SPIRIT REALTY CAPITAL, INC. - 10-K filing on 2019-02-21

Debt

12 Months Ended

Dec. 31, 2018

DEBT

The debt of the Company and the Operating Partnership are the same, except for the presentation of the Convertible Notes, which were issued by the Company. Subsequently, an intercompany note between the Company and the Operating Partnership was executed with terms identical to those of the Convertible Notes. Therefore, in the consolidated balance sheet of the Operating Partnership, the amounts related to the Convertible Notes are reflected as notes payable to Spirit Realty Capital, Inc., net. The Company's debt is summarized below:



	2018 Weighted Average Effective Interest Rates⁽¹⁾		2018 Weighted Average Stated Rates ⁽²⁾		2018 Weighted Average Remaining Term ⁽³⁾	December 31, 2018			December 31, 2017
						(In Thousands)
2015 Credit Facility	5.19	%	3.34	%	0.2	$	146,300		$	112,000
2015 Term Loan	3.83	%	3.63	%	0.8	420,000			—
Master Trust Notes	5.60	%	5.01	%	5.0	167,854			2,248,504
CMBS	5.77	%	5.53	%	4.5	274,758			332,647
Related party notes payable	1.00	%	1.00	%	9.2	27,890			—
Convertible Notes	5.31	%	3.28	%	1.3	747,500			747,500
Senior Unsecured Notes	4.64	%	4.45	%	7.7	300,000			300,000
Total debt	5.26	%	4.19	%	2.9	2,084,302			3,740,651
Debt discount, net						(14,733		)	(61,399		)
Deferred financing costs, net ⁽⁴⁾						(14,932		)	(39,572		)
Total debt, net						$	2,054,637		$	3,639,680

⁽¹⁾ The effective interest rates include amortization of debt discount/premium, amortization of deferred financing costs, facility fees, and non-utilization fees, where applicable, calculated for the year ended December 31, 2018 and based on the average principal balance outstanding.

⁽²⁾ Represents the weighted average stated interest rate based on the outstanding principal balance as of December 31, 2018.

⁽³⁾ Represents the weighted average maturity based on the outstanding principal balance as of December 31, 2018.

⁽⁴⁾The Company records deferred financing costs for the 2015 Credit Facility in deferred costs and other assets, net on its consolidated balance sheets.

Revolving Credit Facilities

On March 31, 2015, the Operating Partnership, as borrower, entered into the 2015 Credit Agreement that established a $600.0 million unsecured revolving credit facility, with an accordion feature to increase the facility size up to $1.0 billion, subject to satisfying certain requirements and obtaining additional lender commitments. On April 27, 2016, the Operating Partnership expanded the borrowing capacity from $600.0 million to $800.0 million by partially exercising the accordion feature. The 2015 Credit Agreement also included a $50.0 million sub-limit for swing-line loans and up to $60.0 million available for issuance of letters of credit. Swing-line loans and letters of credit reduce availability under the 2015 Credit Agreement on a dollar-for-dollar basis.

Payment of the 2015 Revolving Credit Agreement was unconditionally guaranteed by the Company and, under certain circumstances, by one or more material subsidiaries (as defined in the 2015 Revolving Credit Agreement) of the Company.

Borrowings bear interest at a rate equal to 1-Month LIBOR plus 0.875% to 1.55% per annum and require a facility fee in an amount equal to the aggregate revolving credit commitments (whether or not utilized) multiplied by a rate equal to 0.125% to 0.30% per annum, in each case based on the Company's credit rating. As of December 31, 2018, the 2015 Credit Facility bore interest at 1-Month LIBOR plus 1.25% and incurred a facility fee of 0.25% per annum.

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 (as defined in the 2015 Credit Agreement). The 2015 Credit Facility is full recourse to the Operating Partnership and the aforementioned guarantors. The 2015 Credit Facility was to mature on March 31, 2019 (extendible at the Operating Partnership's option to March 31, 2020, subject to satisfaction of certain requirements). Subsequent to December 31, 2018, the Operating Partnership entered into the new 2019 Facilities Agreements, which include a new 2019 Credit Facility that replaces the 2015 Credit Agreement in its entirety. See Note 16 for further discussion.

In connection with the origination and use of the 2015 Credit Facility, the Company incurred costs of $4.8 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the 2015 Credit Facility. The unamortized deferred financing costs were $0.4 million and $1.6 million, at December 31, 2018 and 2017, respectively, and are recorded in deferred costs and other assets, net on the accompanying consolidated balance sheets.

As of December 31, 2018, $146.3 million was outstanding, there was $653.7 million of borrowing capacity available, and no outstanding letters of credit or swing-line loans. The Operating Partnership's ability to borrow under the 2015 Credit Facility is subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of December 31, 2018, the Company and the Operating Partnership were in compliance with these covenants.

Term Loans

On November 3, 2015, the Operating Partnerhsip, as borrower, entered into the 2015 Term Loan Agreement among the Operating Partnership, as borrower, the Company as guarantor and various lenders. The 2015 Term Loan Agreement provided for a $325.0 million unsecured term loan facility, with an accordion feature to increase the facility size up to $600.0 million, subject to the satisfaction of certain requirements and obtaining additional lender commitments. During the fourth quarters of 2015 and 2016, the Operating Partnership exercised the accordion feature and increased the facility from $325.0 million to $370.0 million and $420.0 million, respectively.

Borrowings bear interest at a rate equal to 1-Month LIBOR plus 0.90% to 1.75% per annum, based on the Company's credit ratings. As of December 31, 2018, the 2015 Term Loan bore interest at 1-Month LIBOR plus 1.35%.

Borrowings may be repaid, in whole or in part, at any time, without premium or penalty, but subject to applicable LIBOR breakage fees. Borrowings may be repaid without premium or penalty, and may be re-borrowed within 30 days up to the then available loan commitment and subject to occurrence limitations within any twelve-month period. Payment of the 2015 Term Loan is unconditionally guaranteed by the Company and, under certain circumstances, by one or more material subsidiaries (as defined in the 2015 Term Loan Agreement). The obligations of the Company and any guarantor under the 2015 Term Loan are full recourse to the Company and each guarantor. The 2015 Term Loan that had an initial maturity date of November 2, 2018, extendable at the Company's option pursuant to two one-year extension options, subject to the satisfaction of certain conditions and payment of an extension fee. The Company exercised its first option to extend to November 2, 2019 on November 2, 2018. Subsequent to December 31, 2018, the Operating Partnership entered into a new 2019 Facilities Agreement, which includes a new A-1 Term Loan that replace the 2015 Term Loan in its entirety and a new A-2 Term Loan, see Note 16 for further discussion.

In connection with the origination of the 2015 Term Loan, the Company incurred costs of $2.4 million. These deferred financing costs are being amortized to interest expense over the remaining initial term of the 2015 Term Loan. As of December 31, 2018 and 2017, the unamortized deferred financing costs were $0.4 million and $0.7 million, respectively, and were recorded net against the principal balance of the 2015 Term Loan for 2018 and and mortgages and notes payable for 2017, respectively, on the accompanying consolidated balance sheets.

As of December 31, 2018, there was a $420.0 million outstanding balance and no borrowing capacity available. The Operating Partnership's ability to borrow under the 2015 Term Loan Agreement was subject to ongoing compliance with a number of customary financial covenants and other customary affirmative and negative covenants. As of December 31, 2018, the Operating Partnership was in compliance with these covenants.

Master Trust Notes

Master Trust 2013 and Master Trust 2014 are asset-backed securitization platforms through which the Company has raised capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans.

The Master Trust Notes are summarized below:



	Stated Rate		Remaining Term	December 31, 2018			December 31, 2017
			(in Years)	(in Thousands)
Series 2014-1 Class A1							$	—
Series 2014-1 Class A2							252,437
Series 2014-2							222,683
Series 2014-3							311,336
Series 2014-4 Class A1							150,000
Series 2014-4 Class A2							358,664
Series 2017-1 Class A							515,280
Series 2017-1 Class B							125,400
Total Master Trust 2014 notes							1,935,800
Series 2013-1 Class A				$	—		125,000
Series 2013-2 Class A	5.60	%	5.0	167,854			187,704
Total Master Trust 2013 notes	5.60	%	5.0	167,854			312,704
Total Master Trust Notes				167,854			2,248,504
Debt discount, net				—			(36,188		)
Deferred financing costs, net				(4,189		)	(24,010		)
Total Master Trust Notes, net				$	163,665		$	2,188,306

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 (i) $125.0 million of Series 2013-1 Class A interest-only notes with a 3.89% interest rate, with an original expected repayment in December 2018 and (ii) $205.0 million of Series 2013-2 Class A amortizing notes with a 5.27% interest rate and expected repayment in December 2023. On May 21, 2018, the Company retired the remaining outstanding balance of Series 2013-1 Class A notes. There was no make-whole payment associated with the redemption of these notes.

As of December 31, 2018, the Master Trust 2013 Series 2013-2 Class A notes were secured by 269 owned and financed properties issued by a single indirect wholly-owned subsidiary of the Company.

Master Trust 2014

Master Trust 2014 consists of five bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. On November 20, 2017, the Company made a voluntary pre-payment of the full outstanding principal balance of Master Trust 2014 Series 2014-1 Class A1 notes. In December 2017, Master Trust 2014 completed the issuance of $674.4 million aggregate principal amount of net-lease mortgage notes comprised of (i) $542.4 million of Series 2017-1 Class A, amortizing notes and (ii) $132.0 million of Series 2017-1 Class B, interest-only notes. Both classes of notes have an anticipated repayment date in December 2022. In January 2018, the Company re-priced the private offering of the Series 2017-1 notes, resulting in the interest rate on the Class B Notes reducing from 6.35% to 5.49%, while the other terms of the Class B Notes and all terms of the Class A Notes remained unchanged. In connection with the re-pricing, the Company received $8.2 million in additional proceeds, that reduced the discount on the underlying debt. In conjunction with the issuance of the Series 2017-1 notes, the Operating Partnership retained $27.1 million of Class A Notes and $6.6 million of Class B Notes to satisfy its regulatory risk retention obligations. On February 2, 2018, the Operating Partnership sold its holding of Series 2014-2 notes with a principal balance of $11.6 million to a third-party.

On May 31, 2018, in conjunction with the Spin-Off, the Company contributed Master Trust 2014, which is included in liabilities related to SMTA Spin-Off in our December 31, 2017 consolidated balance sheet.

CMBS

As of December 31, 2018, indirect wholly-owned special purpose entity subsidiaries of the Company were borrowers under six fixed-rate non-recourse loans, excluding one defaulted loan, which have been securitized into CMBS and are secured by the borrowers' respective leased properties and related assets. The stated interest rates as of December 31, 2018 for the non-defaulted loans ranged from 4.67% to 6.00%, with a weighted average stated rate of 5.53%. As of December 31, 2018, the non-defaulted loans were secured by 100 properties. As of December 31, 2018 and December 31, 2017, the unamortized deferred financing costs associated with the CMBS loans were $3.2 million and $3.9 million, respectively, and the unamortized net premium was $0.1 million as of both periods. Both unamortized deferred financing costs and premium are recorded net against the principal balance of the mortgages and notes payable on the accompanying consolidated balance sheets and are being amortized to interest expense over the term of the respective loans.

As of December 31, 2018, a certain borrower remained in default under the loan agreement relating to one CMBS fixed-rate loan, where the one property securing the loan is vacant and no longer generating revenue to pay the scheduled debt service. The default interest rate on this loan is 9.85%. The defaulted borrower is a bankruptcy remote special purpose entity and the sole owner of the collateral securing the loan obligation. As of December 31, 2018, the aggregate principal balance under the defaulted loan was $10.1 million, which includes $3.4 million of interest capitalized to the principal balances.

Related Party Notes Payable

Wholly-owned subsidiaries of Spirit are the borrower on four mortgage notes payable held by SMTA and secured by six single-tenant properties. In total, these mortgage notes had outstanding principal of $27.9 million at December 31, 2018, which is included in mortgages and notes payable, net on the consolidated balance sheets. As of December 31, 2018, these mortgage notes have a weighted average stated interest rate of 1.00%, a weighted average remaining term of 9.2 years and are eligible for early repayment without penalty.

Convertible Notes

In May 20, 2014, the Company issued $402.5 million aggregate principal amount of 2.875% convertible notes due in 2019 and $345.0 million aggregate principal amount of 3.75% convertible notes due in 2021. 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. Proceeds from the issuance were contributed to the Operating Partnership and are recorded as a note payable to Spirit Realty Capital, Inc., on the consolidated balance sheets of the Operating Partnership.

The Convertible Notes are convertible only during certain periods and, subject to certain circumstances, into cash, shares of the Company's common stock, or a combination thereof. The initial conversion rate applicable to each series was 15.2727 per $1,000 principal note (equivalent to an initial conversion price of $65.48 per share of common stock, representing a 22.5% premium above the public offering price of the common stock offered concurrently at the time the Convertible Notes were issued). The conversion rate is subject to adjustment for certain anti-dilution events, including special distributions and regular quarterly cash dividends exceeding $0.73026 per share. As of December 31, 2018, the conversion rate was 17.4458 per $1,000 principal note, which reflects the adjustment for the reverse stock split and the adjustment from the SMTA dividend distribution related to the Spin-Off, in addition to regular dividends declared during the life of the Convertible Notes. Earlier conversion may be triggered if shares of the Company's common stock trades higher than the established thresholds, if the Convertible Notes trade below 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 feature for each of the Convertible Notes. The discount is being 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, 2018 and December 31, 2017, the unamortized discount was $13.3 million and $23.7 million, respectively. 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 $55.1 million and is recorded in capital in excess of par value in the accompanying consolidated balance sheets, net of financing transaction costs.

In connection with the offering, the Company also incurred $19.6 million in deferred financing costs. 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. As of December 31, 2018 and December 31, 2017, the unamortized deferred financing costs relating to the Convertible Notes was $4.3 million and $8.0 million, respectively, and recorded net against the Convertible Notes principal balance on the accompanying consolidated balance sheets.

Senior Unsecured Notes

On August 18, 2016, the Operating Partnership completed a private placement of $300.0 million aggregate principal amount of senior notes, which are guaranteed by the Company. The Senior Unsecured Notes were issued at 99.378% of their principal amount, resulting in net proceeds of $296.2 million, after deducting transaction fees and expenses. The Senior Unsecured Notes accrue interest at a rate of 4.450% per annum, payable on March 15 and September 15 of each year, and mature on September 15, 2026. The Company filed a registration statement with the SEC to exchange the private Senior Unsecured Notes for registered Senior Unsecured Notes with substantially identical terms, which became effective April 14, 2017. All $300.0 million aggregate principal amount of private Senior Unsecured Notes were tendered in the exchange for registered Senior Unsecured Notes.

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 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 indenture. Notwithstanding the foregoing, if any of the Senior Unsecured Notes are redeemed on or after June 15, 2026 (three months prior to the maturity date of the Senior Unsecured Notes), the redemption price will not include a make-whole premium.

In connection with the offering, the Operating Partnership incurred $3.4 million in deferred financing costs. This amount is being amortized to interest expense over the life of the Senior Unsecured Notes. The unamortized deferred financing costs were $2.7 million and $3.0 million as of December 31, 2018 and 2017, respectively, and the unamortized discount was $1.5 million and $1.7 million, respectively. Both unamortized deferred financing costs and discount are recorded net against the Senior Unsecured Notes principal balance on the accompanying consolidated balance sheets.

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 covenants and other customary affirmative and negative covenants. As of December 31, 2018, the Company and the Operating Partnership were in compliance with these financial covenants.

Debt Extinguishment

During the year ended December 31, 2018, the Company extinguished a total of $202.1 million aggregate principal amount of mortgages and notes payable indebtedness with a weighted average contractual interest rate of 5.47%, and recognized a net gain on debt extinguishment during the year ended December 31, 2018 of approximately $26.7 million. The gain was primarily attributable to the extinguishment of $56.2 million of CMBS debt related to six defaulted loans on six underperforming properties, which was partially offset by a loss on the extinguishment of the Master Trust 2013 Series 2013-1 notes and make-whole penalties on early pre-payments of Master Trust 2013 Series 2013-2.

During the year ended December 31, 2017, the Company extinguished a total of $238.5 million aggregate principal amount of indebtedness with a weighted average contractual interest rate of 5.46%. As a result of these transactions, the Company recognized a net loss on debt extinguishment during the year ended December 31, 2017 of approximately $1.6 million. The loss was primarily attributable to the lender make-whole payment associated with the early payoff of the Master Trust 2014 Series 2014-1 Class A1 notes.

Debt Maturities

As of December 31, 2018, scheduled debt maturities of the Company’s 2015 Credit Facility, 2015 Term Loan, Senior Unsecured Notes, mortgages and notes payable, and Convertible Notes, including balloon payments, are as follows (in thousands):



	Scheduled Principal		Balloon Payment		Total
2019 ⁽¹⁾	$	11,672	$	978,914	$	990,586
2020	12,164		—		12,164
2021	12,737		345,000		357,737
2022	13,315		42,400		55,715
2023	11,609		339,526		351,135
Thereafter	16,895		300,070		316,965
Total	$	78,392	$	2,005,910	$	2,084,302

⁽¹⁾ The balloon payment balance in 2019 includes the 2015 Credit Facility and 2015 Term Loan. On January 11, 2019, Spirit entered into a new 2019 Facilities Agreement which replaces the existing 2015 Credit Facility and 2015 Term Loan in their entirety, see Note 16 for further discussion. The balloon payment balance in 2019 also includes $10.1 million, of which $3.4 million is capitalized interest, for the acceleration of principal payable following an event of default under one non-recourse CMBS loan.

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,
	2018		2017		2016
Interest expense – 2015 Credit Facility ⁽¹⁾	$	8,220	$	7,957	$	3,314
Interest expense – 2015 Term Loan	6,594		9,793		5,218
Interest expense – mortgages and notes payable	68,530		111,049		143,233
Interest expense – Convertible Notes ⁽²⁾	24,509		24,509		24,509
Interest expense – Unsecured Senior Notes	13,350		13,351		4,932
Non-cash interest expense:
Amortization of deferred financing costs	9,306		9,896		9,070
Amortization of net losses related to interest rate swaps	—		—		93
Amortization of debt discount/(premium), net	13,560		13,572		6,217
Total interest expense	$	144,069	$	190,127	$	196,586

⁽¹⁾Includes facility fees of approximately $2.1 million, $2.1 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.

⁽²⁾ Included in interest expense on the Operating Partnership's consolidated statements of operations are amounts paid to the Corporation by the Operating Partnership related to the notes payable to Spirit Realty Capital, Inc.