SPIRIT REALTY CAPITAL, INC. - 10-K filing on 2015-02-27

Debt

12 Months Ended

Dec. 31, 2014

The Company's debt is summarized below:



	2014 Weighted Average Effective Interest Rates ⁽¹⁾		2014 Weighted Average Stated Rates ⁽²⁾		2014 Weighted Average Maturity ⁽³⁾	December 31, 2014			December 31, 2013
						(In Thousands)
Revolving credit facilities	4.84	%	3.58	%	1.6	$	15,181		$	35,120
Master Trust Notes	5.62	%	5.04	%	8.2	1,710,380			1,241,437
CMBS - fixed-rate	5.34	%	5.85	%	3.2	1,836,181			2,387,532
CMBS - variable-rate⁽⁴⁾	3.50	%	3.28	%	2.7	110,685			111,018
Convertible Notes	4.82	%	3.28	%	5.3	747,500			—
Unsecured fixed rate promissory note	9.12	%	7.00	%	7.0	1,293			1,442
						4,421,220			3,776,549
Unamortized net debt (discount) premium						(51,586		)	1,669
Total debt, net						$	4,369,634		$	3,778,218

⁽¹⁾The effective interest rates include amortization of debt discount, amortization of deferred financing costs, and related debt insurer premiums and non-utilization fees, where applicable, calculated for the three months ended December 31, 2014.
⁽²⁾ Represents the weighted average stated interest rate based on the outstanding principal balance as of December 31, 2014.
⁽³⁾ Represents the weighted average maturity based on the outstanding principal balance as of December 31, 2014.
⁽⁴⁾ Variable-rate notes are predominantly hedged with interest rate swaps (see Note 7).

Revolving Credit Facilities

$400 million Credit Facility - On July 17, 2013, the Operating Partnership and various affiliates, entered into a three-year credit agreement ("Credit Facility") with various lenders and terminated the Company's previous $100.0 million secured revolving credit facility. The Operating Partnership may obtain loans and/or extensions of credit in an aggregate amount not to exceed $400.0 million. The initial term expires on July 17, 2016 and may be extended for an additional 12 months subject to the satisfaction of specified requirements. The Credit Facility bears interest, at the Operating Partnership’s option, of either (i) the “Base Rate” (as defined in the Credit Facility) plus 1.00% to 2.00%; or (ii) LIBOR plus 2.00% to 3.00%, depending on the Operating Partnership’s leverage ratio. The Operating Partnership is also required to pay a fee on the unused portion of the Credit Facility at a rate of either 0.25% or 0.35% per annum, based on percentage thresholds for the average daily unused balance during a fiscal quarter, which amounted to $1.2 million, $0.7 million and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

As a result of entering into the Credit Facility, the Company incurred origination costs of $4.5 million. These costs are being amortized to interest expense, on a straight-line basis, over the remaining initial term of the Credit Facility. As of December 31, 2014 and 2013, $2.3 million and $3.8 million, respectively, remain in deferred costs and other assets, net on the accompanying consolidated balance sheet. The interest rate, excluding the impact of non-cash amortization of deferred financing costs and non-utilization fee of the Credit Facility, was 2.69% for the three months ended December 31, 2014. As of December 31, 2014, there was no balance outstanding on the Credit Facility and $400.0 million of borrowing capacity.

The Company guarantees the Operating Partnership's obligations under the Credit Facility and, to the extent not prohibited by law, all of its assets and the Operating Partnership's assets, other than interests in subsidiaries that are contractually prohibited from being pledged, are pledged as collateral for obligations under the Credit Facility.

The ability to borrow under the Credit Facility is subject to the Operating Partnerships' ongoing compliance with a number of customary financial covenants. As of December 31, 2014, the Operating Partnership was in compliance with these financial covenants.

Line of Credit - As of December 31, 2014, a special purpose entity indirectly owned by the Company had access to a $40.0 million secured revolving credit facility (“Line of Credit”). The initial term of the Line of Credit expires in March 2016, and each advance under the Line of Credit has a 24-month term. The interest rate is determined on the date of each advance and is the greater of (i) the stated prime rate or (ii) the floor rate, which was amended and reduced during the third quarter 2014, equal to 3.50%. The interest rate with respect to each advance resets on the annual anniversary date of each advance, and is subject to the same terms as above. As of December 31, 2014, $15.2 million was outstanding on the Line of Credit under three separate advances, secured by three properties, at a weighted average stated rate of 3.58% and an effective interest rate for the three months ended December 31, 2014 of 5.83%. Each advance under the Line of Credit is secured by the assets specified as collateral for such advance. The ability to borrow under the Line of Credit is subject to the Operating Partnership and special purposes entity's ongoing compliance with a number of customary financial covenants. As of December 31, 2014, the Operating Partnership and, if applicable, the special purpose entity were in compliance with these financial covenants.

Master Trust Notes

The Company utilizes an asset-backed securitization platform to raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans (the “Spirit Master Funding Program”). The Spirit Master Funding Program consists of two separate securitization trusts which have one or multiple bankruptcy-remote, special purpose entities as issuers of the notes (“Master Trust 2013” and “Master Trust 2014”, respectively). Each issuer is an indirect wholly-owned subsidiary of the Company. Notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within that trust. The notes issued under Master Trust 2013 and Master Trust 2014 are collectively referred to as the “Master Trust Notes”.

Master Trust 2013

In December 2013, an indirect wholly-owned subsidiary of the Company issued $330.0 million aggregate principal amount of investment grade rated net-lease mortgage notes comprised of $125.0 million of 3.89% interest only notes expected to be repaid in December 2018 and $205.0 million of 5.27% amortizing notes expected to be repaid in December 2023 (collectively referred to as the “2013 Notes”). As of December 31, 2014, the 2013 Notes had an outstanding principal balance of $326.0 million and were secured by 313 properties, including 77 properties securing mortgage loans. The 2013 Notes have a weighted average stated interest rate of 4.74% and a weighted average maturity of 7.1 years as of December 31, 2014.

Master Trust 2014

In May 2014, the Company completed its offer to exchange the outstanding principal balance of three series of existing net-lease mortgage notes for three series of newly issued 2014 Notes (the “Exchange Offer”). The terms of the new notes remain generally similar to the old notes including the interest rate and anticipated final repayment dates; however, the new notes generally amortize more slowly than the old notes and have a legal final payment date that is 17 years later than the old notes (although the anticipated repayment date remains the same). The Exchange Offer was accounted for as a debt modification and the related costs of $13.0 million and $0.7 million for the years ended December 31, 2014 and 2013, respectively, are classified as finance restructuring charges in the accompanying consolidated statements of operations.

In November 2014, the existing issuers under Master Trust 2014 and two additional indirect wholly-owned subsidiaries of the Company, collectively as co-issuers, completed the issuance of $510.0 million aggregate principal amount of net-lease mortgage notes comprised of $150.0 million of 3.50% interest only notes expected to be repaid in January 2020 and $360.0 million of 4.63% amortizing notes (interest only through November 2017) expected to be repaid in January 2030 (together with the new notes from the Exchange Offer, the “2014 Notes”). As of December 31, 2014, the 2014 Notes had an outstanding principal balance of $1.38 billion and were secured by 952 properties, including 82 properties securing mortgage loans. The 2014 Notes have a weighted average stated interest rate of 5.11% and a weighted average maturity of 8.5 years as of December 31, 2014.

CMBS

As of December 31, 2014, indirectly owned subsidiaries of the Company were borrowers under 175 fixed and 11 variable rate non-recourse loans that had been securitized into CMBS that are secured by the borrowers' respective leased properties and related assets. The stated interest rates as of December 31, 2014 for the fixed rate notes ranged from 3.90% to 10.88% with a weighted average stated rate of 5.85%. The variable rate notes ranged from 2.66% to 3.66% with a weighted average stated rate of 3.28%. As of December 31, 2014, the fixed and variable rate loans have balances outstanding of $1.84 billion and $110.7 million and are secured by 721 and 123 properties, respectively.

In connection with obtaining lender consent to our IPO, the Company agreed to certain cash sweep covenants that were more restrictive than those provided under certain original loan agreements. One such CMBS loan is secured by a first priority lien on properties leased to one of our tenants pursuant to a master lease that expires in April 2027. During the year ended December 31, 2014, the servicer of this CMBS loan notified the Company that conditions exist under covenants contained in the loan agreement that permit the servicer to retain rents in excess of debt service requirements (“Excess Cash”) as additional deposited collateral beginning as of September 30, 2013. In December 2014, the borrower deposited with the lender an Excess Cash amount of $8.6 million, representing the required cash collateral from September 30, 2013 through December 31, 2014. The right of the servicer to claim Excess Cash continues until (a) the collateral tenant meets certain financial performance requirements for four consecutive fiscal quarters, (b) no event of default under the loan agreement is continuing, and (c) our long term debt is rated at or above “BB” by S&P and “Ba2” by Moody’s. For so long as the cash sweep triggering event period continues, on a quarterly basis, the borrower will be required to post additional Excess Cash of approximately $1.7 million per quarter, and the Company must guarantee the anticipated Excess Cash for the remainder of the loan term, which is $15.0 million as of December 31, 2014. Pursuant to the notice from the loan servicer, the Company is permitted to issue a letter of credit in lieu of the Excess Cash eligible to be swept. Excess Cash deposited with the lender as additional collateral is included in deferred costs and other assets, net in the accompanying consolidated balance sheet.

As of December 31, 2014, certain borrowers were in default under the loan agreements relating to four separate CMBS loans where the collateral securing the respective loans was no longer generating sufficient revenue to pay the required debt service. Each defaulted borrower is a special purpose entity and the sole owner of the collateral securing the loan obligations. As of December 31, 2014, the aggregate principal balance under the defaulted CMBS loans was $75.6 million, which includes $2.6 million of interest capitalized to principal. The following table provides key elements of the defaulted mortgage loans (dollars in thousands):



Industry	Properties	Net Book Value		Monthly Base Rent		Outstanding Principal		Restricted Cash ⁽³⁾		Stated Rate			Default Rate			Accrued Interest
Drug Stores / Pharmacies	1	$	1,032	$	—	$	1,247	$	78	5.67	%		9.67	%		$	61	⁽¹⁾
Home Furnishings	1	3,315		36		17,026		3,537		6.88	%		10.88	%		1,168		⁽¹⁾
Sporting Goods	1	3,375		—		4,133		609		5.52	%		9.52	%		260		⁽¹⁾
Manufacturing	9	39,034		83		53,184		9,497		5.85	%		9.85	%		1,614		⁽¹⁾
	12	$46,756		$	119	$	75,590	$	13,721	6.06	%	⁽²⁾	10.06	%	⁽²⁾	$	3,103

(1) Interest accrued or capitalized to principal that remains unpaid.
(2) Weighted average interest rate.
(3) Represents restricted cash controlled by the lender that may be applied to reduce amounts owed.

Convertible Senior Notes

On May 20, 2014, the Company completed registered offerings of $402.5 million aggregate principal amount of 2.875% Convertible Notes due in 2019 (the "2019 Notes") and $345.0 million aggregate principal amount of 3.75% Convertible Notes due in 2021 (the "2021 Notes" and together with the 2019 Notes, the "Convertible Notes"). Interest on the Convertible Notes is payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes will mature on May 15, 2019 and the 2021 Notes will mature on May 15, 2021.

The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of Spirit Realty Capital's common stock, or a combination thereof. The initial conversion rate applicable to each series is 76.3636 per $1,000 principal note (equivalent to an initial conversion price of $13.10 per share of common stock, representing a 22.5% premium above the public offering price). Earlier conversion may be triggered if shares of Spirit Realty Capital common stock trade higher than the established thresholds or certain corporate events occur.

In connection with the issuance of the Convertible Notes, the Company recorded a discount of $56.7 million, which represents the estimated value of the embedded conversion option feature for each of the Convertible Notes. The discount is shown net against the aggregate outstanding principal balance of the Convertible Notes on the accompanying consolidated balance sheets. The equity component of the conversion feature is recorded in capital in excess of par, net of $1.6 million in financing transaction costs incurred and allocated to this conversion feature. The discount will be amortized to interest expense using the effective interest method over the term of each of the 2019 Notes and 2021 Notes. As of December 31, 2014, the unamortized discount was $51.5 million. The Company also incurred $19.6 million in transaction costs recorded in deferred financing costs in connection with the Convertible Notes Offering. This amount has been allocated on a pro-rata basis to each of the Convertible Notes and is being amortized to interest expense over the term of each note.

Debt Extinguishment

Net proceeds raised from the concurrent registered offerings of Convertible Notes and common stock (see Note 9) in May 2014, were partially used to retire the senior mortgage notes payable encumbering the Specialty Retail Shops Holding Corp. ("Shopko") properties with an aggregate principal balance of $488.7 million, redeem $18.0 million of old notes that were not tendered in the Exchange Offer, and repay all amounts then drawn against the Credit Facility. During the year ended December 31, 2014, the Company extinguished a total of $583.8 million aggregate principal amount of senior mortgage indebtedness with a weighted average contractual interest rate of 6.41%. As a result of these transactions, the Company recognized a loss on debt extinguishment of approximately $64.8 million primarily from costs incurred related to the defeasance of the Shopko indebtedness.

Debt Maturities

As of December 31, 2014, scheduled debt maturities of the Company’s revolving credit facilities, mortgages and notes payable, including balloon payments, are as follows (in thousands):



	Scheduled Principal		Balloon Payment		Total
2015	$	31,552	$	321,372	$	352,924
2016	30,167		289,045		319,212
2017	29,667		839,977		869,644
2018	43,750		248,851		292,601
2019	45,771		452,000		497,771
Thereafter	289,752		1,799,316		2,089,068
	$	470,659	$	3,950,561	$	4,421,220

Interest Expense

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



	Years Ended December 31,
	2014			2013		2012
Interest expense – revolving credit facilities	$	3,597		$	3,037	$	108
Interest expense – mortgages and notes payable	196,246			157,903		119,196
Interest expense – Convertible Notes	15,046			—		—
Interest expense – other	6			475		10
Interest expense – term note payable	—			—		19,925
Amortization of deferred financing costs ⁽¹⁾	5,899			13,188		2,819
Amortization of net losses related to interest rate swaps	125			11		3,415
Amortization of debt (premium)/discount	(849		)	4,653		10,747
Total interest expense	$	220,070		$	179,267	$	156,220

⁽¹⁾Includes $9.5 million arising from financing commitments related to the Merger for the year ended December 31, 2013.