144   
          
Net investments
   5,943,530   5,468,563   
Cash and cash equivalents
   70,303   14,492   
Deferred costs and other assets, net
   157,353   124,006   
Goodwill
   225,600   225,600   
          
Total assets
  $6,396,786  $5,832,661   
          
   
Liabilities and partners’ capital
         
Liabilities:
         
Revolving credit facilities
  $0  $116,500   
Term loans, net
   177,309   0   
Senior Unsecured Notes, net
   1,927,348   1,484,066   
Mortgages and notes payable, net
   212,582   216,049   
Notes Payable to Spirit Realty Capital, Inc., net
   189,102   336,402   
          
Total debt, net
   2,506,341   2,153,017   
Intangible lease liabilities, net
   121,902   127,335   
Accounts payable, accrued expenses and other liabilities
   167,423   139,060   
          
Total liabilities
   2,795,666   2,419,412   
Commitments and contingencies (see Note 6)
       
Partners’ Capital
         
General partner’s common capital, 797,644 units issued and outstanding as of both December 31, 2020 and December 31, 2019
   20,505   22,389   
Limited partners’ preferred capital: 6,900,000 units issued and outstanding as of December 31, 2020 and December 31, 2019, respectively
   166,177   166,177   
Limited partners’ common capital: 114,014,971 and 101,678,508 units issued and outstanding as of December 31, 2020 and December 31, 2019, respectively
   3,414,438   3,224,683   
          
Total partners’ capital
   3,601,120   3,413,249   
          
Total liabilities and partners’ capital
  $6,396,786  $5,832,661   
          
See accompanying notes.
 
67

SPIRIT REALTY, L.P.
Consolidated Statements of Operations
(In Thousands, Except Unit and Per Unit Data)
 
   
Year Ended December 31,
 
   
2020
  
2019
  
2018
 
Revenues:
             
Rental income
  $      479,901  $      438,691  $      402,321 
Interest income on loans receivable
   998   3,240   3,447 
Earned income from direct financing leases
   571   1,239   1,814 
Related party fee income
   678   69,218   15,838 
Other income
   1,469   4,039   21,705 
              
Total revenues
   483,617   516,427   445,125 
Expenses:
             
General and administrative
   48,380   52,424   52,993 
Termination of interest rate swaps
   0   12,461    
Property costs (including reimbursable)
   24,492   18,637   21,066 
Deal pursuit costs
   2,432   844   210 
Interest
   104,165   101,060   97,548 
Depreciation and amortization
   212,620   175,465   162,452 
Impairments
   81,476   24,091   6,725 
              
Total expenses
   473,565   384,982   340,994 
              
Other income:
             
(Loss) gain on debt extinguishment
   (7,227)   (14,330)   27,092 
Gain on disposition of assets
   24,156   58,850   14,629 
Preferred dividend income from SMTA
   0   10,802   8,750 
Other expense
      0   (5,319) 
              
Total other income
   16,929   55,322   45,152 
Income from continuing operations before income tax expense
   26,981   186,767   149,283 
Income tax expense
   (273)   (11,501)   (792) 
              
Income from continuing operations
   26,708   175,266   148,491 
Loss from discontinued operations
      0   (16,439) 
              
Net income
   26,708   175,266   132,052 
Preferred distributions
   (10,350)   (10,350)   (10,352) 
              
Net income after preferred distributions
  $16,358  $164,916  $121,700 
              
    
Net income attributable to the general partner:
             
Continuing operations
  $125  $1,450  $1,270 
Discontinued operations
      0   (151) 
              
Net income attributable to the general partner
  $125  $1,450  $1,119 
    
Net income attributable to the limited partners:
             
Continuing operations
  $26,583  $173,816  $147,221 
Discontinued operations
      0   (16,288) 
              
Net income attributable to the limited partners
  $26,583  $173,816  $130,933 
See accompanying notes.
 
68

SPIRIT REALTY, L.P.
Consolidated Statements of Operations
(In Thousands, Except Unit and Per Unit Data)
 
   
Year Ended December 31,
 
   
2020
   
2019
   
2018
 
Net income per partnership unit - basic:
               
Continuing operations
  $0.15   $1.81   $1.59 
Discontinued operations
       0    (0.19
                
Net income per partnership unit - basic
  $0.15   $1.81   $1.40 
                
Net income per partnership unit - diluted:
               
Continuing operations
  $0.15   $1.81   $1.58 
Discontinued operations
       0    (0.19
                
Net income per partnership unit - diluted
  $0.15   $1.81   $1.39 
                
Weighted average partnership units outstanding:
               
Basic
   104,357,660    90,621,808    86,321,268 
Diluted
   104,535,384
    90,869,312    86,476,449 
 
69

SPIRIT REALTY, L.P.
Consolidated Statements of Comprehensive Income
(In Thousands)
 
   
For the Year Ended December 31,
 
   
      2020      
   
      2019      
  
      2018      
 
Net income after preferred distributions
  $16,358  $164,916  $121,700 
Other comprehensive income (loss):
             
Net reclassification of amounts from (to) AOCL
   2,807   (4,302  (7,159)  
              
Total comprehensive income
  $      19,165  $      160,614  $      114,541  
              
See accompanying notes.
 
70

SPIRIT REALTY, L.P.
Consolidated Statements of Partners’ Capital
(In Thousands, Except Unit Data)
 
  
Preferred Units
 
Common Units
 
Total
  
Limited Partners’ Capital
 (2)
 
General Partner’s Capital
 (1)
 
Limited Partners’ Capital
 (2)
 
Partnership
  
    Units    
 
  Amount  
  
    Units    
 
    Amount    
  
    Units    
 
    Amount    
 
Capital
Balances, December 31, 2017
   6,900,000  $166,193   797,644   $24,426   88,976,491  $3,128,990  $3,319,609 
Net income
            1,119      130,933   132,052 
Partnership distributions declared on preferred units
                  (10,352  (10,352
                              
Net income after preferred distributions
              1,119       120,581   121,700 
Other comprehensive loss
            (66     (7,093  (7,159
Partnership distributions declared on common units
            (2,418     (260,469  (262,887
Tax withholdings related to net settlement of common units
               (57,679  (2,403  (2,403
Issuance of common units, net
      (16        92,458   2,972   2,956 
Repurchase of common units
               (4,244,446  (168,165  (168,165
                              
SMTA dividend distribution
                  (216,005  (216,005
                              
Stock-based compensation, net
               222,887   14,103   14,103 
Balances, December 31, 2018
   6,900,000  $166,177   797,644   $23,061   84,989,711  $2,612,511  $2,801,749 
                              
Net income
            1,450      173,816   175,266 
Partnership distributions declared on preferred units
                  (10,350  (10,350
                             
Net income after preferred distributions
              1,450       163,466   164,916 
Other comprehensive loss            (38     (4,264  (4,302
Partnership distributions declared on common units
            (2,083     (234,860  (236,943
Tax withholdings related to net settlement of common units
               (58,445  (2,542  (2,542
Issuance of common units, net
               16,578,423   677,190   677,190 
Stock-based compensation, net
               168,819   13,260   13,260 
                              
Other
            (1     (78  (79
                              
Balances, December 31, 2019
   6,900,000  $166,177   797,644   $22,389   101,678,508  $3,224,683  $3,413,249 
Net income
            125      26,583   26,708 
                              
Partnership distributions declared on preferred units
                  (10,350  (10,350
Net income after preferred distributions
              125       16,233   16,358 
Other comprehensive income
            21      2,786   2,807 
Partnership distributions declared on common units
            (2,030     (264,629  (266,659
Tax withholdings related to net settlement of common units
               (117,543  (4,381  (4,381
Issuance of common units, net
               12,137,210   428,239   428,239 
Stock-based compensation, net
               316,796   11,507   11,507 
                              
Balances, December 31, 2020
   6,900,000   $166,177    797,644    $20,505    114,014,971   $3,414,438   $3,601,120  
                              
 
(1) 
Consists of general partnership interests held by Spirit General OP Holdings, LLC.
 
(2) 
Consists of limited partnership interests held by Spirit Realty Capital, Inc. and Spirit Notes Partner, LLC.
See accompanying notes.
 
71

SPIRIT REALTY, L.P.
Consolidated Statements of Cash Flows
(In Thousands)
 
   
For the Year Ended December 31,
   
2020
 
2019
 
2018
Operating activities
             
Net income
  $26,708  $175,266  $132,052 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   212,620       175,465       197,913 
Impairments
   81,476   24,091   17,668 
Amortization of deferred financing costs
   5,278   6,289   9,306 
Amortization of debt discounts
   4,343   7,028   13,560 
Amortization of deferred losses on interest rate swaps
   2,807   858    
Loss on termination of interest rate swaps
      12,461    
Payment for termination of interest rate swaps
      (24,843   
Stock-based compensation expense
   12,640   14,277   15,114 
Loss (gain) on debt extinguishment
   7,227   14,330   (26,729
Gain on dispositions of real estate and other assets
   (24,156  (58,850  (14,355
Non-cash
revenue
   (12,996  (19,943  (18,878
Bad debt expense and other
   221   189   2,313 
Changes in operating assets and liabilities:
             
Deferred costs and other assets, net
   (21,296  2,953   (1,396
Accounts payable, accrued expenses and other liabilities
   19,440   9,482   9,797 
              
Net cash provided by operating activities
   314,312   339,053   336,365 
Investing activities
             
Acquisitions of real estate
   (867,456  (1,295,545  (257,712
Capitalized real estate expenditures
   (12,659  (47,652  (52,390
Investments in loans receivable
         (35,450
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   11,037   30,427 
Proceeds from dispositions of real estate and other assets, net
   100,594   253,626   94,663 
              
Net cash used in investing activities
   (747,750  (894,999  (220,462
Financing activities
             
Borrowings under revolving credit facilities
   1,155,000   1,047,200   826,000 
Repayments under revolving credit facilities
   (1,271,500  (1,077,000  (791,700
Borrowings under mortgages and notes payable
         104,247 
Repayments under mortgages and notes payable
   (4,101  (242,049  (170,519
Borrowings under term loans
   400,000   820,000   420,000 
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
   (4,032  (15,277  (2,968
Deferred financing costs
   (6,642  (22,105  (1,981
Cash, cash equivalents and restricted cash held by SMTA at
Spin-Off
         (73,081
Sale of SubREIT preferred shares
         5,000 
Proceeds from issuance of common stock, net of offering costs
   428,272   677,428   2,972 
 
72

SPIRIT REALTY, L.P.
Consolidated Statements of Cash Flows - (continued)
(In Thousands)
 
   
For the Year Ended December 31,
   
2020
 
2019
 
2018
Proceeds from issuance of preferred stock, net of offering costs
         (16
Repurchase of shares of common stock, including tax withholdings related to net stock settlements
   (4,381  (2,541  (170,568
Common distributions paid
   (260,488  (226,522  (290,223
Preferred distributions paid
   (10,350  (10,350  (10,352
              
Net cash provided by (used in) financing activities
   490,713   504,548   (153,189
              
Net increase (decrease) in cash, cash equivalents and restricted cash
   57,275   (51,398  (37,286
Cash, cash equivalents and restricted cash, beginning of period
   26,023   77,421   114,707 
              
Cash, cash equivalents and restricted cash, end of period
  $83,298  $26,023  $77,421 
              
The following table presents the supplemental cash flow disclosures (in thousands):
 
Supplemental Disclosures of
Non-Cash
Activities:
  
For the Year Ended December 31,
   
      2020      
  
      2019      
  
      2018      
Distributions declared and unpaid
  $       71,758         $       64,049         $       53,617  
Relief of debt through sale or foreclosure of real estate properties
   0          10,368          56,119  
Net real estate and other collateral assets sold or surrendered to lender
   0          654          28,271  
Accrued interest capitalized to principal 
(1)
   0          251          1,967  
Accrued market-based award dividend rights
   1,133          1,017          1,011  
Accrued capitalized costs
   2,174          2,230          695  
Financing provided in connection with disposition of assets
   —          0          2,888  
Right-of-use
lease assets
   0          6,143          —  
Lease liabilities
   0          6,143          —  
Reclass of residual value from direct financing lease to operating lease
   6,831          5,841          4,455  
Investment in preferred shares
   —          0          150,000  
Non-cash
distribution to SMTA, net
   —          0          142,924  
Cash flow hedge changes in fair value
   —          18,593          7,159  
Receivable for disposal of real estate property
   2,000          —          —  
Supplemental Cash Flow Disclosures:
               
Cash paid for interest
  $82,916         $73,530         $118,329  
Cash paid for taxes
   801          11,826          1,099  
 
 
(1)
 
    Accrued and overdue interest on certain CMBS notes that have been intentionally placed in default.
See accompanying notes.
 
73

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements
December 31, 2020
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
 
United States
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”). For periods prior to the
Spin-Off,
the historical financial results of SMTA are reflected in our consolidated financial statements as discontinued operations. 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 ACCOUNTING POLICIES
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared on the accrual basis of accounting, in accordance with GAAP. The consolidated financial statements of the Company include the accounts of the Corporation and its wholly-owned subsidiaries. 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 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.
A variable interest entity (“VIE”) would be consolidated by the Company when the Company is the primary beneficiary, which is based on whether the Company has
 
(i)
 the power to direct activities that most significantly impact the economic performance of the VIE and
(ii)
 the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements and other contractual arrangements. The Company evaluated SMTA as a VIE at the time of
Spin-Off
and quarterly thereafter until the third quarter of 2019 and concluded the Company was not the primary beneficiary. In the third quarter of 2019, the Company no longer had variable interests in SMTA and control was evaluated under the voting interest model. The Company concluded SMTA
did
not require consolidation by the Company for any period presented.
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.
 
74

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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 under their governing documents. As of December 31, 2020 and 2019, net assets totaling $343.4 million and $375.5 million, respectively, were held, and net liabilities totaling $215.9 million and $231.7 million, respectively, were owed by these encumbered special purpose entities and are included in the accompanying consolidated balance sheets.
Discontinued Operations
A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition. Examples of a strategic shift include disposing of: (i) a separate major line of business, (ii) a separate major geographic area of operations, or (iii) other major parts of the Company. The Company determined that the
Spin-Off
represented a strategic shift that had a major effect on the Company’s results and, therefore, SMTA’s operations
qualified
as discontinued operations. See Note 12 for further discussion of discontinued operations.
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.
Real Estate Investments
Purchase Accounting and Acquisition of Real Estate
When acquiring a property, the purchase price (including acquisition and closing costs) is allocated to land, building, improvements and equipment based on their relative fair values. The Company considers several assumptions to estimate the fair value of the components of the tangible property acquired including market assumptions for land, building and improvements. The determination of the intangible assets and liabilities primarily relate to the contractual lease terms, estimates of the fair market rental rates, discount rates, and estimates of costs to carry and obtain a tenant. For properties acquired with
in-place
leases, the purchase price of real estate is allocated to the tangible and intangible assets and liabilities acquired based on their relative fair values. In making estimates of fair values for this purpose, a number of sources are used, including independent appraisals and information obtained about each property as a result of
pre-acquisition
due diligence, marketing and leasing activities.
Carrying Value of Real Estate Investments
The Company’s real estate properties are recorded at cost and depreciated using the straight-line method over the estimated remaining useful lives of the properties, which generally range from 20 to 50 years for buildings and improvements and from 5 to 20 years for land improvements. Properties classified as held for sale are not depreciated. Properties classified as held for sale are recorded at the lower of their carrying value or their fair value, less anticipated selling costs.
 
75

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
Held for Sale
The Company is continually evaluating the portfolio of real estate assets and may elect to dispose of assets considering criteria including, but not limited to, tenant concentration, tenant credit quality, unit financial performance, local market conditions and lease rates, associated indebtedness, asset location, and tenant operation type
(e.g., industry, sector, or concept/brand). Real
estate assets held for sale are expected to be sold within twelve months.
Lease Intangibles
Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of
in-place
leases and above- or below-market leases. For real estate acquired subject to existing lease agreements,
in-place
lease intangibles are valued based on the Company’s estimate of costs related to acquiring a tenant and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.
Direct Financing Leases
For real estate property leases classified as direct financing leases, the building portion of the lease is accounted for as a direct financing lease, while the land portion is accounted for as an operating lease when certain criteria are met. For direct financing leases, the Company records an asset which represents the net investment that is determined by using the aggregate of the total amount of future minimum lease payments, the estimated residual value of the leased property and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are reviewed annually, represent the estimated amount the Company expects to receive at lease termination from the disposition of the leased property. Actual residual values realized could differ from these estimates.
Impairments
The Company reviews its real estate investments and related lease intangibles periodically for indicators of impairment, including, but not limited to: the asset being held for sale, vacant
,
tenant bankruptcy or delinquency, and leases expiring in 60 days or less. For assets with indicators of impairment, the Company then evaluates if its carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.
Impairment is then calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, as the amount by which the carrying value exceeds fair value less costs to sell. Estimating fair values is highly subjective and such estimates could differ materially from actual results. Key assumptions used in estimating fair values include, but are not limited to: signed purchase and sale agreements or letters of intent; recently quoted bid or ask prices, or market prices for comparable properties; estimates of residual values, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.
Gain or Loss on Disposition of Assets
When real estate properties are disposed of, the related net book value of the properties is removed and a gain or loss on disposition is recognized in our consolidated statements of operations as the difference between the proceeds from the disposition, net of any costs to sell, and the net book value. As leasing is the Company’s primary activity, the
 
76

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
Company determined that its sales of real estate, which are nonfinancial assets, are sold to noncustomers and fall within the scope of ASC
610-20.
The full gain or loss on the disposition of real estate properties is recognized at time of sale provided that the Company (i) has no controlling financial interest in the real estate and (ii) has no continuing interest or obligation with respect to the disposed real estate.
Revenue Recognition
Rental Income: Cash and Straight-line Rent
The Company primarily leases real estate to its tenants under long-term,
triple-net
leases that are classified as operating leases. To evaluate lease classification, the Company assesses the terms and conditions of the lease to determine the appropriate lease term. The majority of our operating leases include one or more options to extend, typically for a period of five to ten years per renewal option. Excluding Walgreen Co., less than 1% of the Company’s operating leases at December 31, 2020 include an option to terminate. Walgreen Co. leases are generally for fifty years or more with several five-year termination periods after an initial
non-cancellable
term. Less than 10% of the Company’s operating leases at December 31, 2020 include an option to purchase, where the purchase option is generally determined based on fair market value of the underlying property. 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 seeks to protect residual value through its underwriting of acquisitions, incorporating the proprietary Spirit Property Ranking Model which is real estate centric. Once a property is acquired, the lessee is responsible for maintenance of the property, including insurance protecting any damage to the property. To further protect residual value, the Company supplements the tenant insurance policy with a master policy covering all properties owned by the Company. As an active manager, the Company will occasionally invest in capital improvements on properties,
re-lease
properties to new tenants or extend lease terms to protect residual value.
The Company’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.
 
77

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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.
Other Income: Lease Termination Fees
Lease termination fees are included in other income on the Company’s consolidated statements of operations and are recognized when there is a signed termination agreement and all of the conditions of the agreement have been met. The Company recorded lease termination fees of $0.7 million, $0.4 million and $0.3 million during the years ended December 31, 2020, 2019 and 2018, respectively.
Loans Receivable
Loans receivable consists of mortgage loans, net of premium, and notes receivables. Interest on loans receivable is recognized using the effective interest rate method. In September 2020, all the Company’s first-priority mortgage loans were fully paid off. A loan is placed on
non-accrual
status when the loan has become
60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on
non-accrual
status, interest income is recognized only when received. No loans receivable were on
non-accrual
status as of December 31, 2019. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted.
 
78

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term instruments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
 
   
  December 31,  

2020  
  
  December 31,  

2019  
 
  December 31,  

2018  
 
Cash and cash equivalents
  $70,303    $14,492  $14,493 
Restricted cash:
             
Collateral deposits 
(1)
   335     347   351 
Tenant improvements, repairs and leasing commissions 
(2)
   12,660     10,877   9,093 
Master Trust Release 
(3)
   0     0   7,412 
1031 Exchange proceeds, net
   0     0   45,042 
Other 
(4)
   0     307   1,030 
              
Total cash, cash equivalents and restricted cash
  $            83,298    $            26,023    $77,421 
              
 
(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) 
Proceeds from the sale of assets pledged as collateral under either Master Trust 2013 or Master Trust 2014, which were held on deposit until a qualifying substitution was made or the funds were applied as prepayment of principal. The Master Trust 2014 notes were included in the
Spin-Off
to SMTA. The Master Trust 2013 notes were extinguished in June 2019.
(4) 
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 $29.5 million and $7.7 million at December 31, 2020 and 2019, respectively, after the impact of $13.1 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 assessed in conjunction with the evaluation of rental income as described above. The Company had straight-line rent receivables of $93.1 million and $83.6 million at December 31, 2020 and 2019, respectively, after the impact of $14.5 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. 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. The FASB issued ASU
2017-04,
Simplifying the Test for Goodwill Impairment,
which the
Company adopted 
 
79

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
effective January 1, 2020. 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 compare the fair value of each reporting unit with its carrying amount and 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. No impairment was recorded for the periods presented. The
Spin-Off
of SMTA did qualify as a disposition of a business, resulting in a reduction in goodwill.
The following table presents a reconciliation of the Company’s goodwill (in thousands):
 
   
      Consolidated      
Balance as of December 31, 2017
  $254,340 
Goodwill allocated to dispositions of a business
(Spin-Off
of SMTA)
   (28,740
      
Balance as of December 31, 2018
   225,600 
Goodwill allocated to dispositions of a business
   0 
      
Balance as of December 31, 2019
   225,600 
Goodwill allocated to dispositions of a business
   0 
      
Balance as of December 31, 2020
  $                    225,600 
      
Accounting for Derivative Financial Instruments and Hedging Activities  
The Company may utilize derivative instruments such as interest rate swaps for purposes of hedging exposures to fluctuations in interest rates associated with certain of its financing transactions. At the inception of a hedge transaction, the Company enters into a contractual arrangement with the hedge counterparty and formally documents the relationship between the derivative instrument and the financing transaction being hedged, as well as its risk management objective and strategy for undertaking the hedge transaction. The fair value of the derivative instrument is recorded on the balance sheet as either an asset or liability. At inception and at least quarterly thereafter, a formal assessment is performed to determine whether the derivative instrument has been highly effective in offsetting changes in cash flows of the related financing transaction and whether it is expected to be highly effective in the future. The Company recognizes the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in other comprehensive (loss) income. The amounts recorded in other comprehensive (loss) income will subsequently be reclassified to earnings when the hedged item affects earnings.
Income Taxes
The Corporation has elected to be taxed as a REIT under the Code. As a REIT, the Corporation generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of the Company’s assets, the amounts distributed to the Corporation’s stockholders and the ownership of Corporation stock. Management believes the Corporation has qualified and will continue to qualify as a REIT and, therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Corporation qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.
Taxable income earned by any of the Company’s taxable REIT subsidiaries, including from
non-REIT
activities, is subject to federal, state and local taxes. 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 its termination effective 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. See Note 13 for additional discussion.
 
80

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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.
Earnings Per Share and Unit
The Company’s unvested restricted common stock, which contains
non-forfeitable
rights to receive dividends, are considered participating securities requiring the
two-class
method of computing earnings per share and unit. 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. Under the
two-class
method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the
two-class
method, undistributed earnings are allocated to both common shares and participating securities based on their respective weighted average shares outstanding during the period. Under the terms of the Amended Incentive Award Plan, restricted stock awards (see Note 9) are not allocated losses, including undistributed losses as a result of dividends declared exceeding net income. The Company uses income or loss from continuing operations as the basis for determining whether potential common shares are dilutive or
anti-dilutive
and undistributed net income or loss as the basis for determining whether undistributed earnings are allocable to participating securities.
Forward Equity Sale Agreements
The Company may enter into forward sale agreements for the sale and issuance of shares of our common stock, either through an underwritten public offering or through our ATM Program. These agreements may be physically settled in stock, settled in cash, or net share settled at the Company’s election. The Company evaluated the forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Before any issuance of shares of our common stock to physically settle a forward sale agreement, such forward sale agreement will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of our common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of our common stock that could be purchased by us in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to physical settlement or net share settlement of a forward sale agreement, there will be no dilutive effect on our earnings per share except during periods when the average market price of our common stock is above the adjusted forward sale price. However, if we decide to physically settle or net share settle such forward sale agreement, delivery of our shares on any physical settlement or net share settlement of the forward sale agreement will result in dilution to our earnings per share.
Unaudited Interim Information
The consolidated quarterly financial data in Note 14 is unaudited. In the opinion of management, this financial information reflects all adjustments necessary for a fair presentation of the respective interim periods. All such adjustments are of a normal recurring nature.
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
 
81

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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.
The Company reviewed receivables within the scope of ASU
2016-13
totaling $40.3 million as of January 1,
 2020, which were comprised of loans receivable and real estate assets held under direct financing lease. There were no amounts past due related to these receivables. As such, 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 ASU
2016-13
resulted in the recognition of a loss of $0.3 million on January 1, 2020, which was 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 $26.3 million of deferrals being recognized in rental income for the year ended December 31, 2020. The deferral periods range generally from one to six months, with an average deferral period of four months and an average repayment period of 12 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 December 31, 2020, the Company’s gross investment in owned real estate properties totaled approximately $6.8 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 10.7%, as the only state with a gross investment greater than 10.0% of the total gross investment of the Company’s entire portfolio.
 
82

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
During the years ended December 31, 2020 and 2019, 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, 2018
       1,459   3   1,462  $    5,054,523  $22,064  $5,076,587 
Acquisitions/improvements 
(1)
   334   0   334   1,344,843   0   1,344,843 
Dispositions of real estate 
(2)(3)
   (16  (28  (44  (98,327  (140,909  (239,236
Transfers to Held for Sale
   (27  27   0   (128,396  128,396   0 
Impairments 
(4)
   0   0   0   (18,974  (5,117  (24,091
Reset of gross balances 
(5)
   0   0   0   (12,894  (3,211  (16,105
                        
Gross balance, December 31, 2019
   1,750   2   1,752   6,140,775   1,223   6,141,998 
Acquisitions/improvements 
(1)
   146   0   146   880,897   0   880,897 
Dispositions of real estate 
(2)
   (20  (18  (38  (53,985  (32,028  (86,013
Transfers to Held for Sale
   (23  23   0   (72,912  72,912   0 
Impairments 
(4)
   0   0   0   (70,376  (11,100  (81,476
Res
e
t of gross balances 
(5)
   0   0   0   (45,386  (3,243  (48,629
Other
   0   0   0   (1,340  
 
 
   (1,340
                        
Gross balance, December 31, 2020
   1,853   7   1,860  $6,777,673  $27,764  $6,805,437 
                        
Accumulated depreciation and amortization
               (981,866  (1,943  (983,809
               
Net balance, December 31, 2020 
(6)
              $    5,795,807  $25,821  $5,821,628 
               
 
(1) 
Includes investments of $10.0 million and $45.0 million, respectively, in revenue producing capitalized expenditures, as well as $2.5 million and $4.6 million, respectively, of
non-revenue
producing capitalized expenditures for the years ended December 31, 2020 and 2019.
(2) 
The total gain on disposal of assets for properties held in use was $10.2 million, $26.5 million and $1.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The total gain on disposal of assets for properties held for sale was $14.2 million, $32.4 million and $13.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(3) 
Includes 1
deed-in-lieu
property with a real estate investment of $0.8 million that was transferred to the lender during the year ended December 31, 2019.
(4) 
Impairments on owned real estate is comprised of real estate and intangible asset impairment and allowance for credit losses on direct financing leases.
(5) 
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.
(6) 
Reconciliation of total owned investments to the accompanying consolidated balance sheet at December 31, 2020 is as follows:
 
Net investments
   5,943,530 
Intangible lease liabilities, net
   (121,902
      
Net balance
  $        5,821,628 
 
83

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
Operating Leases
As of December 31, 2020, 2019, and 2018, the Company held 1,852, 1,745, and 1,453 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):
 
   
For the Year Ended December 31,
 
   
2020
   
2019
   
2018
 
Base Cash Rent 
(1)
  $453,013     $404,720     $466,658   
Variable cash rent (including reimbursables)
   13,176      12,737      14,931   
Straight-line rent, net of uncollectible reserve 
(2)
   11,876      16,924      16,461   
Amortization of above
-
and below
-
market lease intangibles, net 
(3)
   1,836      4,310      4,943   
                
Total rental income
  $        479,901     $        438,691     $        502,993   
                
 
(1) 
Includes net impact of (amounts not deemed probable of collection)/amounts recovered of $(10.9) million, $0.4 million, and $
(
0.5
)
 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(2) 
Includes net impact of amounts not deemed probable for collection of $14.9 million, $0.2 million, and
$0.1 mi
l
lion
for the years ended December 31, 2020, 2019 and 2018, respectively. As a
 
result of the Company’s adoption of ASU
2016-02
on January 1, 2019, the Company reclassified bad debt expense to rental income on a prospective basis.
(3) 
Excludes amortization of in-place leases of
 $34.8 million, $29.8 million,
and $32.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
Scheduled minimum future contractual rent to be received under the remaining
non-cancellable
term of these operating leases (including contractual fixed rent increases occurring on or after January 1, 2021) at December 31, 2020 are as follows (in thousands):
 
   
        December 31,        

2020
2021
  $505,018      
2022
   495,232      
2023
   477,604      
2024
   455,840      
2025
   442,818      
Thereafter
   3,207,076      
      
Total future minimum rentals
  $              5,583,588      
      
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.
 
84

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
 
   
        December 31,        

2020
 
        December 31,        

2019
In-place
leases
  $473,062   $457,616 
Above-market leases
   83,185   95,002 
Less: accumulated amortization
   (188,258  (167,539
          
Intangible lease assets, net
  $367,989      $385,079     
          
   
Below-market leases
  $178,614  $176,816 
Less: accumulated amortization
   (56,712  (49,481
          
Intangible lease liabilities, net
  $                121,902  $                127,335 
          
The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was 12.8 years, 11.0 years, 17.4 years and 13.7 years, respectively, as of December 31, 2020. The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was
13.4 years, 10.9 years, 18.1 years and 14.2
years, respectively, as of December 31, 2019. During the year ended December 31, 2020, the Company acquired in-place lease intangible assets of $47.7 million, above-market lease intangible assets of $3.5 million and below-market lease intangible liabilities of $6.3 million. During the year ended December
 31, 2019, the Company acquired
in-place
lease intangible assets of $100.3 million, above-market lease intangible assets of $33.3 million and below-market lease intangible liabilities of $20.9 million.
Based on the balance of intangible assets and liabilities at December 31, 2020, the net aggregate amortization expense for the next five years and thereafter is expected to be as follows (in thousands):
 
   
December 31,

2020
2021
  $32,658  
2022
   30,592 
2023
   28,936 
2024
   26,917 
2025
   23,503 
Thereafter
   103,481 
      
Total future minimum amortization
  $               246,087 
      
Direct Financing Leases
As of December 31, 2019, the Company held 2 properties under direct financing leases, which were held in use.
During the year ended
December 31, 2020, 1 of the properties was reclassified to an operating lease. For the remaining property held under direct financing lease, the property had
$3.6 million in scheduled minimum future payments to be received under its remaining
non-cancellable
lease term as of December 31, 2020. 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 December 31, 2020, there was a remaining reserve of $0.1 million against the net investment balance of $7.6 million.
Loans Receivable
As of December 31, 2019, the Company held 2 first-priority mortgage loans. The mortgage loans were secured by single-tenant commercial properties and had fixed interest rates over the term of the loans. There were 2 other
 
85

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
notes receivable as of December 31, 2019. One was secured by tenant assets and stock with a principal outstanding of $37 thousand, and the other was unsecured with a balance of $1.9 million as of December 31,
2019.
As of December 31, 2020, all of the Company’s loans receivable
were
 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.
During the years ended December 31, 2020 and 2019, the Company had the following loan activity (dollars in thousands):
 
   
Mortgage Loans
 
Other Notes
 
Total
   
Properties  
 
Investment  
 
Investment  
 
Investment  
Principal, December 31, 2018
   52   $      42,660  $      2,082  $      44,742  
Principal payments and payoffs
   (9  (10,927  (110  (11,037
                  
Principal, December 31, 2019
   43   31,733   1,972   33,705 
Principal payments and payoffs
   (43  (31,733  (1,972  (33,705
                  
Principal, December 31, 2020
           0  $0  $0  $0 
                  
Impairments and Allowance for Credit Losses
The following table summarizes total impairments and allowance for credit losses recognized in continuing and discontinued operations on the accompanying consolidated statements of operations (in thousands):
 
   
        Year Ended December 31,        
   
      2020        
 
        2019        
 
        2018        
Real estate
 
asset impairment
  $59,206   $24,130   $17,193  
Intangible asset impairment (recovery)
   22,118   (39  492 
Allowance for credit losses on direct financing leases
   152      0 
Reversal for credit losses on loans receivable
   0      (17
             
Total impairment loss
  $    81,476  $    24,091   $    17,668 
              
 
86

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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):
 
  
2020 Weighted

Average Effective

Interest Rates
 (1)
  
2020 Weighted

Average Stated

Rates
 (2)
  
2020 Weighted

Average Remaining
Years to Maturity
 (3)
  
December 31,

2020
  
December 31,

2019
 
Revolving credit facilities
   5.12%        2.3   $   $116,500  
Term loans
   2.57%    1.65%    1.3    178,000    
Senior Unsecured Notes
   3.80%    3.61%    8.2    1,950,000   1,500,000 
CMBS
   5.80%    5.47%    2.8    214,237   218,338 
Convertible Notes
         5.54%          3.75%            0.4    190,426   345,000 
                         
Total debt
   4.05%    3.64%    6.7    2,532,663   2,179,838 
Debt discount, net
                  (7,807  (9,272
Deferred financing costs, net
(4)
                  (18,515  (17,549
                         
Total debt, net
                 $  2,506,341  $  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 year ended December 31, 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 December 31, 2020.
(3)
Represents the weighted average remaining years to maturity based on the outstanding principal balance as of December 31, 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.
Deferred financing costs and offering discount/premium incurred in connection with entering into debt agreements are amortized to interest expense over the initial term of the respective agreements. Both deferred financing costs and offering discount/premium are recorded net against the principal debt balance on the accompanying consolidated balance sheets, except for deferred costs related to revolving credit facilities, which are recorded in deferred costs and other assets, net.
Revolving Credit Facilities
On January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, comprised of the 2019 Credit Facility and the
A-1
Term Loans, which replaced the 2015 Credit Facility and 2015 Term Loan, respectively. The 2019 Credit Facility is comprised of $800.0 million of aggregate revolving commitments with a maturity date of March 31, 2023 and includes 2
six-month
extensions that can be exercised at the Company’s option. The 2019 Revolving Credit and Term Loan Agreement includes an accordion feature providing for an additional $400.0 million of revolving borrowing capacity, subject to satisfying certain requirements. 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. Payment is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions. The 2019 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.
As of December 31, 2020, 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, outstanding loans 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.
 
87

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
The
 
unamortized deferred financing costs were $
2.6
 million as of December 
31
,
2020
, compared to $
3.7
 million as of December 
31
,
2019
. As of December 
31
,
2020
, the full $
800.0
 million of borrowing capacity was available under the
2019
Credit Facility and there were
0
outstanding letters of credit. The Operating Partnership’s ability to borrow under the
2019
Credit Facility is subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 
31
,
2020
.
Term Loans
As discussed above, on January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, which included the
A-1
Term Loans. The
A-1
Term Loans had an aggregate borrowing amount of $420.0 million, a maturity date of March 31, 2024 and an accordion feature for an additional $200.0 million of term loans, subject to satisfying certain requirements. In addition, on January 14, 2019, the Operating Partnership entered into the
A-2
Term Loans, with an aggregate of $400.0 million of delayed draw term loans, a maturity date of March 31, 2022 and an accordion feature for an additional $200.0 million of term loans, subject to satisfying certain requirements. The Company drew on the
A-2
Term Loans to retire the 2.875% Convertible Notes upon their maturity in May 2019.
The
A-1
Term Loans and
A-2
Term Loans bore interest at LIBOR plus an applicable margin of 1.00% per annum based on the Operating Partnership’s credit rating after the upgrade in May 2019. Prior to the upgrade, they bore interest at LIBOR plus an applicable margin of 1.25%. In addition, a ticking fee accrued on the unused portion of the
A-2
Term Loans at a rate of 0.20% until the earlier of July 12, 2019 or the termination of the commitments. On September 16, 2019, in connection with the issuance of the 2027 Senior Unsecured Notes and 2030 Senior Unsecured Notes described below, the Company repaid the
A-1
Term Loans and
A-2
Term Loans in full.
On
April 2, 2020
, the Operating Partnership entered into the 2020 Term Loan Agreement, which provided for $200.0 million of unsecured term loans with a maturity date of April 2, 2022. The 2020 Term Loan Agreement included an accordion feature, which the Operating Partnership fully exercised in the second quarter of 2020 to borrow an additional $200.0 million of term loans. As of December 31, 2020, the 2020 Term Loans bore interest at LIBOR plus an applicable margin of 1.50% per annum, based on the Operating Partnership’s credit rating. In connection with entering into the 2020 Term Loan Agreement, the Company incurred $2.5 million in deferred financing costs.
On August 6, 2020, the issuance of the 2031 Senior Unsecured Notes described below triggered a mandatory prepayment under the 2020 Term Loan Agreement. As such, the Company repaid $222.0 million of the 2020 Term Loans and
wrote-off
$1.0 million of related unamortized deferred financing costs.
As of December 31, 2020, the remaining unamortized deferred financing costs were $0.7 million. The Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants in relation to the borrowings under the 2020 Term Loan Agreement, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2020. On January 4, 2021, the Company repaid the 2020 Term Loans in full.
 
88

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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
 
December 31,

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 June 27, 2019, the Operating Partnership issued $400.0 million aggregate principal amount of 2029 Senior Unsecured Notes, resulting in net proceeds of $395.9 million. In connection with the June 2019 offering, the Operating Partnership incurred $3.8 million in deferred financing costs and an offering discount of $0.3 million. On September 16, 2019, the Operating Partnership issued $300.0 million aggregate principal amount of 2027 Senior Unsecured Notes, resulting in net proceeds of $297.0 million, and $500.0 million aggregate principal amount of 2030 Senior Unsecured Notes, resulting in net proceeds of $494.2 million. In connection with the September 2019 offering, the Operating Partnership incurred $7.3 million in deferred financing costs and an offering discount of $1.5 million. On August 6, 2020, the Operating Partnership issued $450.0 million aggregate principal amount of 2031 Senior Notes, resulting in net proceeds of $441.3 million. In connection with the August 2020 offering, the Operating Partnership incurred $4.2 million in deferred financing costs and an offering discount of $4.5 million.
Interest on the Senior Unsecured Notes is payable on January 15 and July 15 of each year, except for the 2026 Senior Notes, for which interest is payable on March 15 and September 15 of each year, and the 2031 Senior Notes, for which interest is 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.
As of December 31, 2020 and December 31, 2019, the unamortized deferred financing costs were $15.6 million and $12.9 million, respectively, and the unamortized discount was $7.0 million and $3.0 million, respectively. In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2020.
CMBS
Indirect wholly-owned special purpose entity subsidiaries of the Company are borrowers under five 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 December 31, 2020 for the loans ranged from 5.23% to 6.00%, with a weighted average stated rate of 5.47%. As of December 31, 2020, the
non-defaulted
loans were secured by 88 properties. As of December 31, 2020 and 2019, the unamortized deferred financing costs associated with the CMBS loans were $1.9 million and $2.6 million, respectively, and the unamortized net premium was $0.2 million and $0.3 million,
respectively.
 
89

SPIRIT REALTY CAPITAL, INC. and SPIRIT REALTY, L.P.
Notes to Consolidated Financial Statements - (continued)
December 31, 2020
 
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 Company’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 December 31, 2020, the conversion rate was 17.4458 per $1,000 principal note, which reflects the adjustment from the SMTA dividend distrib