EX-99.1 15 d471702dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

 

LOGO

Dear Spirit Realty Capital, Inc. Stockholder:

We are pleased to inform you that on May 1, 2018, the board of directors of Spirit Realty Capital, Inc. (“Spirit”) declared the distribution of 100% of the common shares of beneficial interest, par value $0.01 per share, or common shares, of Spirit MTA REIT (“SMTA”), a wholly-owned subsidiary of Spirit, to Spirit’s common stockholders. SMTA holds or will hold prior to the distribution, directly or indirectly, the assets that collateralize Master Trust 2014, part of Spirit’s asset-backed securitization program, almost all of the properties that Spirit leases to Specialty Retail Shops Holding Corp. and certain of its affiliates, as well as certain other assets.

Upon the distribution, Spirit common stockholders will own 100% of the common shares of SMTA. The board of directors of Spirit has determined upon careful review and consideration that creating SMTA is in the best interests of Spirit and its stockholders.

The distribution of the common shares of SMTA will occur on May 31, 2018 by way of a taxable pro rata special distribution to Spirit’s common stockholders of record on the record date of the distribution. Each holder of Spirit common stock will be entitled to receive one common share of SMTA for every ten shares of Spirit common stock held by such stockholder as of the close of business on May 18, 2018, the record date of the distribution. The SMTA common shares will be issued in book-entry form only, which means that no physical share certificates will be issued.

Stockholder approval of the distribution is not required, and you are not required to take any action to receive your SMTA common shares.

Following the distribution, you will own shares in both Spirit and SMTA. The number of Spirit shares you own will not change as a result of this distribution. Spirit’s common stock will continue to trade on the New York Stock Exchange under the symbol “SRC.” SMTA intends to list its common shares on the New York Stock Exchange under the symbol “SMTA.”

The information statement, which is being mailed to all holders of Spirit common stock on the record date for the distribution, describes the distribution in detail and contains important information about SMTA, its business, financial condition and operations. We urge you to read the information statement carefully.

We want to thank you for your continued support of Spirit and we look forward to your future support of SMTA.

Sincerely,

Jackson Hsieh

Chief Executive Officer and President


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Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED MAY 4, 2018

INFORMATION STATEMENT

Common Shares

Spirit MTA REIT

 

 

This information statement is being furnished in connection with the taxable distribution by Spirit Realty Capital, Inc. (“Spirit”), a real estate investment trust (“REIT”), to its stockholders of outstanding common shares of beneficial interest, par value $0.01 per share, or common shares, of Spirit MTA REIT (“SMTA,” “we,” “us” or “our”), a wholly-owned subsidiary of Spirit. We hold, or will hold, directly or indirectly, investments in a portfolio of approximately 903 properties. To implement the distribution, Spirit will distribute 100% of our outstanding common shares on a pro rata basis to existing holders of Spirit’s common stock. References herein to Spirit’s stockholders are intended to refer only to holders of Spirit’s common stock, unless context otherwise requires.

For every ten shares of common stock of Spirit held of record by you as of the close of business on May 18, 2018 (the “distribution record date”), you will receive one of our common shares. We expect our common shares will be distributed by Spirit to you on or about May 31, 2018 (the “distribution date”).

No vote of Spirit’s stockholders is required in connection with the spin-off. Therefore, you are not being asked for a proxy, and you are requested not to send us a proxy, in connection with the spin-off from Spirit. You will not be required to pay any consideration or to exchange or surrender your existing shares of common stock of Spirit or take any other action to receive our common shares to which you are entitled on the distribution date.

There is no current trading market for our common shares, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the distribution record date, and we expect “regular-way” trading of our common shares to begin on the first trading day following the completion of the distribution. We intend to list our common shares on the New York Stock Exchange (“NYSE”) under the symbol “SMTA.”

We intend to elect to be taxed as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2018. We believe we will be organized and intend to operate in a manner that will allow us to qualify for taxation as a REIT commencing with such taxable year. To qualify as a REIT, we must meet a number of organizational and operational requirements, including requirements related to the nature of our income and assets and the amount of our distributions, among others. See “Material U.S. Federal Income Tax Consequences.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 29.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement was first mailed to Spirit’s stockholders on or about                     , 2018.

                    ,


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TABLE OF CONTENTS

 

BASIS OF PRESENTATION

     ii  

CERTAIN DEFINED TERMS

     iii  

SUMMARY

     1  

RISK FACTORS

     29  

FORWARD-LOOKING STATEMENTS

     60  

OUR SPIN-OFF FROM SPIRIT

     62  

DISTRIBUTION POLICY

     74  

SELECTED PRO FORMA AND HISTORICAL COMBINED FINANCIAL AND OTHER DATA

     78  

UNAUDITED PRO FORMA FINANCIAL INFORMATION

     80  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     89  

BUSINESS AND PROPERTIES

     111  

OUR MANAGER AND ASSET MANAGEMENT AGREEMENT

     127  

MANAGEMENT

     137  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     146  

PRINCIPAL SHAREHOLDERS

     155  

DESCRIPTION OF INDEBTEDNESS

     157  

DESCRIPTION OF SHARES

     170  

CERTAIN PROVISIONS OF MARYLAND LAW AND OUR DECLARATION OF TRUST AND BYLAWS

     180  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     188  

WHERE YOU CAN FIND MORE INFORMATION

     210  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

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BASIS OF PRESENTATION

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about Spirit MTA REIT, a Maryland real estate investment trust (“SMTA”), assumes the completion of all of the transactions referred to in this information statement in connection with the spin-off by Spirit Realty Capital, Inc. (“Spirit”) and the combination of the legal entities to be contributed by Spirit to SMTA.

Upon completion of the spin-off, we expect to own investments in a portfolio of approximately 903 properties, consisting of 897 owned properties and mortgage loans receivable secured by six properties. Unless the context otherwise requires, references in this information statement to “our company,” “the company,” “us,” “our,” and “we” refer to SMTA following the spin-off.

 

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CERTAIN DEFINED TERMS

 

2017 Tax Legislation

  Tax Cuts and Jobs Act

ABS

  Asset Backed Securities

ACM

  Asbestos-Containing Materials

ADA

  Americans with Disabilities Act

AFFO

 

Adjusted Funds From Operations. See definition in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”

ASC

  Accounting Standards Codification

Asset Management Agreement

  Asset Management Agreement between Spirit Realty, L.P. and Spirit MTA REIT

ASU

  Accounting Standards Update

CMBS

  Commercial Mortgage Backed Securities

Code

  Internal Revenue Code of 1986, as amended

Contractual Rent

  Monthly contractual cash rent, excluding percentage rents, from properties owned fee-simple or ground leased, recognized during the final month of the reporting period, adjusted to exclude amounts received from properties sold during that period and adjusted to include a full month of contractual rent for properties acquired during that period

CPI

  Consumer Price Index

EBITDA

  Earnings Before Interest, Taxes, Depreciation and Amortization

EDF

  Expected Default Frequency

Exchange Act

  Securities and Exchange Act of 1934

FASB

  Financial Accounting Standards Board

FCCR

  Fixed Charge Coverage Ratio. See definition in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”

FFO

  Funds From Operations. See definition in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”

Financing JV

  SMTA Financing JV, LLC

GAAP

  Generally Accepted Accounting Principles in the United States

IASB

  International Accounting Standards Board

IFRS

  International Financial Reporting Standards

IRS

  Internal Revenue Service

JOBS Act

  Jumpstart Our Business Startups Act

Liquidity Reserve

  Cash held on deposit until there is a cashflow shortfall as defined in the Master Trust 2014 agreements or a liquidation of Master Trust 2014 occurs

Manager

  Spirit Realty, L.P., a wholly-owned subsidiary of Spirit

Master Trust 2014

  The asset-backed securitization trust established in 2005, and amended and restated in 2014, which issues non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans from time to time

 

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Master Trust 2014 Release

   Proceeds from the sale of assets securing Master Trust 2014 held in a restricted account until a qualifying substitution is made

MGCL

   Maryland General Corporation Law

Moody’s

   Moody’s Investor Services

NAREIT

   National Association of Real Estate Investment Trusts

NYSE

   New York Stock Exchange

Occupancy

   The number of economically yielding owned properties divided by total owned properties

Operating Partnership

   Spirit MTA REIT, L.P.

OP Holdings

   Spirit MTA OP Holdings, LLC

PIK

   Payment-in-kind

Porter’s Five Forces

   An analytical framework used to examine the attractiveness of an industry and potential for disruption in that industry based on: threats of new entrants, threats of substitutes, the bargaining power of customers, the bargaining power of suppliers and industry rivalry

Post-ARD

   Post anticipated repayment date

Predecessor Entities

   The legal entities comprised of Master Trust 2014, the Shopko Entities, the Sporting Goods Entities and two additional legal entities

Properties

   Owned properties and mortgage loans receivable secured by properties

Property Management and Servicing Agreement

   Second amended and restated agreement governing the management services and special services provided to Master Trust 2014 by Spirit Realty, L.P., dated as of May 20, 2014, as amended, supplemented, amended and restated or otherwise modified

QSR

   Quick service restaurants

Real Estate Investment Value

   The gross acquisition cost, including capitalized transaction costs, plus improvements and less impairments, if any

REIT

   Real Estate Investment Trust

S&P

   Standard & Poor’s Rating Services

Separation and Distribution Agreement

   Separation and Distribution Agreement between Spirit Realty Capital, Inc. and Spirit MTA REIT

SEC

   Securities and Exchange Commission

Securities Act

   Securities Act of 1933, as amended

Series A preferred shares

   10% series A preferred shares of beneficial interest, par value $0.01 per share, of Spirit MTA REIT initially issued to Spirit with an aggregate liquidation preference of $150.0 million

Shopko

   Specialty Retail Shops Holding Corp. and certain of its affiliates

Shopko Assets

   Owned properties leased to Shopko

Shopko Entities

   Three legal entities which own properties primarily leased to Shopko

SMTA

   Spirit MTA REIT

Spirit

   Spirit Realty Capital, Inc.

 

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Spirit Heat Map

   An analysis of industries across Porter’s Five Forces and potential causes of technological disruption to identify tenant industries which Spirit believes to have good fundamentals for future performance

Spirit Property Ranking Model

   A proprietary model used annually to rank properties across twelve factors and weightings consisting of both real estate quality scores and credit underwriting criteria, in order to benchmark property quality, identify asset recycling opportunities and to enhance acquisition or disposition decisions

Sporting Goods Entities

   One legal entity which owns a single distribution center property leased to a sporting goods tenant and its general partner entity

SubREIT

  

Spirit MTA SubREIT, Inc., a corporation that will be our subsidiary and intends to elect to be taxed as a REIT for federal income tax purposes

SubREIT preferred shares

   18% series A preferred stock, par value $0.01 per share, of Spirit MTA SubREIT with an aggregate liquidation preference of $5.0 million

TRS

   Taxable REIT subsidiary

TSR

   Total Shareholder Return

U.S.

   United States of America

Vacant

   Owned properties that are not economically yielding

 

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SUMMARY

This summary highlights some of the information in this information statement relating to our company, our spin-off from Spirit and the distribution of our common shares by Spirit to its stockholders. For a more complete understanding of our business and the spin-off, you should read carefully the more detailed information set forth under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Our Spin-Off from Spirit” and the other information included in this information statement. Except as otherwise indicated or unless the context otherwise requires, (i) references in this information statement to “our company,” “the company,” “us,” “our,” and “we” refer to SMTA following the spin-off and (ii) operating and financial data disclosed herein give effect to the spin-off and related transactions and the other adjustments described under the section entitled “Unaudited Pro Forma Combined Financial Information.”

 

 

Overview

We are a newly formed, externally-managed REIT with a portfolio of primarily single-tenant properties throughout the U.S. Upon completion of the spin-off, we expect to own investments in a portfolio of approximately 903 properties, approximately 57.8% of which are operated under master leases. At December 31, 2017, our properties had an Occupancy of 99.1%, and their leases had a weighted average non-cancelable remaining lease term (based on Contractual Rent) of approximately 10.6 years. These leases are generally long-term, with non-cancelable initial terms of 15 to 20 years and tenant renewal options for additional terms. As of December 31, 2017, approximately 96.0% of our single-tenant leases (based on Contractual Rent) provided for increases in future annual base rent.

The assets comprising Master Trust 2014 will be the largest component of SMTA. Master Trust 2014 is an investment-grade rated long-term ABS platform through which we are able to raise capital on an ongoing basis by issuing non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans receivable. Additionally, we will own one distribution center property encumbered with CMBS debt, an unencumbered portfolio of properties primarily leased to Shopko, a Midwest retailer operating in the general merchandise industry, and 14 other unencumbered properties.

We will be externally managed by Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, a self-administered and self-managed REIT with in-house capabilities, including acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting and capital markets. Spirit primarily invests in single-tenant, operationally essential real estate throughout the U.S. that is generally acquired through strategic sale-leaseback transactions and subsequently leased on a long-term, triple-net basis to high-quality tenants with business operations within predominantly retail and, to a lesser extent, office and industrial property types. We will not have any employees. All of the services typically provided by employees will be provided to us by our Manager pursuant to the Asset Management Agreement. We believe that our Manager is well-positioned to optimize the operating and financial performance of our portfolio and that the experience, extensive industry relationships and asset management expertise of its senior management team will enable us to compete effectively for acquisitions and help generate attractive returns for our shareholders.

We intend to elect to be taxed as a REIT for federal income tax purposes, and we intend to conduct our business and own substantially all of our assets through the Operating Partnership.

Prior to the completion of the spin-off, we are a wholly-owned subsidiary of Spirit.



 

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Our Mission Statement

Our mission will be to grow and reinforce our asset base through a) our Manager’s active and experienced management of our portfolio, b) pursuing monetization, distribution of proceeds to shareholders and capital recycling of our Shopko Assets, c) redeveloping select Shopko Assets, and d) developing select outparcels of Shopko Assets into quick service restaurants and casual dining restaurants. We intend to utilize Master Trust 2014 to provide long-term financing for redeployed proceeds from dispositions of our Shopko Assets. We plan to redeploy Shopko proceeds into new assets consistent with the Spirit Heat Map and Spirit Property Ranking Model and potentially distribute a portion of these proceeds to shareholders. We will generally focus on entering into new leases with small and medium sized tenants using master lease structures, with contractual rent escalators and requirements to provide unit level financial reporting.

Reasons for the Spin-Off

Upon careful review and consideration in accordance with the applicable standard of review under Maryland law, Spirit’s board of directors determined that the spin-off is in the best interest of Spirit and its stockholders. The spin-off will enable potential investors and the financial community to evaluate the performance of each company separately, which may result in a higher aggregate market value than the value of the combined company. Spirit’s board of directors’ determination was based on a number of factors and goals, including those set forth below:

 

    Optimize Capital Structure for Both Companies. Upon completion of the spin-off, we believe each company will have a clear capital structure tailored to its needs, and each may be able to attain more favorable financing terms separately. Our capital structure will utilize Master Trust 2014 to access the secured ABS market to fund future growth, while the removal of Master Trust 2014 from Spirit’s capital structure will result in Spirit having meaningfully less secured debt, which we believe will further facilitate Spirit’s access to capital and investment-grade credit markets.

 

    Seek Optimal Long-Term Solution for Shopko Portfolio. The transfer of the unencumbered Shopko Assets to SMTA will allow us to pursue longer term value creation alternatives for them, including sales, out parcel development and redevelopment opportunities. Proceeds from dispositions of Shopko Assets can then be utilized to fund new acquisitions that will serve as collateral for future issuances under Master Trust 2014.

Our Competitive Strengths

 

    Strong Master Trust 2014 Platform. Master Trust 2014 will be the cornerstone of SMTA. Master Trust 2014 has a long and stable history as one of the first issuers of triple-net ABS notes in the early 2000s and was investment-grade rated as of December 31, 2017. Since its creation, Master Trust 2014 has issued several series of notes as additional properties have been acquired and added as collateral, including our most recent issuance of approximately $674.4 million aggregate principal amount of notes in December 2017. As of December 31, 2017, Master Trust 2014’s diversified portfolio accounted for 73.2% of our Contractual Rent and consisted of 787 owned properties and mortgage loans receivable secured by an additional six properties, with approximately 196 tenants operating in 44 states across 23 industries, including restaurants—quick service, restaurants—casual dining, movie theaters and medical / other office. We believe it would be difficult for a new competitor to replicate such a diversified portfolio on a comparable scale. The diversity of the Master Trust 2014 portfolio reduces the risks associated with adverse events affecting a particular tenant or an economic decline in any particular industry. Additionally, the scale of this portfolio allows us to make acquisitions without introducing additional concentration risks.


 

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    Unencumbered Portfolio to Provide Capital. Master Trust 2014 allows us to issue additional notes as additional properties are acquired and added as collateral, as evidenced by our issuances of several series of notes, including our most recent issuance of approximately $674.4 million aggregate principal amount of notes in December 2017 at a loan-to-value ratio of 75%. We plan to be an active issuer of notes under Master Trust 2014 by aggressively monetizing our Shopko Assets and 14 unencumbered properties and reinvesting the proceeds in properties that will be added to the collateral pool.

 

    Attractive In-Place Long-Term Indebtedness and Liquidity to Support Business. We seek to select funding sources designed to lock in long-term investment spreads and limit interest rate sensitivity. We also seek to balance the use of debt (which includes Master Trust 2014, CMBS and bank borrowings) and equity financing (including possible preferred share issuances). As of December 31, 2017, we had $2.1 billion aggregate principal amount of indebtedness outstanding, with a weighted average maturity of 5.6 years and a weighted average interest rate of 5.0%. Our long-term leases and in-place indebtedness allow us to deliver attractive levered cash-on-cash returns to our shareholders. There are principal amortization payments of $477.8 million due under our debt instruments prior to January 1, 2021, and 86.3% of the principal balance of our indebtedness at December 31, 2017 is fully or partially amortizing, providing for an ongoing reduction in principal prior to maturity.

 

    Long-Term, Triple-Net Leases. Our properties had a 99.1% Occupancy as of December 31, 2017, with a weighted average non-cancelable remaining lease term (based on Contractual Rent) of approximately 10.6 years. Due to the triple-net structure of approximately 94.4% of our leases (based on Contractual Rent) as of December 31, 2017, we do not expect to incur significant capital expenditures. The potential impact of inflation on our operating expenses is also minimal because approximately 96.0% of our leases (based on Contractual Rent) as of December 31, 2017 provided for increases in future contractual base rent.

 

    Experienced Manager with In-House Capabilities Across Asset Management, Investment, Credit and Research Functions. The senior management of our Manager has significant experience in the real estate industry and in managing public companies, including asset management, investment, credit, research, finance, IT and accounting functions. Our Manager’s President and Chief Executive Officer and our trustee, Jackson Hsieh, has been active in the real estate industry for over 25 years, holding numerous leadership positions in real estate investment banking and public real estate companies. Our Manager’s Head of Asset Management, Ken Heimlich, has over 25 years of industry experience.

 

    Operational Continuity. Our Manager has intimate knowledge of our portfolio from providing asset management, property management, investment, credit and research functions for these assets historically, as well as becoming the direct servicer of Master Trust 2014 collateral in the second quarter of 2017. We will benefit from this knowledge base as we transition into a separate public entity. Our Manager has established internal processes for accounting, finance and IT to allow for the effective management of our assets.

We intend to have our Manager continue to use the Spirit Heat Map and the proprietary Spirit Property Ranking Model to identify asset recycling opportunities and enhance our acquisition and disposition decisions. Further, we will utilize our Manager’s knowledge of our portfolio and our Manager’s network and infrastructure to manage our properties, source deals, underwrite credit and assist with back office support, including accounting and information technology.

 

   

Investment Strategy and Portfolio Rankings. Our Manager’s underwriting and risk management expertise enhances our ability to identify and structure investments that we believe provide superior risk-adjusted returns due to specific investment risks that can be identified and mitigated through intensive credit underwriting and real estate analysis, tailored lease structures (such as master leases) and ongoing tenant monitoring. Spirit has instituted a proprietary Spirit Property Ranking Model that our Manager will also apply to our portfolio. The Spirit Property Ranking Model is used annually to



 

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rank all properties in our and Spirit’s portfolio, across twelve factors and weightings consisting of both real estate quality scores and credit underwriting criteria, in order to benchmark property quality, identify asset recycling opportunities and to enhance acquisition and disposition decisions. Spirit also updates the Spirit Heat Map that will be used for us and Spirit, which analyzes tenant industries across Porter’s Five Forces and potential causes of technological disruption to identify tenant industries that Spirit believes to have good fundamentals for future performance. Porter’s Five Forces – threats of new entrants, threats of substitutes, the bargaining power of customers, the bargaining power of suppliers and industry rivalry – is an analytical framework used to examine the attractiveness of an industry and potential for disruption in that industry. We believe that our Manager’s approach to underwriting and risk management provides us with a unique competitive advantage that translates into the potential for attractive levered cash-on-cash returns to our shareholders.

SPIRIT PROPERTY RANKING MODEL1

 

LOGO

 

  (1)  Represents properties as of December 31, 2017 of Spirit and the Predecessor Entities that will be contributed to SMTA.


 

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SPIRIT HEAT MAP—PORTFOLIO / INVESTMENT METHODOLOGY

 

LOGO

 

    Highly Incentivized Management Structure. We have structured the Asset Management Agreement to incentivize our Manager to drive our growth and total shareholder return. Under the Asset Management Agreement, in addition to an annual $20.0 million flat fee, our Manager will be entitled to receive a promote payment based on meeting certain shareholder return thresholds. The promote payment, due upon the earliest of (i) a termination of the Asset Management Agreement by us without cause, (ii) a termination of the Asset Management Agreement by our Manager for cause (including upon a Change in Control), and (iii) the date that is 36 full calendar months after the distribution date, provides our Manager with additional compensation based on the total shareholder return on our common shares during the relevant period. See “Our Manager and Asset Management Agreement” for a more detailed description of the promote payment. In addition, under the Property Management and Servicing Agreement for Master Trust 2014, our Manager will receive property management fees, which accrue daily at 0.25% per annum of the collateral value of Master Trust 2014 collateral pool, less any specially serviced assets and special servicing fees, which accrue daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced. We believe the relatively stable nature of the asset management and property management fees will allow us to increase our asset base without proportional increases in our general and administrative expenses due to economies of scale.


 

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    Attractive Corporate Governance. We will have a governance structure designed to promote the long-term interests of our shareholders. Some of the significant features of our corporate governance structure include:

 

    our Manager is a public company;

 

    our board of trustees is not classified, each of our trustees is subject to re-election annually and we cannot classify our board in the future without the prior approval of our shareholders;

 

    we provide for majority shareholder voting in uncontested trustee elections;

 

    shareholders may alter or repeal any provision of our bylaws or adopt new bylaws with the affirmative vote of a majority of all votes entitled to be cast on the matter by shareholders;

 

    of the five trustees who will serve on our board of trustees immediately after the completion of the spin-off, we expect our board to determine that four of our trustees satisfy the listing standards for independence of the NYSE and Rule 10A-3 under the Exchange Act, with all four of these trustees having no prior affiliations with Spirit;

 

    at least one of our trustees will qualify as an “audit committee financial expert” as defined by the SEC;

 

    we have opted out of the Maryland business combination and control share acquisition statutes, and we cannot opt back in without prior shareholder approval;

 

    we do not have a shareholders rights plan, and we will not adopt a shareholders rights plan in the future without (i) the approval of our shareholders or (ii) seeking ratification from our shareholders within 12 months of adoption of the plan if the board of trustees determines, in the exercise of its duties under applicable law, that it is in our best interest to adopt a rights plan without the delay of seeking prior shareholder approval;

 

    we will not include a “group,” as that term is used for purposes of Rule 13d-5(b) or Section 13(d)(3) of the Exchange Act, in the definition of “person” for purposes of the “ownership limits” set forth in our declaration of trust;

 

    our chief executive officer and chief financial officer will dedicate their services to us; and

 

    our corporate governance policies will establish a comprehensive framework to address conflicts.

Business and Growth Strategies

We will seek to maximize shareholder value through:

 

    Focus on Diversified Assets in Target Industries. Our investment strategy will be to continue to increase our exposure to industries that we determine are attractive based on Spirit’s proprietary Spirit Heat Map and where we believe we are underweight, including health and fitness, distribution centers, auto service, restaurants—quick service and entertainment assets. On the disposition side, we intend to reduce our Shopko concentration, as well as potentially reduce industry concentration based on the Spirit Heat Map and where we believe we are overweight, including restaurants—casual dining and movie theaters.

We monitor and manage the diversification of our real estate investment portfolio in order to reduce the risks associated with adverse developments affecting a particular tenant, property, industry or region. Our strategy emphasizes a portfolio that (i) derives no more than 7%, excluding Shopko, of Contractual Rent from any single tenant or more than 7% of Contractual Rent from any single property, (ii) is leased to tenants operating in various industries and (iii) is geographically diversified. While we consider the foregoing when making investments, we may make opportunistic investments that do not



 

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meet one or more of these criteria if we believe the opportunity is sufficiently attractive. As of December 31, 2017, Shopko contributed 19.7% of our Contractual Rent and represented 15.3% of total assets. As of December 31, 2017, no other tenant contributed more than 7% of our Contractual Rent or represented more than 7% of our total assets, and no one single property contributed more than 7% of our Contractual Rent.

 

    Focus on Small and Middle Market Companies. We will primarily focus on investing in properties that we net lease to small and middle market companies with attractive credit characteristics and stable operating histories, but that may not carry a credit rating from a rating agency. This strategy offers us the opportunity to achieve superior risk-adjusted returns when coupled with our intensive credit and real estate analysis, lease structuring and ongoing portfolio management. Small and middle market companies are often willing to enter into leases with structures and terms we consider attractive (such as master leases, leases with rental escalations and leases that require ongoing tenant financial reporting) and that we believe increase the security of rental payments. We may also selectively acquire properties leased to large companies where we believe that we can achieve superior risk-adjusted returns, subject to our investment guidelines and conflicts of interest policy.

 

    Portfolio Management through Proactive Asset Management. Our focus will be on maximizing the value of our assets through proactive asset management, including: seller financing to expedite sales of Shopko Assets, effective asset recycling, and new master lease terms, including increased landlord rights, financial controls and performance-based provisions. Additionally, our Manager has robust tenant surveillance and other established processes. We plan to selectively make acquisitions that contribute to our portfolio’s tenant, industry and geographic diversification through proactive recycling of assets. Given the volume of transactions in the single-tenant market, we believe there will be ample opportunities fitting our acquisition and disposition criteria.

 

    Selling Down Shopko Exposure to Pursue Selective Growth through Acquisitions. Our Shopko Assets represented 19.7% of Contractual Rent at December 31, 2017, and Shopko is subject to risks that could adversely affect its performance and, thus, its ability to pay us rent. Therefore, we plan to aggressively monetize our Shopko Assets through dispositions, select redevelopments and select outparcel restaurant—quick service and casual dining developments. We intend to proactively engage with Shopko to enhance the value of our assets, and have identified 72 outparcels for potential new development, including 64 in the Midwest and eight in the Pacific Northwest. We will use the proceeds from our dispositions of Shopko Assets to pursue growth opportunities to further strengthen and diversify our portfolio. Our Manager has a long relationship with Shopko and has been effective in reducing its exposure to Shopko over the last several years.

 

    Active Issuer Under Master Trust 2014. We intend to utilize Master Trust 2014 to lever proceeds from dispositions of Shopko Assets to purchase additional assets that we will add to the collateral pool of Master Trust 2014. We will seek to enter into lease structures that we consider attractive, such as master leases, leases with contractual rent escalators and leases that require ongoing tenant financial reporting, which are attractive features that would allow us to further optimize our borrowing capacity under the Master Trust 2014. Master Trust 2014 provides us access to incremental leverage capacity and liquidity to fund our growth and achieve our asset recycling goals. Additionally, we believe that capital recycling will help drive growth, as well as provide our investors attractive cash-on-cash returns and improve portfolio diversification. In December 2017, we completed an issuance of approximately $674.4 million aggregate principal amount of Master Trust 2014 notes and contributed 10 additional real estate properties to the collateral pool with a total appraised value of $282.4 million.


 

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Our Structure and Formation

Spirit MTA REIT was formed as a Maryland real estate investment trust on November 15, 2017 as a wholly-owned subsidiary of Spirit. Prior to or concurrently with the completion of the spin-off, we have engaged or will engage in certain reorganization transactions that are designed to consolidate Master Trust 2014, the Shopko Entities, the Sporting Goods Entities, two additional legal entities and ten additional properties, all currently owned directly or indirectly by Spirit, into our Operating Partnership, provide for external management, facilitate the spin-off, provide us with our initial capital, and enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2018.

The significant elements of the reorganization transactions include:

 

    Spirit MTA OP Holdings, LLC was formed as a wholly-owned subsidiary of SMTA.

 

    Spirit MTA REIT, L.P. was formed as a subsidiary of SMTA and Spirit MTA OP Holdings, LLC.

 

    SMTA TN Property Holdings, LLC, Spirit Realty AM Corporation and SMTA Financing JV, LLC (“Financing JV”) were formed as wholly-owned subsidiaries of Spirit Realty, L.P.

 

    Certain properties were contributed by Spirit Realty, L.P. and Spirit Realty AM Corporation to Financing JV in exchange for ownership interests in Financing JV.

 

    SMTA Shopko Portfolio I, LLC was formed as a wholly-owned subsidiary of Spirit Realty, L.P.

 

    Spirit Master Funding XI, LLC was formed as a wholly-owned subsidiary of SMTA Financing JV, LLC.

 

    Spirit MTA SubREIT, Inc. (“SubREIT”) was formed as a wholly-owned subsidiary of Spirit Realty, L.P.

 

    Spirit Realty, L.P. contributed certain properties to each of SMTA Shopko Portfolio I, LLC and SMTA TN Property Holdings, LLC.

 

    Spirit Realty, L.P. entered into a binding commitment to sell $5 million in SubREIT preferred shares to third parties.

 

    Spirit Realty, L.P. contributed the Shopko Entities, SMTA TN Property Holdings, LLC, certain properties and entities and the $35 million B-1 Term Loan with Shopko to SMTA, which will then contribute these entities and assets to Spirit MTA REIT, L.P.

 

    Spirit Realty, L.P. contributed SMTA Shopko Portfolio I, LLC and the entities holding the assets that serve as collateral under Master Trust 2014 to Financing JV (but will retain the $33.7 million of notes issued under Master Trust 2014 Series 2017-1 required by risk retention rules).

 

    Spirit Realty, L.P. will contribute its interest in Financing JV and its interest in the Sporting Goods Entities to SubREIT in exchange for additional common shares and $5 million in SubREIT preferred shares.

 

    Spirit Realty, L.P. will contribute its common shares of SubREIT to SMTA, which will contribute such common shares to Spirit MTA REIT, L.P., in exchange for $142.2 million of Series A preferred shares.

 

    Spirit Realty AM Corporation will contribute its interest in Financing JV to SMTA, which will contribute such interest to Spirit MTA REIT, L.P., in exchange for $7.8 million of Series A preferred shares.

Subsequent to the completion of the spin-off, we expect that Spirit MTA REIT, L.P. will contribute the Shopko Entities to Financing JV.



 

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Upon completion of the spin-off, we expect to own investments in a portfolio of approximately 903 properties consisting of 897 owned properties and mortgage loans receivable secured by six properties. As of December 31, 2017, 787 of the 897 owned properties were held through Master Trust 2014, with a Real Estate Investment Value of $2.1 billion. Master Trust 2014 had $2.0 billion aggregate principal amount of notes outstanding as of December 31, 2017, including the $674.4 million aggregate principal of notes issued in December 2017. Subsequent to December 31, 2017, $84 million in CMBS debt was raised on one property with a Real Estate Investment Value of $123.3 million. All proceeds from these issuances were distributed to Spirit. The remaining 109 owned properties as of December 31, 2017, with a Real Estate Investment Value of $649.0 million, were unencumbered, predominately consisting of 95 properties leased to Shopko.

The following diagram depicts our ownership structure upon completion of the spin-off and the expected post spin-off contribution of the Shopko Entities:

 

LOGO

Our Manager and Asset Management Agreement

Prior to the completion of the spin-off, we will enter into the Asset Management Agreement with our Manager. Pursuant to the terms of the Asset Management Agreement, our Manager will provide a management team that will be responsible for implementing our business strategy and performing certain services for us, subject to oversight by our board of trustees. We will not have any employees. Our officers and the other individuals who execute our business strategy will be employees of our Manager or its affiliates. Our Manager’s duties, subject to the supervision of our board of trustees, will include: (1) performing all of our day-to-day functions, (2) sourcing, analyzing and executing on investments and dispositions, (3) determining investment criteria, (4) performing liability management duties, including financing and hedging, and (5) performing financial and accounting management. For its services, our Manager will be entitled to an annual management fee and incentive compensation, as well as a termination fee and a promoted interest under certain circumstances, as further described below. Certain terms of the Asset Management Agreement are summarized below and



 

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described in more detail under “Our Manager and Asset Management Agreement” elsewhere in this information statement.

 

Type

  

Description

Management Fee

  

$20.0 million per year, payable in equal monthly installments, in arrears; provided, however, that (i) in the event of a Management Fee PIK Event arising under clause (i) of the definition thereof, the portion of the monthly installment of the management fee that is necessary for us to have sufficient funds to declare and pay dividends in cash required to be paid in cash in order for us to maintain our status as a REIT under the Code and to avoid incurring income or excise taxes will, during the occurrence and continuation of any such Management Fee PIK Event, be payable in a number of Series A preferred shares determined by dividing such portion of the management fee by the liquidation preference of the Series A preferred shares rounded down to the nearest whole share and (ii) in the event of a Management Fee PIK Event arising under clause (ii) of the definition thereof, the entire monthly installment of the management fee will, during the occurrence and continuation of any such Management Fee PIK Event, be payable in a number of Series A preferred shares determined by dividing the management fee by the liquidation preference of the Series A preferred shares rounded down to the nearest whole share.

 

A Management Fee PIK Event means (i) the good faith determination by our board of trustees that forgoing the payment of all or any portion of the monthly installment of the management fee is necessary for us to have sufficient funds to declare and pay dividends in cash required to be paid in cash in order for us to maintain our status as a REIT under the Code and to avoid incurring income or excise taxes, or (ii) the occurrence and continuation of an “Early Amortization Event,” “Event of Default” or “Sweep Period,” in each case, as defined pursuant under the Second Amended and Restated Master Indenture, dated as of May 20, 2014, among Spirit Master Funding, LLC, Spirit Master Funding II, LLC, Spirit Master Funding III, LLC and Citibank, N.A., as amended and supplemented from time to time.

Term

   Our Asset Management Agreement has an initial three-year term and will be automatically renewed for one-year terms thereafter unless terminated either by us or by our Manager.

Termination

  

Termination without cause:

 

•  Termination by the Company. We may terminate the Asset Management Agreement at any time upon 180-day written notice to our Manager informing it of our intention to terminate the Asset Management Agreement. Effective on the termination date of the Asset Management Agreement by us without cause, we and our Manager will enter into a transition services agreement, upon mutually acceptable terms, that will be in effect until the date that is eight months after the date of the termination of the Asset Management Agreement. For its services under the transition



 

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Type

  

Description

  

services agreement, we will pay our Manager the management fee, pro rated for the eight-month term of the transition services agreement.

 

•  Termination by our Manager. Our Manager may terminate our Asset Management Agreement upon 180-day notice prior to the expiration of the original term or any renewal term.

 

Termination for cause:

 

•  Termination by the Company. We may terminate our Asset Management Agreement upon 30-day notice to our Manager if (i) there is a commencement of any proceeding relating to our Manager’s bankruptcy or insolvency, (ii) our Manager dissolves as an entity or (iii) our Manager commits fraud against us, misappropriates or embezzles our funds or acts in a manner constituting bad faith, willful misconduct or gross negligence in the performance of its duties under our Asset Management Agreement (unless such actions or omissions are caused by an employee of our Manager and our Manager takes appropriate action against such person and cures the damage caused by such actions or omissions within 30 days of our Manager’s actual knowledge of their actions or omissions).

 

•  Termination by our Manager. Our Manager may terminate our Asset Management Agreement upon 60-day prior notice in the event that we are in default in the performance or observance of any material term, condition or covenant contained in our Asset Management Agreement and such default continues for a period of 30 days after such notice specifying such default and requesting that the same be remedied within 30 days. Our Manager may also terminate the Asset Management Agreement in its sole discretion effective immediately concurrently with or within 90 days following a Change in Control or a non-cause termination of the Property Management and Servicing Agreement, in each case upon 30-days’ prior notice to us.

Termination Fee

   In the event that our Asset Management Agreement is terminated (a) by us without cause or (b) by our Manager for cause (including upon a Change in Control), we will pay to our Manager, on the effective termination date or as promptly thereafter as practicable, a termination fee equal to 1.75 times the sum of (x) the management fee for the 12 full calendar months preceding the effective termination date, plus (y) all fees due to the Manager or its affiliates under the Property Management and Servicing Agreement for the 12 full calendar months preceding the effective termination date.

Promote

   Upon the earliest of (a) a termination of our Asset Management Agreement by us without cause, (b) a termination of our Asset Management Agreement by our Manager for cause (including upon a Change in Control), and (c) the date that is 36 full calendar months after the distribution date, we are obligated to pay to our Manager, on the date


 

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Type

  

Description

  

of the relevant termination or other event or as promptly thereafter as practicable, a cash promote payment, calculated as follows:

 

(i) to the extent that the Company TSR Percentage exceeds 10% during the Measurement Period, the Promote will equal the product of:

 

(x) the weighted-average number of our common shares outstanding during the Measurement Period (calculated on a fully-diluted basis in accordance with GAAP), multiplied by

 

(y) the product of (A) 10%, multiplied by (B) the difference of (I) the Company TSR Amount not to exceed a Hurdle TSR Amount implied by a Company TSR Percentage during the Measurement Period of 12.5%, less (II) a Hurdle TSR Amount implied by a Company TSR Percentage during the Measurement Period of 10%;

 

(ii) to the extent that the Company TSR Percentage exceeds 12.5% during the Measurement Period, the Promote will equal the sum of:

 

(x) the amount under (i) above, plus

 

(y) the product of:

 

(A) the weighted-average number of Common Shares outstanding during the Measurement Period (calculated on a fully-diluted basis in accordance with GAAP), multiplied by

 

(B) the product of (I) 15%, multiplied by (II) the difference of (1) the Company TSR Amount not to exceed a Hurdle TSR Amount implied by a Company TSR Percentage during the Measurement Period of 15%, less (2) a Hurdle TSR Amount implied by a Company TSR Percentage during the Measurement Period of 12.5%; and

 

(iii) to the extent that the Company TSR Percentage exceeds 15% during the Measurement Period, the Promote will equal the sum of:

 

(x) the amount under (ii) above, plus

 

(y) the product of:

 

(A) the weighted-average number of our common shares outstanding during the Measurement Period (calculated on a fully-diluted basis in accordance with GAAP), multiplied by

 

(B) the product of (I) 20%, multiplied by (II) the difference of (1) the Company TSR Amount, less (2) a Hurdle TSR Amount implied by a Company TSR Percentage during the Measurement Period of 15%.

 

See “Our Manager and Asset Management Agreement” for relevant definitions.



 

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Type

  

Description

Reimbursement of Expenses

  

Our Manager is responsible for certain enumerated expenses incurred in connection with the performance of its duties under the Asset Management Agreement: (i) employment expenses of the personnel employed by our Manager, including the base salary, cash incentive compensation and other employment expenses of our dedicated chief executive officer and dedicated chief financial officer (excluding any equity compensation granted by us); (ii) fees and travel and other expenses of officers and employees of our Manager, except for (A) fees and travel and other expenses of such persons incurred while performing services on our behalf (provided that, if such fees and travel and other expenses are incurred while providing services on behalf of both us and our affiliates and Spirit and its affiliates, our Manager has the authority to reasonably allocate such fees and travel and other expenses between the entities), and (B) fees and travel and other expenses of such persons who are our trustees or officers incurred in their capacities as such; (iii) rent, telephone, utilities, office furniture, equipment and machinery (including computers, to the extent utilized) and other office expenses of our Manager, except to the extent such expenses relate solely to an office maintained by us separate from the office of our Manager; and (iv) miscellaneous administrative expenses relating to the performance by our Manager of its obligations.

 

We are generally responsible for paying all of our expenses, except those specifically required to be borne by our Manager under the Asset Management Agreement and except with regard to costs, expenses and fees to be paid to our Manager in its capacity as property manager and special servicer under the Property Management and Servicing Agreement.



 

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Summary Risk Factors

You should carefully read and consider the risk factors set forth under the “Risk Factors” section of this information statement, as well as all other information contained in this information statement. If any of the following risks occur, our business, financial condition, and results of operations could be materially and adversely affected, and the trading price of our common shares could decline.

 

    Our tenants may fail to successfully operate their businesses, which could adversely affect us.

 

    A substantial number of our properties are leased to one tenant, Shopko, which represented 19.7% of Contractual Rent at December 31, 2017. As such, any default, breach or delay in the payment of rent by Shopko may materially and adversely affect us. Shopko is subject to certain risks that could adversely affect its performance and thus its ability to pay us rent and we continue to be concerned about Shopko’s ongoing ability to meet its obligations to us under its leases.

 

    Our ongoing business strategy involves the selling down of real estate assets leased to Shopko; however, we may be unable to sell such assets at acceptable terms and conditions or to control the timing of such sales, and our sales must be consistent with our qualification and taxation as a REIT.

 

    A substantial portion of our properties are leased to unrated tenants and the tools we use to measure the credit quality of such tenants may not be accurate.

 

    Decrease in demand for traditional retail and restaurant space may materially and adversely affect us.

 

    We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth, or our future acquisitions may not yield the returns we expect.

 

    We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties, and competition for acquisitions may reduce the number of acquisitions we are able to complete and increase the costs of these acquisitions.

 

    Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.

 

    We depend on our Manager to conduct our business and any material adverse change in its financial condition or our relationship with our Manager could have a material adverse effect on our business and ability to achieve our investment objectives.

 

    There are conflicts of interest in our relationship with our Manager.

 

    Certain terms of our Asset Management Agreement with our Manager could make it difficult and costly to terminate our Manager and could delay or prevent a change of control transaction.

 

    We must pay a base management fee to our Manager regardless of our performance.

 

    We have no history operating as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 

    We may be unable to achieve some or all of the benefits that we expect to achieve from our spin-off from Spirit.

 

    Certain of our agreements with Spirit may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

 

    The distribution of our common shares will not qualify for tax-free treatment and may be taxable to you as a dividend.


 

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    There is currently no public market for our common shares and a trading market that will provide you with adequate liquidity may not develop for our common shares. In addition, once our common shares begin trading, the market price of our shares may fluctuate widely.

 

    We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

 

    Your percentage ownership in us may be diluted in the future.

 

    Our board of trustees may change our investment and financing policies without shareholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

 

    Conflicts of interest could arise in the future between the interests of our shareholders and the interests of holders of partnership interests in the Operating Partnership, which may impede business decisions that could benefit our shareholders.

 

    Upon completion of the spin-off, we will have approximately $2.1 billion aggregate principal amount of indebtedness outstanding, which may expose us to the risk of default under our debt obligations, limit our ability to obtain additional financing or affect the market price of our common shares or debt securities.

 

    Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all.

 

    Failure to maintain our qualification as a REIT would have significant adverse consequences to us and the value of our common shares.

Our Financing Strategy

We intend to use Master Trust 2014 to periodically raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans receivable. We also may raise capital by issuing registered debt or equity securities or obtaining asset level financing, when we deem prudent. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common shareholders primarily through cash provided by operating activities, proceeds from dispositions of our Shopko Assets and potential future bank borrowings. The form of our indebtedness may vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes, but may do so in order to manage or mitigate our interest rate risks on variable rate debt. For additional information regarding our existing debt, please refer to “Description of Indebtedness.”

Distribution Policy

We anticipate making regular quarterly distributions to holders of our common shares. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay regular U.S. federal corporate income tax to the extent that it annually distributes less than 100% of its REIT taxable income. We generally intend over time to make quarterly distributions in an amount at least equal to our REIT taxable income.

Any distributions we make to our shareholders will be at the discretion of our board of trustees and will depend upon, among other things, our actual and anticipated results of operations and liquidity, which will be affected by various factors, including the income from our portfolio, our operating expenses and any other expenditures. For more information, see “Distribution Policy.”



 

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Our Tax Status

We intend to elect to be taxed as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2018. We believe we will be organized and intend to operate in a manner that will allow us to qualify for taxation as a REIT commencing with such taxable year. To qualify as a REIT, we must meet a number of organizational and operational requirements, including requirements related to the nature of our income and assets and the amount of our distributions, among others. See “Material U.S. Federal Income Tax Consequences.”

Restrictions on Ownership and Transfer of Our Common Shares

Our declaration of trust contains restrictions on the ownership and transfer of our common shares that are intended to assist us in complying with the Code’s requirements and continuing to qualify as a REIT. The relevant sections of our declaration of trust provide that no person or entity may actually or beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% in value of the aggregate of our outstanding shares of all classes and series, or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding common shares or any class or series of our outstanding preferred shares, in each case excluding any of our shares that are not treated as outstanding for federal income tax purposes. Our declaration of trust, however, permits exceptions to be made for shareholders provided that our board of trustees determines such exceptions will not jeopardize our tax status as a REIT. In connection with the spin-off, our board of trustees intends to grant an excepted holder limit to Spirit that will allow Spirit to own up to $150.0 million of perpetual Series A preferred shares, together with any perpetual Series A preferred shares acquired by Spirit as a result of a Management Fee PIK Event pursuant to our Asset Management Agreement.

JOBS Act

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and on any golden parachute payments not previously approved.

We may take advantage of these provisions until we cease to be an emerging growth company. We will, in general, qualify as an emerging growth company until the earliest of (i) the last day of our fiscal year following the fifth anniversary of the date of our spin-off from Spirit; (ii) the last day of our fiscal year in which we have an annual gross revenue of $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (iv) the date on which we are deemed to be a



 

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“large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (2) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) have filed at least one annual report pursuant to the Exchange Act.

As a result of our status as an emerging growth company, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

Our Principal Office

Our principal executive offices are located at 2727 N. Harwood Street, Suite 300, Dallas, Texas 75201. Our telephone number is (972) 476-1900. Our web site is www.spiritmastertrust.com. Information contained in or that can be accessed through our web site is not part of, and is not incorporated into, this information statement. The foregoing information about us is only a general summary and is not intended to be comprehensive. For additional information about us, you should refer to the information under “Where You Can Find More Information” in this information statement.



 

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Questions and Answers about Us and the Spin-Off

 

Why is the spin-off structured as a distribution?

Spirit believes that a distribution of our shares is an efficient way to separate our assets from the rest of Spirit’s portfolio and that the spin-off will create benefits and value for us and Spirit. For more information on the reasons for the spin-off, see “Our Spin-Off from Spirit—Reasons for the Spin-Off.”

 

Why am I receiving this document?

Spirit is delivering this document to you because you are a holder of Spirit common stock. If you are a holder of Spirit common stock as of the close of business on May 18, 2018, you are entitled to receive one common share of SMTA for every ten shares of Spirit common stock that you held at the close of business on such date. The number of shares of Spirit common stock you own will not change as a result of the distribution. This document will help you understand how the spin-off will affect your investment in Spirit and your investment in SMTA following the spin-off.

 

How will the spin-off work?

At the time of the spin-off, SMTA will own, through its subsidiaries, investments in a portfolio of approximately 903 properties. Spirit will distribute 100% of the outstanding common shares of SMTA to Spirit’s stockholders on a pro rata basis. Following the spin-off, we will be a separate public company and intend to list our shares on the NYSE.

 

When will the spin-off occur?

We expect that Spirit will distribute our common shares on May 31, 2018 to holders of record of shares of Spirit common stock as of the close of business on May 18, 2018, subject to certain conditions described under “Our Spin-Off from Spirit—Conditions to the Distribution.” No assurance can be provided as to the timing of the spin-off or that all conditions to the spin-off will be met.

 

What do stockholders of Spirit need to do to participate in the spin-off?

Nothing, but we urge you to read this entire information statement carefully. Holders of shares of Spirit common stock as of the distribution record date will not be required to take any action to receive SMTA common shares on the distribution date. No stockholder approval of the spin-off is required or sought. We are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, or to surrender or exchange your shares of Spirit common stock or take any other action to receive your SMTA common shares on the distribution date. If you own shares of Spirit common stock as of the close of business on the distribution record date, Spirit, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue our common shares to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your SMTA common shares, or your bank or brokerage firm will credit your account for the shares. If you sell shares of Spirit common stock in the “regular-way” market on or prior to the



 

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distribution date, you will be selling your right to receive our common shares in the distribution even if you were the record holder of those shares as of the close of business on May 18, 2018, the distribution record date. Following the distribution, shareholders whose shares are held in book-entry form may request that their common shares held in book-entry form be transferred to a brokerage or other account at any time, without charge.

 

Will I be taxed on the common shares of SMTA that I receive in the distribution?

Yes. The distribution will be in the form of a taxable distribution to Spirit stockholders. In the case of a U.S. holder (as defined in “Our Spin-Off From Spirit—Certain U.S. Federal Income Tax Consequences of the Distribution”), an amount equal to the fair market value of our common shares received by you will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Spirit allocable to the distribution, with the excess treated as a nontaxable return of capital to the extent of your tax basis in your shares of Spirit common stock and any remaining excess treated as capital gain. Spirit or other applicable withholding agents may be required to withhold on all or a portion of the distribution payable to non-U.S. stockholders. For a more detailed discussion, see “Our Spin-Off From Spirit—Certain U.S. Federal Income Tax Consequences of the Distribution” and “Material U.S. Federal Income Tax Consequences.” You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

Can Spirit decide to cancel the spin-off of our common shares even if all the conditions have been met?

Yes. The distribution is subject to the satisfaction or waiver of certain conditions. See “Our Spin-Off from Spirit—Conditions to the Spin-Off.” Even if all conditions to the spin-off are satisfied, Spirit may terminate and abandon the spin-off at any time prior to the effectiveness of the spin-off in its sole discretion.

 

Do we plan to pay dividends?

We anticipate making regular quarterly distributions to our common shareholders. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay regular U.S. federal corporate income tax to the extent that it annually distributes less than 100% of its REIT taxable income. We generally intend over time to make quarterly distributions in an amount at least equal to our REIT taxable income.

 

  Any distributions we make to our shareholders will be at the discretion of our board of trustees and will depend upon, among other things, our actual and anticipated results of operations and liquidity, which will be affected by various factors, including the income from our portfolio, our operating expenses and any other expenditures. For more information, see “Distribution Policy.”

 

Will we have any debt?

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Results of Operations—Liquidity and Capital Resources” and “Description of Indebtedness”.

 

What will the spin-off cost?

Spirit intends to incur pre-tax spin-off costs of approximately $31.0 million to $37.0 million. These costs primarily consist of fees paid to our financial advisers and legal adviser, and also include fees paid to our external auditor and other consultants. Spirit will generally be responsible for all fees and expenses associated with the spin-off. However, pursuant to the Separation and Distribution Agreement, SMTA shall reimburse Spirit for certain limited organizational and NYSE-related fees and expenses incurred prior to the distribution date.

 

How will the spin-off affect my tax basis and holding period in shares of Spirit common stock?

Your tax basis in shares of Spirit common stock held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed to you by Spirit in the distribution exceeds Spirit’s current and accumulated earnings and profits allocable to your shares in the distribution. Your holding period for such Spirit shares will not be affected by the distribution. See “Our Spin-Off from Spirit—Certain U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

What will my tax basis and holding period be for common shares of SMTA that I receive in the distribution?

Your tax basis in our common shares received will equal the fair market value of such shares on the distribution date. Your holding period for such shares will begin the day after the distribution date. See “Our Spin-Off from Spirit—Certain U.S. Federal Income Tax Consequences of the Distribution.” You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

What will be the relationships between Spirit and us following the spin-off?

We have entered into a Separation and Distribution Agreement to effect the spin-off and provide a framework for our relationships with Spirit after the spin-off. This agreement will govern the relationships between us and Spirit subsequent to the completion of the spin-off and provide for the allocation between us and Spirit of Spirit’s assets, liabilities and obligations attributable to periods prior to the spin-off. We cannot assure you that this agreement is on terms as favorable to us as agreements with independent third parties. We will also enter into a Tax Matters Agreement that will govern the respective rights, responsibilities and obligations of Spirit and us after the spin-off with respect to various tax matters, an Insurance Sharing Agreement that, among others, will provide for us to be added as a named insurer under certain of Spirit’s existing insurance policies until expiration and, thereafter, will grant our Manager the authority to obtain joint blanket insurance policies for us and Spirit, and a Registration Rights Agreement that will grant Spirit Realty L.P. the right to require us to file a registration statement with the SEC with respect to our Series A



 

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preferred shares that will be issued to it and one of its affiliates in connection with the spin-off. Additionally, we will also enter into an Asset Management Agreement with our Manager, a subsidiary of Spirit, in connection with the spin-off, and our Manager will also continue to provide services under the Property Management and Servicing Agreement. See “Certain Relationships and Related Transactions.”

 

What does Spirit intend to do with any of our Series A preferred shares it retains?

Spirit will decide what actions to take with respect to any of our Series A preferred shares it retains, including whether to dispose of or continue to retain such shares, based on what it believes to be in the best interest of Spirit.

 

Will I receive physical certificates representing common shares of SMTA following the spin-off?

No. Following the spin-off, neither Spirit nor we will be issuing physical certificates representing our common shares. Instead, Spirit, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue our common shares to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your common shares of SMTA, or your bank or brokerage firm will credit your account for the shares. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning shares represented by physical share certificates.

 

Will I receive a fractional number of SMTA common shares?

No. A fractional number of our common shares will not be issued in the spin-off. If you would be entitled to receive a fractional share in the spin-off, then you will instead receive a cash payment in lieu of the fractional share, which cash payment may be taxable to you. See “Our Spin-Off from Spirit—General—Treatment of Fractional Shares.”

 

What if I want to sell my shares of Spirit common stock or my SMTA common shares?

You should consult with your financial advisors, such as your stockbroker, bank or tax advisor. Neither Spirit nor we make any recommendations on the purchase, retention or sale of shares of Spirit common stock or common shares of SMTA to be distributed.

 

  If you decide to sell any shares of common stock before the spin-off, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your shares of Spirit common stock or our common shares that you will receive in the spin-off, or both.

 

Will I be able to trade common shares of SMTA on a public market?

There is not currently a public market for our common shares. We intend to list our common shares on the NYSE under the symbol “SMTA.” We anticipate that trading in our common shares will begin on a “when-issued” basis on or shortly before the distribution record date and will continue through the distribution date and that a “regular-way” trading in our common shares will begin on the first trading day following the distribution date. If trading begins on a “when-issued” basis, you may purchase or sell our common shares up



 

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to and including through the distribution date, but your transaction will not settle until after the distribution date. We cannot predict the trading prices for our common shares before, on or after the distribution date.

 

Will the number of Spirit shares I own change as a result of the spin-off?

No. The number of shares of Spirit common stock you own will not change as a result of the spin-off.

 

What will happen to the listing of shares of Spirit common stock?

Nothing. Shares of Spirit common stock will continue to be traded on the NYSE under the symbol “SRC.”

 

Will the spin-off affect the market price of my Spirit shares?

Yes. As a result of the spin-off, we expect the trading price of shares of Spirit common stock immediately following the spin-off to be lower than immediately prior to the spin-off because their market price will no longer reflect the value of our assets. Furthermore, until the market has fully analyzed the value of Spirit without our assets, the market price of Spirit common stock may fluctuate significantly. Although Spirit believes that over time following the spin-off, the common stock of the separated companies should have a higher aggregate market value, on a fully distributed basis and assuming the same market conditions, than if Spirit were to remain under its current configuration, there can be no assurance of this, and thus the combined market prices of Spirit common stock and our common shares after the spin-off may be equal to or less than the market price of Spirit common stock before the spin-off.

 

What will happen to the manner in which I receive dividends from Spirit or that I will receive from SMTA?

You should contact American Stock Transfer & Trust Company, LLC, the transfer agent for both Spirit and SMTA, with any questions regarding how you receive dividends.

 

Are there risks to owning our common shares?

Yes. Our business is subject to various risks including risks relating to the spin-off. These risks are described in the “Risk Factors” section of this information statement beginning on page 29. We encourage you to read that section carefully.

 

Where can Spirit stockholders get more information?

Before the spin-off, if you have any questions relating to the spin-off, you should contact:

 

  Spirit Realty Capital

2727 North Harwood Street, Suite 300

Dallas, TX 75201

Toll Free: 866-557-7474

Phone: 972-476-1900

Fax: 800-973-0850

 

  After the spin-off, if you have any questions relating to our common shares, you should contact:

 

  Spirit MTA REIT

2727 North Harwood Street, Suite 300

Dallas, TX 75201

Phone: 972-476-1409



 

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The Spin-Off

 

Distributing company

Spirit Realty Capital, Inc.

 

Distributed company

Spirit MTA REIT

 

  We are a Maryland real estate investment trust and, prior to the spin-off, a wholly-owned subsidiary of Spirit. After the spin-off, we will be a separate, publicly traded company and intend to conduct our business as a REIT for U.S. federal income tax purposes.

 

Distribution ratio

Each holder of shares of Spirit common stock will receive one of our common shares for every ten shares of Spirit common stock held as of the close of business on May 18, 2018. If you would be entitled to a fractional number of our common shares, you will instead receive a cash payment in lieu of the fractional share. See “Our Spin-Off from Spirit—General—Treatment of Fractional Shares.”

 

Distributed securities

Spirit will distribute 100% of our outstanding common shares immediately before the distribution. Based on the approximately 428,500,128 shares of Spirit common stock outstanding as of April 27, 2018, assuming distribution of 100% of our outstanding common shares and applying the distribution ratio (without accounting for cash to be issued in lieu of fractional shares), we expect that approximately 42.9 million of our common shares will be distributed to Spirit stockholders.

 

Record date

The record date is the close of business on May 18, 2018.

 

Distribution date

The distribution date is on or about May 31, 2018.

 

Distribution

On the distribution date, Spirit, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue our common shares to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. You will not be required to make any payment or surrender or exchange your shares of Spirit common stock or take any other action to receive our common shares on the distribution date to which you are entitled. If you sell shares of Spirit common stock in the “regular-way” market on or prior to the distribution date, you will be selling your right to receive our common shares in the distribution, even if you were the record holder on the record date. Registered stockholders will receive additional information from the distribution agent shortly after the distribution date. Following the distribution, stockholders whose shares of Spirit common stock are held in book-entry form may request that their common shares of SMTA be transferred to a brokerage or other account at any time, without charge. Beneficial stockholders that hold shares through brokerage firms will receive additional information from their brokerage firms shortly after the distribution date.


 

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Conditions to the spin-off

The spin-off of our common shares by Spirit is subject to the satisfaction of the following conditions:

 

    the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, and no stop order relating to the registration statement shall be in effect;

 

    SMTA’s common shares will have been authorized for listing on the NYSE, subject to official notice of issuance;

 

    no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing completion of the spin-off or any of the transactions related thereto, including the transfers of assets and liability contemplated by the Separation and Distribution Agreement, shall be in effect; and

 

    the Separation and Distribution Agreement will not have been terminated.

 

  Even if all conditions to the spin-off are satisfied, Spirit may terminate and abandon the spin-off at any time prior to the effectiveness of the spin-off.

 

Stock exchange listing

We intend to list our common shares on the NYSE under the symbol “SMTA.”

 

Distribution agent

American Stock Transfer & Trust Company, LLC.

 

Tax considerations

The distribution will be in the form of a taxable distribution to Spirit stockholders. For a discussion of certain U.S. federal income tax consequences of the distribution, see “Our Spin-Off From Spirit—Certain U.S. Federal Income Tax Consequences of the Distribution” and “Material U.S. Federal Income Tax Consequences.” You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

Relationship between Spirit and SMTA following the spin-off

We will enter into a Separation and Distribution Agreement to effect the spin-off and provide a framework for certain aspects of our relationship with Spirit after the spin-off. This agreement will govern certain aspects of the relationship between us and Spirit subsequent to the completion of the spin-off and provide for the allocation between us and Spirit of Spirit’s assets, liabilities and obligations attributable to periods prior to the spin-off from Spirit. We will also enter into a Tax Matters Agreement that will govern the respective rights, responsibilities and obligations of Spirit and us after the spin-off with respect to various tax matters, an Insurance Sharing Agreement that will provide for us to be added as a named insured under certain of Spirit’s existing insurance policies, and a Registration Rights Agreement that will grant Spirit Realty L.P. the right to require us to



 

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file a registration statement with the SEC with respect to our Series A preferred shares that will be issued to it and one of its affiliates in connection with the spin-off. Additionally, we will also enter into an Asset Management Agreement with a subsidiary of Spirit in connection with the spin-off, and our Manager will continue to provide services under the Property Management and Servicing Agreement. See “Certain Relationships and Related Transactions” and “Our Manager and Asset Management Agreement.”



 

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Summary Selected Pro Forma and Historical Combined Financial and Other Data

You should read the following summary selected pro forma and historical combined financial and other data together with “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and the combined financial statements, and related notes thereto, of the Predecessor Entities included elsewhere in this information statement.

The following tables set forth summary selected unaudited pro forma combined financial and other data of SMTA after giving effect to the spin-off and related transactions. The unaudited pro forma combined balance sheet data gives effect to the spin-off and related transactions as if they had occurred on December 31, 2017. The unaudited pro forma combined statement of operations gives effect to the spin-off and related transactions as if they had occurred on January 1, 2017. The summary selected unaudited pro forma combined financial data set forth below is presented for illustrative purposes only and is not necessarily indicative of the combined operating results or financial position that would have occurred if the spin-off and related transactions had been consummated on the dates and in accordance with the assumptions described in the unaudited pro forma combined financial statements, including the notes thereto, which are included elsewhere in this information statement, nor is it necessarily indicative of our future operating results or financial position.

The following tables also set forth summary selected historical combined financial and other data of SMTA’s Predecessor Entities as of the dates and for the periods presented. We have not presented historical information of SMTA because it has not had any operating activity since its formation on November 15, 2017, other than its initial capitalization. The summary selected historical combined financial data as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 as set forth below was derived from the Predecessor Entities’ audited combined financial statements, including the notes thereto, which are included elsewhere in this information statement. The historical results set forth below are not necessarily indicative of our operating results expected for any future periods. We believe that the assumptions and estimates used in preparation of the underlying historical results are reasonable.



 

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     Pro Forma
Year Ended
December 31,
2017
    Historical
Years Ended December 31,
 
       2017     2016     2015  
    

(Unaudited)

    (In Thousands)        

Operating Data:

      

Revenues:

        

Rentals

   $ 243,368     $ 224,312     $ 234,671     $ 249,036  

Interest income on loans receivable

     4,500       768       2,207       3,685  

Tenant reimbursement income

     2,362       2,274       2,130       2,048  

Other income

     5,711       4,448       6,295       6,394  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     255,941       231,802       245,303       261,163  

Expenses:

        

General and administrative

     7,963       23,857       18,956       20,790  

Related party fees

     26,960       5,500       5,427       5,506  

Restructuring charges

     —         —         2,465       3,036  

Transaction costs

     —         4,354       —         —    

Property costs (including reimbursable)

     8,416       9,130       5,258       5,043  

Interest

     111,784       76,733       77,895       83,719  

Depreciation and amortization

     86,493       80,386       85,761       93,692  

Impairments

     25,896       33,548       26,565       19,935  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     267,512       233,508       222,327       231,721  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before other expense and income tax (expense) benefit

     (11,571     (1,706     22,976       29,442  

Other expense:

        

Loss on debt extinguishment

     (2,223     (2,223     (1,372     (787
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (2,223     (2,223     (1,372     (787
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax (expense) benefit

     (13,794     (3,929     21,604       28,655  

Income tax (expense) benefit

     (348     (179     (181     33  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (14,142     (4,108     21,423       28,688  
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Income from discontinued operations

     —       —       —       98  

Gain on disposition of assets

     —       —       —       590  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —       —       —       688  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before gain on disposition of assets

     (14,142     (4,108     21,423       29,376  

Gain on disposition of assets

     —         22,393       26,499       84,111  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (14,142   $ 18,285     $ 47,922     $ 113,487  
  

 

 

   

 

 

   

 

 

   

 

 

 


 

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     Pro Forma
Year Ended
December 31,
2017
    Historical
Years Ended December 31,
       
       2017     2016        
     (Unaudited)     (In Thousands)        

Balance Sheet Data (end of period):

        

Gross investments, including related lease intangibles

   $ 2,934,858     $ 2,870,592     $ 2,817,732    

Net investments

     2,282,997       2,212,488       2,226,235    

Cash and cash equivalents

     3,016       6       1,268    

Total assets

     2,444,836       2,357,660       2,325,538    

Mortgages and notes payable, net

     2,018,057       1,926,835       1,339,614    

Total liabilities

     2,060,310       1,966,742       1,380,681    

Total parent company equity

     384,526       390,918       944,857    

Other Data:

        

FFO (1)

   $ 82,347     $ 109,826     $ 133,749    

AFFO (1)

   $ 89,908     $ 126,765     $ 143,560    

Adjusted Debt (2)

   $ 1,983,496     $ 1,914,656     $ 1,354,467    

Adjusted Debt + Preferred (2)

   $ 2,138,496     $ 1,914,656     $ 1,354,467    

Adjusted EBITDA (1)

   $ 212,602     $ 193,315     $ 217,079    

Leverage (Adjusted Debt / Adjusted EBITDA) (1)(2)

     9.3x       9.9x       6.2x    

Leverage (Adjusted Debt + Preferred / Adjusted EBITDA) (1)(2)

     10.1x       9.9x       6.2x    

FCCR (Adjusted EBITDA / Fixed Charges) (1)

     1.8x       2.7x       3.0x    

Number of properties in investment portfolio

     903       918       982    

Occupancy at period end

     99     99     98  

 

(1)  Please see “Non-GAAP Financial Measures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for our reconciliation to Net Income and definition.
(2)  Please see “Non-GAAP Financial Measures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for our reconciliation to total mortgages and notes payable and definition.


 

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RISK FACTORS

Owning our common shares involves a high degree of risk. You should consider carefully the following risk factors and all other information contained in this information statement. If any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the market price of our common shares could decline significantly, and you could lose all or a part of the value of your ownership in our common shares. Some statements in this information statement, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this information statement entitled “Forward-Looking Statements.”

Risks Related to Our Business

Risks related to commercial real estate ownership could reduce the value of our properties.

Our core business is the ownership of real estate that is leased to retail and service companies on a triple-net basis. Accordingly, our performance is subject to risks inherent to the ownership of commercial real estate, including:

 

    inability to collect rent from tenants due to financial hardship, including bankruptcy;

 

    changes in local real estate markets resulting in the lack of availability or demand for single-tenant retail space;

 

    changes in consumer trends and preferences that reduce the demand for products/services of our tenants;

 

    inability to lease or sell properties upon expiration or termination of existing leases;

 

    environmental risks related to the presence of hazardous or toxic substances or materials on our properties;

 

    subjectivity of real estate valuations and changes in such valuations over time;

 

    illiquid nature of real estate compared to most other financial assets;

 

    changes in laws and regulations, including those governing real estate usage and zoning;

 

    changes in interest rates and the availability of financing; and

 

    changes in the general economic and business climate.

The occurrence of any of the risks described above may cause the value of our real estate to decline, which could materially and adversely affect us.

Credit and capital market conditions may adversely affect our access to and/or the cost of capital.

Periods of volatility in the credit and capital markets negatively affect the amounts, sources and cost of capital available to us. Though we plan to primarily use proceeds from dispositions of the real estate leased to Shopko to fund acquisitions and to refinance indebtedness as it matures, we will also use external debt or equity financing, in particular our Master Trust 2014, for such purposes. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our acquisition activity and/or to take other actions to fund our business activities and repayment of debt, such as selling assets. To the extent that we access capital at a higher cost (reflected in higher interest rates for debt financing or lower share price for equity financing), our acquisition yields, earnings per share and cash flow could be adversely affected.

Our tenants may fail to successfully operate their businesses, which could adversely affect us.

The success of our investments is materially dependent on the financial stability of our tenants’ financial condition and leasing practices. Adverse economic conditions such as high unemployment levels, interest rates,

 

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tax rates and fuel and energy costs may have an impact on the results of operations and financial condition of our tenants and result in a decline in rent or an increased incidence of default under existing leases. Such adverse economic conditions may also reduce overall demand for rental space, which could adversely affect our ability to maintain our current tenants and attract new tenants.

At any given time, our tenants may experience a downturn in their business that may weaken the operating results and financial condition of individual properties or of their business as whole. As a result, a tenant may delay lease commencement, decline to extend a lease upon its expiration, fail to make rental payments when due, become insolvent or declare bankruptcy. We depend on our tenants to operate the properties we own in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage and pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status. The ability of our tenants to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their operations. Cash flow generated by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us. Although our occupied properties are generally operationally essential to our tenants, meaning the property is essential to the tenant’s generation of sales and profits, this does not guarantee that a tenant’s operations at a particular property will be successful or that the tenant will be able to meet all of its obligations to us. Our tenants’ failure to successfully operate their businesses could materially and adversely affect us.

Single-tenant leases involve particular and significant risks related to tenant default.

Our strategy focuses primarily on investing in single-tenant triple-net leased properties throughout the U.S. The financial failure of, or default in payment by, a single tenant under its lease is likely to cause a significant reduction in, or elimination of, our rental revenue from that property and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. This risk is magnified in situations where we lease multiple properties to a single tenant under a master lease, such as our three master leases with Shopko. The failure or default of a tenant under a master lease could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master lease structure may be beneficial to us because it restricts the ability of tenants to individually remove underperforming properties from the portfolio of properties leased from us, there is no guarantee that a tenant will not default in its obligations to us or decline to renew its master lease upon expiration. The default of a tenant that leases multiple properties from us could materially and adversely affect us.

A substantial number of our properties are leased to one tenant, Shopko, which may result in increased risk due to tenant and industry concentration.

As of December 31, 2017, we leased 99 properties to Shopko, primarily pursuant to three master leases (relating to 59, 34 and 4 properties, respectively) and two single site leases, under which we received approximately $3.9 million in contractual rent per month. The Shopko leases are guaranteed by Specialty Retail Shops Holding Corp., the parent company of Shopko. Additionally, in January 2018, Spirit Realty, L.P., our Manager, extended a senior secured term loan to Shopko in the amount of $35.0 million, and this loan was contributed by our Manager to us. The term loan matures in June 2020, bears interest at a rate of 12% per annum and requires repayment in consecutive quarterly installments of $583,625 commencing in November 2018. Revenues generated from Shopko represented 19.7% of our Contractual Rent for the month ended December 31, 2017. Furthermore, a significant portion of our estimated cash available for distribution for the year ending December 31, 2018 is derived from rental revenues received from Shopko and reflected in our unaudited pro forma combined statement of operations for the year ended December 31, 2017. Shopko accounted for approximately $47.7 million, or 18.6%, of our revenues and $1.1 million, or 13.0%, of our property costs (including reimbursables) on a pro forma basis for the year ended December 31, 2017. Because a significant portion of our revenues are derived from rental revenues received from Shopko, any default, breach or delay in the payment of rent by Shopko may materially and adversely affect us and could limit or eliminate our ability to make distributions to our common shareholders.

 

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As a result of the significant number of properties leased to Shopko, our results of operations and financial condition are significantly impacted by Shopko’s performance under its leases. Shopko operates as a multi-department general merchandise retailer and retail health services provider primarily in mid-size and large communities in the Midwest, Pacific Northwest, North Central and Western Mountain states. Shopko is subject to the following risks, as well as other risks that we are not currently aware of, that could adversely affect its performance and thus its ability to pay rent to us:

 

    The retail industry in which Shopko operates is highly competitive, which could impair its operations and liquidity, limit its growth opportunities and reduce profitability. Shopko competes with other discount retail merchants as well as mass merchants, catalog merchants, internet retailers and other general merchandise, apparel and household merchandise retailers. It faces strong competition from large national discount retailers, such as Walmart, Kmart and Target, and mid-tier merchants such as Kohl’s and J.C. Penney.

 

    Shopko stores are geographically concentrated in the Midwest, Pacific Northwest, North Central and Western Mountain states. As a result, adverse economic conditions in these regions may materially and adversely affect its results of operations and retail sales.

 

    The seasonality in retail operations may cause fluctuations in Shopko’s quarterly performance and results of operations and could adversely affect its cash flows.

 

    Shopko stores are dependent on the efficient functioning of its distribution networks. Problems that cause delays or interruptions in the distribution networks could materially and adversely affect its results of operations.

 

    Shopko stores depend on attracting and retaining quality employees. Many employees are entry-level or part-time with historically high rates of turnover.

Based on our monitoring of Shopko’s financial information and recent liquidity events and other challenges, including bankruptcies, impacting the retail industry generally relative to recent years, we continue to be concerned about Shopko’s ongoing ability to meet its obligations to us under its leases. As of December 31, 2017, our pro forma Adjusted Debt to Adjusted EBITDA ratio was 9.3x, our pro forma Adjusted Debt + Preferred to Adjusted EBITDA ratio was 10.1x and our pro forma Fixed Charge Coverage Ratio was 1.8x. Our pro forma Fixed Charge Coverage Ratio does not reflect the impact of our amortizing debt principal payments. Were Shopko to completely default on its lease payments, our pro forma Adjusted Debt to Adjusted EBITDA ratio as of December 31, 2017 would have been 12.0x, our pro forma Adjusted Debt + Preferred to Adjusted EBITDA ratio would have been 13.0x and our pro forma Fixed Charge Coverage Ratio would have been 1.4x. Although Shopko is current on all of its obligations to us under its lease arrangements with us as of March 5, 2018, we can give you no assurance that this will continue to be the case, particularly if Shopko (not just the stores subject to leases with us) experiences a further decline in its business, financial condition and results of operations or loses access to liquidity. If such events were to occur, Shopko may request discounts or deferrals on the rents it pays to us, seek to terminate its master leases with us or close certain of its stores or file for bankruptcy, all of which could significantly decrease the amount of revenue we receive from it and could reduce cash flow available for distribution on our common shares and Series A preferred shares and could affect our ability to pay the management fee due under the Asset Management Agreement.

While we seek to reduce the tenant concentration of Shopko, we may have difficulty in selling or leasing to other tenants the properties currently leased to Shopko. Our ongoing business strategy involves the selling down of real estate leased to Shopko. As we look to sell these assets, general economic conditions, market conditions, the illiquidity of real estate investments and asset-specific issues may negatively affect the value of such assets and may reduce our return on the investment or prevent us from selling such assets on acceptable terms and conditions, or at all.

Furthermore, we can provide no assurance that we will deploy the proceeds from the disposition of any Shopko properties in a manner that would produce comparable or better yields.

 

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A substantial portion of our properties are leased to unrated tenants and the tools we use to measure the credit quality of such tenants may not be accurate.

A substantial portion of our properties are leased to unrated tenants whom we determine, through our internal underwriting and credit analysis, to be creditworthy. Many of our tenants are required to provide financial information, which includes balance sheet, income statement and cash flow statement data, on a quarterly and/or annual basis, and approximately 97.3% of our lease investment portfolio requires the tenant to provide property-level performance information, which includes income statement data on a quarterly and/or annual basis. To assist in our determination of a tenant’s credit quality, we license a product from Moody’s Analytics that provides an EDF and a “shadow rating,” and we evaluate a lease’s property-level rent coverage ratio. An EDF is only an estimate of default probability based, in part, on assumptions incorporated into the product. A shadow rating does not constitute a published credit rating and lacks the extensive company participation that is typically involved when a rating agency publishes a rating; accordingly, a shadow rating may not be as indicative of creditworthiness as a rating published by Moody’s, S&P, or another nationally recognized statistical rating organization. Our calculations of EDFs, shadow ratings and rent coverage ratios are based on financial information provided to us by our tenants and prospective tenants without independent verification on our part, and we must assume the appropriateness of estimates and judgments that were made by the party preparing the financial information. If our measurement of credit quality proves to be inaccurate, we may be subject to defaults, and investors may view our cash flows as less stable.

Decrease in demand for traditional retail and restaurant space may materially and adversely affect us.

As of December 31, 2017, leases representing approximately 39.4% and 20.5% of our Contractual Rent were with tenants in the traditional retail and restaurant industries, respectively, and we may acquire additional traditional retail and restaurant properties in the future. Accordingly, decreases in the demand for traditional retail and/or restaurant spaces adversely impact us. The market for retail and restaurant space has previously been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retail and restaurant companies, the ongoing consolidation in the retail and restaurant industries, the excess amount of retail and restaurant space in a number of markets and, in the case of the retail industry, increasing consumer purchases through catalogs or over the Internet. In recent years a number of companies in the retail industry, including some of our tenants, have declared bankruptcy, have gone out of business or have significantly reduced the number of their retail stores. In particular, we have experienced, and expect to continue to experience, challenges with some of our general merchandise retailers through increased credit losses.

To the extent that the adverse conditions listed above continue, they are likely to negatively affect market rents for retail and restaurant space, thereby reducing rents payable to us, and they may lead to increased vacancy rates at our properties and diminish our ability to attract and retain retail and restaurant tenants.

High geographic concentration of our properties could magnify the effects of adverse economic or regulatory developments in such geographic areas on our operations and financial condition.

As of December 31, 2017, 12.0% of our portfolio (as a percentage of Contractual Rent) was located in Texas, representing the highest concentration of our assets. Geographic concentration exposes us to greater economic or regulatory risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the economic or regulatory environments of the geographic areas in which we concentrate (or in which we may develop a substantial concentration of assets in the future), such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes or costs of complying with governmental regulations.

 

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We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.

Our results of operations depend on our ability to strategically lease space in our properties (by renewing or re-leasing expiring leases and leasing vacant space), optimize our tenant mix or lease properties on more economically favorable terms. As of December 31, 2017, leases representing approximately 1.6% of our Contractual Revenue will expire during 2018. As of December 31, 2017, 8 of our properties, representing approximately 0.9% of our total number of owned properties, were Vacant. Current tenants may decline, or may not have the financial resources available, to renew current leases and we cannot guarantee that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew the leases as they expire, we will have to find new tenants to lease our properties and there is no guarantee that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights, below-market renewal options or other lease incentive payments will not be offered to attract new tenants. We may experience significant costs in connection with renewing, leasing or re-leasing a significant number of our properties, which could materially and adversely affect us.

Our ability to realize future rent increases will vary depending on changes in the CPI.

Most of our leases contain rent escalators, or provisions that periodically increase the base rent payable by the tenant under the lease. Although some of our rent escalators increase rent at a fixed amount on fixed dates, as of December 31, 2017, 60.9% of our rent escalators increase rent by the lesser of (a) a multiple of any increase in the CPI over a specified period, (b) a fixed percentage or (c) a fixed schedule. If the product of any increase in the CPI multiplied by the applicable factor is less than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on a fixed percentage. Therefore, during periods of low inflation or deflation, small increases or decreases in the CPI will subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on fixed percentages or amounts. Conversely, if the product of any increase in the CPI multiplied by the applicable factor is more than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on an increase in CPI. Therefore, periods of high inflation will subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on CPI increases.

The bankruptcy or insolvency of any of our tenants could result in the termination of such tenant’s lease and material losses to us.

The occurrence of a tenant bankruptcy or insolvency could diminish the income we receive from that tenant’s lease or leases. In particular, the traditional retail industry is facing reductions in sales revenues and increased bankruptcies throughout the United States, and revenues generated from traditional retail tenants represented 39.4% of our Contractual Rent for the month ended December 31, 2017. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. In addition, any claim we have for unpaid past rent, if any, may not be paid in full. We may also be unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms.

Moreover, tenants who are considering filing for bankruptcy protection may request that we agree to amendments of their master leases to remove certain of the properties they lease from us under such master leases. We cannot guarantee that we will be able to sell or re-lease such properties or that lease termination fees,

 

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if any, received in exchange for such releases will be sufficient to make up for the rental revenues lost as a result of such lease amendments. As a result, tenant bankruptcies may materially and adversely affect us.

Property vacancies could result in significant capital expenditures and illiquidity.

The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new tenant. Many of the leases we enter into or acquire are for properties that are specially suited to the particular business of our tenants. Because these properties have been designed or physically modified for a particular tenant, if the current lease is terminated or not renewed, we may be required to renovate the property at substantial costs, decrease the rent we charge or provide other concessions in order to lease the property to another tenant. In the event we are required to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed or modified. This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions, including tenant demand. These limitations may materially and adversely affect us.

We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth, or our future acquisitions may not yield the returns we expect.

Our ability to expand through acquisitions requires us to identify and complete acquisitions or investment opportunities that are compatible with our growth strategy and to successfully integrate newly acquired properties into our portfolio. We continually evaluate investment opportunities and may acquire properties when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them may be constrained by the following significant risks:

 

    we face competition from other real estate investors with significant capital, including REITs and institutional investment funds, which may be able to accept more risk than we can prudently manage, including risks associated with paying higher acquisition prices;

 

    we face competition from other potential acquirers which may significantly increase the purchase price for a property we acquire, which could reduce our growth prospects;

 

    we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete;

 

    we may acquire properties that are not accretive to our results upon acquisition, and we may be unsuccessful in managing and leasing such properties in accordance with our expectations;

 

    our cash flow from an acquired property may be insufficient to meet our required principal and interest payments with respect to debt used to finance the acquisition of such property;

 

    we may discover unexpected items, such as unknown liabilities, during our due diligence investigation of a potential acquisition or other customary closing conditions may not be satisfied, causing us to abandon an acquisition opportunity after incurring expenses related thereto;

 

    we may fail to obtain financing for an acquisition on favorable terms or at all;

 

    we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

 

    market conditions may result in higher than expected vacancy rates and lower than expected rental rates; or

 

    we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties, liabilities incurred in the ordinary course of business and claims for indemnification by general partners, trustees, officers and others indemnified by the former owners of the properties.

 

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If any of these risks are realized, we may be materially and adversely affected.

Operational risks may disrupt our businesses, result in losses or limit our growth.

We are completely dependent on our Manager’s financial, accounting, communications and other data processing systems. Such systems may fail to operate properly or become disabled as a result of tampering or a breach of the network security systems or otherwise. In addition, such systems are from time to time subject to cyberattacks. Breaches of our Manager’s network security systems could involve attacks that are intended to obtain unauthorized access to our proprietary information or personal identifying information of our shareholders, destroy data or disable, degrade or sabotage our systems, often through the introduction of computer viruses, cyberattacks and other means, and could originate from a wide variety of sources, including unknown third parties. Although our Manager takes various measures to ensure the integrity of such systems, there can be no assurance that these measures will provide adequate protection. If such systems are compromised, do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage.

Finally, our Manager relies on third-party service providers for certain aspects of our business, including for certain information systems, technology and administration. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of our operations and could affect our reputation and hence adversely affect our business.

Illiquidity of real estate investments could significantly impede our ability to pursue our ongoing business strategy to sell certain of our assets or respond to adverse changes in the performance of our properties and harm our financial condition.

The real estate investments made, and expected to be made, by us are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our portfolio pursuant to our ongoing business strategy or in response to changing economic, financial or investment conditions is limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objective by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of the jurisdiction in which a property is located.

In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may materially and adversely affect us.

We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties, and competition for acquisitions may reduce the number of acquisitions we are able to complete and increase the costs of these acquisitions.

We compete with numerous developers, owners and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease

 

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incentive payments in order to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties, which could materially and adversely affect us.

We also face competition for acquisitions of real property from investors, including traded and non-traded public REITs, private equity investors and institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties. This competition will increase if investments in real estate become more attractive relative to other types of investment. Accordingly, competition for the acquisition of real property could materially and adversely affect us.

The loss of a borrower or the failure of a borrower to make loan payments on a timely basis will reduce our revenues, which could lead to losses on our investments and reduced returns to our shareholders.

We have and may originate or acquire long-term, commercial mortgage and other loans. The success of our loan investments will be materially dependent on the financial stability of our borrowers. The success of our borrowers will be dependent on each of their individual businesses and their industries, which could be affected by economic conditions in general, changes in consumer trends and preferences and other factors over which neither they nor we have control. A default of a borrower on its loan payments to us that would prevent us from earning interest or receiving a return of the principal of our loan could materially and adversely affect us. In the event of a default, we may also experience delays in enforcing our rights as lender and may incur substantial costs in collecting the amounts owed to us and in liquidating any collateral.

Foreclosure and other similar proceedings used to enforce payment of real estate loans are generally subject to principles of equity, which are designed to relieve the indebted party from the legal effect of that party’s default. Foreclosure and other similar laws may limit our right to obtain a deficiency judgment against the defaulting party after a foreclosure or sale. The application of any of these principles may lead to a loss or delay in the payment on loans we hold, which in turn could reduce the amounts we have available to make distributions. Further, in the event we have to foreclose on a property, the amount we receive from the foreclosure sale of the property may be inadequate to fully pay the amounts owed to us by the borrower and our costs incurred to foreclose, repossess and sell the property which could materially and adversely affect us.

Inflation may materially and adversely affect us and our tenants.

Increased inflation could have a negative impact on variable-rate debt we currently have or that we may incur in the future. Our leases typically contain provisions designed to mitigate the adverse impact of inflation on our results of operations. Because tenants are typically required to pay all property operating expenses, increases in property-level expenses at our leased properties generally do not affect us. However, increased operating expenses at vacant properties and the limited number of properties that are not subject to full triple-net leases could cause us to incur additional operating expenses, which could increase our exposure to inflation. Additionally, the increases in rent provided by many of our leases may not keep up with the rate of inflation. Increased costs may also have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us.

If we fail to implement and maintain effective internal controls over financial reporting, we may not be able to accurately and timely report our financial results.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. After the spin-off, we will be subject to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules of the SEC, which generally require our

 

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management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Beginning with the second annual report that we will be required to file with the SEC, Section 404 requires an annual management assessment of the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting.

We do not have any employees, and we are completely dependent on our Manager’s financial reporting systems. We cannot assure you that our Manager will be successful in implementing or maintaining adequate internal control over financial reporting. Furthermore, as we grow our business, our internal controls needs will become more complex, and we may require significantly more resources to ensure our internal controls remain effective. In addition, the existence of a material weakness or significant deficiency in our Manager’s internal controls over financial reporting, or any failure to maintain effective controls or timely effect any necessary improvement of internal controls over financial reporting could harm our operating results or cause us to fail to meet our reporting obligations, which could affect the listing of our common shares on the NYSE. Ineffective internal controls over financial reporting and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the per share trading price of our common shares.

Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.

In order to maintain our qualification as a REIT, we are required under the Code to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to regular U.S. federal corporate income tax to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we may rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:

 

    general market conditions;

 

    the market’s perception of our growth potential;

 

    our current debt levels;

 

    our current and expected future earnings;

 

    our cash flow and cash distributions; and

 

    the market price per share of our common shares.

If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our shareholders necessary to maintain our qualification as a REIT.

Historically, we have raised a significant amount of debt capital through our Master Trust 2014. We have generally used the proceeds from this program to repay debt and fund real estate acquisitions. As of December 31, 2017, we had issued notes under our Master Trust 2014 in seven different series over five separate

 

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issuances with $2.0 billion aggregate principal amount outstanding. The Master Trust 2014 notes have a weighted average maturity of 5.4 years as of December 31, 2017. Our obligations under this program are generally secured by liens on certain of our properties. Subject to certain conditions, we may substitute real estate collateral within our securitization trust from time to time. Moreover, we view our ability to substitute collateral under our Master Trust 2014 favorably, and no assurance can be given that financing facilities offering similar flexibility will be available to us in the future.

Dispositions of real estate assets could change the holding period assumption in our valuation analyses, which could result in material impairment losses and adversely affect our financial results.

We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If we change our intended holding period due to our intention to sell or otherwise dispose of an asset, we must reevaluate whether that asset is impaired under GAAP. Depending on the carrying value of the property at the time we change our intention and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our financial results. This loss could be material to our assets in the period that it is recognized.

We may become subject to litigation, which could materially and adversely affect us.

In the ordinary course of business, we may become subject to litigation, including claims relating to our operations, security offerings and otherwise. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves. However, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract trustees and officers.

Costs of compliance with, or liabilities related to, environmental laws may materially and adversely affect us.

The properties we own or have owned in the past may subject us to known and unknown environmental liabilities. Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate, clean up such contamination and liability for harm to natural resources. We may face liability regardless of:

 

    our knowledge of the contamination;

 

    the timing of the contamination;

 

    the cause of the contamination; or

 

    the party responsible for the contamination of the property.

There may be environmental liabilities associated with our properties of which we are unaware. We obtain Phase I environmental site assessments on all properties we finance or acquire. The Phase I environmental site assessments are limited in scope and therefore may not reveal all environmental conditions affecting a property. Therefore, there could be undiscovered environmental liabilities on the properties we own. Some of our properties use, or may have used in the past, underground tanks for the storage of petroleum-based products or

 

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waste products that could create a potential for release of hazardous substances or penalties if tanks do not comply with legal standards. If environmental contamination exists on our properties, we could be subject to strict, joint and/or several liability for the contamination by virtue of our ownership interest. Some of our properties may contain ACM. Strict environmental laws govern the presence, maintenance and removal of ACM and such laws may impose fines and penalties for failure to comply with these requirements or expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos). Strict environmental laws also apply to other activities that can occur on a property, such as air emissions and water discharges, and such laws may impose fines and penalties for violations.

The presence of hazardous substances on a property may adversely affect our ability to sell, lease or improve the property or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or businesses may be operated, and these restrictions may require substantial expenditures.

In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could be subject to strict liability by virtue of our ownership interest. We cannot be sure that our tenants will, or will be able to, satisfy their indemnification obligations, if any, under our leases. Furthermore, the discovery of environmental liabilities on any of our properties could lead to significant remediation costs or to other liabilities or obligations attributable to the tenant of that property, which may affect such tenant’s ability to make payments to us, including rental payments and, where applicable, indemnification payments.

Our environmental liabilities may include property damage, personal injury, investigation and clean-up costs. These costs could be substantial. Although we may obtain insurance for environmental liability for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies. If we were to become subject to significant environmental liabilities, we could be materially and adversely affected.

Most of the environmental risks discussed above refer to properties that we own or may acquire in the future. However, each of the risks identified also applies to the owners (and potentially, the lessees) of the properties that secure each of the loans we have made and any loans we may acquire or make in the future. Therefore, the existence of environmental conditions could diminish the value of each of the loans and the abilities of the borrowers to repay the loans and could materially and adversely affect us.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, should our tenants or their employees or customers be exposed to mold at any of our properties we could be required to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, exposure to mold by our tenants or others could subject us to liability if property damage or health concerns arise. If we were to become subject to significant mold-related liabilities, we could be materially and adversely affected.

 

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Insurance on our properties may not adequately cover all losses, which could materially and adversely affect us.

Our tenants are required to maintain liability and property insurance coverage for the properties they lease from us pursuant to triple-net leases. Pursuant to such leases, our tenants are generally required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged.

Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Furthermore, in the event we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.

Compliance with the ADA and fire, safety and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.

Our properties are subject to the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases and financing agreements to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, our tenants’ ability to cover the costs could be adversely affected. We may be required to expend our own funds to comply with the provisions of the ADA, which could materially and adversely affect us.

In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us and could materially and adversely affect us.

 

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As a result of acquiring C corporations in carry-over basis transactions, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits.

From time to time, we may acquire C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.

If we acquire any asset from a corporation that is or has been a C corporation in a carry-over basis transaction, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we will be required to pay regular U.S. federal corporate income tax on this gain to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our shareholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a carry-over basis transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any non-REIT earnings and profits by the close of the taxable year in which such transaction occurs. Any adjustments to the acquired corporation’s income for taxable years ending on or before the date of the transaction, including as a result of an examination of the corporation’s tax returns by the IRS, could affect the calculation of the corporation’s earnings and profits. If the IRS were to determine that we acquired non-REIT earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the carry-over basis transaction occurred, we could avoid disqualification as a REIT by paying a “deficiency dividend.” Under these procedures, we generally would be required to distribute any such non-REIT earnings and profits to our shareholders within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement and may require that we borrow funds to make the distribution even if the then-prevailing market conditions are not favorable for borrowings. In addition, payment of the statutory interest charge could materially and adversely affect us.

Changes in accounting standards may materially and adversely affect us.

From time to time the FASB, and the SEC, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these standards that will govern the preparation of our financial statements. These changes could materially and adversely affect our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could materially and adversely affect our tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate.

The SEC is currently considering whether issuers in the U.S. should be required to prepare financial statements in accordance with IFRS instead of GAAP. IFRS is a comprehensive set of accounting standards promulgated by the IASB which are rapidly gaining worldwide acceptance. The SEC currently has not finalized the timeframe it expects that U.S. issuers would first report under the new standards. If IFRS is adopted, the potential issues associated with lease accounting, along with other potential changes associated with the adoption or convergence with IFRS, may materially and adversely affect us.

Additionally, the FASB is considering various changes to GAAP, some of which may be significant, as part of a joint effort with the IASB to converge accounting standards. In particular, FASB issued a new accounting standard that requires companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. For public companies, this new standard will be effective for fiscal years beginning after

 

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December 15, 2018, including interim periods within those fiscal years. Many companies that account for certain leases on an “off balance sheet” basis would be required to account for such leases “on balance sheet” upon adoption of this rule. This change removes many of the differences in the way companies account for owned property and leased property, and could have a material effect on various aspects of our tenants’ businesses, including their credit quality and the factors they consider in deciding whether to own or lease properties. Additionally, it could cause companies that lease properties to prefer shorter lease terms in an effort to reduce the leasing liability required to be recorded on the balance sheet. This new standard could also make lease renewal options less attractive, because, under certain circumstances, the rule would require a tenant to assume that a renewal right will be exercised and accrue a liability relating to the longer lease term.

In the future, we may choose to acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in shareholder dilution and limit our ability to sell such assets.

In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in the Operating Partnership, which may result in shareholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with accounting standards newly issued or revised after April 5, 2012, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

Risks Related to Our Relationship with Our Manager

We depend on our Manager to conduct our business and any material adverse change in its financial condition or our relationship with our Manager could have a material adverse effect on our business and ability to achieve our investment objectives.

We have no employees. We are completely reliant on our Manager for the effective operation of our business, which has discretion regarding the implementation of our operating policies and strategies, subject to the supervision of our board of trustees. Our officers and other individuals who perform services for us are employees of our Manager, including certain key employees of our Manager whose continued service is not guaranteed. Our Manager may suffer or become distracted by adverse financial or operational problems in connection with our Manager’s business and activities unrelated to us and over which we have no control. Should our Manager fail to allocate sufficient resources to perform its responsibilities to us for any reason, we may be unable to achieve our investment objectives or to pay distributions to our shareholders.

Lastly, we are subject to the risk that our Manager may terminate the Asset Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all. Our Manager may terminate our Asset Management Agreement without cause upon 180-day notice prior to the expiration of the original term or any renewal term. Our Manager may terminate our Asset Management

 

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Agreement upon 60 days’ prior written notice for cause in the event that we are in default in the performance or observance of any material term, condition or covenant contained in our Asset Management Agreement and such default continues for a period of 30 days after such notice specifying such default and requesting that the same be remedied within 30 days, or effective immediately concurrently with or within 90 days following a Change in Control or a non-cause termination of the Property Management and Servicing Agreement, in each case upon 30-days’ notice to us. Furthermore, if the Asset Management Agreement is terminated for any reason, our Manager may resign as property manager and special servicer of Master Trust 2014, subject to certain conditions, which could adversely our results of operations and financial condition.

There are conflicts of interest in our relationship with our Manager.

There are conflicts of interest in our relationship with our Manager insofar as our Manager and its parent, Spirit, have investment objectives that overlap with our investment objectives. Spirit has instituted a proprietary Spirit Property Ranking Model that our Manager will also apply to our portfolio. The Spirit Property Ranking Model is used annually to rank all properties across twelve factors and weightings, consisting of both real estate quality scores and credit underwriting criteria, in order to benchmark property quality, identify asset recycling opportunities and to enhance acquisition or disposition decisions. Spirit also updates the Spirit Heat Map that will be used for us and Spirit, which analyzes tenant industries across Porter’s Five Forces and potential causes of technological disruption to identify tenant industries which Spirit believes to have good fundamentals for future performance. Our Manager will use an “every other” rotation system when considering potential acquisitions by Spirit and us, subject to available liquidity and certain other criteria. As a result, we may not be presented with certain investment opportunities that may be appropriate for us. Additionally, we own real estate assets in the same geographic regions as Spirit and may compete with it for tenants. This competition may affect our ability to attract and retain tenants and may reduce the rent we are able to charge.

The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Asset Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage (subject to our investment manual and conflicts of interest policy) in material transactions with our Manager or Spirit, which may present an actual, potential or perceived conflict of interest. In order to avoid any actual, potential or perceived conflicts of interest with our Manager or Spirit, we intend to adopt a conflicts of interest policy to address specifically some of the conflicts relating to our activities. However, there is no assurance that this policy will be adequate to address all of the conflicts of interest that may arise or to address such conflicts in a manner that is favorable to us.

It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including difficulty in raising additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting risk of litigation and regulatory enforcement actions.

Certain terms of our Asset Management Agreement could make it difficult and costly to terminate our Manager and could delay or prevent a change of control transaction.

The initial term of our Asset Management Agreement will be three years from its effective date, with automatic one-year renewal terms on each anniversary date thereof, unless previously terminated by us or by our Manager. In the event of a termination of our Asset Management Agreement by us without cause or a termination for cause by our Manager for cause (including upon a Change in Control, as defined elsewhere in this information statement), our Manager will be entitled to a termination fee equal to 1.75 times the sum of (x) the

 

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management fee for the 12 full calendar months preceding the effective termination date, plus (y) all fees due to the Manager or its affiliates under the Property Management and Servicing Agreement for the 12 full calendar months preceding the effective termination date. Additionally, our Manager will receive a promoted interest pursuant to our Asset Management Agreement based on our performance and our ability to generate total shareholder return, due upon the earlier of (i) a termination of our Asset Management Agreement by us without cause, (ii) a termination of our Asset Management Agreement by our Manager for cause (including upon a Change in Control), and (iii) the date that is 36 full calendar months after the distribution date. The termination fee and promoted interest will increase the cost to us of terminating our Asset Management Agreement and may make termination more difficult. Additionally, the termination fee and promoted interest could have the effect of delaying, deferring or preventing a Change in Control that would otherwise be economically attractive to us.

The offer to purchase feature of the Series A preferred shares owned by our Manager could affect change of control transactions.

Our Manager owns Series A preferred shares, which may give it different incentives from our common shareholders in a change of control transaction. Upon the occurrence of a Change of Control (as defined), we must offer to purchase the Series A preferred shares held by our Manager at the liquidation preference, plus any accrued and unpaid dividends to, but not including, the payment date. As such, our Manager might be incentivized to facilitate a Change of Control even if such Change of Control might not otherwise prove beneficial to our common shareholders. At the same time, the offer to purchase feature of the Series A preferred shares held by our Manager may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a Change of Control if we do not have sufficient cash to complete such offer to purchase, under circumstances that otherwise could provide our common shareholders with the opportunity to realize a premium over the then-current market price or that our common shareholders may otherwise believe is in their best interests.

We must pay a base management fee to our Manager regardless of our performance.

Our Manager is entitled to a substantial base management fee from us for the first three years, regardless of the performance of our portfolio. Our Manager’s entitlement to a base fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking investments that maximize total returns to our shareholders. This in turn could negatively impact both our ability to make distributions to our shareholders and the market price of our common shares.

We do not own the Spirit name, but we may use it as part of our corporate name pursuant to our Asset Management Agreement. Use of the name by other parties or the termination of our Asset Management Agreement may harm our business.

Under our Asset Management Agreement, we and our affiliates have a royalty-free, non-exclusive and non-transferable license to use the name “Spirit”. Pursuant to the Asset Management Agreement, we have a right to use this name for so long as Spirit Realty, L.P. (or an affiliate thereof) serves as our Manager. Spirit Realty, L.P. and its affiliates retain the right to continue using the “Spirit” name. We will be unable to preclude Spirit Realty, L.P. or its affiliates from licensing or transferring the ownership of the “Spirit” name to third parties, some of whom may compete with us. Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of Spirit Realty, L.P. or others. Furthermore, in the event that our Asset Management Agreement is terminated, we and our affiliates will be required to, among other things, change our name. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise harm our business.

 

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Risks Related to the Spin-Off

We have no history operating as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

We have no experience operating as an independent company. The historical and pro forma financial information we have included in this information statement has been derived from Spirit’s consolidated financial statements and accounting records and does not necessarily reflect what our financial position, results of operation or cash flows would have been had we been a separate, stand-alone company during the periods presented, or those that we will achieve in the future. Factors which could cause our results to differ from those reflected in such historical and pro forma financial information and which may adversely impact our ability to receive similar results in the future may include, but are not limited to, the following:

 

    the financial results in this information statement do not reflect all of the expenses we will incur as a public company; and

 

    our cost structure, management, financing and business operations are significantly different as a result of operating as an independent, externally-managed public company. These changes result in increased costs, including, but not limited to, fees paid to our Manager, legal, accounting, compliance and other costs associated with being a public company with equity securities traded on the NYSE.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as an independent, externally-managed public company. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of our business, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Pro Forma and Historical Combined Financial and Other Data,” “Unaudited Pro Forma Financial Information” and the notes to those statements included elsewhere in this information statement.

We may be unable to achieve some or all of the benefits that we expect to achieve from our spin-off from Spirit.

We may not be able to achieve the full strategic and financial benefits that we expect will result from our spin-off from Spirit or such benefits may be delayed or may not occur at all. For example, there can be no assurances that investors will place a greater value on our company as a stand-alone REIT than on our business being a part of Spirit. Additionally, we may be more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of Spirit. Following our spin-off from Spirit, we will be a smaller and less diversified company than Spirit.

Certain of our agreements with Spirit may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

Certain of the agreements related to the spin-off, including the Separation and Distribution Agreement, were negotiated in the context of the spin-off while we were still part of Spirit and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the context of our spin-off related to, among other things, allocation of assets, liabilities, rights, indemnifications and other obligations among Spirit and us. See “Certain Relationships and Related Transactions.”

The ownership by our executive officers and some of our trustees of shares of common stock, options, or other equity awards of Spirit may create, or may create the appearance of, conflicts of interest.

Because some of our trustees, officers and other employees of our Manager also currently hold positions with Spirit, they own Spirit common stock, options to purchase Spirit common stock or other equity awards.

 

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Ownership by some of our trustees and officers, after our spin-off, of common stock or options to purchase common stock of Spirit, or any other equity awards, creates, or, may create the appearance of, conflicts of interest when these trustees and officers are faced with decisions that could have different implications for Spirit than they do for us.

The distribution of our common shares will not qualify for tax-free treatment and may be taxable to you as a dividend.

The distribution of our common shares will not qualify for tax-deferred treatment, and an amount equal to the fair market value of our common shares received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Spirit. As cash will only be paid in the distribution in lieu of fractional shares, you will need to have alternative sources from which to pay your resulting U.S. federal income tax liability. The amount in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in shares of Spirit common stock and any remaining excess will be treated as capital gain. Your tax basis in shares of Spirit common stock held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our common shares distributed by Spirit in the distribution exceeds Spirit’s current and accumulated earnings and profits. Your holding period for such shares of Spirit common stock will not be affected by the distribution. Your holding period for our common shares will begin the day following the distribution of our common shares, and your basis in our common shares will equal the fair market value of our common shares received by you on the distribution date. Spirit will not be able to advise stockholders of the amount of earnings and profits of Spirit until after the end of the 2018 calendar year. Spirit or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the distribution payable to non-U.S. stockholders, and any such withholding would be satisfied by Spirit or such agent by withholding and selling a portion of our common shares otherwise distributable to non-U.S. stockholders. For a more detailed discussion, see “Our Spin-Off from Spirit—Material U.S. Federal Income Tax Consequences of the Distribution” and “Material U.S. Federal Income Tax Consequences.”

Although Spirit will be ascribing a value to our common shares in the distribution for tax purposes, and will report that value to stockholders and the IRS, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to our common shares, particularly if our common shares trade at prices significantly above the value ascribed to our shares by Spirit in the period following the distribution. Such a higher valuation may cause you to recognize additional dividend or capital gain income or may cause a larger reduction in the tax basis of your shares of Spirit common stock. You should consult your tax advisor as to the particular tax consequences of the distribution to you.

Risks Related to Ownership of our Common Shares and Our Organizational Structure

There is currently no public market for our common shares and a trading market that will provide you with adequate liquidity may not develop for our common shares. In addition, once our common shares begin trading, the market price of our shares may fluctuate widely.

There has not been any public market for our common shares prior to the spin-off. We intend to have our common shares listed on the NYSE under the trading symbol “SMTA.” However, there can be no assurance that an active trading market for our common shares will develop as a result of the spin-off or be sustained in the future.

We cannot predict the prices at which our common shares may trade after the spin-off, and the market price of our shares may be more volatile than the market price of Spirit common stock. Some of the factors that could negatively affect our share price or result in fluctuations in the market price or trading volume of our common shares include:

 

    actual or anticipated variations in our operating results or distributions or those of our competitors;

 

    publication of research reports about us, our competitors or the real estate industry;

 

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    increases in prevailing interest rates that lead purchasers of our common shares to demand a higher yield;

 

    adverse market reaction to any additional indebtedness we incur or equity securities we or our Operating Partnership issue in the future;

 

    additions or departures of our Manager’s key personnel;

 

    changes in credit ratings assigned to us or notes issued by affiliates under our asset-backed securities platform;

 

    the financial condition, performance and prospects of our tenants;

 

    the failure of securities analysts to cover our common shares;

 

    actual or perceived conflicts of interest with our Manager or Spirit; and

 

    general market and economic conditions, including the current state of the credit and capital markets.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common shares.

Changes in market interest rates may adversely impact the value of our common shares.

The market price of our common shares will generally be influenced by the dividend yield on our common shares (as a percentage of the price of our common shares) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common shares to expect a higher dividend yield. However, higher market interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to decrease.

Broad market fluctuations could negatively impact the market price of our common shares.

The stock market has experienced extreme price and volume fluctuations that have affected the market price of the common equity of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations. Either of these factors could lead to a material decline in the per share trading price of our common shares.

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

We intend to make quarterly distributions of an amount at least equal to all or substantially all of our REIT taxable income to holders of our common shares out of assets legally available therefore. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this information statement. Distributions will be authorized by our board of trustees and declared by us based upon a number of factors, including actual results of operations, restrictions under Delaware law or any applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our board of trustees deems relevant. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future.

 

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Furthermore, while we are required to make distributions in order to maintain our REIT status (as described below under “Risks Related to Taxes and Our Status as a REIT”), we may elect not to maintain our REIT status, subject to the requirements of the Tax Matters Agreement, in which case we would no longer be required to make such distributions. Moreover, even if we do elect to maintain our REIT status, we may elect to comply with the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of the required amount in the form of our common shares in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common shares in lieu of cash, such action could negatively affect our business and financial condition as well as the price of our common shares. No assurance can be given that we will pay any dividends on our common shares in the future.

Our common shares are ranked junior to our Series A preferred shares.

Our common shares are ranked junior to our Series A preferred shares. Our outstanding Series A preferred shares also have or will have a preference upon our dissolution, liquidation or winding up in respect of assets available for distribution to our common shareholders.

Future offerings of additional debt securities, which would be senior to our common shares upon liquidation, and/or preferred equity securities that may be senior to our common shares for purposes of distributions or upon liquidation, may materially and adversely affect the market price of our common shares.

In the future, we may attempt to increase our capital resources by making offerings of preferred equity securities or additional debt securities (or causing our Operating Partnership to issue debt securities). Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive distributions of our available assets prior to our common shareholders. Additionally, any additional convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common shares and may result in dilution to owners of our common shares. Our common shareholders are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make distributions to our common shareholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Our common shareholders bear the risk of our future offerings reducing the per share trading price of our common shares.

Your percentage ownership in us may be diluted in the future.

Your percentage ownership in us may be diluted in the future because of equity awards that we expect to be granted to our Manager, to the directors, officers and employees of our Manager who perform services for us, and to our trustees and officers, as well as other equity instruments such as debt and equity financing. We expect our board of trustees will approve an equity incentive plan providing for the grant of equity-based awards, and we expect to reserve 3,645,000 of our common shares for issuance under that plan.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may choose to take advantage of these reporting exemptions until we are no longer an emerging growth company. We cannot predict if investors will find our common stock less attractive if we choose to rely

 

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on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company for up to five years, although we may lose that status sooner. We would cease to qualify as an emerging growth company on the earliest of (i) the last day of any fiscal year in which we have more than $1.07 billion of revenue, (ii) the last day of any fiscal year in which we have more than $700.0 million in market value of our common stock held by non-affiliates as of June 30 of such fiscal year and (iii) the date on which we issue more than $1.07 billion of non-convertible debt over a rolling three-year period.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We may choose to elect to avail ourselves of this exemption from new or revised accounting standards and, if we do, we would be subject to the different new or revised accounting standards than public companies that are not emerging growth companies.

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common stock to be less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Our declaration of trust and bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction, even if such a change in control may be in the interest of our shareholders.

Our declaration of trust contains certain restrictions on ownership and transfer of our common shares. Our declaration of trust contains various provisions that are intended to preserve our qualification as a REIT and, subject to certain exceptions, authorize our trustees to take such actions as are necessary or appropriate to preserve our qualification as a REIT. For example, our declaration of trust prohibits the actual, beneficial or constructive ownership by any person of more than 9.8% in value of the aggregate of our outstanding shares of all classes and series, or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding common shares or any class or series of our outstanding preferred shares. Our board of trustees, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our common shares may:

 

    discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common shares or that our shareholders otherwise believe to be in their best interests; or

 

    result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

We could increase the number of authorized common shares of beneficial interest, classify and reclassify unissued shares of beneficial interest and issue shares of beneficial interest without shareholder approval. Our board of trustees, without shareholder approval, has the power under our declaration of trust to amend our declaration of trust to increase the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class or series that we are authorized to issue, to authorize us to issue authorized but unissued common shares or preferred shares and to classify or reclassify any unissued common shares or preferred shares into one or more classes or series of shares of beneficial interest and to set the terms of such newly classified or reclassified shares. As a result, we may issue one or more series or classes of common shares or preferred shares with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of our common shareholders. Although our board of trustees has no such intention at the present time, it could establish a class or series of common shares or preferred shares that could,

 

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depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders.

Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common shares or that our shareholders otherwise believe to be in their best interest. For more information regarding these provisions, see “Certain Provisions of Maryland Law and Our Declaration of Trust and Bylaws.” Such provisions include the following:

 

    “business combination” provisions that, subject to certain limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or of an affiliate of ours or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting shares at any time within a two-year period immediately prior to the date in question) or any affiliate of an interested stockholder for five years after the most recent date on which the shareholder becomes an interested stockholder, and thereafter impose fair price and/or supermajority and shareholder voting requirements on these combinations; and

 

    “control share” provisions that provide that a holder of “control shares” of our Company (defined as shares that, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of outstanding “control shares”) has no voting rights with respect to those shares except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

As permitted by Maryland law, we have elected, pursuant to provisions in our declaration of trust, to opt out of the Maryland Business Combination Act and to exempt any acquisition of our common shares from the Maryland Control Share Acquisition Act. Any amendment to or repeal of either of these provisions of our declaration of trust must be approved by our shareholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter. In the event that either of these provisions of our declaration of trust are amended or revoked by our shareholders, we would be subject to the Maryland Business Combination Act and/or the Maryland Control Share Acquisition Act, as the case may be.

Certain provisions of Maryland law permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could be in the best interests of our shareholders. Our declaration of trust contains a provision whereby we elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL, or Subtitle 8, relating to the filling of vacancies on our board of trustees. However, we have opted out of the provision of Subtitle 8 that would have permitted our board of trustees to unilaterally divide itself into classes with staggered terms of three years each (also referred to as a classified board) without shareholder approval, and we are prohibited from electing to be subject to such provision of Subtitle 8 unless such election is first approved by our shareholders by the affirmative vote of a majority of all the votes entitled to be cast on the matter. We do not currently have a classified board.

Our board of trustees may change our investment and financing policies without shareholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

Our investment and financing policies are exclusively determined by our board of trustees. Accordingly, our shareholders do not control these policies. Further, our organizational documents do not limit the amount or

 

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percentage of indebtedness, funded or otherwise, that we may incur. Our board of trustees may alter or eliminate our current policy on borrowing at any time without shareholder approval. If this policy changed, we could become more highly leveraged, which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could materially and adversely affect us.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited.

As permitted by Maryland law, our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:

 

    actual receipt of an improper benefit or profit in money, property or services; or

 

    active and deliberate dishonesty by the trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.

As a result, we and our shareholders have rights against our trustees and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our trustees or officers impede the performance of our company, our shareholders’ and our ability to recover damages from such trustee or officer will be limited. In addition, our declaration of trust authorizes us to obligate our company, and our bylaws require us, to indemnify our trustees and officers (and, with the approval of our board of trustees, any employee or agent of ours) for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law.

We are a holding company with no direct operations and will rely on funds received from the Operating Partnership to pay liabilities.

We are a holding company and conduct substantially all of our operations through the Operating Partnership. We do not have, apart from an interest in the Operating Partnership, any independent operations. As a result, we rely on distributions from the Operating Partnership to pay any dividends we might declare on our common shares. We also rely on distributions from the Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from the Operating Partnership. In addition, because we are a holding company, shareholder claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the Operating Partnership and its subsidiaries will be able to satisfy the claims of our shareholders only after all of our and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

We own directly or indirectly 100% of the interests in the Operating Partnership. However, in connection with our future acquisition of properties or otherwise, we may issue partnership interests of the Operating Partnership to third parties. Such issuances would reduce our ownership in the Operating Partnership. Because our shareholders will not directly own partnership interests of the Operating Partnership, they will not have any voting rights with respect to any such issuances or other partnership level activities of the Operating Partnership.

Conflicts of interest could arise in the future between the interests of our shareholders and the interests of holders of partnership interests in the Operating Partnership, which may impede business decisions that could benefit our shareholders.

Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the Operating Partnership or any future partner thereof, on the other. Our trustees and officers have duties to our company under applicable Maryland law in connection with the management of our company. At the

 

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same time, one of our wholly-owned subsidiaries, OP Holdings, as the general partner of the Operating Partnership, has fiduciary duties and obligations to the Operating Partnership and its future limited partners under Delaware law and the partnership agreement of the Operating Partnership in connection with the management of the Operating Partnership. The fiduciary duties and obligations of OP Holdings, as general partner of the Operating Partnership, and its future partners may come into conflict with the duties of the trustees and officers of our company.

Under the terms of the partnership agreement of the Operating Partnership, if there is a conflict between the interests of our shareholders on one hand and any future limited partners on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our shareholders or any future limited partners; provided, however, that for so long as we own a controlling interest in the Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our shareholders or any future limited partners shall be resolved in favor of our shareholders.

The partnership agreement also provides that the general partner will not be liable to the Operating Partnership, its partners or any other person bound by the partnership agreement for monetary damages for losses sustained, liabilities incurred or benefits not derived by the Operating Partnership or any future limited partner, except for liability for the general partner’s intentional harm or gross negligence. Moreover, the partnership agreement provides that the Operating Partnership is required to indemnify the general partner and its members, managers, managing members, officers, employees, agents and designees from and against any and all claims that relate to the operations of the Operating Partnership, except (1) if the act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active or deliberate dishonesty, (2) for any transaction for which the indemnified party received an improper personal benefit, in money, property or services or otherwise in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal proceeding, if the indemnified person had reasonable cause to believe that the act or omission was unlawful.

Risks Related to Our Indebtedness

Upon completion of the spin-off, we will have approximately $2.1 billion aggregate principal amount of indebtedness outstanding, which may expose us to the risk of default under our debt obligations, limit our ability to obtain additional financing or affect the market price of our common shares or debt securities.

Upon completion of the spin-off, we will have approximately $2.1 billion aggregate principal amount of indebtedness outstanding, all of which incurs interest at a fixed rate. We may also incur significant additional debt to finance future investment activities. As of December 31, 2017, our pro forma Adjusted Debt to Adjusted EBITDA ratio was 9.3x, our pro forma Adjusted Debt + Preferred to Adjusted EBITDA ratio was 10.1x and our pro forma Fixed Charge Coverage Ratio was 1.8x. Our pro forma Fixed Charge Coverage Ratio does not reflect the impact of our amortizing debt principal payments. Were Shopko, our largest tenant, to completely default on its lease payments, our pro forma Adjusted Debt to Adjusted EBITDA ratio as of December 31, 2017 would have been 12.0x, our pro forma Adjusted Debt + Preferred to Adjusted EBITDA ratio would have been 13.0x and our pro forma Fixed Charge Coverage Ratio would have been 1.4x. Payments of principal and interest on borrowings may leave us with insufficient cash resources to meet our cash needs or make the distributions to our shareholders necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

    our cash flow may be insufficient to meet our required principal and interest payments;

 

    cash interest expense and financial covenants relating to our indebtedness may limit or eliminate our ability to make distributions to our common shareholders and the holders of our Series A preferred shares and may adversely affect our ability to pay the asset management fee due under the Asset Management Agreement;

 

    we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon acquisition opportunities or meet operational needs;

 

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    we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

    we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;

 

    we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

    we may default on our obligations and the lenders or mortgagees may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases;

 

    we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;

 

    we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and

 

    our default under any loan with cross-default provisions could result in a default on other indebtedness.

Changes in our leverage ratios may also negatively impact the market price of our equity or debt securities. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all.

Over the last few years, the credit markets have experienced significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances have materially impacted liquidity in the financial markets, making financing terms for borrowers less attractive, and in certain cases, have resulted in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness. Reductions in our available borrowing capacity or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us.

Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us. Total debt service, including scheduled principal maturities and interest, for 2018 and 2019 is $136.0 million and $137.0 million, respectively.

Our financing arrangements involve balloon payment obligations.

Our financings require us to make a lump-sum or “balloon” payment at maturity. In addition, there are principal amortization payments of $477.8 million due under our debt instruments prior to January 1, 2021. Our ability to make any balloon payment is uncertain and may depend on our ability to obtain additional financing or our ability to sell our properties. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell our properties at a price sufficient to make the balloon payment, if at all. If the balloon payment is refinanced at a higher rate, it will reduce or eliminate any income from our properties. Our inability to meet a balloon payment obligation, through refinancing or sale proceeds, or refinancing on less attractive terms could materially and adversely affect us.

 

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The agreements governing our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our common shareholders.

The agreements governing our indebtedness contain restrictions and covenants that limit or will limit our ability to operate our business. These covenants, as well as any additional covenants to which we may be subject in the future because of additional indebtedness, could cause us to forgo investment opportunities, reduce or eliminate distributions to our common shareholders or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. In addition, the agreements may have cross default provisions, which provide that a default under one of our financing agreements would lead to a default on some or all of our debt financing agreements.

If an event of default occurs under our current or future CMBS loans, if the master tenants at the properties that secure such CMBS loans fail to maintain certain EBITDAR ratios, or if an uncured monetary default exists under the master leases, then a portion of or all of the cash which would otherwise be distributed to us may be restricted by the lenders and unavailable to us until the terms are cured or the debt refinanced. If the financial performance of the collateral for our indebtedness under our Master Trust 2014 fails to achieve certain financial performance criteria, cash from such collateral may be unavailable to us until the terms are cured or the debt refinanced. Such cash sweep triggering events have occurred previously and may be ongoing from time to time. The occurrence of these events limit the amount of cash available to us for use in our business and could limit or eliminate our ability to make distributions to our common shareholders.

The covenants and other restrictions under our debt agreements affect, among other things, our ability to:

 

    sell or substitute assets;

 

    modify certain terms of our leases;

 

    prepay debt with higher interest rates;

 

    manage our cash flows; and

 

    make distributions to equity holders.

Additionally, we must comply with certain covenants in order to incur additional leverage under our Master Trust 2014. All of these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.

Risks Related to Our Taxes and Our Status as a REIT

Failure to qualify as a REIT would materially and adversely affect us and the value of our common shares.

We will elect to be taxed as a REIT and believe we will be organized and operate in a manner that will allow us to qualify and to remain qualified as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2018. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT and the statements in this information statement are not binding on the IRS or any court. Therefore, we cannot guarantee that we will qualify as a REIT or that we will remain qualified as such in the future. If we fail to qualify as a REIT or lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our shareholders for each of the years involved because:

 

    we would not be allowed a deduction for distributions to shareholders in computing our taxable income and would be subject to regular U.S. federal corporate income tax;

 

    we could be subject to increased state and local taxes; and

 

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    unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to shareholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our shareholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and adversely affect the trading price of our common shares.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our common shares, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to shareholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

We own and may acquire direct or indirect interests in one or more entities that have elected or will elect to be taxed as REITs under the Code (each, a “Subsidiary REIT”). A Subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to us. If a Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to federal income tax, (ii) shares in such Subsidiary REIT would cease to be qualifying assets for purposes of the asset tests applicable to REITs, and (iii) it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our TRSs will be subject to income tax as regular corporations in the jurisdictions in which they operate.

If Spirit failed to qualify as a REIT during certain periods prior to the spin-off, we would be prevented from electing to qualify as a REIT.

Under applicable Treasury Regulations, if Spirit failed, or fails, to qualify as a REIT during certain periods prior to the spin-off, unless Spirit’s failure were subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Spirit failed to qualify.

If certain of our subsidiaries, including the Operating Partnership, fail to qualify as partnerships or disregarded entities for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

One or more of our subsidiaries may be treated as a partnership or disregarded entity for federal income tax purposes and, therefore, will not be subject to federal income tax on its income. Instead, each of its partners or its owner, as applicable, which may include us, will be allocated, and may be required to pay tax with respect to, such partner’s or owner’s share of its income. We cannot assure you that the IRS will not challenge the status of any subsidiary partnership or limited liability company in which we own an interest as a disregarded entity or partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were

 

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successful in treating any subsidiary partnership or limited liability company as an entity taxable as a corporation for federal income tax purposes, we could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of any subsidiary partnerships or limited liability company to qualify as a disregarded entity or partnership for applicable income tax purposes could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners or members, including us.

Our ownership of TRSs is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our TRSs are not conducted on arm’s-length terms.

From time to time we may own interests in one or more TRSs. A TRS is a corporation, other than a REIT, in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

A REIT’s ownership of securities of a TRS is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets may be represented by securities (including securities of TRSs), other than those securities includable in the 75% asset test, and not more than 20% of the value of our total assets may be represented by securities of TRSs. We anticipate that the aggregate value of the stock and securities of any TRS and other nonqualifying assets that we own will be less than 20% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with any TRSs that we own to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the above limitations or to avoid application of the 100% excise tax discussed above.

We may be forced to borrow funds to maintain our REIT status, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us.

To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding any net capital gains, and we will be subject to regular corporate income taxes on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We could have a potential distribution shortfall as a result of, among other things, differences in timing between the actual receipt of cash and recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Also, the ability of Master Trust 2014 to make cash distributions is limited and, in some cases, could be eliminated entirely. In addition, as discussed in this information statement, our tenants may experience a downturn in their business, and as a result may delay lease commencement, decline to extend a lease upon its expiration, fail to make rental payments when due, become insolvent or declare bankruptcy. In order to maintain REIT status and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements. Our ability to borrow funds, however, may not be available on favorable terms or at all. Our access

 

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to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our common shares, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us. Alternatively, we may make taxable in-kind distributions of our own shares, which may cause our shareholders to be required to pay income taxes with respect to such distributions in excess of any cash they receive, or we may be required to withhold taxes with respect to such distributions in excess of any cash our shareholders receive.

The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.

The IRS may take the position that specific sale-leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of re-characterization unless we elect to make an additional distribution to maintain our REIT status. The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of our REIT taxable income and could cause us to fail the REIT distribution test that requires a REIT to distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all shareholders at the time of declaration rather than the shareholders existing in the taxable year affected by the re-characterization.

Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends, which may negatively affect the value of our shares.

Income from “qualified dividends” payable to U.S. shareholders that are individuals, trusts and estates are generally subject to tax at preferential rates, currently at a maximum federal rate of 20%. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Under the recently enacted 2017 Tax Legislation, however, U.S. shareholders 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 after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common shares.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors. Accordingly, these rules could limit our ability to execute sales of the Shopko assets or assets that collateralize Master Trust 2014 in accordance with our business strategy outlined herein.

 

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Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our shareholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

Legislative or other actions affecting REITs could have a negative effect on us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

The 2017 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the 2017 Tax Legislation that could affect us and our shareholders include:

 

    temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;

 

    permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21%;

 

    permitting a deduction for certain pass-through business income, including dividends received by our shareholders from us that are not designated by us as capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;

 

    reducing the highest rate of withholding with respect to our distributions to non-U.S. shareholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;

 

    limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of our REIT taxable income (determined without regard to the dividends paid deduction);

 

    generally limiting the deduction for net business interest expense in excess of 30% of a business’s “adjusted taxable income,” except for taxpayers that engage in certain real estate businesses (including most equity REITs) and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods); and

 

    eliminating the corporate alternative minimum tax.

 

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Many of these changes that are applicable to us are effective with our 2018 taxable year, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the 2017 Tax Legislation as a whole will have on us.

 

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FORWARD-LOOKING STATEMENTS

This information statement contains forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-term, triple-net leases of freestanding, single-tenant properties, contain forward-looking statements. When used in this information statement, 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 consumer price index;

 

    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 and reduce the concentration of our significant tenant;

 

    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;

 

    our relationship with our Manager and its ability to retain qualified personnel;

 

    potential conflicts of interest with our Manager or Spirit;

 

    our ability to achieve the intended benefits from our spin-off from Spirit;

 

    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.

 

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The factors included in this information statement are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional risk factors, see the factors set forth under “Risk Factors.” All forward-looking statements are based on information that was available, and speak only, as of 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.

 

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OUR SPIN-OFF FROM SPIRIT

General

The board of directors of Spirit determined upon careful review and consideration that the spin-off of our assets and liabilities from the rest of Spirit and our establishment as a separate, publicly-traded company was in the best interests of Spirit and its stockholders.

In furtherance of this plan, Spirit will distribute 100% of our common shares held by Spirit to holders of Spirit common stock, subject to certain conditions. The distribution of our common shares is expected to take place on May 31, 2018. On the distribution date, each holder of Spirit common stock will receive one of our common shares for every ten shares of Spirit common stock held at the close of business on the distribution record date, as described below. You will not be required to make any payment, surrender or exchange your shares of Spirit common stock or take any other action to receive your SMTA common shares to which you are entitled on the distribution date.

The spin-off of our common shares as described in this information statement is subject to the satisfaction or waiver of certain conditions. We cannot provide any assurances that the spin-off will be completed. For a more detailed description of these conditions, see the section entitled “Conditions to the Spin-Off.”

The Number of Shares You Will Receive

For every ten shares of Spirit common stock that you owned as of the close of business on May 18, 2018, the distribution record date, you will receive one of our common shares on the distribution date.

Transferability of Shares You Receive

The SMTA common shares distributed to Spirit stockholders will be freely transferable, subject to the restrictions on ownership and transfer set forth in our declaration of trust, except for shares received by persons who may be deemed to be our “affiliates” under the Securities Act. Persons who may be deemed to be our affiliates after the spin-off generally include individuals or entities that control, are controlled by or are under common control with us and may include trustees and certain officers or principal shareholders of us. Our affiliates will be permitted to sell their SMTA common shares only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Rule 144.

When and How You Will Receive the Distributed Shares

Spirit will distribute our common shares on May 31, 2018, the distribution date. American Stock Transfer & Trust Company, LLC will serve as distribution agent and registrar for our common shares and as distribution agent in connection with the distribution.

If you own Spirit common stock as of the close of business on the distribution record date, the SMTA common shares that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in the distribution. Unless specifically requested by a shareholder, no physical share certificates of ours will be issued.

If you sell shares of Spirit common stock in the “regular-way” market prior to the distribution date, you will be selling your right to receive our common shares in the distribution. For more information, see the section entitled “—Market for Common Shares—Trading Between the Distribution Record Date and Distribution Date”.

 

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Commencing on or shortly after the distribution date, if you hold physical stock certificates that represent your shares of Spirit common stock, or if you hold your shares in book-entry form, and you are the registered holder of such shares, the distribution agent will mail to you an account statement that indicates the number of our common shares that have been registered in book-entry form in your name.

Most Spirit stockholders hold their shares of Spirit common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank’s or brokerage firm’s books. If you hold your Spirit common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for our common shares that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having our common shares held in “street name,” we encourage you to contact your bank or brokerage firm.

Treatment of Fractional Shares

The distribution agent will not deliver any fractional shares in connection with the delivery of our common shares pursuant to the spin-off. Instead, the distribution agent will aggregate all fractional shares and sell them on behalf of those stockholders who otherwise would be entitled to receive fractional shares. These sales will occur as soon as practicable after the distribution date. Those stockholders will then receive a cash payment, in the form of a check, in an amount equal to their pro rata share of the total proceeds of those sales. Any applicable expenses, including brokerage fees, will be paid by us.

We expect that all fractional shares held in street name will be aggregated and sold by brokers or other nominees according to their standard procedures, and that brokers or other nominees may request the distribution agent to sell the fractional shares on their behalf. You should contact your broker or other nominee for additional details. None of Spirit, us, or our distribution agent will guarantee any minimum sale price for fractional shares or pay any interest on the proceeds from the sale of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholder. See “Our Spin-Off from Spirit—Certain Material Federal Income Tax Consequences of the Spin-Off.”

Results of the Spin-Off

After the spin-off, we will be a separate, publicly traded company. Immediately following the spin-off, we expect to have approximately 2,529 shareholders of record, based on the number of registered stockholders of Spirit common stock on April 27, 2018, and 42,850,013 of our common shares outstanding. The actual number of shares to be distributed will be determined on the distribution record date and will reflect any changes in the number of shares of Spirit common stock between April 27, 2018 and the distribution record date.

We will enter into a Separation and Distribution Agreement to effect the spin-off and provide a framework for our relationship with Spirit after the spin-off. This agreement will govern the relationship between us and Spirit subsequent to the completion of the spin-off and provide for the allocation between us and Spirit of Spirit’s assets, liabilities and obligations attributable to periods prior to the spin-off from Spirit. We will also enter into a Tax Matters Agreement that will govern the respective rights, responsibilities and obligations of Spirit and us after the spin-off with respect to various tax matters, an Insurance Sharing Agreement that will provide for us to be added as a named insurer under certain of Spirit’s existing insurance policies and authorize our Manager to procure joint blanket insurance policies for us and Spirit thereafter, and a Registration Rights Agreement that will grant Spirit Realty, L.P. the right to require us to file a registration statement with the SEC with respect to our Series A preferred shares that will be issued to it in connection with the spin-off. Additionally, we will also enter into an Asset Management Agreement with our Manager, a subsidiary of Spirit, in connection with the spin-off, and our Manager will also continue to provide services under the Property Management and Servicing Agreement. For a more detailed description of these agreements, see “Certain Relationships and Related Transactions” and “Our Manager and Asset Management Agreement.”

 

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The spin-off will not affect the number of outstanding shares of Spirit common stock or any rights of Spirit stockholders.

Certain U.S. Federal Income Tax Consequences of the Distribution

The following discussion is a summary of certain U.S. federal income tax consequences of the distribution, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. For purposes of this discussion, references to “we,” “our” and “us” mean only SMTA and do not include any of its subsidiaries, except as otherwise indicated; and references to “Spirit” include only Spirit Realty Capital, Inc. and not its subsidiaries, except as otherwise indicated. This discussion is based on the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the IRS, in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a holder of Spirit’s common stock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the distribution.

This discussion is limited to holders who hold Spirit’s common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a holder’s particular circumstances. In addition, except where specifically noted, it does not address consequences relevant to holders subject to special rules, including, without limitation:

 

    U.S. expatriates and former citizens or long-term residents of the United States;

 

    persons subject to the alternative minimum tax;

 

    U.S. holders (as defined below) whose functional currency is not the U.S. dollar;

 

    persons holding Spirit’s common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

 

    banks, insurance companies, and other financial institutions;

 

    REITs or regulated investment companies;

 

    brokers, dealers or traders in securities;

 

    “controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;

 

    S corporations, partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);

 

    tax-exempt organizations or governmental organizations;

 

    persons subject to special tax accounting rules as a result of any item of gross income with respect to Spirit’s common stock being taken into account in an applicable financial statement;

 

    persons deemed to sell Spirit’s common stock under the constructive sale provisions of the Code; and

 

    persons who hold or receive Spirit’s common stock pursuant to the exercise of any employee stock option or otherwise as compensation.

This discussion does not address the U.S. federal income tax consequences of owning and disposing of SMTA common shares received in the distribution. For a discussion of the tax consequences of the ownership and disposition of the SMTA common shares, see “Material U.S. Federal Income Tax Consequences—Material U.S. Federal Income Tax Consequences to Holders of Our Common Shares.”

 

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THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED AS TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE DISTRIBUTION ARISING UNDER OTHER U.S. FEDERAL TAX LAWS (INCLUDING ESTATE AND GIFT TAX LAWS), UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

For purposes of this discussion, a “U.S. holder” is a beneficial owner of Spirit’s common stock that, for U.S. federal income tax purposes, is or is treated as:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;

 

    an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

    a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

For purposes of this discussion, a “non-U.S. holder” is any beneficial owner of Spirit’s common stock that is neither a U.S. holder nor an entity treated as a partnership for U.S. federal income tax purposes.

If an entity treated as a partnership for U.S. federal income tax purposes holds Spirit’s common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding Spirit’s common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

Treatment of the Distribution

The distribution will be treated as a taxable distribution to Spirit stockholders. Accordingly, each Spirit stockholder will be treated as receiving an amount equal to the fair market value of the SMTA common shares received by such stockholder (including any fractional shares deemed received by the stockholder, as described below), determined as of the date of the distribution. We refer to such amount as the “distribution amount.”

The distribution will also be a taxable transaction for Spirit in which Spirit will recognize gain, but not loss, based on the difference between its tax basis in the SMTA common shares and its fair market value as of the distribution. Certain transactions entered into in connection with the spin-off are also expected to be taxable to Spirit. To the extent Spirit recognizes gain in connection with the spin-off, such gain generally should constitute qualifying income for purposes of the REIT gross income tests. In addition, Spirit’s earnings and profits will be increased, which may increase the portion of the distribution amount treated as dividend income to Spirit’s stockholders, as described below.

Although Spirit will ascribe a value to the SMTA common shares distributed in the distribution, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the distributed SMTA common shares, particularly if, following the distribution, those common shares trade at prices significantly above the value ascribed to those shares by Spirit. Such a higher valuation may affect the distribution amount and thus the tax consequences of the distribution to Spirit’s stockholders.

Any cash received by a Spirit stockholder in lieu of a fractional SMTA common share will be treated as if such fractional share had been (i) received by the stockholder as part of the spin-off and then (ii) sold by such

 

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stockholder, via the distribution agent, for the amount of cash received. As described below, the basis of the fractional share deemed received by a Spirit stockholder will equal the fair market value of such share on the date of the distribution, and the amount paid in lieu of a fractional share will be net of the distribution agent’s brokerage fees.

Tax Basis and Holding Period of SMTA Common Shares Received by Holders of Spirit Common Stock

A Spirit stockholder’s tax basis in SMTA common shares received in the distribution generally will equal the fair market value of such shares on the date of the distribution, and the holding period for such shares will begin the day after the date of the distribution.

Tax Treatment of the Distribution to U.S. Holders of Spirit’s Common Stock

Generally. The portion of the distribution amount that is payable out of Spirit’s current or accumulated earnings and profits will be treated as a dividend and, other than with respect to capital gain dividends and certain amounts which have previously been subject to corporate level tax, as discussed below, will be taxable to Spirit’s taxable U.S. holders as ordinary income when actually or constructively received. See “—Tax Rates” below. As long as Spirit qualifies as a REIT, this portion of the distribution will not be eligible for the dividends-received deduction in the case of U.S. holders that are corporations or, except to the extent described in “—Tax Rates” below, the preferential rates on qualified dividend income applicable to non-corporate U.S. holders, including individuals. For purposes of determining whether distributions to holders of Spirit’s capital stock are out of Spirit’s current or accumulated earnings and profits, Spirit’s earnings and profits will be allocated first to its outstanding preferred stock, if any, and then to Spirit’s outstanding common stock.

To the extent that the distribution amount is in excess of Spirit’s allocable current and accumulated earnings and profits, it will be treated first as a tax-free return of capital to a U.S. holder to the extent of the U.S. holder’s adjusted tax basis in its shares of Spirit’s common stock. This treatment will reduce the U.S. holder’s adjusted tax basis in its shares of Spirit’s common stock by such amount, but not below zero. Distributions in excess of Spirit’s allocable current and accumulated earnings and profits and in excess of a U.S. holder’s adjusted tax basis in its shares will be taxable as capital gain. Such gain will be taxable as long-term capital gain if the shares have been held for more than one year. U.S. holders may not include in their own income tax returns any of Spirit’s net operating losses or capital losses.

Capital Gain Dividends. Dividends that Spirit properly designates as capital gain dividends will be taxable to Spirit’s taxable U.S. holders as a gain from the sale or disposition of a capital asset held for more than one year, to the extent that such gain does not exceed Spirit’s actual net capital gain for the taxable year and may not exceed Spirit’s dividends paid for the taxable year, including dividends paid the following year that are treated as paid in the current year. Spirit anticipates that it will recognize capital gains as a result of the spin-off and that it will designate a portion of its dividends with respect to the taxable year that includes the spin-off as capital gain dividends. U.S. holders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. If Spirit properly designates any portion of a dividend as a capital gain dividend, then, except as otherwise required by law, Spirit presently intends to allocate a portion of the total capital gain dividends paid or made available to holders of all classes of Spirit’s capital stock for the year to the holders of each class of Spirit’s capital stock in proportion to the amount that Spirit’s total dividends, as determined for U.S. federal income tax purposes, paid or made available to the holders of each such class of Spirit’s capital stock for the year bears to the total dividends, as determined for U.S. federal income tax purposes, paid or made available to holders of all classes of Spirit’s capital stock for the year.

Passive Activity Losses and Investment Interest Limitations. Distributions Spirit makes will not be treated as passive activity income. As a result, U.S. holders generally will not be able to apply any “passive losses” against this income. A U.S. holder generally may elect to treat capital gain dividends and income designated as qualified dividend income, as described in “—Tax Rates” below, as investment income for purposes of computing the

 

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investment interest limitation, but in such case, the holder will be taxed at ordinary income rates on such amount. Other distributions made by Spirit, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation.

Tax Rates. The maximum tax rate for non-corporate taxpayers for (1) long-term capital gains, including certain “capital gain dividends,” generally is 20% (although depending on the characteristics of the assets which produced these gains and on designations which Spirit may make, certain capital gain dividends may be taxed at a 25% rate) and (2) “qualified dividend income” generally is 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding period requirements have been met and the REIT’s dividends are attributable to dividends received from taxable corporations (such as its TRSs) or to income that was subject to tax at the corporate/REIT level (for example, if the REIT distributed taxable income that it retained and paid tax on in the prior taxable year). Capital gain dividends will only be eligible for the rates described above to the extent that they are properly designated by the REIT as “capital gain dividends.” U.S. holders that are corporations may be required to treat up to 20% of some capital gain dividends as ordinary income. In addition, non-corporate U.S. holders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.

Tax Treatment of the Distribution to Tax-Exempt Holders of Spirit’s Common Stock

Dividend income from Spirit and gain arising upon the distribution to the extent it is treated as a sale of shares of Spirit common stock generally should not be unrelated business taxable income, or UBTI, to a tax-exempt holder, except to the extent a tax-exempt holder holds its shares as “debt-financed property” within the meaning of the Code. Generally, “debt-financed property” is property the acquisition or holding of which was financed through a borrowing by the tax-exempt holder.

For tax-exempt holders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, or qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code, respectively, income from an investment in Spirit’s shares will constitute UBTI unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for specific purposes so as to offset the income generated by its investment in Spirit’s shares. These holders should consult their tax advisors concerning these “set aside” and reserve requirements.

Notwithstanding the above, however, a portion of the dividends paid by a “pension-held REIT” may be treated as UBTI as to certain trusts that hold more than 10%, by value, of the interests in the REIT. A REIT will not be a “pension-held REIT” if it is able to satisfy the “not closely held” requirement without relying on the “look-through” exception with respect to certain trusts or if such REIT is not “predominantly held” by “qualified trusts.” As a result of restrictions on ownership and transfer of Spirit’s stock contained in Spirit’s charter, Spirit does not expect to be classified as a “pension-held REIT,” and as a result, the tax treatment described above should be inapplicable to Spirit’s holders. However, because Spirit’s common stock is (and, Spirit anticipates, will continue to be) publicly traded, Spirit cannot guarantee that this will always be the case.

Tax Treatment of the Distribution to Non-U.S. Holders of Spirit’s Common Stock

The following discussion addresses the rules governing U.S. federal income taxation of the distribution to non-U.S. holders. These rules are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the discussion does not address all aspects of U.S. federal income taxation and does not address other federal, state, local or non-U.S. tax consequences that may be relevant to a non-U.S. holder in light of its particular circumstances. We urge non-U.S. holders to consult their tax advisors to determine the impact of U.S. federal, state, local and non-U.S. income and other tax laws and any applicable tax treaty on the distribution, including any reporting requirements.

 

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Generally. The portion of the distribution amount that is neither attributable to gains from sales or exchanges by Spirit of United States real property interests, or USRPIs, nor designated by Spirit as a capital gain dividend (except as described below) will be treated as a dividend of ordinary income to the extent it is made out of Spirit’s allocable current or accumulated earnings and profits. This portion of the distribution amount ordinarily will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the distribution is treated as effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such dividend is attributable). Under certain treaties, however, lower withholding rates generally applicable to dividends do not apply to dividends from a REIT. Certain certification and disclosure requirements must be satisfied for a non-U.S. holder to be exempt from withholding under the effectively connected income exemption. Dividends that are treated as effectively connected with a U.S. trade or business generally will not be subject to withholding but will be subject to U.S. federal income tax on a net basis at the regular graduated rates, in the same manner as dividends paid to U.S. holders are subject to U.S. federal income tax. Any such dividends received by a non-U.S. holder that is a corporation may also be subject to an additional branch profits tax at a 30% rate (applicable after deducting U.S. federal income taxes paid on such effectively connected income) or such lower rate as may be specified by an applicable income tax treaty.

Except as otherwise provided below, Spirit expects to withhold U.S. federal income tax at the rate of 30% on the distribution made to a non-U.S. holder unless:

 

  (1) a lower treaty rate applies and the non-U.S. holder furnishes an IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) evidencing eligibility for that reduced treaty rate; or

 

  (2) the non-U.S. holder furnishes an IRS Form W-8ECI (or other applicable documentation) claiming that the distribution is income effectively connected with the non-U.S. holder’s trade or business.

To the extent the distribution amount is in excess of Spirit’s allocable current and accumulated earnings and profits, it will not be taxable to a non-U.S. holder to the extent that such distributions do not exceed the adjusted tax basis of the holder’s common stock, but rather will reduce the adjusted tax basis of such stock. To the extent that the distribution amount exceeds the non-U.S. holder’s adjusted tax basis in such common stock, it generally will give rise to gain from the sale or exchange of such stock, the tax treatment of which is described below. However, such excess distributions may be treated as dividend income for certain non-U.S. holders. For withholding purposes, Spirit expects to treat all distributions as made out of its current or accumulated earnings and profits. However, amounts withheld may be refundable if it is subsequently determined that the distribution was, in fact, in excess of Spirit’s allocable current and accumulated earnings and profits, provided that certain conditions are met.

Capital Gain Dividends and Distributions Attributable to a Sale or Exchange of United States Real Property Interests. Distributions to a non-U.S. holder that Spirit properly designates as capital gain dividends, other than those arising from the disposition of a USRPI, generally should not be subject to U.S. federal income taxation, unless:

 

  (1) the investment in Spirit’s common stock is treated as effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such dividends are attributable), in which case the non-U.S. holder will be subject to the same treatment as U.S. holders with respect to such gain, except that a non-U.S. holder that is a corporation may also be subject to a branch profits tax of up to 30%, as discussed above; or

 

  (2) the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and certain other conditions are met, in which case the non-U.S. holder will be subject to U.S. federal income tax at a rate of 30% on the non-U.S. holder’s capital gains (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of such non-U.S. holder (even though the individual is not considered a resident of the United States), provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.

 

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Pursuant to the Foreign Investment in Real Property Tax Act, which is referred to as “FIRPTA,” distributions to a non-U.S. holder that are attributable to gain from sales or exchanges by Spirit of USRPIs (including gain realized in the spin-off), whether or not designated as capital gain dividends, will cause the non-U.S. holder to be treated as recognizing such gain as income effectively connected with a U.S. trade or business. Non-U.S. holders generally would be taxed at the regular graduated rates applicable to U.S. holders, subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals. Spirit also will be required to withhold and to remit to the IRS 21% of any distribution to non-U.S. holders attributable to gain from sales or exchanges by Spirit of USRPIs. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder that is a corporation. The amount withheld is creditable against the non-U.S. holder’s U.S. federal income tax liability. However, any distribution with respect to any class of stock that is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market located in the United States is not subject to FIRPTA, and therefore, not subject to the 21% U.S. withholding tax described above, if the non-U.S. holder did not own more than 10% of such class of stock at any time during the one-year period ending on the date of the distribution. Instead, such distributions generally will be treated as ordinary dividend distributions and subject to withholding in the manner described above with respect to ordinary dividends. In addition, distributions to certain non-U.S. publicly traded shareholders that meet certain record-keeping and other requirements (“qualified shareholders”) are exempt from FIRPTA, except to the extent owners of such qualified shareholders that are not also qualified shareholders own, actually or constructively, more than 10% of Spirit’s capital stock. Furthermore, distributions to “qualified foreign pension funds” or entities all of the interests of which are held by “qualified foreign pension funds” are exempt from FIRPTA. Non-U.S. holders should consult their tax advisors regarding the application of these rules.

Sale of Spirit’s Common Stock. To the extent the distribution is treated as a sale of Spirit’s common stock, gain realized by a non-U.S. holder generally will not be subject to U.S. federal income tax unless such stock constitutes a USRPI. In general, stock of a domestic corporation that constitutes a “United States real property holding corporation,” or USRPHC, will constitute a USRPI. Spirit believes that it is a USRPHC. Spirit’s common stock will not, however, constitute a USRPI so long as Spirit is a “domestically controlled qualified investment entity.” A “domestically controlled qualified investment entity” includes a REIT in which at all times during a five-year testing period less than 50% in value of its stock is held directly or indirectly by non-United States persons, subject to certain rules. For purposes of determining whether a REIT is a “domestically controlled qualified investment entity,” a person who at all applicable times holds less than 5% of a class of stock that is “regularly traded” is treated as a United States person unless the REIT has actual knowledge that such person is not a United States person. Spirit believes, but cannot guarantee, that it is a “domestically controlled qualified investment entity.” Because Spirit’s common stock is (and, Spirit anticipates, will continue to be) publicly traded, no assurance can be given that Spirit will continue to be a “domestically controlled qualified investment entity.”

Even if Spirit does not qualify as a “domestically controlled qualified investment entity” at the time a non-U.S. holder is treated as selling Spirit’s common stock, gain realized from the sale by a non-U.S. holder of such common stock would not be subject to U.S. federal income tax under FIRPTA as a sale of a USRPI if:

 

  (1) Spirit’s common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market such as the NYSE; and

 

  (2) such non-U.S. holder owned, actually and constructively, 10% or less of Spirit’s common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the non-U.S. holder’s holding period.

In addition, sales of Spirit’s common stock by qualified shareholders are exempt from FIRPTA, except to the extent owners of such qualified shareholders that are not also qualified shareholders own, actually or constructively, more than 10% of Spirit’s capital stock. Furthermore, dispositions of Spirit’s common stock by “qualified foreign pension funds” or entities all of the interests of which are held by “qualified foreign pension funds” are exempt from FIRPTA. Non-U.S. holders should consult their tax advisors regarding the application of these rules.

 

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Notwithstanding the foregoing, gain from the distribution to the extent it is treated as a sale of Spirit’s common stock not otherwise subject to FIRPTA will be taxable to a non-U.S. holder if either (a) the investment in Spirit’s common stock is treated as effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such gain is attributable), in which case the non-U.S. holder will be subject to the same treatment as U.S. holders with respect to such gain, except that a non-U.S. holder that is a corporation may also be subject to the 30% branch profits tax (or such lower rate as may be specified by an applicable income tax treaty) on such gain, as adjusted for certain items, or (b) the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax on the non-U.S. holder’s capital gains (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the non-U.S. holder (even though the individual is not considered a resident of the United States), provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. In addition, even if Spirit is a domestically controlled qualified investment entity, upon disposition of Spirit’s common stock, a non-U.S. holder may be treated as having gain from the sale or other taxable disposition of a USRPI if the non-U.S. holder (1) disposes of such stock within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been treated as gain from the sale or exchange of a USRPI and (2) acquires, or enters into a contract or option to acquire, or is deemed to acquire, other shares of that stock during the 61-day period beginning with the first day of the 30-day period described in clause (1), unless such stock is “regularly traded” and the non-U.S. holder did not own more than 10% of the stock at any time during the one-year period ending on the date of the distribution described in clause (1).

To the extent the distribution is treated as a sale of Spirit’s common stock and gain were subject to taxation under FIRPTA, the non-U.S. holder would be required to file a U.S. federal income tax return and would be subject to regular U.S. federal income tax with respect to such gain in the same manner as a taxable U.S. holder (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals).

Information Reporting and Backup Withholding

U.S. Holders. A U.S. holder may be subject to information reporting and backup withholding when such holder receives the distribution. Certain U.S. holders are exempt from backup withholding, including corporations and certain tax-exempt organizations. A U.S. holder will be subject to backup withholding if such holder is not otherwise exempt and:

 

    the holder fails to furnish the holder’s taxpayer identification number, which for an individual is ordinarily his or her social security number;

 

    the holder furnishes an incorrect taxpayer identification number;

 

    the applicable withholding agent is notified by the IRS that the holder previously failed to properly report payments of interest or dividends; or

 

    the holder fails to certify under penalties of perjury that the holder has furnished a correct taxpayer identification number and that the IRS has not notified the holder that the holder is subject to backup withholding.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. U.S. holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption.

Non-U.S. Holders. The distribution of SMTA common shares generally will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the

 

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holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any dividends on Spirit’s common stock paid to the non-U.S. holder, regardless of whether any tax was actually withheld. In addition, proceeds of a sale of such stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting, if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds of a sale of such stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the non-U.S. holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

Medicare Contribution Tax on Unearned Income

Certain U.S. holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends on stock and capital gains from the sale or other disposition of stock. U.S. holders should consult their tax advisors regarding the effect, if any, of these rules on the distribution.

Additional Withholding Tax on Payments Made to Foreign Accounts

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on Spirit’s common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in clause (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

Holders should consult their tax advisors regarding the potential application of withholding under FATCA to the distribution.

Time for Determination of the Tax Consequences of the Distribution

The tax consequences of the distribution will be affected by a number of facts that are yet to be determined, including Spirit’s final earnings and profits for 2018 (including as a result of the income and gain Spirit recognizes in connection with the spin-off), the fair market value of SMTA common shares on the date of the

 

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distribution and the extent to which Spirit recognizes gain on the sales of USRPIs or other capital assets. Thus, a definitive calculation of the U.S. federal income tax consequences of the distribution will not be possible until after the end of the 2018 calendar year. Spirit will provide its stockholders with tax information on an IRS Form 1099-DIV, informing them of the character of distributions made during the taxable year, including the distribution.

Market for Common Shares

There is currently no public market for our common shares. A condition to the spin-off is the listing on the NYSE of our common shares. We intend to list our common shares on the NYSE under the symbol “SMTA.”

Trading Between the Distribution Record Date and Distribution Date

Beginning shortly before the distribution record date and continuing up to and through the distribution date, we expect that there will be two markets in Spirit common stock: a “regular-way” market and an “ex-distribution” market. Shares of Spirit common stock that trade on the regular way market will trade with an entitlement to our common shares distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to our common shares distributed pursuant to the distribution. Therefore, if you sell shares of Spirit common stock in the “regular-way” market through the distribution date, you will be selling your right to receive our common shares in the distribution. If you own shares of Spirit common stock at the close of business on the distribution record date and sell those shares on the “ex-distribution” market through the distribution date, you will still receive our common shares that you would be entitled to receive pursuant to your ownership of the shares of Spirit common stock on the distribution record date.

Furthermore, beginning on or shortly before the distribution record date and continuing up to and through the distribution date, we expect that there will be a “when-issued” market in our common shares. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for our common shares that will be distributed to Spirit stockholders on the distribution date. If you owned shares of Spirit common stock at the close of business on the distribution record date, you would be entitled to our common shares distributed pursuant to the distribution. You may trade this entitlement to our common shares, without trading the shares of Spirit common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to our common shares will end and “regular-way” trading will begin.

Conditions to the Spin-Off

The spin-off of our common shares by Spirit is subject to the satisfaction of the following conditions:

 

    the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, and no stop order relating to the registration statement shall be in effect;

 

    SMTA’s common shares will have been authorized for listing on the NYSE, subject to official notice of issuance;

 

    no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing completion of the spin-off or any of the transactions related thereto, including the transfers of assets and liability contemplated by the Separation and Distribution Agreement, shall be in effect; and

 

    the Separation and Distribution Agreement will not have been terminated.

Even if all conditions to the spin-off are satisfied, Spirit may terminate and abandon the spin-off at any time prior to the effectiveness of the spin-off.

 

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Reasons for the Spin-Off

Upon careful review and consideration in accordance with the applicable standard of review under Maryland law, Spirit’s board of directors determined that the spin-off is in the best interest of Spirit and its stockholders. The spin-off will enable potential investors and the financial community to evaluate the performance of each company separately, which may result in a higher aggregate market value than the value of the combined company. Spirit’s board of directors’ determination was based on a number of factors and goals, including those set forth below:

 

    Optimize Capital Structure for Both Companies. Upon completion of the spin-off, we believe each company will have a clear capital structure tailored to its needs, and each may be able to attain more favorable financing terms separately. Our capital structure will utilize Master Trust 2014 to access the secured ABS market to fund future growth, while the removal of Master Trust 2014 from Spirit’s capital structure will result in Spirit having meaningfully less secured debt, which we believe will further facilitate Spirit’s access to capital and investment-grade credit markets.

 

    Seek Optimal Long-Term Solution for Shopko Portfolio. The transfer of the unencumbered Shopko Assets to SMTA will allow us to pursue longer term value creation alternatives for them, including sales, out parcel development and redevelopment opportunities. Proceeds from dispositions of Shopko Assets can then be utilized to fund new acquisitions that will serve as collateral for future issuances under Master Trust 2014.

The anticipated benefits of the spin-off are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated, or at all. In the event that the spin-off does not result in such benefits, the costs associated with the spin-off, including an expected increase in general and administrative expenses, could have a material adverse effect on the financial condition, liquidity and results of operations of each company individually and in the aggregate. For more information about the risks associated with the spin-off, see “Risk Factors—Risks Related to the Spin-Off.”

Reasons for Furnishing this Information Statement

This information statement is being furnished solely to provide information to Spirit stockholders who are entitled to receive our common shares in the spin-off. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or securities of Spirit. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Spirit nor we undertake any obligation to update such information.

 

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DISTRIBUTION POLICY

We anticipate making regular quarterly distributions to our common shareholders. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay regular U.S. federal corporate income tax to the extent that it annually distributes less than 100% of its REIT taxable income. We generally intend over time to make quarterly distributions in an amount at least equal to our REIT taxable income, which may not equal our cash available for distribution during any particular period. However, in determining whether we will make a cash distribution to our common shareholders, our board of trustees will consider various factors, including our cash available for distribution to our common shareholders for the applicable period. In estimating our cash available for distribution to our common shareholders for the year ending December 31, 2018, we have made certain assumptions as reflected in the table and footnotes below.

Our estimate of cash available for distribution to our common shareholders for the year ending December 31, 2018 is based on our unaudited pro forma combined financial data for the year ended December 31, 2017 and does not take into account our business and growth strategies, nor does it take into account any unanticipated expenditures we may have to make or any financings to fund such expenditures. Our estimate also does not include the effect of any changes in our working capital resulting from changes in our working capital accounts, the amount of cash estimated to be used for investing activities for acquisition and other similar activities (except as specifically noted below) or the amount of cash estimated to be used for financing activities (except as specifically noted below). Any such activities may materially and adversely affect our estimate of cash available for distribution to our common shareholders. Because we have made the assumptions set forth above in estimating cash available for distribution to our common shareholders, we do not intend this estimate to be a projection or forecast of our actual results of operations, EBITDA, Adjusted EBITDA, FFO, AFFO, liquidity or financial condition. Our estimate of cash available for distribution to our common shareholders should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to pay distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future dividends or other distributions.

If the financial performance of the collateral for our indebtedness under our Master Trust 2014 fails to achieve certain financial performance criteria, cash from such collateral may be unavailable to us until the terms are cured or the debt refinanced. In addition, if an event of default occurs under our current or future CMBS loans, if the tenants at the properties that secure our current or future CMBS loans fail to maintain certain EBITDAR ratios or if an uncured monetary default exists under the relevant leases, a portion of or all of the cash that would otherwise be distributed to us may be restricted by the lenders and unavailable to us until the terms are cured or the debt refinanced. Such cash sweep triggering events have occurred previously with respect to CMBS loans and may be ongoing from time to time. The occurrence of these events would limit the amount of cash available to us for use in our business and could limit or eliminate our ability to make distributions to our common shareholders. See “Risk Factors—Risks Related to Our Indebtedness—The agreements governing our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our common shareholders.”

Furthermore, a significant portion of our estimated cash available for distribution for the year ending December 31, 2018 is derived from rental revenues received from Shopko and reflected in our unaudited pro forma combined statement of operations for the year ended December 31, 2017. Shopko accounted for approximately $47.7 million, or 18.6%, of our revenues and $1.1 million, or 13.0%, of our property costs (including reimbursables) on a pro forma basis for the year ended December 31, 2017. Although Shopko is current on all of its obligations to us under its lease arrangements with us as of March 5, 2018, we can give you no assurance that this will continue to be the case, particularly if Shopko (not just the stores subject to leases with us) experiences a further decline in its business, financial condition and results of operations or loses access to liquidity. If such events were to occur, Shopko may request discounts or deferrals on the rents it pays to us, seek

 

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to terminate its master leases with us or close certain of its stores or file for bankruptcy, all of which could significantly decrease the amount of rental revenue we receive from it without a proportionate or any decrease in the amount of Shopko-related property costs we incur. The occurrence of these events would limit the amount of cash available to us for use in our business and could limit or eliminate our ability to make distributions to our common shareholders. See “Risk Factors—Risks Related to Our Business—A substantial number of our properties are leased to one tenant, Shopko, which may result in increased risk due to tenant and industry concentration.”

No assurance can be given that our estimated cash available for distribution to our common shareholders for the year ending December 31, 2018 will be accurate or that our actual cash available for distribution to our common shareholders will be sufficient to pay distributions to them at any expected level or at any particular yield, in an amount sufficient for us to continue to qualify as a REIT or to reduce or eliminate U.S. federal income taxes or at all. Accordingly, we may need to borrow or rely on other third-party capital to make distributions to our common shareholders, and such third-party capital may not be available to us on favorable terms, or at all. As a result, we may not be able to pay distributions to our common shareholders in the future. In addition, our series A preferred shares initially issued to Spirit Realty, L.P. and one of its affiliates and the SubREIT preferred shares issued by SubREIT to Spirit Realty, L.P. (which will have a binding commitment to sell such shares to third parties) will have a preference on distribution payments. All distributions will be made at the discretion of our board of trustees and will depend on our historical and projected results of operations, liquidity and financial condition, our REIT qualification, our cash available for distribution to our common shareholders, our debt service requirements, operating expenses and capital expenditures, prohibitions and other restrictions under financing arrangements and applicable law and other factors as our board of trustees may deem relevant from time to time. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution to our common shareholders from what they otherwise would have been.

U.S. federal income tax law requires that a REIT distribute annually at least 90% of its taxable income (determined without regard to the dividends paid deduction and excluding net capital gain) and that it pay regular U.S. federal corporate income tax to the extent that it distributes annually less than 100% of its taxable income (including capital gain). For more information, please see “Material U.S. Federal Income Tax Consequences—Taxation of Our Company—Annual Distribution Requirements.”

The following table sets forth calculations relating to the estimated cash available for distribution to our common shareholders for the year ending December 31, 2018 based on unaudited pro forma combined financial data for the year ended December 31, 2017 and is provided solely for the purpose of illustrating the estimated cash available for distribution to our common shareholders for the year ending December 31, 2018 and is not intended to be a basis for actually determining future distributions. All dollar amounts are in thousands.

 

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Pro forma net loss for the year ended December 31, 2017

   $ (14,142

Add: Real estate depreciation and amortization

     86,493  

Less: Net effect of non-cash rental revenue(1)

     (7,000

Add: Other amortization and non-cash charges(2)

     938  

Add: Non-cash interest expense(3)

     9,900  

Less: Incremental general and administrative expenses(4)

     (1,537

Add: Non-cash impairment charges(5)

     25,896  

Add: Loss on extinguishment of debt

     2,223  

Add: Net reduction to interest expense associated with the amortization of indebtedness(6)

     361  

Less: Net decreases in contractual rent due to lease expirations, assuming renewals consistent with historical data(7)

     (6,862

Add: Non-cash compensation expense(8)

     1,500  
  

 

 

 

Estimated cash flow from operating activities for the year ending December 31, 2018

   $ 97,770  

Less: Estimated cash disbursement obligations for property and tenant improvements(9)

     (1,041

Less: Scheduled principal payments on indebtedness(10)

     (34,502
  

 

 

 

Estimated cash available for distribution for the year ending December 31, 2018

   $ 62,227  
  

 

 

 

Dividends to preferred noncontrolling interests in consolidated subsidiaries(11)

   $ (900

Dividends to holders of series A preferred shares(12)

   $ (15,000

Our common shareholder’s share of estimated cash available for distribution

   $ 46,327  

 

 

(1)  Represents the elimination of non-cash rental revenues associated with the straight-line adjustment to rental revenue, net of bad debt expense, for the year ended December 31, 2017.
(2)  Represents the elimination of pro forma amortization associated with above and below-market lease intangibles and other identified tangible and intangible assets for the year ended December 31, 2017.
(3)  Represents the elimination of pro forma non-cash interest expense for the year ended December 31, 2017, including the amortization of deferred finance costs and debt discount.
(4)  Represents estimated incremental general and administrative expenses not reflected in our pro forma net loss for the year ended December 31, 2017 using the mid-point of our estimated range of total cash general and administrative expense of $7.5 million to $8.5 million as discussed in Note II to our unaudited pro forma combined statement of operations included elsewhere in this information statement.
(5)  Represents the elimination of non-cash impairment charges recognized on real estate investments during the year ended December 31, 2017.
(6)  Represents net reductions in contractual interest expense for the year ending December 31, 2018 due to reductions in outstanding principal amount of indebtedness arising from principal amortization payments on our indebtedness described in footnote 10 below.
(7)  Represents (i) the full-year impact of leases that expired or were terminated during the year ended December 31, 2017 or the period January 1, 2018 through April 6, 2018, in each case that were not renewed or re-leased as of April 6, 2018, and (ii) estimated net decreases in contractual rent during the year ending December 31, 2018 due to lease expirations at 26 properties, assuming a renewal rate of 81.5% based on expiring Contractual Rent, which was our weighted average lease renewal rate for the eight quarters ended December 31, 2017 (weighted by Contractual Rent and without giving effect to incremental Contractual Rent under new leases) and rental rates on renewed leases equal to the in-place rates for such leases at expiration. This adjustment gives effect only to expirations net of estimated renewals and does not take into account incremental new leasing.
(8)  Represents the elimination of pro forma non-cash compensation expense related to equity-based awards for the year ended December 31, 2017.
(9)  Represents the expected cash disbursements associated with all known property and tenant improvement obligations projected to be completed during the year ending December 31, 2018.
(10)  Represents scheduled principal amortization during the year ending December 31, 2018 for indebtedness outstanding at December 31, 2017, as well as additional indebtedness incurred through April 6, 2018.

 

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(11)  Represents dividends at a rate of 18% per annum on the 5,000 SubREIT preferred shares issued by SubREIT to Spirit Realty, L.P. (which will have a binding commitment to sell such shares to third parties) with an aggregate liquidation preference of $5.0 million, assuming such dividends are paid entirely in cash.
(12)  Represents dividends at a rate of 10% per annum on the Series A preferred shares initially issued to Spirit Realty, L.P. and one of its affiliates with an aggregate liquidation preference of $150.0 million, assuming such dividends are paid entirely in cash.

 

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SELECTED PRO FORMA AND HISTORICAL COMBINED FINANCIAL AND OTHER DATA

You should read the following selected pro forma and historical combined financial and other data together with “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and the combined financial statements, and related notes thereto, of the Predecessor Entities included elsewhere in this information statement.

The following tables set forth selected unaudited pro forma combined financial and other data of SMTA after giving effect to the spin-off and related transactions. The unaudited pro forma combined balance sheet data gives effect to the spin-off and related transactions as if they had occurred on December 31, 2017. The unaudited pro forma combined statement of operations gives effect to the spin-off and related transactions as if they had occurred on January 1, 2017. The selected unaudited pro forma combined financial data set forth below is presented for illustrative purposes only and is not necessarily indicative of the combined operating results or financial position that would have occurred if the spin-off and related transactions had been consummated on the dates and in accordance with the assumptions described in the unaudited pro forma combined financial statements, including the notes thereto, which are included elsewhere in this information statement, nor is it necessarily indicative of our future operating results or financial position.

The following tables also set forth selected historical combined financial and other data of SMTA’s Predecessor Entities as of the dates and for the periods presented. We have not presented historical information of SMTA because it has not had any operating activity since its formation on November 15, 2017, other than its initial capitalization. The selected historical combined financial data as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 as set forth below was derived from the Predecessor Entities’ audited combined financial statements, including the notes thereto, which are included elsewhere in this information statement. The historical results set forth below are not necessarily indicative of our operating results expected for any future periods. We believe that the assumptions and estimates used in preparation of the underlying historical results are reasonable.

 

     Pro Forma
Year Ended
December 31,
2017
     Historical
Years Ended December 31,
 
        2017      2016      2015  
     (Unaudited)      (In Thousands)         

Operating Data:

           

Revenues:

           

Rentals

   $ 243,368      $ 224,312      $ 234,671      $ 249,036  

Interest income on loans receivable

     4,500        768        2,207        3,685  

Tenant reimbursement income

     2,362        2,274        2,130        2,048  

Other income

     5,711        4,448        6,295        6,394  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     255,941        231,802        245,303        261,163  

Expenses:

           

General and administrative

     7,963        23,857        18,956        20,790  

Related party fees

     26,960        5,500        5,427        5,506  

Restructuring charges

     —          —          2,465        3,036  

Transaction costs

     —          4,354        —          —    

Property costs (including reimbursable)

     8,416        9,130        5,258        5,043  

Interest

     111,784        76,733        77,895        83,719  

Depreciation and amortization

     86,493        80,386        85,761        93,692  

Impairments

     25,896        33,548        26,565        19,935  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     267,512        233,508        222,327        231,721  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Pro Forma
Year Ended
December 31,
2017
    Historical
Years Ended December 31,
 
       2017     2016     2015  
     (Unaudited)     (In Thousands)        

(Loss) income from continuing operations before other expense and income tax (expense) benefit

     (11,571     (1,706     22,976       29,442  

Other expense:

        

Loss on debt extinguishment

     (2,223     (2,223     (1,372     (787
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (2,223     (2,223     (1,372     (787
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax (expense) benefit

     (13,794     (3,929     21,604       28,655  

Income tax (expense) benefit

     (348     (179     (181     33  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (14,142 )      (4,108 )      21,423       28,688  
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Income from discontinued operations

     —         —         —         98  

Gain on disposition of assets

     —         —         —         590  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —         —         —         688  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before gain on disposition of assets

     (14,142 )      (4,108 )      21,423       29,376  

Gain on disposition of assets

     —         22,393       26,499       84,111  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (14,142   $ 18,285     $ 47,922     $ 113,487  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Pro Forma
Year Ended
December 31,
2017
    Historical Years Ended
December 31,
 
       2017     2016  
     (Unaudited)     (In Thousands)  

Balance Sheet Data (end of period):

      

Gross investments, including related lease intangibles

   $ 2,934,858     $ 2,870,592     $ 2,817,732  

Net investments

     2,282,997       2,212,488       2,226,235  

Cash and cash equivalents

     3,016       6       1,268  

Total assets

     2,444,836       2,357,660       2,325,538  

Mortgages and notes payable, net

     2,018,057       1,926,835       1,339,614  

Total liabilities

     2,060,310       1,966,742       1,380,681  

Total parent company equity

     384,526       390,918       944,857  

Other Data:

      

FFO (1)

   $ 82,347     $ 109,826     $ 133,749  

AFFO (1)

   $ 89,908     $ 126,765     $ 143,560  

Adjusted Debt (2)

   $ 1,983,496     $ 1,914,656     $ 1,354,467  

Adjusted Debt + Preferred (2)

   $ 2,138,496     $ 1,914,656     $ 1,354,467  

Adjusted EBITDA (1)

   $ 212,602     $ 193,315     $ 217,079  

Leverage (Adjusted Debt / Adjusted EBITDA) (1)(2)

     9.3x       9.9x       6.2x  

Leverage (Adjusted Debt + Preferred / Adjusted EBITDA) (1)(2)

     10.1x       9.9x       6.2x  

FCCR (Adjusted EBITDA / Fixed Charges) (1)

     1.8x       2.7x       3.0x  

Number of properties in investment portfolio

     903       918       982  

Occupancy at period end

     99     99     98

 

(1)  Please see “Non-GAAP Financial Measures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for our reconciliation to Net Income and definition.
(2)  Please see “Non-GAAP Financial Measures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for our reconciliation to total mortgages and notes payable and definition.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The accompanying unaudited pro forma combined financial statements presented below have been prepared to reflect the effect of certain pro forma adjustments to the historical financial statements of SMTA and the historical financial statements of the Predecessor Entities. All significant pro forma adjustments and their underlying assumptions are described more fully in the notes to the unaudited pro forma combined financial statements, which you should read in conjunction with such unaudited pro forma combined financial statements.

The unaudited pro forma combined financial statements give effect to the spin-off and the related transactions, including:

 

    the creation of a Maryland real estate investment trust, SMTA, which was formed on November 15, 2017 and capitalized on November 17, 2017;

 

    the transfer from Spirit to SMTA of the Predecessor Entities, which include (i) Master Trust 2014, an asset-backed securitization trust comprised of six legal entities that has issued non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans receivable, (ii) three legal entities that own 98 properties primarily leased to Shopko, (iii) one legal entity that owns a single distribution center property leased to a sporting goods tenant and its general partner entity and (iv) two legal entities that own four unencumbered properties;

 

    the contribution by Spirit to SMTA of a $35.0 million B-1 Term Loan made by Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, as part of a syndicated loan and security agreement with Shopko as borrower and several banks as lenders entered into on January 16, 2018;

 

    the incurrence by the Predecessor Entities of $758.4 million of new indebtedness, consisting of the issuance of (i) $674.4 million aggregate principal amount of new Master Trust 2014 notes comprised of $542.4 million aggregate principal amount of net-lease mortgage notes Series 2017-1, Class A Notes, and $132.0 million aggregate principal amount of net-lease mortgage notes Series 2017-1, Class B Notes, on December 14, 2017 and (ii) $84.0 million aggregate principal amount of new CMBS loan on a single distribution center property leased to a sporting goods tenant on January 22, 2018, the proceeds of which, in each case, were distributed to Spirit;

 

    the repayment by the Predecessor Entities of $43.1 million aggregate principal amount of existing Master Trust 2014 notes comprised of net-lease mortgage notes Series 2014-1, Class A-1 Notes, on November 20, 2017;

 

    the issuance of (i) 10% Series A preferred shares by SMTA to Spirit Realty, L.P. and one of its affiliates with an aggregate liquidation preference of $150.0 million, (ii) 18% SubREIT preferred shares by SubREIT to Spirit Realty, L.P. (which will have a binding commitment to sell such shares to third parties) with an aggregate liquidation preference of $5.0 million;

 

    the entry into the Asset Management Agreement between SMTA and Spirit Realty, L.P.; and

 

    the distribution of approximately 42,850,013 SMTA common shares by Spirit to Spirit stockholders, based on the approximately 428,500,128 shares of Spirit common stock outstanding as of April 27, 2018, assuming distribution of 100% of Spirit outstanding common shares and applying the distribution ratio of one common share of SMTA for every ten shares of Spirit common stock (without accounting for cash to be issued in lieu of fractional shares).

As of December 31, 2017, the Predecessor Entities consisted of 907 owned properties with a 99.3% Occupancy. The owned properties were leased to 201 tenants across 45 states and 24 industries. In addition, Master Trust 2014 included mortgage loans receivable secured by an additional 11 properties. The spin-off and the related transactions also include, and the unaudited pro forma combined financial statements reflect, the impact of the following property contribution, acquisition, distribution and disposition transactions that have

 

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occurred or are expected to occur in preparation for the spin-off during the period of January 1, 2017 through record date of the spin-off to reflect the real estate assets that will comprise SMTA at the time of the spin-off:

 

    the contribution by Spirit to SMTA or its subsidiaries of ten properties and the acquisition by the Predecessor Entities from a third party of three properties in preparation for the spin-off subsequent to December 31, 2017;

 

    the distribution by the Predecessor Entities to Spirit of three properties and the disposition by the Predecessor Entities to third parties of 25 properties in preparation for the spin-off subsequent to December 31, 2017;

 

    the addition by Spirit to the collateral of Master Trust 2014 of 10 properties on December 14, 2017 in connection with the issuance of $674.4 million aggregate principal amount of Series 2017-1 notes described above;

 

    the acquisition by the Predecessor Entities from a third party of one property and the contribution by Spirit to the Predecessor Entities of one property in the normal course of business during the year ended December 31, 2017; and

 

    the disposition by Predecessor Entities to third parties of 76 properties in the normal course of business during the year ended December 31, 2017.

Upon completion of the spin-off, we expect to own investments in a portfolio of approximately 903 properties, consisting of 897 owned properties and mortgage loans receivable secured by six properties. The unaudited pro forma combined balance sheet assumes the spin-off and the related transactions occurring subsequent to December 31, 2017 had occurred as of that date. The unaudited pro forma combined statement of operations assumes the spin-off and the related transactions occurred on January 1, 2017. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to the spin-off and the related transactions and, for purposes of the statements of operations, are expected to have a continuing impact on our business.

The following unaudited pro forma combined financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma combined financial statements. The unaudited pro forma combined financial statements are presented for illustrative purposes only and do not purport to reflect the results we may achieve in future periods or the historical results that would have been obtained had the above transactions been completed as of December 31, 2017 in the case of the unaudited pro forma combined balance sheet or on January 1, 2017 in the case of the unaudited pro forma statements of operations.

The unaudited pro forma combined financial statements are derived from and should be read in conjunction with the historical balance sheet and accompanying notes of SMTA and the historical combined financial statements and accompanying notes of the Predecessor Entities included elsewhere in this information statement.

 

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SMTA

Unaudited Pro Forma Combined Balance Sheet

As of December 31, 2017

(In Thousands, Except Share and Per Share Data)

 

    SMTA
Historical
(A)
    Predecessor
Entities

Historical
(B)
    2018
Contributions
(C)
    2018
Distributions and
Dispositions

(D)
    Other
Adjustments
          Pro Forma
Combined
Total
 

Assets

             

Investments:

             

Real estate investments:

             

Land and improvements

  $      —       $ 973,231     $ 20,200     $ (15,655   $  —         $ 977,776  

Buildings and improvements

    —         1,658,023       47,125       (12,229     —           1,692,919  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total real estate investments

    —         2,631,254       67,325       (27,884     —           2,670,695  

Less: accumulated depreciation

    —         (557,948     (9,733     6,753     —           (560,928
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    —         2,073,306       57,592       (21,131     —           2,109,767  

Loans receivable, net

    —         32,307       —         (1,501     35,551     (E     66,357  

Intangible lease assets, net

    —         102,262       1,411       (1,172     —           102,501  

Real estate assets held for sale, net

    —         28,460       —         —         —           28,460  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net investments

    —         2,236,335       59,003       (23,804     35,551         2,307,085  

Cash and cash equivalents

    10     6       —         —         3,000       (F     3,016  

Deferred costs and other assets, net

    —         107,770       (5,116     18,532     —           121,186  

Goodwill

    —         13,549       —         —         —           13,549  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total assets

  $ 10     $ 2,357,660     $ 53,887     $ (5,272   $ 38,551       $ 2,444,836  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Liabilities, mezzanine equity and equity

             

Liabilities:

             

Mortgages and notes payable, net

  $  —       $ 1,926,835     $  —       $  —       $

 

8,216

83,006

 

 

   

(G

(H

)

  $ 2,018,057  

Intangible lease liabilities, net

    —         23,847       884       (643     —           24,088  

Accounts payable, accrued expenses and other liabilities

    —         16,060       900       (795     2,000       (F     16,165  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

    —         1,966,742       1,784       (1,438     93,222         2,060,310  

Mezzanine equity:

             

Series A preferred shares, $0.01 par value, $25.00 per share liquidation preference, authorized: 0 shares issued and outstanding, SMTA historical, and 6,000,000 shares issued and outstanding, pro forma combined total

    —         —         —         —         150,000       (I     150,000  

Preferred noncontrolling interests in consolidated subsidiaries

    —         —         —         —         5,000       (J     5,000  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total mezzanine equity

    —         —         —         —         155,000         155,000  

 

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Table of Contents
     SMTA
Historical
(A)
     Predecessor
Entities

Historical
(B)
     2018
Contributions
(C)
     2018
Distributions and
Dispositions

(D)
    Other
Adjustments
          Pro Forma
Combined
Total
 

Equity:

                 

Net parent investment

     —          390,918        52,103        (3,834 )    

35,551

1,000

(8,216

(83,006

(150,000

(5,000

(229,516

 

 

   

(E

(F

(G

(H

(I

(J

(K


    —    

Common shares, $0.01 par value, 750,000,000 shares authorized: 10,000 shares issued and outstanding, SMTA historical, and 42,850,013 shares issued and outstanding, pro forma combined total

     —          —          —          —         429       (K     429  

Capital in excess of par value

     10        —          —          —         229,087       (K     229,097  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

     

 

 

 

Total equity

     10      390,918        52,103        (3,834 )     (209,671       229,526  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

     

 

 

 

Total liabilities, mezzanine equity and equity

   $ 10      $ 2,357,660      $ 53,887      $ (5,272   $ 38,551       $ 2,444,836  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

     

 

 

 

See accompanying notes.

 

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SMTA

Unaudited Pro Forma Combined Statement of Operations

Year Ended December 31, 2017

(In Thousands, Except Share and Per Share Data)

 

     SMTA
Historical
(AA)
     Predecessor
Entities
(BB)
    2018
Contributions

(CC)
    2018
Distributions
and
Dispositions
(DD)
    Master
Trust
2014

Additions
(EE)
     2017
Acquisitions
and
Contributions

(FF)
     2017
Dispositions
(GG)
    Other
Adjustments
          Pro Forma
Combined
Total
       

Revenues:

                         

Rentals

   $  —      $ 224,312     $ 5,977     $ (2,584   $ 19,323      $ 622    $ (4,282   $  —     $ 243,368    

Interest income on loans receivable

          768         (173 )                 (20     3,925       (HH     4,500    

Tenant reimbursement income

          2,274     168       (34 )                 (54     8       (NN     2,362    

Other income

          4,448     1,300           100             (137           5,711    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

Total revenues

            231,802       7,445       (2,791 )     19,423        622      (4,493     3,933         255,941    

Expenses:

                         

General and administrative

          23,857       375       (10 )     3             (1,356     (14,906     (II     7,963    

Related party fees

          5,500                                   20,000       (JJ     26,960    
                      1,460       (KK    

Transaction costs

          4,354                                   (4,354     (LL        

Property costs (including reimbursable)

            9,130       2,162       (432     20               (2,472     8       (NN     8,416    

Interest

            76,733                                       35,051       (MM     111,784    

Depreciation and amortization

            80,386       2,268       (777     6,174        318        (1,876           86,493    

Impairments

            33,548       7,184       (389                   (14,447           25,896    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

Total expenses

            233,508       11,989       (1,608     6,197        318        (20,151     37,259         267,512    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

(Loss) income before other expense and income tax expense

            (1,706     (4,544     (1,183     13,226      304      15,658       (33,326       (11,571  

Other expense:

                         

Loss on debt extinguishment

            (2,223                                     (2,223  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

Total other expense

            (2,223                                     (2,223  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

(Loss) income before income tax expense

          (3,929     (4,544     (1,183     13,226      304      15,658     (33,326       (13,794  

Income tax expense

          (179                               (169 ) (NN)        (348  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

(Loss) income before gain on disposition of assets

          (4,108     (4,544     (1,183     13,226      304      15,658     (33,495       (14,142  

Gain on disposition of assets

          22,393             15                 (22,408            
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

 

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Table of Contents
     SMTA
Historical
(AA)
     Predecessor
Entities
(BB)
    2018
Contributions

(CC)
    2018
Distributions
and
Dispositions
(DD)
    Master
Trust
2014

Additions
(EE)
     2017
Acquisitions
and
Contributions

(FF)
     2017
Dispositions
(GG)
    Other
Adjustments
          Pro Forma
Combined
Total
       

Net income (loss)

   $      $ 18,285     $ (4,544   $ (1,168   $ 13,226      $ 304      $ (6,750   $ (33,495     $ (14,142  

Net income attributable to preferred noncontrolling interests in consolidated subsidiaries

                      900       (OO     900    

Preferred dividends

                      15,000       (PP     15,000    

Net income (loss) attributable to common shareholders:

   $      $ 18,285     $ (4,544   $ (1,168   $ 13,226      $ 304      $ (6,750   $ (49,395     $ (30,042  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

     

 

 

   

Net loss per share attributable to common shareholders:

                         

Basic

                        $ (0.70     (QQ
                       

 

 

   

Diluted

                        $ (0.70     (QQ
                       

 

 

   

Weighted average common shares outstanding:

                         

Basic

                          42,850,013       (QQ
                       

 

 

   

Diluted

                          42,850,013       (QQ
                       

 

 

   

See accompanying notes.

 

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SMTA

Notes to Unaudited Pro Forma Combined Financial Statements

 

1. Adjustments to Unaudited Pro Forma Combined Balance Sheet

 

(A) Reflects the historical balance sheet of SMTA as of December 31, 2017.

 

(B) Reflects the historical combined balance sheet of the Predecessor Entities as of December 31, 2017. The transfer from Spirit to SMTA of the Predecessor Entities are transactions between entities under common control. As a result, the Predecessor Entities’ assets and liabilities are reflected at their historical cost basis.

 

(C) Reflects ten properties contributed by Spirit to SMTA or its subsidiaries and the acquisition by the Predecessor Entities from a third party of three properties in preparation for the spin-off subsequent to December 31, 2017 with an aggregate net book value of $58.1 million as of December 31, 2017.

 

(D) Reflects three properties distributed by the Predecessor Entities to Spirit subsequent to December 31, 2017 and 25 properties disposed of by the Predecessor Entities to third parties in preparation for the spin-off subsequent to December 31, 2017 with an aggregate net book value of $23.2 million as of December 31, 2017.

 

(E) Reflects the contribution to SMTA of a $35.0 million B-1 Term Loan made by Spirit Realty, L.P. as part of a syndicated loan and security agreement with Shopko as borrower and several banks as lenders, resulting in a $35.5 million increase in net parent investment, which is reclassified to shareholder’s equity as discussed in Note I. The B-1 Term Loan is secured by Shopko’s assets in its $784 million asset-backed lending facility and is subordinate to an existing Term B Loan. The B-1 Term Loan matures on June 19, 2020 and bears interest at a rate of 12% per annum.

 

(F) Reflects the cash contribution of $3.0 million to SMTA from Spirit Realty, L.P. at or prior to the spin-off. Additionally, reflects the related liability to be recorded by SMTA as SMTA is required to pay Spirit Realty, L.P. $2.0 million within 60 days of the spin-off for certain estimated rents received with respect to the SMTA assets that relates to the period between May 1, 2018 and the spin-off.

 

(G) The Series 2017-1 Class B Notes issued by Master Trust 2014 were repriced on January 23, 2018 pursuant to a private offering that decreased the interest rate on the Class B Notes from 6.35% to 5.49% per annum. The Series 2017-1 Class A Notes issued by Master Trust 2014 were also repriced on the same date, with no change to their terms. In connection with the repricing, the Predecessor Entities received $8.2 million in additional proceeds that reduced the debt discount. The additional proceeds were distributed to Spirit, resulting in a $8.2 million reduction in net parent investment, which is reclassified to shareholder’s equity as discussed in Note I.

 

(H) Reflects the incurrence of approximately $84.0 million of new indebtedness, net of deferred financing fees of $1.0 million, through issuance of new CMBS loan on a single distribution center property leased to a sporting goods tenant. The CMBS loan matures on February 1, 2028 and has a stated interest rate of 5.14%. The proceeds of the CMBS loan issuance were distributed to Spirit, resulting in a $83.0 million reduction in net parent investment, which is reclassified to shareholder’s equity as discussed in Note I.

 

(I) Reflects the issuance of 10% Series A preferred shares by SMTA to Spirit Realty, L.P. and one of its affiliates with an aggregate liquidation preference of $150.0 million. The Series A preferred shares will be classified as mezzanine equity in the unaudited pro forma combined balance sheet in accordance with ASC 480-10-S99, Distinguishing Liabilities from Equity (which requires mezzanine equity classification for preferred equity issuances with redemption features that are outside of the control of the issuer) because, for so long as any Series A preferred shares are held by Spirit Realty, L.P. (together with one or more of its affiliates), upon the occurrence of an Offer to Purchase Event (as defined), we must offer to purchase the Series A preferred shares held by Spirit Realty, L.P. (together with one or more of its affiliates) at a purchase price equal to $25.00 per share, plus any accrued and unpaid dividends to, but not including, the payment date.

 

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(J) Reflects the issuance of 18% SubREIT preferred shares by SubREIT to Spirit Realty, L.P. (which will have a binding commitment to sell such shares to third parties) with an aggregate liquidation preference of $5.0 million. The SubREIT preferred shares will also require mezzanine equity classification.

 

(K) Reflects the reclassification of the net parent investment attributable to the Predecessor Entities to par value and capital in excess of par value in connection with the distribution of 42,850,013 of our common shares to Spirit.

 

2. Adjustments to Unaudited Pro Forma Combined Statement of Operations

 

(AA) Represents the historical statement of operations of SMTA for the year ended December 31, 2017. SMTA has had no operating activity since its formation on November 15, 2017, other than the issuance of 10,000 common shares for an aggregate purchase price of $10,000 in connection with the initial capitalization of SMTA.

 

(BB) Reflects the historical combined statement of operations of the Predecessor Entities for the year ended December 31, 2017. As discussed in Note B, the transfer from Spirit to SMTA of the Predecessor Entities are transactions between entities under common control. As a result, expenses such as depreciation and amortization to be recognized by us are based on the Predecessor Entities’ historical cost basis of the related assets and liabilities.

 

(CC) Reflects the revenue and expenses from ten properties contributed by Spirit to SMTA or its subsidiaries and the acquisition by the Predecessor Entities from a third party of three properties in preparation for the spin-off subsequent to December 31, 2017 as though the contributions were made on January 1, 2017.

 

(DD) Reflects the revenue and expenses from three properties distributed by the Predecessor Entities to Spirit and 25 properties disposed of by the Predecessor Entities to third parties subsequent to December 31, 2017 as though the distributions and dispositions were made on January 1, 2017.

 

(EE) Reflects the revenue and expenses from 10 properties added to the collateral of Master Trust 2014 by Spirit on December 14, 2017 in connection with the issuance of $674.4 million aggregate principal amount of Series 2017-1 notes as though the additions were made on January 1, 2017.

 

(FF) Reflects the revenue and expenses from one property acquired by Predecessor Entities from a third party and one property contributed by Spirit to the Predecessor Entities in the normal course of business during the year ended December 31, 2017 as though the acquisition and contribution were made on January 1, 2017.

 

(GG) Reflects the revenue and expenses from 76 properties disposed of by Predecessor Entities to third parties in the normal course of business during the year ended December 31, 2017 as though the dispositions were made on January 1, 2017.

 

(HH) Reflects interest income related to the $35.0 million B-1 Term Loan made to Shopko as though the loan was made on January 1, 2017, with an interest rate of 12% per annum described in Note E.

 

(II) Reflects (i) the elimination of general and administrative expenses of $16.0 million for the year ended December 31, 2017, as these costs will be incurred by our Manager under the Management Agreement as discussed in Note JJ, partially offset by (ii) equity-based compensation expense associated with grants of restricted shares with an aggregate value of $1.5 million that we expect to make to our independent trustees. These grants are expected to vest over a one-year period. The remaining general and administrative expenses reflect the historical bad debt expense of the Predecessor Entities for the year ended December 31, 2017 and certain other expenses that are expected to be recurring.

We estimate recurring cash general and administrative expenses of approximately $7.5 million to $8.5 million for the year ended December 31, 2018 as a result of being a public company. As we have not yet entered into contracts with third parties to provide the services included within this estimate (other than our expected equity-based compensation expense), approximately $0.8 million to $1.8 million of these estimated expenses do not appear in the unaudited pro forma combined statement of operations.

 

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(JJ) Reflects fees associated with the Management Agreement with Spirit of $20 million per year pursuant to which Spirit will provide various services subject to the supervision of our board of trustees, including, but not limited to: (i) performing all of our day-to-day functions, (ii) sourcing, analyzing and executing on investments and dispositions, (iii) determining investment criteria, (iv) performing investment and liability management duties, including financing and hedging, and (v) performing financial and accounting management.

 

(KK) Reflects an increase in fees paid to Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, as property manager and special servicer of Master Trust 2014 as a result of the additional collateral added to Master Trust 2014 in conjunction with the issuance of the Series 2017-1 notes.

 

(LL) Reflects the elimination of transaction costs that are directly attributable to the spin-off that will not have a continuing impact on our results of operations.

 

(MM) Reflects an increase in interest expense of $35.4 million related to the incurrence of approximately $758.4 million of new indebtedness with a weighted average interest rate of approximately 4.8% per annum (including the impact of the repricing of the Series 2017-1 Class B notes as described in Note F), net of a reduction in interest expense of $0.3 million related to the repayment of $43.1 million of existing indebtedness with an interest rate of 5.1% per annum. The adjustments include interest expense paid to a related party of $1.3 million for the year ended December 31, 2017. The adjustment also reflects non-cash interest expense for the amortization of the fees paid to lenders of $3.8 million for the year ended December 31, 2017.

Interest expense was calculated assuming constant debt levels throughout the periods presented, as though the debt was incurred on January 1, 2017. Interest expense may be higher or lower if our amount of debt outstanding changes. A 0.125% change to the annual interest rate would change interest expense by approximately $2.6 million for the year ended December 31, 2017.

 

(NN) Reflects income tax expense associated with our contemplated structure, in connection with the spin-off and related transactions. The portion of these taxes that we can pass through to our tenants under our leases is reflected as tenant reimbursement income and property costs (including reimbursable).

 

(OO) Reflects the allocation of net income to preferred noncontrolling interests in consolidated subsidiaries attributable to the SubREIT preferred shares issued by SubREIT described in Note J.

 

(PP) Represents dividends at a rate of 10% per annum on the Series A preferred shares with an aggregate liquidation preference of $150.0 million described in Note H.

 

(QQ) Our pro forma earnings per share are based upon the distribution of all of the outstanding SMTA common shares owned by Spirit on the basis of one common share of SMTA for every ten shares of Spirit common stock held as of the close of business on the record date, or 42,850,013 shares.

The number of our common shares used to compute basic and diluted earnings per share for the year ended December 31, 2017 is based on the number of our common shares assumed to be outstanding on the distribution date, based on the number of shares of Spirit common stock outstanding on April 27, 2018, assuming a distribution ratio of one common share of SMTA for every ten shares of Spirit common stock outstanding and the shares that were issued and outstanding at the time of our initial capitalization.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following is a discussion and analysis of the financial condition of SMTA immediately following the spin-off, as well as the historical results of SMTA’s Predecessor Entities. You should read this discussion in conjunction with the audited historical combined financial information and accompanying notes and the unaudited pro forma combined financial information and accompanying notes, both of which are included elsewhere in this information statement. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted or expected in these forward-looking statements as a result of various factors, including those which are discussed below and elsewhere in this information statement, including “Risk Factors” and “Forward-Looking Statements.” Our financial statements may not necessarily reflect our future financial condition and results of operations, or what they would have been had we been a separate, stand-alone company during the periods presented.

On August 3, 2017, Spirit announced a plan to spin-off its interests in (i) Master Trust 2014, an asset-backed securitization trust comprised of six legal entities, which has issued non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans receivable, (ii) three legal entities which own properties primarily leased to Shopko, (iii) the Sporting Goods Entities, and (iv) two legal entities which own unencumbered properties. As of December 31, 2017, the Predecessor Entities consisted of 907 owned properties, with a 99.3% Occupancy. The owned properties were leased to 201 tenants across 45 states and 24 industries. In addition, Master Trust 2014 included mortgage loans receivable secured by an additional 11 real estate properties.

The spin-off will be effectuated by means of a pro rata distribution by Spirit to its common shareholders of all outstanding SMTA common shares. SMTA was formed for the purpose of receiving, via contribution from Spirit, the legal entities which comprise the Predecessor Entities. To date, SMTA has not conducted any business as a separate company and has no material assets and liabilities.

The accompanying combined financial statements of the Predecessor Entities have been prepared on a carve-out basis in accordance with GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting periods. Actual results could differ from these estimates. The historical financial results for the carved-out Predecessor Entities reflect expenses for certain corporate costs which we believe are reasonable. These expenses were based on either actual cost incurred or a proportion of costs estimated to be allocable to SMTA based on the relative property count of the Predecessor Entities to those owned by Spirit as a whole. Such costs do not necessarily reflect what the actual costs would have been if SMTA had been operating as a separate standalone public company. These expenses are discussed further in footnote 5 of the accompanying combined financial statements.

Prior to the spin-off, we raised $674.4 million in new debt through issuance of new Series 2017-1 notes under Master Trust 2014 in December 2017 and an additional $84.0 million of new CMBS debt on the single distribution center property leased to a sporting goods tenant in January 2018. All cash from the proceeds of these debt issuances has been distributed to Spirit prior to the transfer of the Predecessor Entities described above. In January 2018, we also re-priced a private offering of the Series 2017-1 Class B notes with $132.0 million aggregate principal, reducing the interest rate on such notes from 6.35% to 5.49%, and Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, funded a $35.0 million term loan as part of a syndicated loan and security agreement with Shopko as borrower and several banks as lenders that will be contributed to us in connection with the spin-off. In connection with the spin-off, SMTA will issue $150.0 million of Series A preferred shares to Spirit Realty, L.P. and one of its affiliates in exchange for the contribution of certain legal entities. SubREIT will issue common shares and SubREIT preferred shares with an aggregate liquidation preference of $5.0 million to Spirit Realty, L.P. in exchange for the contribution of certain assets, including an interest in Financing JV. Spirit Realty, L.P. will then sell the preferred shares of SubREIT to third parties.

 

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SMTA will enter into an Asset Management Agreement with Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, under which Spirit Realty, L.P. will provide various services including, but not limited to: active portfolio management (including underwriting and risk management), financial reporting, and SEC compliance. The fees for these services will be a flat rate of $20 million annually. Additionally, subsequent to the spin-off, Spirit Realty, L.P. will continue as the property manager and special servicer of Master Trust 2014, under which Spirit Realty, L.P. receives property management fees which accrue daily at 0.25% per annum of the collateral value of the Master Trust 2014 collateral pool less any specially serviced assets and special servicing fees which accrue daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced per the terms of the Property Management and Servicing Agreement. SMTA and Spirit will also enter into an Insurance Sharing Agreement, a Tax Matters Agreement, and a Registration Rights Agreement in connection with the spin-off.

Subsequent to the transfer of entities to SMTA and the distribution of SMTA’s common shares to Spirit’s shareholders, SMTA expects to operate in a manner intended to enable it to qualify as a REIT under the applicable provisions of the Code. To maintain REIT status, SMTA must meet a number of organizational and operational requirements, including a requirement to distribute annually to shareholders at least 90% of SMTA’s REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. Since the Predecessor Entities are disregarded entities for Federal income tax purposes, no provision for Federal income tax has been made in the accompanying combined financial statements. The Predecessor Entities are subject to certain other taxes, including state taxes, which are shown as income tax (expense) benefit in the combined statements of operations.

Presentation of earnings per share information is not applicable in these combined financial statements, since these assets are wholly owned by Spirit.

Critical Accounting Policies and Estimates

Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our combined financial statements.

Real Estate Investments

Purchase Accounting and Acquisition of Real Estate; Lease Intangibles

We use a number of sources to estimate fair value of real estate acquisitions, including building age, building location, building condition, rent comparables from similar properties, and terms of in-place leases, if any. Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above or below-market leases. In-place lease intangibles are valued based on our estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. We then allocate the purchase price (including acquisition and closing costs) to land, building, improvements and equipment based on their relative fair values. For properties acquired with in-place leases, we allocate the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values. Above and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and our estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease.

 

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Impairment

We review our real estate investments and related lease intangibles quarterly for indicators of impairment, which include the asset being held for sale, tenant bankruptcy, leases expiring in less than 12 months and property vacancy. For assets with indicators of impairment, we then evaluate if its carrying value exceeds its estimated undiscounted cash flows, in which case the asset is considered impaired. Estimating future cash flows and fair values are highly subjective and such estimates could differ materially from actual results. Key assumptions used in estimating future cash flows and fair values include, but are not limited to, revenue growth rates, interest rates, discount rates, capitalization rates, lease renewal probabilities, tenant vacancy rates and other factors.

Impairment is then calculated as the amount by which the carrying value exceeds the estimated fair value. The fair values are estimated 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.

Allowance for Doubtful Accounts

We review our rent receivables for collectability on a regular basis, taking into consideration factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. If the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a write-off of the specific receivable will be made. Uncollected accounts receivable are written off against the allowance when all possible means of collection have been exhausted. For deferred rental revenues related to the straight-line method of reporting rental revenue, we establish a provision for losses based on our estimate of uncollectible receivables and our assessment of the risks inherent in our portfolio, giving consideration to historical experience.

Results of Operations

Comparison of the Years Ended December 31, 2017 and 2016

The following discussion includes the results of our continuing operations as summarized in the table below:

 

     Years Ended December 31,  
     2017      2016      Change     % Change  
     (in thousands)        

Revenues:

          

Rentals

   $ 224,312      $ 234,671      $ (10,359     (4.4 )% 

Interest income on loans receivable

     768        2,207        (1,439     (65.2 )% 

Tenant reimbursement income

     2,274        2,130        144       6.8

Other income

     4,448        6,295        (1,847     (29.3 )% 
  

 

 

    

 

 

    

 

 

   

Total revenues

     231,802        245,303        (13,501     (5.5 )% 

Expenses:

          

General and administrative

     23,857        18,956        4,901       25.9

Related party fees

     5,500        5,427        73       1.3

Restructuring charges

            2,465        (2,465     (100.0 )% 

Transaction costs

     4,354               4,354       100.0

Property costs (including reimbursable)

     9,130        5,258        3,872       73.6

Interest

     76,733        77,895        (1,162     (1.5 )% 

Depreciation and amortization

     80,386        85,761        (5,375     (6.3 )% 

Impairment

     33,548        26,565        6,983       26.3
  

 

 

    

 

 

    

 

 

   

Total expenses

     233,508        222,327        11,181       5.0

 

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     Years Ended December 31,  
     2017     2016     Change     % Change  
     (in thousands)        

(Loss) income from continuing operations before other expense and income tax expense

     (1,706     22,976       (24,682     NM  

Other expense:

        

Loss on debt extinguishment

     (2,223     (1,372     (851     62.0
  

 

 

   

 

 

   

 

 

   

Total other expense

     (2,223     (1,372     (851     62.0

(Loss) income from continuing operations before income tax expense

     (3,929     21,604       (25,533     NM  

Income tax expense

     (179     (181     2       (1.1 )% 
  

 

 

   

 

 

   

 

 

   

(Loss) income from continuing operations

   $ (4,108   $ 21,423     $ (25,531     NM  
  

 

 

   

 

 

   

 

 

   

Gain on disposition of assets

   $ 22,393     $ 26,499     $ (4,106     (15.5 )% 
  

 

 

   

 

 

   

 

 

   

NM—Percentages over 100% are not displayed.

Revenues

Rentals

For the year ended December 31, 2017, approximately 96.8% of our total revenues were generated from long-term leases of our owned properties. The year-over-year decrease in rental revenue was due primarily to a decrease in contractual rental revenue resulting from the timing of real estate transactions subsequent to December 31, 2016. While the Predecessor Entities increased total Real Estate Investment value by $265.5 million for the year ended December 31, 2017 through the acquisition of two properties and Spirit’s contribution of 10 properties in conjunction with the Master Trust 2014 issuance, the 10 properties were not contributed until December 2017. During the same period, the Predecessor Entities disposed of 76 properties with a Real Estate Investment Value of $145.7 million. As of December 31, 2017, our properties had a 99.3% Occupancy. As of December 31, 2017 and 2016, respectively, 6 and 18 of our properties were Vacant, representing approximately 0.7% and 1.8% of our owned properties. Of the six Vacant properties, none were held for sale as of December 31, 2017.

During the year ended December 31, 2017 and 2016, non-cash rentals were $5.2 million and $4.1 million, respectively, representing approximately 2.3% and 1.7%, respectively, of total rental revenue from continuing operations.

Interest income on loans receivable

The decrease in interest income on loans receivable year over year primarily relates to the timing of change in outstanding loans during the year ended December 31, 2016, where mortgage loans receivable decreased from 79 loans collateralized by 81 properties at the beginning of 2016 to 9 loans collateralized by 11 properties at December 31, 2016. Mortgage loans receivable then remained flat, with 9 loans collateralized by 11 properties still outstanding at December 31, 2017.

Tenant reimbursement income

We have a number of leases that require our tenants to reimburse us for certain property costs we incur, which we record on a gross basis. As such, tenant reimbursement income is driven by the tenant reimbursable property costs described below, less an allowance for reimbursable expenses determined to be uncollectable from our tenants.

 

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Other income

Year-over-year other income decreased primarily due to a decrease in lease termination fees received. For the year ended December 31, 2017, other income is primarily attributable to $3.6 million in lease termination fees received from one property with a tenant in the medical office industry and nine properties with tenants in the restaurant – casual dining industry. For the year ended December 31, 2016, other income is primarily attributable to $5.4 million in lease termination fees received from three properties with a tenant in the education industry.

Expenses

General and administrative, Restructuring charges and Transaction costs

General and administrative expenses of $4.0 million and $1.4 million during the years ended December 31, 2017 and 2016, respectively, were specifically identified based on direct usage or benefit. The change in specifically identified expenses is a result of an increase in bad debt expense as a result of certain tenants in the education, sporting goods, specialty retail, medical office and restaurant—casual dining industries for which the straight-line rent has been determined to be uncollectible for the year ended December 31, 2017, whereas there was no bad debt expense recorded for the year ended December 31, 2016. Transaction costs are the expenses associated with the spin-off, and there were no transaction costs incurred for the year ended 2016. For the transaction costs incurred during the year ended December 31, 2017, $3.2 million were specifically identified based on direct usage or benefit.

The remaining general and administrative expenses, restructuring charges and transaction costs have been allocated from Spirit’s financial statements, based on the Predecessor Entities’ property count relative to Spirit’s property count. The Predecessor Entities’ property count decreased from 982 properties at December 31, 2016 to 918 properties at December 31, 2017. Spirit’s property count also decreased from 2,615 properties to 2,480 for the same period. As such, the allocation percentage year over year remained relatively flat. Therefore, the increase in general and administrative expenses is a direct result of Spirit’s increased expenses year-over-year. The relocation of Spirit’s headquarters from Scottsdale, Arizona to Dallas, Texas was completed in 2016 and therefore there were no restructuring charges at recognized at Spirit for the year ended December 31, 2017.

Related party fees

Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, is the property manager and special servicer of Master Trust 2014, under which Spirit Realty, L.P. receives property management fees which accrue daily at 0.25% per annum of the collateral value of the Master Trust 2014 collateral pool less any specially serviced assets and special servicing fees which accrue daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced per the terms of the Property Management and Servicing Agreement. Collateral value remained relatively flat from $2.0 billion at December 31, 2016 to $1.9 billion at November 31, 2017. In conjunction with the issuance completed in December 2017, collateral value increased to $2.6 billion at December 31, 2017. However, due to the timing of the issuance, the increase in collateral value had little impact on the related party fees for the year ended December 31, 2017, resulting in relatively flat related party fees year-over-year.

Property costs

For the year ended December 31, 2017, property costs were $9.1 million (including $2.8 million of tenant reimbursable expenses) compared to $5.3 million (including $2.0 million of tenant reimbursable expenses) for the same period in 2016. The increase was driven primarily by an increase in non-reimbursable property taxes on operating properties of $2.4 million, which relates primarily to the timing of dispositions of vacant properties during 2017, as well as an increase in tenant credit issues year-over-year.

 

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Interest

Interest expense decreased slightly year-over year, primarily due to the timing of debt extinguishment in both 2016 and 2017. For the year ended December 31, 2016, $119.3 million of CMBS debt was extinguished with a weighted average interest rate of 6.0%, however most of the debt was extinguished in the first half of 2016. For the year ended December 31, 2017, $43.1 million of Master Trust 2014 debt was extinguished with an interest rate of 5.1%, however it was not extinguished until November 2017.

The following table summarizes our interest expense on related borrowings from continuing operations:

 

     Years Ended December 31,  
     2017      2016  
     (in thousands)  

Interest expense—Master Trust 2014

   $ 70,664      $ 70,223  

Interest expense—CMBS

     —          2,833  

Non-cash interest expense:

     

Amortization of deferred financing costs

     1,480        1,285  

Amortization of debt discount, net

     4,589        3,554  
  

 

 

    

 

 

 

Total interest expense

   $ 76,733      $ 77,895  
  

 

 

    

 

 

 

Depreciation and amortization

Depreciation and amortization expense relates to the commercial buildings and improvements we own and to amortization of the related lease intangibles. The year-over-year decrease is primarily due to the disposition of 76 properties with a depreciable basis of $145.7 million, during the year ended December 31, 2017. The decrease was partially offset by acquisitions of 12 properties during 2017 with a depreciable basis of $265.5 million, however 10 of these properties were contributed to the Predecessor Entities in conjunction with the Master Trust 2014 issuance in December 2017 and therefore did not contribute significantly to depreciation and amortization expenses for the year ended 2017. The decline in depreciable basis was furthered by impairment charges recorded in 2017 on properties that remain in our portfolio.

The following table summarizes our depreciation and amortization expense from continuing operations:

 

     Years Ended December 31,  
           2017                   2016        
     (in thousands)  

Depreciation of real estate assets

   $ 69,909      $ 73,866  

Amortization of lease intangibles

     10,477        11,895  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 80,386      $ 85,761  
  

 

 

    

 

 

 

Impairment

During the year ended December 31, 2017, we recorded impairment losses from continuing operations of $33.5 million. These charges included $25.2 million of impairment on 27 vacant properties, of which $21.4 million relates to vacant properties held and used and $3.8 million relates to vacant properties held for sale. $8.0 million of impairment was recorded on underperforming properties, including $6.4 million of impairment on 3 underperforming properties within the education industry classified as held for sale. The remaining $0.3 million of impairment charges related to unrecoverable amounts from loans receivable.

 

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During the year ended December 31, 2016, we recorded impairment losses from continuing operations of $26.6 million. These charges included $11.4 million of impairment on 13 properties that were held for sale, including $2.9 million of impairment on vacant held for sale properties. The remaining $15.2 million was recorded on properties held and used, including $6.4 million on 15 vacant held and used properties and $8.8 million on 28 underperforming properties within the general merchandise, restaurants—casual dining, and movie theater industries.

Loss on debt extinguishment

During the year ended December 31, 2017, we extinguished the full outstanding balance of Master Trust 2014 Series 2014-1 Class A1 note of $43.1 million. The loss on the extinguishment was primarily attributable to the $1.6 million pre-payment premium paid in conjunction with this voluntary pre-payment. During the same period in 2016, we extinguished $119.3 million of CMBS debt and recognized a loss on debt extinguishment of $1.4 million. The CMBS debt related to three fixed rate loans collateralized by 56 properties with a weighted average interest rate of 6.0%.

Gain on disposition of assets

During the year ended December 31, 2017, we disposed of 76 properties and recorded gains totaling $22.4 million from continuing operations. Included in these amounts is a $15.0 million gain from the sales of 24 Shopko and former Shopko properties, $2.5 million gain on the sale of 8 properties within the restaurant—quick service industry, $2.4 million gain for the sale of one manufacturing property, and $1.7 million gain on the sale of 4 properties within the restaurant—casual dining industry. During 2016, we disposed of 48 properties and recorded gains totaling $26.5 million from continuing operations. Included in these amounts is a $14.3 million gain from the sales of 14 Shopko and former Shopko properties, $6.1 million gain for the sale of 12 restaurant—casual dining properties, and $4.1 million gain on the sale of 10 properties within the restaurant—quick service industry.

Comparison of the Years Ended December 31, 2016 and 2015

The following discussion includes the results of our continuing operations as summarized in the table below:

 

     Years Ended December 31,  
     2016     2015     Change     % Change  
     (in thousands)        

Revenues:

        

Rentals

   $ 234,671     $ 249,036     $ (14,365     (5.8 )% 

Interest income on loans receivable

     2,207       3,685       (1,478     (40.1 )% 

Tenant reimbursement income

     2,130       2,048       82       4.0

Other income

     6,295       6,394       (99     (1.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     245,303       261,163       (15,860     (6.1 )% 

Expenses:

        

General and administrative

     18,956       20,790       (1,834     (8.8 )% 

Related party fees

     5,427       5,506       (79     (1.4 )% 

Restructuring charges

     2,465       3,036       (571     (18.8 )% 

Property costs (including reimbursable)

     5,258       5,043       215       4.3

Interest

     77,895       83,719       (5,824     (7.0 )% 

Depreciation and amortization

     85,761       93,692       (7,931     (8.5 )% 

Impairment

     26,565       19,935       6,630       33.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     222,327       231,721       (9,394     (4.1 )% 

Income from continuing operations before other expense and income tax (expense) benefit

     22,976       29,442       (6,466     (22.0 )% 

Other expense:

        

Loss on debt extinguishment

     (1,372     (787     (585     (74.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (1,372     (787     (585     (74.3 )% 

 

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     Years Ended December 31,  
     2016     2015      Change     % Change  
     (in thousands)        

Income from continuing operations before income tax (expense) benefit

     21,604       28,655        (7,051     (24.6 )% 

Income tax (expense) benefit

     (181     33        (214     NM  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

   $ 21,423     $ 28,688      $ (7,265     (25.3 )% 
  

 

 

   

 

 

    

 

 

   

 

 

 

Gain on disposition of assets

   $ 26,499     $ 84,111      $ (57,612     (68.5 )% 
  

 

 

   

 

 

    

 

 

   

 

 

 

NM—Percentages over 100% are not displayed.

Revenues

Rentals

For the year ended December 31, 2016, approximately 95.7% of our total revenues were generated from long-term leases of our owned properties. The year-over-year decrease in rental revenue was due primarily to a decrease in contractual rental revenue resulting from net dispositions of real estate subsequent to December 31, 2015. The Predecessor Entities acquired 17 properties during the year ended December 31, 2016, with a Real Estate Investment Value of $93.9 million, however the Predecessor Entities disposed of 48 properties during the same period, with a Real Estate Investment Value of $145.7 million. As of December 31, 2016, our properties had a 98.2% Occupancy. As of December 31, 2016 and 2015, respectively, 18 and 13 of our properties were Vacant, representing approximately 1.8% and 1.3% of our owned properties. Of the 18 Vacant properties, four were held for sale as of December 31, 2016.

During the year ended December 31, 2016 and 2015, non-cash rentals were $4.1 million and $4.4 million, respectively, representing approximately 1.7% and 1.8%, respectively, of total rental revenue from continuing operations.

Interest income on loans receivable

Mortgage loans receivable held by the company decreased from 79 loans collateralized by 81 properties at December 31, 2015 to 9 loans collateralized by 11 properties at December 31, 2016, resulting in a decrease of 46.2% in loans receivable balances for the comparative period, and therefore a decrease in interest income on loans receivable.

Tenant reimbursement income

We have a number of leases that require our tenants to reimburse us for certain property costs we incur, which we record on a gross basis. As such, tenant reimbursement income is driven by the tenant reimbursable property costs described below, less an allowance for reimbursable expenses determined to be uncollectable from our tenants.

Other income

Year-over-year other income remained relatively flat. For the year ended December 31, 2016, other income is primarily attributable to $5.4 million in lease termination fees received from three properties with a tenant in the education industry. For the year ended December 31, 2015, other income was primarily a result of $5.8 million in lease termination fees on 15 properties with tenants in the education, convenience store and general merchandise industries.

 

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Expenses

General and administrative and Restructuring charges

General and administrative expenses of $1.4 million and $1.7 million during the years ended December 31, 2016 and 2015, respectively, were specifically identified based on direct usage or benefit. The remaining general and administrative expenses and restructuring charges have been allocated from Spirit’s financial statements, based on the Predecessor Entities’ property count relative to Spirit’s property count. The Predecessor Entities’ property count decreased from 1,083 properties at December 31, 2015 to 982 properties at December 31, 2016. Spirit’s property count remained relatively flat from 2,629 properties to 2,615 for the same period. Therefore, while general and administrative expenses of Spirit increased year-over-year, the amount allocated to the Predecessor Entities decreased as a result of the change in the Predecessor Entities’ relative property count. Restructuring charges at Spirit decreased over the same period, which in conjunction with the Predecessor Entities’ decrease in relative property count, resulted in a decreased allocation to the Predecessor Entities.

Related party fees

Spirit Realty, L.P., a wholly-owned subsidiary of Spirit, is the property manager and special servicer of Master Trust 2014, under which Spirit Realty, L.P. receives property management fees which accrue daily at 0.25% per annum of the collateral value of the Master Trust 2014 collateral pool less any specially serviced assets and special servicing fees which accrue daily at 0.75% per annum of the collateral value of any assets deemed to be specially serviced per the terms of the Property Management and Servicing Agreement. Collateral value decreased slightly from $2.1 billion at December 31, 2015 to $2.0 billion at December 31, 2016, resulting in a slight decline in related party fees for the years then ended. This decrease in collateral value was due to timing of redeployment of restricted cash from the Master Trust 2014 Release.

Property costs

For the year ended December 31, 2016, property costs were $5.3 million (including $2.0 million of tenant reimbursable expenses) compared to $5.0 million (including $1.9 million of tenant reimbursable expenses) for the same period in 2015. The increase was driven primarily by an increase in non-reimbursable property taxes on non-operating properties of $0.5 million, which relates primarily to the increase in Vacant properties from 13 to 18 from December 31, 2015 to December 31, 2016.

Interest

Year-over-year decrease in interest expense is primarily due to the extinguishment of $119.3 million of CMBS debt with a weighted average interest rate of 6.0% during the year ended December 31, 2016. Additionally, one of the Predecessor Entities had access to a line of credit which expired on March 27, 2016.

The following table summarizes our interest expense on related borrowings from continuing operations:

 

     Years Ended December 31,  
     2016        2015  
     (in thousands)  

Interest expense—Master Trust 2014

   $ 70,223        $ 70,995  

Interest expense—CMBS

     2,833          8,296  

Interest expense—Line of Credit

     —            171  

Non-cash interest expense:

       

Amortization of deferred financing costs

     1,285          1,266  

Amortization of debt discount, net

     3,554          2,991  
  

 

 

      

 

 

 

Total interest expense

   $ 77,895        $ 83,719  
  

 

 

      

 

 

 

 

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Depreciation and amortization

Depreciation and amortization expense relates to the commercial buildings and improvements we own and to amortization of the related lease intangibles. The year-over-year decrease is primarily due to the disposition of 48 properties with a depreciable basis of $145.7 million, during the year ended December 31, 2016. The decrease was partially offset by acquisitions of 17 properties during 2016 with a depreciable basis of $93.9 million.

The decline in depreciable basis was furthered by impairment charges recorded in 2016 on properties that remain in our portfolio and a higher real estate value of properties held for sale compared to 2015. Properties held for sale are no longer depreciated.

The following table summarizes our depreciation and amortization expense from continuing operations:

 

     Years Ended December 31,  
     2016      2015  
     (in thousands)  

Depreciation of real estate assets

   $ 73,866      $ 80,213  

Amortization of lease intangibles

     11,895        13,479  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 85,761      $ 93,692  
  

 

 

    

 

 

 

Impairment

During the year ended December 31, 2016, we recorded impairment losses from continuing operations of $26.6 million. These charges included $11.4 million of impairment on 13 properties that were held for sale, including $2.9 million of impairment on vacant held for sale properties. The remaining $15.2 million was recorded on properties held and used, including $6.4 million on 15 vacant held and used properties and $8.8 million on 28 underperforming properties within the general merchandise, restaurants—casual dining, and movie theater industries.

During the year ended December 31, 2015, we incurred impairment losses from continuing operations of $19.9 million. These charges included $10.2 million of impairment on 20 properties that were held for sale, including $3.5 million of impairment on vacant held for sale properties. The remaining $9.7 million was recorded on properties held and used, including $8.4 million on 7 underperforming properties in the restaurants—casual dining industry.

Loss on debt extinguishment

During the year ended December 31, 2016, we extinguished $119.3 million of CMBS debt and recognized a loss on debt extinguishment of $1.4 million. The CMBS debt related to three fixed rate loans collateralized by 56 properties with a weighted average interest rate of 6.0%. During the same period in 2015, we partially retired the debt of one CMBS fixed rate loan, extinguishing $19.1 million in principal with a stated interest rate of 6.6%. This resulted in a loss on debt extinguishment of $0.7 million.

Gain on disposition of assets

During the year ended December 31, 2016, we disposed of 48 properties and recorded gains totaling $26.5 million from continuing operations. Included in these amounts is a $14.3 million gain from the sales of 14 Shopko and former Shopko properties, $6.1 million gain for the sale of 12 restaurant—casual dining properties, and $4.1 million gain on the sale of 10 properties within the restaurant—quick service industry. During 2015, we disposed of 76 properties and recorded gains totaling $84.1 million from continuing operations. These gains are primarily attributable to a $76.9 million gain from the sale of 32 Shopko properties, $4.1 million gain on the sale of seven properties within the restaurant—quick service industry, and $2.6 million gain on the sale of one automotive dealer property.

 

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Liquidity and Capital Resources

Short-term Liquidity and Capital Resources

On a short-term basis, our principal demands for funds will be for operating expenses, including financing of acquisitions, distributions to shareholders and interest and principal on current and any future debt financings. We expect to fund our operating expenses and other short-term liquidity requirements, capital expenditures, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common shareholders, primarily through cash provided by operating activities, continued dispositions of our Shopko assets and potential future bank borrowings.

As of December 31, 2017, we had approximately $2.0 billion aggregate principal amount of indebtedness outstanding, all of which incurs interest at a fixed rate. Subsequent to December 31, 2017, we issued an additional $84.0 million aggregate principal of debt, which incurs interest at a variable rate. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.

As discussed under “Risk Factors” in this information statement, a substantial number of our properties are leased to one tenant, Shopko. Although Shopko is current on all obligations to us under its lease arrangements with us as of March 5, 2018, we can give you no assurance that this will continue to be the case, particularly if Shopko (not just the stores subject to leases with us) experiences a further decline in its business, financial condition and results of operations or loses access to liquidity. If such events were to occur, Shopko may request discounts or deferrals on the rents it pays to us, seek to terminate its master leases with us or close certain of its stores or file for bankruptcy, all of which could significantly decrease the amount of revenue we receive from it. As a result, in order to make the distributions to our common shareholders necessary to maintain our REIT qualification and to meet our short-term liquidity needs, we may be required to dispose of assets sooner than anticipated or on potentially disadvantageous terms and/or reduce the amount of our dividends to shareholders. To mitigate these factors, we may borrow to pay dividends or issue stock dividends in order to maintain our status as a REIT.

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, obtaining asset level financing and occasionally by issuing fixed rate secured or unsecured notes and bonds using the Master Trust 2014 program discussed below. We may issue common shares when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties.

We will continually evaluate alternative financing and believe that we can obtain financing on reasonable terms. However, we cannot assure you that we will have access to the capital markets at times and on terms that are acceptable to us. We expect that our primary uses of capital will be for property and other asset acquisitions and the payment of tenant improvements, operating expenses, including debt service payments on any outstanding indebtedness, and distributions to our shareholders.

Description of Certain Debt

Master Trust 2014

Master Trust 2014 is an asset-backed securitization platform in which we raise capital through the issuance of non-recourse net-lease mortgage notes collateralized by commercial real estate, net-leases and mortgage loans receivable. Master Trust 2014 allows us to issue notes that are secured by the assets of the special purpose entity note issuers that are pledged to the indenture trustee for the benefit of the noteholders and managed by Spirit as property manager. This collateral pool consists of commercial real estate properties, the issuers’ rights in the leases of such properties and commercial mortgage loans secured by commercial real estate properties. In

 

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general, monthly rental and mortgage receipts with respect to the leases and mortgage loans receivable are deposited with the indenture trustee who will first utilize these funds to satisfy the debt service requirements on the notes and any fees and costs associated with the administration of Master Trust 2014. The remaining funds are remitted to the issuers monthly on the note payment date.

In addition, upon satisfaction of certain conditions, the issuers may, from time to time, sell or exchange real estate properties or mortgage loans receivable from the collateral pool. Proceeds from these transactions are held on deposit by the indenture trustee in the Master Trust 2014 Release until a qualifying substitution is made or the amounts are distributed as an early repayment of principal. At December 31, 2017, $66.5 million was held on deposit and classified as restricted cash within deferred costs and other assets, net in our audited historical combined balance sheet included in this information statement.

Master Trust 2014 has multiple bankruptcy-remote, special purpose entities as issuers. Each issuer is an indirect wholly-owned subsidiary of ours. All outstanding series of Master Trust 2014 were investment-grade rated by S&P as of December 31, 2017.

The Master Trust 2014 notes are summarized below:

 

     2017
Effective
Rates (1)
    2017
Stated
Rates (1)
    2017
Maturity
     December 31,
2017
    December 31,
2016
 
                 (in Years)      (in Thousands)  

Series 2014-1 Class A1

     —         —         —        $ —       $ 53,919  

Series 2014-1 Class A2

     6.2     5.4     2.5        252,437       253,300  

Series 2014-2

     6.3     5.8     3.2        234,329       238,117  

Series 2014-3

     6.2     5.7     4.2        311,336       311,820  

Series 2014-4 Class A1

     4.0     3.5     2.1        150,000       150,000  

Series 2014-4 Class A2

     4.9     4.6     12.1        358,664       360,000  

Series 2017-1 Class A

     3.6     4.4     5.0        542,400       —    

Series 2017-1 Class B

     4.4     6.4     5.0        132,000       —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Master Trust 2014 notes

     5.0     5.0     5.4        1,981,166       1,367,156  
         

 

 

   

 

 

 

Debt discount, net

            (36,342     (18,985

Deferred financing costs, net

            (17,989     (8,557
         

 

 

   

 

 

 

Total Master Trust 2014, net

          $ 1,926,835     $ 1,339,614  
         

 

 

   

 

 

 

 

(1)  Represents the individual series effective and stated interest rates as of December 31, 2017 and the weighted average effective and stated rate of the total Master Trust 2014 notes, based on the collective series outstanding principal balances as of December 31, 2017.

As of December 31, 2016, the Master Trust 2014 notes were secured by 815 owned and financed properties. The notes issued under Master Trust 2014 are cross-collateralized by the assets of all issuers within this trust.

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 of $43.1 million, as well as paid a pre-payment premium of $1.6 million.

On December 14, 2017, the Company completed the issuance of $674.4 million of notes in Master Trust 2014 comprised of $542.4 million aggregate principal amount of net-lease mortgage notes Series 2017-1, Class A Notes, and $132.0 million aggregate principal amount of net-lease mortgage notes Series 2017-1, Class B Notes. Both Class A Notes and Class B Notes have an anticipated repayment date in December 2022 and a legal final payment date in December 2047. The Class A Notes bear interest at a rate of 4.36% and the Class B Notes bear interest at a rate of 6.35%. In conjunction with this issuance, Spirit contributed 10 additional real estate properties

 

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to the collateral pool with total appraised value of $282.4 million. All proceeds from this issuance were distributed to Spirit. The revisions to Master Trust 2014, in connection with the issuance of the new notes, generally provide Spirit more administrative flexibility as property manager and special servicer, specifically in expanding the definition of qualifying substitutions to allow Spirit to better redeploy proceeds held on deposit by the indenture trustee.

On January 23, 2018, we re-priced a private offering of the Master Trust 2014 Series 2017-1 notes with $674.4 million aggregate principal amount. As a result, the interest rate on the Class B Notes will be reduced from 6.35% to 5.49%, while the other terms of the Class B Notes will remain unchanged. The terms of the Class A Notes were unaffected by the repricing. In connection with the repricing, we received $8.2 million in additional proceeds that reduced the debt discount. The additional proceeds were distributed to Spirit.

CMBS

We may use long-term, fixed-rate debt to finance our properties on a “match-funded” basis. In such events, we generally seek to use asset level financing that bears annual interest less than the annual rent on the related lease(s) and that matures prior to the expiration of such lease(s). 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 of December 31, 2017, we had no outstanding CMBS loans.

On January 22, 2018, we completed an issuance of CMBS debt on the single distribution center property leased to a sporting goods tenant, with proceeds of approximately $84.0 million. The loan has a term of 10 years to maturity and a stated interest rate of 5.14%. The proceeds were distributed to Spirit.

Debt Maturities

Future principal payments due on our various types of debt outstanding as of December 31, 2017 are as follows (in thousands):

 

     Total      2017      2018      2019      2020      2021      Thereafter  

Master Trust 2014

   $ 1,981,166      $ 33,535      $ 35,321      $ 405,526      $ 243,084      $ 996,244      $ 267,456  

Contractual Obligations

The following table provides information with respect to our commitments (not including any available debt extensions) as well as potential acquisitions under contract as of December 31, 2017 (in thousands):

 

     Payment due by period