SPIRIT REALTY CAPITAL, INC. - 10-Q filing on 2015-05-08

Investments

3 Months Ended

Mar. 31, 2015

Investments in and Advances to Affiliates, Schedule of Investments [Abstract]

Real Estate Investments

As of March 31, 2015, the Company's gross investment in real estate and loans totaled approximately $8.23 billion, representing investments in 2,547 properties, including 145 properties securing mortgage loans. The gross investment is comprised of land, buildings, lease intangible assets and lease intangible liabilities, as adjusted for any impairment, and the carrying amount of loans receivable, real estate assets held under direct financing leases and real estate assets held for sale. The portfolio is geographically dispersed throughout 49 states with only one state, Texas, with an 11.9% investment, accounting for more than 10% of the total dollar amount of the Company’s investment portfolio.

The properties that the Company owns are leased to tenants under long-term operating leases that typically include one or more renewal options. The leases are generally triple-net, which provides that the lessee is responsible for the payment of all property operating expenses, including property taxes, maintenance and repairs, and insurance costs. Therefore, the Company is generally not responsible for repairs or other capital expenditures related to its properties, unless the property is not subject to a lease agreement.

During the three months ended March 31, 2015, the Company had the following real estate and loan activity, net of accumulated depreciation and amortization:



	Number of Properties					Dollar Amount of Investments, net
	Owned ⁽³⁾		Financed	Total		Owned			Financed			Total
						(In Thousands)
Gross balance, December 31, 2014	2,364		145	2,509		$	7,934,938		$	109,425		$	8,044,363
Acquisitions/improvements ^{(1) (3)}	53		—	53		265,740			—			265,740
Dispositions of real estate ^{(2) (3)}	(15	)	—	(15	)	(78,428		)	—			(78,428		)
Principal payments and payoffs	—		—	—		—			(1,403		)	(1,403		)
Impairments	—		—	—		(1,555		)	—			(1,555		)
Write off of gross lease intangibles	—		—	—		(1,844		)	—			(1,844		)
Loan premium amortization and other	—		—	—		(49		)	(619		)	(668		)
Gross balance, March 31, 2015	2,402		145	2,547		$	8,118,802		$	107,403		$	8,226,205
Accumulated depreciation and amortization						(981,784		)	—			(981,784		)
Other non-real estate assets held for sale						1,595			—			1,595
Net balance, March 31, 2015						$	7,138,613		$	107,403		$	7,246,016

⁽¹⁾ Includes investments of $0.2 million in revenue producing capitalized expenditures, as well as $0.2 million of non-revenue producing capitalized maintenance expenditures. Capitalized maintenance expenditures are not included in the Company's gross investments in real estate disclosed elsewhere.

⁽²⁾ The total accumulated depreciation and amortization associated with these dispositions of real estate was $12.5 million.

⁽³⁾During the three months ended March 31, 2015, the Company sold 6 properties for $39.4 million under 1031 Exchanges of which $32.5 million of this amount was used to partially fund 4 property acquisitions.

⁽⁴⁾At March 31, 2015 and December 31, 2014, 42 and 37, respectively, of the Company's properties were vacant, not subject to a lease and in the Company’s possession; of this amount 14 and 8, respectively, of these properties were held for sale.

Scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases at March 31, 2015 (in thousands):



Remainder of 2015	$	459,105
2016	600,209
2017	585,456
2018	570,474
2019	550,798
Thereafter	4,320,779
Total future minimum rentals	$	7,086,821

Because lease renewal periods are exercisable at the option of the lessee, 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 or other stipulated reference rate.

Certain of the Company’s leases contain tenant purchase options. Most of these options are at or above fair market value at the time the option is exercisable, and none of these purchase options represent bargain purchase options.

Loans Receivable

The following table details loans receivable, net of premium (in thousands):



	March 31, 2015		December 31, 2014
Mortgage - principal	$	95,204	$	96,594
Mortgage - premium	11,833		12,452
Mortgages, net	107,037		109,046
Other note - principal	366		379
Total loans receivable, net	$	107,403	$	109,425

The mortgage loans are secured by single-tenant commercial properties and may provide for scheduled increases in interest rates over the term of the loans. The other note receivable is unsecured.

Lease Intangibles, Net

The following table details lease intangible assets and liabilities, net of accumulated amortization (in thousands):



	March 31, 2015			December 31, 2014
In-place leases	$	670,127		$	676,665
Above-market leases	100,125			100,568
Less: accumulated amortization	(196,327		)	(187,160		)
Intangible lease assets, net	$	573,925		$	590,073

Below-market leases	$	239,050		$	237,593
Less: accumulated amortization	(34,889		)	(31,625		)
Intangible lease liabilities, net	$	204,161		$	205,968

The amounts amortized as a net increase to rental revenue for capitalized above- and below-market leases was $1.4 million and $1.3 million for the three months ended March 31, 2015 and 2014, respectively. The value of in-place leases amortized and included in depreciation and amortization expense was $12.8 million and $13.4 million for the three months ended March 31, 2015 and 2014, respectively.

Real Estate Assets Under Direct Financing Leases

The components of real estate investments held under direct financing leases were as follows (in thousands):



	March 31, 2015			December 31, 2014
Minimum lease payments receivable	$	15,053		$	15,897
Estimated residual value of leased assets	52,195			55,858
Unearned income	(14,396		)	(15,191		)
Total	$	52,852		$	56,564

Real Estate Assets Held for Sale

The following table shows the activity in real estate assets held for sale, for continuing and discontinued operations, for the three months ended March 31, 2015:



	Number of Properties					Carrying Value
	Continuing Operations		Discontinued Operations	Total		Continuing Operations			Discontinued Operations			Total
						(In Thousands)
Balance, December 31, 2014	19		5	24		$	110,918		$	8,994		$	119,912
Transfers from real estate investments	23		—	23		105,976			(34		)	105,942
Sales	(10	)	—	(10	)	(48,617		)	—			(48,617		)
Balance, March 31, 2015	32		5	37		$	168,277		$	8,960		$	177,237

Properties included in discontinued operations as of March 31, 2015, are collateral assets under the 2014 Master Trust securitization. The following table is a reconciliation of the major classes of assets and liabilities from discontinued operations included in real estate assets held for sale on the accompanying consolidated balance sheets (in thousands):



	March 31, 2015			December 31, 2014
Assets
Land and improvements	$	5,335		$	5,351
Buildings and improvements	5,780			5,798
Total real estate investments	11,115			11,149
Less: accumulated depreciation	(2,167		)	(2,167		)
Intangible lease assets, net	460			460
Total assets	$	9,408		$	9,442

Liabilities
Intangible lease liabilities, net	$	448		$	448
Total liabilities	$	448		$	448

Net assets	$	8,960		$	8,994

Impairments

The following table summarizes total impairment losses recognized in continuing and discontinued operations on the accompanying consolidated statements of operations (in thousands):



	Three Months Ended March 31,
	2015		2014
Real estate and intangible asset impairment	$	1,043	$	1,637
Write-off of lease intangibles due to lease terminations, net	512		70
Total impairments from real estate investment net assets	1,555		1,707
Other impairment	103		—
Total impairment loss in continuing and discontinued operations	$	1,658	$	1,707