See accompanying notes.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Organization
Organization and Operations
Spirit MTA REIT ("SMTA" or the "Company") operated as an externally managed REIT formed in Maryland. The Company began operations through predecessor legal entities which were wholly-owned subsidiaries of Spirit Realty Capital, Inc. ("Spirit"). On May 31, 2018, Spirit completed the Spin-Off that resulted in the Company's establishment as an independent, publicly traded company. The Spin-Off was effected by means of a pro rata distribution of SMTA common shares to Spirit stockholders of record as of the close of business on the record date. In conjunction with the Spin-Off, SMTA and a wholly-owned subsidiary of Spirit (the "Manager") entered into an Asset Management Agreement under which the Manager provided external management of SMTA. Costs associated with the Spin-Off incurred in the year ended December 31, 2018 and 2017 totaled $8.7 million and $4.4 million, respectively, and are reflected as transaction costs on the accompanying consolidated statements of operations and comprehensive income (loss).
On January 16, 2019, in connection with the Shopko bankruptcy filing, the Company announced that its board of trustees elected to accelerate its strategic plan and on June 2, 2019 announced a definitive agreement to sell its interests in Master Trust 2014 to SVC. Costs associated with the execution of strategic alternatives (excluding the SVC transaction closing costs) in the eight months ended August 31, 2019 totaled $6.2 million, and are reflected as transaction costs on the accompanying consolidated statements of operations and comprehensive income (loss). On September 4, 2019, at a special meeting of SMTA shareholders, SMTA’s shareholders approved the Master Trust 2014 Sale, as well as the Plan of Liquidation. As a result, the Company adopted the liquidation basis of accounting using a convenience date of September 1, 2019, as the difference in dates is not material to presentation of the financial results.
On September 20, 2019, the Company completed the Master Trust 2014 Sale and, as a result, the Asset Management Agreement was terminated, and the Interim Management Agreement went into effect. The Company will receive management services from its Manager under the Interim Management Agreement in connection with its wind down pursuant to the Plan of Liquidation. As of December 31, 2019, the Company had a portfolio of 11 unencumbered properties.
In accordance with the Plan of Liquidation, on January 1, 2020, SMTA entered into a Liquidating Trust Agreement (the “Trust Agreement”), for the creation and operation of a newly-created trust called SMTA Liquidating Trust (the “Liquidating Trust”), a Maryland common law trust, and transferred to the Liquidating Trust the remaining 11 properties and other assets then owned by SMTA (subject to all of SMTA’s liabilities). Also, all of the units of beneficial interests of the Liquidating Trust, or the Trust Units, were distributed to SMTA’s shareholders, with each shareholder receiving one Trust Unit for each common share of SMTA then held of record by such shareholder. SMTA was dissolved and terminated and all of the outstanding common shares of SMTA were cancelled and are no longer outstanding.
The Liquidating Trust’s activities are restricted to winding up the affairs of SMTA as promptly as reasonably possible. Under the terms of the Trust Agreement, the Company will not acquire any new properties, and is focused on liquidating its remaining assets. As of the date of the report, the Company has sold two properties, the property located in Orange, TX leased to Exceptional Emergency Center and a vacant property located in Tyler, TX, for a total of $4.2 million. As of the date of the report, the Company owns a total of nine properties, four of which are vacant.
Note 2. Plan of Liquidation
The Plan of Voluntary Liquidation provides for an orderly sale of the Company's remaining assets, payment of the Company's liabilities and other obligations, and the winding up of operations and dissolution of the Company following the Master Trust 2014 Sale, which occurred on September 20, 2019. The Plan of Voluntary Liquidation enables the Company to sell any and all of its assets without further approval of the shareholders and provides that liquidating distributions be made to the shareholders as determined by the board of trustees. On January 1, 2020, the Company transferred and assigned its remaining assets to the Liquidating Trust. The Liquidating Trust expects to pay or provide for all of the Company’s liabilities and distribute any remaining net proceeds from the sale of its remaining assets to the holders of interests in the Liquidating Trust.
The dissolution process and the amount and timing of distributions to shareholders involves significant risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to shareholders, and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the consolidated statement of net assets.
The Company expects to qualify as a REIT from its initial election at the time of the Spin-Off through the transfer of its remaining assets to the Liquidating Trust.
32
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Note 3. Summary of Significant Accounting Policies
As a result of the approval of the Plan of Liquidation in September 2019, the Company’s financial position and results of operations for the year ended December 31, 2019 will be presented using two different presentations. The Company adopted the liquidation basis of accounting as of September 1, 2019 and for the period subsequent to September 1, 2019. As a result, a consolidated statement of net assets is presented, which represents the estimated amount of net cash that the Company reasonably expects to collect as it carries out its Plan of Liquidation. In addition, a consolidated statement of changes in net assets reflects changes in net assets from the original estimated values as of September 1, 2019 through the most recent period presented, as further described below.
All financial results and disclosures up through August 31, 2019, prior to adopting the liquidation basis of accounting, will be presented based on a going concern basis, which contemplated the realization of assets and liabilities in the normal course of business. As a result, the balance sheet as of December 31, 2018, and the statements of operations and the statements of cash flows for the eight months ended August 31, 2019 and the comparative years ended December 31, 2018 and 2017 used the going concern basis presentation consistent with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as further described below.
Basis of Accounting – Going Concern Basis
The accompanying consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the consolidated financial statements include the normal, recurring adjustments necessary for a fair presentation of the information required to be set forth therein.
Subsequent to the Spin-Off on May 31, 2018, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The pre-spin consolidated financial statements were prepared on a carve-out basis and reflect significant assumptions and allocations.
For the periods prior to the Spin-Off, the financial position and results of operations reflect a combination of entities under common control that have been carved-out from Spirit’s consolidated financial statements and present Spirit's historical carrying values of the assets and liabilities, consistent with accounting for spin-off transactions in accordance with GAAP. Since the Company prior to the Spin-Off did not represent one entity, a separate capital structure did not exist. As a result, the combined net assets of the predecessor legal entities have been reflected in the consolidated financial statements as net parent investment for periods prior to the Spin-Off. All transactions between Spirit and the predecessor legal entities are considered effectively settled through equity in the consolidated financial statements at the time the transaction is recorded, other than certain mortgages as discussed in Note 13. The settlement of these transactions is reflected as contributions from and distributions to parent in the consolidated statement of changes in equity and contributions from and distributions to parent in the consolidated statements of cash flows as a financing activity.
Through May 31, 2018, the pre-spin consolidated financial statements include expense allocations related to certain Spirit corporate general and administrative functions. These expenses have been allocated based on direct usage or benefit where specifically identifiable, with the remainder allocated pro rata based on property count. All the expense allocations were deemed to have been incurred and settled through net parent investment in the period in which the costs were incurred. Management considers the expense allocation methodology and results to be reasonable. However, the allocations may not be indicative of the actual expense that would have been incurred had the Company operated as an independent, publicly traded company for the periods presented prior to May 31, 2018. At time of the Spin-Off, SMTA entered into an Asset Management Agreement with Spirit to provide these corporate functions, and such agreement was terminated in June 2019 and replaced with an Interim Asset Management Agreement with an initial term through September 2020.
These consolidated financial statements include certain special purpose entities that were formed to acquire and hold real estate encumbered by indebtedness (see Note 7). Each special purpose entity is a separate legal entity and is the sole owner of its assets and responsible for its liabilities. The assets of these special purpose entities are not available to pay, or otherwise satisfy obligations to, the creditors of any affiliate or owner of another entity unless the special purpose entities have expressly agreed and are permitted under their governing documents. As of December 31, 2018, net assets totaling $2.18 billion were held and net liabilities totaling $2.18 billion were owed by these encumbered special purpose entities included in the accompanying consolidated balance sheets. As of December 31, 2019, there were no encumbered special purpose entities.
33
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Basis of Accounting - Liquidation Basis
As a result of the approval of the Plan of Liquidation by SMTA’s shareholders, the Company adopted the liquidation basis of accounting as of September 1, 2019 and for the periods subsequent to September 1, 2019 in accordance with GAAP. Accordingly, on September 1, 2019 assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Company reasonably expects to collect. Estimated costs to dispose of assets have been presented separately from the real estate assets, net in the consolidated statement of net assets. Liabilities are carried at their contractual amounts due or estimated settlement amounts. The liquidation value of the Company’s net assets is presented on an undiscounted basis.
The Company accrues expenses and income that it expects to incur and earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified as a liability for estimated expense in excess of estimated income during liquidation on the consolidated statement of net assets. Actual expenses and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 4 for further discussion.
Net assets in liquidation represents the estimated liquidation value available to shareholders upon liquidation. Due to the uncertainty in the timing of the anticipated sale dates and the estimated cash flows, actual operating results and sale proceeds may differ materially from the amounts estimated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Segment Reporting
The Company views its operations in two segments—Master Trust 2014 and all other properties ("Other Properties"). The Master Trust 2014 segment was sold on September 20, 2019. See Note 10 for further discussion. The Company has no other reportable segments.
Revenue Recognition – Going Concern Basis
Rental Income: Cash and Straight-line Rent
The Company primarily leased real estate to its tenants under long-term, triple-net leases that were classified as operating leases. To evaluate lease classification, the Company assessed the terms and conditions of the lease to determine the appropriate lease term. For the majority of our operating leases, the lease included one or more options to extend, typically for a period of five to ten years per renewal option. The Company’s operating leases sometimes also included an option to terminate or to purchase. The Company did not include these options in its evaluation for lease classification purposes or for recognizing rental income unless the Company was reasonably certain the tenant would exercise the option.
Another component of lease classification which required significant assumptions and judgment was the amount expected to be derived from the property at the end of the lease term. Generally, the Company assumed a value equal to net book value of the property at the date of the assessment, as the Company generally expected fair value to be equal to or greater than net book value. The Company sought to protect residual value through its underwriting of acquisitions, as well as lease structures where the lessee was responsible for maintenance of the property, including insurance protecting any damage to the property. To further protect residual value, the Company supplemented the tenant insurance policy with a master policy covering all properties owned by the Company. Additionally, the Company occasionally invested in capital improvements on properties, re-leasing properties to new tenants or extending lease terms to protect residual value.
The Company’s leases sometimes provided for contingent rent based on a percentage of the tenant’s gross sales, in which case the Company recognized contingent rental revenue when the change in the factor on which the contingent lease payment was based actually occurred.
The Company’s leases generally provided for rent escalations throughout the lease terms. For leases that had contingent rent escalators indexed to future changes in the CPI, rent increased at a multiple of any increase in the CPI over a specified period. Because of the volatility and uncertainty with respect to future changes in the CPI, increases in rental revenue from leases with this type of escalator were recognized when the changes in the rental rates occurred.
34
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
For leases that provided for fixed contractual escalations, rental revenue was recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, accrued rental revenue, calculated as the aggregate difference between the rental revenue recognized on a straight-line basis and scheduled rents, represented unbilled rent receivables that the Company would receive only if the tenants made all rent payments required through the expiration of the initial term of the leases.
Rental income was subject to an evaluation for collectability, which included management’s estimates of amounts that would not be realized based on an assessment of the risks inherent in the portfolio, considering historical experience, as well as the tenant's payment history and financial condition. The Company recorded a provision for losses against rental income for amounts that were not probable of collection.
Rental Income: Tenant Reimbursement Revenue
Under a triple-net lease, the tenant is typically responsible for all improvements and is contractually obligated to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs. Certain leases contained additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, which were non-lease components. The Company elected to combine all of its non-lease components, which were determined to have the same pattern of transfer as the related operating lease component, into a single combined lease component. Tenant reimbursement revenue was variable and recognized as revenue in the period in which the related expenses were incurred, with the related expense included in property costs (including reimbursable). Tenant receivables were carried net of any allowances for amounts that were not probable of collection.
Rental Income: Intangible Amortization
Initial direct costs associated with the origination of a lease were deferred and amortized over the related lease term as an adjustment to rental revenue. In-place lease intangibles were amortized on a straight-line basis over the remaining initial term of the related lease and included in depreciation and amortization expense. Above-market lease intangibles were amortized over the remaining initial terms of the respective leases as a decrease in rental revenue. Below-market lease intangibles were amortized as an increase to rental revenue over the remaining initial term of the respective leases, or over the initial term plus renewal periods when the Company was reasonably certain the tenant would exercise the renewal options. If the Company was reasonably certain a lease would terminate early, the unamortized portion of any related lease intangible was immediately recognized in impairments in the Company’s consolidated statements of operations and comprehensive income (loss).
Allowance for Doubtful Accounts – Going Concern Basis
Under going concern basis, the Company reviewed its rent and other tenant receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operated, and economic conditions in the area in which the tenant operated. If the collectability of a receivable with respect to any tenant was in doubt, a provision for uncollectible amounts was established or a direct write-off of the specific receivable was made. The Company’s reserve for uncollectible amounts totaled $6.6 million as of December 31, 2018, against accounts receivable balances of $8.2 million. Receivables were written off against the reserves for uncollectible amounts when all possible means of collection had been exhausted. Receivables are presented within deferred costs and other assets, net in the accompanying consolidated balance sheet.
For receivable balances related to the straight-line method of reporting rental revenue, the collectability was assessed in conjunction with the evaluation of rental income as described above. As of December 31, 2018, the Company established a reserve for losses of $0.5 million against straight-line receivables of $28.2 million. These receivables are presented within deferred costs and other assets, net in the accompanying consolidated balance sheet.
35
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money market funds of major financial institutions with fund investments consisting of highly-rated money market instruments and other short-term instruments. Restricted cash is classified within deferred costs and other assets, net in the accompanying consolidated balance sheet. Cash, cash equivalents and restricted cash consisted of the following (in thousands):
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
December 31, 2017
|
|
|
Cash and cash equivalents
|
|
$
|
17,183
|
|
|
$
|
161,013
|
|
|
$
|
6
|
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release Account (1)
|
|
|
—
|
|
|
|
16,141
|
|
|
|
61,001
|
|
|
Liquidity Reserve (2)
|
|
|
—
|
|
|
|
5,599
|
|
|
|
5,503
|
|
|
Lender controlled accounts (3)
|
|
|
—
|
|
|
|
22,347
|
|
|
|
—
|
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
17,183
|
|
|
$
|
205,100
|
|
|
$
|
66,510
|
|
|
(1)
|
Release Account cash consists of proceeds from the sales of assets pledged as collateral under Master Trust 2014 and is held on deposit until a qualifying substitution is made or the funds are applied as prepayment of principal.
|
|
(2)
|
Liquidity Reserve cash was placed on deposit in conjunction with the issuance of additional series of notes under Master Trust 2014 and is held until there is a cashflow shortfall, as defined in the Master Trust 2014 agreements, or a liquidation of Master Trust 2014 occurs.
|
|
(3)
|
Funds held in lender-controlled accounts are released after scheduled debt service requirements are met.
|
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. Spirit recorded goodwill as a result of its merger with Cole Credit Property II, Inc. (“Cole”) on July 17, 2013. Goodwill was allocated to the Company based on the fair value of the Cole assets attributable to the Company relative to the total fair value of Cole assets acquired by Spirit through its merger. Goodwill then was initially allocated to each reporting unit of the Company based upon the relative fair value of each reporting unit, resulting in $7.0 million allocated to Master Trust 2014 and $6.5 million allocated to Other Properties. The goodwill related to the Other Properties segment was fully impaired in 2018. The goodwill allocated to the Master Trust 2014 segment was relieved in conjunction with the Master Trust 2014 Sale in September 2019.
Income Taxes
For the period prior to the Spin-Off, the Company applied the provisions of FASB ASC Topic 740, Income Taxes, and computed the provision for income taxes on a separate return basis. The separate return method applied the accounting guidance for income taxes to the stand-alone consolidated financial statements as if the Company was a separate taxpayer and a stand-alone enterprise for the periods presented.
The Company was wholly-owned by Spirit prior to the Spin-Off and was disregarded for federal income tax purposes. The Manager is wholly-owned by Spirit through certain direct and indirect ownership interests and is taxed as a partnership for Federal income tax purposes. Spirit has elected to be taxed as a REIT under the applicable provisions of the Code and, as a result, will not be subject to federal income tax as long as it distributes 100% of its taxable income and satisfies certain other requirements. Therefore, no provision for federal income tax was made in the accompanying consolidated financial statements for the period prior to the Spin-Off.
For the period subsequent to the Spin-Off, the Company elected to be taxed as a REIT under the Code beginning with its initial tax year ended December 31, 2018 through the transfer of its remaining assets to the Liquidating Trust on January 1, 2020. As a REIT, the Company generally was not subject to federal income tax provided it continued to satisfy certain tests concerning the Company’s sources of income, the nature of its assets, the amounts distributed to its shareholders, and the ownership of Company shares. Management believes the Company qualified as a REIT beginning with its initial tax year ended December 31, 2018 through the transfer of its remaining assets to the Liquidating Trust on January 1, 2020 and therefore, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Even if the Company qualified for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income tax and excise tax on its undistributed income.
The Company is subject to certain other taxes which are reflected as income tax expense in the consolidated statements of operations and comprehensive income (loss). Franchise taxes are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss) and estimated future taxes are included in
36
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
liability for estimated expense in excess of estimated income during liquidation in the accompanying consolidated statement of net assets.
Earnings Per Share – Going Concern Basis
The Company’s unvested restricted common shares, which contain non-forfeitable rights to receive dividends, are considered participating securities requiring the two-class method of computing earnings per share. Under the two class method, earnings attributable to unvested restricted shares are deducted from income from continuing operations in the computation of net income (loss) attributable to common shareholders. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on their respective weighted average shares outstanding during the period. Under the terms of the 2018 Incentive Award Plan and the related restricted share awards, losses are not allocated to participating securities including undistributed losses as a result of dividends declared exceeding net income. The Company uses income or loss from continuing operations as the basis for determining whether potential common shares are dilutive or anti-dilutive and undistributed net income or loss as the basis for determining whether undistributed earnings are allocable to participating securities.
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for the fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and as such, the Company adopted ASU 2016-02 effective January 1, 2019. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief as follows:
|
|
•
|
The Company elected to use the package of practical expedients, which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) any initial direct costs for any existing leases as of the effective date.
|
|
|
•
|
The Company elected to use the comparative period expedient, which permits the Company to recognize any cumulative adjustments as of the date of initial application and not record adjustments to prior reported periods. As a result of this election, bad debt expense is being presented in "rental income" on a prospective basis, compared to "property costs (including reimbursable)" for periods prior to January 1, 2019. Bad debt expense was $0.9 million for the eight months ended August 31, 2019. The adoption of the lease standard did not result in a cumulative catch-up adjustment to opening equity.
|
|
|
•
|
The Company elected to use the land easements expedient, which permits the Company to not reassess land easements for potential lease classification.
|
|
|
•
|
The Company elected to use the components expedient, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same. The Company elected this expedient for all lessor operating leases, where certain leases contain non-lease components related to tenant reimbursement, and concluded that the leasing component is the predominant component.
|
|
|
•
|
The Company elected not to use the hindsight expedient, which would require the re-evaluation of the lease term on all leases using current facts and circumstances.
|
As a lessor, our recognition of rental income remained consistent with previous guidance, apart from expanded disclosure requirements. As such, the Company concluded that the overall impact of the ASU had no material impact on the Company's reported revenues, results of operations or financial position.
Note 4. Liability for Estimated Expense in Excess of Estimated Income During Liquidation
The liquidation basis of accounting requires the Company to estimate net cash flows from operations and to accrue all income and expenses associated with implementing and completing the Plan of Liquidation. As a basis for our assumptions, although there can be no assurance that we will meet such timing, we currently expect to sell the remaining properties during 2020 and to complete our liquidation by December 31, 2020, although, with the impact that the recent pandemic has had on asset values, tenant liquidity and capital markets, there can be no assurance that we will be able to do so. The Company currently estimates that it will have expenses in excess of income during the liquidation. These amounts can vary significantly due to, among other things, the timing of property sales, direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These amounts are estimated and are anticipated to be paid out and collected over the liquidation period.
37
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Upon transition to the liquidation basis of accounting on September 1, 2019, the Company accrued the following income and expenses expected to be incurred during liquidation, had the following cash payments (receipts) in the four months ended December 31, 2019 and has reclassified income earned, not yet received, to other assets and expenses incurred, not yet paid, to accounts payable and other liabilities in the accompanying consolidated statement of net assets (in thousands):
|
|
|
September 1, 2019
|
|
|
Cash
Payments
(Receipts)
|
|
|
Remeasurement
of Assets
and Liabilities
|
|
|
Reclassification
for Expenses
Incurred and
Income Earned
|
|
|
December 31, 2019
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income (1)
|
|
$
|
7,594
|
|
|
$
|
(6,253
|
)
|
|
$
|
487
|
|
|
$
|
(790
|
)
|
|
$
|
1,038
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property costs (2)
|
|
|
(1,159
|
)
|
|
|
922
|
|
|
|
(1,100
|
)
|
|
|
64
|
|
|
$
|
(1,273
|
)
|
|
General and administrative (3)
|
|
|
(27,620
|
)
|
|
|
10,678
|
|
|
|
1,699
|
|
|
|
9,044
|
|
|
$
|
(6,199
|
)
|
|
Related party fees (4)
|
|
|
(51,693
|
)
|
|
|
49,857
|
|
|
|
836
|
|
|
|
83
|
|
|
$
|
(917
|
)
|
|
Cost of real estate investment sales (5)
|
|
|
(4,981
|
)
|
|
|
3,694
|
|
|
|
(1,335
|
)
|
|
|
—
|
|
|
$
|
(2,622
|
)
|
|
Total liability for estimated expense in excess of estimated income during liquidation
|
|
$
|
(77,859
|
)
|
|
$
|
58,898
|
|
|
$
|
587
|
|
|
$
|
8,401
|
|
|
$
|
(9,973
|
)
|
|
(1)
|
The majority of the revenue accrued at September 1, 2019 and collected in the four months ended December 31, 2019 relates to the properties sold during September 2019. In the fourth quarter of 2019, the rental income estimate was remeasured to reflect increased rental income expected to be collected as a result of changes in the timing of sales of the remaining assets. The December 31, 2019 balance of $1.0 million is comprised of estimated rental income on the six operating properties until their estimated sale in 2020.
|
|
(2)
|
The majority of the costs accrued at September 1, 2019 and paid in the four months ended December 31, 2019 relate to the properties sold during September 2019. In the fourth quarter of 2019, the property costs estimate was remeasured to reflect increased property costs expected to be paid as a result of changes in the timing of sales of the remaining assets. The December 31, 2019 balance of $1.3 million is related to expenses expected to be incurred on the remaining properties prior to their estimated sale in 2020.
|
|
(3)
|
The payments in the four months ended December 31, 2019 primarily relate to legal and consulting fees incurred in conjunction with the Master Trust 2014 Sale. $9.0 million of general and administrative expenses have been reclassified to accounts payable and other liabilities in the accompanying consolidated statement of net assets for actual expenses incurred, not yet paid, as of December 31, 2019. In the fourth quarter of 2019, the general and administrative expense estimate was remeasured to reflect decreased costs expected to be paid as a result of lower actual costs on the Master Trust 2014 sale and the reduction in audit fees as a result of transferring to the Liquidating Trust. The December 31, 2019 balance of $6.2 million includes estimates for professional fees, compensation to the Company’s CEO and members of the board of trustees, insurance, taxes and other costs of liquidation.
|
|
(4)
|
The payments in the four months ended December 31, 2019 include the $48.2 million termination fee for the Asset Management Agreement, as well as 20 days of management fees under the Asset Management Agreement and 3 months of management fees under the Interim Management Agreement. In the fourth quarter of 2019, the related party fees estimate was remeasured to reflect decreased costs expected to be paid as a result of revised expectations for the fees expected to be incurred subsequent to the termination of the Interim Management Agreement. The December 31, 2019 balance of $0.9 million is comprised of 12 months of expected management fees.
|
|
(5)
|
$3.7 million paid in the four months ended December 31, 2019 relates to the three sales completed in September 2019. In the fourth quarter of 2019, the cost of sales estimate was remeasured to reflect increased costs expected to be paid on the sales of the remaining assets. The December 31, 2019 balance of $2.6 million represents the estimated costs of sales for the remaining 11 properties.
|
Note 5. Net Assets in Liquidation
Adoption of Liquidation Basis
The following is a reconciliation of shareholders’ deficit under the going concern basis of accounting to net assets in liquidation under the liquidation basis of accounting as of September 1, 2019 (in thousands):
|
Shareholders' deficit as of August 31, 2019
|
|
$
|
(184,178
|
)
|
|
Increase due to estimated net realizable value of investments in real estate
|
|
|
667,006
|
|
|
Decrease due to adjustment of assets and liabilities to net realizable value
|
|
|
(24,089
|
)
|
|
Decrease due to obligation to redeem preferred shares
|
|
|
(3,654
|
)
|
|
Liability for estimated expense in excess of estimated income during liquidation
|
|
|
(77,859
|
)
|
|
Adjustment to reflect the change to the liquidation basis of accounting
|
|
|
561,404
|
|
|
Estimated value of net assets in liquidation as of September 1, 2019
|
|
$
|
377,226
|
|
The net realizable value of investments in real estate for the Master Trust 2014 Sale, the sale of the property leased to Academy and one other property were adjusted to the signed sales agreements, which resulted in a net increase of $667.0 million. All three of these sales were completed in September 2019. In conjunction with these sales, the Master Trust 2014 debt was retired and the CMBS debt on the Academy property was assumed by the buyer. The net realizable value of the remaining 11 properties as of September 1, 2019 was derived using the sales comparable approach and the income capitalization approach, resulting in no change in value. Eight of the 11 properties were valued utilizing the sales comparable approach, specifically vacant sales comparables, using price per square foot ranging from $26.86 to $141.47. The remaining three assets were valued utilizing the direct income capitalization rate approach, using capitalization rates ranging from 5.75% to 8.41%.
38
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
The adjustment of assets and liabilities to net realizable value was primarily comprised of a $29.0 million write-off of straight-line rent receivables and a $3.8 million write-off of lease-incentive intangibles, which were partially offset by the accrual of $5.2 million tax refund receivable which is expected to be collected in 2020 and a $1.6 million write-off of property tax liability for the transfer of the liability to SVC in conjunction with the Master Trust 2014 Sale.
The decrease due to obligation to redeem preferred shares was comprised of $2.8 million of dividends and pre-payment premiums for the Series A SubREIT Preferred Shares, $0.8 million of dividends for the SMTA Preferred Shares and $16 thousand of dividends and pre-payment premiums for the Series B SubREIT Preferred Shares.
See Note 4 for detail on the liability for estimated expense in excess of estimated income during liquidation.
Changes in Net Assets
During the period from September 1, 2019 through December 31, 2019, $345.4 million, or $8.00 per share, of the net assets were distributed to common shareholders. Real estate assets were remeasured, resulting in an $11.7 million increase to the estimated net realizable value of the remaining 11 properties. For two of the remaining properties, the properties sold subsequent to December 31, 2019, the executed sales agreement was used for remeasurement in determining the net realizable value. For the remaining nine properties, the net realizable value was derived using broker opinions of value, with prices per square foot ranging from $27.93 to $587.50. The estimated liquidation values of our remaining properties are based on market conditions and assumptions as of December 31, 2019. The actual timing and amount of these future sales proceeds may differ materially from our current projection. For example, the impact of potential risks, or public perception of risks, related to the recent global outbreak of a novel coronavirus (COVID-19) could have a material impact on the liquidation value of remaining properties and timing of liquidation. The ultimate extent of the impact of any epidemic, pandemic or other health crisis on our business, including timing and amount of future sales proceeds, will depend on future developments, which are highly uncertain and cannot be predicted.
Also, during the period from September 1, 2019 through December 31, 2019, other assets and liabilities were remeasured, resulting in a $0.6 million increase. There was a $0.6 million increase in net assets related to the liability for estimated expense in excess of estimated income during liquidation, see Note 4. There was also a $0.5 million increase related to interest earned on cash and cash equivalents. These increases were partially offset by a $0.5 million increase in accounts payable, accrued expenses and other liabilities as a result of increased property taxes on the remaining properties held and an increase in liabilities incurred in connection with the Master Trust 2014 sale.
The remaining undistributed net assets in liquidation of $44.1 million as of December 31, 2019 would result in liquidating distributions of approximately $1.02 per Trust Unit. This estimate of liquidating distributions includes projections of timing and amounts of future sales, as well as costs and expenses to be incurred during the period required to complete the Plan of Liquidation as described in Note 4. It should be noted that the sales estimates, which are as of December 31, 2019, were made prior to the outbreak in the U.S. of the novel coronavirus and do not reflect the potential impact that the outbreak may have on the ultimate liquidation. By way of example, for each 10% decrease in estimated liquidation value of properties not sold subsequent to December 31, 2019 as a result of fluctuations in real estate values due to adverse market conditions, the resulting liquidating distribution would be reduced by $0.08 per Trust Unit. There is inherent uncertainty with these projections, and they could change materially based on the timing and amount of the sales, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows.
Note 6. Investments
Real Estate Investments
As of December 31, 2019, the Company’s net investment in real estate totaled approximately $37.5 million, representing investments in 11 owned properties.
39
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Owned Properties
During the twelve months ended December 31, 2019, the Company had the following owned real estate activity (dollars in thousands):
|
For the eight months ended August 31, 2019
|
|
Total Properties
|
|
|
Dollar Amount
of Investments
|
|
|
(prior to liquidation basis)
|
|
|
|
|
|
|
|
|
|
Gross balance, December 31, 2018
|
|
|
876
|
|
|
$
|
2,531,248
|
|
|
Acquisitions/improvements
|
|
|
—
|
|
|
|
5,891
|
|
|
Dispositions of real estate (1)(2)
|
|
|
(100
|
)
|
|
|
(199,560
|
)
|
|
Impairments
|
|
|
—
|
|
|
|
(38,655
|
)
|
|
Write-off of intangibles
|
|
|
—
|
|
|
|
(48,112
|
)
|
|
Gross balance, August 31, 2019
|
|
|
776
|
|
|
$
|
2,250,812
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(455,995
|
)
|
|
Accumulated amortization
|
|
|
|
|
|
|
(58,413
|
)
|
|
Other non-real estate assets held for sale
|
|
|
|
|
|
|
43
|
|
|
Net balance, August 31, 2019
|
|
|
|
|
|
$
|
1,736,447
|
|
|
|
|
|
|
|
|
|
|
|
|
For the four months ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
(post liquidation basis)
|
|
|
|
|
|
|
|
|
|
Net balance, August 31, 2019
|
|
|
776
|
|
|
$
|
1,736,447
|
|
|
Net Adjustments to Realizable Value
|
|
|
—
|
|
|
|
678,725
|
|
|
Net Dispositions
|
|
|
(765
|
)
|
|
|
(2,377,722
|
)
|
|
Net balance, December 31, 2019
|
|
|
11
|
|
|
$
|
37,450
|
|
|
(1)
|
For the eight months ended August 31, 2019, the net gains on the disposal of total properties was $1.7 million.
|
|
(2)
|
Includes 83 properties with a real estate investment of $167.6 million that were transferred to the lender under the Shopko CMBS Loan Agreement.
|
As of December 31, 2019, all remaining assets are considered held for sale under liquidation basis of accounting.
Operating Leases
As of August 31, 2019, December 31, 2018, and December 31, 2017, the Company held 771, 851, and 901 properties under operating leases, respectively. The following table summarizes the components of rental income recognized on these operating leases in the accompanying consolidated statements of operations (in thousands):
|
|
|
Eight Months Ended August 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Base cash rent
|
|
$
|
127,663
|
|
|
$
|
232,534
|
|
|
$
|
216,765
|
|
|
Variable cash rent (including reimbursables)
|
|
|
3,590
|
|
|
|
4,763
|
|
|
|
4,609
|
|
|
Straight-line rent, net of bad debt expense (1)
|
|
|
1,546
|
|
|
|
3,447
|
|
|
|
5,771
|
|
|
Amortization of lease intangibles (2)
|
|
|
13
|
|
|
|
(334
|
)
|
|
|
(559
|
)
|
|
Total rental income
|
|
$
|
132,812
|
|
|
$
|
240,410
|
|
|
$
|
226,586
|
|
|
(1)
|
As a result of the Company's adoption of ASU 2016-02 on January 1, 2019, the Company reclassified bad debt expense to rental income on a prospective basis. See Note 3 for additional detail.
|
|
(2)
|
Excludes amortization of in-place leases of $5.8 million, $10.9 million, and $10.5 million for the eight months ended August 31, 2019 and years ended December 31, 2018 and 2017, respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income (loss).
|
40
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Loans Receivable
During the twelve months ended December 31, 2019, the Company had the following loan activity (dollars in thousands):
|
For the eight months ended August 31, 2019
|
|
Mortgage Loans
|
|
|
Other Notes
|
|
|
|
|
|
|
(prior to liquidation basis)
|
|
Properties
|
|
|
Investment
|
|
|
Investment
|
|
|
Total Investment
|
|
|
Principal, December 31, 2018
|
|
|
8
|
|
|
$
|
30,778
|
|
|
$
|
34,416
|
|
|
$
|
65,194
|
|
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dispositions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Principal payments and payoffs
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,416
|
)
|
|
|
(34,416
|
)
|
|
Write-off of principal balance
|
|
|
(2
|
)
|
|
|
(2,888
|
)
|
|
|
—
|
|
|
|
(2,888
|
)
|
|
Principal, August 31, 2019
|
|
|
6
|
|
|
$
|
27,890
|
|
|
$
|
—
|
|
|
$
|
27,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the four months ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(post liquidation basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal, August 31, 2019
|
|
|
6
|
|
|
$
|
27,890
|
|
|
$
|
—
|
|
|
$
|
27,890
|
|
|
Principal payments and payoffs
|
|
|
(6
|
)
|
|
|
(27,890
|
)
|
|
|
—
|
|
|
|
(27,890
|
)
|
|
Principal, December 31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The mortgage loans were secured by single-tenant commercial properties and generally had fixed interest rates over the term of the loans. Other notes consisted of the Shopko B-1 Term Loan. A loan was placed on non-accrual status when the loan had become 60 days past due, or earlier if management determined that full recovery of the contractually specified payments of principal and interest was doubtful. While on non-accrual status, interest income was recognized only when received. In connection with Shopko’s bankruptcy filing in January 2019, Shopko filed pleadings asserting that any recovery under the Shopko B-1 Term Loan will be limited and may be impaired in full. Therefore, the Company recorded a full allowance for the Shopko B-1 Term Loan and placed the loan on non-accrual status as of December 31, 2018. The Company recovered the full principal balance owed during the eight months ended August 31, 2019. During the eight months ended August 31, 2019, the Company recorded interest income on loans receivable of $2.5 million on the B-1 Term Loan.
Impairments
The following table summarizes total impairment (recoveries) recognized on the accompanying consolidated statements of operations and comprehensive income (loss) (in thousands):
|
|
|
Eight Months
Ended
August 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Real estate and intangible asset impairment
|
|
$
|
38,655
|
|
|
$
|
179,726
|
|
|
$
|
33,159
|
|
|
(Recoveries) provision for loan losses
|
|
|
(33,786
|
)
|
|
|
35,085
|
|
|
|
389
|
|
|
Goodwill impairment and other
|
|
|
—
|
|
|
|
6,538
|
|
|
|
—
|
|
|
Impairment, net of recoveries for loan losses
|
|
$
|
4,869
|
|
|
$
|
221,349
|
|
|
$
|
33,548
|
|
Note 7. Debt
Master Trust 2014
The Company had access to an asset-backed securitization platform, Master Trust 2014, to raise capital through the issuance of non-recourse, asset-back securities collateralized by commercial real estate, net-leases and mortgage loans. Master Trust 2014 had five bankruptcy-remote, special purpose entities as issuers or co-issuers of the notes. In December 2017, the existing issuers under Master Trust 2014, completed the issuance of $674.4 million aggregate principal amount of Series 2017-1 net-lease mortgage notes comprised of $542.4 million of 4.36%, Class A, amortizing notes and $132.0 million of 6.35%, Class B, interest only notes. In conjunction with the issuance, the Company pre-paid the Series 2014-1 Class A1 notes, resulting in a loss on debt extinguishment of approximately $2.2 million primarily related to the pre-payment premium. On November 1, 2018, SMTA closed on variable funding notes within Master Trust 2014 with up to $50.0 million in borrowing capacity. During the year ended December 31, 2018, the Company extinguished $6.3 million of Master Trust 2014 debt as a result of unscheduled principal pre-payments, resulting in approximately $0.4 million in losses on debt extinguishment attributable to the pre-payment premiums paid. As of December 31, 2018, the notes had an outstanding principal balance of $1.94 billion, unamortized debt discount of $21.2 million and unamortized deferred financing costs of $14.9 million. During the eight months ended August 31, 2019, pre-payments of principal of $3.0 million
41
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
were made, resulting in a loss on debt extinguishment of $0.1 million due to pre-payment premiums. On September 20, 2019, the Company completed the sale of the entities that comprise Master Trust 2014 to SVC, which included 769 owned and financed properties. Upon closing the Master Trust 2014 Sale, all of the outstanding classes and series of the notes issued under the Master Trust 2014 were repaid in full, and the related pre-payment premium of $82 million was paid by SVC.
CMBS
Academy CMBS
On January 22, 2018, the Company entered into a non-recourse loan agreement, which was collateralized by a single distribution center property located in Katy, Texas leased to Academy Sports + Outdoors. As a result of the issuance, the Company received approximately $84.0 million in proceeds, which were distributed to Spirit. As of December 31, 2018, the loan had an outstanding principal balance of $83.0 million and unamortized deferred financing costs of $1.1 million. On September 27, 2019, the Company sold the distribution center, and the outstanding CMBS debt and restricted cash associated with the property was assumed by the buyer.
Shopko CMBS
On November 1, 2018, SMTA, through four indirectly wholly-owned, property-owning subsidiaries, entered into a $165.0 million non-recourse mortgage loan agreement and, on November 27, 2018, $40.0 million of the loan was carved out into a separate mezzanine loan agreement. These Shopko CMBS Loan Agreements were secured by the equity of the entity that owned the four property-owning subsidiaries, which collectively held 85 assets (83 owned properties and two seller-financed notes on properties) that were leased to Shopko. As of December 31, 2018, the loans had an outstanding principal balance of $157.4 million, unamortized deferred financing costs of $5.9 million and a remaining maturity of 0.9 years.
On January 16, 2019, the Company's indirect wholly-owned subsidiaries as borrowers under the Shopko CMBS Loan Agreements defaulted on the loans when those entities ceased to make interest payments as a result of Shopko ceasing to pay its rent obligations following its bankruptcy filing. Upon the default, the full balance of principal outstanding under the loans immediately became due and payable and interest began accruing at the default rate of LIBOR plus 12.50% on the $125.0 million portion and LIBOR plus 18.00% on the $40.0 million mezzanine portion. On March 1, 2019, the Shopko Lenders foreclosed on the equity of the entity that owned the four property-owning subsidiaries. As a result of the foreclosure, the Company recognized a loss on debt extinguishment of $21.3 million during the eight months ended August 31, 2019. The components of the loss on debt extinguishment were $161.3 million of net investments and $21.2 million of restricted cash foreclosed, offset by $155.9 million of net debt and $5.3 million of accrued payables relieved.
Interest Expense
The following table is a summary of the components of interest expense related to the Company’s borrowings (in thousands):
|
|
|
Eight Months Ended August 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Interest expense
|
|
$
|
69,969
|
|
|
$
|
103,374
|
|
|
$
|
70,664
|
|
|
Non-cash interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
3,692
|
|
|
|
4,653
|
|
|
|
1,480
|
|
|
Amortization of debt discount
|
|
|
4,593
|
|
|
|
6,970
|
|
|
|
4,589
|
|
|
Total interest expense
|
|
$
|
78,254
|
|
|
$
|
114,997
|
|
|
$
|
76,733
|
|
Note 8. Shareholders' Equity and Redeemable Preferred Equity
The Company's declaration of trust authorized it to issue 750,000,000 common shares of beneficial interest, $0.01 par value per share, and 20,000,000 preferred shares of beneficial interest, $0.01 par value per share. The board of trustees had the power, without shareholder approval, to increase or decrease the number of common shares the Company is authorized to issue. The Company became a Liquidating Trust on January 1, 2020 and the Company’s declaration of trust was no longer in effect.
Common Shares
SMTA was originally capitalized on November 17, 2017 with the issuance of 10,000 common shares of beneficial interest ($0.01 par value per share) for a total of $10,000.
42
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
On May 31, 2018, the distribution date, Spirit completed the Spin-Off of SMTA. On the distribution date, Spirit distributed on a pro rata basis one SMTA common share for every ten shares of Spirit common stock held by each of Spirit's stockholders as of May 18, 2018, which was the record date. As a result, 42,851,010 SMTA common shares were issued on May 31, 2018.
On January 1, 2020, all of the outstanding common shares of SMTA were cancelled and are no longer outstanding. Also on January 1, 2020 each shareholder received one Trust Unit for each common share of SMTA then held of record by such shareholder. See Note 1 for further discussion.
SMTA Preferred Shares
In conjunction with the Spin-Off, SMTA issued to the Manager and one of its affiliates, also a wholly-owned subsidiary of Spirit, 6.0 million Series A preferred shares with an aggregate liquidation preference of $150.0 million (the "SMTA Preferred Shares"). Redemption value of the SMTA Preferred Shares is equal to the liquidation preference plus any accrued and unpaid dividends and redemption is under the control of SMTA unless a change of control event occurs, as defined in the SMTA Preferred Shares agreements. Therefore, as redemption may occur outside the control of SMTA, the SMTA Preferred Shares are classified as temporary equity.
The SMTA Preferred Shares pay cash dividends at the rate of 10.0% per annum on the liquidation preference of $25.00 per share (equivalent to $0.625 per share on a quarterly basis and $2.50 per share on an annual basis). In September 2019, all 6.0 million shares of 10.0% SMTA Preferred Shares were repurchased for the full liquidation preference of $150.0 million.
SubREIT Preferred Shares
Prior to the Spin-Off, in exchange for property, SubREIT issued to the Manager 5,000 shares of Series A preferred shares with an aggregate liquidation preference of $5.0 million (the "SubREIT Preferred Shares"). The Series A SubREIT Preferred Shares pay cash dividends at the rate of 18.0% per annum on the liquidation preference of $1,000.00 per share (equivalent to $45.00 per share on a quarterly basis and $180.00 per share on an annual basis). On December 19, 2018, SubREIT issued 125 Shares of Series B SubREIT Preferred Shares with an aggregate liquidation preference of $125 thousand. Series B SubREIT Preferred Shares pay cash dividends at the rate of 12.0% per annum on the liquidation preference of $1,000.00 per share (equivalent to $30.00 per share on a quarterly basis and $120.00 per share on an annual basis).
Redemption value of the SubREIT Preferred Shares is equal to the liquidation preference plus any accrued and unpaid dividends and redemption is under the control of SubREIT unless a change of control event occurs, as defined in the SubREIT Preferred Shares agreements. Therefore, as redemption may occur outside the control of SubREIT, the SubREIT Preferred Shares are classified as temporary equity. In conjunction with the Spin-Off, the Manager sold the SubREIT Preferred Shares to a third-party. On September 30, 2019, SMTA caused the funding for all the Series B SubREIT Preferred Shares to be redeemed by SMTA at their full liquidation preference of $125 thousand, plus $16 thousand for pre-payment penalties and accrued but unpaid dividends, which was effective on October 1, 2019. In October 2019, all Series A SubREIT Preferred Shares were redeemed by SMTA at their full liquidation preference, plus a pre-payment premium and accrued but unpaid dividends.
Share Repurchase Program
In December 2018, the Company's board of trustees approved a share repurchase program, which authorized repurchases of up to $50.0 million of the Company's common shares. No repurchases were made under the program.
43
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Dividends Declared
During the years ended December 31, 2019 and 2018, the Company's board of trustees declared the following dividends for SMTA Preferred Shares and SMTA common shares, and SubREIT's Board of Directors declared the following dividends for SubREIT Preferred Shares:
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
Total Amount
(in Thousands)
|
|
|
Payment Date
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMTA Preferred Shares
|
|
March 5, 2019
|
|
$
|
0.625
|
|
|
March 15, 2019
|
|
$
|
3,750
|
|
|
March 29, 2019
|
|
SubREIT Series A Preferred Shares
|
|
February 28, 2019
|
|
$
|
45.000
|
|
|
March 15, 2019
|
|
$
|
225
|
|
|
March 29, 2019
|
|
SMTA Preferred Shares
|
|
May 1, 2019
|
|
$
|
0.625
|
|
|
June 14, 2019
|
|
$
|
3,750
|
|
|
June 28, 2019
|
|
SubREIT Series A Preferred Shares
|
|
May 23, 2019
|
|
$
|
45.000
|
|
|
June 14, 2019
|
|
$
|
225
|
|
|
June 28, 2019
|
|
SubREIT Series B Preferred Shares
|
|
May 29, 2019
|
|
$
|
64.000
|
|
|
June 14, 2019
|
|
$
|
8
|
|
|
June 28, 2019
|
|
SMTA Preferred Shares
|
|
July 1, 2019
|
|
$
|
0.625
|
|
|
September 13, 2019
|
|
$
|
3,750
|
|
|
September 20, 2019
|
|
SubREIT Series B Preferred Shares
|
|
September 30, 2019
|
|
$
|
30.330
|
|
|
September 30, 2019
|
|
$
|
4
|
|
|
September 30, 2019
|
|
SubREIT Series A Preferred Shares
|
|
August 1, 2019
|
|
$
|
45.000
|
|
|
September 13, 2019
|
|
$
|
225
|
|
|
October 1, 2019
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMTA Common Shares
|
|
March 5, 2019
|
|
$
|
0.330
|
|
|
March 29, 2019
|
|
$
|
14,218
|
|
|
April 15, 2019
|
|
SMTA Common Shares
|
|
May 1, 2019
|
|
$
|
0.330
|
|
|
June 28, 2019
|
|
$
|
14,243
|
|
|
July 15, 2019
|
|
SMTA Common Shares
|
|
October 3, 2019
|
|
$
|
8.000
|
|
|
October 14, 2019
|
|
$
|
345,424
|
|
|
October 23, 2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMTA Preferred Shares (1)
|
|
June 19, 2018
|
|
$
|
0.208
|
|
|
June 19, 2018
|
|
$
|
1,250
|
|
|
June 29, 2018
|
|
SubREIT Series A Preferred Shares (1)
|
|
June 14, 2018
|
|
$
|
15.000
|
|
|
June 19, 2018
|
|
$
|
75
|
|
|
June 29, 2018
|
|
SMTA Preferred Shares
|
|
August 9, 2018
|
|
$
|
0.625
|
|
|
September 14, 2018
|
|
$
|
3,750
|
|
|
September 28, 2018
|
|
SubREIT Series A Preferred Shares
|
|
August 9, 2018
|
|
$
|
45.000
|
|
|
September 14, 2018
|
|
$
|
225
|
|
|
September 28, 2018
|
|
SMTA Preferred Shares
|
|
December 5, 2018
|
|
$
|
0.625
|
|
|
December 17, 2018
|
|
$
|
3,750
|
|
|
December 31, 2018
|
|
SubREIT Series A Preferred Shares
|
|
December 4, 2018
|
|
$
|
45.000
|
|
|
December 17, 2018
|
|
$
|
225
|
|
|
December 31, 2018
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMTA Common Shares
|
|
August 9, 2018
|
|
$
|
0.330
|
|
|
September 28, 2018
|
|
$
|
14,190
|
|
|
October 15, 2018
|
|
SMTA Common Shares (2)
|
|
December 5, 2018
|
|
$
|
1.330
|
|
|
December 31, 2018
|
|
$
|
57,191
|
|
|
January 15, 2019
|
|
(1)
|
Dividend was prorated for the period from June 1, 2018 to June 30, 2018.
|
|
(2)
|
Dividend includes quarterly dividend of $0.33 per share and special dividend of $1.00 per share.
|
Note 9. Commitments and Contingencies
The Company is periodically subject to claims or litigation in the ordinary course of business, including claims generated from business conducted by tenants on real estate owned by the Company. In these instances, the Company is typically indemnified by the tenant against any losses that might be suffered, and the Company and/or the tenant are insured against such claims.
On March 4, 2019, SMTA received a demand notice from the Shopko Lenders seeking repayment of the loans under the Shopko CMBS Loan Agreements pursuant to SMTA’s guaranty of the loans in which the Shopko Lenders allege, among other things, fraud and intentional misrepresentations by the borrowers. While SMTA believes the allegations were without merit, on July 29, 2019, SMTA resolved the dispute with the Shopko Lenders and reached a confidential settlement. The Company has recorded the cost of the settlement in Shopko-related expenses in the consolidated statements of operations and comprehensive income (loss) for the eight months ended August 31, 2019.
The Company was a lessee under five long-term, non-cancelable ground leases under which it is obligated to pay monthly rent as of December 31, 2018. Total rental expense included in property costs (including reimbursable) amounted to $0.3 million, $1.1 million and $1.1 million for the eight months ended August 31, 2019 and years ended December 31, 2018 and 2017, respectively. Certain of the ground lease rental expenses were reimbursed by unrelated third parties, and the corresponding rental revenue was recorded in rentals on the accompanying consolidated statements of operations and comprehensive income (loss). Four of these ground leases were included in the foreclosure of the Shopko entities and the remaining obligation transferred. The remaining ground lease obligation was included in the Master Trust 2014 Collateral Pool and sold on September 20, 2019.
As of December 31, 2019, there were no outstanding claims against the Company that are expected to have a material adverse effect on the Company’s financial position.
As of December 31, 2019, the Company had no outstanding commitments to fund improvements or construction on properties the Company currently owns, nor any commitments to acquire new properties.
The Company estimates future costs for known environmental remediation requirements when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The Company considers various factors when estimating its
44
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
environmental liabilities, and adjustments are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues. When only a wide range of estimated amounts can be reasonably established and no other amount within the range is better than another, the low end of the range is recorded in the consolidated financial statements. As of December 31, 2019, no accruals have been made.
Note 10. Segments
Prior to the completion of the Master Trust 2014 Sale in September 2019, management viewed the operations of the Company as two separate segments—Master Trust 2014 and Other Properties—and made operating decisions based on these two reportable segments. Subsequent to the adoption of the Plan of Liquidation, the Company no longer makes operating decisions or assesses performance in separate segments as all remaining assets and liabilities are held for sale.
Master Trust 2014 was an asset-backed securitization platform, see Note 7, with specific criteria for operating the Collateral Pool, including restrictions on use of Release Account cash, concentration thresholds which could not be exceeded, and a minimum debt service coverage ratio which had to be met. On September 20, 2019, the Company completed the Master Trust 2014 Sale. Accordingly, as of December 31, 2019, all remaining assets and liabilities are related to the Other Properties segment.
For periods prior to the completion of the Master Trust 2014 Sale, segment results are comprised of revenues, property management and servicing fees, property costs, depreciation and amortization, impairments, and interest expense. General and administrative expenses, asset management fees under the Asset Management Agreement, transaction costs, and income taxes are not allocated to individual segments for purposes of assessing segment performance.
The performance of the reportable segments prior to the Master Trust 2014 Sale was not comparable with the Company's consolidated results, nor necessarily comparable with similar information for any other REITs. Additionally, because of the interrelationship of the segments prior to the Master Trust 2014 Sale, the information presented is not indicative of how the segments would perform if they operated as independent entities.
45
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Segment results for the eight months ended August 31, 2019 and the years ended December 31, 2018 and 2017 are as follows (in thousands):
|
|
|
Eight Months Ended August 31, 2019
|
|
|
|
|
Master Trust 2014
|
|
|
Other Properties
|
|
|
Total
|
|
|
Segment Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
118,204
|
|
|
$
|
14,608
|
|
|
$
|
132,812
|
|
|
Interest income on loans receivable
|
|
|
179
|
|
|
|
2,490
|
|
|
|
2,669
|
|
|
Other income
|
|
|
949
|
|
|
|
1,967
|
|
|
|
2,916
|
|
|
Property Management and Servicing Fees (1)
|
|
|
(5,070
|
)
|
|
|
—
|
|
|
|
(5,070
|
)
|
|
Property expenses (including reimbursable)
|
|
|
(3,541
|
)
|
|
|
(1,346
|
)
|
|
|
(4,887
|
)
|
|
Depreciation and amortization
|
|
|
(42,386
|
)
|
|
|
(4,992
|
)
|
|
|
(47,378
|
)
|
|
Impairments, net of recoveries for loan losses
|
|
|
(5,959
|
)
|
|
|
1,090
|
|
|
|
(4,869
|
)
|
|
Interest expense
|
|
|
(70,628
|
)
|
|
|
(7,626
|
)
|
|
|
(78,254
|
)
|
|
Loss on debt extinguishment
|
|
|
(144
|
)
|
|
|
(21,267
|
)
|
|
|
(21,411
|
)
|
|
Gain on disposition of assets
|
|
|
1,626
|
|
|
|
114
|
|
|
|
1,740
|
|
|
Segment loss
|
|
$
|
(6,770
|
)
|
|
$
|
(14,962
|
)
|
|
$
|
(21,732
|
)
|
|
Non-allocated expenses
|
|
|
|
|
|
|
|
|
|
|
(35,029
|
)
|
|
Loss before income tax expense
|
|
|
|
|
|
|
|
|
|
$
|
(56,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
Master Trust 2014
|
|
|
Other Properties
|
|
|
Total
|
|
|
Segment Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
180,317
|
|
|
$
|
60,093
|
|
|
$
|
240,410
|
|
|
Interest income on loans receivable
|
|
|
294
|
|
|
|
2,786
|
|
|
|
3,080
|
|
|
Other income
|
|
|
1,908
|
|
|
|
909
|
|
|
|
2,817
|
|
|
Property Management and Servicing Fees (1)
|
|
|
(7,033
|
)
|
|
|
—
|
|
|
|
(7,033
|
)
|
|
Property expenses (including reimbursable)
|
|
|
(3,869
|
)
|
|
|
(8,889
|
)
|
|
|
(12,758
|
)
|
|
Depreciation and amortization
|
|
|
(62,942
|
)
|
|
|
(21,736
|
)
|
|
|
(84,678
|
)
|
|
Impairments, net of recoveries for loan losses
|
|
|
(19,838
|
)
|
|
|
(201,511
|
)
|
|
|
(221,349
|
)
|
|
Interest expense
|
|
|
(106,915
|
)
|
|
|
(8,082
|
)
|
|
|
(114,997
|
)
|
|
Loss on debt extinguishment
|
|
|
(363
|
)
|
|
|
(3
|
)
|
|
|
(366
|
)
|
|
Gain on disposition of assets
|
|
|
1,314
|
|
|
|
8,144
|
|
|
|
9,458
|
|
|
Segment loss
|
|
$
|
(17,127
|
)
|
|
$
|
(168,289
|
)
|
|
$
|
(185,416
|
)
|
|
Non-allocated expenses
|
|
|
|
|
|
|
|
|
|
|
(34,601
|
)
|
|
Loss before income tax expense
|
|
|
|
|
|
|
|
|
|
$
|
(220,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
Master Trust 2014
|
|
|
Other Properties
|
|
|
Total
|
|
|
Segment Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
164,683
|
|
|
$
|
61,903
|
|
|
$
|
226,586
|
|
|
Interest income on loans receivable
|
|
|
748
|
|
|
|
20
|
|
|
|
768
|
|
|
Other income
|
|
|
4,186
|
|
|
|
262
|
|
|
|
4,448
|
|
|
Property Management and Servicing Fees (1)
|
|
|
(5,500
|
)
|
|
|
—
|
|
|
|
(5,500
|
)
|
|
Property expenses (including reimbursable)
|
|
|
(9,528
|
)
|
|
|
(2,968
|
)
|
|
|
(12,496
|
)
|
|
Depreciation and amortization
|
|
|
(57,819
|
)
|
|
|
(22,567
|
)
|
|
|
(80,386
|
)
|
|
Impairments, net of recoveries for loan losses
|
|
|
(20,928
|
)
|
|
|
(12,620
|
)
|
|
|
(33,548
|
)
|
|
Interest expense
|
|
|
(76,733
|
)
|
|
|
—
|
|
|
|
(76,733
|
)
|
|
(Loss) gain on debt extinguishment
|
|
|
(2,224
|
)
|
|
|
1
|
|
|
|
(2,223
|
)
|
|
Gain on disposition of assets
|
|
|
7,422
|
|
|
|
14,971
|
|
|
|
22,393
|
|
|
Segment income
|
|
$
|
4,307
|
|
|
$
|
39,002
|
|
|
$
|
43,309
|
|
|
Non-allocated expenses
|
|
|
|
|
|
|
|
|
|
|
(24,845
|
)
|
|
Income before income tax expense
|
|
|
|
|
|
|
|
|
|
$
|
18,464
|
|
|
(1)
|
Property Management and Servicing Fees are included in related party fees in the consolidated statements of operations and comprehensive income (loss). Asset Management Fees, the other component of related party fees, are included in non-allocated expenses.
|
46
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Dispositions by reportable segment are as follows (dollars in thousands):
|
|
|
Year Ended December 31, 2019
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
Properties
|
|
|
Gross
Proceeds
|
|
|
Properties (3)
|
|
|
Gross
Proceeds (3)
|
|
|
Master Trust 2014 (1)
|
|
|
784
|
|
|
$
|
2,416,445
|
|
|
|
35
|
|
|
$
|
38,911
|
|
|
Other Properties (2)
|
|
|
87
|
|
|
|
112,805
|
|
|
|
12
|
|
|
|
52,074
|
|
|
Total
|
|
|
871
|
|
|
$
|
2,529,250
|
|
|
|
47
|
|
|
$
|
90,985
|
|
|
(1)
|
Includes 769 owned and financed properties disposed on September 20, 2019 in the Master Trust 2014 Sale. See Note 7 for further discussion.
|
|
(2)
|
Includes 83 properties disposed during the year ended December 31, 2019, which relieved Shopko CMBS debt in lieu of generating cash proceeds. See Note 7 for further discussion.
|
|
(3)
|
Excludes three properties transferred to Spirit prior to the Spin-Off, see Note 13.
|
Note 11. 2018 Incentive Award Plan
Restricted Common Shares
During the year ended December 31, 2019, the Company granted approximately 164 thousand restricted shares under the 2018 Incentive Award Plan to the principal executive officer of the Company and members of the board of trustees. Prior to the shareholder approval of the Master Trust 2014 Sale and Plan of Liquidation, the Company had 145 thousand unvested restricted shares outstanding. These outstanding restricted shares vested in connection with the aforementioned shareholder meeting and approval, and there were no outstanding restricted shares as of December 31, 2019.
The following table summarizes restricted share activity under the 2018 Incentive Award Plan:
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Price (1)
(per share)
|
|
|
Number of
Shares
|
|
|
Weighted
Average Price (1)
(per share)
|
|
|
Outstanding non-vested shares, beginning of year
|
|
|
149,852
|
|
|
$
|
11.04
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Shares granted
|
|
|
163,693
|
|
|
|
7.33
|
|
|
|
149,852
|
|
|
|
11.04
|
|
|
Shares vested
|
|
|
(313,545
|
)
|
|
|
9.10
|
|
|
|
—
|
|
|
|
—
|
|
|
Shares forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding non-vested shares, end of year
|
|
|
—
|
|
|
$
|
—
|
|
|
|
149,852
|
|
|
|
11.04
|
|
(1) Based on grant date fair values.
Market-Based Awards
During the year ended December 31, 2019, the Company granted approximately 32 thousand shares under market-based awards to the principal executive officer of the Company. The performance period of these grants runs through December 31, 2021. Awards vest in three annual tranches beginning December 31, 2019 and ending December 31, 2021. Potential common shares that the participant is eligible to receive is based on performance goals related to total shareholder return achieved by the Company during the performance period. During the year ended December 31, 2019, the market-based awards were accelerated in conjunction with shareholder approval of the Master Trust 2014 Sale and were earned at 200% of the target amount, which resulted in 64 thousand market-based awards issued. During the year ended December 31, 2018, there were no shares granted under market-based awards. The Company had no outstanding market-based awards as of December 31, 2019 and 2018.
Share-based Compensation Expense
For the eight months ended August 31, 2019, the Company recognized $1.4 million in stock-based compensation expense from restricted share and market-based awards. Of this amount, $0.9 million related to restricted shares awarded to members of the board of trustees and is included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss). The remaining $0.5 million related to restricted shares and market-based awards granted to the principal executive officer of the Company, an employee of the Manager. This expense is considered a component of the Company’s management fees under the Asset Management Agreement and is included in related party fees in the accompanying consolidated statements of operations and comprehensive income (loss).
For the year ended December 31, 2018, the Company recognized $0.9 million in stock-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss).
47
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
As of December 31, 2019, the Company had no remaining unamortized share-based compensation expense as all restricted share awards and market-based awards had vested and paid out. As of December 31, 2018, the remaining unamortized share-based compensation expense totaled $0.8 million, all of which is related to restricted share awards. Amortization is recognized on a straight-line basis over the service period of the awards.
Note 12. Loss Per Share
Loss per share has been computed using the two-class method, which is computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and any participating securities based on the weighted average shares outstanding during the period. Under the two-class method, any earnings attributable to unvested restricted shares are deducted from loss from continuing operations in the computation of net loss attributable to common shareholders.
The table below is a reconciliation of the numerator and denominator used in the computation of basic and diluted net loss per share computed using the two-class method (dollars in thousands):
|
|
|
Eight Months Ended August 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Basic and diluted (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income and total comprehensive (loss) income
|
|
$
|
(56,847
|
)
|
|
$
|
(220,238
|
)
|
|
$
|
18,285
|
|
|
Less: dividends paid to preferred shareholders
|
|
|
(10,611
|
)
|
|
|
(9,275
|
)
|
|
|
—
|
|
|
Less: dividends declared on unvested restricted shares
|
|
|
(120
|
)
|
|
|
(249
|
)
|
|
|
—
|
|
|
Net (loss) income attributable to common shareholders used in basic and diluted (loss) income per share
|
|
$
|
(67,578
|
)
|
|
$
|
(229,762
|
)
|
|
$
|
18,285
|
|
|
Basic weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
43,112,164
|
|
|
|
42,919,983
|
|
|
|
42,851,010
|
|
|
Less: Unvested weighted average restricted shares
|
|
|
(173,387
|
)
|
|
|
(68,973
|
)
|
|
|
—
|
|
|
Weighted average common shares outstanding used in basic (loss) income per share
|
|
|
42,938,777
|
|
|
|
42,851,010
|
|
|
|
42,851,010
|
|
|
Net (loss) income per share attributable to common shareholders
|
|
$
|
(1.57
|
)
|
|
$
|
(5.36
|
)
|
|
$
|
0.43
|
|
|
Dilutive weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in diluted (loss) income per share
|
|
|
42,938,777
|
|
|
|
42,851,010
|
|
|
|
42,851,010
|
|
|
Net (loss) income per share attributable to common shareholders - diluted
|
|
$
|
(1.57
|
)
|
|
$
|
(5.36
|
)
|
|
$
|
0.43
|
|
|
Total potentially dilutive common shares (1)
|
|
|
107,115
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
For the eight months ended August 31, 2019, potential dilutive shares consisted of unvested restricted shares and market-based awards. For the years ended December 31, 2018 and 2017, there were no adjustments to the weighted average number of common shares outstanding used in the diluted calculation given there were no potentially dilutive shares.
|
Note 13. Related Party Transactions
Cost Sharing Arrangements
In conjunction with the Spin-Off, the Company entered into certain agreements, including the Separation and Distribution Agreement, Tax Matters Agreement, Registration Rights Agreement and Insurance Sharing Agreement. These agreements provide a framework for the relationship between the Company and Spirit after the Spin-Off, by which Spirit may incur certain expenses on behalf of the Company that the Company must reimburse in a timely manner. These agreements, except for the Tax Matters Agreement, were terminated in conjunction with the termination of the Asset Management Agreement. At December 31, 2019, the Company had immaterial accrued payable and accrued receivable balances in connection with these arrangements. At December 31, 2018, the Company had accrued payable balances of $0.1 million to Spirit and $1.8 million accrued receivable balances from Spirit in connection with these arrangements.
Asset Management Agreement
In conjunction with the Spin-Off, the Company entered into the Asset Management Agreement pursuant to which the Manager provided various services subject to the supervision of SMTA's board of trustees, including, but not limited to: (i) performing all of SMTA's 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. As compensation for these services, the Manager was entitled to a management fee of $20 million per annum, payable monthly in arrears. Under certain circumstances, the Manager was also entitled to a promoted interest fee based on the total shareholder return of SMTA's common shares during the relevant period, as well as a termination fee. On June 2, 2019, concurrently with the execution of the agreement for the Master Trust 2014 Sale, the Company entered into a termination agreement of the Asset Management Agreement, which became effective on September 20, 2019. Pursuant to the termination agreement, the
48
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Company paid the Manager a termination fee of $48.2 million and the Manager waived its right to receive any promoted interest fee as otherwise provided for under the Asset Management Agreement, resulting in a net reversal of $0.8 million in promoted interest expense for the eight months ended August 31, 2019. The Manager also waived its rights to receive management fees for a 180-day notice period and subsequent eight-month transition services period provided for in the Asset Management Agreement. On June 2, 2019, the Company and the Manager also entered into an Interim Management Agreement, which became effective September 20, 2019, which provides that the Manager is entitled to an annual management fee of $1 million for the initial one-year thereof, plus certain cost reimbursements. The Interim Management Agreement is terminable at any time by the Company and, upon a six month notice period, may be terminated at any time after September 20, 2020 by the Manager, in each case without payment of a termination fee. On March 18, 2020, the Manager notified the Liquidating Trust that it intends to terminate the Interim Asset Management Agreement on September 14, 2020. Asset management fees of $13.3 million and $11.7 million were incurred during the eight months ended August 31, 2019 and the year ended December 31, 2018, respectively, which are included in related party fees in the consolidated statements of operations and comprehensive income (loss). Additionally, under the terms of the Asset Management Agreement, the Company recognized related party fees of $0.5 million for stock compensation awarded by SMTA to its principal executive officer for the eight months ended August 31, 2019. At December 31, 2019, asset management fees of $0.1 million are included in accounts payable and $0.9 million are included in the liability for estimated expense in excess of estimated receipts during liquidation in the accompanying statement of net assets. Asset management fees of $1.7 million and promote fees of $0.8 million were accrued at December 31, 2018, which are included in accounts payable, accrued expenses and other liabilities in the accompanying balance sheet.
Property Management and Servicing Agreement
The Manager provided property management services and special services for Master Trust 2014 under the terms of the Property Management and Servicing Agreement dated May 20, 2014. The property management fees accrued daily at 0.25% per annum of the collateral value of the Master Trust 2014 Collateral Pool other than specially serviced assets, which accrued daily at 0.75% per annum. Property management fees of $4.0 million, $6.2 million, and $4.5 million were incurred during the eight months ended August 31, 2019 and years ended December 31, 2018 and 2017, respectively. Additionally, special servicing fees of $1.1 million, $0.8 million, and $1.0 million were incurred during the eight months ended August 31, 2019 and years ended December 31, 2018 and 2017, respectively. The property management fees and special servicing fees are included in related party fees in the consolidated statements of operations and comprehensive income (loss). As of December 31, 2018, the Company had accrued payable balances of $0.5 million related to these fees. In conjunction with the Master Trust 2014 Sale, the notes were satisfied and discharged on September 20, 2019 and the Property Management and Servicing Agreement was terminated.
Related Party Loans Receivable
Prior to September 20, 2019, the Company had four mortgage loans receivable where wholly-owned subsidiaries of Spirit were the borrower, and the loans were secured by six single-tenant commercial properties. These mortgage loans, which had a weighted average stated interest rate of 1.00%, were entered into by entities under common control of Spirit in conjunction with the issuance of the Series 2014 notes of Master Trust 2014 because the underlying properties did not qualify to be held directly as collateral by Master Trust 2014 under its governing agreements. These mortgage notes had an outstanding principal of $27.9 million at December 31, 2018, which is included in loans receivable, net on the consolidated balance sheet. The mortgage notes generated $0.2 million, $0.3 million, and $0.3 million of interest income for the eight months ended August 31, 2019 and years ended December 31, 2018 and 2017, respectively, which is included in interest income on loans receivable in the consolidated statements of operations and comprehensive income (loss). In conjunction with the Master Trust 2014 Sale, the remaining balance of the related party loans payable was repaid to the Company in full.
Related Party Notes Payable
In conjunction with the Series 2017-1 notes issuance completed in December 2017, a subsidiary of Spirit, as sponsor of the issuance, retained a 5% economic interest in the Master Trust 2014 Series 2017-1 notes as required by the risk retention rules issued under 17 CFR Part 246. The principal amount due to the Manager under the notes was $33.5 million at December 31, 2018, and is included in mortgages and notes payable, net on the consolidated balance sheet. Interest expense on the consolidated statements of operations and comprehensive income (loss) includes $1.1 million for the eight months ended August 31, 2019 and $1.5 million for the year ended December 31, 2018 in relation to these notes. In conjunction with the Master Trust 2014 Sale, the outstanding principal balance of $33.5 million was paid in full, plus an early repayment premium of $0.9 million was paid by SVC to the Manager in relation to these notes.
49
SPIRIT MTA REIT
Notes to Consolidated Financial Statements
(Unaudited)
Related Party Transfers and Acquisitions
The financial statements include transfers of properties between the Company and Spirit and its wholly-owned subsidiaries prior to the Spin-Off. These transactions are reflected in the combined statements of cash flows as distribution to parent. For the year ended December 31, 2018, the Company transferred three properties to Spirit with a net book value of $2.1 million and Spirit contributed ten properties to the Company with an aggregate net book value of $44.9 million and a $35.0 million B-1 Term Loan with Shopko as borrower, all of which are reflected as non-cash activity in the consolidated statement of cash flows. For these transactions, due to all entities being under common control, no gain or loss was recognized by the Company and transferred properties were accounted for by the Company at their historical cost basis to Spirit. During the year ended December 31, 2018, Spirit also acquired a portfolio of properties and subsequently assigned three of the acquired properties to SMTA. In conjunction with the assignment, the Company paid a $393 thousand equalization payment to Spirit to ensure a consistent capitalization rate for the acquired properties between the Company and Spirit.
For the year ended December 31, 2017, the Company purchased one property from Spirit for $16.0 million. Additionally, during 2017, Spirit contributed ten real estate properties to the collateral pool of Master Trust 2014 with total net book value of $204.7 million in conjunction with the issuance of the Series 2017-1 notes.
There were no related party transfers during the year ended December 31, 2019.
Expense Allocations
As described in Note 3, the accompanying consolidated financial statements present the operations of the Company as carved-out from the financial statements of Spirit through the date of the Spin-Off. General and administrative expenses and transaction costs were first specifically identified based on direct usage or benefit. The remaining general and administrative expenses and transaction costs for the period prior to the Spin-Off have been allocated to the Company based on relative property count, which the Company believes to be a reasonable methodology. These allocated expenses are centralized corporate costs borne by Spirit for management and other services, including, but not limited to, executive oversight, asset management, property management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations, as well as transaction costs incurred in connection with the Spin-Off. A summary of the amounts allocated by property count for the period prior to the Spin-Off is provided below (dollars in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Allocated corporate expenses:
|
|
|
|
|
|
|
|
|
|
Cash compensation and benefits
|
|
$
|
3,965
|
|
|
$
|
8,078
|
|
|
Stock compensation
|
|
|
2,424
|
|
|
|
6,131
|
|
|
Professional fees
|
|
|
1,013
|
|
|
|
3,350
|
|
|
Other corporate expenses
|
|
|
1,068
|
|
|
|
2,255
|
|
|
Total corporate expenses
|
|
$
|
8,470
|
|
|
$
|
19,814
|
|
|
Transaction Costs
|
|
$
|
3,957
|
|
|
$
|
1,180
|
|
|
(1)
|
Allocation for the year ended December 31, 2018 is for the period prior to the Spin-Off.
|
Corporate expenses have been included within general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
50