**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| **(Mark One)** |
|----------------|
| ** **     |
| **x**          | **QUARTERLY****REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the quarterly period ended March 31, 2007** |
| ** **     | ** ** |
| **o**          | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the transition period 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    No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated 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   No  x

Asof April 30, 2007, 114,085,085****sharesof the registrant’s Common Stock, par value $0.01 per share, were outstanding.

 

----

**PARTI – FINANCIAL INFORMATION**

### **Item 1.  Financial Statements**

**SpiritFinance Corporation**

**CONSOLIDATEDBALANCE SHEETS**

(dollars inthousands, except per share data)
| ** **                                                                                                                                        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Investments, at cost:                                                                                                                             |       |                     |       |                        |       |
| Real estate  investments:                                                                                                                         |       |                     |       |                        |       |
| Land and  improvements                                                                                                                            |       | $                        | 1,104,676  |                        | $          | 1,042,368 |   |
| Buildings and  improvements                                                                                                                       |       | 1,771,357                |       | 1,688,630                   |       |
| Total real  estate investments                                                                                                                    |       | 2,876,033                |       | 2,730,998                   |       |
| Less:  Accumulated depreciation                                                                                                                   |       | (78,019                  | )          | (63,871                     | )          |
|                                                                                                                                              |       | 2,798,014                |       | 2,667,127                   |       |
| Loans receivable                                                                                                                                  |       | 81,608                   |       | 75,173                      |       |
| Net investments                                                                                                                                   |       | 2,879,622                |       | 2,742,300                   |       |
| Cash and cash  equivalents                                                                                                                        |       | 193,592                  |       | 52,317                      |       |
| Lease intangibles, net                                                                                                                            |       | 25,685                   |       | 24,313                      |       |
| Deferred costs and  other assets, net                                                                                                             |       | 33,566                   |       | 37,660                      |       |
| Total assets                                                                                                                                      |       | $                        | 3,132,465  |                        | $          | 2,856,590 |   |
|                                                                                                                                              |       |                     |       |                        |       |
| **Liabilities and stockholders’  equity**                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Liabilities:                                                                                                                                      |       |                     |       |                        |       |
| Secured credit  facilities                                                                                                                        |       | $                        | —     |                        | $          | 128,535 |   |
| Mortgages and  notes payable                                                                                                                      |       | 2,011,509                |       | 1,670,839                   |       |
| Accounts  payable, accrued expenses and other liabilities                                                                                         |       | 33,001                   |       | 39,538                      |       |
| Dividends  payable                                                                                                                                |       | 25,099                   |       | 23,653                      |       |
| Total liabilities                                                                                                                                 |       | 2,069,609                |       | 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                                                                                                                   |       | 1,149,598                |       | 1,069,217                   |       |
| Accumulated  distributions in excess of net income                                                                                                |       | (75,438                  | )          | (63,787                     | )          |
| Accumulated  other comprehensive loss                                                                                                             |       | (12,445                  | )          | (12,480                     | )          |
| Total stockholders’  equity                                                                                                                  |       | 1,062,856                |       | 994,025                     |       |
| Total liabilities and stockholders’ equity                                                                                                   |       | $                        | 3,132,465  |                        | $          | 2,856,590 |   |

 

*See accompanying notes.*

2

----

**SpiritFinance Corporation**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

(dollars inthousands, except per share data)
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues:                                    |       |                             |       |   |   |
| Rentals                                      |       | $                                | 62,348     |   | $ | 30,921 |   |
| Interest income on loans receivable          |       | 1,812                            |       | 1,499 |   |
| Interest and other income                    |       | 664                              |       | 638 |   |
| Total revenues                               |       | 64,824                           |       | 33,058 |   |
|                                         |       |                             |       |   |   |
| Expenses:                                    |       |                             |       |   |   |
| General and administrative                   |       | 4,773                            |       | 4,207 |   |
| Property costs                               |       | 1,500                            |       | 63 |   |
| Merger costs                                 |       | 1,548                            |       | — |   |
| Depreciation and amortization                |       | 14,897                           |       | 8,047 |   |
| Interest                                     |       | 29,131                           |       | 13,696 |   |
| Total expenses                               |       | 51,849                           |       | 26,013 |   |
|                                         |       |                             |       |   |   |
| Income from  continuing operations           |       | 12,975                           |       | 7,045 |   |
|                                         |       |                             |       |   |   |
| Discontinued  operations:                    |       |                             |       |   |   |
| Income from discontinued operations          |       | 26                               |       | 1,223 |   |
| Net gains (losses) on sales of real estate   |       | 541                              |       | (133 | ) |
| Total discontinued  operations               |       | 567                              |       | 1,090 |   |
|                                         |       |                             |       |   |   |
| Net income                                   |       | $                                | 13,542     |   | $ | 8,135 |   |
|                                         |       |                             |       |   |   |
| Income per  common share:                    |       |                             |       |   |   |
| Basic:                                       |       |                             |       |   |   |
| Continuing operations                        |       | $                                | 0.12       |   | $ | 0.09 |   |
| Discontinued operations                      |       | 0.01                             |       | 0.02 |   |
| Net income                                   |       | $                                | 0.13       |   | $ | 0.11 |   |
| Diluted:                                     |       |                             |       |   |   |
| Continuing operations                        |       | $                                | 0.12       |   | $ | 0.09 |   |
| Discontinued operations                      |       | 0.01                             |       | 0.02 |   |
| Net income                                   |       | $                                | 0.13       |   | $ | 0.11 |   |
|                                         |       |                             |       |   |   |
| Weighted average  outstanding common shares: |       |                             |       |   |   |
| Basic                                        |       | 107,762,002                      |       | 76,413,164 |   |
| Diluted                                      |       | 108,215,496                      |       | 76,742,960 |   |
|                                         |       |                             |       |   |   |
| Cash dividends  declared per common share    |       | $                                | 0.22       |   | $ | 0.21 |   |

 

*See accompanying notes.*

3

----

**SpiritFinance Corporation**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

(dollars inthousands)
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                |       | $                                                    | 13,542     |   | $ | 8,135 |   |
| Adjustments to  net income:                               |       |                                                 |       |   |   |
| Depreciation and amortization                             |       | 14,907                                               |       | 8,252 |   |
| Stock-based compensation                                  |       | 594                                                  |       | 449 |   |
| Real estate impairments                                   |       | 1,125                                                |       | — |   |
| Amortization of deferred financing costs                  |       | 442                                                  |       | 727 |   |
| Amortization of net interest rate swap hedge losses       |       | 122                                                  |       | 223 |   |
| Net (gains) losses on sales of real estate                |       | (541                                                 | )          | 133 |   |
| Other noncash items                                       |       | 348                                                  |       | 111 |   |
| Changes in operating assets and liabilities:              |       |                                                 |       |   |   |
| Deferred costs and other assets                           |       | (2,109                                               | )          | (616 | ) |
| Accounts payable, accrued expenses and other  liabilities |       | (3,294                                               | )          | 2,304 |   |
| Net cash  provided by operating activities                |       | 25,136                                               |       | 19,718 |   |
|                                                      |       |                                                 |       |   |   |
| **Cash  flows from investing activities**                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Acquisitions of  real estate                              |       | (142,958                                             | )          | (139,980 | ) |
| Investments in  loans receivable                          |       | (7,110                                               | )          | (11,401 | ) |
| Proceeds from  sales of real estate                       |       | 3,210                                                |       | 5,629 |   |
| Collections of  principal on loans receivable             |       | 659                                                  |       | 173 |   |
| Net cash used in  investing activities                    |       | (146,199                                             | )          | (145,579 | ) |
|                                                      |       |                                                 |       |   |   |
| **Cash  flows from financing activities**                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Borrowings under  secured credit facilities               |       | 138,433                                              |       | 39,889 |   |
| Repayments under  secured credit facilities               |       | (266,968                                             | )          | (269,744 | ) |
| Borrowings under  mortgages and notes payable             |       | 350,300                                              |       | 344,570 |   |
| Repayments under  mortgages and notes payable             |       | (6,186                                               | )          | (2,839 | ) |
| Deferred  financing costs paid                            |       | (4,872                                               | )          | (5,489 | ) |
| Payments (made)  received on interest rate swaps          |       | (4,470                                               | )          | 5,825 |   |
| Proceeds from  issuances of common stock, net             |       | 79,849                                               |       | 153,591 |   |
| Dividends paid  on common stock                           |       | (23,748                                              | )          | (14,288 | ) |
| Net cash  provided by financing activities                |       | 262,338                                              |       | 251,515 |   |
|                                                      |       |                                                 |       |   |   |
| Net increase in  cash and cash equivalents                |       | 141,275                                              |       | 125,654 |   |
|                                                      |       |                                                 |       |   |   |
| Cash and cash  equivalents, beginning of period           |       | 52,317                                               |       | 30,536 |   |
| Cash and cash  equivalents, end of period                 |       | $                                                    | 193,592    |   | $ | 156,190 |   |

 

*See accompanying notes.*

4

----

**Spirit Finance Corporation**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

ThreeMonths Ended March 31, 2007

(Unaudited)

(dollars inthousands)
| ** **                                           | ** ** | **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                                           |       |                     |       |                              |       |                                                |       | 13,542                                                                  |       |                                        |       | 13,542                                |       |
| Change in net  unrealized losses on cash flow hedges |       |                     |       |                              |       |                                                |       |                                                                    |       | (87                                         | )          | (87                                   | )          |
| Net cash flow  hedge losses reclassified to earnings |       |                     |       |                              |       |                                                |       |                                                                    |       | 122                                         |       | 122                                   |       |
| Issuances of  common stock, net                      |       | 6,150,000                |       | 62                                |       | 79,787                                              |       |                                                                    |       |                                        |       | 79,849                                |       |
| Dividends  declared on common stock                  |       |                     |       |                              |       |                                                |       | (25,193                                                                 | )          |                                        |       | (25,193                               | )          |
| Restricted stock  activity, net                      |       | 419,219                  |       | 4                                 |       | 594                                                 |       |                                                                    |       |                                        |       | 598                                   |       |
| Balances at March 31,  2007                          |       | 114,085,085              |       | $                                 | 1,141      |                                                | $          | 1,149,598                                                               |       | $                                           | (75,438    | )                                     | $          | (12,445 | ) | $ | 1,062,856 |   |

 

*See accompanying notes.*

5

----

**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.   The common stock of Spirit Finance is listedon the New York Stock Exchange under the symbol “SFC.”

**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 three months endedMarch 31, 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.

Theconsolidated financial statements of Spirit Finance include the accounts of theCompany and its wholly-owned subsidiaries, Spirit Management Company, SpiritFinance Acquisitions, LLC and its wholly-owned special purpose entities.  Spirit Finance formed numerous specialpurpose entities to acquire and hold real estate subject to mortgage notespayable and to facilitate borrowings under the Company’s secured creditfacility (see Note 5).  As a result,substantially all of the Company’s consolidated assets are held in thesewholly-owned special purpose entities and are subject to debt. Each specialpurpose entity is a separate legal entity and is the sole owner of its assetsand liabilities.  The assets of the specialpurpose entities are not available to pay, or otherwise satisfy obligations to,the creditors of any owner or affiliate of the special purpose entity.  At March 31, 2007 and December 31, 2006,assets totaling $2.9 billion and $2.7 billion, respectively, were held andliabilities totaling $2.0 billionand $1.7 billion, respectively, were owed by these special purpose entities andare included in the accompanying consolidated balance sheets.  All intercompany account balances andtransactions have been eliminated in consolidation.

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

----

**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 EscrowDeposits**

TheCompany classified restricted cash and deposits in escrow totaling $4.0 millionand $13.3 million at March 31, 2007 and December 31, 2006, respectively, 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 andMarch 31, 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

----

**2.PROPOSED MERGER TRANSACTION**

On March 12, 2007, SpiritFinance entered into an agreement and plan of merger (the “Merger Agreement”)pursuant to which a consortium, including an affiliate of Macquarie BankLimited, Kaupthing Bank hf. and other independent equity participants, willacquire the Company through a merger with Redford Merger Co. (“MergerCo”), asubsidiary of Redford Holdco, LLC (“Redford”), with Spirit Finance Corporationas the surviving company (the “Merger”).

If the Merger iscompleted, each outstanding share of common stock, $.01 par value, of theCompany will be converted into the right to receive $14.50 in cash, withoutinterest and less any applicable withholding taxes.  Holders of Spirit Finance’s restricted commonstock that vest in connection with the Merger will receive $14.50 per vestedshare in cash, without interest and less any applicable withholding taxes.Also, immediately before completion of the Merger, all unvested options toacquire shares of the Company’s common stock granted to employees under theCompany’s Amended and Restated 2003 Stock Option and Incentive Plan will vestin full.  Holders of each outstandingoption will receive a cash payment equal to $14.50, less the exercise price ofthe option, multiplied by the number of shares of common stock covered by theoption, without interest and less any applicable withholding taxes.

The Merger Agreementcontains termination rights for both the Company and Redford, and furtherprovides that, upon termination of the Merger Agreement under specifiedcircumstances, the Company may be required to pay Redford a termination feeequal to $31.0 million in cash plus certain out-of-pocket expenses incurred byRedford up to $2.25 million. Redford may be required to pay the Company anamount equal to certain out-of-pocket expenses incurred by the Company up to$2.25 million if the Merger Agreement is terminated under specified circumstances.

The completion of theMerger is subject to the satisfaction or waiver of customary closingconditions, including, without limitation, the approval of the transaction bystockholders holding a majority of the Company’s outstanding shares of common stockentitled to vote thereon.  The Merger isnot subject to a financing condition and is expected to close promptlyfollowing the satisfaction of all closing conditions.

Concurrent with theexecution of the Merger Agreement, Redford agreed to purchase 6,150,000 newlyissued shares of Spirit Finance common stock at $12.99 per share in a privateplacement.  The Company used the proceedsof this March 2007 private placement to fund real estate acquisitions in theordinary course of business.

All costs related to theMerger transaction are being expensed in the period incurred.  Merger costs totaled approximately $1.5million for the three months ended March 31, 2007.

8

----

**3. INVESTMENTS**

At March 31, 2007, SpiritFinance had investments in 1,095 real estate properties, including 990 ownedproperties with a gross acquisition cost of approximately $2.9 billion(including $29.7 million of gross related lease intangibles, see Note 4),mortgage loans receivable with a carrying amount of $60.0 million andequipment and other loans receivable with an aggregate outstanding balance of$21.6 million.  A substantial portion ofthese investments are pledged as collateral under the Company’s debtobligations (see Note 5).

The Company’s investmentsare geographically dispersed throughout 45 states.  Only two states, Wisconsin and Texas, both atapproximately 11%, accounted for 10% or more of the total dollar amount ofSpirit Finance’s investment portfolio at March 31, 2007.

During the three monthsended March 31, 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                     |       | 65                                                          |       | 158,021                                              |       |
| Sales (see Note  10)                                    |       | (3                                                          | )          | (2,796                                               | )          |
| Principal  payments, premium amortization and other (b) |       | (1                                                          | )          | (1,800                                               | )          |
| Balance, March 31, 2007                                 |       | 1,095                                                       |       | $                                                    | 2,987,303  |   |

 

----

(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.

(b)             “Other” includesnon-cash real estate impairment charges of $1.1 million which are included in “Propertycosts” in the accompanying consolidated statement of operations.

9

----

The following table showsinformation regarding the diversification of the Company’s total investmentportfolio among the different industries in which our customers operate as ofMarch 31, 2007 (dollars in thousands):
| ** **                                        | ** ** | **Number of  Properties** | ** ** | **Total Dollar  Amount of  Investments (a)** | ** ** | **Percentage of  Total Dollar  Amount of  Investments** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| General and  discount retailer properties         |       | 178                            |       | $                                                           | 827,978    |                                                                   | 28         | % |
| Restaurants                                       |       | 616                            |       | 707,420                                                     |       | 24                                                                     |       |
| Specialty  retailer properties                    |       | 39                             |       | 296,773                                                     |       | 10                                                                     |       |
| Movie theaters                                    |       | 25                             |       | 223,460                                                     |       | 7                                                                      |       |
| Industrial  properties                            |       | 33                             |       | 205,226                                                     |       | 7                                                                      |       |
| Automotive  dealers, parts and service facilities |       | 83                             |       | 194,041                                                     |       | 6                                                                      |       |
| Educational  facilities                           |       | 20                             |       | 157,055                                                     |       | 5                                                                      |       |
| Recreational  facilities                          |       | 7                              |       | 100,298                                                     |       | 3                                                                      |       |
| Supermarkets                                      |       | 19                             |       | 62,785                                                      |       | 2                                                                      |       |
| Distribution  facilities                          |       | 43                             |       | 59,672                                                      |       | 2                                                                      |       |
| 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                                                                      |       |
| Convenience  stores/car washes                    |       | 11                             |       | 18,720                                                      |       | 1                                                                      |       |
| Drugstores                                        |       | 9                              |       | 18,310                                                      |       | 1                                                                      |       |
| Total  investments                                |       | 1,095                          |       | $                                                           | 2,987,303  |                                                                   | 100        | % |

 

----

(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 Company’s propertiesare leased to customers under long-term operating leases that typically includeone or more renewal options.  Theweighted average remaining noncancelable lease term at March 31, 2007 wasapproximately 15 years. The leases are generally triple-net, which provides thatthe lessee is responsible for the payment of all property operating expenses,including property taxes, maintenance and insurance; therefore, Spirit Financeis generally not responsible for repairs or other capital expenditures relatedto the properties.

Scheduled minimum futurerentals to be received under the remaining noncancelable term of the operatingleases at March 31, 2007 are as follows (dollars in thousands):

| 2007                          |   | $         | 188,426   |   |
|-------------------------------|--------|-----------|-----------|--------|
| 2008                          |   | 251,683   |      |
| 2009                          |   | 252,144   |      |
| 2010                          |   | 252,411   |      |
| 2011                          |   | 250,376   |      |
| 2012                          |   | 250,184   |      |
| Thereafter                    |   | 2,484,419 |      |
| Total future minimum  rentals |   | $         | 3,929,643 |   |

 

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 intangible assets are shown in theaccompanying consolidated balance sheets net of accumulated amortization of$4.0 million at March 31, 2007 and $3.4 million at December 31, 2006.

10

----

**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 March 31, 2007, the Company had nooutstanding borrowings under its secured credit facility.

The facility matures inOctober 2007, with the ability to extend the facility with the consent of thebank.  Borrowings under the facilityrequire monthly payments of interest indexed to the one-month London InterbankOffered Rate (LIBOR) plus an additional amount ranging from 1.25% to 3.25%,depending on the amount of outstanding borrowings.  At both March 31, 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) and may alsobe secured by the Company’s equity ownership interests in certain of theCompany’s consolidated special purpose subsidiaries.

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 March 31, 2007, Spirit Finance was incompliance with its covenants.

**Mortgages and Notes Payable**

TheCompany’s mortgages and notes payable are summarized below (dollars inthousands): 
| ** **                                                                | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Net-lease mortgage  notes payable:                                        |       |                     |       |                        |       |
| Series 2005-1,  Class A-1 amortizing mortgage note, 5.05%, due 2020       |       | $                        | 169,635    |                        | $          | 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 |       | 296,447                  |       | 297,821                     |       |
| Series 2007-1,  Class A amortizing mortgage note, 5.74%, balloon due 2022 |       | 350,300                  |       | —                      |       |
| Secured fixed-rate  amortizing mortgage notes payable:                    |       |                     |       |                        |       |
| 8.44% - 9.02%  Notes, effective rates 6.19% - 6.62%, balloons due 2010    |       | 32,068                   |       | 32,201                      |       |
| 5.78% Note,  balloon due 2010                                             |       | 15,263                   |       | 15,314                      |       |
| 5.90% - 6.50%  Notes, balloons due 2012                                   |       | 22,245                   |       | 22,350                      |       |
| 6.25% Note,  balloon due 2013                                             |       | 6,330                    |       | —                      |       |
| 5.40% Notes,  balloons due 2014                                           |       | 34,581                   |       | 34,714                      |       |
| 5.26% - 5.62%  Notes, balloons due 2015                                   |       | 113,751                  |       | 114,177                     |       |
| 5.037% - 8.39%  Notes, balloons due 2016                                  |       | 42,189                   |       | 42,326                      |       |
| 6.59% Notes,  balloons due 2016                                           |       | 609,955                  |       | 611,650                     |       |
| 5.85% Notes,  interest only until January 2009, balloon due 2017          |       | 56,250                   |       | 56,250                      |       |
| Secured fixed-rate  promissory note, 4.61%, paid in January 2007          |       | —                   |       | 9,652                       |       |
| Unsecured fixed-rate  promissory note, 7.00%, due 2021                    |       | 2,157                    |       | 2,178                       |       |
|                                                                      |       | 2,009,471                |       | 1,668,657                   |       |
| Unamortized debt  premium                                                 |       | 2,038                    |       | 2,182                       |       |
| Total mortgages and notes payable                                         |       | $                        | 2,011,509  |                        | $          | 1,670,839 |   |

 

11

----

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 March 31, 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$1.6 billion at March 31, 2007.  At March31, 2007, the fixed-rate mortgage notes payable were secured by real estateproperties with an aggregate investment value of $1.3 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,$49.8 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 generally are not prepayable but can be defeased, after an initiallock-out period, upon the posting of certain defeasance collateral.  The debt premium is amortized to interestexpense using the effective interest method over the terms of the relatednotes. Scheduled debt maturities, including balloon payments, during theremainder of 2007 and the next five years are as follows (dollars inthousands):

| 2007       |   | $         | 21,667    |   |
|------------|--------|-----------|-----------|--------|
| 2008       |   | 30,599    |      |
| 2009       |   | 33,318    |      |
| 2010       |   | 79,808    |      |
| 2011       |   | 36,764    |      |
| 2012       |   | 58,380    |      |
| Thereafter |   | 1,748,935 |      |
|       |   | $         | 2,009,471 |   |

 

The financing costsrelated to the establishment of the mortgages and notes payable and the securedcredit facility are deferred and amortized to interest expense using theeffective interest method over the term of the related debt instrument.  Unamortized financing costs totaled$21.5 million and $17.0 million at March 31, 2007 and December 31,2006, respectively, and are included in “Deferred costs and other assets, net”in the accompanying consolidated balance sheets.

**6.DERIVATIVE AND HEDGING ACTIVITIES**

The Company uses interestrate derivative contracts (interest rate swaps) to manage its exposure tochanges in interest rates on forecasted debt transactions. Spirit Finance doesnot enter 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 will be amortized to earnings,using the effective interest method, as an increase in interest expense over aperiod of 15 years.

During the three monthsended March 31, 2007 and 2006, amortization of net losses related to allsettled swaps totaled $122,000 and $223,000, respectively, and is included ininterest expense.  The net unamortizedbalance in “Accumulated other comprehensive loss” related to all interest rateswaps at March 31, 2007 totaled $12.4 million.

**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 (see Note 2), receiving netproceeds of $79.8 million.

12

----

**8.COMMITMENTS AND CONTINGENCIES**

At March 31, 2007, SpiritFinance had commitments totaling $228 million related to future propertypurchases and future improvements on properties the Company currentlyowns.  Over $200 million of theagreements to purchase property were completed in April 2007.  The future improvements, the majority of which are anticipated to becompleted during the remainder of 2007, will include costs to beincurred on facilities during which the tenant’s business continues to operatewithout interruption and advances for the construction of new facilities forwhich operations have not commenced.  Inaddition, Spirit Finance iscontingently liable for $5.7 million of debt of one of its tenants and isindemnified by that tenant for any payments the Company may be required to makeon the debt.

Recently,the Company was served with two lawsuits in connection with the Merger (seeNote 2), each naming it and its directors and, in the case of one of the suits,also naming Macquarie Bank and Kaupthing Bank hf., as defendants.  Thecomplaints allege, among other things, self-dealing and breach of fiduciaryduty against the individual directors based on the claim that the proposedconsideration for the stockholders in the Merger is inadequate.  The complaints seek, among other relief,certification of the lawsuits as class actions on behalf of all similarlysituated stockholders.  The Company andthe individual directors intend to vigorously defend the actions and, while noassurances can be given, the Company does not believe the lawsuits, ifadversely determined, will have a material adverse effect on our financialcondition or results of operations.

TheCompany may also be subject to claims or litigation in the ordinary course ofbusiness.  At March 31, 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.

**9. SIGNIFICANT CREDIT AND REVENUE CONCENTRATION**

Spirit Finance’s realestate investments are operated by over 150 customers that provide retail,distribution or service activities across various industries.  Rental revenues under a master leaseagreement with one tenant totaled 26% of Spirit Finance’s total revenues duringthe three months ended March 31, 2007. The 112 properties that are operated by this tenant representedapproximately 23% of Spirit Finance’s total assets at March 31, 2007.  No other individual tenant represented morethan 4% of the Company’s total revenues or total assets at March 31, 2007.

13

----

**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 (losses)from the real estate dispositions as well as the current and prior operationshave been reclassified to discontinued operations as summarized below (dollarsin thousands):
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                            |       |                             |       |   |   |
| Revenues                                        |       | $                                | 37         |   | $ | 1,442 |   |
|                                            |       |                             |       |   |   |
| Expenses:                                       |       |                             |       |   |   |
| General and administrative                      |       | 1                                |       | 13 |   |
| Depreciation and amortization                   |       | 10                               |       | 205 |   |
| Interest                                        |       | —                           |       | 1 |   |
| Total expenses                                  |       | 11                               |       | 219 |   |
|                                            |       |                             |       |   |   |
| Income from  discontinued operations            |       | 26                               |       | 1,223 |   |
| Net gains  (losses) on sales of real estate (a) |       | 541                              |       | (133 | ) |
| Total  discontinued operations                  |       | $                                | 567        |   | $ | 1,090 |   |

 

----

| (a) Number of properties  sold during period |   | 3 |   | 6 |   |
|----------------------------------------------|--------|---|--------|---|--------|

 

14

----

**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** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                              | ** ** | **March 31,**               | ** ** |
| ** **                                                                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Weighted average  shares:                                                                               |       |                             |       |   |   |
| Weighted average outstanding common shares used in  the calculation of basic income per common share    |       | 107,762,002                      |       | 76,413,164 |   |
| Effect of unvested restricted stock                                                                     |       | 153,860                          |       | 120,048 |   |
| Effect of stock options (a)                                                                             |       | 299,634                          |       | 209,748 |   |
| Weighted average  outstanding common shares used in the calculation of diluted income per  common share |       | 108,215,496                      |       | 76,742,960 |   |

 

----

(a)          Options to purchase 15,000 shares of commonstock were included in total stock options outstanding at March 31, 2006 butwere not included in the computation of diluted net income per common sharebecause the effect was not dilutive.

**12. COMPREHENSIVE INCOME**

The reconciliation of netincome to comprehensive income is as follows (dollars in thousands):  
|                                                      | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                 |       |                             |       |   |   |
| Net income as  reported                              |       | $                                | 13,542     |   | $ | 8,135 |   |
| Change in net  unrealized losses on cash flow hedges |       | (87                              | )          | 5,877 |   |
| Net cash flow  hedge losses reclassified to earnings |       | 122                              |       | 223 |   |
| Comprehensive income                                 |       | $                                | 13,577     |   | $ | 14,235 |   |

 

**13.SUPPLEMENTAL CASH FLOW INFORMATION**

The Company assumedexisting debt financing of $6.4 million related to real estate investmentsacquired during the three months ended March 31, 2007.  In addition, during the three months endedMarch 31, 2007, interim seller financing of $9.7 million wasrepaid with the Company’s restricted cash and escrow deposits.

15

----

### **Item 2.  Management’s Discussionand Analysis of Financial 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 March 31,2007 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 free-standing, commercialreal estate facilities that contain our customers’ retail, distribution orservice activities that are vital to the generation of their sales and profits.A triple-net lease generally requires the tenant to pay all operating andmaintenance costs, insurance premiums and real estate taxes on the property. Wemay also selectively originate or acquire long-term, commercial mortgage loansthat are integral to our strategy of providing a complete solution of financingproducts to our customers.  Since webegan purchasing real estate assets in December 2003, we have completed over$3.1 billion in real estate acquisitions and mortgage loan investments.

As of March 31, 2007, ourgross investment in real estate properties and loans totaled nearly$3.0 billion and represented 1,095 owned or financed propertiesgeographically diversified across 45 states. Only two states, Wisconsin and Texas, both at approximately 11%,accounted for 10% or more of the total dollar value of our real estate and loanportfolio.  Of our total investmentportfolio as of March 31, 2007, $2.9 billion, or 97%, represented thegross cost of real estate and related lease intangibles that we own and theremaining $81.6 million, or 3%, represented mortgage and other loansreceivable.  Our properties are leased orfinanced to over 150 customers operating in various industries.  The three largest industries in which ourcustomers operated at March 31, 2007 as a percentage of our total investmentportfolio were the general and discount retail industry (28%), the restaurantindustry (24%) and the specialty retail industry (10%).  As of March 31, 2007, our 10 largestcustomers as a percentage of the total investment portfolio were: ShopKo StoresOperating Co., LLC; Pamida Stores Operating Co., LLC; Carmike Cinemas, Inc.(NASDAQ: CKEC); National Envelope Corporation; Casual Male Retail Group, Inc.(NASDAQ: CMRG); Dickinson Theatres, Inc.; CarMax, Inc. (NYSE: KMX); UnitedSupermarkets, Ltd.; Main Event Entertainment, LP, the operator of Main Eventfamily entertainment centers; and CBH2O, LP, the operator of Camelback Ski Areaand Camelbeach Waterpark in Pennsylvania. Together, these customers accounted for 44% of our total investment portfolioat March 31, 2007.  ShopKo StoresOperating Co., LLC is the largest individual tenant at 25% of theportfolio.  No other individual tenantrepresents more than 4% 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

16

----

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-termleases is expected to increase over the term of the leases because theygenerally contain rent escalation provisions; however, the amount of any futurerent increases is variable and unpredictable since the majority of ourescalation provisions are indexed to future changes in the Consumer Price Index(“CPI”).  We finance our real estateproperties with long-term, fixed-rate debt which provides for a fixed monthlydebt payment.  As of March 31, 2007, 96%of our investment portfolio was match-funded with long-term, fixed-ratedebt.  As a result, we expect to realizea growing stream 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.

**ProposedMerger Transaction**

On March 12, 2007, weentered into an agreement and plan of merger (the “Merger Agreement”) pursuantto which a consortium including an affiliate of Macquarie Bank Limited,Kaupthing Bank hf. and other independent equity participants will acquire usthrough a merger with Redford Merger Co. (“MergerCo.”), a subsidiary of RedfordHoldco, LLC (“Redford”), with Spirit Finance Corporation as the survivingcompany.  If the Merger is completed,each outstanding share of our common stock will be converted into the right toreceive $14.50 in cash, without interest and less any applicable withholdingtaxes.

The Merger Agreementcontains termination rights for both us and Redford, and further provides that,upon termination of the Merger Agreement under specified circumstances, we maybe required to pay Redford a termination fee equal to $31.0 million in cashplus certain out-of-pocket expenses incurred by Redford up to$2.25 million. Redford may be required to pay us an amount equal to certainout-of-pocket expenses incurred by us up to $2.25 million if the MergerAgreement is terminated under specified circumstances.

17

----

The completion of theMerger is subject to the satisfaction or waiver of customary closingconditions, including, without limitation, the approval of the transaction by amajority of our stockholders.  The Mergeris not subject to a financing condition and is expected to close promptlyfollowing the satisfaction of all closing conditions.

Concurrent with theexecution of the Merger Agreement, Redford agreed to purchase 6,150,000 newlyissued shares of our common stock at $12.99 per share in a privateplacement.  We used the proceeds of thisMarch 2007 private placement to fund real estate acquisitions in the ordinarycourse of business.

All costs related to themerger transaction are being expensed in the period they are incurred.  Merger costs totaled approximately $1.5million for the three months ended March 31, 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 ofMarch 31, 2007, we had a maximum aggregate borrowing capacity of$400 million under our secured credit facility.  We intend to fund future real estateinvestments initially with borrowings on our secured credit facility and thenimplement our long-term financing strategies by raising funds through theissuance of debt and additional equity capital.

During the first threemonths of 2007, we acquired or financed 65 single tenant commercial real estateproperties through various transactions totaling over $158 million using acombination of proceeds from new borrowings and the private placement of6,150,000 shares of our common stock.  AtMarch 31, 2007, we had commitments totaling $228 million related to futureproperty purchases and future improvements on properties we currently own.  Over $200 million of the agreements topurchase property were completed in April 2007 with the remainder expected tobe completed by the end of the second quarter. The future improvements, themajority of which are anticipated to be completed during the remainder of 2007,will include costs to be incurred on facilities during which the tenant’sbusiness continues to operate without interruption and advances for theconstruction of new facilities 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.  We considerinvestments as under review when we have signed a confidentiality agreement, wehave exchanged financial information, or we or our advisors are in current andactive negotiations.  Investments underreview are generally subject to significant change, and the timing ofcompleting any such transactions may vary significantly from quarter toquarter.  After further diligence, we maydecide not to pursue any or all of these transactions, we may not be the successfulbidder on all of the transactions we pursue, and there is no assurance that wewill ultimately 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 March 31, 2007, our weightedaverage

18

----

noncancelable remaininginitial lease term was approximately 15 years, and our leases generally providefor one or more renewal options.  Lessthan 2% of the leases in our real estate investment portfolio at March 31, 2007will expire prior to 2012.  Our leasesare generally triple-net, which provides that the lessee is responsible for thepayment of all property operating expenses, such as insurance, real estatetaxes and repairs and maintenance.  Sinceour tenants generally pay the property operating and maintenance costs, we donot believe we will incur significant capital or operating expenditures on ourproperties.

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 $25.1 million for the three months endedMarch 31, 2007 as compared to $19.7 million for the same period in 2006, primarilydue to the increases in net income and the non-cash adjustment for depreciationand amortization expense, which are reflective of the growth in our investmentportfolio.

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 thethree months ended March 31, 2007, we declared dividends of $0.22 per share,totaling $25.2 million.  Cash for futuredistributions is expected to be generated from operations, although we may alsoborrow funds to make distributions.  Ourability to pay distributions will depend on, among other things, our actualresults of operations, which depend primarily on our receipt of payments fromour leases and 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.

We generally use our $400million revolving short-term credit facility to partially fund the initialpurchase of real estate pending the issuance of long-term, fixed-ratedebt.  As of March 31, 2007, no amountswere outstanding under this facility. The facility is structured as a master loan repurchase agreement and ourborrowings under the facility are secured by the underlying real estateproperties we pledge (we can borrow up to 60% of the value of the properties)and may also be secured by our equity ownership interests in certain of ourconsolidated special purpose subsidiaries. Borrowings under the facility require monthly payments of interestindexed to the one-month London Interbank Offered Rate (LIBOR) plus anadditional amount ranging from 1.25% to 3.25%, depending on the amount ofoutstanding borrowings.  At March 31,2007, the

19

----

one-month LIBOR was5.32%.  As described further in the Notesto Consolidated Financial Statements and Quantitative and QualitativeDisclosures About Market Risk, we use interest rate swaps to manage ourexposure to changes in interest rates until we can put into place our long-termdebt 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.  The remaining proceeds will be used toprovide funds for real estate acquisitions. This was the third issuance under our master funding debt structurewhich was created in 2005.  At March 31,2007, the aggregate balance of the net-lease mortgage notes totaled $1.1billion and was secured by a collateral pool in excess of $1.5 billion in realestate assets.  The notes may be prepaidat any time, subject to a yield maintenance prepayment premium.  The notes also permit the substitution ofreal estate collateral from time to time subject to certain conditions andlimits. In addition, the note structure allows for the contribution ofadditional properties to the collateral pool and the issuance of additionalseries of notes secured by the increased collateral pool.

At March 31, 2007, thetotal carrying amount of our fixed-rate debt, including the net-lease mortgagenotes described above, was $2.0 billion. Real estate investments with an aggregate investment value of$2.9 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 will be 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 inlong-term interest rates.  However, wemay experience 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.  AtMarch 31, 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,among other requirements, a minimum liquidity requirement of $15 million,a maximum total debt to tangible net worth ratio of 4:1, a maximum ratio oftotal debt to total assets of 75% and a minimum tangible net worth requirementof $633.5 million.  As of March 31,2007, we were in compliance with 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 ourliquidity needs for the operating and financing obligations and commitments ofour existing real estate investment portfolio. On a long-term basis, we intend to use a combination of debt andadditional equity

20

----

capital to accomplish ourgoal of acquiring real estate while maintaining our borrowings at a targetedleverage ratio (defined as the ratio of our total debt to total assets) ofapproximately 65%, however, we may exceed this leverage ratio target from timeto time.  At March 31, 2007, our leverageratio was 64%.  We intend to usesubstantially all of our properties to secure our borrowings under our variousdebt financings.

**Resultsof Operations**

Since we began purchasingreal estate assets in December 2003, we have completed over $3.1 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** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **March 31,**               | ** ** |
| ** **                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                     |       |                             |       |   |   |
| Net income (in  thousands)                                               |       | $                                | 13,542     |   | $ | 8,135 |   |
|                                                                     |       |                             |       |   |   |
| Net income per  diluted common share                                     |       | $                                | 0.13       |   | $ | 0.11 |   |
|                                                                     |       |                             |       |   |   |
| Weighted average  outstanding common shares – diluted (in millions) |       | 108.2                            |       | 76.7 |   |

 

The weighted averagediluted common shares outstanding for the first quarter of 2007 increased byapproximately 31 million shares as compared to the same period in 2006primarily as a result of stock offerings completed during 2006.

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.

21

----

We sold three and sixproperties during the three months ended March 31, 2007 and 2006,respectively.  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** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** |
| ** **                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                       |       |                             |       |   |   |
| Income from  continuing operations         |       | $                                | 12,975     |   | $ | 7,045 |   |
|                                       |       |                             |       |   |   |
| Discontinued  operations:                  |       |                             |       |   |   |
| Income from discontinued operations        |       | 26                               |       | 1,223 |   |
| Net gains (losses) on sales of real estate |       | 541                              |       | (133 | ) |
| Total  discontinued operations             |       | 567                              |       | 1,090 |   |
|                                       |       |                             |       |   |   |
| Net income                                 |       | $                                | 13,542     |   | $ | 8,135 |   |
|                                       |       |                             |       |   |   |
| Income per  diluted common share:          |       |                             |       |   |   |
| Continuing operations                      |       | $                                | 0.12       |   | $ | 0.09 |   |
| Discontinued operations                    |       | 0.01                             |       | 0.02 |   |
| Net income                                 |       | $                                | 0.13       |   | $ | 0.11 |   |

 

The following discussionincludes the results of both continuing and discontinued operations assummarized in the following table (dollars in thousands):
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|
| ** **                          | ** ** | **Continuing  Operations**                           | ** ** | **Discontinued  Operations** | ** ** | **Total  Operations** | ** ** |
| ** **                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                            |       | $                                                    | 64,824     |   | $ | 33,058 |   | $ | 37 |   | $ | 1,442 |   | $ | 64,861 |   | $ | 34,500 |   |
| Expenses:                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses |       | 6,321                                                |       | 4,207 |   | 1 |   | 13 |   | 6,322 |   | 4,220 |   |
| Property costs                      |       | 1,500                                                |       | 63 |   | — |   | — |   | 1,500 |   | 63 |   |
| Depreciation and amortization       |       | 14,897                                               |       | 8,047 |   | 10 |   | 205 |   | 14,907 |   | 8,252 |   |
| Interest                            |       | 29,131                                               |       | 13,696 |   | — |   | 1 |   | 29,131 |   | 13,697 |   |
|                                     |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Revenues***

Total revenues increasedto $64.9 million for the first quarter of 2007 from $34.5 million forthe first quarter of 2006.  The increasein revenues is the result of the growth in our investment portfolio primarilydue to property acquisitions made over the past year.

Approximately 96% of therevenues we generated in the first quarter of 2007 were rental revenues fromreal estate properties we own and lease to our customers.  At March 31, 2007, substantially all of ourproperties were occupied and current in their monthly lease and loanpayments.  Rental revenues from a masterlease agreement with ShopKo Stores Operating Co., LLC totaled 26% of our totalrevenues during the first quarter of 2007. No other individual tenant represented more

22

----

than 4% of total revenuesduring the first quarter of 2007.  Incomparison, during the first quarter of 2006, no single tenant represented morethan 6% of total revenues.

Rental revenues haveincreased in relation to the growth in our investment 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** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Rental revenues,  excluding the adjustment for straight-line rent |       | $                                | 61,864     |   | $ | 32,004 |   |
| Straight-line  rent, net                                          |       | 511                              |       | 359 |   |
| Total rental  revenues                                            |       | $                                | 62,375     |   | $ | 32,363 |   |
|                                                              |       |                             |       |   |   |
| Weighted average real  estate investments                         |       | $                                | 2,843,279  |   | $ | 1,493,023 |   |

 

***Expenses***

General and administrativeexpenses include employee-related expenses, professional fees, portfolioservicing costs, and office and other expenses. As our investment portfolio grows, our general and administrativeexpenses are expected to continue to increase; however, general andadministrative expenses calculated as a percent of average gross investmentsare expected to continue to decline as we continue to manage our expense baseand benefit from our scalable, cost-effective operation.  Employee-related expenses have increasedprimarily as a result of our real estate investment activity as we increasedour work force from 38 at March 31, 2006 to 42 at March 31, 2007.  The large increase in the number ofproperties in our portfolio has also resulted in increased portfolio servicingand related costs, which costs will continue to grow proportionately with thegrowth in our investment portfolio.

Property costs representcosts associated with the real estate investment 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 $1.1 million of impairments on our long-lived real estate investmentassets for which we determined, in accordance with our policy, that thecarrying amount of the asset may not be recoverable.  Property costs for the three months endedMarch 31, 2007, also include costs associated with ground lease obligationswhere we lease certain land from third-party land owners. This expense isoffset by rental revenues from the lease of these properties to the relatedbuilding tenant.

Costs related to theproposed merger transaction, as previously discussed, totaled $1.5million.  We expect to incur significantadditional cash and non-cash merger-related expenses over the next six months.

Depreciation andamortization expense relates primarily to commercial buildings and improvementswe own and the related lease intangibles. Depreciation and amortization expensewas $14.9 million in the first quarter of 2007 as compared to $8.3 millionin the same period in 2006.  The increasebetween periods was the result of the addition of properties to our real estate

23

----

investmentportfolio.  Depreciation and amortizationexpense is expected to increase in future periods as we continue to makeinvestments in real estate.

The increase in interestexpense during the first quarter of 2007 is primarily attributable to higherweighted average outstanding debt resulting from new borrowings used to growour investment portfolio.  The increasein interest expense is also partially a result of an increase in the effectiveinterest rate on our debt as a result of the new borrowings made during thepast 12 months.* *Thefollowing table summarizes our interest expense and related borrowings (dollarsin thousands):
| ** **                                                                                                                | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                                                                      |       |                             |       |   |   |
| Interest expense                                                                                                          |       | $                                | 27,986     |   | $ | 12,358 |   |
| Amortization of  deferred financing costs and net losses on settled interest rate swaps and  debt insurer premium expense |       | 1,145                            |       | 1,339 |   |
| Total interest  expense                                                                                                   |       | $                                | 29,131     |   | $ | 13,697 |   |
|                                                                                                                      |       |                             |       |   |   |
| Weighted average debt  outstanding                                                                                        |       | $                                | 1,867,255  |   | $ | 896,929 |   |

 

**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.

24

----

A reconciliation of netincome calculated in accordance with GAAP to FFO is presented in the followingtable (dollars in thousands):
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| ** **                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income (a)                                    |       | $                                | 13,542     |   | $ | 8,135 |   |
| Portfolio depreciation  and amortization expense: |       |                             |       |   |   |
| Continuing  operations                            |       | 14,850                           |       | 8,005 |   |
| Discontinued  operations                          |       | 10                               |       | 205 |   |
| Net (gains) losses on  sales of real estate       |       | (541                             | )          | 133 |   |
| FFO (a)(b)                                        |       | $                                | 27,861     |   | $ | 16,478 |   |

 

----

(a)          Net income and FFO are after deducting mergercosts of $1.5 million or $0.01 per diluted common share.

(b)         FFO includes the adjustment between scheduledrents and rental revenue recognized on a straight-line basis ($511,000 and$359,000 for the three months ended March 31, 2007 and 2006, respectively).

**Forward-LookingStatements**

Some of the statements inthis report constitute ­forward-looking statements. Forward-lookingstatements relate to expectations, beliefs, projections, future plans andstrategies, anticipated events or trends and similar expressions concerning mattersthat are not historical facts. In some cases, forward-looking statementscan be identified by terms such as “anticipate,” “believe,” “could,” “estimate,”“expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” orthe negative of these terms or other similar terminology.

The forward-lookingstatements are based on our beliefs, assumptions and expectations of our futureperformance, taking into account all information currently available to us.These beliefs, assumptions and expectations can change as a result of manypossible events or factors, not all of which are known to us or are within ourcontrol. If a change occurs, our business, financial condition, liquidity andresults of operations may vary materially from those expressed in our forward-lookingstatements. The following are some of the factors that could cause actualresults to vary from our forward-looking statements:

·                  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;

25

----

·                  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.

These forward-lookingstatements speak only as of the date of this report. We expressly disclaim anyobligation or undertaking to disseminate any updates or revisions to anyforward-looking statement contained in this report to reflect any change inour expectations with regard to the statements or any change in events,conditions or circumstances on which any such statement is based.

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

SpiritFinance is exposed to various financial market risks, especially interest raterisk. Interest rates and credit risk influence our performance more so thandoes inflation. Changes in interest rates do not necessarily correlate withinflation rates or changes in inflation rates. We generally offer leases that provide for payments of base rent witheither scheduled increases, increases based on changes in the CPI and/orcontingent rent based on a percentage of the lessee’s gross sales to helpmitigate the effect of inflation. Because the properties in our portfolio are generally leased to tenantsunder triple-net leases where the tenant is responsible for property costs andexpenses, this tends to reduce our exposure to rising property expenses due toinflation.

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 ourborrowings, our results of operations will be adversely affected. Significantincreases in interest rates may also have an adverse impact on our earnings ifwe are unable to acquire real estate with rental rates high enough to offsetthe increase in interest 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 March 31, 2007, we have not experienced any significant credit losses.  In a decreasing interest rate environment,borrowers are generally more likely to prepay their loans in order to obtainfinancing at lower interest rates; however, our investments in mortgage loansreceivable are subject to significant restrictions on prepayment in the form ofyield maintenance provisions or other prepayment penalties which provide uswith a certain level of yield protection in a decreasing interest rateenvironment.

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

26

----

assets with fixed-rateliabilities and variable-rate assets with variable-rate liabilities. As part ofthis strategy, we have used and may continue to use derivative contracts, suchas forward-starting interest rate swaps, to manage our interest rate risk.  We do not enter into derivative contracts forspeculative or trading purposes. We generally intend to utilize derivativeinstruments to hedge interest rate risk on our liabilities and not usederivatives for other purposes, such as hedging asset-related risks, as suchhedging transactions may generate income which is not qualified income forpurposes of maintaining our REIT status. Our hedging strategy is monitored bythe audit committee of our board of directors.

At March 31, 2007, ourfixed-rate debt totaled $2.0 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 exceeded its carrying amount at March 31,2007 by approximately $7.7 million. Our mortgage and other loans receivable are also fixed-rateinstruments.  At March 31, 2007, ourmortgage and other loans receivable totaled $81.6 million.  Using a discounted cash flow analysis, theestimated fair value of our fixed-rate loans receivable exceeded its carryingamount by approximately $834,000 at March 31, 2007.  It is our intent to hold our fixed-rate loansreceivable and our fixed-rate mortgages and notes payable to maturity;accordingly, changes in market interest rates impact the fair value of thesefinancial instruments but have no impact on interest recognized 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 threemonths ended March 31, 2007, the weighted average outstanding balance of ourvariable-rate debt, which was based on spreads over one-month LIBOR (which wasrelatively constant during the period), was $194.7 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 firstthree months of 2007, our net income for the three months ended March 31, 2007would have 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 three months of 2007 and assumes noother changes 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.

27

----

**Item4.  Controls and Procedures**

Wehave adopted and maintain disclosure controls and procedures that are designedto ensure that information required to be disclosed in our reports under theSecurities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,summarized and reported within the time periods required under the Securitiesand Exchange Commission’s rules and forms and that the information is gatheredand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow for timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement 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 of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report.  Basedon the foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective at thereasonable 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.

28

----

**PART II – OTHER INFORMATION**

**Item1.  Legal Proceedings**

Recently, the Company was served with two lawsuitsin connection with the Merger (see Note 2), each naming it and its directorsand, in the case of one of the suits, also naming Macquarie Bank and KaupthingBank hf., as defendants.  The complaints allege, among otherthings, self-dealing and breach of fiduciary duty against the individualdirectors based on the claim that the proposed consideration for thestockholders in the Merger is inadequate. The complaints seek, among other relief, certification of the lawsuitsas class actions on behalf of all similarly situated stockholders.  The Company and the individual directorsintend to vigorously defend the actions and, while no assurances can be given,the Company does not believe the lawsuits, if adversely determined, will have amaterial adverse effect on our financial condition or results of operations.

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 includes a discussionof factors that could affect our business and results of operations under thecaption “Item 1A. Risk Factors.”  The following discussion updates andsupplements the discussion contained in our Form 10-K, and should be readtogether with the factors set forth in our Form 10-K.  These factors,taken together, set forth important information that may cause our actualresults of operations in future periods to differ materially from thosecurrently expected or discussed in forward-looking statements contained in thisreport relating to our financial results, operations and businessprospects.  Except as set forth below, there have been no material changesto the risk factors set forth in our Form 10-K.

***Our proposed merger with a subsidiary of Redford Holdco, LLCis subject to closing conditions and is the subject of lawsuits that couldresult in the merger not being completed, which may in turn result in a declinein the price of our common stock.***

The proposedmerger with a subsidiary of Redford Holdco, LLC, an entity organized by a consortium of purchasers including anaffiliate of Macquarie Bank Limited, Kaupthing Bank hf. and other equityparticipants, is subject to customary closing conditions including thereceipt of approval of our stockholders. Many of the conditions to closing are outside our control.  If any condition to the closing of the mergeris not satisfied or waived, if permissible, the merger will not becompleted.  Furthermore, two lawsuitshave been filed challenging the merger. These lawsuits could result in a delay in the completion of the mergeror in the merger not being completed.

If we do notcomplete the merger, the price of our common stock may decline to the extentthat the current market price reflects a market assumption that the merger willbe completed with our

29

----

stockholdersreceiving $14.50 in cash for each share of our common stock held.  We will also be obligated to pay fees andexpenses we have incurred in connection with the merger, whether or not themerger is completed.  In addition, wehave expended, and will continue to expend, significant management resources inan effort to complete the merger. Further, if the merger agreement is terminated under specifiedcircumstances, we will be required to pay a termination fee of $31 millionto the other parties to the merger agreement and reimburse their expenses up to$2.25 million.

***Whether or not the proposed merger is completed, thependency of the merger could disrupt our operations, which could adverselyaffect our business and financial results.***

Whether or not theproposed merger is completed, there are various risks and uncertainties arisingin connection with the pendency of the merger, including the diversion ofmanagement’s attention away from the execution of our existing business planand negative perceptions among prospective tenants and business partners as toour future direction, both of which could adversely and potentially materiallyeffect our business and our operating results.

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

During the quarter ended March 31, 2007, we repurchased the followingshares of our common stock:
| **Period**                             | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number of  Shares that May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2007  to January 31, 2007   |       | 13,000                                           | (1)        | $                                                | 0.01       |                                                                                                                         | —     |                                                                                                                            | —     |   |
| February 1, 2007  to February 28, 2007 |       | 8,000                                            | (1)        | $                                                | 0.01       |                                                                                                                         | —     |                                                                                                                            | —     |   |
| March 1, 2007 to  March 31, 2007       |       | —                                           |       | —                                           |       | —                                                                                                                       |       | —                                                                                                                          |       |
| Total                                  |       | 21,000                                           | (1)        | $                                                | 0.01       |                                                                                                                         | —     |                                                                                                                            | —     |   |

 

----

(1)  We repurchased a total of21,000 unvested shares of our restricted stock which were forfeited inaccordance with the terms of the Spirit Finance Corporation 2003 Stock Optionand Incentive Plan.

30

----

**Item3.  Defaults Upon Senior Securities**

Not Applicable.

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

None.

**Item5.  Other Information**

None.

31

----

**Item6.  Exhibits**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                     |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                |
| 2.1          |       | Agreement and Plan of Merger, by and among Redford  Holdco, LLC, Redford Merger Co. and Spirit Finance Corporation, dated as of  March 12, 2007 (incorporated by reference to the Company’s Current Report on  Form 8-K dated March 12, 2007, filed March 13, 2007).                                                           |
|         |       |                                                                                                                                                                                                                                                                                                                                |
| 4.1          |       | Series 2007-1 Indenture Supplement dated as of March  29, 2007, among Spirit Master Funding, LLC, Spirit Master Funding II, LLC,  Spirit Master Funding III, LLC and Citibank, N.A., as indenture trustee  (incorporated by reference to the Company’s Current Report on Form 8-K dated  March 29, 2007, filed April 4, 2007). |
|         |       |                                                                                                                                                                                                                                                                                                                                |
| 10.1         |       | Stock Purchase Agreement between Redford Holdco, LLC  and Spirit Finance Corporation dated as of March 12, 2007 (incorporated by  reference to the Company’s Current Report on Form 8-K dated March 12, 2007,  filed March 13, 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.                                                                                                                                                                                                                                |

 

32

----

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                   | SPIRIT FINANCE CORPORATION |
|-------------------|----------------------------|
|              |                       |
| Date: May 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 |

 

33

----