EDGAR 10-K Filing

Company CIK: 1308606
Filing Year: 2022
Filename: 1308606_10-K_2022_0001564590-22-004951.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
We are a self-administered and self-managed REIT with in-house capabilities including acquisition, credit research, asset management, portfolio management, real estate research, legal, finance and accounting functions. We primarily invest in single-tenant, operationally essential real estate assets throughout the United States, which are subsequently leased on a long-term, triple-net basis to high quality tenants with operations in retail, industrial and certain other industries.
As of December 31, 2021, Spirit owned a diversified portfolio of 2,003 properties with gross investment in real estate totaling approximately $7.9 billion and with in-place Annualized Base Rent of $588.1 million. See Item 2. "Properties" for further information on our portfolio diversification.
Our operations are carried out through the Operating Partnership. OP Holdings, one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. We and one of our wholly-owned subsidiaries are the only limited partners and together own the remaining 99% of the Operating Partnership.
Shares of our common stock are traded on the NYSE under the symbol “SRC.”
Business and Growth Strategies
Funding the heart of America’s business
Our objective is to maximize stockholder value by providing a growing stream of earnings and dividends generated by high quality, diversified commercial real estate. We seek to accomplish this objective by utilizing our proprietary tools and underwriting expertise to invest in and manage a high-quality portfolio of single-tenant, operationally essential real estate throughout the United States, which generally consists of free-standing, commercial real estate facilities where our tenants conduct activities essential to the generation of their sales and profits. We then generate revenue primarily by leasing these properties to tenants we believe possess attractive credit characteristics and operate in stable or growing industries. Our leases are typically structured as triple-net leases, whereby the tenant is responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs.
STRONG OPERATING SYSTEMS
Spirit utilizes integrated tools that streamline key processes for acquisitions, tenant monitoring, capital funding, forecasts and records. We believe the effective use of our technology platforms to inform portfolio decisions provides efficiency, depth and scalability to our processes, allowing us to seamlessly execute our objectives. To enhance our operating systems, we have developed several proprietary tools to minimize risk and maximize stockholder returns:
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Spirit Property Ranking Model. The Spirit Property Ranking Model is a core tool developed internally by Spirit that ranks every owned and acquired property across twelve criteria, with a higher weighting allocated to real estate characteristics. The criteria are: (i) replacement rent, assuming the property becomes vacant, (ii) real estate score based on the site’s location, access, visibility and overall desirability, (iii) 5-mile population for retail properties or 15-mile population for industrial properties, (iv) remaining lease term, (v) 5-mile household income, (vi) pre-overhead unit coverage, (vii) pre-overhead master lease coverage, (viii) corporate coverage, (ix) U.S. State ranking, (x) rent escalation characteristics, (xi) lease structure and (xii) tenant industry ranking. We believe that the higher the overall score assigned to a property, the lower the risk of a residual loss given a tenant default. Through acquisitions, dispositions, lease renewals and re-lets, we seek to continually improve the weighted-average property ranking of our portfolio.
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The Spirit Heat Map. The Spirit Heat Map is used to analyze tenant industries across Porter’s Five Forces and for potential causes of technological disruption. The data is then used to predict the long-term future performance of those industries. The Spirit Heat Map is updated regularly to incorporate changes in business and market conditions, changes in technology and other trends. Using this tool, coupled with our intensive credit and real estate analysis, lease structuring and ongoing portfolio management, we seek to achieve superior risk-adjusted returns by focusing our investments within industries that we believe will be healthy and viable prospectively and disposing of properties within industries that have less favorable outlooks.
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Spirit Business Intelligence Tools. Our business intelligence tools capture and bring together critical information across Spirit’s databases, including property data (including property performance and data points used in the Spirit Property Ranking Model), industry data and tenant credit data, allowing the information to be efficiently analyzed. Spirit uses these tools to compare potential acquisitions and dispositions to the existing portfolio and quantify improvements in key metrics including industry concentration, tenant concentration, weighted-average lease term, weighted-average Spirit property ranking and credit metrics.
OUTSTANDING PEOPLE
We have implemented sound social, human capital management and environmental practices and policies throughout the operation of our business, demonstrating our solid commitment to be responsible and conscientious in everything that we do as we strive to both drive long-term stakeholder value and make the communities in which we operate a better place to live and work. We have documented these commitments in our Code of Business Conduct and Ethics, DEI Policy and Environmental Management System, each of which can be accessed on the Investor Relations page of our website at www.spiritrealty.com. One of these key pillars is human capital management. We believe attracting, developing and retaining a team of highly talented and motivated employees is critical to reflecting our “all one team” motto and delivering strong financial results:
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Talent acquisition and development. To ensure we retain top talent, we provide competitive compensation and benefits, including stock awards for all employees. We aim to develop our employees by providing internal training, leadership coaching programs and providing tuition assistance and course reimbursement for career-enhancing education and licensure requirements. We encourage both formal and informal mentorship to provide employees with critical developmental feedback and all employees have direct access to the executive team, including through monthly “Town Hall” meetings hosted by our CEO. Goals are set annually for each employee and performance is measured at least twice a year on these goals, as well as on each of our core competencies: managing resources, leadership, communication, accountability and teamwork. We look first to promote from within, but when external hires are needed to fill open positions, we use a thorough hiring process which includes multiple levels of interviews, cultural surveys, and technical skill testing, when appropriate, to ensure candidates will be an appropriate fit.
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Diversity and inclusion. We provide equal employment opportunities to all individuals and seek to cultivate an inclusive culture that respects and appreciates diversity of experience, ideas and opinions. Our employee population is very diverse: approximately half of our employees are female, 26% are from racial or ethnic minority groups, and we have well-rounded age diversity. To promote inclusivity, our Diversity and Inclusion Council is tasked with providing educational and social programming for all affinity groups, as well as directing support to charitable organizations in line with our diversity efforts. Under the Diversity and Inclusion Council, we have a Women’s Leadership Council, which focuses specifically on empowering our female employees in personal and professional growth, and a Young Professional Committee, which focuses specifically on developing our employees under the age of 35. With the support of our Board of Directors, we continue to explore additional diversity and inclusion initiatives.
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Employee wellness. The physical and mental well-being of our employees is an important piece of our business and overall success. Our offices were designed with employee health and well-being in mind (sit-stand desks, ergonomic chairs, healthy snack options, maximized natural light in all workspaces, designated creative and collaborative workspaces) and we have routinely sponsored wellness initiatives for our employees, including walking and weight-loss challenges. At the onset of the COVID-19 pandemic, we took swift action to enable all employees to work from home, enhanced our in-office safety measures for voluntary return to office (including increasing cleaning and sanitizing procedures, temperature screening upon entering the office, providing personal protective equipment, installing plexiglass wellness screens and initiating social distancing measures), and instituted a COVID-19 pandemic leave policy for illness or caretaking. As guidance from applicable health authorities and state and local leadership permits, we have transitioned to a permanent hybrid work policy (maintaining our enhanced safety measures in the office), which allows our employees the benefits of both remote and in-person work environments.
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Workplace culture. We strive to create a best-in-class workplace culture, where all employees are encouraged to “R.E.A.C.H. for the stars” by demonstrating our five core values: (i) value relationships, (ii) pursue excellence, (iii) act with integrity, (iv) choose optimism, and (v) have fun. We actively seek employee feedback through surveys and results of those surveys are communicated to all employees, as well as to our Board of Directors, to provide transparency and continuous improvement. We also acknowledge employee successes through recognition at monthly “Town Hall” meetings. We firmly believe that regular social and team building events for our employees encourage socialization, collaboration, and relationship building - all things that are vital for employee engagement and result in a high performing “all one team” culture. We promote social engagement through our Spirit One Committee (comprised of employees across all levels and departments who collaborate to create social programming), annual company-wide events (including a virtual holiday season party in 2021), and department team building events throughout the year.
As of December 31, 2021, we had 84 employees, as compared to 82 employees as of December 31, 2020. None of these employees are represented by a labor union.
DEFINED AND DISCIPLINED INVESTMENT STRATEGY
During the year ended December 31, 2021, we purchased 166 properties with a gross investment of $1.2 billion, invested $15.4 million in revenue producing capital expenditures on properties we already owned and funded an $11.0 million loan receivable. During the same period, we sold 23 properties with a gross investment of $65.2 million. We selectively make acquisitions and dispositions that we believe will contribute to our business objectives. We believe there will be ample acquisition opportunities in the single-tenant market fitting our underwriting and acquisition criteria.
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Sourcing acquisitions. We believe a multi-channel approach drives acquisition volume and are focused on building and growing partnerships with a diverse base of tenants, brokers and owners. Over time, our target is a balanced mix of opportunities sourced from direct relationships with existing tenants, direct relationships with new tenants and broker relationships. These channels are built through current relationships with key members of our acquisitions, asset management and executive teams, partner appreciation events, attendance at critical conferences and conventions and through reliable execution.
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Evaluating acquisitions. Each acquisition opportunity is evaluated against our acquisition criteria, which includes, but is not limited to: accretive capitalization rate, long-term lease structure containing rent escalations, favorable tenant industries based on the Spirit Heat Map, favorable Spirit property ranking, attractive tenant credit characteristics and overall portfolio diversification impact. As part of our acquisition strategy, we target tenants that are publicly listed and have over $100 million in revenues, as we believe those tenants possess certain attractive characteristics, including continual access to capital, generally lower leverage, audited financial statements and governance scrutiny. While we consider the foregoing when making investments, we have made investments that do not meet one or more of these criteria, and we may make additional investments that do not meet one or more of these criteria if we believe the opportunity is sufficiently attractive. Acquisition opportunities go through a rigorous evaluation process culminating in review and approval by our Investment Committee. The Investment Committee includes representation from the acquisitions, asset management, credit, legal and finance departments.
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Evaluating tenant credit. We believe extensive credit underwriting is important to minimizing tenant financial risk and protecting stockholder value. Our credit department, which is independent from our acquisitions department, underwrites all acquisition, disposition and capital investment opportunities and monitors the financial health of our existing portfolio. We use our underwriting capabilities to identify tenants with attractive credit characteristics and stable operating histories and to dispose of tenants with weakening characteristics.
HIGH-QUALITY PORTFOLIO
We believe that portfolio diversification and leases with structures aligned with our business and growth strategies are the cornerstones to managing the inherent risk associated with investing in real estate. The following portfolio qualities help maintain the stability of our rental revenue and maximize our long-term return on our investments:
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Diverse and granular portfolio. We seek to maintain a portfolio that (i) derives no more than 5.0% of its ABR from any single-tenant, (ii) derives no more than 2.0% of its ABR from any single property, (iii) is leased to tenants operating in various industries aligned with our Spirit Heat Map and (iv) is located across the U.S. without significant geographic concentration. As of December 31, 2021, our largest tenant exposure equaled 3.0%, our largest single property exposure equaled 1.2%, our largest industry concentration equaled 7.2%, and our largest geographic concentration by state equaled 12.2%, in each case based on ABR. Our portfolio is also well diversified between investment and non-investment grade rated tenants with 51.9% of our ABR from public issuers. See Item 2. “Properties" for further information on our portfolio composition as of December 31, 2021.
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Leases for operationally essential real estate. We seek to own properties that are operationally essential to our tenants, thereby reducing the risk that the tenant would choose not to renew an expiring lease or reject a lease in bankruptcy.
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Leases with contractual rental growth. We seek leases that contain contractual provisions to increase rental revenue over the term of the lease. Approximately 89.8% of our ABR as of December 31, 2021 is subject to rent escalations which, generally, increase rent at specified dates by: (i) a fixed amount; or (ii) the lesser of (a) 1 to 2 times any increase in the CPI over a specified period, (b) a fixed percentage, or (c) a fixed schedule.
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Leases with relatively long terms. We seek leases with relatively long terms, typically with non-cancellable initial terms of 10 to 20 years and tenant renewal options for additional terms with attractive rent escalation provisions. As of December 31, 2021, our weighted average remaining lease term based on ABR was 10.4 years.
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Leases with a master lease structure. Where appropriate, we seek master leases whereby we lease multiple properties to a tenant on an “all or none” basis. In a master lease structure, a tenant is responsible for a single lease payment relating to the entire portfolio of leased properties, as opposed to separate lease payments relating to each individually leased property. The master lease structure hinders a tenant's ability to “cherry pick” locations, where it unilaterally gives up underperforming properties while maintaining its leasehold interest in well-performing properties. Approximately 44.0% of our ABR as of December 31, 2021 is subject to a master lease structure.
Since our inception, our occupancy has never fallen below 96.1%, despite the economic downturn of 2008 through 2010, and since the Spin-off, our occupancy has never fallen below 99.2%, despite the COVID-19 pandemic. While a number of our tenants requested relief at the onset of the COVID-19 pandemic, the majority of these requests were for rent deferrals and were from tenants in industries directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, especially those in the movie theater, casual dining restaurant, entertainment, health and fitness and hotel industries. For the year ended December 31, 2020, we deferred $31.9 million of rent and abated $6.3 million of rent. For the year ended December 31, 2021, we only deferred $8.4 million of rent and abated $1.5 million of rent. The deferral periods ranged, generally, from one to six months, with an average repayment period of 12 months. We believe the diversity and strength of our portfolio helped limit the impact of the COVID-19 pandemic on our 2020 and 2021 operating results and, as of February 10, 2022, we have not granted additional rent deferrals or abatements beyond December 31, 2021.
FORTRESS BALANCE SHEET
Our long-term financing strategy is to maintain a leverage profile that creates operational flexibility and generates superior risk-adjusted returns for our stockholders. We finance our operations and investments using a variety of methods, including available unrestricted cash balances, property operating revenue, proceeds from property dispositions, available borrowings under our credit facilities, common and preferred stock issuances, and debt securities issuances, including mortgage indebtedness and senior unsecured debt. We determine the amount of equity and debt financing to be used when acquiring an asset by evaluating our cost of equity capital, terms available in the credit markets (such as interest rate, repayment provisions and maturity) and our assessment of the particular asset’s risk.
In October 2020, we renewed our shelf registration statement with the SEC, which became immediately effective upon filing and will expire in October 2023, unless renewed before. Under this shelf registration statement, we may offer shares of our common or preferred stock or debt securities in amounts, at prices, and on terms to be announced when, and if, such securities are offered. The specifics of any future offerings, along with the use of proceeds from any such offerings, will be described in detail in a prospectus supplement or other offering materials at the time of such offerings.
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Issuance of common stock. We may issue common stock when we believe that our share price is at a level that allows the offering proceeds to be accretively invested into additional properties, to permanently finance properties that were financed by our credit facilities, or to repay outstanding debt at or before maturity.
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Issuance of debt securities. We have issued senior unsecured debt securities and have obtained other senior unsecured debt at the Operating Partnership level. In addition, our debt historically has also consisted of some long-term borrowings secured by specific real estate assets or, more typically, pools of real estate assets. To the extent practicable, we expect to maintain a well-balanced debt profile with manageable and staggered maturities.
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Cash provided by operations. In addition to cash provided by the issuance of common stock and debt securities, we expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs, and cash distributions to common and preferred stockholders, primarily through cash provided by operating activities and borrowings under our available credit facilities.
We anticipate that we will continue to use a number of different sources to finance our acquisitions and operations going forward; however, we cannot assure you that we will have access to the capital and credit markets at times and at terms that are acceptable to us.
Competition
We face competition for acquisitions from investors, including traded and non-traded public REITs, private equity funds and institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such. This competition will increase if investments in real estate become more attractive relative to other forms of investment.
As a landlord, we compete in the multi-billion dollar commercial real estate market with numerous developers and owners of properties, many of which own properties similar to ours in the same markets in which our properties are located. In operating and managing our portfolio, we compete for tenants based on a number of factors, including location, rental rates and flexibility. Some of our competitors have greater economies of scale, have lower cost of capital, have access to more resources, and have greater name recognition than we do. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose our tenants or prospective tenants and we may be pressured to reduce our rental rates or to offer substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options in order to retain tenants when our leases expire.
Regulation
GENERAL
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of our properties has the necessary permits and approvals.
AMERICANS WITH DISABILITIES ACT
Pursuant to the ADA, our properties are required to meet federal requirements related to access and use by persons with disabilities. Compliance with the ADA, as well as a number of additional federal, state and local laws and regulations, may require modifications to properties we currently own and any properties we purchase, or may restrict renovations of those properties. Noncompliance with these laws or regulations could result in fines or an award of damages to private litigants, as well as the incurrence of costs to make modifications to attain compliance. Although our tenants are generally responsible for compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the property for a failure of one of our tenants to comply with such laws or regulations.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations regulate releases of hazardous or toxic substances into the environment. Some of our properties contain, have contained, or are adjacent to or near properties that contain or have contained storage tanks for petroleum products or that involve or involved the use of hazardous or toxic substances. Under certain of these laws and regulations, a current or previous owner, operator or tenant may be required to investigate and clean-up hazardous or toxic substances or petroleum product releases or threats of releases, and may be held liable to a government entity or third parties for property damage and for investigation, clean-up and monitoring costs incurred by those parties in connection with actual or threatened contamination. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the contamination. The liability may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may seek contributions from other identified, solvent, responsible parties for their fair share toward these costs. In addition, strict environmental laws regulate a variety of activities that can occur on a property, including the storage of petroleum products or other hazardous or toxic substances, air emissions and water discharges. Such laws may impose fines or penalties for violations.
Environmental laws also govern ACM. Federal regulations require building owners and those exercising control over a building’s management to identify and warn, through signs and labels, of potential hazards posed by workplace exposure to ACM in their building. The regulations also have employee training, record keeping and due diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations and we could be subject to lawsuits if personal injury from exposure to ACM occurs. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of ACM when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for improper handling or a release into the environment of ACM and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with ACM. In addition, our properties may contain or develop harmful mold or other airborne contaminants. The presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. Further, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury occurs.
Before completing an acquisition, we obtain environmental assessments carried out in accordance with the Standard Practice for Environmental Site Assessments as set by ASTM International. These assessments generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historical aerial photographs and other information on past uses of the property. These assessments are limited in scope, however, if recommended in the initial assessments, we may undertake additional assessments such as soil and/or groundwater samplings, other limited subsurface investigations and ACM or mold surveys. A prior owner or operator of a property or historic operations at our properties may have created a material environmental condition that is not known to us or the independent consultants preparing the site assessments. Generally, our leases provide that the lessee will indemnify us for any loss or expense we incur as a result of the presence, use or release of hazardous materials on our property. However, if environmental concerns are not satisfactorily resolved in any initial or additional assessments, we may obtain environment insurance policies to insure against potential environmental risk or loss depending on the type of property, the availability and cost of the insurance and various other factors we deem relevant (i.e., an environmental occurrence affects one of our properties where our lessee may not have the financial capability to honor its indemnification obligations to us).
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and the Section 16 filings of our directors and officers, as well as any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website www.spiritrealty.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Also available on our website, free of charge, are corporate governance documents, including our Corporate Governance Guidelines and Code of Business Conduct and Ethics. We intend to disclose on our website any amendment to, or waiver of, any provisions of our Code of Business Conduct and Ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the SEC or the NYSE. Information contained on or hyperlinked from our website is not incorporated by reference into, and should not be considered part of, this Annual Report on Form 10-K or our other filings with the SEC. A copy of this Annual Report on Form 10-K is also available without charge upon written request to: Investor Relations, Spirit Realty Capital, Inc., 2727 North Harwood Street, Suite 300, Dallas, Texas 75201.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Set forth below are some (but not all) of the risk factors that could adversely affect our business, financial condition, results of operations, cash flow, liquidity and ability to access the capital markets and satisfy debt service obligations and make distributions to our stockholders (which we refer to collectively as “materially and adversely affecting” us or having “a material adverse effect” on us and comparable phrases) and the market price of our securities. Because we operate in a highly competitive and rapidly changing environment, new risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
RISKS RELATED TO OUR BUSINESS AND PROPERTIES
Risks related to commercial real estate ownership could reduce the value of our properties.
Our core business is the ownership of retail, industrial and other real estate that is leased to companies on a triple-net basis. Accordingly, our performance is subject to risks inherent to the ownership of commercial real estate, including:
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inability to collect rent from tenants due to financial hardship, including bankruptcy;
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changes in local real estate markets resulting in the lack of availability or demand for single-tenant retail space;
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changes in consumer trends and preferences that reduce the demand for products/services of our tenants;
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inability to lease or sell properties upon expiration or termination of existing leases;
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environmental risks related to the presence of hazardous or toxic substances or materials on our properties;
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subjectivity of real estate valuations and changes in such valuations over time;
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illiquid nature of real estate compared to most other financial assets;
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changes in laws and regulations, including those governing real estate usage and zoning;
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changes in interest rates and the availability of financing; and
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changes in the general economic and business climate.
The occurrence of any of the risks described above may cause the value of our real estate to decline.
Actual or perceived threats associated with epidemics, pandemics or public health crises, including the ongoing COVID-19 pandemic, could have a material adverse effect on us.
Epidemics, pandemics or other public health crises, including the ongoing COVID-19 pandemic, that impact economic and market conditions, particularly in markets where our properties are located, and preventative measures taken to alleviate any public health crises, may have a material adverse effect on us and our tenants, and may affect our ability as a net-lease real estate investment trust to acquire properties or lease properties to our tenants, who may be unable, as a result of any economic downturn or longer-term changes in consumer demand occasioned by public health crises, to make rental payments when due. Certain of our tenants, especially those in the movie theater, casual dining restaurant, entertainment, health and fitness and hotel industries, have been directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, and accordingly, their ability to make rental payments when due, could be adversely affected by decreased consumer confidence or longer-term changes in consumer demand as a result of the COVID-19 pandemic. Although most state governments and other authorities have lifted or reduced restrictions, they and others may reinstitute these measures in the future, or impose new, more restrictive measures, if the risks, or the perception of the risks, related to the COVID-19 pandemic worsen at any time.
The ongoing COVID-19 pandemic has directly resulted, and may continue to result, in a reduction in our rental income and/or an increase in our property costs and impairments. In addition, it has resulted, and may continue to result, in an increase in our general and administrative expenses, as we have incurred and may continue to incur costs to negotiate rent deferrals, lease restructures and/or lease terminations and/or enforce our contractual rights (including through litigation), as we deem appropriate on a case-by-case basis. For the year ended December 31, 2021, we deferred $8.4 million of rent and abated $1.5 million of rent. The deferral periods ranged generally from one to six months, with an average repayment period of 12 months. As of February 10, 2022, we have not granted additional rent deferrals or abatements beyond December 31, 2021. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, we can provide no assurance that such efforts or our efforts in future periods will be successful. We are not able to predict whether any resurgence of COVID-19, as a result of a new variant or otherwise, or any other epidemics, pandemics or other public health crises will occur in the future that may have similar impacts. Nevertheless, the ongoing COVID-19 pandemic and restrictions intended to prevent its spread and the current financial, economic and capital markets environment and future developments in these and other areas present material risks and uncertainties with respect to the adverse impacts on us. Such adverse impacts could depend on, among other factors:
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the financial condition and viability of our tenants - many of which are in retail industries - and their ability or willingness to pay rent in full on a timely basis;
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state, local, federal and industry-initiated efforts that may adversely affect landlords, including us, and their ability to collect rent and/or enforce remedies for the failure to pay rent;
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our need to restructure leases with our tenants and our ability to do so on favorable terms or at all;
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our ability to renew leases or re-lease available space in our properties on favorable terms or at all in the event of nonrenewal or in the event we exercise our right to replace an existing tenant, and obligations we may incur in connection with the replacement of an existing tenant;
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a severe and prolonged disruption and instability in the global financial markets may affect our or our tenants’ ability to access capital necessary to fund our respective business operations or retire, replace or renew maturing liabilities on a timely basis, on attractive terms or at all and may adversely affect the valuation of financial assets and liabilities;
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a refusal or failure of one or more lenders under the 2019 Revolving Credit and Term Loan Agreement to fund their respective financing commitment to us;
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the broader impact of the severe economic contraction due to the COVID-19 pandemic and restrictions intended to prevent its spread, the resulting increase in unemployment that has occurred and its effect on consumer behavior, and negative consequences that will occur if these trends are not timely reversed;
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disruptions in our tenants’ supply chains or delays in the delivery of products, services or other materials necessary for our tenants’ operations, which could force our tenants to reduce, delay or eliminate offerings of their products and services, reduce or eliminate their revenues and liquidity and/or result in their bankruptcy or insolvency;
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the further utilization of e-commerce in certain industries as a result of the temporary closure of many retail properties, which may lead to the closure of underperforming properties by retailers;
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our and our tenants’ ability to manage our respective businesses to the extent our and their management or personnel (including on-site employees) are impacted in significant numbers by the COVID-19 pandemic and are otherwise not willing, available or allowed to conduct work; and
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our and our tenants’ ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during the COVID-19 pandemic.
We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth, or our future acquisitions may not yield the returns we expect.
Our ability to expand through acquisitions requires us to identify and complete investment opportunities on favorable terms that are compatible with our growth strategy. Our ability to acquire properties on favorable terms and successfully operate them may be constrained by the following significant risks:
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competition from other real estate investors, including REITs and institutional investment funds, which may be able to accept more risk, including higher acquisition prices, than we can prudently manage;
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competition from other real estate investors across our acquisition sourcing channels (including brokers, existing tenant relationships, prospective tenant relationships, etc.) that may significantly reduce our acquisition volume or increase the purchase price for a property we acquire;
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financing for an acquisition may not be available on favorable terms or at all for potential acquisitions;
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significant costs and management attention diverted to evaluate and negotiate potential acquisitions, including ones that we may not subsequently complete;
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acquisition of properties that are not and may not become accretive to our results;
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cash flow from an acquired property may be insufficient to meet our required principal and interest payments with respect to debt used to finance the acquisition of such property;
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necessary improvements or renovations to acquired properties may exceed budgeted amounts;
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market conditions may result in higher than expected vacancy rates and lower than expected rental rates; or
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properties acquired may be subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as clean-up of undisclosed environmental contamination or claims by tenants, vendors or other persons dealing with the former owners of the properties.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
The real estate investments made, and expected to be made, by us are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more of our properties in response to changing economic, financial or investment conditions is limited. We may be unable to dispose of properties by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of the jurisdiction in which a property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms.
Dispositions of real estate assets could change the holding period assumption in our valuation analyses, which could result in material impairment losses and adversely affect our financial results.
We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If we change our intended holding period due to our intention to sell or otherwise dispose of an asset, we must reevaluate whether that asset is impaired under GAAP. Depending on the carrying value of the property at the time we change our intention and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our financial results.
In the future, we may choose to acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in the Operating Partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
High geographic concentration of our properties could magnify the effects of adverse economic or regulatory developments in such geographic areas on our operations and financial condition.
As of December 31, 2021, 12.2% of our portfolio (as a percentage of ABR) was located in Texas, representing the highest concentration of our assets. We are susceptible to adverse developments in the economic or regulatory environments of the geographic areas in which we concentrate (or in which we may develop a substantial concentration of assets in the future), such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes or costs of complying with governmental regulations.
Our tenants may fail to successfully operate their businesses, which could adversely affect us.
The success of our investments is materially dependent on the financial stability of our tenants’ financial condition and leasing practices. At any given time, our tenants may experience a downturn in their business, including as a result of adverse economic conditions, that may weaken the operating results and financial condition of individual properties or of their business as whole. We depend on our tenants to operate the properties we own in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage and pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status. Although our occupied properties are generally essential to the tenant’s generation of sales and profits, this does not guarantee that a tenant’s operations at a particular property will be successful or that the tenant will be able to meet all of its obligations to us. As a result, a tenant may delay lease commencement, decline to extend a lease upon its expiration, fail to make rental payments when due, become insolvent or declare bankruptcy.
Single-tenant leases involve particular and significant risks related to tenant default.
Our strategy focuses primarily on investing in single-tenant triple-net leased properties throughout the United States. The financial failure of, or default in payment by, a tenant under its lease is likely to cause a significant reduction in, or elimination of, our rental revenue from that property and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. This risk is magnified in situations where we lease multiple properties to a single tenant under a master lease. The failure or default of a tenant under a master lease could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master lease structure may be beneficial to us because it restricts the ability of tenants to individually remove underperforming properties from the portfolio of properties leased from us, there is no guarantee that a tenant will not default in its obligations to us or decline to renew its master lease upon expiration.
The bankruptcy or insolvency of any of our tenants could result in the termination of such tenant’s lease and material losses to us.
The bankruptcy or insolvency of any of our tenants could diminish the income we receive from that tenant’s lease or leases. A substantial portion of our properties are leased to unrated tenants, which may increase the risk that a tenant bankruptcy or insolvency will occur. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. In addition, any claim we have for unpaid past rent, if any, may not be paid in full. We may also be unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms.
Moreover, tenants who are considering filing for bankruptcy protection may request that we agree to amendments of their master leases to remove certain of the properties they lease from us under such master leases. We cannot guarantee that we will be able to sell or re-lease such properties or that lease termination fees, if any, received in exchange for such releases will be sufficient to make up for the rental revenues lost as a result of such lease amendments.
We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties.
We compete with numerous developers, owners and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments in order to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties.
Decrease in demand for discretionary retail and restaurant space may materially and adversely affect us.
As of December 31, 2021, leases representing approximately 15.6% and 10.4% of our ABR were with tenants in discretionary retail and restaurant industries, respectively, and we may acquire additional properties in the future leased to discretionary retail and restaurant tenants. The market for discretionary retail and restaurant space has previously been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retail and restaurant companies, the ongoing consolidation in the discretionary retail and restaurant industries, the excess amount of discretionary retail and restaurant space in a number of markets and, in the case of the discretionary retail industry, increasing consumer purchases over the Internet. To the extent that these conditions continue, they are likely to negatively affect market rents for discretionary retail and restaurant space.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
Our results of operations depend on our ability to strategically lease space in our properties (by renewing or re-leasing expiring leases and leasing vacant space), optimize our tenant mix or lease properties on more economically favorable terms. As of December 31, 2021, leases representing approximately 1.5% of our ABR will expire during 2022. As of December 31, 2021, four of our properties, representing approximately 0.2% of our total properties, were vacant. Current tenants may decline, or may not have the financial resources available, to renew current leases and we cannot guarantee that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew their leases as they expire, we will have to find new tenants to lease our properties and there is no guarantee that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights, below-market renewal options or other lease incentive payments will not be offered to attract new tenants. We may experience significant costs in connection with renewing, leasing or re-leasing a significant number of our properties.
Our ability to realize future rent increases will vary depending on changes in the CPI.
As of December 31, 2021, approximately 16.2% of our ABR is subject to rent escalators which increase rent by a multiple of any increases in the CPI or the lesser of (a) 1 to 2 times any increase in the CPI over a specified period, (b) a fixed percentage, or (c) a fixed schedule. If the product of any increase in the CPI multiplied by the applicable factor is less than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on a fixed percentage. Therefore, during periods of low inflation or deflation, small increases or decreases in the CPI subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on fixed percentages or amounts. Conversely, if the product of any increase in the CPI multiplied by the applicable factor is more than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on an increase in CPI. Therefore, periods of high inflation subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on CPI increases.
Property vacancies could result in significant capital expenditures and illiquidity.
The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new tenant. Many of the leases we enter into or acquire are for properties that are specially suited to the particular business of our tenants. Because these properties have been designed or physically modified for a particular tenant, if the current lease is terminated or not renewed, we may be required to renovate the property at substantial costs, decrease the rent we charge or provide other concessions in order to lease the property to another tenant. In the event we are required to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed or modified. This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions, including tenant demand.
We may be vulnerable to security breaches or cyber-attacks which could disrupt our operations and have a material adverse effect on our financial performance and operating results.
Security breaches, cyber-attacks, or disruption, of our or our third-party service providers’ physical or information technology infrastructure, networks and related management systems could result in, among other things, a breach of our networks and information technology infrastructure, the misappropriation of our or our tenants’ proprietary or confidential information, interruptions or malfunctions in our or our tenants’ operations, delays or interruptions to our ability to meet tenant needs, breach of our legal, regulatory or contractual obligations, inability to access or rely upon critical business records, unauthorized access to our facilities or other disruptions in our operations. Numerous sources can cause these types of incidents, including: physical or electronic security breaches; viruses, ransomware or other malware; hardware vulnerabilities such as Meltdown and Spectre; accident or human error by our own personnel or third parties; criminal activity or malfeasance (including by our own personnel); fraud or impersonation scams perpetrated against us or our partners or tenants; or security events impacting our third-party service providers or our partners or tenants. Our exposure to cybersecurity threats and negative consequences of cybersecurity breaches will likely increase as we store an increasing amount of tenant data.
We recognize the increasing volume of cyber-attacks and employ commercially practical efforts to provide reasonable assurance such attacks are appropriately mitigated. We may be required to expend significant financial resources to protect against or respond to such breaches. Techniques used to breach security change frequently and are generally not recognized until launched against a target, so we may not be able to promptly detect that a security breach or unauthorized access has occurred. We also may not be able to implement security measures in a timely manner or, if and when implemented, we may not be able to determine the extent to which these measures could be circumvented. As we provide assurances to our tenants that we provide a high level of security, if an actual or perceived security breach occurs, the market’s perception of our security measures could be harmed and we could lose current and potential tenants, and such a breach could be harmful to our brand and reputation. Any breaches that may occur could expose us to increased risk of lawsuits, material monetary damages, potential violations of applicable privacy and other laws, penalties and fines, harm to our reputation and increases in our security and insurance costs. In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the data. We cannot guarantee that any backup systems, regular data backups, security protocols, network protection mechanisms and other procedures currently in place, or that may be in place in the future, will be adequate to prevent network and service interruption, system failure, damage to one or more of our systems or data loss in the event of a security breach or attack.
In addition, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the United States. We may not be able to limit our liability or damages in the event of such a loss. Data protection legislation is becoming increasingly common in the United States at both the federal and state level and may require us to further modify our data processing practices and policies. For example, the California Consumer Privacy Act of 2018, which took effect on January 1, 2020 and is expected to provide California residents with increased privacy rights and protections with respect to their personal information. Compliance with existing, proposed and recently enacted laws and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, fines and penalties, or damage to our reputation and credibility.
Inflation may materially and adversely affect us and our tenants.
Increased inflation could have a negative impact on variable-rate debt we currently have or that we may incur in the future. Our leases typically contain provisions designed to mitigate the adverse impact of inflation on our results of operations. Because tenants are typically required to pay all property operating expenses, increases in property-level expenses at our leased properties generally do not affect us. However, increased operating expenses at vacant properties and the limited number of properties that are not subject to full triple-net leases could cause us to incur additional operating expenses, which could increase our exposure to inflation. Additionally, the increases in rent provided by many of our leases may not keep up with the rate of inflation. Increased costs may also have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us.
The market price and trading volume of shares of our common stock may fluctuate or decline.
The market price and trading volume of our common stock may fluctuate widely due to various factors, including:
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broad market fluctuations unrelated to our or our competitors’ operating performances;
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actual or anticipated variations in our or our competitors' quarterly operating results or distributions;
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publication of research reports about us, our competitors or the real estate industry;
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market reaction to any additional indebtedness we incur or debt or equity securities we or the Operating Partnership issue in the future;
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additions or departures of key management personnel;
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changes in our credit ratings;
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the financial condition, performance and prospects of our tenants;
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changes in market interest rates in comparison to the distribution yield on shares of our common stock; and
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the realization of any of the other risk factors presented in this Annual Report on Form 10-K.
We may issue shares of our common stock or other securities without stockholder approval, including shares issued to satisfy REIT distribution requirements. The Operating Partnership may issue partnership interests to third parties, and such partnership interests would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when partnership interests in the Operating Partnership are issued. Our existing stockholders have no preemptive rights to acquire any of these securities, and any issuance of equity securities by us or the Operating Partnership may dilute stockholder investment.
If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately and timely report our financial results.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. We are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.
As a result of material weaknesses or significant deficiencies that may be identified in our internal control over financial reporting in the future, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we or our independent registered public accounting firm discover any such weaknesses or deficiencies, we will make efforts to further improve our internal control over financial reporting controls. However, there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal control over financial reporting could harm operating results or cause us to fail to meet our reporting obligations, which could affect the listing of our common stock on the NYSE. Ineffective internal control over financial reporting and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock.
Loss of our key personnel with long-standing business relationships could materially impair our ability to operate successfully.
Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel, particularly our President and Chief Executive Officer, Jackson Hsieh, who has extensive market knowledge and relationships and exercises substantial influence over our operational, financing, acquisition and disposition activity. Many of our other key executive personnel, particularly our executive and senior vice presidents, also have extensive experience and strong reputations in the real estate industry and have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel and arranging necessary financing. In particular, the extent and nature of the relationships that these individuals have developed with financial institutions and existing and prospective tenants is critically important to the success of our business. The loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry personnel, which could materially and adversely affect us.
Costs of compliance with, or liabilities related to, environmental laws may materially and adversely affect us.
The properties we own or have owned in the past may subject us to known and unknown environmental liabilities. Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate, clean up such contamination and liability for harm to natural resources. We may face liability regardless of:
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our knowledge of the contamination;
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the timing of the contamination;
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the cause of the contamination; or
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the party responsible for the contamination of the property.
We obtain Phase I environmental site assessments on all properties we finance or acquire, however, these assessments are limited in scope and therefore may not reveal all environmental conditions affecting a property. Therefore, there could be undiscovered environmental liabilities on the properties we own. Some of our properties use, or may have used in the past, underground tanks for the storage of petroleum-based products or waste products that could create a potential for release of hazardous substances or penalties if tanks do not comply with legal standards. If environmental contamination exists on our properties, we could be subject to strict, joint and/or several liability for the contamination by virtue of our ownership interest. Some of our properties may contain ACM. Strict environmental laws govern the presence, maintenance and removal of ACM and such laws may impose fines and penalties for failure to comply with these requirements or expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos). Strict environmental laws also apply to other activities that can occur on a property, such as air emissions and water discharges, and such laws may impose fines and penalties for violations.
The presence of hazardous substances on a property may adversely affect our ability to sell, lease or improve the property or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or businesses may be operated, and these restrictions may require substantial expenditures.
In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could be subject to strict liability by virtue of our ownership interest. We cannot be sure that our tenants will, or will be able to, satisfy their indemnification obligations, if any, under our leases. Furthermore, the discovery of environmental liabilities on any of our properties could lead to significant remediation costs or to other liabilities or obligations attributable to the tenant of that property, which may affect such tenant’s ability to make payments to us, including rental payments and, where applicable, indemnification payments.
Our environmental liabilities may include property damage, personal injury, investigation and clean-up costs. These costs could be substantial. Although we may obtain insurance for environmental liability for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies.
Insurance on our properties may not adequately cover all losses, which could materially and adversely affect us.
Our tenants are required to maintain liability and property insurance coverage for the properties they lease from us pursuant to triple-net leases. Pursuant to such leases, our tenants are generally required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged.
Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Furthermore, in the event we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.
Compliance with the ADA and fire, safety and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.
Our properties are subject to the ADA, fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases and financing agreements to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, our tenants' ability to cover the costs could be adversely affected. We may be required to expend our own funds to comply with the provisions of the ADA. We may be required to make substantial capital expenditures to comply with these requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.
To maintain our qualification as a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we are subject to federal corporate income tax to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including acquisition financing, from operating cash flow and may have to rely on third-party sources. We may not be able to obtain the financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:
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general market conditions;
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the market’s perception of our growth potential;
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our current debt levels;
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our current and expected future earnings;
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our cash flow and cash distributions; and
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the market price per share of our common stock.
If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
In recent history, we have raised a significant amount of debt through senior unsecured debt securities. We have generally used the proceeds from these financings to repay debt and fund real estate acquisitions. No assurance can be given that we will have access to the capital markets in the future at times and on terms that are acceptable to us, whether to refinance existing debt or to raise additional debt capital.
We have significant indebtedness outstanding, which may expose us to risk of default under our debt obligations, limit our ability to obtain additional financing or affect the market price of our common stock or debt securities.
As of December 31, 2021, the total principal balance outstanding on our indebtedness was approximately $3.0 billion, of which the $288.4 million outstanding under the 2019 Credit Facility incurs interest at a variable rate. We may also incur significant additional debt to finance future investment activities. Payments of principal and interest on borrowings may leave us with insufficient cash resources to meet our cash needs or make the distributions to our common stockholders necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
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our cash flow may be insufficient to meet our required principal and interest payments;
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cash interest expense and financial covenants relating to our indebtedness may limit or eliminate our ability to make distributions to our common stockholders;
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we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon acquisition opportunities or meet operational needs;
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we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
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increases in interest rates could increase our interest expense for our variable interest rate debt;
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we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;
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we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;
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we may default on our obligations and the lenders or mortgagees may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases;
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we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;
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we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and
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our default under any loan with cross-default provisions could result in a default on other indebtedness.
Changes in our leverage ratios may also negatively impact the market price of our equity or debt securities. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
The agreements governing our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our preferred and common stockholders.
The agreements governing our indebtedness contain restrictions and covenants that limit or will limit our ability to operate our business. These covenants, as well as any additional covenants to which we may be subject in the future because of additional indebtedness, could cause us to forgo investment opportunities, reduce or eliminate distributions to our preferred and common stockholders or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. In addition, the agreements may have cross-default provisions, which provide that a default under one of our financing agreements would lead to a default on some or all of our debt financing agreements. The covenants and other restrictions under our debt agreements affect, among other things, our ability to:
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incur indebtedness;
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create liens on assets;
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sell or substitute assets;
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modify certain terms of our leases;
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prepay debt with higher interest rates;
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manage our cash flows; and
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make distributions to equity holders.
Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.
Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all.
The credit markets can experience significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances could materially impact liquidity in the financial markets, making financing terms for borrowers less attractive, and in certain cases, result in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness. We primarily use external financing to fund acquisitions and to refinance indebtedness as it matures. Reductions in our available borrowing capacity or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us, and we could be forced to limit our acquisition activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact our acquisition yields, earnings per share and cash flow as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us. Total debt service, including scheduled principal maturities and interest, for 2022 and 2023 is $94.0 million and $379.8 million, respectively. Debt service includes the final repayment of $288.4 million for the 2019 Credit Facility in 2023.
Changes in market interest rates may adversely impact our variable debt expenses.
The 2019 Credit Facility incurs interest at a variable rate using LIBOR and, as such, our interest expense will increase with increases in LIBOR. Further, in 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. If LIBOR ceases to exist after 2021, a comparable or successor reference rate as approved under the 2019 Revolving Credit and Term Loan Agreement will apply or such other reference rate as may be agreed by the Company and the lenders under the respective agreements will apply. To the extent these interest rates are less favorable than LIBOR, our interest expense will increase.
Some of our financing arrangements involve balloon payment obligations.
Some of our financings require us to make a lump-sum or “balloon” payment at maturity, including the final repayment of $288.4 million for the 2019 Credit Facility in 2023. Our ability to make any balloon payment is uncertain and may depend on our ability to obtain additional financing or our ability to sell our properties. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell our properties at a price sufficient to make the balloon payment, if at all. If the balloon payment is refinanced at a higher rate, it will reduce or eliminate any income from our properties. In addition, if we are unable to refinance these maturities or otherwise retire the indebtedness, we could be forced to relinquish the related collateral.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction, even if such a change in control may be in the interest of our stockholders.
Our charter contains certain restrictions on ownership and transfer of our stock. Our charter contains various provisions that are intended to preserve our qualification as a REIT and, subject to certain exceptions, authorize our directors to take such actions as are necessary or appropriate to preserve our qualification as a REIT. For example, our charter prohibits the actual, beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock. Our Board of Directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our stock may:
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discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; or
•
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
We could increase the number of authorized shares of stock, classify and reclassify un-issued stock and issue stock without stockholder approval. Our Board of Directors, without stockholder approval, has the power under our charter to amend our charter to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue, to authorize us to issue authorized but un-issued shares of our common stock or preferred stock and to classify or reclassify any un-issued shares of our common stock or preferred stock into one or more classes or series of stock and to set the terms of such newly classified or reclassified shares. As a result, we may issue one or more series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of our common stockholders. Although our Board of Directors has no such intention at the present time, it could establish a class or series of common stock or preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interest. Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•
“business combination” provisions that, subject to certain limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or of an affiliate of ours or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within a two-year period immediately prior to the date in question) or any affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose fair price and/or super-majority and stockholder voting requirements on these combinations; and
•
“control share” provisions that provide that a holder of “control shares” of our Company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of outstanding “control shares”) has no voting rights with respect to those shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
As permitted by the MGCL, we have elected, by resolution of our Board of Directors, to opt out of the business combination provisions of the MGCL and, pursuant to a provision in our bylaws, to exempt any acquisition of our stock from the control share provisions of the MGCL. However, our Board of Directors may, by resolution, elect to repeal the exemption from the business combination provisions of the MGCL and may, by amendment to our bylaws, opt into the control share provisions of the MGCL at any time in the future, whether before or after an acquisition of control shares.
Certain provisions of the MGCL set forth in Title 3, Subtitle 8 of the MGCL (“Subtitle 8”) permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could be in the best interests of our stockholders. Our charter contains a provision whereby we have elected, at such time as we became eligible to do so, to be subject to the provisions of Subtitle 8 relating to the filling of vacancies on our Board of Directors only by the remaining directors. Our Board of Directors has adopted a resolution prohibiting us from electing to be subject to the provisions of Subtitle 8 relating to a classified board unless such election is first approved by our stockholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
As permitted by Maryland law, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
•
actual receipt of an improper benefit or profit in money, property or services; or
•
active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our company, our stockholders' and our ability to recover damages from such director or officer may be limited. In addition, our charter authorizes us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law.
Conflicts of interest could arise in the future between the interests of our stockholders and the interests of holders of partnership interests in the Operating Partnership, which may impede business decisions that could benefit our stockholders.
Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the Operating Partnership or any future partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with the management of our company. At the same time, one of our wholly-owned subsidiaries, OP Holdings, as the general partner of the Operating Partnership, has fiduciary duties and obligations to the Operating Partnership and its future limited partners under Delaware law and the partnership agreement of the Operating Partnership in connection with the management of the Operating Partnership. The fiduciary duties and obligations of OP Holdings, as general partner of the Operating Partnership, and its future partners may come into conflict with the duties of the directors and officers of our company.
Under the terms of the partnership agreement of the Operating Partnership, if there is a conflict between the interests of our stockholders on one hand and any future limited partners on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or any future limited partners; provided, however, that for so long as we own a controlling interest in the Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or any future limited partners shall be resolved in favor of our stockholders.
The partnership agreement also provides that the general partner will not be liable to the Operating Partnership, its partners or any other person bound by the partnership agreement for monetary damages for losses sustained, liabilities incurred or benefits not derived by the Operating Partnership or any future limited partner, except for liability for the general partner’s intentional harm or gross negligence. Moreover, the partnership agreement provides that the Operating Partnership is required to indemnify the general partner and its members, managers, managing members, officers, employees, agents and designees from and against any and all claims that relate to the operations of the Operating Partnership, except (1) if the act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active or deliberate dishonesty, (2) for any transaction for which the indemnified party received an improper personal benefit, in money, property or services or otherwise in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal proceeding, if the indemnified person had reasonable cause to believe that the act or omission was unlawful.
RISKS RELATED TO TAXES AND OUR STATUS AS A REIT
Failure to qualify as a REIT would materially and adversely affect us and the value of our common stock.
We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2005 and we intend to continue operating in such a manner. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT and the statements in this Annual Report on Form 10-K are not binding on the IRS or any court. Therefore, we cannot guarantee that we have qualified as a REIT or that we will remain qualified as such in the future. If we lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders for each of the years involved because:
•
we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to regular U.S. federal corporate income tax;
•
we could be subject to the federal alternative minimum tax for tax years prior to 2018 and increased state and local taxes; and
•
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital and could materially and adversely affect the trading price of our common stock.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. To qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, the composition of our assets and the sources of our income. Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains.
In addition, legislation, new regulations, administrative interpretations or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our TRSs will be subject to income tax as regular corporations in the jurisdictions in which they operate.
If Spirit MTA REIT failed to qualify as a REIT, we could cease to qualify as a REIT and suffer other adverse consequences.
If Spirit MTA REIT failed to qualify as a REIT for any taxable year, such failure to qualify as a REIT could adversely affect our ability to qualify as a REIT. If Spirit MTA REIT failed to qualify as a REIT during the year of the Spin-Off, the income recognized by us in connection with the Spin-Off would not have constituted qualifying income for purposes of the 75% gross income test, which could have adversely affected our ability to qualify as a REIT for such year. In addition, if Spirit MTA REIT failed to qualify as a REIT for any period, the SMTA Preferred Stock would not have qualified as a real estate asset for purposes of the REIT asset tests or produced qualifying income for purposes of the REIT 75% gross income test for such period. In such case, our ownership of the SMTA Preferred Stock during such period could adversely affect our ability to qualify as a REIT, unless we are entitled to relief under an applicable cure provision.
If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe the Operating Partnership is currently treated as a partnership for federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, such partner’s share of its income. We cannot assure you that the IRS will not challenge the status of the Operating Partnership or any other subsidiary partnership or limited liability company in which we own an interest as a disregarded entity or partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership or any such other subsidiary partnership or limited liability company as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of the Operating Partnership or any subsidiary partnerships or limited liability company to qualify as a disregarded entity or partnership for applicable income tax purposes could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners or members, including us.
Our ownership of TRSs is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our TRSs are not conducted on arm’s-length terms.
We own securities in TRSs and may acquire securities in additional TRSs in the future. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets may be represented by securities (including securities of TRSs), other than those securities includable in the 75% asset test, and not more than 20% of the value of our total assets may be represented by securities of TRSs. We anticipate that the aggregate value of the stock and securities of any TRS and other nonqualifying assets that we own will be less than 25% (or 20%, as applicable) of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with any TRSs that we own to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the above limitations or to avoid application of the 100% excise tax discussed above.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.
The IRS may take the position that specific sale-leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of re-characterization unless we elect to make an additional distribution to maintain our REIT status. The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of our REIT taxable income and could cause us to fail the REIT distribution test that requires a REIT to distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all stockholders at the time of declaration rather than the stockholders existing in the taxable year affected by the re-characterization.
We may be forced to borrow funds to maintain our REIT status, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding any net capital gains, and we will be subject to regular corporate income taxes on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. To maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other things, differences in timing between the actual receipt of cash and recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our common stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect our financial condition, results of operations, cash flow, cash available for distributions to our stockholders, and per share trading price of our common stock.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends, which may negatively affect the value of our shares.
Dividends treated as “qualified dividend income” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates, currently at a maximum federal rate of 20%. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Under the 2017 Tax Legislation, however, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common stock.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.
Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions. Accordingly, satisfying the REIT requirements could materially and adversely affect us.
As a result of acquiring C corporations in carry-over basis transactions, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits.
From time to time, we have and may continue to acquire C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.
If we acquire any asset from a corporation that is or has been a C corporation in a carry-over basis transaction, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we will be required to pay tax at the regular corporate tax rate on this gain to the extent of the excess of the fair market value of the asset over our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our stockholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a carry-over basis transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any non-REIT earnings and profits by the close of the taxable year in which such transaction occurs. Any adjustments to the acquired corporation’s income for taxable years ending on or before the date of the transaction, including as a result of an examination of the corporation’s tax returns by the IRS, could affect the calculation of the corporation’s earnings and profits. If the IRS were to determine that we acquired non-REIT earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the carry-over basis transaction occurred, we could avoid disqualification as a REIT by paying a “deficiency dividend.” Under these procedures, we generally would be required to distribute any such non-REIT earnings and profits to our stockholders within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement and may require that we borrow funds to make the distribution even if the then-prevailing market conditions are not favorable for borrowings. In addition, payment of the statutory interest charge could materially and adversely affect us.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
PROPERTY PORTFOLIO DIVERSIFICATION
2,003
99.8%
Owned Properties
Occupancy
States
Tenants
Industries
Diversification By Tenant
The following is a summary of tenant concentration for our owned real estate as of December 31, 2021:
Tenant Concept (1)
Number of
Properties
Total
Square Feet
(in thousands)
Percent of
ABR
Life Time Fitness
3.0
%
ClubCorp
2.9
%
Church's Chicken
2.2
%
BJ's Wholesale Club
1,028
2.2
%
At Home
1,684
2.1
%
Home Depot
2.0
%
Circle K
1.9
%
Dollar Tree / Family Dollar
1.8
%
GPM (C-Store)
1.7
%
Walgreens
1.7
%
Other(2)
1,451
40,899
78.5
%
Vacant
-
Total
2,003
49,145
100.0
%
(1)
Tenant concentration represents concentration by the legal entities ultimately responsible for obligations under the lease agreements or affiliated entities. Concentration is shown by tenant concept, which represents the brand or trade name under which the tenant operates. Other tenants may operate under the same or similar brand or trade name.
(2)
No tenants within Other individually account for greater than 1.7% of ABR.
Lease Expirations
As of December 31, 2021, the weighted average remaining non-cancellable initial term of our leases (based on ABR) was 10.4 years. The following is a summary of lease expirations for our owned real estate as of December 31, 2021, assuming that tenants do not exercise any renewal options or early termination rights:
Leases Expiring In:
Number of
Properties
ABR
(in thousands)
Total Square
Feet
(in thousands)
Percent of ABR
$
9,638
1.5
%
24,586
2,174
4.2
%
17,566
1,565
3.0
%
19,318
1,547
3.3
%
42,069
4,144
7.2
%
48,025
3,778
8.2
%
33,091
2,267
5.6
%
42,096
2,832
7.2
%
23,314
2,384
4.0
%
34,815
4,378
5.9
%
Thereafter
293,613
22,721
49.9
%
Vacant
-
-
Total owned properties
2,003
$
588,131
49,145
100.0
%
Diversification By Geography
The following is a summary of geographic concentration for our owned real estate as of December 31, 2021:
Location
Number of
Properties
Total Square Feet
(in thousands)
Percent of
ABR
Location (continued)
Number of
Properties
Total Square Feet
(in thousands)
Percent of ABR
Texas
5,671
12.2
%
Arkansas
1.2
%
Florida
2,996
8.9
%
Massachusetts
1.2
%
Georgia
2,755
6.0
%
Utah
1.0
%
Ohio
3,447
5.4
%
Kansas
1.0
%
California
1,559
4.2
%
Alaska
0.9
%
Tennessee
2,185
4.1
%
New Jersey
0.9
%
Michigan
2,080
3.9
%
New Hampshire
0.9
%
Illinois
1,395
3.4
%
Wisconsin
0.9
%
New York
2,054
3.4
%
Idaho
0.8
%
North Carolina
1,892
3.3
%
Connecticut
0.7
%
Arizona
2.9
%
Washington
0.5
%
Missouri
1,567
2.9
%
Maine
0.4
%
South Carolina
1,073
2.8
%
West Virginia
0.4
%
Alabama
1,145
2.7
%
Delaware
0.3
%
Maryland
1,401
2.7
%
Nebraska
0.3
%
Colorado
1,158
2.3
%
Montana
0.3
%
Virginia
1,339
2.2
%
North Dakota
0.3
%
Minnesota
1,050
2.1
%
Iowa
0.2
%
Indiana
1,810
1.9
%
Rhode Island
0.2
%
Oklahoma
1,030
1.8
%
Oregon
0.2
%
New Mexico
1.7
%
South Dakota
0.2
%
Mississippi
1.6
%
Wyoming
0.1
%
Pennsylvania
1.6
%
U.S. Virgin Islands
0.1
%
Kentucky
1.6
%
Nevada
0.1
%
Louisiana
1.3
%
Vermont
*
*
Less than 0.1%
Diversification By Asset Type and Tenant Industry
The following is a summary of asset type concentration, the industry of the underlying tenant operations for our retail properties and the underlying property use for our non-retail properties as of December 31, 2021:
Asset Type
Tenant Industry / Underlying Use
Number of
Properties
Total
Square Feet
(in thousands)
Percent of
ABR
Retail
1,749
27,534
71.6
%
Health and Fitness
2,631
7.2
%
Convenience Stores
1,045
6.7
%
Restaurants - Quick Service
5.5
%
Restaurants - Casual Dining
4.9
%
Dealerships
4.1
%
Movie Theaters
1,953
4.1
%
Car Washes
3.9
%
Drug Stores / Pharmacies
3.7
%
Automotive Service
1,032
3.5
%
Entertainment
1,070
3.1
%
Dollar Stores
1,768
3.0
%
Warehouse Club and Supercenters
1,659
2.7
%
Home Improvement
1,692
2.6
%
Grocery
1,654
2.6
%
Home Décor
2,235
2.4
%
Specialty Retail
1,198
2.1
%
Sporting Goods
1,124
2.1
%
Department Stores
1,424
1.7
%
Early Education
1.6
%
Home Furnishings
1.5
%
Automotive Parts
0.9
%
Other
0.7
%
Office Supplies
0.5
%
Pet Supplies & Service
0.4
%
Apparel
0.1
%
Vacant
-
Non-Retail
21,611
28.4
%
Distribution
10,413
10.7
%
Manufacturing
7,971
7.8
%
Country Club
2.9
%
Office
1,087
2.7
%
Medical
2.6
%
Data Center
1.1
%
Hotel
0.5
%
Flex
0.1
%
Total
2,003
49,145
100.0
%

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
From time-to-time, we may be subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosure
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION FOR COMMON STOCK, HOLDERS OF RECORD AND DIVIDEND POLICY
Our common stock is traded on the NYSE under the symbol “SRC.” As of February 10, 2022, there were approximately 2,024 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
We intend to pay regular quarterly dividends to our stockholders, although all future distributions will be declared and paid at the discretion of the Board of Directors and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES
No sales of unregistered securities. Net proceeds of $197.2 million from sales of registered securities during the fourth quarter of 2021 were used for funding acquisitions, operating expenses and payment of interest and principal on current debt financings.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
EQUITY COMPENSATION PLAN INFORMATION
Our equity compensation plan information required by this item will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
PERFORMANCE GRAPH
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act. The following graph shows our cumulative total stockholder return for the five most recent fiscal years, with stock prices retroactively adjusted for the Spin-Off of SMTA. The graph assumes a $100 investment in each of the indices on December 31, 2016 and the reinvestment of all cash dividends. Our stock price performance shown in the following graph is not indicative of future stock price performance.
Period Ended
Index:
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
Spirit Realty Capital, Inc.
$
100.00
$
86.74
$
86.18
$
127.20
$
111.98
$
141.82
S&P 500
$
100.00
$
119.42
$
111.97
$
144.31
$
167.77
$
212.89
NAREIT US Equity REIT Index
$
100.00
$
105.23
$
100.36
$
126.45
$
116.34
$
166.64

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Spirit Realty Capital, Inc. is a New York Stock Exchange listed company under the ticker symbol "SRC." We are a self-administered and self-managed REIT with in-house capabilities including acquisition, credit research, asset management, portfolio management, real estate research, legal, finance and accounting functions. We primarily invest in single-tenant real estate assets throughout the United States, which are generally acquired through sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high quality tenants operating in retail, industrial, and other property types. Single-tenant, operationally essential real estate consists of properties that are free-standing, commercial real estate facilities where our tenants conduct activities that are essential to the generation of their sales and profits. Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs.
As of December 31, 2021, our diverse portfolio consisted of 2,003 owned properties across 49 states, which were leased to 321 tenants operating in 35 industries. As of December 31, 2021, our owned properties were approximately 99.8% occupied.
Our operations are carried out through the Operating Partnership. OP Holdings, one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of the Operating Partnership. Although the Operating Partnership is wholly-owned by us, in the future, we may issue partnership interests in the Operating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in the Operating Partnership issued to third parties would be exchangeable for cash or, at our election, shares of our common stock at specified ratios set when such partnership interests in the Operating Partnership are issued.
We have elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in such a manner.
On May 31, 2018, we completed a Spin-Off of certain assets into an independent, publicly traded REIT, SMTA. In conjunction with the Spin-Off, we entered into the Asset Management Agreement, pursuant to which we served as the external asset manager for SMTA for an annual management fee of $20.0 million. In September 2019, SMTA approved a plan of liquidation, the Asset Management Agreement was terminated and the Interim Management Agreement with SMTA became effective. Pursuant to the Interim Management Agreement, we were entitled to receive $1 million during the initial one-year term and $4 million for any renewal one-year term to manage and liquidate the remaining SMTA assets. The Interim Management Agreement was terminated effective September 4, 2020 and we have no further continuing involvement with SMTA.
COVID-19 PANDEMIC IMPACT
At the onset of the COVID-19 pandemic in 2020, many of our tenants requested rent deferrals or other forms of relief. Our discussions with tenants requesting relief substantially focused on industries that were directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, particularly movie theaters, casual dining restaurants, entertainment, health and fitness and hotels. Since the beginning of 2021, we have seen a reduction in the impact of the COVID-19 pandemic and we expect that trend to continue. For the year ended December 31, 2020, we deferred $31.9 million of rent and abated $6.3 million of rent. For the year ended December 31, 2021, we deferred $8.4 million of rent and had net reversals of previous reserves against deferred rent of $5.0 million, resulting in $13.4 million recognized in rental income, and we abated $1.5 million of rent.
As of December 31, 2021, we had an accounts receivable balance related to deferred rent of $15.3 million, compared to $20.2 million as of December 31, 2020. The deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 12 months. As of February 10, 2022, we have not granted any additional deferrals or abatements beyond 2021. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic and restrictions intended to prevent its spread continue for a prolonged period. Refer to Part I, Item 1A. “Risk Factors” for additional information about the potential impact of the COVID-19 pandemic and restrictions intended to prevent its spread on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and make distributions to our stockholders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. See Notes 2 and 8 to the consolidated financial statements for additional details.
Purchase Accounting and Acquisition of Real Estate; Lease Intangibles
We evaluate a number of factors in estimating fair value of real estate acquisitions, including building age, building location, building condition, rent comparables from similar properties, and terms of in-place leases, if any. Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above or below-market leases. In-place lease intangibles are valued based on our estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. We then allocate the purchase price (including acquisition and closing costs) to land, building, improvements and equipment based on their relative fair values. For properties acquired with in-place leases, we allocate the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values. Above and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and our estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.
Rental Income: Cash and Straight-line Rent
We primarily lease real estate to our tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, we assess the terms and conditions of the lease to determine the appropriate lease term and do not include options to extend, terminate or purchase in our evaluation for lease classification or for recognizing rental income unless we are reasonably certain the tenant will exercise the option. Evaluation of lease classification also requires an estimate of the residual value of the real estate at the end of the lease term. For acquisitions, we use the tangible fair value of the property at the date of acquisition. For lease modifications, we generally use sales comparables or a direct capitalization approach to determine residual value.
In conjunction with the FASB Staff Q&A released in April 2020, we elected to account for lease concessions related to the COVID-19 pandemic consistent with ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether they explicitly exist in the lease). As such, rent deferrals are recorded as an increase to rent receivables and recognized as income during the deferral period. Lease concessions other than rent deferrals have been evaluated to determine if a substantive change to the consideration in the original lease contract occurred and should be accounted for as a lease modification.
Our leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. For leases with variable escalators, increases in rental revenue are recognized when the changes in the rental rates have occurred. Some of our leases also provide for contingent rent based on a percentage of the tenant’s gross sales, which is recognized when the change in the factor on which the contingent lease payment is based actually occurs.
Rental income is subject to an evaluation for collectability, which includes our estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. We do not recognize rental income for amounts that are not probable of collection.
Impairment
We review our real estate investments and related lease intangibles periodically for indicators of impairment including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. For assets with indicators of impairment, we then evaluate if its carrying amount may not be recoverable. We consider factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.
Impairment is calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, the amount by which the carrying value exceeds fair value less costs to sell. Estimating fair values is highly subjective and such estimates could differ materially from actual results. The fair values of real estate and intangible assets are determined using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; broker opinions of value; recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows; and expectations for the use of the real estate.
REIT Status
We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT commencing with such taxable year, and we intend to continue operating in such a manner. To maintain our REIT status, we are required to annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate level federal income tax on the earnings distributed to our stockholders that we derive from our REIT qualifying activities. We are still subject to state and local income and franchise taxes and to federal income and excise tax on our undistributed income. If we fail to qualify as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal corporate tax, including any applicable alternative minimum tax for taxable years beginning before January 1, 2018. Unless entitled to relief under specific statutory provisions, we would be ineligible to elect to be treated as a REIT for the four taxable years following the year for which we lose our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief.
SUPPLEMENTAL GUARANTOR DISCLOSURES
In March 2020, the SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered guaranteed securities. As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are no longer required to provide separate financial statements, provided that the parent guarantee is “full and unconditional,” the subsidiary obligor is consolidated into the parent company’s consolidated financial statements and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Prior to the amendment, a parent company was required to provide certain financial information about the subsidiary on an ongoing basis until the guaranteed debt was no longer outstanding.
The Company and the Operating Partnership have filed a registration statement on Form S-3 with the SEC registering, among other securities, debt securities of the Operating Partnership, which will be fully and unconditionally guaranteed by the Company. At December 31, 2021, the Operating Partnership had issued and outstanding the Senior Unsecured Notes. The obligations of the Operating Partnership to pay principal, premiums, if any, and interest on the Senior Unsecured Notes are guaranteed on a senior, full and unconditional basis by the Company. The Operating Partnership is a wholly-owned subsidiary of the Company, and the Company owns all of its assets and conducts all of its operations through the Operating Partnership and the Operating Partnership is consolidated into the Company’s financial statements.
In accordance with the SEC rules, separate consolidated financial statements of the Operating Partnership are not presented because the assets, liabilities and results of operations of the Operating Partnership are not materially different than the corresponding amounts in the Company’s consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Year Ended December 31,
Increase /
(In Thousands)
(Decrease)
Revenues:
Rental income
$
606,099
$
479,901
$
126,198
Interest income on loans receivable
(969
)
Earned income from direct financing leases
(45
)
Related party fee income
-
(678
)
Other income
1,736
1,469
Total revenues
608,390
483,617
124,773
Expenses:
General and administrative
52,608
48,380
4,228
Property costs (including reimbursable)
23,232
24,492
(1,260
)
Deal pursuit costs
1,136
2,432
(1,296
)
Interest
103,003
104,165
(1,162
)
Depreciation and amortization
244,624
212,620
32,004
Impairments
23,760
81,476
(57,716
)
Total expenses
448,363
473,565
(25,202
)
Other income:
Loss on debt extinguishment
(29,186
)
(7,227
)
(21,959
)
Gain on disposition of assets
41,468
24,156
17,312
Total other income
12,282
16,929
(4,647
)
Income before income tax expense
172,309
26,981
145,328
Income tax expense
(607
)
(273
)
Net income
$
171,702
$
26,708
$
144,994
Changes related to operating properties
The components of rental income are summarized below (in thousands):
Base Cash Rent; Depreciation and amortization
The increase in Base Cash Rent, the largest component of rental income, year-over-year was driven by our net acquisitions, which also was the driver for the increase in depreciation and amortization. We acquired 166 properties during 2021 with a total of $84.4 million of annual in-place rent (monthly fixed rent at date of transaction multiplied by 12). During the same period, we disposed of 23 properties, 15 of which were vacant and the remaining 8 had annual in-place rents of $3.2 million. Our acquisition and disposition activity for the year ended December 31, 2021 is summarized below (in thousands):
In addition, we observed recovery in 2021 from the impact of the COVID-19 pandemic and related tenant credit issues we experienced in 2020 and had minimal new tenant credit issues in 2021. We reserved $10.9 million of Base Cash Rent for the year ended December 31, 2020 for amounts deemed not probable of collection. For the year ended December 31, 2021, we reversed a significant amount of those reserves and had minimal new reserves unrelated to the COVID-19 pandemic, resulting in a net recovery of $5.5 million. Rent abatements executed as relief for the COVID-19 pandemic also decreased from $6.3 million for the year ended December 31, 2020 to $1.5 million for the year ended December 31, 2021.
Variable cash rent (including reimbursable); Property costs (including reimbursable)
Variable cash rent is primarily comprised of tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, less reimbursements we deem not probable of collection. For the years ended December 31, 2021 and 2020, tenant reimbursement income was $14.3 million and $12.3 million, respectively, while reimbursable property expenses were $14.1 million and $14.5 million, respectively. The increase in tenant reimbursement income was due to fewer tenant credit issues, while reimbursable property expenses remained relatively flat year-over-year. Other variable cash income increased from $0.9 million for the year ended December 31, 2020 to $2.5 million for the year ended December 31, 2021, primarily due to a lease converting to a contingent rent arrangement based on tenant sales during 2021.
Non-reimbursable property expenses decreased year-over-year. For the years ended December 31, 2021 and 2020, non-reimbursable property costs were $9.1 million and $10.0 million, respectively, with the change driven by fewer tenant credit issues in 2021.
Straight-line rent, net of uncollectible reserve; Amortization of above- and below- market lease intangibles, net
Non-cash rental income consists of straight-line rental revenue, amortization of above- and below- market lease intangibles and bad debt expense. In conjunction with the reduction in tenant credit issues, in the second quarter of 2021 we reversed a significant amount of reserves for straight-line rent previously deemed not probable of collection and had minimal reserves for straight-line rent in 2021, resulting in an increase in non-cash rental income of $25.8 million year-over-year. The remaining increase in non-cash rental income was due to increases in straight-line rent as a result of our net acquisitions described above and certain lease modifications.
Impairments
The decrease in impairments year-over-year was driven by a recovery in the commercial real estate market and tenant performance in 2021, after the downturn in early 2020 at the onset of the COVID-19 pandemic. For the year ended December 31, 2021, we recorded $20.0 million of impairment on 20 underperforming properties, compared to $49.0 million recorded on 28 underperforming properties for the year ended December 31, 2020. Additionally, impairment of $18.2 million was recorded on lease intangible assets for the year ended December 31, 2020, primarily as a result of a tenant bankruptcy during the second quarter of 2020 which resulted in the termination of a four-property master lease, with no significant tenant bankruptcies in 2021.
The slight decrease in vacancy rates also resulted in a decrease in impairment on vacant properties year-over-year. For the year ended December 31, 2021, we recorded $3.2 million of impairment on five vacant properties, compared to $14.2 million recorded on eight vacant properties for the year ended December 31, 2020.
Finally, we recorded an allowance for credit loss of $0.1 million during the year ended December 31, 2020 on our direct financing lease as a result of adopting ASU 2016-13 in 2020, compared to recording an allowance for credit loss of $0.6 million during the year ended December 31, 2021 as a result of entering into a new loan receivable.
Gain on disposition of assets
Gain on disposition of assets increased year-over-year. During the year ended December 31, 2021, we recognized net gains of $38.0 million on the sales of eight occupied properties, net gains of $1.4 million on the sales of 15 vacant properties, net gains of $1.7 million on asset substitutions, a $0.3 million gain related to a property reconstructed by a tenant after previous fire damage and other net gains of $0.1 million.
During the year ended December 31, 2020, we recognized net gains of $23.2 million on the sales of 18 occupied properties and net gains of $1.3 million on the sales of 20 vacant properties. These net gains were partially offset by a $0.2 million loss recorded on the sale of a note receivable and other net losses of $0.1 million.
Changes related to debt
Interest expense; Loss on debt extinguishment
Our debt is summarized below (in thousands):
During the first quarter of 2020, we did not issue or extinguish any debt. During the second quarter of 2020, we entered into the 2020 Term Loans. During the third quarter of 2020, we issued $450.0 million of 2031 Senior Notes, which triggered a mandatory repayment of $222.0 million of the 2020 Term Loans that resulted in a loss on debt extinguishment of $1.0 million. Remaining proceeds from the 2031 Senior Notes issuance were primarily utilized to repurchase $154.6 million of 2021 Convertible Notes, resulting in a loss on debt extinguishment of $6.2 million.
In January 2021, we repaid the 2020 Term Loan in full, resulting in a loss on debt extinguishment of $0.7 million primarily due to the write-off of unamortized deferred financing costs. In March 2021, we issued $800.0 million aggregate principal amount of the 2028 and 2032 Senior Notes. Proceeds from these issuances were used to extinguish $207.4 million of CMBS loans, resulting in a loss on debt extinguishment of $28.5 million primarily due to pre-payment penalties. The Convertible Notes matured in May 2021, at which time they were settled in cash and the remaining discount and deferred financing costs were fully amortized.
While these changes in our debt structure resulted in an overall increase in our total debt outstanding, the issuance of new debt at lower interest rates reduced our weighted average interest rate from 3.64% at December 31, 2020 to 3.04% at December 31, 2021. The components of interest expense are summarized below (in thousands):
Changes related to general and administrative expenses
General and administrative expenses increased, driven by an increase in compensation expenses of $4.2 million year-over-year. The increase in compensation expenses primarily resulted from lower executive bonuses in 2020 due to the impact of the COVID-19 pandemic on performance metrics, and the improvement of those performance metrics in 2021 as our tenants and our results have recovered from the impact of the COVID-19 pandemic. Additionally, IT software and licensing expenses increased by $0.5 million year-over-year due to the implementation of additional technology. These increases were partially offset by a decrease year-over-year of $1.0 million in expenses recognized related to the COVID-19 pandemic, including legal fees for executing rent deferral or abatement agreements.
LIQUIDITY AND CAPITAL RESOURCES
ATM Program
In November 2021, the Board of Directors approved a new $500.0 million 2021 ATM program, and we terminated the 2020 ATM Program. Sales of shares of our common stock under the 2021 ATM Program may be made in sales deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act. The 2021 ATM Program contemplates that, in addition to the issuance and sale by us of shares of our common stock to or through the agents, we may enter into separate forward sale agreements with one of the agents or one of their respective affiliates (in such capacity, each, a “forward purchaser”). When we enter into a forward sale agreement, we expect that the forward purchaser will attempt to borrow from third parties and sell, through a forward seller, shares of our common stock to hedge the forward purchaser's exposure under the forward sale agreement. We will not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller.
We currently expect to fully physically settle any forward sale agreement with the respective forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. However, subject to certain exceptions, we may also elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which case we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser.
During the year ended December 31, 2021, 8.5 million shares of our common stock were sold under the ATM Programs, comprised of 5.8 million shares sold under the 2020 ATM Program and 2.7 million shares sold under the 2021 ATM Program. All of these sales were through forward sales agreements, except for 0.4 million of the shares sold under the 2021 ATM Program. The forward sale price that we receive upon physical settlement of the agreements is subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As of December 31, 2021, there were 0.1 million shares remaining under open forward sales agreements with a weighted average forward price of $47.45. Assuming the full physical settlement of those open forward sales agreements, we have $375.9 million remaining under the 2021 ATM Program as of December 31, 2021.
Short-term liquidity and capital resources
On a short-term basis, our principal demands for funds will be for operating expenses, acquisitions, distributions to stockholders and payment of interest and principal on current and any future debt financings. We expect to fund these demands primarily through cash provided by operating activities, borrowings under the 2019 Credit Facility and, when market conditions warrant, issuances of equity securities, including shares of our common stock under our 2021 ATM program. As of December 31, 2021, available liquidity was comprised of $17.8 million in cash and cash equivalents and $511.6 million of borrowing capacity under the 2019 Credit Facility. Also, as of December 31, 2021, we had $2.6 million of expected proceeds available assuming the full physical settlement of our open forward sale agreements under our 2021 ATM Program, with remaining capacity of $375.9 million.
Subsequent to year end, we entered into forward sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 9.4 million shares of common stock at an initial public offering price of $47.60 per share, before underwriting discounts and offering expenses. We did not receive any proceeds from the sale of our shares of common stock by the forward purchasers at the time of the offering. The forward sale price that we will receive upon physical settlement of the forward sale agreements is subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements. As of February 10, 2022, the forward sale agreements for all 9.4 million shares remained open, with expected proceeds of $430.8 million assuming full physical settlement.
Long-term liquidity and capital resources
We plan to meet our long-term capital needs, including long-term financing of property acquisitions, by issuing registered debt or equity securities, by obtaining asset level financing and by issuing fixed-rate secured or unsecured notes and bonds. In the future, some of our property acquisitions could be made by issuing partnership interests of our Operating Partnership in exchange for property owned by third parties. These partnership interests would be exchangeable for cash or, at our election, shares of our common stock. We continually evaluate financing alternatives and believe that we can obtain financing on reasonable terms. However, we cannot be sure that we will have access to the capital markets at times and on terms that are acceptable to us. We expect that our primary uses of capital will be for property and other asset acquisitions, the payment of tenant improvements, operating expenses, debt service payments and distributions to our stockholders.
Description of certain debt
The following descriptions of debt should be read in conjunction with Note 4 to the consolidated financial statements herein.
2019 Credit Facility
As of December 31, 2021, the aggregate gross commitment under the 2019 Credit Facility was $800.0 million, which may be increased up to $1.2 billion by exercising an accordion feature, subject to satisfying certain requirements and obtaining additional lender commitments. The 2019 Credit Facility has a maturity of March 31, 2023 and includes two six-month extensions that can be exercised at our option.
We may voluntarily prepay the 2019 Credit Facility, in whole or in part, at any time without premium or penalty. Payment of the 2019 Credit Facility is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions. As of December 31, 2021, there were no subsidiaries that met this requirement.
As of December 31, 2021, the 2019 Credit Facility bore interest at 1-Month LIBOR plus 0.90%, with $288.4 million in borrowings outstanding, and a ratings-based facility fee in the amount of 0.20% per annum. As of December 31, 2021, there were no letters of credit outstanding.
Amounts available for borrowing under the 2019 Credit Facility remained subject to compliance with certain customary restrictive covenants including:
•
Maximum leverage ratio (defined as consolidated total indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.60:1.00;
•
Minimum fixed charge coverage ratio (defined as EBITDA of the Company, to fixed charges) of 1.50:1.00;
•
Maximum secured indebtedness leverage ratio (defined as consolidated secured indebtedness of the Company, net of certain cash and cash equivalents, to total asset value) of 0.50:1:00;
•
Minimum unsecured interest coverage ratio (defined as consolidated net operating income from unencumbered properties, to unsecured interest expense) of 1.75:1.00; and
•
Maximum unencumbered leverage ratio (defined as consolidated unsecured indebtedness of the Company, net of certain cash and cash equivalents, to total unencumbered asset value) of 0.60:1:00.
In addition to these covenants, the 2019 Revolving Credit and Term Loan Agreement also included other customary affirmative and negative covenants, such as (i) limitation on liens and negative pledges; (ii) transactions with affiliates; (iii) limitation on mergers, consolidations and sales of all or substantially all assets; (iv) maintenance of status as a REIT and listing on any national securities exchange; and (v) material modifications to organizational documents. As of December 31, 2021, the Corporation and the Operating Partnership were in compliance with these covenants.
Senior Unsecured Notes
As of December 31, 2021, we had the following Senior Unsecured Notes outstanding (dollars in thousands):
Maturity Date
Interest Payment Dates
Stated Interest Rate
December 31,
2026 Senior Notes
September 15, 2026
March 15 and September 15
4.45%
$
300,000
2027 Senior Notes
January 15, 2027
January 15 and July 15
3.20%
$
300,000
2028 Senior Notes
March 15, 2028
March 15 and September 15
2.10%
$
450,000
2029 Senior Notes
July 15, 2029
January 15 and July 15
4.00%
$
400,000
2030 Senior Notes
January 15, 2030
January 15 and July 15
3.40%
$
500,000
2031 Senior Notes
February 15, 2031
February 15 and August 15
3.20%
$
450,000
2032 Senior Notes
February 15, 2032
February 15 and August 15
2.70%
$
350,000
Total Senior Unsecured Notes
3.25%
$
2,750,000
The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: an amount equal to 100% of the principal amount of the respective Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium calculated in accordance with the respective indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
The indentures governing the Senior Unsecured Notes subject the Corporation and Operating Partnership to certain customary restrictive covenants that limit their ability to incur additional indebtedness, including:
•
Maximum leverage ratio (defined as consolidated total indebtedness, to total consolidated undepreciated real estate assets plus the Company’s other assets, excluding accounts receivable and non-real estate intangibles) of 0.60:1.00;
•
Minimum unencumbered asset coverage ratio (defined as total consolidated undepreciated real estate assets plus the Company’s other assets, excluding accounts receivable and non-real estate intangibles, to consolidated total unsecured indebtedness) of 1.50:1:00;
•
Maximum secured indebtedness leverage ratio (defined as consolidated total secured indebtedness, to total consolidated undepreciated real estate assets plus the Company’s other assets, excluding accounts receivable and non-real estate intangibles) of 0.40:1.00; and
•
Minimum fixed charge coverage ratio (defined as consolidated income available for debt service, to the annual service charge) of 1.50:1.0.
The indentures governing the Senior Unsecured Notes also include other customary affirmative and negative covenants, including (i) maintenance of the Corporation’s existence; (ii) payment of all taxes, assessments and governmental charges levied against the Corporation; (iii) reporting on financial information; and (iv) maintenance of properties and insurance. As of December 31, 2021, the Corporation and the Operating Partnership were in compliance with these covenants.
Mortgages payable
In general, the obligor of our asset level debt is a special purpose entity that holds the real estate and other collateral securing the indebtedness. Each special purpose entity is a bankruptcy remote separate legal entity and is the sole owner of its assets and solely responsible for its liabilities other than typical non-recurring covenants. As of December 31, 2021, we had two fixed-rate CMBS loans with $5.4 million of aggregate outstanding principal. One of the CMBS loans, with principal outstanding of $4.7 million, matures in August 2031 and has a stated interest rate of 5.80%. The other CMBS loan, with principal outstanding of $0.7 million, matures in December 2025 and has a stated interest rate of 6.00%. Both CMBS loans are partially amortizing and require a balloon payment at maturity.
Debt Maturities
Future principal payments due on our various types of debt outstanding as of December 31, 2021 (in thousands):
Total
Thereafter
2019 Credit Facility
$
288,400
$
-
$
288,400
$
-
$
-
$
-
$
-
Senior Unsecured Notes
2,750,000
-
-
-
-
300,000
2,450,000
Mortgages payable
5,350
2,584
$
3,043,750
$
$
288,956
$
$
$
300,469
$
2,452,584
Contractual Obligations
The following table provides information with respect to our commitments, which are primarily composed of our debt obligations as discussed above, as of December 31, 2021 (in thousands):
Contractual Obligations
Payment due by period
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Debt - Principal
$
3,043,750
$
$
289,546
$
301,095
$
2,452,584
Debt - Interest (1)
661,018
93,467
180,350
174,927
212,274
Acquisitions Under Contract (2)
165,288
165,288
-
-
-
Capital Improvements
67,370
59,449
7,921
-
-
Operating Lease Obligations
6,527
1,243
2,463
2,480
Total
$
3,943,953
$
319,972
$
480,280
$
478,502
$
2,665,199
(1)
Debt - Interest has been calculated based on outstanding balances as of December 31, 2021 through their respective maturity dates and excludes unamortized non-cash deferred financing costs of $20.3 million and unamortized debt discount, net of $10.8 million.
(2)
Contracts contain standard cancellation clauses contingent on results of due diligence.
Distribution Policy
Distributions from our current or accumulated earnings are generally classified as ordinary income, whereas distributions in excess of our current and accumulated earnings, to the extent of a stockholder’s federal income tax basis in our common stock, are generally characterized as a return of capital. Under the 2017 Tax Legislation, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Distributions in excess of a stockholder’s federal income tax basis in our common stock are generally characterized as capital gain.
We are required to distribute 90% of our taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and are required to pay federal income tax at regular corporate rates to the extent we distribute less than 100% of our taxable income (including capital gains).
We intend to make distributions that will enable us to meet the distribution requirements applicable to REITs and to eliminate or minimize our obligation to pay corporate-level federal income and excise taxes.
Any distributions will be at the sole discretion of our Board of Directors, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable laws and such other factors as our Board of Directors deems relevant.
CASH FLOWS
In this section, we discuss our cash flows for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020. The following table presents a summary of our cash flows for the years ended December 31, 2021 and 2020 (in thousands):
Years Ended December 31,
Change
Net cash provided by operating activities
$
411,133
$
314,312
$
96,821
Net cash used in investing activities
(1,169,827
)
(747,750
)
(422,077
)
Net cash provided by financing activities
693,195
490,713
202,482
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(65,499
)
$
57,275
$
(122,774
)
As of December 31, 2021, we had $17.8 million of cash, cash equivalents, and restricted cash as compared to $83.3 million as of December 31, 2020.
Operating Activities
Cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent and the level of our operating expenses and other general and administrative costs. The increase in net cash provided by operating activities was driven by the net increase in cash rental revenue of $114.6 million, driven by net acquisitions over the trailing twelve month period, as well as cash collections of previously reserved rents as our tenants recovered from the COVID-19 pandemic.
The increase in net cash provided by operating activities was partially offset by the following:
•
an increase in cash interest paid of $7.0 million driven by the issuance of the 2027 Senior Notes, 2029 Senior Notes, 2030 Senior Notes, and 2031 Senior Notes, all of which pay interest semi-annually,
•
a decrease of interest income of $1.0 million as a result of the collection of principal on all loans receivable during 2020, and
•
a decrease in related party fee income of $0.6 million driven by the termination of the Interim Management Agreement effective September 4, 2020.
Investing Activities
Cash used in investing activities is primarily relates to acquisitions of real estate and capitalized real estate expenditures. Cash provided by investing activities primarily relates to dispositions of real estate.
Net cash used in investing activities during the year ended December 31, 2021 included $1.2 billion for the acquisition of 166 properties, $22.0 million of capitalized real estate expenditures and $11.0 million for investments in loans receivable. These outflows were partially offset by $99.0 million in net proceeds from dispositions, comprised of $97.0 million for 23 properties sold in 2021 and $2.0 million that was collected from a disposal that occurred in 2020.
During the same period in 2020, net cash used in investing activities included $867.5 million for the acquisition of 146 properties and $12.7 million of capitalized real estate expenditures. These outflows were partially offset by $100.6 million in net proceeds from the disposition of 38 properties and the sale of one loan receivable. Additionally, the outflows were further offset by the collection of $31.8 million of principal on loans receivable, which includes $28.7 million for the paydown of the outstanding loan balances.
Financing Activities
Cash provided by or used in financing activities primarily relates to borrowings under our revolving credit facilities and term loans, issuances of common stock and Senior Unsecured Notes, and dividends paid on our common and preferred stock.
Net cash provided by financing activities during the year ended December 31, 2021 was primarily attributable to borrowings of $794.8 million under Senior Unsecured Notes, net proceeds from the issuance of common stock of $533.9 million and net borrowings of $288.4 million under our revolving credit facilities. These amounts were partially offset by payment of dividends to equity owners of $308.4 million, repayments of $208.9 million on mortgages payable, repayments of $190.4 million on convertible notes, repayments of $178.0 million on term loans, debt extinguishment costs of $26.7 million, deferred financing costs of $7.1 million and common stock repurchases for employee tax withholdings totaling $4.4 million.
During the same period in 2020, net cash provided by financing activities was primarily attributable to borrowings of $445.5 million under Senior Unsecured Notes, net proceeds from the issuance of common stock of $428.3 million and net borrowings of $178.0 million under term loans. These amounts were partially offset by payment of dividends to equity owners of $270.8 million, repayment of $154.6 million on convertible notes, net repayments of $116.5 million on our revolving credit facilities, deferred financing costs of $6.6 million, common stock repurchases for employee tax withholdings totaling $4.4 million, repayment of $4.1 million on mortgages and notes payable and debt extinguishment costs of $4.0 million.
Non-GAAP Financial Measures
FFO AND AFFO
FFO is a supplemental non-GAAP financial measure calculated in accordance with the standards established by NAREIT. FFO represents net income (loss) attributable to common stockholders (computed in accordance with GAAP), excluding real estate-related depreciation and amortization, impairment charges and net (gains) losses from property dispositions. We believe that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate-related depreciation and amortization, gains and losses from property dispositions and impairment charges, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year-over-year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other equity REITs. However, because FFO excludes depreciation and amortization and does not capture the changes in the value of our properties that result from use or market conditions, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited.
AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. We adjust FFO to eliminate the impact of certain items that we believe are not indicative of our core operating performance, such as net gains (losses) on debt extinguishment, deal pursuit costs, default interest and fees on non-recourse mortgage indebtedness, costs associated with termination of interest rate swaps, costs related to the COVID-19 pandemic, and certain non-cash items. These certain non-cash items include non-cash interest expense (comprised of amortization of deferred financing costs and amortization of net debt discount/premium), non-cash revenues (comprised of straight-line rents net of bad debt expense, amortization of lease intangibles, and amortization of net premium/discount on loans receivable), and non-cash compensation expense.
Other equity REITs may not calculate FFO and AFFO as we do, and, accordingly, our FFO and AFFO may not be comparable to such other equity REITs’ FFO and AFFO. FFO and AFFO do not represent cash generated from operating activities determined in accordance with GAAP, are not necessarily indicative of cash available to fund cash needs and should only be considered a supplement, and not an alternative, to net income (loss) attributable to common stockholders (computed in accordance with GAAP) as a performance measure.
Adjusted Debt
Adjusted Debt represents interest bearing debt (reported in accordance with GAAP) adjusted to exclude unamortized debt discount/premium and deferred financing costs and reduced by cash and cash equivalents and restricted cash. By excluding these amounts, the result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition.
EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre
EBITDAre is a non-GAAP financial measure computed in accordance with standards established by NAREIT. EBITDAre represents net income (loss) (computed in accordance with GAAP), excluding interest expense, income tax expense, depreciation and amortization, net (gains) losses from property dispositions, and impairment charges.
Adjusted EBITDAre represents EBITDAre as adjusted for revenue producing acquisitions and dispositions for the quarter (as if such acquisitions and dispositions had occurred as of the beginning of the quarter), construction rent collected, not yet recognized in earnings, and for other certain items that we believe are not indicative of our core operating performance. These other certain other items include deal pursuit costs, net (gains) losses on debt extinguishment, costs related to the COVID-19 pandemic, and non-cash compensation expense. We focus our business plans to enable us to sustain increasing shareholder value. Accordingly, we believe that excluding these items, which are not key drivers of our investment decisions and may cause short-term fluctuations in net income, provides a useful supplemental measure to investors and analysts in assessing the net earnings contribution of our real estate portfolio. Because these measures do not represent net income (loss) that is computed in accordance with GAAP, they should only be considered a supplement, and not an alternative, to net income (loss) (computed in accordance with GAAP) as a performance measure.
Annualized Adjusted EBITDAre is calculated as Adjusted EBITDAre for the quarter, adjusted for straight-line rent related to prior periods, including amounts deemed not probable of collection (recoveries), and items where annualization would not be appropriate, multiplied by four. Our computation of Adjusted EBITDAre and Annualized Adjusted EBITDAre may differ from the methodology used by other equity REITs to calculate these measures and, therefore, may not be comparable to such other REITs.
Adjusted Debt to Annualized Adjusted EBITDAre
Adjusted Debt to Annualized Adjusted EBITDAre is a supplemental non-GAAP financial measure we use to evaluate the level of borrowed capital being used to increase the potential return of our real estate investments, and a proxy for a measure we believe is used by many lenders and ratings agencies to evaluate our ability to repay and service our debt obligations over time. We believe the ratio is a beneficial disclosure to investors as a supplemental means of evaluating our ability to meet obligations senior to those of our equity holders. Our computation of this ratio may differ from the methodology used by other equity REITs, and, therefore, may not be comparable to such other REITs.
FFO and AFFO
Years Ended December 31,
(Dollars in thousands, except per share data)
Net income attributable to common stockholders
$
161,352
$
16,358
$
164,916
Portfolio depreciation and amortization
244,053
212,038
174,895
Portfolio impairments
23,760
81,476
24,091
Gain on disposition of assets
(41,468
)
(24,156
)
(58,850
)
FFO attributable to common stockholders
$
387,697
$
285,716
$
305,052
Loss on debt extinguishment
29,186
7,227
14,330
Deal pursuit costs
1,136
2,432
Non-cash interest expense
8,890
12,428
14,175
Accrued interest and fees on defaulted loans
-
-
Straight-line rent, net of uncollectible reserve
(44,758
)
(11,876
)
(16,924
)
Other amortization and non-cash charges
(2,847
)
(918
)
(2,769
)
Swap termination costs
-
-
12,461
Non-cash compensation expense
14,003
12,640
14,277
Costs related to COVID-19 (1)
1,798
-
AFFO attributable to common stockholders (2)
$
394,085
$
309,447
$
341,731
Net income per share of common stock - diluted
$
1.35
$
0.15
$
1.81
FFO per share of common stock - diluted (3)
$
3.26
$
2.73
$
3.34
AFFO per share of common stock - diluted (3)
$
3.31
$
2.95
$
3.75
AFFO per share of common stock, excluding AM termination fee - diluted (3)(4)
N/A
N/A
$
3.34
AFFO per share of common stock, excluding out of period rent COVID-19 recoveries - diluted (3)(5)
$
3.25
N/A
N/A
Weighted average shares of common stock outstanding - diluted
118,715,838
104,535,384
90,869,312
(1)
Costs related to COVID-19 are included in general and administrative expense and primarily relate to legal fees for executing rent deferral or abatement agreements.
(2)
AFFO includes $13.4 million and $26.3 million for the years ended December 31, 2021 and 2020, respectively, of deferred rental income recognized in conjunction with the FASB’s relief for deferral agreements extended as a result of the COVID-19 pandemic.
(3)
Dividends paid and undistributed earnings allocated, if any, to unvested restricted stockholders are deducted from FFO and AFFO for the computation of the per share amounts. The following amounts were deducted:
Years Ended December 31,
FFO
$0.7 million
$0.8 million
$1.2 million
AFFO
$0.8 million
$0.9 million
$1.4 million
(4)
AFFO per share of common stock, excluding $48.2 million of termination fee income, net of $11.3 million in income tax expense recognized in 2019. The termination fee was received in conjunction with SMTA’s sale of Master Trust 2014 in September 2019 and termination of the Asset Management Agreement on September 20, 2019. AFFO attributable to common stockholders has not been adjusted to exclude the following amounts for the year ended December 31, 2019: (i) asset management fees of $14.7 million; (ii) property management and servicing fees of $5.4 million; (iii) preferred dividend income from SMTA $10.8 million; (iv) interest income on related party notes receivable of $1.1 million and an early repayment premium of $0.9 million; and (v) interest expense on related party loans payable of $0.2 million.
(5)
AFFO per share of common stock, excluding $7.0 million of recoveries recognized in 2021 for amounts deemed not probable of collection in 2020 as a result of the COVID-19 pandemic.
Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
December 31,
(Dollars in thousands)
Revolving credit facilities
$
288,400
$
-
Term loans
-
177,309
Senior Unsecured Notes, net
2,718,641
1,927,348
Mortgages payable, net
5,551
212,582
Convertible Notes, net
-
189,102
Total debt, net
3,012,592
2,506,341
Unamortized debt discount, net
10,824
7,807
Unamortized deferred financing costs
20,334
18,515
Cash and cash equivalents
(17,799
)
(70,303
)
Restricted cash
-
(12,995
)
Adjusted Debt
$
3,025,951
$
2,449,365
Three Months
Ended December 31,
(Dollars in thousands)
Net income
$
44,369
$
29,170
Interest
25,131
26,307
Depreciation and amortization
64,402
55,054
Income tax expense (benefit)
(133
)
Gain on disposition of assets
(1,672
)
(12,347
)
Portfolio impairments
4,795
11,547
EBITDAre
$
137,171
$
109,598
Adjustments to revenue producing acquisitions and dispositions
5,801
4,596
Construction rent collected, not yet recognized in earnings (1)
-
Deal pursuit costs
Gain on debt extinguishment
-
(25
)
Costs related to COVID-19 (2)
Non-cash compensation expense (1)
3,507
-
Adjusted EBITDAre
$
147,090
$
115,329
Adjustments related to straight-line rent (3)
(82
)
(506
)
Other adjustments for Annualized Adjusted EBITDAre (4)
Annualized Adjusted EBITDAre
$
588,452
$
460,880
Adjusted Debt / Annualized Adjusted EBITDAre (5)
5.1x
5.3x
(1)
Construction rent collected, not yet recognized in earnings and non-cash compensation expense were not included as an adjustment to EBITDAre during the three months ended December 31, 2020.
(2)
Costs related to COVID-19 are included in general and administrative expense and primarily relate to legal fees for executing rent deferral or abatement agreements.
(3)
Adjustment for the three months ended December 31, 2021 relates to prior period straight-line rent recognized in the current period and adjustment for the three months ended December 31, 2020 relates to recoveries on straight-line rent receivable balances deemed not probable of collection in previous periods.
(4)
Adjustments for the three months ended December 31, 2021 are comprised of prior period property costs recognized in the current period. For the same period in 2020, adjustments are certain recoveries related to prior period amounts (rent deemed not probable of collection, abatements, property costs and tax expenses) and certain general and administrative expenses.
(5)
Adjusted Debt / Annualized Adjusted EBITDAre would be 5.1x if all 56 thousand shares under open forward sales agreements had been settled as of December 31, 2021 and 5.0x if the 4.1 million shares under open forward agreements had been settled as of December 31, 2020.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including interest rate risk. Interest rates and other factors, such as occupancy, rental rates and our tenants’ financial condition, influence our performance more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. As described above, we generally enter into leases that provide for payments of rent with scheduled increases and, to a lesser extent, contingent rent based on a percentage of the tenant’s gross sales, to help mitigate the effect of inflation. Because the properties in our portfolio are generally leased to tenants under triple-net leases, our exposure to rising property operating costs due to inflation is mitigated.
Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and global economic and political conditions, which are beyond our control. Our operating results depend heavily on the difference between the revenue from our assets and the interest expense incurred on our borrowings. We may incur additional variable-rate debt in the future, including amounts that we may borrow under our 2019 Credit Facility. In addition, decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments, which may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected. Significant increases in interest rates may also have an adverse impact on our earnings if we are unable to acquire real estate with rental rates high enough to offset the increase in interest rates on our borrowings. In the event interest rates rise significantly or there is an economic downturn, defaults may increase and result in credit losses, which may adversely affect our liquidity and operating results.
As of December 31, 2021, our assets were primarily long-term, fixed-rate leases, the vast majority of which have scheduled rent increases during the term of the lease. As of December 31, 2021, $2.8 billion of our indebtedness outstanding was fixed-rate, consisting of our Senior Unsecured Notes and mortgages payable, with a weighted average stated interest rate of 3.25%, excluding amortization of deferred financing costs and debt discounts/premiums. The remaining $288.4 million of our indebtedness was variable-rate borrowings outstanding under our 2019 Credit Facility, with a stated interest rate of 1.03%. If 1-Month LIBOR as of December 31, 2021 increased by 100 basis points, or 1.0%, the resulting increase in annual interest expense with respect to the $288.4 million outstanding under the 2019 Credit Facility would impact our future earnings and cash flows by $2.9 million.
The estimated fair values of our Senior Unsecured Notes have been derived based on quoted prices in active markets, while the estimated fair values of the remaining debt instruments have been derived based on discounted cash flow analysis using estimates of the amount and timing of future cash flows, market rates and credit spreads. The debt instrument balances as of December 31, 2021 are as follows (in thousands):
Carrying
Value
Estimated
Fair Value
2019 Credit Facility
$
288,400
$
288,549
Senior Unsecured Notes, net (1)
2,718,641
2,865,187
Mortgages payable, net (1)
5,551
5,748
(1) The carrying value of the debt instruments are net of unamortized deferred financing costs and debt discounts/premiums.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements and Supplemental Data
Reports of Independent Registered Public Accounting Firm (PCAOB ID 42)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Spirit Realty Capital, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Spirit Realty Capital, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2021 consolidated financial statements of the Company and our report dated February 14, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 14, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Spirit Realty Capital, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spirit Realty Capital, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 14, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of Impairment on Real Estate Investments Held and Used
Description of the Matter
At December 31, 2021, the Company’s real estate assets held for investment (land, building, and improvements) totaled $6.4 billion. As discussed in Note 2 to the consolidated financial statements, the Company reviews its real estate investments held for investment periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, and market trends (such as the effects of leasing demand and competition) in assessing recoverability of these investments. Key assumptions used in estimating future cash flows and fair values include recently quoted bid or ask prices, market prices of comparable investments, contractual and comparable market rents, leasing assumptions, capitalization rates, and expectations for the use of the asset. A real estate asset held for investment is considered impaired if its carrying value exceeds its estimated undiscounted cash flows, and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value.
Auditing management’s evaluation of impairment on real estate assets held for investment is judgmental due to the estimation required in determining undiscounted cash flows that can be generated from the investment and determining the estimated fair value when the investment is not deemed recoverable from those estimated undiscounted future cash flows. In particular, the impairment evaluation is sensitive to the investment’s estimated residual value that is derived from the key assumptions stated above, which can be affected by expectations about future market or economic conditions, demand, and competition.
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s impairment evaluation process. This included controls over management’s review of the key assumptions underlying the undiscounted cash flows and the fair value determination. To test the Company’s evaluation of impairment of real estate investments, we performed audit procedures that included, among others, testing the key assumptions used by management in its recoverability analysis and in determining the fair value of investments that were impaired. We compared the key assumptions to observable market transaction information published by independent industry research sources to assess whether the assumptions were market supported. We involved a valuation specialist to assist in evaluating the key assumptions listed above. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of key assumptions to evaluate the changes in the valuation of certain properties that would result from changes in the assumptions or using alternative valuation techniques.
In addition, we performed procedures to evaluate the completeness and accuracy of the data utilized in management’s impairment analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management.
Collectability of Lease Payments
Description of the Matter
The Company recorded $606.1 million in rental income for the year ended December 31, 2021. As discussed in Note 2 to the consolidated financial statements, the Company evaluates the collectability of lease payments on a regular basis. The Company considers certain key factors in assessing collectability, including: tenant’s payment history and financial condition, business conditions in the industry in which the tenant operates, economic conditions of the geographic location in which the tenant operates, as well as other relevant tenant specific circumstances.
Auditing management’s evaluation of collectability of lease payments requires judgement as the assessment is based on tenant specific circumstances and expectations of future economic and market conditions. In particular, the longer-term nature of repayments of COVID-19 induced deferrals, the absence of cash receipts during the deferral period, and the current market environment requires the judgement of management in evaluating the collectability of billed and unbilled tenant receivables. Given the tenant specific nature of this evaluation and the uncertainty associated with future economic and market conditions, the related reserves against revenue and, as applicable, the subsequent reversal of previously recognized reserves are sensitive to the economic considerations of individual tenants described above and management’s judgment in evaluating the collectability conclusion.
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s lease payment collectability process. To test the Company’s assessment of collectability, our audit procedures included, among others, evaluating tenant specific financial information, current and historical tenant payment collection, and changes in the collectability conclusions made during the year.
In addition, we tested the completeness and accuracy of the data used in management’s collectability analysis. We also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Dallas, Texas
February 14, 2022
SPIRIT REALTY CAPITAL, INC.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31,
December 31,
Assets
Investments:
Real estate assets held for investment:
Land and improvements
$
2,516,715
$
2,090,592
Buildings and improvements
4,962,203
4,302,004
Less: accumulated depreciation
(1,033,391
)
(850,320
)
Total real estate assets held for investment, net
6,445,527
5,542,276
Intangible lease assets, net
426,972
367,989
Real estate assets under direct financing leases, net
7,442
7,444
Real estate assets held for sale, net
8,264
25,821
Loans receivable, net
10,450
-
Total investments, net
6,898,655
5,943,530
Cash and cash equivalents
17,799
70,303
Deferred costs and other assets, net
188,816
157,353
Goodwill
225,600
225,600
Total assets
$
7,330,870
$
6,396,786
Liabilities and stockholders’ equity
Liabilities:
Revolving credit facilities
$
288,400
$
-
Term loans, net
-
177,309
Senior Unsecured Notes, net
2,718,641
1,927,348
Mortgages payable, net
5,551
212,582
Convertible Notes, net
-
189,102
Total debt, net
3,012,592
2,506,341
Intangible lease liabilities, net
128,077
121,902
Accounts payable, accrued expenses and other liabilities
190,402
167,423
Total liabilities
3,331,071
2,795,666
Commitments and contingencies (see Note 6)
Stockholders’ equity:
Preferred stock and paid in capital, $0.01 par value, 20,000,000 shares authorized: 6,900,000 shares issued and outstanding at both December 31, 2021 and December 31, 2020, liquidation preference of $25.00 per share
166,177
166,177
Common stock, $0.05 par value, 350,000,000 shares authorized: 127,699,235 and 114,812,615 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively
6,385
5,741
Capital in excess of common stock par value
6,673,440
6,126,503
Accumulated deficit
(2,840,356
)
(2,688,647
)
Accumulated other comprehensive loss
(5,847
)
(8,654
)
Total stockholders’ equity
3,999,799
3,601,120
Total liabilities and stockholders’ equity
$
7,330,870
$
6,396,786
See accompanying notes.
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
For the Year Ended December 31,
Revenues:
Rental income
$
606,099
$
479,901
$
438,691
Interest income on loans receivable
3,240
Earned income from direct financing leases
1,239
Related party fee income
-
69,218
Other income
1,736
1,469
4,039
Total revenues
608,390
483,617
516,427
Expenses:
General and administrative
52,608
48,380
52,424
Termination of interest rate swaps
-
-
12,461
Property costs (including reimbursable)
23,232
24,492
18,637
Deal pursuit costs
1,136
2,432
Interest
103,003
104,165
101,060
Depreciation and amortization
244,624
212,620
175,465
Impairments
23,760
81,476
24,091
Total expenses
448,363
473,565
384,982
Other income:
Loss on debt extinguishment
(29,186
)
(7,227
)
(14,330
)
Gain on disposition of assets
41,468
24,156
58,850
Preferred dividend income from SMTA
-
-
10,802
Total other income
12,282
16,929
55,322
Income before income tax expense
172,309
26,981
186,767
Income tax expense
(607
)
(273
)
(11,501
)
Net income
171,702
26,708
175,266
Dividends paid to preferred stockholders
(10,350
)
(10,350
)
(10,350
)
Net income attributable to common stockholders
$
161,352
$
16,358
$
164,916
Net income per share attributable to common stockholders:
Basic
$
1.36
$
0.15
$
1.81
Diluted
$
1.35
$
0.15
$
1.81
Weighted average shares of common stock outstanding:
Basic
118,342,441
104,357,660
90,621,808
Diluted
118,715,838
104,535,384
90,869,312
See accompanying notes.
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
For the Year Ended December 31,
Net income attributable to common stockholders
$
161,352
$
16,358
$
164,916
Other comprehensive income (loss):
Net reclassification of amounts from (to) AOCL
2,807
2,807
(4,302
)
Total comprehensive income
$
164,159
$
19,165
$
160,614
See accompanying notes.
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Stockholders’ Equity
(In Thousands, Except Share Data)
Preferred Stock
Common Stock
Shares
Par Value and
Capital in Excess
of Par Value
Shares
Par Value
Capital in
Excess of
Par Value
Accumulated
Deficit
AOCL
Total
Stockholders’
Equity
Balances, December 31, 2018
6,900,000
$
166,177
85,787,355
$
4,289
$
4,995,697
$
(2,357,255
)
$
(7,159
)
$
2,801,749
Net income
-
-
-
-
-
175,266
-
175,266
Dividends declared on preferred stock
-
-
-
-
-
(10,350
)
-
(10,350
)
Net income available to common stockholders
-
-
-
-
-
164,916
-
164,916
Other comprehensive loss
-
-
-
-
-
-
(4,302
)
(4,302
)
Dividends declared on common stock
-
-
-
-
-
(236,943
)
-
(236,943
)
Tax withholdings related to net stock settlements
-
-
(58,445
)
(3
)
-
(2,539
)
-
(2,542
)
Issuance of shares of common stock, net
-
-
16,578,423
676,361
-
-
677,190
Stock-based compensation, net
-
-
168,819
14,268
(1,017
)
-
13,260
Other
-
-
-
-
(79
)
-
-
(79
)
Balances, December 31, 2019
6,900,000
$
166,177
102,476,152
$
5,124
$
5,686,247
$
(2,432,838
)
$
(11,461
)
$
3,413,249
Net income
-
-
-
-
-
26,708
-
26,708
Dividends declared on preferred stock
-
-
-
-
-
(10,350
)
-
(10,350
)
Net income available to common stockholders
-
-
-
-
-
16,358
-
16,358
Other comprehensive income
-
-
-
-
-
-
2,807
2,807
Dividends declared on common stock
-
-
-
-
-
(266,659
)
-
(266,659
)
Tax withholdings related to net stock settlements
-
-
(117,543
)
(6
)
-
(4,375
)
-
(4,381
)
Issuance of shares of common stock, net
-
-
12,137,210
427,632
-
-
428,239
Stock-based compensation, net
-
-
316,796
12,624
(1,133
)
-
11,507
Balances, December 31, 2020
6,900,000
$
166,177
114,812,615
$
5,741
$
6,126,503
$
(2,688,647
)
$
(8,654
)
$
3,601,120
Net income
-
-
-
-
-
171,702
-
171,702
Dividends declared on preferred stock
-
-
-
-
-
(10,350
)
-
(10,350
)
Net income available to common stockholders
-
-
-
-
-
161,352
-
161,352
Other comprehensive income
-
-
-
-
-
-
2,807
2,807
Dividends declared on common stock
-
-
-
-
-
(306,325
)
-
(306,325
)
Tax withholdings related to net stock settlements
-
-
(206,597
)
(10
)
-
(4,385
)
-
(4,395
)
Issuance of shares of common stock, net
-
-
12,567,506
532,960
-
533,588
Stock-based compensation, net
-
-
525,711
13,977
(2,351
)
-
11,652
Balances, December 31, 2021
6,900,000
$
166,177
127,699,235
$
6,385
$
6,673,440
$
(2,840,356
)
$
(5,847
)
$
3,999,799
See accompanying notes.
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended December 31,
Operating activities
Net income
$
171,702
$
26,708
$
175,266
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
244,624
212,620
175,465
Impairments
23,760
81,476
24,091
Amortization of deferred financing costs
3,942
5,278
6,289
Amortization of debt discounts
2,140
4,343
7,028
Amortization of deferred losses on interest rate swaps
2,807
2,807
Loss on termination of interest rate swaps
-
-
12,461
Payment for termination of interest rate swaps
-
-
(24,843
)
Stock-based compensation expense
14,003
12,640
14,277
Loss on debt extinguishment
29,186
7,227
14,330
Gain on dispositions of real estate and other assets
(41,468
)
(24,156
)
(58,850
)
Non-cash revenue
(47,605
)
(12,996
)
(19,943
)
Bad debt expense and other
Changes in operating assets and liabilities:
Deferred costs and other assets, net
2,598
(21,296
)
2,953
Accounts payable, accrued expenses and other liabilities
5,430
19,440
9,482
Net cash provided by operating activities
411,133
314,312
339,053
Investing activities
Acquisitions of real estate
(1,235,861
)
(867,456
)
(1,295,545
)
Capitalized real estate expenditures
(21,957
)
(12,659
)
(47,652
)
Proceeds from redemption of preferred equity investment
-
-
150,000
Collections from investment in Master Trust 2014
-
-
33,535
Investments in loans receivable
(11,000
)
-
-
Collections of principal on loans receivable
-
31,771
11,037
Proceeds from dispositions of real estate and other assets, net
98,991
100,594
253,626
Net cash used in investing activities
(1,169,827
)
(747,750
)
(894,999
)
Financing activities
Borrowings under revolving credit facilities
1,077,500
1,155,000
1,047,200
Repayments under revolving credit facilities
(789,100
)
(1,271,500
)
(1,077,000
)
Repayments under mortgages payable
(208,891
)
(4,101
)
(242,049
)
Borrowings under term loans
-
400,000
820,000
Repayments under term loans
(178,000
)
(222,000
)
(1,240,000
)
Repayments under Convertible Notes
(190,426
)
(154,574
)
(402,500
)
Borrowings under Senior Unsecured Notes
794,842
445,509
1,198,264
Debt extinguishment costs
(26,685
)
(4,032
)
(15,277
)
Deferred financing costs
(7,071
)
(6,642
)
(22,105
)
Proceeds from issuance of common stock, net of offering costs
533,868
428,272
677,428
Repurchase of shares of common stock, including tax withholdings related to net stock settlements
(4,395
)
(4,381
)
(2,541
)
Common stock dividends paid
(298,097
)
(260,488
)
(226,522
)
Preferred stock dividends paid
(10,350
)
(10,350
)
(10,350
)
Net cash provided by financing activities
693,195
490,713
504,548
Net (decrease) increase in cash, cash equivalents and restricted cash
(65,499
)
57,275
(51,398
)
Cash, cash equivalents and restricted cash, beginning of period
83,298
26,023
77,421
Cash, cash equivalents and restricted cash, end of period
$
17,799
$
83,298
$
26,023
SPIRIT REALTY CAPITAL, INC.
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended December 31,
Supplemental Cash Flow Disclosures:
Cash paid for interest
$
89,866
$
82,916
$
73,530
Cash paid for taxes
11,826
Supplemental Disclosures of Non-Cash Activities:
Dividends declared and unpaid
$
81,380
$
71,758
$
64,049
Relief of debt through sale or foreclosure of real estate properties
-
-
10,368
Net real estate and other collateral assets sold or surrendered to lender
-
-
Accrued interest capitalized to principal (1)
-
-
Accrued market-based award dividend rights
2,304
1,133
1,017
Accrued capitalized costs
10,369
2,174
2,230
Right-of-use lease assets
-
-
6,143
Lease liabilities
-
-
6,143
Reclass of residual value from direct financing lease to operating lease
-
6,831
5,841
Cash flow hedge changes in fair value
-
-
18,593
Receivable for disposal of real estate property
-
2,000
-
(1) Accrued and overdue interest on certain CMBS notes that have been intentionally placed in default.
See accompanying notes.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements
December 31, 2021
NOTE 1. ORGANIZATION
Organization and Operations
Spirit Realty Capital, Inc. (the "Corporation" or "Spirit" or, with its consolidated subsidiaries, the "Company") operates as a self-administered and self-managed REIT that seeks to generate sustainable and attractive returns for stockholders by primarily investing in and managing a portfolio of single-tenant, operationally essential real estate throughout the United States that is generally leased on a long-term, triple-net basis to tenants operating within retail, industrial and other property types. Single-tenant, operationally essential real estate refers to free-standing, commercial real estate facilities where tenants conduct activities that are essential to the generation of their sales and profits.
The Company’s operations are generally carried out through Spirit Realty, L.P. (the "Operating Partnership") and its subsidiaries. Spirit General OP Holdings, LLC, one of the Corporation's wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of the Operating Partnership. The Corporation and a wholly-owned subsidiary (Spirit Notes Partner, LLC) are the only limited partners and, together, own the remaining 99% of the Operating Partnership.
On May 31, 2018, the Company completed the spin-off (the "Spin-Off") of the assets that collateralized Master Trust 2014, properties leased to Shopko, and certain other assets into an independent, publicly traded REIT, Spirit MTA REIT ("SMTA"). The Company formed Spirit Realty AM Corporation (“SRAM”), a wholly-owned taxable REIT subsidiary. The rights and obligations of the Asset Management Agreement were transferred to SRAM on April 1, 2019, which was subsequently terminated and simultaneously replaced by the Interim Management Agreement between SRAM and SMTA, which was effective from September 20, 2019 through September 4, 2020. The Company allocated personnel and other general and administrative costs to SRAM for management services provided to SMTA.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting, in accordance with GAAP. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. The consolidated financial statements of the Company include the accounts of the Corporation and its wholly-owned subsidiaries, including the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
A variable interest entity (“VIE”) would be consolidated by the Company when the Company is the primary beneficiary, which is based on whether the Company has (i) the power to direct activities that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements and other contractual arrangements. The Company evaluated SMTA as a VIE at the time of Spin-Off and quarterly thereafter until the third quarter of 2019 and concluded the Company was not the primary beneficiary. In the third quarter of 2019, the Company no longer had variable interests in SMTA and control was evaluated under the voting interest model. The Company concluded SMTA did not require consolidation by the Company for any period presented.
These consolidated financial statements include certain special purpose entities that were formed to acquire and hold real estate encumbered by indebtedness (see Note 4). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted to do so under their governing documents. As of December 31, 2021 and 2020, net assets totaling $12.3 million and $343.4 million, respectively, were held, and net liabilities totaling $5.5 million and $215.9 million, respectively, were owed by these encumbered special purpose entities and are included in the accompanying consolidated balance sheets.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations as one segment, which consists of net leasing operations. The Company has no other reportable segments.
Real Estate Investments
Purchase Accounting and Acquisition of Real Estate
When acquiring a property, the purchase price (including acquisition and closing costs) is allocated to land, building, improvements and equipment based on their relative fair values. The Company considers several assumptions to estimate the fair value of the components of the tangible property acquired including market assumptions for land, building and improvements. The determination of the intangible assets and liabilities primarily relate to the contractual lease terms, estimates of the fair market rental rates, discount rates, and estimates of costs to carry and obtain a tenant. For properties acquired with in-place leases, the purchase price of real estate is allocated to the tangible and intangible assets and liabilities acquired based on their relative fair values. In making estimates of fair values for this purpose, a number of sources are used, including independent appraisals and information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.
Carrying Value of Real Estate Investments
The Company’s real estate properties are recorded at cost and depreciated using the straight-line method over the estimated remaining useful lives of the properties, which generally range from 20 to 50 years for buildings and improvements and from 5 to 20 years for tenant and land improvements. Properties classified as held for sale are not depreciated and are recorded at the lower of their carrying value or their fair value, less anticipated selling costs.
Held for Sale
The Company is continually evaluating the portfolio of real estate assets and may elect to dispose of assets considering criteria including, but not limited to, tenant concentration, tenant credit quality, unit financial performance, local market conditions and lease rates, associated indebtedness, asset location, and tenant operation type (e.g., industry or concept/brand). Real estate assets held for sale are expected to be sold within twelve months.
Lease Intangibles
Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above- or below-market leases. For real estate acquired subject to existing lease agreements, in-place lease intangibles are valued based on the Company’s estimate of costs related to acquiring a tenant and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease and, in certain instances, over the renewal period.
Direct Financing Leases
For real estate property leases classified as direct financing leases, the building portion of the lease is accounted for as a direct financing lease, while the land portion is accounted for as an operating lease when certain criteria are met. For direct financing leases, the Company records an asset which represents the net investment that is determined by using the aggregate of the total amount of future minimum lease payments, the estimated residual value of the leased property and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are reviewed annually, represent the estimated amount the Company expects to receive at lease termination from the disposition of the leased property. Actual residual values realized could differ from these estimates.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Impairments
The Company reviews its real estate investments and related lease intangibles periodically for indicators of impairment, including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. For assets with indicators of impairment, the Company then evaluates if its carrying amount may not be recoverable. The Company considers factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors in making this assessment. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows.
Impairment is calculated as the amount by which the carrying value exceeds the estimated fair value, or for assets held for sale, as the amount by which the carrying value exceeds fair value less costs to sell. Estimating fair values is highly subjective and such estimates could differ materially from actual results. Key assumptions used in estimating fair values include, but are not limited to: signed purchase and sale agreements or letters of intent; broker opinions of value; recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.
Gain or Loss on Disposition of Assets
When real estate properties are disposed of, the related net book value of the properties is removed and a gain or loss on disposition is recognized in our consolidated statements of operations as the difference between the proceeds from the disposition, net of any costs to sell, and the net book value. As leasing is the Company’s primary activity, the Company determined that its sales of real estate, which are nonfinancial assets, are sold to noncustomers and fall within the scope of ASC 610-20. The full gain or loss on the disposition of real estate properties is recognized at time of sale, provided that the Company (i) has no controlling financial interest in the real estate and (ii) has no continuing interest or obligation with respect to the disposed real estate.
Revenue Recognition
Rental Income: Cash and Straight-line Rent
The Company primarily leases real estate to its tenants under long-term, triple-net leases that are classified as operating leases. To evaluate lease classification, the Company assesses the terms and conditions of the lease to determine the appropriate lease term. The majority of our operating leases include one or more options to extend, typically for a period of five to ten years per renewal option. Excluding Walgreen Co., less than 1% of the Company’s operating leases at both December 31, 2021 and 2020 include an option to terminate. Walgreen Co. leases are generally for fifty years or more and contain certain termination options after an initial non-cancellable term. Less than 10% of the Company’s operating leases at both December 31, 2021 and 2020 include an option to purchase, where the purchase option is generally determined based on fair market value of the underlying property. Options to extend, terminate or purchase are not included in the evaluation for lease classification or for recognition of rental income unless the Company is reasonably certain the tenant will exercise the option.
Evaluation of lease classification also requires an estimate of the residual value of the real estate at the end of the lease term. For acquisitions, the Company uses the tangible value of the property at the date of acquisition. For lease modifications, the Company generally uses sales comparables or a direct capitalization approach to determine residual value. The Company seeks to protect residual value through its underwriting of acquisitions, incorporating the proprietary Spirit Property Ranking Model which is real estate centric. Once a property is acquired, the lessee is responsible for maintenance of the property, including insurance protecting against any damage to the property. To further protect residual value, the Company supplements the tenant insurance policy with a master policy covering all properties owned by the Company. As an active manager, the Company will occasionally invest in capital improvements on properties, re-lease properties to new tenants or extend lease terms to protect residual value.
In conjunction with the FASB Staff Q&A released in April 2020, the Company elected to account for lease concessions related to the COVID-19 pandemic consistent with ASC 842 as though enforceable rights and obligations for those concessions existed (regardless of whether they explicitly exist in the lease). As such, rent deferrals are recorded as an increase to rent receivables and recognized as income during the deferral period. For the years ended December 31, 2021 and 2020, $13.4 million and $26.3 million of deferrals were recognized in rental income. Lease concessions other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
The Company’s leases generally provide for rent escalations throughout the term of the lease. For leases with fixed escalators, rental income is recognized on a straight-line basis to produce a constant periodic rent over the term of the lease. Accordingly, the difference between rental income recognized on a straight-line basis and billed rents is recorded as rent receivables, which the Company will receive only if the tenant makes all rent payments required through the initial term of their lease. For leases with variable escalators, rental income typically increases at a multiple of any increase in the CPI over a specified period and may adjust annually or over multiple-year periods. Because of the volatility and uncertainty regarding future changes in the CPI and the Company’s inability to determine the extent to which any specific future change in the CPI is probable, increases from variable escalators are recognized when the changes in the rental rates have occurred.
Some of the Company’s leases also provide for contingent rent based on a percentage of the tenant’s gross sales, which is recognized as rental income when the change in the factor on which the contingent lease payment is based actually occurs.
Rental income is subject to an evaluation for collectability, which includes management’s estimates of amounts that will not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. The Company does not recognize rental income for amounts that are not probable of collection. For lease concessions granted in conjunction with the COVID-19 pandemic, management reviewed all amounts recognized on a tenant-by-tenant basis for collectability.
Rental Income: Tenant Reimbursement Revenue
Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. Certain leases contain additional amounts recoverable from tenants for common area maintenance and certain other expenses, which are non-lease components. The Company elected to combine all its non-lease components, which were determined to have the same pattern of transfer as the related operating lease component, into a single combined lease component. Tenant reimbursement revenue is variable and is recognized in the period in which the related expenses are incurred, with the related expenses included in property costs (including reimbursable) on the Company’s consolidated statements of operations. Tenant reimbursements are recorded on a gross basis in instances when our tenants reimburse us for property costs which we incur. Tenant receivables are reduced for amounts that are not probable of collection.
Rental Income: Intangible Amortization
Initial direct costs associated with the origination of a lease are deferred and amortized as an adjustment to rental revenue. Above- and below-market lease intangibles are amortized as a decrease and increase, respectively, to rental revenue. Amortization of in-place lease intangibles is included in depreciation and amortization expense. All lease intangibles are amortized on a straight-line basis over the term of the lease, which includes any renewal options the Company is reasonably certain the tenant will exercise. If the Company subsequently determines it is reasonably certain that the tenant will not exercise the renewal options, the unamortized portion of any related lease intangible is accelerated over the remaining initial term of the lease. If the Company believes a lease intangible balance is no longer recoverable, the unamortized portion is immediately recognized in impairments in the Company’s consolidated statements of operations.
Other Income: Lease Termination Fees
Lease termination fees are included in other income on the Company’s consolidated statements of operations and are recognized when there is a signed termination agreement and all of the conditions of the agreement have been met. The Company recorded lease termination fees of $19 thousand, $0.7 million and $0.4 million during the years ended December 31, 2021, 2020 and 2019, respectively.
Loans Receivable
Loans receivable consists of mortgage loans, net of premium, and other loans. Interest on loans receivable is recognized using the effective interest rate method. A loan is placed on non-accrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on non-accrual status, interest income is recognized only when received. Delinquent loans receivable are written off against the allowance when all possible means of collection have been exhausted.
The Company evaluates its loans receivable balance, including accrued interest, for potential credit losses by analyzing the credit of the borrower, the remaining time to maturity of the loan, collateral value and quality (if any), and other relevant factors. Allowance for credit losses are recorded in impairments on the accompanying consolidated statement of operations.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term instruments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheets. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
December 31,
December 31,
December 31,
Cash and cash equivalents
$
17,799
$
70,303
$
14,492
Restricted cash:
Collateral deposits (1)
-
Tenant improvements, repairs and leasing commissions (2)
-
12,660
10,877
Other (3)
-
-
Total cash, cash equivalents and restricted cash
$
17,799
$
83,298
$
26,023
(1)
Funds held in lender-controlled accounts generally used to meet future debt service or certain property operating expenses.
(2)
Deposits held as additional collateral support by lenders to fund improvements, repairs and leasing commissions incurred to secure a new tenant.
(3)
Funds held in lender-controlled accounts released after scheduled debt service requirements are met.
Tenant Receivables
The Company reviews its rent and other tenant receivables for collectability on a regular basis, considering changes in factors such as the tenant’s payment history, the tenant’s financial condition, industry conditions in which the tenant operates and economic conditions in the geographic area in which the tenant operates. If a receivable is not probable of collection, a direct write-off of the receivable will be made. The Company had accounts receivable balances of $21.7 million and $29.5 million at December 31, 2021 and 2020, respectively, after the impact of $3.9 million and $13.1 million of receivables, respectively, that were deemed not probable of collection. Receivables are recorded within deferred cost and other assets, net in the accompanying consolidated balance sheets.
For receivable balances related to the straight-line method of recognizing rental income, the collectability is generally assessed in conjunction with the evaluation of rental income as described above. The Company had straight-line rent receivables of $137.6 million and $93.1 million at December 31, 2021 and 2020, respectively, after the impact of $2.6 million and $14.5 million of receivables, respectively, that were deemed not probable of collection. These receivables are recorded within deferred costs and other assets, net in the accompanying consolidated balance sheets.
Goodwill
Goodwill arises from business combinations as the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company performs a qualitative assessment to determine if the quantitative impairment test is necessary. The quantitative impairment test, if deemed necessary, compares the fair value of each reporting unit with its carrying amount and impairment is recognized as the amount by which the carrying amount exceeds the reporting unit’s fair value. No impairment was recorded for the periods presented. Goodwill for the years ended December 31, 2021, 2020 and 2019 was $225.6 million, respectively.
Accounting for Derivative Financial Instruments and Hedging Activities
The Company may utilize derivative instruments such as interest rate swaps for purposes of hedging exposures to fluctuations in interest rates associated with certain of its financing transactions. At the inception of a hedge transaction, the Company enters into a contractual arrangement with the hedge counterparty and formally documents the relationship between the derivative instrument and the financing transaction being hedged, as well as its risk management objective and strategy for undertaking the hedge transaction. The fair value of the derivative instrument is recorded on the balance sheet as either an asset or liability. At inception and at least quarterly thereafter, a formal assessment is performed to determine whether the derivative instrument has been highly effective in offsetting changes in cash flows of the related financing transaction and whether it is expected to be highly effective in the future. The Company recognizes the entire change in the fair value of cash flow hedges included in the assessment of hedge effectiveness in other comprehensive (loss) income. The amounts recorded in other comprehensive (loss) income will subsequently be reclassified to earnings when the hedged item affects earnings.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Income Taxes
The Corporation has elected to be taxed as a REIT under the Code. As a REIT, the Corporation generally will not be subject to federal income tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of the Company’s assets, the amounts distributed to the Corporation’s stockholders and the ownership of Corporation stock. Management believes the Corporation has qualified and will continue to qualify as a REIT and, therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Corporation qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.
Taxable income earned by any of the Company’s taxable REIT subsidiaries, including from non-REIT activities, is subject to federal, state and local taxes. Accordingly, all asset management fees earned from April 1, 2019 through September 4, 2020, including the termination fee income earned in September 2019, were subject to income tax. See Note 12 for additional discussion.
Earnings Per Share
The Company’s unvested restricted common stock, which contains non-forfeitable rights to receive dividends, are considered participating securities requiring the two-class method of computing earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on their respective weighted average shares outstanding during the period. Under the terms of the Amended Incentive Award Plan, restricted stock awards are not allocated losses, including undistributed losses as a result of dividends declared exceeding net income. The Company uses income or loss from continuing operations as the basis for determining whether potential common shares are dilutive or anti-dilutive and undistributed net income or loss as the basis for determining whether undistributed earnings are allocable to participating securities.
Forward Equity Sale Agreements
The Corporation may enter into forward sale agreements for the sale and issuance of shares of our common stock, either through an underwritten public offering or through the 2021 ATM Program. These agreements may be physically settled in stock, settled in cash, or net share settled at the Company’s election. The Company evaluated the forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Corporation’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Corporation’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Corporation’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Corporation’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Corporation elects to physically settle or net share settle such forward sale agreement, delivery of the Corporation’s shares will result in dilution to the Company’s earnings per share.
Unaudited Interim Information
The consolidated quarterly financial data in Note 13 is unaudited. In the opinion of management, this financial information reflects all adjustments necessary for a fair presentation of the respective interim periods. All such adjustments are of a normal recurring nature.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
NOTE 3. INVESTMENTS
Owned Properties
As of December 31, 2021, the Company’s gross investment in owned real estate properties totaled approximately $7.9 billion. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with Texas, at 11.9%, as the only state with a gross investment greater than 10.0% of the total gross investment of the Company’s entire portfolio.
During the years ended December 31, 2021 and 2020, the Company had the following real estate activity (dollars in thousands):
Number of Properties
Dollar Amount of Investments
Held in Use
Held for Sale
Total
Held in Use
Held for Sale
Total
Gross balance, December 31, 2019
1,750
1,752
$
6,140,775
$
1,223
$
6,141,998
Acquisitions/improvements (1)
-
880,897
-
880,897
Dispositions of real estate (2)
(20
)
(18
)
(38
)
(53,985
)
(32,028
)
(86,013
)
Transfers to Held for Sale
(23
)
-
(72,912
)
72,912
-
Impairments (3)
-
-
-
(70,376
)
(11,100
)
(81,476
)
Reset of gross balances (4)
-
-
-
(45,386
)
(3,243
)
(48,629
)
Other
-
-
-
(1,340
)
-
(1,340
)
Gross balance, December 31, 2020
1,853
1,860
6,777,673
27,764
6,805,437
Acquisitions/improvements (1)
-
1,256,983
-
1,256,983
Dispositions of real estate (2)
(13
)
(10
)
(23
)
(42,472
)
(22,750
)
(65,222
)
Transfers to Held for Sale
(9
)
-
(18,403
)
18,403
-
Transfers from Held for Sale
(3
)
-
11,300
(11,300
)
-
Impairments (3)
-
-
-
(21,474
)
(1,736
)
(23,210
)
Reset of gross balances (4)
-
-
-
(31,143
)
(2,019
)
(33,162
)
Other
-
-
-
2,359
-
2,359
Gross balance, December 31, 2021
2,000
2,003
$
7,934,823
$
8,362
$
7,943,185
Accumulated depreciation and amortization
(1,182,959
)
(98
)
(1,183,057
)
Net balance, December 31, 2021 (5)
$
6,751,864
$
8,264
$
6,760,128
(1)
Includes investments of $15.4 million and $10.0 million, respectively, in revenue producing capitalized expenditures, and $10.7 million and $2.5 million, respectively, of non-revenue producing capitalized expenditures for the years ended December 31, 2021 and 2020.
(2)
The total net gain on disposal of assets for properties held in use was $37.3 million, $10.2 million and $26.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. The total gain on disposal of assets for properties held for sale was $2.2 million, $14.2 million and $32.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. Additionally, there were $1.7 million of gains recognized on two asset substitutions within a master lease and $0.3 million in other gains recognized during the year ended December 31, 2021.
(3)
Impairments on owned real estate is comprised of real estate and intangible asset impairment and allowance for credit losses on direct financing leases.
(4)
Represents write-off of gross investment balances against the related accumulated depreciation and amortization balances as a result of basis reset due to impairment or intangibles and tenant improvements which have been fully amortized.
(5)
Reconciliation of total owned investments to the accompanying consolidated balance sheet at December 31, 2021 is as follows:
Real estate assets held for investment, net
$
6,445,527
Intangible lease assets, net
426,972
Real estate assets under direct financing leases, net
7,442
Real estate assets held for sale, net
8,264
Intangible lease liabilities, net
(128,077
)
Net balance
$
6,760,128
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Operating Leases
As of December 31, 2021, 2020, and 2019, the Company held 1,998, 1,852 and 1,745 properties under operating leases, respectively. The following table summarizes the components of rental income recognized on these operating leases in the accompanying consolidated statements of operations (in thousands):
For the Year Ended December 31,
Base Cash Rent (1)
$
541,726
$
453,013
$
404,720
Variable cash rent (including reimbursables)
16,768
13,176
12,737
Straight-line rent, net of uncollectible reserve (2)
44,758
11,876
16,924
Amortization of above- and below- market lease intangibles, net (3)
2,847
1,836
4,310
Total rental income
$
606,099
$
479,901
$
438,691
(1)
Includes net impact of amounts recovered/(amounts not deemed probable of collection) of $5.5 million, $(10.9) million and $0.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(2)
Includes net impact of amounts recovered/(amounts not deemed probable for collection) of $10.9 million, $(14.9) million and $(0.2) million for the years ended December 31, 2021, 2020 and 2019, respectively.
(3)
Excludes amortization of in-place leases of $38.5 million, $34.8 million and $29.8 million for the years ended December 31, 2021, 2020 and 2019, respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
Scheduled minimum future rent to be received under the remaining non-cancellable term of these operating leases (including contractual fixed rent increases occurring on or after January 1, 2022) at December 31, 2021 are as follows (in thousands):
December 31, 2021
$
589,408
581,102
567,137
556,015
532,790
Thereafter
3,980,944
Total future minimum rentals
$
6,807,396
Because lease renewal periods are exercisable at the lessees’ options, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum rentals do not include any contingent rentals based on a percentage of the lessees’ gross sales or lease escalations based on future changes in the CPI.
The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):
December 31, 2021
December 31, 2020
In-place leases
$
536,344
$
473,062
Above-market leases
100,837
83,185
Less: accumulated amortization
(210,209
)
(188,258
)
Intangible lease assets, net
$
426,972
$
367,989
Below-market leases
$
188,718
$
178,614
Less: accumulated amortization
(60,641
)
(56,712
)
Intangible lease liabilities, net
$
128,077
$
121,902
The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was 13.3 years, 13.7 years, 17.6 years and 14.3 years, respectively, as of December 31, 2021. The remaining weighted average amortization period for in-place leases, above-market leases, below-market leases and in total was 12.8 years, 11.0 years, 17.4 years and 13.7 years, respectively, as of December 31, 2020. During the year ended December 31, 2021, the Company acquired in-place lease intangible assets of $84.8 million, above-market lease intangible assets of $23.1 million and below-market lease intangible liabilities of $16.8 million. During the year ended December 31, 2020, the Company acquired in-place lease intangible assets of $47.7 million, above-market lease intangible assets of $3.5 million and below-market lease intangible liabilities of $6.3 million.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Based on the intangible assets and liabilities at December 31, 2021, the net aggregate amortization expense for the next five years and thereafter is expected to be as follows (in thousands):
December 31, 2021
$
36,480
34,824
32,805
29,355
26,951
Thereafter
138,480
Total future minimum amortization
$
298,895
Direct Financing Leases
As of December 31, 2021 and 2020, the Company held one property under a direct financing lease, which was held in use. As of December 31, 2021, this property had $3.0 million in scheduled minimum future payments to be received under its remaining non-cancellable lease term. As of December 31, 2021, the Company had a reserve of $0.1 million against the net investment balance of $7.5 million, which was initially recorded in 2020 as a result of the initial term of the direct financing lease extending until 2027.
Loans Receivable
As of December 31, 2020, all of the Company’s previous loans receivable were fully paid off and the related allowance for loan losses reversed. During 2021, the Company issued a fixed-rate, uncollateralized loan receivable for $11.0 million. The Company evaluated the collectability of the amounts receivable under the loan and recorded an allowance for loan losses of $0.6 million as of December 31, 2021.
During the years ended December 31, 2021 and 2020, the Company had the following loan activity (dollars in thousands):
Mortgage Loans
Other Loans
Total
Properties
Investment
Investment
Investment
Principal, December 31, 2019
$
31,733
$
1,972
$
33,705
Principal payments and payoffs
(43
)
(31,733
)
(1,972
)
(33,705
)
Principal, December 31, 2020
-
-
-
-
Issuance of loan
-
-
11,000
11,000
Principal, December 31, 2021
-
$
-
$
11,000
$
11,000
Impairments and Allowance for Credit Losses
The following table summarizes total impairments and allowance for credit losses recognized in the accompanying consolidated statements of operations (in thousands):
Year Ended December 31,
Real estate asset impairment
$
22,120
$
59,206
$
24,130
Intangible asset impairment (recovery)
1,090
22,118
(39
)
Allowance for credit losses on direct financing leases
-
-
Allowance for credit losses on loans receivable
-
-
Total impairment loss
$
23,760
$
81,476
$
24,091
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
NOTE 4. DEBT
The Company's debt is summarized below (dollars in thousands):
2021 Weighted Average Effective Interest Rates (1)
2021 Weighted Average Stated Rates (2)
2021 Weighted Average Remaining Years to Maturity (3)
December 31,
December 31,
Debt:
Revolving credit facilities
3.41
%
1.03
%
1.3
$
288,400
$
-
Term loans
1.96
%
-
-
-
178,000
Senior Unsecured Notes
3.46
%
3.25
%
7.4
2,750,000
1,950,000
Mortgages payable
4.42
%
5.83
%
8.9
5,350
214,237
Convertible Notes
5.03
%
-
-
-
190,426
Total debt
3.52
%
3.04
%
6.8
3,043,750
2,532,663
Debt discount, net
(10,824
)
(7,807
)
Deferred financing costs, net (4)
(20,334
)
(18,515
)
Total debt, net
$
3,012,592
$
2,506,341
(1)
Includes amortization of debt discount/premium, amortization of deferred financing costs, facility fees, and non-utilization fees, where applicable, calculated for the year ended December 31, 2021 based on the average principal balance outstanding during the period.
(2)
Represents the weighted average stated interest rate based on the outstanding principal balance as of December 31, 2021.
(3)
Represents the weighted average remaining years to maturity based on the outstanding principal balance as of December 31, 2021.
(4)
Excludes deferred financing costs for the revolving credit facilities.
Deferred financing costs and offering discount/premium incurred in connection with entering into debt agreements are amortized to interest expense over the initial term of the respective agreement. Both deferred financing costs and offering discount/premium are recorded net against the principal debt balance on the consolidated balance sheets, except for deferred costs related to revolving credit facilities, which are recorded in deferred costs and other assets, net.
Revolving Credit Facilities
On January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, which includes the 2019 Credit Facility. The 2019 Facilities Agreements replaced the previous 2015 Credit Agreement and 2015 Term Loan Agreement. The 2019 Credit Facility is comprised of $800.0 million of aggregate revolving commitments with a maturity date of March 31, 2023 and includes two six-month extensions that can be exercised at the Company’s option. The 2019 Revolving Credit and Term Loan Agreement includes an accordion feature providing for an additional $400.0 million of revolving borrowing capacity, subject to satisfying certain requirements. Borrowings may be repaid, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees, if any. Payment is unconditionally guaranteed by the Company and material subsidiaries that meet certain conditions. The 2019 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors.
As of December 31, 2021, outstanding loans under the 2019 Credit Facility bore interest at 1-Month LIBOR plus an applicable margin of 0.90% per annum and the aggregate revolving commitments incurred a facility fee of 0.20% per annum, in each case, based on the Operating Partnership's credit rating.
The unamortized deferred financing costs were $1.4 million as of December 31, 2021, compared to $2.6 million as of December 31, 2020. As of December 31, 2021, $511.6 million of borrowing capacity was available under the 2019 Credit Facility and there were no outstanding letters of credit. The Operating Partnership's ability to borrow under the 2019 Credit Facility is subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2021.
Term Loans
As discussed above, on January 14, 2019, the Operating Partnership entered into the 2019 Revolving Credit and Term Loan Agreement, which included the A-1 Term Loans. The A-1 Term Loans had an aggregate borrowing amount of $420.0 million and a maturity date of March 31, 2024. In addition, on January 14, 2019, the Operating Partnership entered into the A-2 Term Loans, with an aggregate of $400.0 million of delayed draw term loans and a maturity date of March 31, 2022. The Company drew on the A-2 Term Loans to retire the 2.875% Convertible Notes upon their maturity in May 2019. On September 16, 2019, in connection with the issuance of the 2027 Senior Unsecured Notes and 2030 Senior Unsecured Notes described below, the Company repaid the A-1 Term Loans and A-2 Term Loans in full.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
On April 2, 2020, the Operating Partnership entered into the 2020 Term Loan Agreement, which provided for $200.0 million of unsecured term loans with a maturity date of April 2, 2022. The 2020 Term Loan Agreement included an accordion feature, which the Operating Partnership fully exercised in the second quarter of 2020 to borrow an additional $200.0 million of term loans. The 2020 Term Loans bore interest at LIBOR plus an applicable margin of 1.50% per annum, based on the Operating Partnership’s credit rating. In connection with entering into the 2020 Term Loan Agreement, the Company incurred $2.5 million in deferred financing costs.
On August 6, 2020, the issuance of the 2031 Senior Unsecured Notes triggered a mandatory prepayment under the 2020 Term Loan Agreement. As such, the Company repaid $222.0 million of the 2020 Term Loans and wrote-off $1.0 million of related unamortized deferred financing costs. As of December 31, 2020, the remaining unamortized deferred financing costs were $0.7 million. On January 4, 2021, the Company repaid the 2020 Term Loan in full and wrote-off the remaining unamortized deferred financing costs.
Senior Unsecured Notes
The Senior Unsecured Notes were issued by the Operating Partnership and are guaranteed by the Company. The following is a summary of the Senior Unsecured Notes outstanding (dollars in thousands):
Maturity Date
Interest Payment Dates
Stated Interest Rate
December 31,
December 31,
2026 Senior Notes
September 15, 2026
March 15 and September 15
4.45%
$
300,000
$
300,000
2027 Senior Notes
January 15, 2027
January 15 and July 15
3.20%
300,000
300,000
2028 Senior Notes
March 15, 2028
March 15 and September 15
2.10%
450,000
-
2029 Senior Notes
July 15, 2029
January 15 and July 15
4.00%
400,000
400,000
2030 Senior Notes
January 15, 2030
January 15 and July 15
3.40%
500,000
500,000
2031 Senior Notes
February 15, 2031
February 15 and August 15
3.20%
450,000
450,000
2032 Senior Notes
February 15, 2032
February 15 and August 15
2.70%
350,000
-
Total Senior Unsecured Notes
3.25%
$
2,750,000
$
1,950,000
For the years ended December 31, 2019, 2020 and 2021, the Operating Partnership completed the following issuances of Senior Unsecured Notes:
•
2029 Senior Unsecured Notes issued on June 27, 2019, resulting in net proceeds of $395.9 million, deferred financing costs of $3.8 million and an offering discount of $0.3 million;
•
2027 Senior Unsecured Notes and the 2030 Senior Unsecured Notes issued on September 16, 2019, resulting in net proceeds of $791.2 million, deferred financing costs of $7.3 million and an offering discount of $1.5 million;
•
2031 Senior Notes issued on August 6, 2020, resulting in net proceeds of $441.3 million, deferred financing costs of $4.2 million and an offering discount of $4.5 million; and
•
2028 Senior Notes and 2032 Senior Notes issued on March 3, 2021, resulting in net proceeds of $787.7 million, deferred financing costs of $7.1 million and an offering discount of $5.2 million.
The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership’s option, at a redemption price equal to the sum of: 100% of the principal amount of the respective Senior Unsecured Notes to be redeemed plus accrued and unpaid interest and liquidated damages, if any, up to, but not including, the redemption date; and a make-whole premium. If any of the Senior Unsecured Notes are redeemed three months or less (or two months or less in the case of the 2027 Senior Notes and 2028 Senior Notes) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
As of December 31, 2021 and December 31, 2020, the unamortized deferred financing costs were $20.3 million and $15.6 million, respectively, and the unamortized discount was $11.0 million and $7.0 million, respectively. In connection with the issuance of the Senior Unsecured Notes, the Company and Operating Partnership are subject to ongoing compliance with a number of customary financial and other affirmative and negative covenants, all of which the Company and the Operating Partnership were in compliance with as of December 31, 2021.
Mortgages Payable
Master Trust 2013 was an asset-backed securitization platform through which the Company raised capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans. On June 20, 2019, the Company elected to retire the Master Trust 2013 notes, which had one series of notes outstanding and were secured by 267 owned and financed properties at time of repayment.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under five fixed-rate non-recourse loans, which were securitized into CMBS and secured by the borrowers’ respective leased properties and related assets. In connection with the issuance of the 2028 and 2032 Senior Unsecured Notes in March 2021, the Company repaid three of these loans. As such, as of December 31, 2021, indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under two non-defaulted loans with stated interest rates of 5.80% and 6.00%, respectively. Each loan was secured by one property. There were no unamortized deferred financing costs as of December 31, 2021, compared to unamortized deferred financing costs of $1.9 million as of December 31, 2020. The unamortized net premium as of both December 31, 2021 and 2020 was $0.2 million.
Convertible Notes
In May 2014, the Company issued $345.0 million aggregate principal amount of 3.75% convertible notes for which interest was payable semi-annually in arrears on May 15 and November 15. During the year ended December 31, 2020, the Company repurchased $154.6 million of the 2021 Convertible Notes in cash. As of December 31, 2020, the unamortized discount was $1.0 million and the unamortized deferred financing costs were $0.3 million. The remaining 2021 Convertible Notes matured on May 15, 2021 at which time they were settled in cash and the remaining discount and deferred financing costs were fully amortized.
Debt Extinguishment
During the year ended December 31, 2021, the Company extinguished the following debt:
•
$207.4 million aggregate principal amount of CMBS indebtedness on three loans secured by 86 properties, resulting in a loss on debt extinguishment of $28.5 million,
•
$190.4 million of Convertible Notes upon their maturity, and
•
$178.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $0.7 million.
During the year ended December 31, 2020, the Company extinguished the following debt:
•
$222.0 million of indebtedness outstanding under the 2020 Term Loans, resulting in a loss on debt extinguishment of $1.0 million and
•
$154.6 million aggregate principal amount of the 2021 Convertible Notes, resulting in a loss on debt extinguishment of $6.2 million.
During the year ended December 31, 2019, the Company extinguished the following debt:
•
$820.0 million of indebtedness outstanding under the A-1 Term Loans and A-2 Term Loans, resulting in a loss on debt extinguishment of $5.3 million,
•
$606.7 million of indebtedness outstanding under the 2015 Credit Agreement and 2015 Term Loan Agreement, resulting in a loss on debt extinguishment of $0.7 million,
•
$402.5 million of the 2019 Convertible Notes upon their maturity,
•
$165.5 million aggregate principal amount of the Master Trust 2013 notes, resulting in a loss on debt extinguishment of $15.0 million, and
•
$52.8 million aggregate principal amount of CMBS indebtedness on two loans secured by 13 properties, resulting in a net gain on debt extinguishment of $6.7 million.
Debt Maturities
As of December 31, 2021, scheduled debt maturities, including balloon payments, were as follows (in thousands):
Scheduled
Principal
Balloon
Payment
Total
$
$
-
$
288,400
288,956
-
300,000
300,469
Thereafter
2,531
2,450,053
2,452,584
Total
$
5,281
$
3,038,469
$
3,043,750
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Interest Expense
The following table is a summary of the components of interest expense related to the Company's borrowings (in thousands):
Year Ended December 31,
Revolving credit facilities (1)
$
2,930
$
3,686
$
5,201
Term loans
3,545
15,448
Senior Unsecured Notes
85,996
61,750
29,286
Mortgages payable
2,506
12,028
18,733
Convertible Notes
2,658
10,728
17,245
Interest rate swaps
-
-
Non-cash amortization of:
Deferred financing costs
3,942
5,278
6,289
Debt discount, net
2,140
4,343
7,028
Net losses related to interest rate swaps
2,807
2,807
Total interest expense
$
103,003
$
104,165
$
101,060
(1)
Includes facility fees of approximately $1.7 million, $1.6 million and $2.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
NOTE 5. STOCKHOLDERS' EQUITY
Preferred Stock
On October 3, 2017, the Company completed an underwritten public offering of 6.9 million shares of 6.00% Series A Preferred Stock. The Series A Preferred Stock pays cumulative cash dividends at the rate of 6.00% per annum on their liquidation preference of $25.00 per share (equivalent to $0.375 per share on a quarterly basis and $1.50 per share on an annual basis). Dividends are payable quarterly in arrears on or about the last day of March, June, September and December of each year, beginning on December 31, 2017. The Series A Preferred Stock trades on the NYSE under the symbol “SRC-A.”
The Company may not redeem the Series A Preferred Stock prior to October 3, 2022, except in limited circumstances to preserve the Corporation’s status as a real estate investment trust, and pursuant to the special optional redemption provision described below. On and after October 3, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends up to but excluding the redemption date. In addition, upon the occurrence of a change of control, the Company may, at its option, exercise the special optional redemption provision and redeem the Series A Preferred Stock, in whole or in part within 120 days after the first date on which such change of control occurred, by paying $25.00 per share, plus any accrued and unpaid dividends up to, but not including, the date of redemption.
Common Stock
In May 2019, the Company entered into forward sale agreements in connection with an offering of 11.5 million shares of common stock at an initial gross offering price of $41.00 per share, before underwriting discounts and offering expenses. The forward purchasers borrowed and sold an aggregate of 11.5 million shares of common stock in the offering. The Company did not receive any proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering. All 11.5 million of these shares were settled during 2019, generating gross proceeds of $471.5 million.
In June 2020, the Company entered into forward sale agreements in connection with an offering of 9.2 million shares of common stock at an initial public offering price of $37.35 per share, before underwriting discounts and offering expenses. The Company did not receive any proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering. All 9.2 million of these shares were settled during 2020, generating net proceeds of $319.1 million.
In January 2022, the Company entered into forward sale agreements in connection with an offering of 9.4 million shares of common stock at an initial public offering price of $47.60 per share, before underwriting discounts and offering expenses. The Company did not receive any proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering. All 9.4 million of these shares remain open, with a final settlement date of July 19, 2023.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
ATM Program
In November 2016, the Board of Directors approved the 2016 ATM Program and the Corporation terminated its prior program. The agreement provided for the offer and sale of shares of the Company’s common stock having an aggregate gross sales price of up to $500.0 million through the agents, as its sales agents or, if applicable, as forward sellers for forward purchasers, or directly to the agents acting as principals. The Company could sell shares in amounts and at times to be determined by the Company but had no obligation to sell any of the shares in the 2016 ATM Program. From inception of the 2016 ATM Program through its termination in November 2020, 8.8 million shares of the Company’s common stock were sold, of which 7.0 million were sold through forward sales agreements. During the year ended December 31, 2020, 2.9 million of these shares were settled, generating net proceeds of $109.2 million and 0.6 million of these shares were settled during the year ended December 31, 2021, generating net proceeds of $21.9 million.
In November 2020, the Board of Directors approved a new $500.0 million ATM Program, and the Corporation terminated its 2016 ATM program. From inception of the 2020 ATM Program through its termination in November 2021, 9.3 million shares of the Company’s common stock were sold, all through forward sale agreements. All of these shares were settled during the year ended December 31, 2021, generating net proceeds of $391.4 million.
In November 2021, the Board of Directors approved a new $500.0 million ATM Program, and the Corporation terminated its 2020 ATM program. Since inception of the 2021 ATM Program through December 31, 2021, 2.7 million shares of the Company’s common stock have been sold, of which 2.3 million were sold through forward sale agreements. During the year ended December 31, 2021, 2.6 million shares were issued for net proceeds of $120.3 million, and 0.1 million shares remained open under forward contracts as of December 31, 2021, with a weighted average forward settlement price of $47.45 per share. The final settlement date for these shares under open forward contracts is November 22, 2022. Approximately $375.9 million remained available under the program as of December 31, 2021.
Stock Repurchase Program
On May 1, 2018, the Company's Board of Directors approved a stock repurchase program, which authorized the Company to repurchase up to $250.0 million of the Company’s common stock. These purchases could be made in the open market or through private transactions from time to time over the 18-month time period following authorization, depending on prevailing market conditions and applicable legal and regulatory requirements. No shares of the Company’s common stock were repurchased under the program, and the full $250.0 million in gross repurchase capacity expired unused on November 1, 2019.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Dividends Declared
In fiscal years 2021 and 2020, the Company's Board of Directors declared the following dividends:
Declaration Date
Dividend Per Share
Record Date
Total Amount
Payment Date
(in Thousands)
Preferred Stock
February 17, 2021
$
0.3750
March 15, 2021
$
2,588
March 31, 2021
May 19, 2021
0.3750
June 15, 2021
2,588
June 30, 2021
July 29, 2021
0.3750
September 15, 2021
2,587
September 30, 2021
November 17, 2021
0.3750
December 15, 2021
2,587
December 31, 2021
Total Preferred Dividend
$
1.5000
$
10,350
Common Stock
February 17, 2021
$
0.6250
March 31, 2021
$
71,837
April 15, 2021
May 19, 2021
0.6250
June 30, 2021
74,436
July 15, 2021
July 29, 2021
0.6380
September 30, 2021
78,674
October 15, 2021
November 17, 2021
0.6380
December 31, 2021
81,378
January 14, 2022
Total Common Dividend
$
2.5260
$
306,325
Preferred Stock
February 27, 2020
$
0.3750
March 13, 2020
$
2,588
March 31, 2020
May 22, 2020
0.3750
June 15, 2020
2,588
June 30, 2020
August 25, 2020
0.3750
September 15, 2020
2,587
September 30, 2020
November 13, 2020
0.3750
December 15, 2020
2,587
December 31, 2020
Total Preferred Dividend
$
1.5000
$
10,350
Common Stock
February 27, 2020
$
0.6250
March 31, 2020
$
64,338
April 15, 2020
May 22, 2020
0.6250
June 30, 2020
64,402
July 15, 2020
August 25, 2020
0.6250
September 30, 2020
66,171
October 15, 2020
November 13, 2020
0.6250
December 31, 2020
71,748
January 15, 2021
Total Common Dividend
$
2.5000
$
266,659
The common stock dividend declared on November 17, 2021 is included in accounts payable, accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2021.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are insured against such claims. The Company is contingently liable for $5.7 million of debt owed by one of its former tenants until the maturity of the debt on March 15, 2022. The Company has accrued the full $5.7 million liability in accounts payable, accrued expenses and other liabilities in the consolidated balance sheets as of both December 31, 2021 and December 31, 2020.
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements. As of December 31, 2021, no accruals have been made.
As of December 31, 2021, there were no outstanding claims against the Company that are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Purchase and Capital Improvement Commitments
As of December 31, 2021, the Company had commitments totaling $232.7 million, of which $165.3 million relates to future acquisitions and the remainder relates to improvements on properties the Company already owns. Acquisition commitments contain standard cancellation clauses contingent on the results of due diligence. $224.7 million of the Company’s commitments are expected to be funded during 2022, with the remainder to be funded by the end of 2023.
Lessee Contracts
The Company leases its corporate office space, which is classified as an operating lease. The corporate office lease contains a variable lease cost related to the lease of parking spaces and a non-lease component related to the reimbursement of certain common area maintenance expenses, both of which are recognized as incurred. The Company elected to use the components expedient for all lessee operating leases, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same. As such, total rental expense, including variable rent, for the corporate office space amounted to $1.5 million, $1.5 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively, and is included in general and administrative expense. The Company’s lease of its corporate office space has an initial term that expires on January 31, 2027 and is renewable at the Company’s option for two additional periods of five years each after the initial term.
The Company is also a lessee under long-term, non-cancellable ground leases under which it is obligated to pay monthly rent. There were four ground leases as of December 31, 2021 and 2020, respectively. Total rental expense included in property costs amounted to $0.3 million for each of the years ended December 31, 2021, 2020 and 2019, respectively. For all ground leases, rental expenses are reimbursed by tenants, and the corresponding rental revenue is recorded in rental income on the accompanying consolidated statements of operations. All leases are classified as operating leases and have a weighted average remaining lease term of 6.3 years.
The Company’s minimum aggregate rental commitments under all non-cancellable operating leases as of December 31, 2021 are as follows (in thousands):
Ground Leases
Office Lease
Total
$
$
1,040
$
1,243
1,055
1,224
1,070
1,239
1,086
1,237
1,101
1,243
Thereafter
Total
1,083
5,444
6,527
Less: imputed interest
(251
)
(1,130
)
(1,381
)
Total operating lease liabilities
$
$
4,314
$
5,146
Imputed interest was calculated using a weighted-average discount rate of 4.25%. The discount rate is based on our estimated incremental borrowing rate, calculated as the treasury rate for the same period as the underlying lease term, plus a spread determined using factors including the Company's credit rating and REIT industry performance. The evaluation of the Company's right-of-use lease asset associated with the corporate office included the unamortized portion of a $1.7 million cash lease incentive paid at inception of the lease. As of December 31, 2021 and 2020, the Company had a right-of-use lease asset balance of $3.7 million and $4.6 million, respectively, which are included in deferred costs and other assets, net and an operating lease liability balance of $5.1 million and $6.3 million, respectively, which are included in accounts payable, accrued expenses and other liabilities on the accompanying consolidated balance sheets.
NOTE 7. DERIVATIVE AND HEDGING ACTIVITIES
The Company may use interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in AOCL and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the consolidated statements of cash flows. Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
In December 2018, the Company entered into interest rate swap agreements. In the third quarter of 2019, the Company terminated those interest rate swaps and accelerated the reclassification of a loss of $12.5 million from AOCL to termination of interest rate swaps as a result of a portion of the hedged forecasted transactions becoming probable not to occur. There were no events of default related to the interest rate swaps prior to their termination. Given that a portion of the hedged transactions remained probable to occur, $12.3 million of the loss was deferred in other comprehensive loss and is being amortized over the remaining initial term of the interest rate swaps, which ends March 31, 2024. As of December 31, 2021, the unamortized portion of loss in AOCL related to terminated interest rate swaps was $5.8 million.
The following table provides information about the amounts recorded in AOCL, as well as the loss recorded in operations, when reclassified out of AOCL or recognized in earnings immediately (in thousands):
Year Ended December 31,
Gross amount of loss recognized in AOCL on derivatives
$
-
$
-
$
(18,593
)
Amount of loss reclassified from AOCL to termination of interest rate swaps
-
-
12,461
Amount of loss reclassified from AOCL to interest expense
2,807
2,807
1,830
Net reclassification of amounts from (to) AOCL
$
2,807
$
2,807
$
(4,302
)
During the next 12 months, we estimate that approximately $2.8 million will be reclassified as an increase to interest expense related to terminated hedges of existing floating-rate debt.
NOTE 8. FAIR VALUE MEASUREMENTS
Fair Value Measurements
The fair value measurement framework specifies a hierarchy of valuation inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable:
•
Level 1 - Valuation is based upon quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 - Inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. These types of inputs include the Company's own assumptions.
Nonrecurring Fair Value Measurements
Fair value measurement of an asset on a nonrecurring basis occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. Real estate assets and their related intangible assets are evaluated for impairment based on certain indicators including, but not limited to: the asset being held for sale, vacant, tenant bankruptcy or delinquency, and leases expiring in 60 days or less. The fair values of real estate and intangible assets were determined using the following information, depending on availability, in order of preference: signed purchase and sale agreements (“PSA”) or letters of intent (“LOI”); broker opinion of value (“BOV”); recently quoted bid or ask prices, or market prices for comparable properties; estimates of discounted cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, expenses based upon market conditions and capitalization rates; and expectations for the use of the real estate.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of their respective measurement dates (in thousands):
Fair Value Hierarchy Level
Description
Fair Value
Level 1
Level 2
Level 3
Assets held at December 31, 2021
Impaired at March 31, 2021
$
1,739
$
-
$
-
$
1,739
Impaired at June 30, 2021
$
9,655
$
-
$
-
$
9,655
Impaired at September 30, 2021
$
3,479
$
-
$
-
$
3,479
Impaired at December 31, 2021
$
11,656
$
-
$
-
$
11,656
Assets held at December 31, 2020
Impaired at March 31, 2020
$
36,491
$
-
$
-
$
36,491
Impaired at June 30, 2020
$
8,055
$
-
$
-
$
8,055
Impaired at September 30, 2020
$
10,027
$
-
$
-
$
10,027
Impaired at December 31, 2020
$
14,259
$
-
$
-
$
14,259
As of December 31, 2021, the Company held 14 properties that were impaired during 2021. As of December 31, 2020, the Company held 23 properties that were impaired during 2020. For one property held at December 31, 2021 and one held at December 31, 2020, the Company estimated fair value using a capitalization rate of 14.00% and 10.06%, respectively, based on capitalization rates from market comparables. For the remaining properties, the Company estimated property fair value using price per square foot from unobservable inputs and, for the properties valued using comparable properties during 2020, the price per square foot includes a discount of 0-10% to account for the market impact of the COVID-19 pandemic. The unobservable inputs for the remaining properties are as follows:
Unobservable Input
Asset Type
Property Count
Price Per Square Foot Range
Weighted Average Price Per Square Foot
Square
Footage
December 31, 2021
PSA, LOI or BOV
Retail
$63.83 - $418.57
$102.35
39,603
PSA, LOI or BOV
Medical
$65.63 - $105.16
$75.60
41,496
PSA, LOI or BOV
Data Center
$38.57
$38.57
188,475
Comparable Properties
Retail
$29.35 - $483.09
$67.48
42,357
Comparable Properties
Medical
$78.66 - $106.35
$95.00
15,974
December 31, 2020
PSA, LOI or BOV
Retail
$16.67 - $338.98
$43.32
577,945
Comparable Properties
Retail
$4.35 - $282.08
$57.62
431,563
Comparable Properties
Office
$79.80 - $103.79
$89.25
28,804
Estimated Fair Value of Financial Instruments
Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash and escrow deposits, and accounts receivable and payable. Generally, these assets and liabilities are short-term in duration and are recorded at cost, which approximates fair value, on the accompanying consolidated balance sheets.
In addition, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair values. The fair values of financial instruments are estimates based upon market conditions and perceived risks at measurement date. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities. The estimated fair values of these financial instruments have been derived either based on (i) market quotes for identical or similar instruments in markets or (ii) discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. The Senior Unsecured Notes, net are classified as Level 1 of the fair value of the hierarchy as of December 31, 2021 and the remaining measurements are classified as Level 2.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
The following table discloses fair value information for these financial instruments (in thousands):
December 31, 2021
December 31, 2020
Carrying Value
Estimated Fair Value
Carrying Value
Estimated Fair Value
Loans receivable, net
$
10,450
$
11,381
$
-
$
-
2019 Credit Facility
288,400
288,549
-
-
2020 Term Loans, net (1)
-
-
177,309
177,884
Senior Unsecured Notes, net (1)
2,718,641
2,865,187
1,927,348
2,122,409
Mortgages payable, net (1)
5,551
5,748
212,582
226,240
Convertible Notes, net (1)
-
-
189,102
194,124
(1)
The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.
NOTE 9. INCENTIVE AWARD PLAN AND EMPLOYEE BENEFIT PLAN
Amended Incentive Award Plan
Under the Amended Incentive Award Plan, the Company may grant equity incentive awards to eligible employees, directors and other consultants or advisors of the Company. Awards under the Amended Incentive Award Plan may be in the form of stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, performance awards, stock payment awards, market-based awards, Operating Partnership units and other incentive awards. If an award under the Amended Incentive Award Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the Amended Incentive Award Plan. As of December 31, 2021, 1.9 million shares remained available for award under the Amended Incentive Award Plan.
Shares of common stock have been granted pursuant to the Amended Incentive Award Plan and, during the periods presented, portions of these awards vested. The vesting of these shares resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Amended Incentive Award Plan and the award grants, certain executive officers and employees elected to surrender shares of common stock during the years ended December 31, 2021, 2020 and 2019 valued at $4.4 million, $4.4 million and $2.5 million, respectively, solely to pay the associated statutory tax withholdings, which do not exceed the maximum statutory rate. Common shares repurchased are considered retired under Maryland law, and the cost of the stock repurchased is recorded as a reduction to common stock and accumulated deficit on the consolidated balance sheets. The Company has made an accounting policy election to recognize stock-based compensation forfeitures as they occur.
Restricted Shares of Common Stock
Restricted share awards have been granted to certain employees, including executive officers, and members of the Board of Directors. The requisite service period for the awards is generally three years for employees and one year for members of the Board of Directors. The following table summarizes the restricted share activity:
Number of
Shares
Weighted
Average Price (1)
(per share)
Number of
Shares
Weighted
Average Price (1)
(per share)
Number of
Shares
Weighted
Average Price (1)
(per share)
Outstanding non-vested shares, beginning of year
279,912
$
42.67
321,627
$
40.66
346,181
$
45.48
Shares granted
118,996
39.22
148,045
46.42
172,818
38.41
Shares vested
(157,054
)
40.83
(182,653
)
42.04
(193,373
)
47.33
Shares forfeited
(8,719
)
40.87
(7,107
)
45.77
(3,999
)
38.40
Outstanding non-vested shares, end of year
233,135
$
42.22
279,912
$
42.67
321,627
$
40.66
(1)
Based on grant date fair values.
The Company recorded $4.7 million in deferred stock-based compensation associated with restricted shares granted during the year ended December 31, 2021. The fair value of the restricted stock grants was determined based on the Company's closing stock price on the date of grant. During the year ended December 31, 2021, restricted shares with an aggregate fair value of $6.5 million vested. The fair value of the vesting was determined based on the Company’s closing stock price on the date of vest. Outstanding non-vested awards as of December 31, 2021 have a remaining weighted average recognition period of 0.7 years.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Market-Based Awards
Market-based awards have been granted to executive officers upon approval from the Board of Directors or committee thereof. These awards are granted at a target number of units and represent shares that are potentially issuable in the future. The market-based share awards vest based on the Company’s stock price, dividend performance, and TSR at the end of their respective performance periods relative to a group of industry peers. The performance periods generally begin on January 1st of the year of grant and end after three years on December 31st. Potential shares of the Corporation's common stock that each participant is eligible to receive is based on the initial target number of shares granted, multiplied by a percentage range between 0% and 375%. The following table summarizes the market-based award activity:
Number of
Target Shares
Weighted
Average Fair
Value
(per share)
Number of
Target Shares
Weighted
Average Fair
Value
(per share)
Number of
Target Shares
Weighted
Average Fair
Value
(per share)
Outstanding non-vested awards, beginning of year
201,468
$
58.12
319,731
$
49.49
266,801
$
51.19
Grants at target
170,307
77.57
87,746
67.30
96,543
50.95
Earned above performance target
154,312
50.92
83,259
54.57
-
-
Vested
(266,319
)
50.92
(268,694
)
54.57
(30,597
)
69.54
Forfeited
-
-
-
-
(8,662
)
72.24
Incremental Shares (1)
(1,715
)
N/A
(20,574
)
N/A
(4,354
)
N/A
Outstanding non-vested awards, end of year
258,053
$
74.08
201,468
$
58.12
319,731
$
49.49
(1)
In 2018, in connection with the Spin-Off and in accordance with the rights granted per the Amended Incentive Award Plan, the Board of Directors made an equitable adjustment for all market-based awards outstanding, resulting in incremental shares. During the years ended December 31, 2021, 2020 and 2019, 1.7 thousand, 20.6 thousand and 3.4 thousand, respectively, of these incremental shares were earned. 1 thousand of the incremental shares expired unearned during the year ended December 31, 2019. Because the fair value of the outstanding market-based awards the day prior to and the day after the Spin-Off did not materially change, there was no change to unrecognized compensation expense and no incremental compensation expense related to the incremental shares.
Grant date fair value of the market-based share awards was calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the time horizons matching the performance periods. For market-based awards granted in 2021, significant inputs for the calculation were expected volatility of the Company of 42.8% and expected volatility of the Company's peers, ranging from 29.5% to 64.2%, with an average volatility of 39.3% and a risk-free interest rate of 0.19%.
The projected shares to be awarded are not considered issued under the Amended Incentive Award Plan until the performance period has ended and the actual number of shares to be released is determined. The market-based shares and dividend rights are subject to forfeiture in the event of a non-qualifying termination of a participant prior to the performance period end date. During the year ended December 31, 2021, market-based awards with an aggregate fair value of $12.8 million vested. The fair value of the vesting was determined based on the Company’s closing stock price on the date of vest. Outstanding non-vested awards as of December 31, 2021 have a remaining weighted average recognition period of 1.8 years and would have resulted in 0.5 million shares released based on the Corporation's TSR relative to the specified peer groups through that date.
In addition, final shares issued under each market-based share award entitle its holder to a cash payment equal to the aggregate dividends declared with record dates during the performance period, beginning on the grant date and ending the day before the awards are released. Approximately $3.3 million and $2.3 million in dividend rights have been accrued as of December 31, 2021 and 2020, respectively.
Stock-based Compensation Expense
For the years ended December 31, 2021, 2020 and 2019, the Company recognized $14.0 million, $12.6 million and $14.3 million, respectively, in stock-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations. Stock-based compensation is recognized on a straight-line basis over the minimum required service period of each applicable award.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
The following is a summary of remaining unamortized stock-based compensation expense (in thousands):
December 31, 2021
December 31, 2020
Restricted share awards
$
4,787
$
6,421
Market-based awards
11,143
5,920
Total unamortized stock-based compensation expense
$
15,930
$
12,341
401(k) Plan
The Company has a 401(k) Plan, which is available to full-time employees on the first month following their date of hire with the Company. Currently, the Company provides a matching contribution equal to 100% of elective deferrals up to 4% of compensation, which vests immediately.
NOTE 10. INCOME PER SHARE
The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share computed using the two-class method (dollars in thousands):
Years Ended December 31,
Basic and diluted income:
Income from continuing operations
$
171,702
$
26,708
$
175,266
Less: dividends paid to preferred stockholders
(10,350
)
(10,350
)
(10,350
)
Less: dividends and income attributable to unvested restricted stock
(581
)
(728
)
(915
)
Net income attributable to common stockholders used in basic and diluted income per share
$
160,771
$
15,630
$
164,001
Basic weighted average shares of common stock outstanding:
Weighted average shares of common stock outstanding
118,587,722
104,656,242
91,005,932
Less: unvested weighted average shares of restricted stock
(245,281
)
(298,582
)
(384,124
)
Basic weighted average shares of common stock outstanding
118,342,441
104,357,660
90,621,808
Net income per share attributable to common stockholders - basic
$
1.36
$
0.15
$
1.81
Diluted weighted average shares of common stock outstanding: (1)
Plus: unvested market-based awards
373,396
175,952
247,504
Plus: unsettled shares under open forward equity contracts
1,772
-
Diluted weighted average shares of common stock outstanding
118,715,838
104,535,384
90,869,312
Net income per share attributable to common stockholders - diluted
$
1.35
$
0.15
$
1.81
Potentially dilutive shares of common stock related to:
Unsettled shares of restricted stock
95,411
62,448
166,625
(1)
Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.
NOTE 11. RELATED PARTY TRANSACTIONS
Cost Sharing Arrangements
In conjunction with the Spin-Off, the Company and SMTA entered into certain agreements, including the Separation and Distribution Agreement, Tax Matters Agreement, Registration Rights Agreement and Insurance Sharing Agreement. These agreements provided a framework for the relationship between the Company and SMTA after the Spin-Off, by which Spirit could incur certain expenses on behalf of SMTA that had to be reimbursed in a timely manner. These agreements, except for the Tax Matters Agreement, were terminated in conjunction with the termination of the Asset Management Agreement. The Tax Matters Agreement was terminated in conjunction with the termination of the Interim Management Agreement.
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
Asset Management Agreement and Interim Management Agreement
In conjunction with the Spin-Off, the Company entered into the Asset Management Agreement to provide various management services to SMTA. On June 2, 2019, concurrently with SMTA’s entry into an agreement to sell Master Trust 2014, the Company entered into a termination agreement of the Asset Management Agreement, which became effective on September 20, 2019, pursuant to which SMTA paid the Company a termination fee of $48.2 million. On June 2, 2019, the Company and SMTA also entered into an Interim Management Agreement, which became effective September 20, 2019 and was subsequently terminated effective September 4, 2020. Asset management fees of $0.7 million and $14.7 million were earned during the years ended December 31, 2020 and 2019, respectively, and are included in related party fee income in the consolidated statements of operations. Also, under the terms of the Asset Management Agreement, the Company recognized related party fee income of $0.9 million, which was fully offset by general and administrative expense, for other compensation awarded by SMTA to an employee of Spirit for the year ended December 31, 2019.
Property Management and Servicing Agreement
Prior to September 20, 2019, the Operating Partnership provided property management services and special services for Master Trust 2014. Property management fees of $4.2 million and special servicing fees of $1.2 million were earned for the year ended December 31, 2019, which are included in related party fee income in the consolidated statements of operations. In conjunction with SMTA’s sale of Master Trust 2014 on September 20, 2019, the notes were retired and the Property Management and Servicing Agreement was terminated.
Related Party Loans Payable
Prior to September 20, 2019, wholly-owned subsidiaries of the Company were the borrower on four mortgage loans payable to SMTA and secured by six single-tenant commercial properties owned by the Company. The notes incurred interest expense of $0.2 million for the year ended December 31, 2019, which is included in interest expense in the consolidated statements of operations. In conjunction with SMTA’s sale of Master Trust 2014 on September 20, 2019, the Company repaid the related party loans in full.
Related Party Notes Receivable
The Operating Partnership, as sponsor of the issuance, retained a 5.0% economic interest in the Master Trust 2014 Series 2017-1 notes as required by the risk retention rules issued under 17 CFR Part 246. The notes generated interest income of $1.1 million for the year ended December 31, 2019, which is included in interest income on loans receivable in the consolidated statements of operations. In conjunction with SMTA’s sale of Master Trust 2014 on September 20, 2019, the Master Trust 2014 notes were redeemed, resulting in the Company receiving the full outstanding principal balance of $33.5 million, plus an early repayment premium of $0.9 million.
Investments in SMTA
In conjunction with the Spin-Off, SMTA issued to the Operating Partnership and one of its affiliates, both wholly-owned subsidiaries of Spirit, a total of 6.0 million shares of Series A preferred stock with an aggregate liquidation preference of $150.0 million (the “SMTA Preferred Stock”). The SMTA Preferred Stock paid cash dividends at the rate of 10.0% per annum on the liquidation preference of $25.00 per share. Spirit recognized $10.8 million in dividends during the year ended December 31, 2019 that is reflected as preferred dividend income from SMTA in the consolidated statements of operations. On September 20, 2019, in conjunction with SMTA’s sale of Master Trust 2014, the SMTA Preferred Stock was repurchased by SMTA.
NOTE 12. INCOME TAXES
The Company’s total income tax expense was as follows (in thousands):
Year Ended December 31,
State income tax
$
$
$
1,327
Federal income tax
10,174
Total income tax expense
$
$
$
11,501
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
The Operating Partnership is a partnership for federal income tax purposes. Partnerships are pass-through entities and are not subject to U.S. federal income taxes, and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Although most states and cities where the Operating Partnership operates follow the U.S. federal income tax treatment, there are certain jurisdictions such as Texas, Tennessee and Ohio that impose income or franchise taxes on a partnership. The Company’s deferred income tax expense and its ending balance in deferred tax assets and liabilities, which are recorded within accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets, were immaterial as of December 31, 2021, 2020 and 2019.
The Operating Partnership transferred its rights and obligations under the Asset Management Agreement to SRAM, a wholly-owned taxable REIT subsidiary of Spirit, on April 1, 2019. This agreement was subsequently terminated and simultaneously replaced by the Interim Management Agreement between SRAM and SMTA, effective from September 20, 2019 through September 4, 2020. Accordingly, all asset management fees earned from April 1, 2019 through September 4, 2020, including the termination fee income earned in September 2019, were subject to income tax. The Operating Partnership allocated personnel and other general and administrative costs to SRAM for management services provided to SMTA, including services provided in connection with SMTA’s sale of Master Trust 2014 on September 20, 2019. The federal income tax related to SRAM for the year ended December 31, 2019 was $10.2 million and the state income tax for the year ended December 31, 2019 was $0.7 million. Income tax expense for SRAM attributable to income before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate of 21% to income before income taxes. The difference between the statutory rate and reported amount for SRAM is caused by non-deductible executive compensation expenses totaling $0.6 million and the impact of state income taxes, net of federal income tax benefit, totaling $0.6 million.
To the extent that the Company acquires property that has been owned by a C corporation in a transaction in which the tax basis of the property carries over, and the Company recognizes a gain on the disposition of such property during the subsequent recognition period, it will be required to pay tax at the regular corporate tax rate to the extent of such built-in gain. No properties subject to state built-in gain tax were sold during the years ended December 31, 2021, 2020 or 2019.
The Corporation has federal net operating loss carry-forwards for income tax purposes totaling $66.1 million for each of the years ended December 31, 2021, 2020 and 2019. These losses, which begin to expire in 2027 through 2034, are available to reduce future taxable income or distribution requirements, subject to certain ownership change limitations. The Corporation intends to make annual distributions at least equal to its taxable income and thus does not expect to utilize its net operating loss carryforwards in the foreseeable future.
The Company files federal, state and local income tax returns. All federal tax returns for years prior to 2018 are no longer subject to examination. Additionally, state tax returns for years prior to 2017 are generally no longer subject to examination. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as operating expenses. There was no accrual for interest or penalties as of December 31, 2021, 2020 and 2019. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
Common stock dividends paid were characterized for tax as follows (per share):
Year Ended December 31,
Ordinary income
$
1.37
$
1.80
$
1.94
Return of capital
1.14
0.70
0.05
Capital gain
-
-
0.51
Total
$
2.51
$
2.50
$
2.50
SPIRIT REALTY CAPITAL, INC.
Notes to Consolidated Financial Statements - (continued)
December 31, 2021
NOTE 13. CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited consolidated financial information for each of the four quarters included in the years ended December 31, 2021 and 2020 (in thousands, except share and per share data):
First
Second
Third
Fourth
(Unaudited)
Quarter
Quarter
Quarter
Quarter
Year
Total revenues
$
135,141
$
164,626
$
152,568
$
156,055
$
608,390
Depreciation and amortization
(57,087
)
(60,074
)
(63,061
)
(64,402
)
(244,624
)
Interest
(26,624
)
(26,170
)
(25,078
)
(25,131
)
(103,003
)
Other expenses
(25,558
)
(27,955
)
(24,005
)
(23,825
)
(101,343
)
(Loss) gain on debt extinguishment
(29,177
)
(10
)
-
(29,186
)
Gain on disposition of assets
1,836
37,507
1,672
41,468
Net (loss) income
(1,469
)
87,924
40,878
44,369
171,702
Dividends paid to preferred stockholders
(2,588
)
(2,588
)
(2,587
)
(2,587
)
(10,350
)
Net (loss) income attributable to common stockholders
$
(4,057
)
$
85,336
$
38,291
$
41,782
$
161,352
Net (loss) income per share attributable to common stockholders - basic
$
(0.04
)
$
0.74
$
0.32
$
0.34
$
1.36
Net (loss) income per share attributable to common stockholders - diluted
$
(0.04
)
$
0.74
$
0.32
$
0.34
$
1.35
Dividends declared per common share
$
0.6250
$
0.6250
$
0.6380
$
0.6380
$
2.5260
First
Second
Third
Fourth
(Unaudited)
Quarter
Quarter
Quarter
Quarter
Year
Total revenues
$
122,720
$
118,524
$
113,741
$
128,632
$
483,617
Depreciation and amortization
(52,236
)
(53,160
)
(52,170
)
(55,054
)
(212,620
)
Interest
(25,359
)
(26,095
)
(26,404
)
(26,307
)
(104,165
)
Other expenses
(61,360
)
(40,340
)
(24,880
)
(30,473
)
(157,053
)
(Loss) gain on debt extinguishment
-
-
(7,252
)
(7,227
)
Gain on disposition of assets
10,763
12,347
24,156
Net (loss) income
(15,847
)
(413
)
13,798
29,170
26,708
Dividends paid to preferred stockholders
(2,588
)
(2,588
)
(2,587
)
(2,587
)
(10,350
)
Net (loss) income attributable to common stockholders
$
(18,435
)
$
(3,001
)
$
11,211
$
26,583
$
16,358
Net (loss) income per share attributable to common stockholders - basic
$
(0.18
)
$
(0.03
)
$
0.11
$
0.24
$
0.15
Net (loss) income per share attributable to common stockholders - diluted
$
(0.18
)
$
(0.03
)
$
0.11
$
0.24
$
0.15
Dividends declared per common share
$
0.6250
$
0.6250
$
0.6250
$
0.6250
$
2.5000
PART III

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of Spirit Realty Capital, Inc.'s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness as of December 31, 2021 of the design and operation of Spirit Realty Capital, Inc.'s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded, as of December 31, 2021, that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level.
Management's Report on Internal Control over Financial Reporting
Management, including the Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting for Spirit Realty Capital, Inc. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - 2013 Integrated Framework to assess the effectiveness of Spirit Realty Capital, Inc.'s internal control over financial reporting. Based upon the assessments, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, internal control over financial reporting was effective at the reasonable assurance level.
Ernst & Young LLP, Spirit Realty Capital, Inc.'s independent registered public accounting firm, audited Spirit Realty Capital, Inc.'s financial statements included in this Annual Report on Form 10-K and has issued an attestation report on Spirit Realty Capital, Inc.'s effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes to Spirit Realty Capital, Inc.'s internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, Spirit Realty Capital, Inc.'s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information concerning our directors and executive officers required by Item 10 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information concerning our executive compensation required by Item 11 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information concerning our security ownership of certain beneficial owners and management and related stockholder matters (including equity compensation plan information) required by Item 12 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information concerning certain relationships, related transactions and director independence required by Item 13 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information concerning our principal accounting fees and services required by Item 14 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a)(1) and (2)
Financial Statements and Schedules. The following documents are filed as a part of this report (see Item 8):
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2021 and 2020.
Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019.
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019.
Notes to Consolidated Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2021.
Schedule IV - Mortgage Loans on Real Estate as of December 31, 2021.
All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and the notes thereto.
(b) Exhibits.
Exhibit No.
Description
2.1
Agreement and Plan of Merger by and among Spirit Realty Capital, Inc., Spirit Realty, L.P., Cole Credit Property Trust II, Inc., and Cole Operating Partnership II, LP, dated January 22, 2013, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K on January 24, 2013 and incorporated herein by reference.
2.2
First Amendment to Agreement and Plan of Merger by and among Spirit Realty Capital, Inc., Spirit Realty, L.P., Cole Credit Property Trust II, Inc., and Cole Operating Partnership II, LP, dated May 8, 2013, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K on May 9, 2013 and incorporated herein by reference.
2.3
Articles of Merger by and between Spirit Realty Capital, Inc. and Spirit Realty Capital, Inc. and the Amended and Restated Charter of Spirit Realty Capital, Inc. attached thereto as Exhibit A filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
2.4
Separation and Distribution Agreement by and between Spirit Realty Capital, Inc. and Spirit MTA REIT, dated May 21, 2018, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K on May 24, 2018 and incorporated herein by reference.
3.1
Articles of Restatement of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Registration Statement on Form S-3 on November 8, 2013 and incorporated herein by reference.
3.2
Articles of Amendment of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Current Report on Form 8-K on May 13, 2014 and incorporated herein by reference.
3.3
Articles Supplementary of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Current Report on Form 8-K on March 3, 2017 and incorporated herein by reference.
3.4
Fifth Amended and Restated Bylaws of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on August 15, 2017 and incorporated herein by reference.
3.5
Articles Supplementary designating Spirit Realty Capital, Inc.'s 6.000% Series A Cumulative Redeemable Preferred Stock filed as Exhibit 3.4 to the Company's Registration Statement on Form 8-A on October 2, 2017 and incorporated herein by reference.
3.6
Articles of Amendment of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Current Report on Form 8-K on April 29, 2019 and incorporated herein by reference.
3.7
Articles of Amendment of Spirit Realty Capital, Inc. filed as Exhibit 3.1 to the Company's Current Report on Form 8-K on November 18, 2021 and incorporated herein by reference.
4.1
Form of Certificate for Common Stock of Spirit Realty Capital, Inc. filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4/A on March 29, 2013 and incorporated herein by reference.
4.2
Form of Certificate for Spirit Realty Capital, Inc.'s 6.000% Series A Cumulative Redeemable Preferred Stock filed as Exhibit 3.6 to the Company's Registration Statement on Form 8-A on October 2, 2017 and incorporated herein by reference.
4.3
Indenture among Spirit Realty, L.P. and U.S. Bank, National Association, dated as of August 18, 2016, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K on August 19, 2016 and incorporated herein by reference.
4.4
First Supplemental Indenture among Spirit Realty, L.P., Spirit Realty Capital, Inc. and U.S. Bank, National Association, including the form of the Notes and the guarantee, dated as of August 18, 2016, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K on August 19, 2016 and incorporated herein by reference.
4.5
Second Supplemental Indenture among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor and U.S. Bank National Association, as trustee, including the form of the Notes and the guarantee, dated as of June 27, 2019, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on June 27, 2019 and incorporated herein by reference.
4.6
Third Supplemental Indenture among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor and U.S. Bank National Association, as trustee, dated as of September 16, 2019, including the form of the Notes and the guarantee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on September 16, 2019 and incorporated herein by reference.
4.7
Fourth Supplemental Indenture among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor and U.S. Bank National Association, as trustee, dated as of September 16, 2019, including the form of the Notes and the guarantee, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K on September 16, 2019 and incorporated herein by reference.
4.8
Fifth Supplemental Indenture, dated as of August 6, 2020, among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor and U.S. Bank National Association, as trustee, including the form of the Notes and the Guarantee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on August 6, 2020 and incorporated herein by reference.
4.9
Sixth Supplemental Indenture, dated as of March 3, 2021, among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the 2028 Notes and the 2028 Guarantee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on March 3, 2021 and incorporated herein by reference.
4.10
Seventh Supplemental Indenture, dated as of March 3, 2021, among Spirit Realty, L.P., as issuer, Spirit Realty Capital, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the form of the 2032 Notes and the 2032 Guarantee, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K on March 3, 2021 and incorporated herein by reference.
4.11
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, filed as Exhibit 4.11 to the Company’s Annual Report on Form 10-K on February 25, 2020 and incorporated herein by reference.
10.1
Second Amended and Restated Agreement of Limited Partnership of Spirit Realty, L.P. filed as Exhibit 3.1 to the Operating Partnership's Current Report on Form 8-K on October 3, 2017 and incorporated herein by reference.
10.2#
Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan filed as Appendix A within the Company's Definitive Proxy Statement on Schedule 14A on April 11, 2016 and incorporated herein by reference.
10.3#
Amendment to the Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan, dated March 2, 2017, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on March 3, 2017 and incorporated herein by reference.
10.4#
Second Amendment to the Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan, dated March 2, 2017, filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K on February 25, 2020 and incorporated herein by reference.
10.5#
Third Amendment to the Amended and Restated Spirit Realty Capital, Inc. and Spirit Realty, L.P. 2012 Incentive Award Plan, dated May 20, 2019, filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K on February 25, 2020 and incorporated herein by reference.
10.6#
Form of Restricted Stock Award Grant Notice and Agreement filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
10.7#
Form of 2021 Performance Share Award Grant Notice and Agreement filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q on May 5, 2021 and incorporated herein by reference.
10.8#*
Form of 2022 Performance Share Award Grant Notice and Agreement.
10.9#
Form of Indemnification Agreement of Spirit Realty Capital, Inc. filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
10.10#
Second Amended and Restated Employment Agreement among Spirit Realty Capital, Inc. and Jackson Hsieh, dated February 27, 2020, filed as Exhibit 10.1 to the Company’s Form 8-K on March 2, 2020 and incorporated herein by reference.
10.11#
Employment Agreement among Spirit Realty Capital, Inc. and Michael Hughes, dated March 20, 2018, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on March 21, 2018 and incorporated herein by reference.
10.12#
Amendment to Employment Agreement, dated February 27, 2020, by and between Spirit Realty Capital, Inc. and Michael Hughes, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K on March 2, 2020 and incorporated herein by reference.
10.13#
Restricted Stock Award Agreement between Spirit Realty Capital, Inc. and Michael Hughes dated March 29, 2018, filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K on February 25, 2020 and incorporated herein by reference.
10.14#
Performance Share Award Agreement between Spirit Realty Capital, Inc. and Michael Hughes dated March 29, 2018, filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K on February 25, 2020 and incorporated herein by reference.
10.15#
Second Amended and Restated Employment Agreement, dated January 24, 2022, by and between Spirit Realty Capital, Inc. and Jay Young, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on January 20, 2022 and incorporated herein by reference.
10.16#
Employment Agreement among Spirit Realty Capital, Inc. and Kenneth Heimlich dated April 3, 2018, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K on April 6, 2018 and incorporated herein by reference.
10.17#
Amendment to Employment Agreement, dated February 27, 2020, by and between Spirit Realty Capital, Inc. and Kenneth Heimlich, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K on March 2, 2020 and incorporated herein by reference.
10.18#
Employment Agreement among Spirit Realty Capital, Inc. and Rochelle Thomas dated January 24, 2022, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K on January 20, 2022 and incorporated herein by reference.
10.19#*
Director Compensation Program of Spirit Realty Capital, Inc. dated November 17, 2021.
10.20
Revolving Credit and Term Loan Agreement among Spirit Realty L.P., JPMorgan Chase Bank, N.A., as administrative agent and the financial institutions party thereto as lenders from time to time, dated January 14, 2019, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on January 14, 2019 and incorporated herein by reference.
10.21
Guaranty between Spirit Realty Capital, Inc. and JPMorgan Chase Bank, N.A., and acknowledged by Spirit Realty L.P., dated January 14, 2019, filed as Exhibit 10.2 to the Company's Current Report on Form 8-K on January 14, 2019 and incorporated herein by reference.
10.22
Loan Agreement, between German American Capital Corporation and Spirit SPE Loan Portfolio 2013-2, LLC, dated July 17, 2013, filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
10.23
Guaranty of Recourse Obligations of Borrower, by Spirit Realty, L.P. in favor of German American Capital Corporation, dated July 17, 2013, filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
10.24
Loan Agreement, between Barclays Bank PLC and Spirit SPE Loan Portfolio 2013-3, LLC, dated July 17, 2013, filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
10.25
Guaranty of Recourse Obligations of Borrower by Spirit Realty, L.P. in favor of Barclays Bank PLC, dated July 17, 2013, filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.
21.1*
List of Subsidiaries of Spirit Realty Capital, Inc. as of December 31, 2021.
22.1*
List of Issuers of Guaranteed Securities as of December 31, 2021.
23.1*
Consent of Ernst & Young LLP, Spirit Realty Capital, Inc.'s Independent Registered Accounting Firm.
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Spirit Realty Capital, Inc.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Spirit Realty Capital, Inc.
32.1*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Spirit Realty Capital, Inc.
101.1*
The following financial information from Spirit Realty Capital, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements.
104.1*
Cover Page Interactive Data File - The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
*
Filed herewith.
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Management contract or compensatory plan or arrangement.