SPIRIT REALTY CAPITAL, INC. - 10-Q filing on 2018-08-09

Fair Value Measurements

6 Months Ended

Jun. 30, 2018

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. The following table sets forth the Company’s assets that were accounted for at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017 (in thousands):



			Fair Value Hierarchy Level
Description	Fair Value		Level 1		Level 2		Level 3
June 30, 2018
Long-lived assets held and used	$	4,818	$	—	$	—	$	4,818
Long-lived assets held for sale	$	—	$	—	$	—	$	—

December 31, 2017
Long-lived assets held and used	$	28,312	$	—	$	—	$	28,312
Long-lived assets held for sale	$	42,142	$	—	$	—	$	42,142

Real estate and the related intangible assets are evaluated for impairment based on certain indicators including, but not limited to: the asset being held for sale, vacant, non-operating or the lease on the asset expiring in 60 days or less. The fair values of impaired real estate and intangible assets were determined by using the following information, depending on availability, in order of preference: signed purchase and sale agreements or letters of intent; recently quoted bid or ask prices, or market prices for comparable properties; estimates of cash flow, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, and expenses based upon market conditions; and expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate and intangible assets falls within Level 3 of the fair value hierarchy.

During the six months ended June 30, 2018 and for the year ended December 31, 2017, we determined that two and 18 long-lived assets held and used, respectively, were impaired.

For 17 of the held and used properties impaired during the year ended December 31, 2017, the Company estimated property fair value using price per square foot of comparable properties. The following table provides information about the price per square foot of comparable properties used as inputs (price per square foot in dollars):



	June 30, 2018					December 31, 2017
Description	Range		Weighted Average		Square Footage	Range	Weighted Average		Square Footage
Long-lived assets held and used by asset type
Retail	$	—	$	—	—	$13.66 - $305.05	$	55.68	364,940
Industrial	$	—	$	—	—	$3.30 - $8.56	$	5.35	370,824
Office	$	—	$	—	—	$24.82 - $244.86	$	40.14	161,346

For the two held and used properties impaired during the six months ended June 30, 2018 and one held and used property impaired during the year ended December 31, 2017, the Company estimated property fair value using price per square foot based on a listing price or a broker opinion of value. The following table provides information about the price per square foot based on a listing price and broker opinion of value used as inputs (price per square foot in dollars):



	June 30, 2018					December 31, 2017
Description	Range		Weighted Average		Square Footage	Range		Weighted Average		Square Footage
Long-lived assets held and used by asset type
Retail	$	232.81	$	232.81	16,000	$	88.89	$	88.89	22,500
Office	$	225.04	$	225.04	5,999	$	—	$	—	—

For the eight long-lived assets held for sale impaired during the year ended December 31, 2017, the Company estimated fair value of held for sale properties using price per square foot from the signed purchase and sale agreements as follows (price per square foot in dollars):



	June 30, 2018					December 31, 2017
Description	Range		Weighted Average		Square Footage	Range	Weighted Average		Square Footage
Long-lived assets held for sale by asset type
Retail	$	—	$	—	—	$55.30 - $346.23	$	230.52	150,376
Industrial	$	—	$	—	—	$24.02 - $54.21	$	37.09	223,747

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 to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, 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 June 30, 2018 and December 31, 2017. 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 the following financial instruments have been derived based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 of the fair value hierarchy. The following table discloses fair value information for these financial instruments (in thousands):



	June 30, 2018				December 31, 2017
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Loans receivable, net	$	55,438	$	58,408	$	79,967	$	82,886
Revolving Credit Facility	346,500		346,470		112,000		111,997
Term Loan, net	—		—		—		—
Senior Unsecured Notes, net ⁽¹⁾	295,542		289,236		295,321		299,049
Mortgages and notes payable, net ⁽¹⁾	467,334		495,046		2,516,478		2,657,599
Convertible Notes, net ⁽¹⁾	722,756		750,624		715,881		761,440
Investment in Master Trust 2014	33,581		33,581		—		—

⁽¹⁾The carrying value of the debt instruments are net of unamortized deferred financing costs and certain debt discounts/premiums.