**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLY REPORT UNDER SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterlyperiod ended June 30, 2007**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transitionperiod from                                to                               **

**Commissionfile number:  01-32386**

**SPIRIT FINANCE CORPORATION**

(Exact name ofregistrant as specified in its charter)

** **

| **Maryland**                     |   | **20-0175773**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

| **14631 N. Scottsdale Road, Suite 200**   |   | ** ** |
|-------------------------------------------|--------|------------|
| **Scottsdale,  Arizona**                  |   | **85254**  |
| (Address of  principal executive offices) |   | (Zip Code) |

 

Registrant’s telephonenumber, including area code: **(480) 606-0820**

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  Noo

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o  Nox

As of July 31, 2007,114,084,785****shares of theregistrant’s Common Stock, par value $0.01 per share, were outstanding.

 

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**PARTI — FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**Spirit FinanceCorporationCONSOLIDATED BALANCE SHEETS**(dollarsin thousands, except per share data)
| ** **                                                                                                                                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                        |       |                    |       |                        |       |
| Investments, at cost:                                                                                                                             |       |                    |       |                        |       |
| Real estate  investments:                                                                                                                         |       |                    |       |                        |       |
| Land and  improvements                                                                                                                            |       | $                       | 1,182,559  |                        | $          | 1,042,368 |   |
| Buildings and  improvements                                                                                                                       |       | 1,872,832               |       | 1,688,630                   |       |
| Total real  estate investments                                                                                                                    |       | 3,055,391               |       | 2,730,998                   |       |
| Less:  Accumulated depreciation                                                                                                                   |       | (91,093                 | )          | (63,871                     | )          |
|                                                                                                                                              |       | 2,964,298               |       | 2,667,127                   |       |
| Loans receivable                                                                                                                                  |       | 82,095                  |       | 75,173                      |       |
| Net investments                                                                                                                                   |       | 3,046,393               |       | 2,742,300                   |       |
| Cash and cash  equivalents                                                                                                                        |       | 151,582                 |       | 52,317                      |       |
| Lease intangibles, net                                                                                                                            |       | 25,230                  |       | 24,313                      |       |
| Deferred costs and  other assets, net                                                                                                             |       | 41,762                  |       | 37,660                      |       |
| Total assets                                                                                                                                      |       | $                       | 3,264,967  |                        | $          | 2,856,590 |   |
|                                                                                                                                              |       |                    |       |                        |       |
| **Liabilities and stockholders’  equity**                                                                                                    |       |                    |       |                        |       |
| Liabilities:                                                                                                                                      |       |                    |       |                        |       |
| Secured credit  facilities                                                                                                                        |       | $                       | —     |                        | $          | 128,535 |   |
| Mortgages and  notes payable                                                                                                                      |       | 2,154,320               |       | 1,670,839                   |       |
| Accounts  payable, accrued expenses and other liabilities                                                                                         |       | 29,790                  |       | 39,538                      |       |
| Dividends  payable                                                                                                                                |       | 25,099                  |       | 23,653                      |       |
| Total liabilities                                                                                                                                 |       | 2,209,209               |       | 1,862,565                   |       |
| Commitments and  contingencies (Note 8)                                                                                                           |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                        |       |                    |       |                        |       |
| Preferred stock,  $0.01 par value per share, 125,000,000 shares authorized, no shares issued  and outstanding                                     |       | —                  |       | —                      |       |
| Common stock,  $0.01 par value per share, 375,000,000 shares authorized, 114,085,085 (2007)  and 107,515,866 (2006) shares issued and outstanding |       | 1,141                   |       | 1,075                       |       |
| Capital in  excess of par value                                                                                                                   |       | 1,150,267               |       | 1,069,217                   |       |
| Accumulated  distributions in excess of net income                                                                                                |       | (83,417                 | )          | (63,787                     | )          |
| Accumulated  other comprehensive loss                                                                                                             |       | (12,233                 | )          | (12,480                     | )          |
| Total stockholders’  equity                                                                                                                  |       | 1,055,758               |       | 994,025                     |       |
| Total liabilities and stockholders’ equity                                                                                                   |       | $                       | 3,264,967  |                        | $          | 2,856,590 |   |

 

See accompanying notes.

2

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**SpiritFinance Corporation**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

(dollars in thousands, except per share data)
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                    |       |                             |       |                           |       |   |   |   |   |
| Rentals                                      |       | $                                | 65,492     |                           | $          | 38,235 |   | $ | 126,170 |   | $ | 68,166 |   |
| Interest income  on loans receivable         |       | 1,893                            |       | 1,655                          |       | 3,705 |   | 3,154 |   |
| Other interest  income                       |       | 2,157                            |       | 1,287                          |       | 2,821 |   | 1,925 |   |
| Total revenues                               |       | 69,542                           |       | 41,177                         |       | 132,696 |   | 73,245 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Expenses:                                    |       |                             |       |                           |       |   |   |   |   |
| General and  administrative                  |       | 4,457                            |       | 3,956                          |       | 9,157 |   | 8,158 |   |
| Property costs                               |       | 390                              |       | 99                             |       | 863 |   | 162 |   |
| Merger costs                                 |       | 1,524                            |       | —                         |       | 3,072 |   | — |   |
| Depreciation and  amortization               |       | 15,717                           |       | 9,488                          |       | 30,278 |   | 17,317 |   |
| Interest                                     |       | 33,039                           |       | 19,570                         |       | 62,170 |   | 33,266 |   |
| Total expenses                               |       | 55,127                           |       | 33,113                         |       | 105,540 |   | 58,903 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income from continuing  operations           |       | 14,415                           |       | 8,064                          |       | 27,156 |   | 14,342 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Discontinued  operations:                    |       |                             |       |                           |       |   |   |   |   |
| Income from  discontinued operations         |       | 857                              |       | 1,758                          |       | 1,117 |   | 3,748 |   |
| Net gains on  sales of real estate           |       | 1,848                            |       | 1,400                          |       | 2,389 |   | 1,267 |   |
| Total discontinued  operations               |       | 2,705                            |       | 3,158                          |       | 3,506 |   | 5,015 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net income                                   |       | $                                | 17,120     |                           | $          | 11,222 |   | $ | 30,662 |   | $ | 19,357 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income per common  share:                    |       |                             |       |                           |       |   |   |   |   |
| Basic:                                       |       |                             |       |                           |       |   |   |   |   |
| Continuing  operations                       |       | $                                | 0.13       |                           | $          | 0.10 |   | $ | 0.25 |   | $ | 0.18 |   |
| Discontinued  operations                     |       | 0.02                             |       | 0.04                           |       | 0.03 |   | 0.06 |   |
| Net income                                   |       | $                                | 0.15       |                           | $          | 0.14 |   | $ | 0.28 |   | $ | 0.24 |   |
| Diluted:                                     |       |                             |       |                           |       |   |   |   |   |
| Continuing  operations                       |       | $                                | 0.13       |                           | $          | 0.10 |   | $ | 0.25 |   | $ | 0.18 |   |
| Discontinued  operations                     |       | 0.02                             |       | 0.04                           |       | 0.03 |   | 0.06 |   |
| Net income                                   |       | $                                | 0.15       |                           | $          | 0.14 |   | $ | 0.28 |   | $ | 0.24 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Weighted average  outstanding common shares: |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | 113,208,242                      |       | 81,944,688                     |       | 110,500,167 |   | 79,194,207 |   |
| Diluted                                      |       | 113,810,282                      |       | 82,183,382                     |       | 111,027,934 |   | 79,478,452 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Cash dividends declared  per common share    |       | $                                | 0.22       |                           | $          | 0.21 |   | $ | 0.44 |   | $ | 0.42 |   |

 

See accompanying notes.

3

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**SpiritFinance Corporation**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

(dollars inthousands)
| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Cash flows from operating  activities**                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                |       | $                                                 | 30,662     |   | $ | 19,357 |   |
| Adjustments to net  income:                               |       |                                              |       |   |   |
| Depreciation and  amortization                            |       | 30,907                                            |       | 18,116 |   |
| Stock-based  compensation                                 |       | 1,251                                             |       | 897 |   |
| Real estate  impairments                                  |       | 1,125                                             |       | — |   |
| Amortization of  deferred financing costs                 |       | 993                                               |       | 1,527 |   |
| Amortization of  net interest rate swap hedge losses      |       | 334                                               |       | 347 |   |
| Net gains on sales  of real estate                        |       | (2,389                                            | )          | (1,267 | ) |
| Other noncash  items                                      |       | 834                                               |       | 185 |   |
| Changes in  operating assets and liabilities:             |       |                                              |       |   |   |
| Deferred costs  and other assets                          |       | (3,274                                            | )          | (1,515 | ) |
| Accounts  payable, accrued expenses and other liabilities |       | (7,241                                            | )          | 4,366 |   |
| Net cash provided by  operating activities                |       | 53,202                                            |       | 42,013 |   |
|                                                      |       |                                              |       |   |   |
| **Cash flows from investing  activities**                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Acquisitions of real  estate                              |       | (407,324                                          | )          | (1,018,679 | ) |
| Investments in loans  receivable                          |       | (7,110                                            | )          | (11,401 | ) |
| Proceeds from sales of  real estate                       |       | 82,693                                            |       | 22,505 |   |
| Collections of  principal on loans receivable             |       | 6,075                                             |       | 6,200 |   |
| Net cash used in  investing activities                    |       | (325,666                                          | )          | (1,001,375 | ) |
|                                                      |       |                                              |       |   |   |
| **Cash flows from financing  activities**                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Borrowings under  secured credit facilities               |       | 138,433                                           |       | 157,289 |   |
| Repayments under  secured credit facilities               |       | (266,968                                          | )          | (387,144 | ) |
| Borrowings under  mortgages and notes payable             |       | 500,318                                           |       | 956,071 |   |
| Repayments under  mortgages and notes payable             |       | (13,246                                           | )          | (7,028 | ) |
| Deferred financing  costs paid                            |       | (4,880                                            | )          | (6,377 | ) |
| Payments (made) received  on interest rate swaps          |       | (4,470                                            | )          | 5,825 |   |
| Proceeds from issuances  of common stock, net             |       | 79,861                                            |       | 329,555 |   |
| Dividends paid on  common stock                           |       | (48,846                                           | )          | (31,480 | ) |
| Transfers to restricted  cash and escrow deposits         |       | (8,473                                            | )          | (338 | ) |
| Net cash provided by  financing activities                |       | 371,729                                           |       | 1,016,373 |   |
|                                                      |       |                                              |       |   |   |
| Net increase in cash  and cash equivalents                |       | 99,265                                            |       | 57,011 |   |
|                                                      |       |                                              |       |   |   |
| Cash and cash  equivalents, beginning of period           |       | 52,317                                            |       | 30,536 |   |
| Cash and cash equivalents, end of period                  |       | $                                                 | 151,582    |   | $ | 87,547 |   |

 

See accompanying notes.

4

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**Spirit Finance Corporation**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

SixMonths Ended June 30, 2007

(Unaudited)

(dollars in thousands)
| ** **                                           | ** ** | **Common  Shares** | ** ** | **Common  Stock  Par Value** | ** ** | **Capital in  Excess of Par  Value** | ** ** | **Accumulated  Distributions in  Excess of Net  Income** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|-----------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
|                                                 |       |               |       |                              |       |                                                |       |                                                                    |       |                                        |       |                                  |       |
| Balances at December  31, 2006                       |       | 107,515,866        |       | $                                 | 1,075      |                                                | $          | 1,069,217                                                               |       | $                                           | (63,787    | )                                     | $          | (12,480 | ) | $ | 994,025 |   |
| Net income                                           |       |               |       |                              |       |                                                |       | 30,662                                                                  |       |                                        |       | 30,662                                |       |
| Change in net  unrealized losses on cash flow hedges |       |               |       |                              |       |                                                |       |                                                                    |       | (87                                         | )          | (87                                   | )          |
| Net cash flow hedge  losses reclassified to earnings |       |               |       |                              |       |                                                |       |                                                                    |       | 334                                         |       | 334                                   |       |
| Issuances of common  stock, net                      |       | 6,150,000          |       | 62                                |       | 79,799                                              |       |                                                                    |       |                                        |       | 79,861                                |       |
| Dividends declared on  common stock                  |       |               |       |                              |       |                                                |       | (50,292                                                                 | )          |                                        |       | (50,292                               | )          |
| Restricted stock  activity, net                      |       | 419,219            |       | 4                                 |       | 1,251                                               |       |                                                                    |       |                                        |       | 1,255                                 |       |
| Balances at June 30, 2007                            |       | 114,085,085        |       | $                                 | 1,141      |                                                | $          | 1,150,267                                                               |       | $                                           | (83,417    | )                                     | $          | (12,233 | ) | $ | 1,055,758 |   |

 

See accompanying notes.

5

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**SpiritFinance Corporation**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**TheCompany**

Spirit FinanceCorporation (“Spirit Finance” or the “Company”) is a Maryland corporationformed on August 14, 2003 as a self-managed and self-advised real estateinvestment trust (“REIT”) under the Internal Revenue Code.

**Basis ofAccounting and Principles of Consolidation**

Theaccompanying unaudited consolidated financial statements are prepared on theaccrual basis of accounting in accordance with U.S. generally acceptedaccounting principles for interim financial information.  Accordingly, they do not include all of theinformation and footnotes required for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been recorded. Operating results for the six months endedJune 30, 2007 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2007.  The accompanying financial statements andnotes should be read in conjunction with the audited financial statementsincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

The consolidated financialstatements of Spirit Finance include the accounts of the Company and itswholly-owned subsidiaries, Spirit Management Company, Spirit FinanceAcquisitions, LLC and its wholly-owned special purpose entities.  Spirit Finance formed numerous special purposeentities to acquire and hold real estate subject to mortgage notes payable andto facilitate borrowings under the Company’s secured credit facility (see Note5).  As a result, substantially all ofthe Company’s consolidated assets are held in these wholly-owned specialpurpose entities and are subject to debt. Each special purpose entity is a separate legal entity and is the soleowner of its assets and liabilities.  Theassets of the special purpose entities are not available to pay, or otherwise satisfyobligations to, the creditors of any owner or affiliate of the special purposeentity.  At June 30, 2007 andDecember 31, 2006, assets totaling $3.1 billion and $2.7 billion,respectively, were held and liabilities totaling $2.2 billion and $1.7 billion, respectively, wereowed by these special purpose entities and are included in the accompanyingconsolidated balance sheets.  Allintercompany account balances and transactions have been eliminated inconsolidation.

For acomplete listing of the Company’s significant accounting policies, please referto Note 1 in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

6

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**Reclassifications**

Certain reclassifications have been made to priorperiod balances to conform to the current period presentation.

**Use ofEstimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Although management believes its estimates are reasonable,actual results could differ from those estimates.

**Restricted Cash and Escrow Deposits**

TheCompany classified restricted cash and deposits in escrow totaling $12.1million at June 30, 2007 and $13.3 million at December 31, 2006 in “Deferredcosts and other assets, net” in the accompanying consolidated balance sheets.  Therestricted cash balances primarily represented amounts required to bemaintained under certain of the Company’s debt agreements.  In January 2007, $9.7 million of the restricted cash and escrowdeposits held at December 31, 2006 was used to repay a maturing note payable.

**NewAccounting Standard**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FinancialInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),which clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes.” The interpretation prescribes a recognition threshold andmeasurement attribute criteria for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.The interpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

TheCompany adopted the provisions of FIN 48 on January 1, 2007. The adoption ofFIN 48 did not impact the Company’s consolidated financial condition, resultsof operations or cash flows. At January 1, 2007, the Company had nounrecognized tax benefits and, accordingly, there will be no impact on theCompany’s effective tax rate in future periods.

TheCompany files income tax returns in the U.S. federal jurisdiction, and variousstates and local jurisdictions. All of the Company’s tax years remain subjectto examination by these jurisdictions. The Company’s policy is to recognize interest related to anyunderpayment of income taxes as interest expense and any penalties as operatingexpenses. There is no accrual for interest or penalties at January 1, 2007 andJune 30, 2007. The Company believes that it has appropriate support for theincome tax positions taken and to be taken on its tax returns and that itsaccruals for tax liabilities are adequate for all open years based on anassessment of many factors including past experience and interpretations of taxlaw applied to the facts of each matter.

7

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**2.SUBSEQUENT EVENT—MERGER TRANSACTION**

On July 2, 2007, theholders of a majority of the outstanding shares of common stock of SpiritFinance approved the merger (the “Merger”) of Spirit Finance with RedfordMerger Co. (“MergerCo”) pursuant to the agreement and plan of merger, datedMarch 12, 2007, among Redford Holdco, LLC (“Redford”), MergerCo and SpiritFinance.  On August 1, 2007, the Mergerwas consummated and MergerCo was merged with and into the Company, with SpiritFinance being the surviving company.  Asa result of the Merger, the Company is now a subsidiary of Redford.  Redford is owned by a consortium ofinvestors, including an affiliate of Macquarie Bank Limited, Kaupthing Bank hf.and other independent equity participants. The Company will continue to do business under the name “Spirit FinanceCorporation” but its common stock is no longer listed for trading on the NewYork Stock Exchange.

In connection with theMerger, on August 1, 2007, MergerCo entered into an $850 million creditagreement (the “Credit Agreement”) with Redford, other guarantor parties listedin the Credit Agreement, the lenders, and Credit Suisse, Cayman Islands Branch,as administrative and collateral agent.  Immediately following the closingof the Merger, the Company assumed all obligations of MergerCo under the CreditAgreement.  The proceeds from the Credit Agreement were used to partiallyfund the Merger, and the Company, through its assumption of the CreditAgreement, has agreed to secure all of its obligations under the CreditAgreement by granting to the collateral agent, for the benefit of the securedparties, a first priority security interest in various specified collateral ofthe Company and its subsidiaries.

As part of the Merger,each outstanding share of common stock of the Company was converted into theright to receive $14.50 in cash.  Aprorated dividend for the period beginning July 1, 2007 through the effectivedate of the Merger was declared in connection with completion of theMerger.  In addition, immediately beforecompletion of the Merger, all unvested options to acquire shares of the Company’scommon stock granted to employees vested in full and all holders of unexercisedoptions received a cash payment equal to $14.50, less the exercise price of theoption, multiplied by the number of shares of common stock covered by theoption.

All costs related to theMerger transaction are expensed in the period incurred.  Merger costs totaled $1.5 million for thequarter and $3.1 million for the six months ended June 30, 2007.

**3. INVESTMENTS**

At June 30, 2007, SpiritFinance had investments in 1,133 real estate properties, including 1,027 ownedproperties with a gross acquisition cost of approximately $3.1 billion(including $29.7 million of gross related lease intangibles, see Note 4),mortgage loans receivable with a carrying amount of $59.8 million and equipmentand other loans receivable with an aggregate outstanding balance of $22.3million.  A substantial portion of theseinvestments are pledged as collateral under the Company’s debt obligations (seeNote 5).

8

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The Company’s investmentsare geographically dispersed throughout 45 states.  Only two states, Texas (12%) and Wisconsin (11%), accounted for 10% or more ofthe total dollar amount of Spirit Finance’s investment portfolio at June 30,2007.

During the six monthsended June 30, 2007, the Company had the following gross real estateacquisition and loan origination activity (dollars in thousands):
|                                                     | ** ** | **Number of  Properties Owned or  Financed** | ** ** | **Dollar Amount of  Investments (a)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Balance,  December 31, 2006                         |       | 1,034                                                       |       | $                                                    | 2,833,878  |   |
| Acquisitions and  loan originations                 |       | 137                                                         |       | 428,610                                              |       |
| Sales (see Note  10)                                |       | (36                                                         | )          | (88,058                                              | )          |
| Principal  payments, premium amortization and other |       | (2                                                          | )          | (7,233                                               | )          |
| Balance, June 30, 2007                              |       | 1,133                                                       |       | $                                                    | 3,167,197  |   |

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(a)             Thedollar amount of investments includes the gross cost of land, buildings andlease intangibles related to properties owned and the carrying amount of loansreceivable.

The following table showsinformation regarding the diversification of the Company’s total investmentportfolio among the different industries in which our customers operate as ofJune 30, 2007 (dollars in thousands):
| ** **                                        | ** ** | **Number of  Properties  Owned or  Financed** | ** ** | **Dollar  Amount of  Investments (a)** | ** ** | **Percentage of  Total Dollar  Amount of  Investments** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
| General and  discount retailer properties         |       | 178                                                     |       | $                                           | 827,978    |                                                                   | 26         | % |
| Restaurants                                       |       | 604                                                     |       | 697,530                                     |       | 22                                                                     |       |
| Specialty  retailer properties                    |       | 34                                                      |       | 251,100                                     |       | 8                                                                      |       |
| Industrial  properties                            |       | 35                                                      |       | 220,289                                     |       | 7                                                                      |       |
| Movie theaters                                    |       | 24                                                      |       | 220,081                                     |       | 7                                                                      |       |
| Automotive  dealers, parts and service facilities |       | 87                                                      |       | 215,277                                     |       | 7                                                                      |       |
| Lumber suppliers                                  |       | 55                                                      |       | 206,351                                     |       | 6                                                                      |       |
| Educational  facilities                           |       | 20                                                      |       | 157,055                                     |       | 5                                                                      |       |
| Recreational  facilities                          |       | 7                                                       |       | 100,280                                     |       | 3                                                                      |       |
| Supermarkets                                      |       | 19                                                      |       | 62,785                                      |       | 2                                                                      |       |
| Distribution  facilities                          |       | 43                                                      |       | 59,672                                      |       | 1                                                                      |       |
| Interstate  travel plazas                         |       | 4                                                       |       | 37,535                                      |       | 1                                                                      |       |
| Call centers                                      |       | 2                                                       |       | 33,988                                      |       | 1                                                                      |       |
| Health  clubs/gyms                                |       | 5                                                       |       | 23,022                                      |       | 1                                                                      |       |
| Medical office                                    |       | 1                                                       |       | 21,020                                      |       | 1                                                                      |       |
| Drugstores                                        |       | 9                                                       |       | 18,310                                      |       | 1                                                                      |       |
| Convenience  stores/car washes                    |       | 6                                                       |       | 14,924                                      |       | 1                                                                      |       |
| Total  investments                                |       | 1,133                                                   |       | $                                           | 3,167,197  |                                                                   | 100        | % |

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(a)          The dollar amount ofinvestments includes the gross cost of land, buildings and lease intangiblesrelated to properties owned and the carrying amount of loans receivable.

The 1,027 properties thatthe Company owns are leased to customers under long-term operating leases thattypically include one or more renewal options. The weighted average remaining noncancelable lease term at June 30, 2007was approximately 15 years. The leases are generally triple-net, which

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provides that the lesseeis responsible for the payment of all property operating expenses, includingproperty taxes, maintenance and insurance; therefore, Spirit Finance isgenerally not responsible for repairs or other capital expenditures related tothe properties.

Scheduled minimum futurerentals to be received under the remaining noncancelable term of the operatingleases at June 30, 2007 are as follows (dollars in thousands):

| 2007                          |   | $         | 133,558   |   |
|-------------------------------|--------|-----------|-----------|--------|
| 2008                          |   | 267,471   |      |
| 2009                          |   | 267,936   |      |
| 2010                          |   | 268,138   |      |
| 2011                          |   | 266,151   |      |
| 2012                          |   | 266,185   |      |
| Thereafter                    |   | 2,759,987 |      |
| Total future minimum  rentals |   | $         | 4,229,426 |   |

 

Since lease renewalperiods are exercisable at the option of the lessee, the preceding tablepresents future minimum lease payments due during the initial lease term only.In addition, the future minimum rentals do not include any contingent rentalsbased on a percentage of the lessee’s gross sales or lease escalations based onfuture changes in the Consumer Price Index.

**4. LEASEINTANGIBLES, NET**

Intangible assetsrepresent the value of in-place leases associated with those properties thatthe Company acquired subject to existing leases.  Total lease intangibles are shown in theaccompanying consolidated balance sheets net of accumulated amortization of$4.5 million at June 30, 2007 and $3.4 million at December 31, 2006.

**5. DEBT**

**Secured Credit Facilities**

The Company’s $400million short-term secured credit facility is used to partially fund realestate acquisitions pending the issuance of long-term, fixed-rate debt.  As of June 30, 2007, the Company had nooutstanding borrowings and no properties were pledged as collateral under itssecured credit facility.

The facility matures inOctober 2007.  Borrowings under thefacility require monthly payments of interest indexed to the one-month LondonInterbank Offered Rate (LIBOR) plus an additional amount ranging from 1.25% to3.25%, depending on the amount of outstanding borrowings.  At both June 30, 2007 and December 31, 2006,the one-month LIBOR was 5.32%.  Thefacility is structured as a master loan repurchase agreement and borrowingsunder the facility are secured by real estate properties owned by the Company(the Company can borrow up to 60% of the value of the properties).  Borrowings may also be secured by the Company’sequity ownership interests in certain of the Company’s consolidated specialpurpose subsidiaries.

 

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The Company is subject tovarious financial and nonfinancial covenants under the secured credit facility,including maintaining a minimum tangible net worth of $633.5 million, a maximumtotal debt to tangible net worth ratio of 4:1, a maximum ratio of total debt tototal assets of 75% and a minimum liquidity requirement of $15 million.  As of June 30, 2007, Spirit Finance was incompliance with its covenants.

**Mortgages and Notes Payable**

The Company’s mortgages and notes payable aresummarized below (dollars in thousands):
| ** **                                                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Net-lease mortgage  notes payable:                                        |       |                    |       |                        |       |
| Series 2005-1,  Class A-1 amortizing mortgage note, 5.05%, due 2020       |       | $                       | 167,513    |                        | $          | 171,724 |   |
| Series 2005-1,  Class A-2 interest-only mortgage note, 5.37%, due 2020    |       | 258,300                 |       | 258,300                     |       |
| Series 2006-1,  Class A amortizing mortgage note, 5.76%, balloon due 2021 |       | 295,053                 |       | 297,821                     |       |
| Series 2007-1,  Class A amortizing mortgage note, 5.74%, balloon due 2022 |       | 349,249                 |       | —                      |       |
| Secured fixed-rate  amortizing mortgage notes payable:                    |       |                    |       |                        |       |
| 8.44% - 9.02%  Notes, effective rates 6.19% - 6.62%, balloons due 2010    |       | 31,947                  |       | 32,201                      |       |
| 5.78% Note,  balloon due 2010                                             |       | 15,216                  |       | 15,314                      |       |
| 5.90% - 6.50%  Notes, balloons due 2012                                   |       | 22,147                  |       | 22,350                      |       |
| 6.25% Note,  balloon due 2013                                             |       | 6,275                   |       | —                      |       |
| 5.40% Notes,  balloons due 2014                                           |       | 34,457                  |       | 34,714                      |       |
| 5.26% - 5.62%  Notes, balloons due 2015                                   |       | 113,352                 |       | 114,177                     |       |
| 5.037% - 8.39%  Notes, balloons due 2016                                  |       | 42,063                  |       | 42,326                      |       |
| 6.59% Notes,  balloons due 2016                                           |       | 608,454                 |       | 611,650                     |       |
| 5.85% Note,  interest only until January 2009, balloon due 2017           |       | 56,250                  |       | 56,250                      |       |
| 6.172% Note,  interest only until May 2009, balloon due 2017              |       | 150,018                 |       | —                      |       |
| Secured fixed-rate  promissory note, 4.61%, paid in January 2007          |       | —                  |       | 9,652                       |       |
| Unsecured fixed-rate  promissory note, 7.00%, due 2021                    |       | 2,136                   |       | 2,178                       |       |
|                                                                      |       | 2,152,430               |       | 1,668,657                   |       |
| Unamortized debt  premium                                                 |       | 1,890                   |       | 2,182                       |       |
| Total mortgages and  notes payable                                        |       | $                       | 2,154,320  |                        | $          | 1,670,839 |   |

 

The Company’s securedfixed-rate mortgage notes payable, which are obligations of its consolidatedspecial purpose subsidiaries as described in Note 1, contain various covenantscustomarily found in mortgage notes, including a limitation on Spirit Finance’sability to incur additional indebtedness on the underlying real estatecollateral.  As of June 30, 2007, SpiritFinance was in compliance with these covenants. The net-lease mortgage notes payable are secured by real estateproperties and mortgage notes receivable with an aggregate investment value of$1.5 billion at June 30, 2007.  At June30, 2007, the fixed-rate mortgage notes payable were secured by real estateproperties with an aggregate investment value of $1.5 billion.

Themortgages and notes payable generally require monthly principal and interestpayments and also require balloon payments totaling $44.8 million due in 2010,$19.5 million due in 2012,$4.8 million due in 2013,$29.8 million due in 2014,$96.6 million due in 2015,$567.2 million due in 2016,$183.5 million due in 2017,$258.3 million due in 2020,$176.2 million due in 2021and $249.7 million due in2022.  In general, the Company’snet-lease mortgage notes payable can be prepaid in whole or in part uponpayment of a yield maintenance premium; the Company’s other mortgages and notespayable

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generallyare not prepayable but can be defeased, after an initial lock-out period, uponthe posting of certain defeasance collateral. The debt premium is amortized to interest expense using the effectiveinterest method over the terms of the related notes. Scheduled debt maturities,including balloon payments, during the remainder of 2007 and the next fiveyears are as follows (dollars in thousands):

| 2007       |   | $         | 14,607    |   |
|------------|--------|-----------|-----------|--------|
| 2008       |   | 30,599    |      |
| 2009       |   | 34,241    |      |
| 2010       |   | 81,521    |      |
| 2011       |   | 38,587    |      |
| 2012       |   | 60,293    |      |
| Thereafter |   | 1,892,582 |      |
|       |   | $         | 2,152,430 |   |

 

The financing costsrelated to the establishment of debt are deferred and amortized to interestexpense using the effective interest method over the term of the related debtinstrument.  Unamortized financing coststotaled $20.9 million at June 30, 2007 and $17.0 million at December31, 2006 and are included in “Deferred costs and other assets, net” in theaccompanying consolidated balance sheets.

**6.DERIVATIVE AND HEDGING ACTIVITIES**

The Company uses interestrate derivative contracts (interest rate swaps) to manage its exposure to changesin interest rates on forecasted debt transactions. Spirit Finance does notenter into derivative contracts for speculative or trading purposes.

In conjunction with theissuance of Series 2007-1 net-lease mortgage notes in March 2007 (see Note 5),the Company settled three forward-starting interest rate swap agreements for anet cash payment to the swap counterparty of $4.5 million becauselong-term rates had fallen since the inception of the hedges.  This amount is being amortized to earnings,using the effective interest method, as an increase in interest expense over aperiod of 15 years.

**7.STOCKHOLDERS’ EQUITY**

In January 2007, theCompany granted 419,219 shares (net of forfeitures) of restricted stock toofficers and employees under its stock-based compensation plan.  In March 2007, the Company issued 6,150,000shares of common stock in a private placement, receiving net proceeds of $79.9million.  Subsequent to June 30,2007 and immediately before the completion of the Merger (see Note 2), all unvestedstock options and restricted common stock, vested in accordance with theCompany’s Amended and Restated 2003 Stock Option and Incentive Plan.

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**8.COMMITMENTS AND CONTINGENCIES**

At June 30, 2007, SpiritFinance had commitments totaling $203 million related to future propertypurchases and future improvements on properties the Company currentlyowns.  Over $170 million of theagreements to purchase property are expected to be completed by the end of thethird quarter of 2007.  The futureimprovements, the majority of which areanticipated to be completed during the remainder of 2007, include coststo be incurred on facilities during which the tenant’s business continues tooperate without interruption and advances for the construction of newfacilities for which operations have not commenced.  In addition, Spirit Finance is contingently liable for $5.7 million of debt of one ofits tenants and is indemnified by that tenant for any payments the Company maybe required to make on the debt.

In connection with theMerger (see Note 2), the Company was served with two lawsuits filed in Arizonaand Maryland, each naming it and its directors and, in the case of the Marylandaction, also naming Macquarie Bank and Kaupthing Bank hf., as defendants.  The complaints alleged, among other things,self-dealing and breach of fiduciary duty against the individual directorsbased on the claim that the consideration for the stockholders in the Mergerwas inadequate.  The complaints sought,among other relief, certification of the lawsuits as class actions on behalf ofall similarly situated stockholders.  OnMay 31, 2007, counsel for the defendants and for the Arizona plaintiff enteredinto a Memorandum of Understanding (the “MOU”) that outlined a proposedsettlement of the Arizona and Maryland actions. The MOU provides that the parties will execute a formal SettlementStipulation to be filed with the Court. The Settlement Stipulation will provide for full and unconditionalreleases, certification of the class for settlement purposes, and additionaldisclosures that were made by Spirit Finance in its proxy statement that wasmailed to stockholders in connection with the meeting of stockholders to voteon the Merger.  The MOU provides for acash payment to the Arizona plaintiff for attorneys’ fees and expenses in anamount to be approved by the Court.  Asof June 30, 2007, the parties had not entered into the SettlementStipulation.  Even if the SettlementStipulation were not entered into, the Company does not believe that any actionarising therefrom would have a material adverse effect on its financialcondition or results of operations.

TheCompany may also be subject to claims or litigation in the ordinary course ofbusiness.  At June 30, 2007, there were no such outstandingclaims against the Company that are expected to have a material adverse effecton the Company’s financial position or results of operations.

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**9. SIGNIFICANT CREDIT AND REVENUE CONCENTRATION**

Spirit Finance’s realestate investments are operated by nearly 150 customers that provide retail,distribution or service activities across various industries.  Rental revenues under a master leaseagreement with one tenant totaled 24% and 25% of Spirit Finance’s totalrevenues during the three and six months ended June 30, 2007,respectively.  The 112 properties thatare operated by this tenant represented approximately 23% of Spirit Finance’stotal assets at June 30, 2007.  Noother individual tenant represented more than 5% of the Company’s totalrevenues for the three and six months ended June 30, 2007 or more than 7% oftotal assets at June 30, 2007.

**10. DISCONTINUED OPERATIONS**

Periodically, SpiritFinance may sell real estate properties it owns.  The Company considers these occasional salesof real estate properties to be a part of its long-term business strategy ofacquiring and holding a diversified real estate investment portfolio;consequently, proceeds from the sales of real estate properties are expected tobe reinvested in additional real estate properties such that cash flows fromongoing operations are not negatively affected by sales of individualproperties.  SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” requires that gains andlosses from any such dispositions of properties and all operations from theseproperties be reclassified as “discontinued operations” in the consolidatedstatements of operations.  As a result ofthis reporting requirement, each time a property is sold, the operations ofsuch property previously reported as part of “income from continuing operations”are reclassified into discontinued operations. This presentation has no impact on net income or cash flow.

The net gains from thereal estate dispositions as well as the current and prior operations have beenreclassified to discontinued operations as summarized below (dollars inthousands):
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Revenues                                     |       | $                                | 1,251      |                           | $          | 2,174 |   | $ | 2,958 |   | $ | 4,606 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Expenses:                                    |       |                             |       |                           |       |   |   |   |   |
| General and administrative                   |       | 31                               |       | 40                             |       | 105 |   | 58 |   |
| Property costs                               |       | 80                               |       | —                         |       | 1,107 |   | — |   |
| Depreciation and amortization                |       | 283                              |       | 376                            |       | 629 |   | 799 |   |
| Interest                                     |       | —                           |       | —                         |       | — |   | 1 |   |
| Total expenses                               |       | 394                              |       | 416                            |       | 1,841 |   | 858 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income from  discontinued operations         |       | 857                              |       | 1,758                          |       | 1,117 |   | 3,748 |   |
| Net gains on  sales of real estate (a)       |       | 1,848                            |       | 1,400                          |       | 2,389 |   | 1,267 |   |
| Total  discontinued operations               |       | $                                | 2,705      |                           | $          | 3,158 |   | $ | 3,506 |   | $ | 5,015 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| (a) Number of  properties sold during period |       | 33                               |       | 17                             |       | 36 |   | 23 |   |

 

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**11.INCOME PER COMMON SHARE**

Areconciliation of the denominators used in the computation of basic and dilutedincome per common share is as follows: 
| ** **                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  shares:                                                                               |       |                             |       |                           |       |   |   |   |   |
| Weighted average outstanding common shares used in  the calculation of basic income per common share    |       | 113,208,242                      |       | 81,944,688                     |       | 110,500,167 |   | 79,194,207 |   |
| Effect of unvested restricted stock                                                                     |       | 215,826                          |       | 78,817                         |       | 184,843 |   | 99,433 |   |
| Effect of stock options (a)                                                                             |       | 386,214                          |       | 159,877                        |       | 342,924 |   | 184,812 |   |
| Weighted average  outstanding common shares used in the calculation of diluted income per  common share |       | 113,810,282                      |       | 82,183,382                     |       | 111,027,934 |   | 79,478,452 |   |

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(a)             Optionsto purchase 3,000 shares of common stock were included in total stock optionsoutstanding at June 30, 2006 but were not included in the computation ofdiluted net income per common share because the effect was not dilutive.

**12. COMPREHENSIVE INCOME**

The reconciliation of netincome to comprehensive income is as follows (dollars in thousands):  
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income as  reported                              |       | $                                | 17,120     |                           | $          | 11,222 |   | $ | 30,662 |   | $ | 19,357 |   |
| Change in net  unrealized losses on cash flow hedges |       | —                           |       | 356                            |       | (87 | ) | 6,233 |   |
| Net cash flow  hedge losses reclassified to earnings |       | 212                              |       | 124                            |       | 334 |   | 347 |   |
| Comprehensive income                                 |       | $                                | 17,332     |                           | $          | 11,702 |   | $ | 30,909 |   | $ | 25,937 |   |

 

**13.SUPPLEMENTAL CASH FLOW INFORMATION**

During the first sixmonths of 2007, Spirit Finance provided $5.9 million of buyer financing relatedto certain real estate property sales and assumed existing debt financing of$6.4 million related to real estate investments acquired.  In addition, during the six months ended June30, 2007, interim seller financing of $9.7 million was repaid with the Company’srestricted cash and escrow deposits.

* * * * * * * * **

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**SpecialtyRetail Shops Holding Corp.****Unaudited Consolidated Financial Statements**

The unauditedconsolidated financial statements of Specialty Retail Shops Holding Corp.required by Regulation S-X to be included in this Item 1 are included inExhibit 99.1 to this report and are incorporated by reference herein.

 

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

Management’s discussionand analysis of financial condition, liquidity and capital resources andresults of operations are more clearly understood when read in conjunction withthe accompanying unaudited consolidated financial statements as of June 30,2007 and our audited financial statements included in our Annual Report on Form10-K for the year ended December 31, 2006. Undue reliance should not be placedupon historical financial statements since they are not indicative of expectedresults of operations or financial condition for any future periods.

**Overview**

Spirit FinanceCorporation is a self-managed and self-advised real estate investment trust, orREIT, formed as a Maryland corporation on August 14, 2003. Our objective is toacquire single tenant, operationally essential real estate throughout theUnited States to be leased on a long-term, triple-net basis to retail,distribution and service-oriented companies. Single tenant, operationallyessential real estate consists of properties that are generally free-standing,commercial real estate facilities that contain our customers’ retail,distribution or service activities that are vital to the generation of theirsales and profits. A triple-net lease generally requires the tenant to pay alloperating and maintenance costs, insurance premiums and real estate taxes onthe property. We may also selectively originate or acquire long-term,commercial mortgage loans that are integral to our strategy of providing acomplete solution of financing products to our customers.  Since we began purchasing real estate assetsin December 2003, we have completed over $3.4 billion in real estateacquisitions and mortgage loan investments.

As of June 30, 2007, ourgross investment in real estate properties and loans totaled nearly$3.2 billion and represented 1,133 owned or financed propertiesgeographically diversified across 45 states. Only two states, Texas (12%) and Wisconsin (11%), accounted for 10% ormore of the total dollar value of our real estate and loan portfolio.  Of our total investment portfolio as of June30, 2007, $3.1 billion, or 97%, represented the gross cost of real estateand related lease intangibles that we own and the remaining $82.1 million, or3%, represented mortgage and other loans receivable.  Our properties are leased or financed tonearly 150 customers operating in various industries.  The three largest industries in which ourcustomers operated at June 30, 2007 as a percentage of our total investmentportfolio were the general and discount retail industry (26%), the restaurantindustry (22%) and the specialty retail industry (8%).  As of June 30, 2007, our 10 largest customersas a percentage of the total investment portfolio were: ShopKo Stores OperatingCo., LLC; 84 Properties, LLC; Pamida Stores Operating Co., LLC; CarmikeCinemas, Inc. (NASDAQ: CKEC); National Envelope Corporation; Casual Male RetailGroup, Inc. (NASDAQ: CMRG); Dickinson Theatres, Inc.; CarMax, Inc. (NYSE: KMX);United Supermarkets, Ltd.; and Main Event Entertainment, LP, the operator ofMain Event family entertainment centers. Together, these customers accounted for 46% of our total investmentportfolio at June 30, 2007.  ShopKo StoresOperating Co., LLC is the largest individual tenant at 23% of theportfolio.  No other individual tenantrepresents more than 7% of the total investment portfolio.

We generate our revenueand cash flow primarily by leasing our real estate properties to our customersand from interest income on our portfolio of loans receivable. Our ability togenerate

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positive cash flow willdepend heavily on the difference between the income earned on our assets andthe interest expense incurred on our borrowings.  The cash we generate from our long-term leasesis expected to increase over the term of the leases because they generallycontain rent escalation provisions; however, the amount of any future rentincreases is variable and unpredictable since the majority of our escalationprovisions are indexed to future changes in the Consumer Price Index (“CPI”).  We finance our real estate properties withlong-term, fixed-rate debt which provides for a fixed monthly debtpayment.  As of June 30, 2007, 96% of ourinvestment portfolio was match-funded with long-term, fixed-rate debt.  As a result, we expect to realize a growingstream of net cash flows over the term of the leases.

We expect to grow throughcontinuing our business strategy of acquiring single tenant, operationallyessential real estate principally through sale-leaseback transactions.  Our ability to realize our plan of continuedgrowth is dependent on achieving a substantial volume of acquisitions atattractive yields without compromising our underwriting criteria and ourability to effectively finance those acquisitions to meet our targetedyields.  The current environment for netlease real estate acquisitions continues to be highly competitive, withsubstantial amounts of capital competing for the same real estate investments,which has lead to an increase in the valuation of real estate investments.  This competitive environment could limit boththe dollar volume of properties we acquire and the yield on those acquisitions.  We continue to maintain our strictunderwriting and review of the underlying property fundamentals and we maydelay or decline opportunities if we feel the financial returns do not warrantthe capital risk.  In addition, thetiming of completing property acquisitions, which is dependent on thecompletion of diligence and other factors that may not be under our control,may vary significantly from quarter to quarter. In response to thesechallenges, we are committed to seeking numerous potential investmentopportunities through our full-time acquisitions staff and through our othersourcing relationships. We continue to seek opportunities to combine our costof capital and operational structure with efficient leverage strategies todeliver competitively priced lease products to our customers.

**MergerTransaction**

On July 2, 2007, theholders of a majority of the outstanding shares of common stock of SpiritFinance approved the merger (the “Merger”) of Spirit Finance with RedfordMerger Co. (“MergerCo”) pursuant to the agreement and plan of merger, datedMarch 12, 2007, among Redford Holdco, LLC (“Redford”), MergerCo and SpiritFinance.  On August 1, 2007, the Mergerwas consummated and MergerCo was merged with and into the Company, with SpiritFinance being the surviving company in the Merger.  As a result of the Merger, the Company is nowa subsidiary of Redford.  Redford isowned by a consortium of investors, including an affiliate of Macquarie BankLimited, Kaupthing Bank hf. and other independent equity participants.  The Company will continue to do businessunder the name “Spirit Finance Corporation” but its shares of common stock areno longer listed for trading on the New York Stock Exchange.

In connection with theMerger, on August 1, 2007, MergerCo entered into an $850 million credit agreement(the “Credit Agreement”) with Redford, other guarantor parties listed in theCredit Agreement, the lenders, and Credit Suisse, Cayman Islands Branch, asadministrative and collateral agent.  Immediately following the closing ofthe Merger, the

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Company assumed allobligations of MergerCo under the Credit Agreement.  The proceeds from theCredit Agreement were used to partially fund the Merger, and the Company,through its assumption of the Credit Agreement, has agreed to secure all of itsobligations under the Credit Agreement by granting to the collateral agent, forthe benefit of the secured parties, a first priority security interest invarious specified collateral of the Company and its subsidiaries.

As part of the Merger,each outstanding share of common stock of the Company was converted into theright to receive $14.50 in cash.  Aprorated dividend for the period beginning July 1, 2007 through the effectivedate of the Merger was declared in connection with completion of theMerger.  Immediately before thecompletion of the Merger, certain members of the Company’s management exchangedshares of Spirit Finance common stock they owned for units of Redford. Inaddition, immediately before completion of the Merger, all unvested options toacquire shares of the Company’s common stock granted to employees vested infull and all holders of unexercised options received a cash payment equal to$14.50, less the exercise price of the option, multiplied by the number ofshares of common stock covered by the option.

All costs related to theMerger transaction are expensed in the period incurred.  Merger costs totaled approximately $1.5million for the quarter and $3.1 million for the six months ended June 30,2007.

**Liquidityand Capital Resources**

Our real estateinvestments have generally been acquired using a combination of cash andborrowings under our secured credit facilities or mortgage notes payable. As ofJune 30, 2007, we had a maximum aggregate borrowing capacity of$400 million under a secured credit facility.  We intend to fund future real estateinvestments initially with borrowings on short-term credit facilities and thenimplement our long-term financing strategies by raising funds through theissuance of debt and additional equity capital.

During the second quarterof 2007, we acquired or financed 72 single tenant commercial real estateproperties through various transactions totaling over $270 million using acombination of cash, proceeds from new borrowings and the March 2007 privateplacement of 6,150,000 shares of our common stock.  This brought our acquisitions for the firstsix months of 2007 to 137 properties totaling over $428 million.  We also used net cash proceeds from the salesof 36 real estate properties, totaling $82.7 million for the six monthsended June 30, 2007, to acquire new properties. At June 30, 2007, we had commitments totaling $203 million related tofuture property purchases and future improvements on properties we currentlyown.  Over $170 million of the agreementsto purchase property are expected to be completed by the end of the thirdquarter of 2007.  The futureimprovements, the majority of which areanticipated to be completed during the remainder of 2007, include coststo be incurred on facilities during which the tenant’s business continues tooperate without interruption and advances for the construction of newfacilities for which operations have not commenced.  In addition to our commitments to acquirereal estate, we maintain a pipeline of potential investments under review ofgreater than $2 billion.  Weconsider investments as under review when we have signed a confidentialityagreement, we have exchanged financial information, or we or our advisors arein current and active negotiations. Investments under review are generally subject to significant change,and the

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timing of completing anysuch transactions may vary significantly from quarter to quarter.  After further diligence, we may decide not topursue any or all of these transactions, we may not be the successful bidder onall of the transactions we pursue, and there is no assurance that we willultimately complete any of the real estate acquisitions.  We continue to maintain disciplinedunderwriting criteria for new investments while also closely monitoring theongoing credit quality of our existing investment portfolio.

We generate our revenueand cash flow primarily by leasing our real estate properties to our customers.We generally offer long-term leases that provide for payments of base rent witheither scheduled increases, contingent increases based on future changes in theCPI and/or contingent rent based on a percentage of the lessee’s grosssales.  At June 30, 2007, our weightedaverage noncancelable remaining initial lease term was approximately 15 years,and our leases generally provide for one or more renewal options.  Less than 2% of the leases in our real estateinvestment portfolio at June 30, 2007 will expire prior to 2012.  Our leases are generally triple-net, whichprovides that the lessee is responsible for the payment of all propertyoperating expenses, such as insurance, real estate taxes and repairs andmaintenance.  Since our tenants generallypay the property operating and maintenance costs, we do not believe we willincur significant capital or operating expenditures on our properties.

Our operating expensesinclude interest expense on our debt and the general and administrative costsof acquiring and managing our real estate investment portfolio, such as thecompensation and benefit costs of our employees, professional fees such aslegal and portfolio servicing costs and office expenses such as rent and otheroffice operating expenses.  Noncash itemsinclude straight-line rental revenue, depreciation expense on the buildings andimprovements in our real estate portfolio, real estate impairment charges,stock-based compensation (included in general and administrative expenses), andthe amortization of deferred financing costs and net losses on our settledinterest rate swaps (included in interest expense).  After payment of expenses, our cash flow fromoperating activities totaled $53.2 million for the six months ended June30, 2007 as compared to $42.0 million for the same period in 2006 which isreflective of the growth in our investment portfolio.

We intend to continue tomake regular quarterly distributions to our stockholders so that we distributeeach year all or substantially all of our REIT taxable income to minimize ourexposure to corporate level federal income tax and excise tax on ourearnings.  The distributions we pay mayinclude a return of capital.  During thesix months ended June 30, 2007, we declared dividends of $0.44 per share,totaling $50.3 million.  Our ability topay distributions will depend on, among other things, our actual results ofoperations, which depend primarily on our receipt of payments from our leasesand loans with respect to our real estate investments.

In order to continue toachieve significant growth in revenues and net income, we will need to makesubstantial real estate acquisitions, which will in turn require that we obtainsignificant additional debt and equity funding beyond our currently committedexternal sources of liquidity.  As notedearlier, in March 2007, Redford purchased 6,150,000 shares of our common stockat $12.99 per share in a private placement. We used the proceeds of this private placement to fund real estateacquisitions in the ordinary course of business.

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We generally userevolving short-term credit facilities to partially fund the initial purchaseof real estate pending the issuance of long-term, fixed-rate debt.  No amounts were outstanding under our $400million revolving short-term credit facility at June 30, 2007.  The facility is structured as a master loanrepurchase agreement and borrowings under the facility are secured by theunderlying real estate properties we pledge (we can borrow up to 60% of thevalue of the properties) and may also be secured by our equity ownershipinterests in certain of our consolidated special purpose subsidiaries.  Borrowings under the facility require monthlypayments of interest indexed to the one-month London Interbank Offered Rate(LIBOR) plus an additional amount ranging from 1.25% to 3.25%, depending on theamount of outstanding borrowings.  AtJune 30, 2007, the one-month LIBOR was 5.32%. As described further in the Notes to Consolidated Financial Statementsand Quantitative and Qualitative Disclosures About Market Risk, we use interestrate swaps to manage our exposure to changes in interest rates until we can putinto place our long-term debt arrangements.

In March 2007, we issued,through a private placement, $350.3 million aggregate principal amount of 5.74%amortizing net-lease mortgage notes with a balloon payment due at maturity in2022.  We used a portion of the proceedsto repay balances outstanding under our secured credit facility and a portionof the proceeds were used to provide funds for real estate acquisitions.  This was the third issuance under our masterfunding debt structure which was created in 2005.  At June 30, 2007, the aggregate balance ofthe net-lease mortgage notes totaled $1.1 billion and was secured by a collateralpool in excess of $1.5 billion in real estate assets.  The notes may be prepaid at any time, subjectto a yield maintenance prepayment premium. The notes also permit the substitution of real estate collateral fromtime to time subject to certain conditions and limits. In addition, the notestructure allows for the contribution of additional properties to thecollateral pool and the issuance of additional series of notes secured by theincreased collateral pool.

At June 30, 2007, thetotal carrying amount of our fixed-rate debt, including the net-lease mortgagenotes described above, was $2.2 billion. Real estate investments with an aggregate investment value of$3.0 billion were pledged as collateral for our total fixed-rate debt.

In conjunction with theMarch 2007 issuance of the net-lease mortgage notes, we settled threeforward-starting interest rate swap agreements for a net cash payment to theswap counterparty in the amount of $4.5 million because long-term rates hadfallen since the inception of the hedges. This amount is being amortized to earnings, using the effective interestmethod, as an increase in interest expense over a period of 15 years.

Over the long-term, weexpect lease rates on new leases to fluctuate commensurate with changes in long-terminterest rates.  However, we mayexperience periods where long-term interest rates on future borrowings risefaster than lease rates on our existing portfolio of real estate investments,which may reduce our cash flow. Therefore, in order to limit the effects of changes in interest rates onour operations, we seek to match-fund our long-term, fixed-rate assets withlong-term, fixed-rate liabilities.  AtJune 30, 2007, 96% of our investment portfolio was match-funded with long-termdebt.

We are subject to variouscustomary operating and financial covenants under our mortgage notes payableand our secured credit facility, including a limitation on our ability to incuradditional indebtedness on the underlying secured real estate.  Our secured credit facility also includes,

 

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among other requirements,a minimum liquidity requirement of $15 million, a maximum total debt totangible net worth ratio of 4:1, a maximum ratio of total debt to total assetsof 75% and a minimum tangible net worth requirement of $633.5 million.  As of June 30, 2007, we were in compliancewith all of our debt covenants and requirements.

In the short-term, webelieve that cash provided by our operating activities and the liquidityavailable on our secured credit facility will be sufficient to meet our liquidityneeds for the operating and financing obligations and commitments of ourexisting real estate investment portfolio. On a long-term basis, we intend to use a combination of debt andadditional equity capital to accomplish our goal of acquiring real estate.  We intend to use substantially all of ourproperties to secure our borrowings under our various debt financings.

**Results of Operations**

Since we began purchasingreal estate assets in December 2003, we have completed over $3.4 billionin real estate acquisitions and mortgage loan investments.  The increase in net income, as summarized inthe following table, is reflective of the growth in our rental revenues as aresult of the increase in the size of our investment portfolio.
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net income (in  thousands)                                              |       | $                                | 17,120     |                           | $          | 11,222 |   | $ | 30,662 |   | $ | 19,357 |   |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net income per diluted  common share                                    |       | $                                | 0.15       |                           | $          | 0.14 |   | $ | 0.28 |   | $ | 0.24 |   |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Weighted average outstanding common shares — diluted (in millions) |       | 113.8                            |       | 82.2                           |       | 111.0 |   | 79.5 |   |

 

The weighted averagediluted common shares outstanding increased by approximately 32 million sharesfor both the three and six months ended June 30, 2007 as compared to the sameperiods in 2006 primarily as a result of stock offerings completed during 2006and 2007.

Periodically, we may sellreal estate properties we own.  Weconsider these occasional sales of real estate properties to be an integralpart of our long-term business strategy in acquiring a diversified real estateinvestment portfolio; consequently, proceeds from the sales of real estateproperties are expected to be reinvested in additional properties such thatcash flows from ongoing operations are not negatively affected by sales ofindividual properties.  In addition, weconsider the combined effect of income from continuing operations anddiscontinued operations in our evaluation of our ability to pay dividends.  Each time properties are sold, currentaccounting principles require that gains and losses from any such dispositionsand all operations from the properties previously reported as part of “incomefrom continuing operations” be reclassified to “discontinued operations.”  This reclassification has no impact on netincome or cash flows.

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Income from continuingoperations and discontinued operations and the related per share amountsassociated with all properties sold subsequent to January 1, 2006 are presentedin the table below (dollars in thousands, except per share data):
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income from  continuing operations           |       | $                                | 14,415     |                           | $          | 8,064 |   | $ | 27,156 |   | $ | 14,342 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Discontinued  operations:                    |       |                             |       |                           |       |   |   |   |   |
| Income from discontinued operations          |       | 857                              |       | 1,758                          |       | 1,117 |   | 3,748 |   |
| Net gains on sales of real estate (a)        |       | 1,848                            |       | 1,400                          |       | 2,389 |   | 1,267 |   |
| Total  discontinued operations               |       | 2,705                            |       | 3,158                          |       | 3,506 |   | 5,015 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net income                                   |       | $                                | 17,120     |                           | $          | 11,222 |   | $ | 30,662 |   | $ | 19,357 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income per  diluted common share:            |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                        |       | $                                | 0.13       |                           | $          | 0.10 |   | $ | 0.25 |   | $ | 0.18 |   |
| Discontinued operations                      |       | 0.02                             |       | 0.04                           |       | 0.03 |   | 0.06 |   |
| Net income                                   |       | $                                | 0.15       |                           | $          | 0.14 |   | $ | 0.28 |   | $ | 0.24 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| (a) Number of  properties sold during period |       | 33                               |       | 17                             |       | 36 |   | 23 |   |

 

The following discussion includes the results of bothcontinuing and discontinued operations as summarized in the following table(dollars in thousands):
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **Continuing  Operations**                          | ** ** | **Discontinued  Operations** | ** ** | **Total  Operations** | ** ** |
| ** **                          | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                            |       | $                                                   | 69,542     |   | $ | 41,177 |   | $ | 1,251 |   | $ | 2,174 |   | $ | 70,793 |   | $ | 43,351 |   |
| Expenses:                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses |       | 4,457                                               |       | 3,956 |   | 31 |   | 40 |   | 4,488 |   | 3,996 |   |
| Property costs                      |       | 390                                                 |       | 99 |   | 80 |   | — |   | 470 |   | 99 |   |
| Merger costs                        |       | 1,524                                               |       | — |   | — |   | — |   | 1,524 |   | — |   |
| Depreciation and amortization       |       | 15,717                                              |       | 9,488 |   | 283 |   | 376 |   | 16,000 |   | 9,864 |   |
| Interest                            |       | 33,039                                              |       | 19,570 |   | — |   | — |   | 33,039 |   | 19,570 |   |
|                                     |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **Continuing  Operations**                        | ** ** | **Discontinued  Operations** | ** ** | **Total  Operations** | ** ** |
| ** **                          | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                            |       | $                                                 | 132,696    |   | $ | 73,245 |   | $ | 2,958 |   | $ | 4,606 |   | $ | 135,654 |   | $ | 77,851 |   |
| Expenses:                           |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses |       | 9,157                                             |       | 8,158 |   | 105 |   | 58 |   | 9,262 |   | 8,216 |   |
| Property costs                      |       | 863                                               |       | 162 |   | 1,107 |   | — |   | 1,970 |   | 162 |   |
| Merger costs                        |       | 3,072                                             |       | — |   | — |   | — |   | 3,072 |   | — |   |
| Depreciation and amortization       |       | 30,278                                            |       | 17,317 |   | 629 |   | 799 |   | 30,907 |   | 18,116 |   |
| Interest                            |       | 62,170                                            |       | 33,266 |   | — |   | 1 |   | 62,170 |   | 33,267 |   |
|                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Revenues***

Total revenues increasedto $70.8 million for the second quarter of 2007 from $43.4 millionfor the second quarter of 2006.  Totalrevenues for the first six months of 2007 rose to $135.7 million from$77.9 million for the comparable period in 2006.  The increase in revenues is the result of thegrowth in our investment portfolio primarily due to property acquisitions madeover the past year.

Approximately 95% of therevenues we generated during 2007 were rental revenues from real estateproperties we own and lease to our customers. At June 30, 2007, substantially all of our properties were occupied andcurrent in their monthly lease and loan payments.  Rental revenues from a master lease agreementwith ShopKo Stores Operating Co., LLC totaled 24% during the quarter and 25% ofour total revenues during the six months ended June 30, 2007.  No other individual tenant represented morethan 5% of total revenues during both the three and six months ended June 30,2007.

Rental revenues haveincreased in relation to the growth in our real estate portfolio.  Rental revenues, including rental revenuesreclassified as discontinued operations, and the related weighted average realestate investments are presented in the following table (dollars in thousands):
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                        | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Rental revenues,  excluding the adjustment for straight-line rent |       | $                                | 66,022     |                           | $          | 40,009 |   | $ | 127,887 |   | $ | 72,013 |   |
| Straight-line  rent, net                                          |       | 721                              |       | 400                            |       | 1,231 |   | 759 |   |
| Total rental  revenues                                            |       | $                                | 66,743     |                           | $          | 40,409 |   | $ | 129,118 |   | $ | 72,772 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Weighted average real  estate investments                         |       | $                                | 3,035,748  |                           | $          | 1,850,171 |   | $ | 2,940,045 |   | $ | 1,672,583 |   |

 

***Expenses***

General andadministrative expenses include employee-related expenses, professional fees,portfolio servicing costs, and office and other expenses.  As our real estate portfolio grows, ourgeneral and administrative expenses are expected to continue to increase;however, general and administrative expenses calculated as a percent of averagegross investments are expected to

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continue to decline as wecontinue to manage our expense base and benefit from our scalable,cost-effective operation. Employee-related expenses have increased primarily as a result of ourreal estate investment activity as we increased our work force from 38 at June30, 2006 to 41 at June 30, 2007.  Thelarge increase in the number of properties in our portfolio has also resultedin increased portfolio servicing and related costs, which costs will continueto grow proportionately with the growth in our portfolio.

Property costs representcosts associated with the real estate properties we own.  Our leases are generally triple-net;therefore, the lessee is responsible for the payment of all property operatingexpenses.  Since our tenants generallypay the property operating and maintenance costs, we do not, and do not expectto, incur significant capital or operating expenditures on our properties.  During the first quarter of 2007, werecognized impairment charges totaling $1.1 million on certain of ourlong-lived real estate investment assets for which we determined, in accordancewith our policy, that the carrying amount of the asset may not berecoverable.  Property costs for the sixmonths ended June 30, 2007, also include costs associated with ground leaseobligations where we lease certain land from third-party land owners; however,this expense is offset by rental revenues from the tenants who are leasing theland and building from us.

Depreciation andamortization expense relates primarily to commercial buildings and improvementswe own and the related lease intangibles. Depreciation and amortization expensewas $16.0 million for the quarter and $30.9 million for the six monthsended June 30, 2007 as compared to $9.9 million and $18.1 million,respectively, for the same periods in 2006. The increase between periods was the result of the addition ofproperties to our real estate investment portfolio.  Depreciation and amortization expense isexpected to increase in future periods as we continue to make investments inreal estate.

The increase in interestexpense during the second quarter and for the first six months of 2007 isprimarily attributable to higher weighted average outstanding debt resultingfrom new borrowings used to grow our investment portfolio.  The following table summarizes our interestexpense and related borrowings (dollars in thousands):
| ** **                                                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                                                                          |       | $                                | 31,419     |                           | $          | 18,043 |   | $ | 59,405 |   | $ | 30,401 |   |
| Amortization of  deferred financing costs and net losses on settled interest rate swaps and  debt insurer premium expense |       | 1,620                            |       | 1,527                          |       | 2,765 |   | 2,866 |   |
| Total interest  expense                                                                                                   |       | $                                | 33,039     |                           | $          | 19,570 |   | $ | 62,170 |   | $ | 33,267 |   |
|                                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Weighted average debt  outstanding                                                                                        |       | $                                | 2,114,962  |                           | $          | 1,246,086 |   | $ | 1,991,512 |   | $ | 1,072,472 |   |

** **

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** **

**Reconciliation of Non-GAAPFinancial Measures**

We use certain measuresof historical or future financial performance that are different from measurescalculated and presented in accordance with U.S. generally accepted accountingprinciples (“GAAP”).  One such non-GAAPfinancial measure is funds from operations (“FFO”). We use FFO as a measure ofour performance as a REIT because we believe this measure provides investorswith an understanding of our operating performance, cash flows andprofitability.

We calculate FFOconsistent with the definition used by the National Association of Real EstateInvestment Trusts (“NAREIT”), adopted to promote an industry-wide standardmeasure of REIT operating performance. We use FFO as a measure of performance to adjust for certain non-cashexpenses such as depreciation and amortization because accounting for realestate assets under GAAP implicitly assumes that the value of real estateassets diminishes predictably over time. We disclose FFO to facilitatecomparisons between Spirit Finance and other REITs, although other REITs maynot calculate FFO in accordance with the NAREIT definition and, accordingly,our FFO may not be directly comparable to FFO reported by other REITs.

FFO should not beconsidered an alternative to net income determined in accordance with GAAP as ameasure of profitability, nor should it be considered an equivalent to cashflows provided by operating activities determined in accordance with GAAP as ameasure of liquidity. Spirit Finance’s statements of operations and cash flowsinclude disclosures of interest expense, capital expenditures and itemsexcluded from the calculation of FFO, all of which should be considered whenevaluating our performance.

A reconciliation of netincome calculated in accordance with GAAP to FFO is presented in the followingtable (dollars in thousands):
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                        | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (a)                                    |       | $                                | 17,120     |                           | $          | 11,222 |   | $ | 30,662 |   | $ | 19,357 |   |
| Portfolio  depreciation and amortization expense: |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                             |       | 15,666                           |       | 9,445                          |       | 30,180 |   | 17,232 |   |
| Discontinued operations                           |       | 283                              |       | 376                            |       | 629 |   | 799 |   |
| Net gains on  sales of real estate (b)            |       | (1,377                           | )          | (1,264                         | )          | (1,918 | ) | (1,131 | ) |
| FFO (a)(c)                                        |       | $                                | 31,692     |                           | $          | 19,779 |   | $ | 59,553 |   | $ | 36,257 |   |

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(a)             Netincome and FFO are after deducting $1.5 million, or $0.01 per diluted commonshare, and $3.1 million, or $0.03 per diluted common share, of merger relatedcosts for the three and six months ended June 30, 2007, respectively.

(b)            Excludesthe gain on sale related to development properties totaling $471,000 and$136,000, net of tax, for both the three and six months ended June 30, 2007 and2006, respectively.

(c)             FFOincludes the adjustment between scheduled rents and rental revenue recognizedon a straight-line basis ($721,000 and $400,000 for the three months ended June30, 2007 and 2006, respectively, and $1.2 million and $759,000 for the sixmonths ended June 30, 2007 and 2006, respectively).

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**Forward-Looking Statements**

Someof the statements in this report constitute ­forward-looking statements.Forward-looking statements relate to expectations, beliefs, projections,future plans and strategies, anticipated events or trends and similar expressionsconcerning matters that are not historical facts. In some cases, forward-lookingstatements can be identified by terms such as “anticipate,” “believe,” “could,”“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will”and “would” or the negative of these terms or other similar terminology.

Theforward-looking statements are based on our beliefs, assumptions andexpectations of our future performance, taking into account all informationcurrently available to us. These beliefs, assumptions and expectations canchange as a result of many possible events or factors, not all of which areknown to us or are within our control. If a change occurs, our business,financial condition, liquidity and results of operations may vary materially fromthose expressed in our forward-looking statements. The following are someof the factors that could cause actual results to vary from our forward-lookingstatements:

·                  changes in our industry,interest rates or general economic conditions;

·                  general volatility of thecapital markets and the market price of our common stock;

·                  changes in our businessstrategy or development plans;

·                  availability and terms ofadditional capital;

·                  failure to maintain ourstatus as a REIT;

·                  availability of suitableproperties to acquire at favorable prices and our ability to rent thoseproperties at favorable rates;

·                  timing of acquisitions;

·                  defaults by tenants on ourleases;

·                  our ability to renewleases with tenants at the expiration of their lease term or otherwise re-leasethose properties to suitable new tenants;

·                  availability of qualifiedpersonnel and our ability to retain our key management personnel;

·                  changes in, or the failureor inability to comply with, government regulation;

·                  the extent and nature ofour competition; and

·                  other factors referenced in our annual reporton Form 10-K, including those set forth under the captions “Risk Factors” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andother documents and reports we file with the SEC.

Theseforward-looking statements speak only as of the date of this report. Weexpressly disclaim any obligation or undertaking to disseminate any updates orrevisions to any forward-looking statement contained in this report to reflectany change in our expectations with regard to the statements or any change inevents, conditions or circumstances on which any such statement is based.

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

Spirit Finance is exposed to variousfinancial market risks, especially interest rate risk. Interest rates andcredit risk influence our performance more so than does inflation. Changes ininterest rates do not necessarily correlate with inflation rates or changes ininflation rates.  We generally offerleases that provide for payments of base rent with either scheduled increases,increases based on changes in the CPI and/or contingent rent based on apercentage of the lessee’s gross sales to help mitigate the effect ofinflation.  Because the properties in ourportfolio are generally leased to tenants under triple-net leases where thetenant is responsible for property costs and expenses, this tends to reduce ourexposure to rising property expenses due to inflation.

Interestrates are highly sensitive to many factors, including governmental monetarypolicies, domestic and global economic and political conditions, and otherfactors which are beyond our control. Our operating results will depend heavilyon the difference between the income earned on our assets and the interestexpense incurred on our borrowings. Decreases in interest rates may lead toadditional competition for the acquisition of real estate due to a reduction indesirable alternate income-producing investments. Increased competition for theacquisition of real estate may lead to a decrease in the yields on real estatewe have targeted for acquisition. In such circumstances, if we are not able tooffset the decrease in yields by obtaining lower interest costs on our borrowings,our results of operations will be adversely affected. Significant increases ininterest rates may also have an adverse impact on our earnings if we are unableto acquire real estate with rental rates high enough to offset the increase ininterest rates on our borrowings.

In a rising interest rateenvironment and/or economic downturn, defaults may increase and result incredit losses which may adversely affect our liquidity and operating results;through June 30, 2007, we have not experienced any significant creditlosses.  In a decreasing interest rateenvironment, borrowers are generally more likely to prepay their loans in orderto obtain financing at lower interest rates; however, our investments inmortgage loans receivable are subject to significant restrictions on prepaymentin the form of yield maintenance provisions or other prepayment penalties whichprovide us with a certain level of yield protection in a decreasing interestrate environment.

Our interest rate riskmanagement policy seeks to limit the effects of changes in interest rates onour operations.  One objective of ourinterest rate risk management policy is to match fund fixed-rate assets withfixed-rate liabilities and variable-rate assets with variable-rate liabilities.As part of this strategy, we have used and may continue to use derivativecontracts, such as forward-starting interest rate swaps, to manage our interestrate risk.  We do not enter intoderivative contracts for speculative or trading purposes. We generally intend toutilize derivative instruments to hedge interest rate risk on our liabilitiesand not use derivatives for other purposes, such as hedging asset-relatedrisks, as such hedging transactions may generate income which is not qualifiedincome for purposes of maintaining our REIT status. Our hedging strategy ismonitored by the audit committee of our board of directors.

At June 30, 2007, ourfixed-rate debt totaled $2.2 billion. Using a discounted cash flow analysis based on estimates of the amountand timing of future cash flows, market rates and credit spreads, the estimatedfair value of our fixed-rate debt was approximately $43.6 million below itscarrying amount at June 30, 2007.  Ourmortgage and other loans receivable are also fixed-rate

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instruments.  At June 30, 2007, our mortgage and otherloans receivable totaled $82.1 million. Using a discounted cash flow analysis, the estimated fair value of ourfixed-rate loans receivable was below its carrying amount by approximately $1.3million at June 30, 2007.  It is ourintent to hold our fixed-rate loans receivable and our fixed-rate mortgages andnotes payable to maturity; accordingly, changes in market interest rates impactthe fair value of these financial instruments but have no impact on interestrecognized or cash flows.

We use variable-rate debtto fund acquisitions on a short-term basis until our long-term debt strategiescan be implemented.  During the sixmonths ended June 30, 2007, the weighted average outstanding balance of ourvariable-rate debt, which was based on spreads over one-month LIBOR (LIBOR wasrelatively constant during the period), was $96.8 million.  Excluding the amortization of deferredfinancing costs, this variable rate indebtedness had a weighted averageinterest rate of 6.7%.  Had the weightedaverage interest rate been 100 basis points higher (lower) during the first sixmonths of 2007, our net income for the six months ended June 30, 2007 wouldhave been reduced (increased) by approximately $487,000.  This amount was determined by considering theimpact of a hypothetical interest rate change on our average variable-rateborrowings outstanding during the first six months of 2007 and assumes no otherchanges in our capital structure.

As of December 31, 2006,Spirit Finance had three outstanding forward-starting interest rate swapagreements with an aggregate notional amount of $190.0 million.  In March 2007, the anticipated long-term debtwas issued, and the interest rate swaps were settled for a net cash payment tothe swap counterparty because long-term rates had fallen since the inception ofthe swaps.  The fair value of theinterest rate swaps at the time of settlement, totaling $4.5 million, wasrecorded in accumulated other comprehensive income and is being amortized toearnings as an increase in interest expense over a period of 15 years.

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**Item4.  Controls and Procedures**

We have adopted and maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports under the Securities Exchange Act of 1934 (the “ExchangeAct”) is recorded, processed, summarized and reported within the time periodsrequired under the Securities and Exchange Commission’s rules and forms andthat the information is gathered and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate, toallow for timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

Asrequired by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation,under the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective atthe reasonable assurance level.

Nochange in our internal control over financial reporting occurred during ourmost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

**Item1.  Legal Proceedings**

Inconnection with the Merger, the Company was served with two lawsuits filed inArizona and Maryland, each naming it and its directors and, in the case of theMaryland action, also naming Macquarie Bank and Kaupthing Bank hf., as defendants.  The complaints alleged, among otherthings, self-dealing and breach of fiduciary duty against the individualdirectors based on the claim that the consideration for the stockholders in theMerger was inadequate.  The complaintssought, among other relief, certification of the lawsuits as class actions onbehalf of all similarly situated stockholders. Counsel for the defendants and the Arizona plaintiff have entered into aMemorandum of Understanding (the “MOU”) that outlined a proposed settlement ofthe Arizona and Maryland actions.  TheMOU provides that the parties will execute a formal Settlement Stipulation tobe filed with the Court.  The SettlementStipulation will provide for full and unconditional releases, certification ofthe class for settlement purposes, and additional disclosures that were made bySpirit Finance in its proxy statement that was mailed to stockholders inconnection with the meeting of stockholders to vote on the Merger.  The MOU provides for a cash payment to theArizona plaintiff for attorneys’ fees and expenses in an amount to be approvedby the Court.  As of June 30, 2007, theparties had not entered into the Settlement Stipulation.  Even if the Settlement Stipulation were notentered into, the Company does not believe that any action arising therefromwould have a material adverse effect on its financial condition or results ofoperations.

We are not a party to any other material litigation or legal proceedingswhich, in the opinion of management, individually or in the aggregate, wouldhave a material adverse effect on our results of operations or financialcondition.

**Item1A.  Risk Factors**

Our Annual Reporton Form 10-K for the fiscal year ended December 31, 2006 and our Quarterly Reporton Form 10-Q for the fiscal quarter ended March 31, 2007 include a discussionof factors that could affect our business and results of operations under thecaption “Item 1A. Risk Factors.”  These factors, taken together, set forthimportant information that may cause our actual results of operations in futureperiods to differ materially from those currently expected or discussed inforward-looking statements contained in this report relating to our financialresults, operations and business prospects. Except as set forth below and in our Form 10-Q for the fiscal quarterended March 31, 2007, there have been no material changes to the risk factorsset forth in our Form 10-K for the fiscal year ended December 31, 2006.

***Increased operational risk due to our highly leveragedposition.***In connection with the Merger on August 1, 2007, we became the borrowerunder an $850 million credit agreement which has increased our leverage positionand debt service requirements. If we are unable to make our debt payments asrequired under the credit agreement or any of our other borrowings, a lendercould foreclose on the property or properties securing its debt. This couldcause us to lose part or all of our investment and could have a materialadverse affect on our operations, which in turn could cause distributions toour stockholders to be reduced.

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**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

None.

**Item3.  Defaults Upon Senior Securities**

Not Applicable.

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

The Annual Meeting of Stockholders of Spirit FinanceCorporation was held on July 2, 2007. The following tables set forth each of the proposals that thestockholders were asked to vote upon and the results of the meeting:

1.               A proposal to approve the merger of RedfordMerger Co. with Spirit Finance Corporation on substantially the terms andconditions set forth in the Agreement and Plan of Merger dated as of March 12,2007, by and among Redford Holdco, LLC, Redford Merger Co. and Spirit Finance.

| FOR             |   | 80,500,618 |   |
|-----------------|--------|------------|--------|
| AGAINST         |   | 100,597    |   |
| ABSTAIN         |   | 142,459    |   |
| BROKER NON-VOTE |   | 15,088,924 |   |

 

2.     A proposal to elect 10 directors to theBoard of Directors.

| Director             | ** ** | **For**    | ** ** | **Withheld  Authority** | ** ** |
|----------------------|------------|------------|------------|-------------------------|------------|
| Morton H.  Fleischer |       | 95,628,400 |       | 204,198                 |       |
| Christopher H.  Volk |       | 95,787,511 |       | 45,087                  |       |
| Willie R. Barnes     |       | 95,778,290 |       | 54,308                  |       |
| Linda J.  Blessing   |       | 95,788,547 |       | 44,051                  |       |
| Dennis E.  Mitchem   |       | 95,779,915 |       | 52,683                  |       |
| Paul F. Oreffice     |       | 95,777,990 |       | 54,608                  |       |
| James R. Parish      |       | 95,786,627 |       | 45,971                  |       |
| Kenneth B. Roath     |       | 95,780,171 |       | 52,427                  |       |
| Casey J. Sylla       |       | 95,787,047 |       | 45,551                  |       |
| Shelby Yastrow       |       | 95,779,846 |       | 52,752                  |       |

 

3.               A proposal to ratify the appointment of Ernst& Young LLP as Spirit Finance’s independent registered public accounting firmfor the fiscal year ending December 31, 2007.

| FOR     |   | 95,783,201 |   |
|---------|--------|------------|--------|
| AGAINST |   | 41,726     |   |
| ABSTAIN |   | 7,671      |   |

 

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4.               A proposal to approve any adjournments of theannual meeting for the purpose, among others, of soliciting additional proxiesif there are not sufficient votes at the annual meeting to approve the merger.

| FOR     |   | 88,970,125 |   |
|---------|--------|------------|--------|
| AGAINST |   | 2,792,979  |   |
| ABSTAIN |   | 4,069,494  |   |

 

**Item5.  Other Information**

None.

**Item 6.  Exhibits**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                            |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                       |
| 3.1          |       | Bylaws of Spirit Finance Corporation (incorporated  by reference to the Company’s Current Report on Form 8-K dated  June 1, 2007, filed June 6, 2007). |
|         |       |                                                                                                                                                                       |
| 12.1         |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                         |
|         |       |                                                                                                                                                                       |
| 31.1         |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       |
|         |       |                                                                                                                                                                       |
| 31.2         |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       |
|         |       |                                                                                                                                                                       |
| 32.1         |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       |
|         |       |                                                                                                                                                                       |
| 32.2         |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                      | SPIRIT FINANCE CORPORATION |
|----------------------|----------------------------|
|                 |                       |   |
| Date: August 9, 2007 | By:                        | /s/ Christopher H. Volk |
|                 |                       | Christopher H. Volk  Chief Executive Officer and President |
|                 |                       |   |
|                 | By:                        |  /s/ Catherine Long |
|                 |                       | Catherine Long  Chief Financial Officer, Senior Vice  President and Treasurer |

 

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