Special Note Regarding Forward-looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this quarterly report, the words "estimate," "anticipate," "expect," "believe," "intend," "may," "will," "should," "seek," "approximately" or "plan," or the negative of these words or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following risks and uncertainties, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
• industry and economic conditions;
• volatility and uncertainty in the financial markets, including potential
fluctuations in the CPI;
• our success in implementing our business strategy and our ability to
identify, underwrite, finance, consummate, integrate and manage diversifying
acquisitions or investments;
• the financial performance of our retail tenants and the demand for retail
space, particularly with respect to challenges being experienced by general
merchandise retailers; • our ability to diversify our tenant base; • the nature and extent of future competition;
• increases in our costs of borrowing as a result of changes in interest rates
and other factors; • our ability to access debt and equity capital markets; • our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;
• our ability and willingness to renew our leases upon expiration and to
reposition our properties on the same or better terms upon expiration in the
event such properties are not renewed by tenants or we exercise our rights
to replace existing tenants upon default;
• the impact of any financial, accounting, legal or regulatory issues or
litigation that may affect us or our major tenants; • our ability to manage our expanded operations; • our ability and willingness to maintain our qualification as a REIT; • the impact on our business and those of our tenants from epidemics,
pandemics or other outbreaks of illness, disease or virus (such as the strain of coronavirus known as COVID-19); and
• other risks inherent in the real estate business, including tenant defaults,
potential liability relating to environmental matters, illiquidity of real estate investments and potential damages from natural disasters. The factors included in this quarterly report, including the documents incorporated by reference, and documents we subsequently file with theSEC and incorporate by reference, are not exhaustive and additional factors could adversely affect our business and financial performance. Additional factors that may cause risks and uncertainties include those discussed in the sections entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K and this report and subsequent filings with theSEC . All forward-looking statements are based on information that was available, and speak only, to the date on which they were made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law. 36 --------------------------------------------------------------------------------
Overview
Spirit Realty Capital, Inc. is aNew 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 theU.S. , which are generally acquired through sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high quality tenants with business operations within retail, industrial, office and other industries. Single tenant, operationally essential real estate consists of properties that are generally 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 ofSeptember 30, 2020 , our owned real estate represented investments in 1,778 properties. Our properties are leased to 296 tenants across 48 states and 28 retail industries. As ofSeptember 30, 2020 , our owned properties were approximately 99.3% occupied (based on the number of economically yielding properties). Our operations are carried out through theOperating Partnership .OP Holdings , one of our wholly-owned subsidiaries, is the sole general partner and owns approximately 1% of theOperating Partnership . We and one of our wholly-owned subsidiaries are the only limited partners, and together own the remaining 99% of theOperating Partnership . Although theOperating Partnership is wholly-owned by us, in the future, we may issue partnership interests in theOperating Partnership to third parties in exchange for property owned by such third parties. In general, any partnership interests in theOperating 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 theOperating Partnership are issued.
We have elected to be taxed as a REIT for federal income tax purposes and believe we have been organized and have operated in a manner that allows us to qualify as a REIT for federal income tax purposes.
OnMay 31, 2018 , we completed a Spin-Off of all our interests in the assets that collateralizedMaster Trust 2014, our properties leased toShopko , and certain other assets into an independent, publicly traded REIT, SMTA. In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA, pursuant to which the Company acted as external asset manager for SMTA for an annual management fee of$20.0 million . InSeptember 2019 , SMTA sold the assets held inMaster Trust 2014 and 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, plus certain cost reimbursements, to manage and liquidate the remaining SMTA assets. The Interim Management Agreement was terminated effectiveSeptember 4, 2020 and we have no further continuing involvement with SMTA. Given the timing of the onset in theU.S. , the COVID-19 pandemic had a minimal impact on our first quarter 2020 results and increased impact on our second quarter 2020 results as certain of our tenants experienced business disruption, especially those in industries considered "non-essential" under varying state "shelter-in-place" and "stay-at-home" orders and other restrictions. As a result, many of our tenants requested rent deferrals (and other forms of relief). During the third quarter of 2020, the impact of the COVID-19 pandemic has reduced as certain restrictions on our tenants' operations have been lifted. As such, the majority of the impact to our third quarter 2020 results relates to relief granted during the second quarter of 2020. Our discussions with tenants requesting relief substantially focused on industries that have been directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread, particularly health and fitness, movie theaters, quick service and casual dining restaurants, entertainment, car washes, dealerships, home décor, home furnishings, department stores and education. These and other industries may be further impacted in the future depending on various factors, including the duration of the COVID-19 pandemic, the reinstitution of restrictions intended to prevent its spread or the imposition of new, more restrictive measures. Even after certain of such restrictions are lifted or reduced, the willingness of customers to visit our tenants' businesses may be reduced due to lingering concerns regarding the continued risk of COVID-19 transmission and heightened sensitivity to risks associated with the transmission of other diseases. We are not able to predict the duration of such customer behavior or the COVID-19 pandemic. 37
-------------------------------------------------------------------------------- As ofOctober 26, 2020 , we have collected approximately 90% of third quarter 2020 Base Rent of$118.2 million , deferred approximately 7% and abated approximately 1%. We currently expect to see continued reductions in the impact of COVID-19 on our fourth quarter 2020 results, with expected rent deferrals of$3.7 million (including the maximum impact of arrangements that have a sliding scale based on performance of the underlying property) and rent abatements of$0.1 million . For the deferred rent, the deferral periods range generally from one to six months, with an average deferral period of three months and an average repayment period of 13 months. Of the tenants who we have granted rent deferrals, 22% are public companies and the weighted average remaining lease term of leases with deferrals is 10.3 years (based on Base Rent). Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well as working with certain tenants who have requested rent deferrals, 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 II-Other Information, 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
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and various other assumptions deemed reasonable under the circumstances. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We have not made any material changes to these policies during the periods covered by this quarterly report.
Results of Operations
Comparison of Three Months EndedSeptember 30, 2020 to Three Months EndedSeptember 30, 2019 Three Months Ended September 30, (In Thousands) 2020 2019 Change % Change Revenues: Rental income$ 112,916 $ 109,511 $ 3,405 3.1 % Interest income on loans receivable 189 843 (654 ) (77.6 )% Earned income from direct financing leases 131 267 (136 ) (50.9 )% Related party fee income 178 54,795 (54,617 ) (99.7 )% Other income 327 1,531 (1,204 ) (78.6 )% Total revenues 113,741 166,947 (53,206 ) (31.9 )% Expenses: General and administrative 10,931 12,727 (1,796 ) (14.1 )% Termination of interest rate swaps - 12,461 (12,461 ) (100.0 )% Property costs (including reimbursable) 5,049 4,407 642 14.6 % Deal pursuit costs 597 330 267 80.9 % Interest 26,404 24,675 1,729 7.0 % Depreciation and amortization 52,170 43,907 8,263 18.8 % Impairments 8,106 5,932 2,174 36.6 % Total expenses 103,257 104,439 (1,182 ) (1.1 )% Other income: Loss on debt extinguishment (7,252 ) (5,580 ) (1,672 ) 30.0 % Gain on disposition of assets 10,763 32,254 (21,491 ) (66.6 )% Preferred dividend income from SMTA - 3,302 (3,302 ) (100.0 )% Total other income 3,511 29,976 (26,465 ) (88.3 )% Income before income tax expense 13,995 92,484 (78,489 ) (84.9 )% Income tax expense (197 ) (11,190 ) 10,993 (98.2 )% Net income$ 13,798 $ 81,294 $ (67,496 ) (83.0 )% 38
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REVENUES Rental income Three Months Ended September 30, (In Thousands) 2020 2019 Base Cash Rent$ 108,398 $ 100,962 Variable cash rent (including reimbursables) 3,051 2,823 Straight-line rent, net of uncollectible reserve 899 4,770 Amortization of above- and below- market lease intangibles, net 568 956 Total rental income$ 112,916 $ 109,511 We were a net acquirer of income-producing real estate over the trailing twelve-month period, resulting in an increase in our Base Cash Rent period-over-period. During the trailing twelve months endedSeptember 30, 2020 , we acquired 186 properties, with a Real Estate Investment Value of$1.0 billion , and disposed of 31 properties, of which 15 were income producing, with a Real Estate Investment Value of$98.1 million . The increase was partially offset by an increase in net amounts deemed not probable of collection driven by tenant credit issues from the COVID-19 pandemic from$0.2 million for the three months endedSeptember 30, 2019 to$6.5 million for three months endedSeptember 30, 2020 . The increase period-over-period was also reduced by$1.7 million of rent abatements for the three months endedSeptember 30, 2020 , executed as relief due to the COVID-19 pandemic. Finally, included in the Base Cash Rent for the three months endedSeptember 30, 2020 are rent deferrals deemed probable of collection of$1.8 million , related to the effects of the COVID-19 pandemic. The primary component of variable cash rent is tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, and non-cash rental income. Tenant reimbursement income was$2.7 million and$2.8 million for the three months endedSeptember 30, 2020 and 2019, respectively, and was driven by the tenant reimbursable property costs described below. These amounts represented approximately 2.4% and 2.5% of rental income for the three months endedSeptember 30, 2020 and 2019, respectively. Non-cash rental income consists of straight-line rental revenue, amortization of above- and below-market lease intangibles and bad debt expense. Non-cash rental income decreased period-over-period primarily as a result of a$4.3 million increase in reserves on straight-line rental revenue due to increased tenant credit issues. Related party fee income In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provided a management team responsible for implementing SMTA 's business strategy and performing certain services for SMTA. Under this agreement, we recognized$4.4 million of revenues during the three months endedSeptember 30, 2019 . Additionally, under the terms of this agreement, we recognized$0.5 million of stock compensation awarded by SMTA to an employee of Spirit for the three months endedSeptember 30, 2019 , which was fully offset by$0.5 million in general and administrative expenses recognized for other compensation. This agreement was terminated in conjunction with SMTA's sale ofMaster Trust 2014 onSeptember 20, 2019 , resulting in a termination fee of$48.2 million . We entered into an Interim Management Agreement for an initial annual fee of$1.0 million , under which we agreed to manage and liquidate the remaining SMTA assets. Under this agreement, we recognized$0.2 million of revenues for the three months endedSeptember 30, 2020 . The Interim Management Agreement was terminated effectiveSeptember 4, 2020 . Additionally, we provided property management services and special services forMaster Trust 2014, which was contributed to SMTA as part of the Spin-Off. As a result, for the three months endedSeptember 30, 2019 , we recognized$1.7 million in revenue under the terms of the Property Management and Servicing Agreement. This agreement was terminated in the third quarter of 2019 in conjunction with SMTA's sale ofMaster Trust 2014.
EXPENSES
General and administrative
Period-over-period general and administrative expenses decreased, driven by a decrease in compensation expenses of$1.7 million , primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a decrease of$0.3 million in professional fees and a decrease of$0.2 million in travel expenses. These decreases were partially offset by$0.7 million of expenses recognized during the three months endedSeptember 30, 2020 related to the COVID-19 pandemic, primarily as a result of increased legal fees for executing rent deferral or abatement agreements. 39 --------------------------------------------------------------------------------
Property costs (including reimbursable)
For the three months endedSeptember 30, 2020 , property costs were$5.0 million (including$3.4 million of tenant reimbursable expenses), compared to$4.4 million (including$3.6 million of tenant reimbursable expenses) for the same period in 2019. As such, reimbursable property costs remained relatively flat period-over-period. The increase in non-reimbursable costs of$0.8 million was driven primarily by an increase in carrying costs of vacant properties of$0.7 million due to an increase in vacant properties over the comparative period.
Interest
The increase in interest expense was driven by the issuance of:
• the 2027 Senior Notes and 2030 Senior Notes in the third quarter of 2019,
• the 2020 Term Loans in the second quarter of 2020 and • the 2031 Senior Notes in the third quarter of 2020.
The increase was partially offset by:
• the repayment and termination of the A-1 Term Loans and A-2 Term Loans in
the third quarter of 2019,
• the termination of the interest rate swaps in the third quarter of 2019, and
• the partial early repayment of
in the third quarter of 2020.
The following table summarizes our interest expense on related borrowings:
Three Months Ended September 30, (In Thousands) 2020 2019
Interest expense - revolving credit facilities (1)
1,128
5,779
Interest expense - Senior Unsecured Notes 16,188
8,446
Interest expense - mortgages and notes payable 3,016
3,637
Interest expense - Convertible Notes 2,473
3,234
Interest expense - interest rate swaps/other -
421
Non-cash interest expense 3,190 2,685 Total interest expense$ 26,404 $ 24,675
(1) Includes facility fees of approximately
months ended
Depreciation and amortization
We were a net acquirer during the trailing twelve-month period of$909.9 million of Real Estate Investment Value, resulting in an increase period-over-period in depreciation and amortization. The following table summarizes our depreciation and amortization expense: Three Months Ended September 30, (In Thousands) 2020 2019
Depreciation of real estate assets
146 143
Total depreciation and amortization
Impairments
During the three months endedSeptember 30, 2020 , we recorded impairment losses of$8.1 million . Impairment of$5.6 million was recorded on Vacant properties, comprised of$2.6 million on two Vacant properties held for use and$3.0 million on one Vacant property held for sale. Impairment of$2.8 million was recorded on underperforming properties, comprised of$1.2 million on three underperforming properties held for use and$1.6 million on four underperforming properties held for sale. Finally, we reversed$0.1 million of previously recorded allowance for loan loss as a result of our loans being repaid in full and reversed$0.2 million of previously recorded allowance for credit loss on our direct financing lease as a result of improved credit metrics of the borrower. During the three months endedSeptember 30, 2019 , we recorded impairment losses of$5.9 million . Impairment of$5.6 million was recorded on six underperforming properties held for use. Impairment of$0.3 million was recorded on Vacant properties, comprised of$0.2 million on two Vacant properties held for sale and$0.1 million on one Vacant property held for use. 40 --------------------------------------------------------------------------------
Loss on debt extinguishment
During the three months endedSeptember 30, 2020 , we recorded a loss on debt extinguishment of$6.2 million as a result of the partial early repayment of$154.6 million aggregate principal amount of the Convertible 2021 Notes, comprised of$4.1 million of cash premiums paid and$2.1 million of write-offs of unamortized debt discounts and deferred financing costs related to the debt. Additionally, we recorded a loss on debt extinguishment of$1.1 million for the write-off of unamortized deferred financing costs as a result of the partial repayment of the 2020 Term Loans. During the three months endedSeptember 30, 2019 , we recorded a loss on debt extinguishment of$5.3 million as a result of terminating the A-1 Term Loans and A-2 Term Loans, which were repaid primarily with proceeds from the issuance of the 2027 Senior Unsecured Notes and 2030 Senior Unsecured Notes. Additionally, we recorded an additional$0.3 million of loss on debt extinguishment on the retirement of theMaster Trust 2013 notes, as a result of additional legal fees.
Gain on disposition of assets
During the three months endedSeptember 30, 2020 , we disposed of 11 properties, resulting in net gains of$10.8 million . There were net gains of$11.3 million on the sales of seven active properties and net losses of$0.5 million on the sales of four Vacant properties. For the same period in 2019, we disposed of nine properties, resulting in net gains of$32.3 million . There were net gains of$32.3 million on the sales of eight active properties and a negligible gain on the sale of one Vacant property.
Preferred dividend income from SMTA
As part of the Spin-Off, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of$150.0 million . For the three months endedSeptember 30, 2019 , we recognized preferred dividend income of$3.3 million from these shares. InSeptember 2019 , in conjunction with SMTA's sale ofMaster Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference.
Income tax expense
Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes. As such, income earned by a taxable wholly-owned subsidiary of Spirit pursuant to the Asset Management Agreement was considered non-REIT activity and subject to federal and state income tax. There was a decrease in income tax expense period-over-period of$11.0 million , primarily as a result of the taxable termination fee income of$48.2 million recorded in the third quarter of 2019. 41 -------------------------------------------------------------------------------- Comparison of Nine Months EndedSeptember 30, 2020 to Nine Months EndedSeptember 30, 2019 Nine Months Ended September 30, (In Thousands) 2020 2019 Change % Change Revenues: Rental income$ 351,469 $ 320,084 $ 31,385 9.8 % Interest income on loans receivable 998 2,749 (1,751 ) (63.7 )% Earned income from direct financing leases 439 971 (532 ) (54.8 )% Related party fee income 678 68,971 (68,293 ) (99.0 )% Other income 1,401 2,510 (1,109 ) (44.2 )% Total revenues 354,985 395,285 (40,300 ) (10.2 )% Expenses: General and administrative 36,396 39,741 (3,345 ) (8.4 )% Termination of interest rate swaps - 12,461 (12,461 ) (100.0 )% Property costs (including reimbursable) 18,219 13,968 4,251 30.4 % Deal pursuit costs 1,630 574 1,056 NM Interest 77,858 76,462 1,396 1.8 % Depreciation and amortization 157,566 126,598 30,968 24.5 % Impairments 69,929 13,231 56,698 NM Total expenses 361,598 283,035 78,563 27.8 % Other income: Loss on debt extinguishment (7,252 ) (11,473 ) 4,221 (36.8 )% Gain on disposition of assets 11,809 70,760 (58,951 ) (83.3 )% Preferred dividend income from SMTA - 10,802 (10,802 ) (100.0 )% Total other income 4,557 70,089 (65,532 ) (93.5 )% (Loss) income before income tax expense (2,056 ) 182,339 (184,395 ) NM Income tax expense (406 ) (11,730 ) 11,324 (96.5 )% Net (loss) income$ (2,462 ) $ 170,609 $ (173,071 ) NM
NM - Percentages over 100% are not displayed.
REVENUES Rental income Nine Months Ended September 30, (In Thousands) 2020 2019 Base Cash Rent$ 335,110 $ 296,179 Variable cash rent (including reimbursables) 8,843 9,403 Straight-line rent, net of uncollectible reserve 6,385 12,162 Amortization of above- and below- market lease intangibles, net 1,131 2,340 Total rental income$ 351,469 $ 320,084 We were a net acquirer of income-producing real estate over the trailing twelve-month period, resulting in an increase in our Base Cash Rent period-over-period. During the trailing twelve months endedSeptember 30, 2020 , we acquired 186 properties, with a Real Estate Investment Value of$1.0 billion , and disposed of 31 properties, of which 15 were income producing, with a Real Estate Investment Value of$98.1 million . The increase was partially offset by an increase in net amounts deemed not probable of collection driven by tenant credit issues from the COVID-19 pandemic from a net recovery of$0.8 million for the nine months endedSeptember 30, 2019 to a net reduction of$12.1 million for nine months endedSeptember 30, 2020 . The increase period-over-period was also reduced by$4.1 million of rent abatements for the nine months endedSeptember 30, 2020 , executed as relief due to the COVID-19 pandemic. Finally, included in the Base Cash Rent for the nine months endedSeptember 30, 2020 are rent deferrals deemed probable of collection of$24.1 million , related to the effects of the COVID-19 pandemic. The primary component of variable cash rent is tenant reimbursements, where our tenants are obligated under the lease agreement to reimburse us for certain property costs we incur, and non-cash rental income. Tenant reimbursement income was$8.2 million and$9.1 million for the nine months endedSeptember 30, 2020 and 2019, respectively, and was driven by the tenant reimbursable property costs described below. These amounts represented approximately 2.3% and 2.8% of rental income for the nine months endedSeptember 30, 2020 and 2019, respectively. 42 -------------------------------------------------------------------------------- Non-cash rental income consists of straight-line rental revenue, amortization of above- and below-market lease intangibles and bad debt expense. Non-cash rental income decreased period-over-period primarily as a result of a$10.7 million increase in reserves on straight-line rental revenue due to increased tenant credit issues. Related party fee income In conjunction with the Spin-Off, we entered into the Asset Management Agreement with SMTA pursuant to which we provided a management team responsible for implementing SMTA 's business strategy and performing certain services for SMTA. Under this agreement, we recognized$14.4 million of revenues during the nine months endedSeptember 30, 2019 . Additionally, under the terms of this agreement, we recognized$0.9 million of stock compensation awarded by SMTA to an employee of Spirit for the nine months endedSeptember 30, 2019 , which was fully offset by$0.9 million in general and administrative expenses recognized for other compensation. This agreement was terminated in conjunction with SMTA's sale ofMaster Trust 2014 onSeptember 20, 2019 , resulting in a termination fee of$48.2 million . We entered into an Interim Management Agreement for an initial annual fee of$1.0 million , under which we agreed to manage and liquidate the remaining SMTA assets. Under this agreement, we recognized$0.7 million of revenues for the nine months endedSeptember 30, 2020 . The Interim Management Agreement was terminated effectiveSeptember 4, 2020 . Additionally, we provided property management services and special services forMaster Trust 2014, which was contributed to SMTA as part of the Spin-Off. As a result, for the three months endedSeptember 30, 2019 , we recognized$5.5 million in revenue under the terms of the Property Management and Servicing Agreement. This agreement was terminated in the third quarter of 2019 in conjunction with SMTA's sale ofMaster Trust 2014.
EXPENSES
General and administrative
Period-over-period general and administrative expenses decreased, driven by a decrease in compensation expenses of$4.2 million , primarily as a result of decreased accruals for market-based and merit-based compensation, as well as a decrease of$0.5 million in travel expenses as a result of the COVID-19 pandemic. These decreases were partially offset by$1.4 million of expenses recognized during the nine months endedSeptember 30, 2020 related to the COVID-19 pandemic, primarily as a result of increased legal fees for executing rent deferral or abatement agreements.
Property costs (including reimbursable)
For the nine months endedSeptember 30, 2020 , property costs were$18.2 million (including$10.0 million of tenant reimbursable expenses) compared to$14.0 million (including$11.2 million of tenant reimbursable expenses) for the same period in 2019. As such, reimbursable property costs decreased period-over-period, primarily due to certain property taxes no longer being considered recoverable. The increase in non-reimbursable costs of$5.4 million was driven primarily by an increase in non-reimbursable property taxes of$3.6 million due to tenant credit issues from the COVID-19 pandemic, as well as carrying costs of vacant properties of$1.4 million due to an increase in vacant properties over the comparative period.
Interest
The increase in interest expense was driven by the issuance of:
• the 2029 Senior Notes in the second quarter of 2019,
• the 2027 Senior Notes and 2030 Senior Notes in the third quarter of 2019,
• the 2020 Term Loans in the second quarter of 2020, and • the 2031 Senior Notes in the third quarter of 2020.
The increase was partially offset by:
• the extinguishment of
indebtedness on one defaulted loan in the first quarter of 2019,
• the maturity and repayment of the Convertible 2019 Notes in the second
quarter of 2019,
• the early repayment of the
2019,
• the repayment and termination of the A-1 Term Loans and A-2 Term Loans in
the third quarter of 2019,
• the termination of the interest rate swaps in the third quarter of 2019, and
• the partial early repayment of
in the third quarter of 2020. 43
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The following table summarizes our interest expense on related borrowings:
Nine Months Ended September 30, (In Thousands) 2020 2019
Interest expense - revolving credit facilities (1)
2,799 15,448 Interest expense - Senior Unsecured Notes 44,163 15,299 Interest expense - mortgages and notes payable 9,027 15,168 Interest expense - Convertible Notes 8,942 14,010 Interest expense - interest rate swaps/other - 972 Non-cash interest expense 9,658 11,116 Total interest expense$ 77,858 $ 76,462
(1) Includes facility fees of approximately
nine months ended
Depreciation and amortization
We were a net acquirer during the trailing twelve-month period of$909.9 million of Real Estate Investment Value, resulting in an increase period-over-period in depreciation and amortization. The following table summarizes our depreciation and amortization expense: Nine Months Ended September 30, (In Thousands) 2020 2019
Depreciation of real estate assets
25,942
20,441
Other depreciation 437
426
Total depreciation and amortization
Impairments During the nine months endedSeptember 30, 2020 , we recorded impairment losses of$69.9 million . Impairment of$7.6 million was recorded on Vacant properties, comprised of$4.6 million on seven Vacant properties held for use and$3.0 million on one Vacant property held for sale. Impairment of$44.0 million was recorded on underperforming properties, comprised of$42.4 million on 22 underperforming properties held for use and$1.6 million on five underperforming properties held for sale. Impairment of$18.2 million was recorded on lease intangible assets, primarily as a result of a tenant bankruptcy that had credit issues prior to the COVID-19 pandemic that resulted in the termination of the lease for four properties. Finally, we recorded an allowance for credit loss on our direct financing lease of$0.1 million . During the nine months endedSeptember 30, 2019 , we recorded impairment losses of$13.2 million . Impairment of$11.9 million was recorded on underperforming properties, comprised of$8.1 million recorded on 11 underperforming properties held for use and$3.8 million recorded on nine underperforming properties held for sale. Impairment of$1.5 million was recorded on Vacant properties, comprised of$0.3 million recorded on two Vacant held for use properties and$1.2 million recorded on three Vacant held for sale properties. These impairment charges were partially offset by$0.2 million of net impairment on lease intangible liabilities.
Loss on debt extinguishment
During the nine months endedSeptember 30, 2020 , we recorded a loss on debt extinguishment of$6.2 million as a result of the partial early repayment of$154.6 million aggregate principal amount of the Convertible 2021 Notes, comprised of$4.1 million of cash premiums paid and$2.1 million of write-offs of unamortized debt discounts and deferred financing costs related to the debt. Additionally, we recorded a loss on debt extinguishment of$1.1 million for the write-off of unamortized deferred financing costs as a result of the partial repayment of the 2020 Term Loans.
During the nine months ended
• a
primarily as a result of early repayment penalties,
• a
principal amount of CMBS indebtedness on one defaulted loan, which was secured by one property,
• a
Loans, which were repaid primarily with proceeds from the issuance of the 2027 Senior Unsecured Notes and 2030 Senior Unsecured Notes, and
• a
Term Loan Agreement in conjunction with entering into the 2019 Revolving
Credit and Term Loan Agreement. 44
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Gain on disposition of assets
During the nine months endedSeptember 30, 2020 , we disposed of 21 properties, resulting in net gains of$11.8 million . There were net gains of$11.3 million on the sales of 11 active properties and net gains of$0.9 million on the sales of ten Vacant properties. These gains were partially offset by a$0.2 million loss recorded on the sale of a notes receivable and$0.2 million in other net losses. For the same period in 2019, we disposed of 34 properties, resulting in net gains of$70.8 million . There were net gains of$69.6 million on the sales of 20 active properties and net gains of$1.2 million on the sales of 11 Vacant properties. One property was returned to the lender in conjunction with CMBS debt extinguishment and two properties were leasehold interests that were surrendered to the lessors, which did not result in a gain/loss on disposition.
Preferred dividend income from SMTA
As part of the Spin-Off, SMTA issued to us 10% Series A preferred shares with an aggregate liquidation preference of$150.0 million . For the nine months endedSeptember 30, 2019 , we recognized preferred dividend income of$10.8 million from these shares. InSeptember 2019 , in conjunction with SMTA's sale ofMaster Trust 2014, SMTA repurchased the preferred shares at their aggregate liquidation preference. Income tax expense Taxable income from non-REIT activities managed through any of the Company's taxable REIT subsidiaries is subject to federal, state, and local taxes. As such, income earned by a taxable wholly-owned subsidiary of Spirit pursuant to the Asset Management Agreement was considered non-REIT activity and subject to federal and state income tax. There was a decrease in income tax expense period-over-period of$11.3 million , primarily as a result of the taxable termination fee income of$48.2 million recorded in the third quarter of 2019. 45
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Property Portfolio Information
1,778 99.3% 48 296 28
Diversification By Tenant
The following table sets forth a summary of tenant concentration for our owned
real estate properties as of
Number of Total Square Feet Percent of Tenant (1) Properties (in thousands) ABR Cajun Global LLC 166 238 2.7 % The Home Depot, Inc. 7 848 2.3 % At Home Group Inc. 13 1,597 2.3 % Alimentation Couche-Tard, Inc. 76 230 2.3 % Walgreen Co. 34 487 2.1 % GPM Investments, LLC 112 305 2.1 % Life Time Fitness, Inc 5 588 2.0 % Dollar Tree, Inc. 106 927 2.0 % BJ's Wholesale Club, Inc. 7 789 2.0 % CVS Caremark Corporation 33 409 1.8 % Other 1,207 30,215 78.4 % Vacant 12 594 - Total 1,778 37,227 100.0 %
(1) Tenants represent legal entities ultimately responsible for obligations under the lease agreements or affiliated entities. Other tenants may operate the same or similar business concepts or brands set forth above.
Lease Expirations
The following table sets forth a summary of lease expirations for our owned real estate as ofSeptember 30, 2020 . As ofSeptember 30, 2020 , the weighted average remaining non-cancelable initial term of our leases (based on ABR) was 9.9 years. The information set forth in the table assumes that tenants do not exercise renewal options and or any early termination rights: Number of ABR Total Square Feet Percent of Leases Expiring In: Properties (in thousands) (1) (in thousands) ABR Remainder of 2020 3 $ 738 165 0.2 % 2021 55 18,832 1,817 3.9 % 2022 40 16,075 1,529 3.3 % 2023 112 31,753 2,936 6.6 % 2024 47 17,899 1,557 3.7 % 2025 52 19,115 1,527 4.0 % 2026 101 32,186 2,298 6.7 % 2027 130 40,222 2,954 8.3 % 2028 106 28,685 1,798 5.9 % 2029 323 42,651 2,840 8.8 % Thereafter 797 235,153 17,212 48.6 % Vacant 12 - 594 - Total owned properties 1,778 $ 483,309 37,227 100.0 % (1) ABR is not adjusted for the impact of abatements provided as relief due to the COVID-19 pandemic. As of the date of this report, SRC has agreed to a total of$0.2 million of abatements for the period fromOctober 1, 2020 -September 30, 2021 . 46
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Diversification By Asset Type and Tenant Industry
The following table sets forth a summary of asset types, and for retail assets the tenant industry concentration, for our owned properties as ofSeptember 30, 2020 : Number of Total Square Feet Percent of Asset Type Tenant Industry Properties (in thousands) ABR Retail 1,660 25,517 79.8 % Convenience Stores 331 1,047 8.0 % Health and Fitness 42 2,185 6.9 % Restaurants - Quick Service 366 798 6.7 % Restaurants - Casual Dining 134 945 6.0 % Movie Theaters 37 1,953 5.4 % Drug Stores / Pharmacies 77 991 4.6 % Dealerships 27 925 4.4 % Entertainment 24 1,022 3.6 % Grocery 38 1,752 3.5 % Car Washes 65 308 3.3 % Dollar Stores 168 1,538 3.2 % Home Improvement 14 1,595 3.1 % Home Décor 16 2,159 2.9 % Warehouse Club and Supercenters 13 1,420 2.6 % Specialty Retail 53 1,142 2.4 % Automotive Service 69 578 2.3 % Department Stores 14 1,281 2.0 % Home Furnishings 18 783 1.7 % Sporting Goods 14 739 1.7 % Early Education 35 384 1.6 % Automotive Parts 55 388 1.2 % Office Supplies 16 351 0.8 % Other 9 294 0.7 % Medical Office 5 65 0.5 % Pet Supplies and Service 4 133 0.4 % Apparel 5 151 0.3 % Vacant 11 590 0.0 % Industrial 75 9,695 12.6 % Office and Other 43 2,015 7.6 % Total 1,778 37,227 100.0 % 47
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Diversification By Geography
The following map and table set forth a summary of geographic concentration for
our owned real estate properties as of
[[Image Removed]] Number of Total Square Feet Percent of Location Number of Total Square Feet Percent of Location Properties (in thousands) ABR (continued) Properties (in thousands) ABR Texas 254 4,421 11.7 % Louisiana 23 368 1.3 % Florida 125 2,371 8.8 % Utah 18 333 1.2 % Georgia 122 1,983 6.3 % Pennsylvania 20 488 1.2 % Ohio 86 2,396 5.4 % Alaska 9 319 1.1 % California 24 1,236 4.6 % New Hampshire 16 640 1.1 % Tennessee 104 1,762 4.1 % Idaho 16 273 1.0 % Michigan 86 1,612 4.0 % Kansas 17 341 0.8 % New York 30 1,895 3.6 % Connecticut 5 686 0.8 % Illinois 50 1,258 3.6 % Wisconsin 10 391 0.7 % Arizona 45 824 3.0 % Washington 8 185 0.6 % South Carolina 44 771 2.8 % Maine 26 76 0.5 % Alabama 94 715 2.6 % Nebraska 9 221 0.4 % Virginia 44 1,335 2.6 % West Virginia 13 202 0.4 % North Carolina 59 1,229 2.6 % Montana 3 152 0.4 % Maryland 9 714 2.5 % Massachusetts 2 131 0.4 % Missouri 65 966 2.4 % Iowa 12 194 0.4 % Minnesota 25 936 2.3 % North Dakota 3 105 0.3 % Colorado 25 978 2.1 % Rhode Island 3 95 0.3 % Mississippi 51 670 1.9 % Oregon 3 104 0.3 % New Mexico 28 583 1.7 % Wyoming 1 35 0.1 % Kentucky 43 538 1.7 % U.S. V.I. 1 38 0.1 % Indiana 39 830 1.6 % South Dakota 1 20 0.1 % Oklahoma 50 446 1.6 % Delaware 1 5 0.1 % Arkansas 42 637 1.5 % Vermont 1 2 * New Jersey 13 717 1.4 % * Less than 0.1% 48
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Liquidity and Capital Resources
FORWARD EQUITY OFFERING
InJune 2020 , we entered into forward sale agreements with certain financial institutions acting as forward purchasers 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 forward purchasers borrowed and sold an aggregate of 9.2 million shares of common stock in the offering. 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. We intend (subject to our right to elect cash or net share settlement subject to certain conditions) to deliver, upon physical settlement of the forward sale agreements on one or more dates specified by us occurring no later thanDecember 8, 2021 , an aggregate of 9.2 million shares of our common stock to the forward purchasers in exchange for cash proceeds per share equal to the applicable forward sale price. The forward sale price that we will receive upon physical settlement of the agreements, which was initially$35.856 per share, will be 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 ofSeptember 30, 2020 , we had physically settled 2.8 million of these shares for net proceeds of$99.7 million .
ATM PROGRAM
InNovember 2016 , the Board of Directors approved a$500.0 million ATM Program. InFebruary 2019 , we updated the ATM Program, pursuant to which we may from time to time offer and sell shares of our common stock having an aggregate gross sales price of up to$500.0 million through the agents, as our sales agents or, if applicable, as forward sellers, or directly to the agents acting as principals. Sales of shares of our common stock under the ATM Program may be made in sales deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. The 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" and, collectively, the "forward purchasers"). When we enter into a forward sale agreement with any forward purchaser, we expect that such forward purchaser will attempt to borrow from third parties and sell, through the relevant agent, acting as sales agent for such forward purchaser, shares of our common stock to hedge such forward purchaser's exposure under such 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 relevant 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. As ofSeptember 30, 2020 , 5.9 million shares of our common stock have been sold under the ATM Program, of which 0.7 million shares were sold during the nine months endedSeptember 30, 2020 . Of total shares sold since inception, 4.1 million of the sales were sold by forward purchasers through agents under the ATM Program and pursuant to forward sales agreements, including all shares sold during the nine months endedSeptember 30, 2020 . The forward sale price that we received upon physical settlement of the agreements was 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. During the nine months endedSeptember 30, 2020 , 0.4 million of the shares were physically settled for net proceeds of$17.6 million . As ofSeptember 30, 2020 , there were 0.3 million shares remaining under open forward sales agreements. Assuming the full physical settlement of those open forward sales agreements, we had remaining capacity to sell common stock having an aggregate gross sales price of up to$234.8 million under the ATM Program as ofSeptember 30, 2020 . 49 --------------------------------------------------------------------------------
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 ATM program. As ofSeptember 30, 2020 , available liquidity was comprised of$116.8 million in cash and cash equivalents,$800.0 million of borrowing capacity under the 2019 Credit Facility and$12.7 million in restricted cash and restricted cash equivalents. Assuming the full physical settlement of open forward sale agreements under our ATM Program, we also had remaining capacity to sell common stock having an aggregate gross sales price of up to$234.8 million under our ATM Program as ofSeptember 30, 2020 and$231.1 million of expected proceeds available assuming the full physical settlement of our open forward equity contracts. We believe that this available liquidity makes us well positioned to navigate any macroeconomic uncertainty resulting from the COVID-19 pandemic restrictions intended to prevent its spread.
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 ourOperating 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. Refer to "Part II, 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. 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 ofSeptember 30, 2020 , 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 ofMarch 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 defined in the 2019 Facilities Agreements). As ofSeptember 30, 2020 , there were no subsidiaries that met this requirement. As ofSeptember 30, 2020 , the 2019 Credit Facility bore interest at 1-Month LIBOR plus 0.90%, with no borrowings outstanding, and a ratings-based facility fee in the amount of 0.20% per annum. As ofSeptember 30, 2020 , there were no letters of credit outstanding.
Term Loans
As ofSeptember 30, 2020 ,$178.0 million was outstanding under the 2020 Term Loan Agreement. The 2020 Term Loans have a maturity ofApril 2, 2022 and bear interest at a rate of LIBOR plus an applicable margin of 1.50% per annum. If any loans are outstanding afterApril 2, 2021 , theOperating Partnership will be required to pay a one-time fee in an amount equal to 0.20% of the outstanding principal amount of the loans. 50 --------------------------------------------------------------------------------
Senior Unsecured Notes
As of
Stated September 30, Maturity Date Interest Rate 2020 2026 Senior Notes September 15, 2026 4.45%$ 300,000 2027 Senior Notes January 15, 2027 3.20%$ 300,000 2029 Senior Notes July 15, 2029 4.00%$ 400,000 2030 Senior Notes January 15, 2030 3.40%$ 500,000 2031 Senior Notes February 15, 2031 3.20%$ 450,000 Total Senior Unsecured Notes 3.61%$ 1,950,000 The Senior Unsecured Notes are payable onJanuary 15 andJuly 15 of each year, except for the 2026 Senior Notes, which are payable onMarch 15 andSeptember 15 of each year, and the 2031 Senior Notes, which are payable onFebruary 15 andAugust 15 of each year. The Senior Unsecured Notes are redeemable in whole at any time or in part from time to time, at theOperating 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) prior to their respective maturity dates, the redemption price will not include a make-whole premium.
CMBS
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 ofSeptember 30, 2020 , we had five fixed-rate CMBS loans with$215.3 million of aggregate outstanding principal, a weighted-average contractual interest rate of 5.47% and a weighted-average maturity of 3.1 years. Approximately 86.99% of this debt is partially amortizing and requires a balloon payment at maturity. The following table shows the scheduled principal repayments, including amortization, of the CMBS fixed-rate loans as ofSeptember 30, 2020 (dollars in thousands): Weighted Number of Number of Stated Interest
Average Scheduled
Year of Maturity Loans Properties
- - -% - %$ 1,059 $ -$ 1,059 2021 - - -% - 4,365 - 4,365 2022 - - -% - 4,617 - 4,617 2023 3 86 5.23%-5.50% 5.46 3,074 197,912 200,986 2024 - - -% - 590 - 590 Thereafter 2 2 5.80%-6.00% 5.83 3,610 70 3,680 Total 5 88 5.47 %$ 17,315 $ 197,982 $ 215,297
Convertible Notes
As ofSeptember 30, 2020 , the Convertible Notes were comprised of$190.4 million aggregate principal amount of 3.75% convertible notes maturing onMay 15, 2021 . Interest on the 2021 Notes is payable semiannually in arrears onMay 15 andNovember 15 of each year. Holders may convert the 2021 Notes prior toNovember 15, 2020 only under specific circumstances: (1) if the closing price of our common stock for each of at last 20 trading days (whether or not consecutive) during the last 30 consecutive trading days in the quarter is greater than or equal to 130% of the conversion price for the Convertible Notes; (2) during the five business day period after any 10 consecutive trading day period in which the trading price per$1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last closing price of our common stock and the conversion rate for the Convertible Notes; (3) if we call any or all of the Convertible Notes for redemption prior to the redemption date; or (4) upon the occurrence of specified corporate events as described in the Convertible Notes prospectus supplement. On or afterNovember 15, 2020 , until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes, holders may convert the 2021 Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver cash, shares of common stock or a combination of cash and shares of common stock, at our election. 51 -------------------------------------------------------------------------------- The conversion rate is subject to adjustment for some events, including dividends paid in excess of threshold amounts stipulated in the agreement, but will not be adjusted for any accrued and unpaid interest. As ofSeptember 30, 2020 , the conversion rate was 17.4458 per$1,000 principal note. If we undergo a fundamental change (as defined in the 2021 Notes' supplemental indenture), holders may require us to repurchase all or any portion of their notes at a repurchase price equal to 100% of the principal amount of such notes to be repurchased, plus accrued and unpaid interest.
DEBT MATURITIES
Future principal payments due on our various types of debt outstanding as of
Remainder of Total 2020 2021 2022 2023 2024 Thereafter 2019 Credit Facility $ - $ - $ - $ - $ - $ - $ - 2020 Term Loans 178,000 - - 178,000 - - - Senior Unsecured Notes 1,950,000 - - - - - 1,950,000 CMBS 215,297 1,059 4,365 4,617 200,986 590 3,680 Convertible Notes 190,426 - 190,426 - - - -$ 2,533,723 $ 1,059 $ 194,791 $ 182,617 $ 200,986 $ 590 $ 1,953,680 CONTRACTUAL OBLIGATIONS As discussed above, during the nine months endedSeptember 30, 2020 , we entered into the 2020 Term Loan Agreement to reduce the amounts drawn under the 2019 Credit Facility. Additionally, we issued the 2031 Senior Unsecured Notes and used proceeds to partially repay borrowings outstanding under the 2020 Term Loans and to partially redeem the 2021 Convertible Notes. There were no other material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC . We may enter into commitments to purchase goods and services in connection with the operations of our properties. Those commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures. 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 afterDecember 31, 2017 and beforeJanuary 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. Refer to "Part II, 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. 52 --------------------------------------------------------------------------------
Cash Flows
The following table presents a summary of our cash flows for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively (in thousands): Nine Months Ended September 30, 2020 2019 Change
Net cash provided by operating activities
259,353$ (52,829 ) Net cash used in investing activities (352,766 ) (328,616 ) (24,150 ) Net cash provided by financing activities 249,708 361,508 (111,800 ) Net increase in cash, cash equivalents and restricted cash$ 103,466 $
292,245
As ofSeptember 30, 2020 , we had$129.5 million of cash, cash equivalents and restricted cash as compared to$26.0 million as ofDecember 31, 2019 and$369.7 million as ofSeptember 30, 2019 .
Operating Activities
Our 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 decrease in net cash provided by operating activities was primarily attributable to the following:
• a decrease in related party fee income of
attributable to the
with the termination of the Asset Management Agreement in
which was replaced by the Interim Management Agreement,
• a decrease in preferred dividends received from SMTA of
result of SMTA repurchasing the preferred shares in
• an increase in cash interest paid of
the 2027 Senior Notes, 2029 Senior Notes and 2030 Senior Notes.
The decrease was partially offset by the following:
• termination fee costs of
rate swaps in 2019, and
• a net increase in cash rental revenue of$20.3 million , driven by net acquisitions over the trailing twelve month period, partially offset by$24.1 million of rent deferred and$4.1 million of rent abated during the
nine months ended
Investing Activities Cash used in investing activities is generally used to fund property acquisitions, for investments in loans receivable and for capital expenditures. Cash provided by investing activities generally relates to the disposition of real estate and other assets. Net cash used in investing activities during the nine months endedSeptember 30, 2020 included$433.4 million for the acquisition of 47 properties and$9.9 million of capitalized real estate expenditures. These outflows were partially offset by the$58.7 million in net proceeds from the disposition of 21 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. During the same period in 2019, net cash used in investing activities included$719.1 million for the acquisition of 195 properties and$32.9 million of capitalized real estate expenditures. These outflows were partially offset by$230.5 million in net proceeds from the disposition of 34 properties,$150.0 million in proceeds from the redemption of preferred equity investment in SMTA and$42.8 million in collections of principal on loans receivable.
Financing Activities
Generally, our net cash provided by or used in financing activities is impacted by our borrowings under our revolving credit facilities and term loans, issuances of net-lease mortgage notes, common stock and debt offerings and repurchases and dividend payments on our common and preferred stock.
53 -------------------------------------------------------------------------------- Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was primarily attributable to borrowings of$445.5 million under senior unsecured notes, net borrowings of$178.0 million under term loans and net proceeds from the issuance of common stock of$117.3 million . These amounts were partially offset by payment of dividends to equity owners of$202.1 million , repayment of$154.6 million on convertible notes, net repayments of$116.5 million on our revolving credit facilities, deferred financing costs of$6.5 million , common stock repurchases for employee tax withholdings totaling$4.4 million , debt extinguishment costs of$4.1 million and repayment of$3.0 million on mortgages and notes payable During the same period in 2019, net cash provided by financing activities was primarily attributable to borrowings of$1,198.3 million under senior unsecured notes and net proceeds from the issuance of common stock of$538.0 million . These amounts were partially offset by the net repayment of$420.0 million of Term Loans, payment of dividends to equity owners of$172.0 million , repayment of$198.6 million on mortgages and notes payable, net repayments of$146.3 million on our revolving credit facilities, repayment of$402.5 million on convertible notes, deferred financing costs of$20.2 million , debt extinguishment costs of$12.6 million and common stock share repurchases for employee tax withholdings totaling$2.5 million
Off-Balance Sheet Arrangements
As of
New Accounting Pronouncements
See Note 2 to the consolidated financial statements herein.
54 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
FFO: We calculate FFO 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 use FFO as a supplemental performance measure because 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, impairment charges and net (gains) losses from property dispositions, 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: 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 debt extinguishment gains (losses), 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 revenues (comprised of straight-line rents net of bad debt expense and amortization of lease and loan receivable intangibles), non-cash interest expense (comprised of amortization of deferred financing costs and debt discounts/premiums) 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 cash reserves on deposit with lenders as additional security. 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: EBITDAre is computed in accordance with standards established by NAREIT. EBITDAre is computed as net income (loss) (computed in accordance with GAAP), plus interest expense, income tax expense (if any), depreciation and amortization, impairments of depreciated property and plus/(minus) losses/(gains) on the disposition of depreciated property.
Adjusted EBITDAre: 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 and for certain items that we believe are not indicative of our core operating performance, such as debt extinguishment gains (losses) and costs related to the COVID-19 pandemic. 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: Annualized Adjusted EBITDAre is calculated as Adjusted EBITDAre for the quarter, adjusted for 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. 55 --------------------------------------------------------------------------------
FFO and AFFO Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands) 2020 2019 2020 2019 Net income (loss) attributable to common stockholders$ 11,211 $ 78,707 $ (10,225 ) $ 162,846 Portfolio depreciation and amortization 52,024 43,764 157,129 126,171 Portfolio impairments 8,106 5,932 69,929 13,231 Gain on disposition of assets (10,763 ) (32,254 ) (11,809 ) (70,760 ) FFO attributable to common stockholders$ 60,578 $ 96,149 $ 205,024 $ 231,488 Loss on debt extinguishment 7,252 5,580 7,252 11,473 Deal pursuit costs 597 330 1,630 574 Non-cash interest expense 3,190 2,685 9,658 11,116 Accrued interest and fees on defaulted loans - - - 285 Straight-line rent, net of related bad debt expense (899 ) (4,770 ) (6,385 ) (12,162 ) Other amortization and non-cash charges (383 ) (574 ) (213 ) (1,169 ) Non-cash compensation expense 2,967 3,534 9,726 10,995 Termination of interest rate swaps - 12,461 - 12,461 Costs related to COVID-19(1) 702 - 1,440 - AFFO attributable to common stockholders (2)$ 74,004 $ 115,395
Net income (loss) per share of common stock - Diluted$ 0.11 $ 0.87 $ (0.11 ) $ 1.85 FFO per share of common stock - Diluted (3)$ 0.59 $ 1.06 $ 1.98 $ 2.63 AFFO per share of common stock - Diluted (3)$ 0.72 $ 1.27 $ 2.21 $ 3.01 AFFO per share of common stock - Diluted, excluding AM termination fee income, net of tax (4)$ 0.72 $ 0.87
Weighted average shares of common stock outstanding - Diluted 102,938,860 90,396,797 102,553,798 87,784,477 Weighted average shares of common stock outstanding for non-GAAP measures - Diluted (3) 102,938,860 90,396,797 103,132,749 87,784,477
(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 for the three and nine months ended
million and
in conjunction with the FASB's relief for deferral agreements extended as a
result of the COVID-19 pandemic.
(3) Weighted average shares of common stock for non-GAAP measures includes
unvested market-based awards and unsettled forward equity contracts for the
nine months ended
calculations. 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:
Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 FFO$0.2 million $0.3 million $0.6 million $1.0 million AFFO$0.2 million $0.4 million $0.7 million $1.1 million (4) AFFO attributable to common stockholders for the three months endedSeptember 30, 2019 , excluding$48.2 million of termination fee income, net
of
conjunction with SMTA's sale of
termination of the Asset Management Agreement on
Agreement with SMTA. AFFO attributable to common stockholders has not been
adjusted to exclude the following:
- asset management fees of
three and nine months ended
- property management and servicing fees of
earned during the three and nine months endedSeptember 30, 2019 , respectively;
- preferred dividend income from SMTA of
during the three and nine months ended
- interest income on related party notes receivable of
million earned during the three and nine months ended
respectively, and an early repayment premium of
the three and nine months ended
- interest expense on related party loans payable of
million incurred during the three and nine months ended
respectively. 56
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Adjusted Debt, Adjusted EBITDAre and Annualized Adjusted EBITDAre
September 30, (Dollars in thousands) 2020 2019 Revolving credit facilities $ - $ - Term loans 177,170 - Senior Unsecured Notes, net 1,926,752 1,483,491 Mortgages and notes payable, net 213,479 259,113 Convertible Notes, net 188,216 334,904 Total debt, net 2,505,617 2,077,508 Unamortized debt discount, net 8,642
10,664
Unamortized deferred financing costs 19,464
18,569
Cash and cash equivalents (116,814 ) (358,440 ) Restricted cash balances held for the benefit of lenders (12,675 ) (11,226 ) Adjusted Debt$ 2,404,234 $ 1,737,075 Three Months Ended September 30, (Dollars in thousands) 2020 2019 Net income $ 13,798 $ 81,294 Interest 26,404 24,675 Depreciation and amortization 52,170
43,907
Income tax expense 197
11,190
Gain on disposition of assets (10,763 ) (32,254 ) Portfolio impairments 8,106 5,932 EBITDAre $ 89,912$ 134,744 Adjustments to revenue producing acquisitions and dispositions 2,688 3,599 Deal pursuit costs 597 330 Loss on debt extinguishment 7,252 5,580 Costs related to COVID-19(1) 702 - Termination of interest rate swaps -
12,461
Termination of Asset Management Agreement - (48,156 ) Adjusted EBITDAre$ 101,151 $
108,558
Adjustments related to straight-line rent (2) 4,942 - Other adjustments for Annualized EBITDAre (3) 1,453 (244 ) Annualized Adjusted EBITDAre$ 430,184 $
433,256
Adjusted Debt / Annualized Adjusted EBITDAre (4) 5.6x 4.0 x
(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) Adjustment relates to
straight-line rent receivable balances, where only
expense relates to straight-line rent that would have been recognized during
the three months ended
recognized in previous periods would not be appropriate.
(3) Adjustments for the three months ended
certain other property costs, general and administrative expenses, prior
period rent recoveries, abatements and bad debt expenses related to rental
revenue in previous periods where annualization would not be appropriate.
Adjustments for the three months ended
certain other income where annualization would not be appropriate.
(4) Adjusted Debt / Annualized Adjusted EBITDAre would be 5.1x if the 6.7
million shares under open forward sales agreements had been settled as of
57
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