NYSE: SRC | H. Attar, M. Briggs, T. Krauter | Apr. 2016 · portfolio focused on single tenant operationally essential real estate • Operates across 49 states with large clusters

NYSE: SRC | H. Attar, M. Briggs, T. Krauter | Apr. 2016

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Schedule1. Introduction

a) REIT Terminology & Valuation Methodologyb) Company Overviewc) Industry Overview

2. Key Business Featuresa) Investment Strategyb) Leasing Strategies & Deal Structurec) Portfolio Composition & Distributiond) Buyer Mixe) Recent Developments

3. Industry Considerationsa) Residential Real Estate Trends & Expectationsb) SRC vs. Comparable REITS

4. Variant Perceptiona) Market Perception Summaryb) BIG Discrete Nonconformities – Qualitativec) BIG Discrete Nonconformities – Quantitative

5. Financial Reviewa) Model – Strategies & Key Assumptionsb) Possible Outcomes Examinationc) Valuation – Outcome Weightingd) SRC vs. Comparable Companies – Metricse) Comparable Valuation - Football Field Analysisf) Credit Analysis

6. Q/A

2

Introduction

Introduction Key BusinessFeatures

Industry Considerations

Variant Perception

Financial Review Q/A

3

REIT Terminology & Valuation MethodologyTerminology

Valuation Methodology

• Impairments – Non-cash expense used to write down assets worth less than their balance sheet carrying amount.

• Funds from Operations (FFO) – Net income plus D&A and impairments. Used to evaluate REITs in lieu of EPS.

• Adjusted Funds from Operations (AFFO) – FFO minus capital expenditures and other situational adjustments. Used to more accurately portray operational performance.

• Sale-Leaseback (SLB) Transaction – Sale of an asset followed by a long-term lease to the original owner. Essentially a loan from buyer to seller, where payments take the form of rent. Increases capital access for seller and capital utilization for buyer.

• Triple Net Lease – Tenant is solely responsible for all of the costs relating to the asset being leased (including taxes, maintenance, etc.) in addition to the rent fee.

• REITs are often compared to each other using their Price/FFO or Price/AFFO ratios, which captures net value to investors. Asset-oriented investors also compare REITs using Price/NAV, which helps to appraise capital value in cases of liquidation or restructuring.

• Since REITs are required to pay out 90%+ of their earnings to shareholders each year as a dividend, the yield is also useful in measuring net investor value. Care must be taken, as REITs can utilize leverage to temporarily issue high, unsustainable dividends.

4

Company OverviewBusiness Description Key Differentiators

• Spirit Realty Capital (SRC) is a REIT with a portfolio focused on single tenant operationally essential real estate

• Operates across 49 states with large clusters in CA, TX, IL, and GA

• Rents ~2,600 properties to 455 tenants across 28 industries with 99% occupancy

• Portfolio is 87% retail, 7% industrial, and 6% commercial real estate

• Specializes in “Sale-Lease Back” transactions to unlock value in capital

• Has triple-net leases with 10+ year terms, isolating revenue from cyclical pressure

• Low buyer concentration as largest tenant holds 9.1% of revenue and top 10 tenants hold 26.5% of revenue

• “Master-lease” structure cross-protects lower-quality portfolio holdings

Percent of Total Normalized Revenues Lease and Deal Composition

54%46%

Single Lease Master Lease

78%

22%

Sale-Lease Back Other

5

Industry OverviewDescription Growth Drivers

Industry Revenue and Growth Rates Product and Services Segmentation

• REITs are financial companies which offer highly liquid exposure to real estate markets

• Equity REITs invest in and own properties, mortgage REITS invest in and own mortgages, and hybrid REITs do both

• The industry is mature and competitive, with revenue and income growth rates closely tied to property markets

• Interest rates determine how aggressively REITs are able to grow the balance sheet to increase rental/mortgage income

• Demand for real estate, which is driven by economic growth and job creation, drives down cap rate

• Core value proposition of cap rate > cost of capital as demand for real estate increases/financing decreases

13.9%

20.4%

58.3%

6.0%

1.4%

Equity - Residential

Equity - Retail

Equity - Other Commercial

Mortgage

Hybrid

$56.5

$36.3

$56.9

$69.9 $80.0

$85.4 $94.2

-60%

-40%

-20%

0%

20%

40%

60%

$0

$20

$40

$60

$80

$100

2005

(A)

2006

(A)

2007

(A)

2008

(A)

2009

(A)

2010

(A)

2011

(A)

2012

(A)

2013

(A)

2014

(A)

2015

(A)

2016

(A)

2017

(E)

2018

(E)

2019

(E)

2020

(E)

2021

(E)

2022

(E)

Revenue ($ Bln.)

Growth %

Source: IBISWorld6

Key Business Features



Variant Perception


7

Investment StrategyBottom-Up Underwriting Approach Rent Coverage1

“Operationally Essential” High Occupancy Over Time

1. Unit Level Profitability• Evaluate the cash flows at the

property level2. Real Estate

• Focus placed on operationally essential assets

3. Industry Expertise4. Corporate Credit

• Perform credit reviews

• Assets are essential to the tenant’s generation of sales and profits

• Makes it difficult for a tenant to move from “profitable” locations

• Reduces risk that tenants would chose not to renew a lease or reject a lease in bankruptcy

2.6x 2.7x 2.7x2.8x 2.9x 2.8x 2.8x 2.8x 2.8x 2.8x 2.9x 2.9x

0.0

1.0

2.0

3.0

-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%

0%

20%

40%

60%

80%

100%

Occupancy GDP Growth

Sources: March 2016 Investor Presentation and company filings1 Based on data from 63.8% of tenants who report financials to SRC 8

Key Investment Criteria Metric Range Average (Since 2011)

Unit Level Coverage 2.00x to 3.00x 2.60x

Lease Structure Master Lease or Spirit Form 70%

Rent Escalations 1.25% to 2.00% Annually 1.58% Annually

Investment Size $5 to $30 million $12 million

Target Tenants• Investment grade and equivalent non-investment grade small companies

• < 50 locations and $10 to $100 million in annual sales• Credit rating must be higher than B-

• Investment grade and equivalent non-investment grade middle market companies• 50 - 500 locations and $100 million to $2 billion in annual sales• Credit rating must be higher than B-

• Will take advantage of situational opportunities with Large Companies• > 500 locations and $2+ billion in annual sales

• SRC will not invest in speculative companies of any size (<CCC+ credit rating)

Source: March 2016 Investor Presentation9

Leasing Strategy & Deal StructureLong Term Triple-Net Leases

Master Lease Structure

Rent Escalations• 86% of leases (based on revenue) are

triple-net, in which tenants are contractually obligated to pay all operating expenses

• Prevents inflation having a negative impact on operating expenses

• Risk: If a property becomes vacant, expenses become SRC’s liability

• 88% of properties contain one of the following contractual rent escalators:

1. Fixed amount (varies btwn. leases)2. The lesser of:

a. 1 to 1.25x any increase in CPI over a specified period

b. A fixed 1% to 2% increase per year

• Lease multiple properties to a single tenant on an “all or none” basis

• Prevents tenants from cherry picking premium properties

• Majority are 2 to 8 properties• 124 master leases with weighted average

remaining lease life of 13.6 years (46% of rental revenue)

52%36%

12%

Contractual Fixed Increases CPI-Related Flat

Sources: March 2016 Investor Presentation, company filings 10

Portfolio Composition & DistributionHighly Diversified Across Industries Key Takeaways

Lease Expirations as % of Revenue

• Aggressive diversification reduces the risk associated with adverse developments affecting a particular tenant, property, region or industry - Occupancy has never fallen below

96% and remained at 99% in 2008 and 2009

• Long-term leases assure that no more than 5.7% of leases (based on revenue) are going to expire in a given year through 2025- Most leases have renewal options

for additional terms

• Master leases provide additional protection to exposure within any one industry

General Merchandise

11.4%Restaurant - Casual

Dining 9.7%

Restaurant - Quick Service 7.2%

Convenience Store 6.5%

Movie Theatres6.4%

Grocery 6.0%Drug Store / Pharmacies 6.0%

Building Materials 5.5%

Medical / Other Office 4.0%

Sporting Goods3.7%

Health and Fitness 3.5%

Automotive Parts & Services 3.0%

Other 27.1%

3.8% 3.3% 3.7% 3.5% 4.3% 5.7% 3.9% 5.5% 3.4% 5.6%

57.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Post 2025

Source: Company filings11

Buyer MixTop 10 Tenants Properties % of Revenue

139 9.1%

63 3.3%

108 2.9%

199 2.2%

84 1.9%

6 1.8%

37 1.5%

13 1.3%

8 1.3%

13 1.2%

Top 10 670 26.5%

Spirit Portfolio Considerations

Properties 2,629

Occupancy 98.6%

States 49

Tenants 438

Industries 28

Weighted Avg. Remaining Lease Term 10.7 yrs

Weighted Avg. Unit Level Coverage 2.9x

Top Tenant Concentration by % of Rev

Weighted Avg. Remaining Lease Term 11.4 yrs…......

Weighted Avg. Unit Level Coverage 2.5x….........

Source: March 2016 Investor Presentation 12

9.1%5.9% 6.9%

19.4%21.2%

25.1%26.5%

36.3% 37.9%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%

SRC NNN O

Top Tenant Top 5 Tenants Top 10 Tenants

Recent DevelopmentsCole II Merger IPO

Haggen Fiasco Recent Capital Raised

• In July 2013, SRC merged with Cole II, nearly doubling the size of SRC’s real estate assets

• The surviving entity is managed by the original SRC executive team

• 2 board members added in association with Cole II

• 747 properties added, along with 69 secured mortgage loans

• SRC completed its IPO in September 2012, issuing 33.35 million shares of common stock

• SRC originally went public in 2004 and was taken private in 2007 by a group of private equity investors

• SRC has been able to use access to the public markets to grow its investment portfolio and improve its balance sheet

• Haggen was one of SRC’s top tenants (2.7% of revenue) when it declared bankruptcy earlier this year

• Originally invested in $224 million in 20 properties

• SRC’s investment actually appreciated during Haggen’s tenancy but questions were raised about management’s judgment

Source: Company filings, news reports13

-

500

1,000

1,500

2,000

2013 2014 2015 2016

Revolver Term Loan Master Trust Notes

Covertable Notes Share Issuance Accordian Feature




Variant Perception


14

Recent Real Estate Trends & ExpectationsREITs During 2008 Recession REITs Since 2008 Recession

Medium-Term Expectations Forward Interest Rate Sensitivity• 2.4% annualized top-line growth expected

through 2021; estimates on position in current commercial real estate cycle vary

• SRC growth mainly endogenous and linked to SRC’s specific operations

• Value created through strong, resilient business model, access to capital and strategic management in refinancing

• Low – continue to see expansion of balance sheets and strategic refinancing

• Medium – slower growth of balance sheets and some difficulty refinancing with lower rental incomes

• High – Refinancing becomes expensive, REITs aim to decrease balance sheet to maintain financial health

15

• REITs overleveraged their balance sheets in expectation of continuously increasing property prices

• High debt levels made financing more expensive à hard to service debt or refinance the balance sheet

• Average returns in ‘08 were -40%, but equity REITs more robust

Source: IBISWorld, news reports

• Renewed access to capital, increasing property prices and SME business growth spurred REIT growth and strengthened their balance sheets

• Property values continue to increase significantly and FFO increased 10%, while NOI increased 13% in 2015 alone

• May be reaching the upper limit of RE prices w/o entering bubble territory

SRC vs. Comparable REITsBusiness Models Debt Levels and Financing

• Triple net lease common, but not universal• Operationally essential vs. more diversified

holding types• Management’s compensation tied to

performance (AFFO, occupancy, acquisitions) with checks and balances

• Occupancy Rates high within the industry (>95%), although SRC enjoys particularly high occupancy at 99% with low variability

• SRC’s Net Debt/EBITDA of 7 in line with average of 6.5; high debt levels common among REITs due to reliance on balance sheet as a source of revenue

• Share issuance widely used by REITs as a cheap source of capital for use in accretive acquisitions

• Reliance on multiple layers of debt to finance acquisitions, with SRC decreasing high-yield debt over time

16Source: Company filings

-

50.000

100.000

150.000

200.000

250.000

9/20/12 9/20/13 9/20/14 9/20/15

SRC

EPR

KIM

NNN

VER

O

BXP

RE ETF

Variant Perception



Variant Perception


17

Market Perception Summary (1/2)Haggen Meltdown Tenant’s Risk Profile

Share Issuance Potential Slowdown in Acquisitions

• Haggen, a tenant representing ~2.7% of normalized revenue, declared bankruptcy due to overextension

• Investors are concerned about management’s underwriting and due diligence, as well as the credit profile of SRC’s tenants in general

• Lack of tenant diversification concern in the past

• ATM Program allows SRC to issue 350 million shares (432 million shares outstanding currently). SRC issued 30 million shares in early April, leading investors to believe their equity stakes will continue to be diluted and decreasing investors’ conviction in management’s ability to generate shareholder value

• Company’s relatively high cost of capital has investors doubting SRC’s ability to continue successfully purchasing properties with reasonably priced funds

• Potential timing in the property market cycle has investors worried about the SRC’s ability to maintain its spread in cap rates

• 61% of SRC’s tenants are non-investment grade, making management’s ability to successfully underwrite critical

• 64% of tenants provide unit-level P&L; half of non-reporting tenants are non-investment grade

• SRC unable to independently verify validity of unit level financial reporting

18

$11.83 $10.53

$9.63 $9.84 $10.31 $11.40

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$2.00

$4.00

$6.00

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$12.00

$14.00

1/2/15 3/2/15 5/2/15 7/2/15 9/2/15 11/2/15 1/2/16 3/2/16

Market Perception Summary (2/2)SRC’s Investment GradeSRC Moving HQ

• SRC is currently a non-investment grade firm, due to high levels of debt, including significant portion of high-yield debt

• Lack of investment grade alienates both conservative personal and institutional investors, in particular mutual funds

• SRC is moving its HQ from Scottsdale to Dallas, which is expected to cost $20 million (at least). Loss of top talent, as well as time and money expected to be spent are a concern for investors

• Move will take approx. half a year to complete and so far only 20 of 70 employees are set to move with SRC

19

Price Movement: Recent Earnings Reports vs. Expectations

Source: NYSE

Q4’15 Earnings Released; On target

Q2’15 Earnings Released; 10% over target



Q1’15 Earnings Released; 5% over target

BIG Discrete Nonconformities - QualitativeSRC Moving HQ Haggen Calamity/Tenant Diversification

Share Issuance

• ~12% of revenue comes from Texas, creating an operational incentive to move to the area

• Texas as a focal point with respect to SRC’s 4 largest states based on normalized revenue

• Move to Dallas unlikely to lead to loss of top talent/management

• Legislative and tax incentives

• Equity offerings provide cheaper access to important funds

• Recapitalization at the forefront of management’s considerations

• Investors focus on dilution, but fact funds from offerings will drive profitable acquisitions and enable recapitalization, increasing net value per share

• 9 of 20 stores already re-let, 2 more stores sold. All other stores in the process of being sold or re-let

• Bankruptcy expected to leave the company with $40 million net gain (less low transaction costs)

• Shopko decreasing significantly as percent of normalized revenues from 14% in 2014 to 9% in 2015 with 5% goal

20

BIG Discrete Nonconformities - QuantitativeHaggen Bankrupcy

Share Issuance à Recapitalization

Slowdown in Acquisitions (1)

Slowdown in Acquisitions (2)• Share issuance serves as an important

source of funds for three reasons:1. Continue to acquire properties at

competitive cap rates2. Recapitalize the balance sheet3. Reduce debt levels à improve

debt coverage, attracting more conservative investors

• Completely undrawn LOC of up to $1bn on much more favorable terms (lower yield and unsecured)

• Term loan extension to $600 million, with possibility with two one year optionalitiesto defer principle payments and fund significant acquisitions within investment horizon

• ~90% of leases contain annual escalations of varying amounts, typically between 1-2%. This creates top line growth of 1-2% on at least 60% of properties through 2025

• Minimum contractual revenue $607 million (95% of revenue) for next fiscal year

• 9 stores re-let immediately with no days’ worth of rent lost

• 5 stores sold, others to follow• From a financial perspective: overblown;

SRC netted a 15% IRR on its investment on Haggen properties

• As a reflection of management’s underwriting decision making: hard to say… did mgmt. demonstrate growth?

21

Financial Review



Variant Perception


22

Model – Strategies & Key AssumptionsOverview Debt Assumptions

Dependency Chart Output Analysis

• The model describes the financial future of SRC given a certain combination of operating assumptions

• Those financials are then evaluated on a DCF basis to determine present value

• Key levers: cap rate, investment rate, and expenses as a percentage of revenue

• It also looks at comparables for relative pricing and credit metrics to analyze risk

• We assume SRC pays 10% mandatory amortization on its term loan and makes management-projected payments on mortgages

• Taking into account the cash required to pay the dividend, finance investment, and maintain a minimum balance, SRC then draws down/repays the revolver to make up the balance as necessary

Income Statement

Operating Cash Flow

Debt Schedule

CF from Investing + Financing

Balance Sheet

DCF

Present equity value given assumptions

Expectations determine return (not

risk)

Comparables

Relative cost regardless of expectations

Describes value using assets and

FFO

Credit Metrics

Future credit risks given assumptions

Describes costs of value

in terms of risk

23

Possible Outcomes Examination (1/3)Revenue Growth Rate Operating Expenses

Conservative• Rental income as a % of RE assets declines from 7.9% à

7.5% over 5 years, consistent with a long demand glut• Other streams grow at 7.5% à 3.0% over 5 years, which is

below the 2011-2015 CAGR

Base• Rental income as a % of RE assets starts at 8.5% and

increases geometrically by 1% per year due to contractual rate hikes in most leases

• Other streams grow at 10% à 5%, which is near the 2011-2015 CAGR

Optimistic• Rental income as a % of RE assets from 8.7% à 9.0%

over five years, consistent with a continuing increase in demand for retail space and contractual rate hikes

• Other streams grow at 12.5% à 8.0%, which is above the 2011-2015 CAGR

Conservative• G&A expense higher than 2015 at 7.5%• Property costs from 4.4% à 4.5% over five years,

reflecting potential increases in the price of maintenance• Assumes another ~$5 million in restructuring fees in 2016Base

• G&A expense even with 2015 at 7.2%• Property costs even with 2015 at 4.2%• Assumes no additional restructuring fees in 2016• Management has not indicated margins will change, so level

expenses is the most probably outcome

Optimistic• G&A expense lower than 2015 at 6.9%• Property costs lower than 2015 at 4.0%, reflecting potential

improvements in maintenance efficiency• Assumes no additional restructuring fees in 2016• Impairments drop significantly from 8.0% à 6.0% over 5

years, reflecting increased asset value and less need to impair

24

Possible Outcomes Examination (2/3)Share Issuance Rate Minimum Cash Balance

Buybacks• Management executes $200 million buyback program

which has already been authorized by the board in 2016-2017, undertaking additional financing risk to do so

• Share issuance programs halt• Mgmt. only plans to issue buybacks if the stock price drops

to critical levelsConstant Issuance

• Management does not execute share buyback program; this is most likely as buybacks would place additional strain on the already highly-levered balance sheet

• Share issuance programs halt; management has not issued guidance, so it is possible SRC will see further dilution, but unlikely

Accelerating Issuance• Management does not execute share buyback program• Management continues to issue shares at the 2011-2015

CAGR, which is plausible depending on credit availability and the rate of investment

Conservative• Management dramatically expands end of year cash balance

from ~$20 million in 2016 to $100 million to assuage the fears of creditors

• Will cause notable slowdown in investment

Neutral• Management responds to creditors fears regarding

exceptionally low Q4 cash balance by increasing cash targets to $50 million

• Assuming financing policy does not change substantially, the rate of investment slows by less than 5% in 2016 compared to a $25 million cash balance

Aggressive• Management keeps minimum cash target in the $20 - $25

million range• Allows for maximally rapid investment, but may prevent

gains in financing terms and perception of creditworthiness

25

Possible Outcomes Examination (3/3)Rate of Annual Investment Dividend/FFO

Conservative• Annual investment increases from -$25 million to $200

million over 5 years• Most protective of credit, but reduces revenue growth as

total assets are lower

Neutral• Annual investment increases from $0 to $300 million over

5 years• Represents a middle ground where management is able to

continue to invest near historical levels without unduly damaging the balance sheet

• Still pushes SRC to relatively high debt burdens

Aggressive• Annual investment increases from $25 million to $400

million over 5 years, with significant frontloading• Deleterious to recent improvements in balance sheet

health without coterminous share issuance, but necessary to maintain historical investment levels

Decreasing• Dividend decreases to 75% of FFO from 80% of FFO• Management could pursue this option to reduce financing

burdens in critical years like 2017, but investor confidence would be seriously hampered

Constant• Dividend stays constant at 80% of FFO for 5 years• Management would be very hesitant to decrease the

dividend, and increasing it would run counter to their stated objective of achieving investment grade credit ratings, so this is by far the most likely outcome

Increasing• Dividend increases to 85% of FF from 80% of FFO and

stays there for 5 years• Requires a significant increase in the amount of leverage

taken on to balance cash flows• May be realistic in scenarios where management wants to

alleviate the pain of continued share issuance

26

Valuation – Outcome Weighing

Bear Base Bull

Revenue Growth Rate 30% 40% 30%

Operating Expenses 30% 40% 30%

Share Issuance Rate 10% 50% 40%

Minimum Cash Balance 40% 50% 10%

Rate of Annual Investment 35% 50% 15%

Dividend/FFO 10% 80% 10%

Plug Probabilities Methodology

Representative Cases

• Since there are 729 possible composite cases, 4 representative cases were selected to convey the scope of possibilities and construct a price target

• The weight of each representative case is equal to the chance of all of its plugs happening divided by the probability of any representative case occurring

Un-weighted Weighted Return1

Level growth, standard balance sheet mgmt. 1.6000% 49.3% 20.0%

Increasing growth, aggressive balance sheet mgmt. 0.0432% 01.3% 36.1%

Economic turndown, conservative balance sheet mgmt. 0.4032% 12.4% -33.5%

Level growth, conservative balance sheet mgmt. 1.2000% 37.0% 25.3%

Total/Average 3.2464% 100.0% 15.54%

271 This figure represents the percentage by which SRC’s equity is undervalued. It does not consider dividends or changes in sharesoutstanding.

Share Price Enterprise Value (EV, $ Bln.)

Net Debt/EBITDA

Revenue (TTM, $ Mln)

FFO/Share, TTM

(FFOPS)

Net Asset Value per

Share (NAV/S)

Annualized Yield

FFO Growth/Share Past 3 Years

Price/FFO (P/FFO)

Price/NAV (P/NAV)

Spirit Realty Capital (SRC) $11.24 $9.05 7.03 $660 $0.82 $7.00 6.21% 50.03% 13.7 1.6

EPR Properties (EPR) $65.77 $6.15 5.89 $418 $4.44 $22.46 5.83% -2.42% 14.8 2.9

Kimco Realty Corporation (KIM) $28.29 $17.02 7.34 $1,170 $1.56 $15.18 3.56% 15.56% 18.1 1.9

National Retail Properties (NNN) $45.92 $9.01 6.06 $483 $2.15 $23.55 3.75% 12.74% 21.4 1.9

Vereit (VER) $9.01 $16.36 8.81 $399 $0.63 $6.87 6.10% n/a 14.3 1.3

Realty Income Corp (O) $63.08 $21.02 4.97 $1,023 $2.77 $21.31 3.79% 14.94% 22.8 3.0

Boston Properties (BXP) $128.35 $30.38 6.07 $2,491 $1.21 $37.61 2.03% 8.71% 106.1 3.4

Average (Excl. SRC) $56.74 $16.66 6.52 $997 $2.13 $21.16 4.18% 9.90% 18.28 2.40

SRC vs. Comparable Companies – Metrics

28

P/FFO Discount: 25.0%

P/NAV Discount: 33.2%

Comparable Valuation – Football Field Analysis

29

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00

Dividend Yield

TTM P/NAV

TTM P/FFO

• This analysis compares SRC’s valuation to the comparable REITs according to P/FFO, P/NAV, and yield:• P/FFO – SRC is trading below the 25th percentile on a P/FFO basis highlighting the

market’s belief that they will not able to maintain their growth• P/NAV – On a P/NAV basis, SRC is well below the average indicating possible

undervaluation of their assets • Dividend Yield – SRC boasts one of the highest dividend yields, indicating

unwarranted fear of a risky dividendNote: The analysis shows the 25th to 75th percentiles for the comparable REITs

Credit AnalysisBest Case

Neutral/Most Probable

Worst Case

Management Goal: Debt/EBITDA of < 7.00

Source: Earnings call transcript 30

Fiscal Year Ending December 31, 2016 2017 2018 2019 2020Debt Service Coverage Ratio (DSCR) 0.80 0.58 1.01 1.37 1.56Debt Ratio 0.49 0.44 0.46 0.49 0.52Current Ratio 1.49 0.62 0.97 1.30 1.46Debt/EBITDA 6.63 5.34 5.44 5.51 5.58



RecommendationWe recommend a buy and suggest a 6-8% position. Summary of reasoning:

§ Focus on SLB transactions lets SRC operate in a market with low competition and high yields. These transactions offer the buyer massive leverage. The opportunities in and security of the space are widely undervalued.

§ Limited market risk despite being in a highly cyclical industry as evidenced by SRC’s resiliency during the Financial Crisis of ’08. 10+ yr. leases, operationally essential property, and 40%+ master leases protect rental cash flows (~95% of revenue).

§ High value versus comparable companies as measured by Price/FFO and Price/NAV. Multiples pushed down by concerns over tenant solvency which BIG discounts heavily. Market questions about management’s judgment over Haggen and HQ relocation mitigated by consistency in meeting revenue, FFO and EPS targets.

§ SRC’s yield provides downside protection. “Locked in” rents through 2020 essentially guarantee the dividend. Depreciation in share price will draw capital as yield increases.

Schedule for Future Due Diligence:

§ Reexamine multiples vs. comparables after Q1 SEC filings are released.

§ If SRC’s share price appreciates to the 50th percentile on any metric (bottom of red zone on football field graph) reevaluate potential for additional appreciation.

§ If Debt/EBITDA exceeds 7.5x or 2016 FFO falls short of guidance, reevaluate critically.

31

Q/A



Variant Perception


32

Appendix 1. Sale-Leaseback Transaction2. Credit Metrics - Definitions3. SRC Leadership4. Management Compensation Incentives5. Debt Maturity Schedule6. Proactive Risk Management7. Development Since IPO8. Abbreviated Income Statement – Most Pessimistic9. Abbreviated Income Statement – Neutral10. Abbreviated Income Statement – Most Optimistic11. Abbreviated Balance Sheet – Most Pessimistic12. Abbreviated Balance Sheet – Neutral13. Abbreviated Balance Sheet – Most Optimistic

33

Sale-Leaseback Transaction• A Sale-Leaseback (SLB) Transaction is the sale of an asset followed by a long-term lease

to the original owner• Essentially a loan from buyer to seller, where payments take the form of rent and the seller

may or may not have the option to buy back the property at the end of the term• Increases capital access for seller and capital utilization for buyer• Sellers are generally unable to raise sufficient capital through traditional channels due to either

lack of creditworthiness or existing overleverage; SLB transactions are good solutions because possession of the real estate asset limits the importance of seller’s credit to the buyer

Sale Price

Regular Rent Payments

Property

34

Credit Metrics - Definitions

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• Debt Service Coverage Ratio (DSCR) = Net Operating Income / Total Debt Service.A value less than 1 indicates that the company has sufficient income to pay its obligations.

• Debt Ratio = Total Debt / Total Assets. A debt ratio of less than 1 indicates that the company has more assets than debt. For REITs, debt ratios are typically high since balance sheets tend to be large.

• Current Ratio = Current Assets / Current Liabilities. A ratio under 1 indicates that the company would be unable to meet their short-term obligations if they all came due.

• Debt/EBITDA = Debt/EBITDA. Used by credit agencies as a metric for how likely the company is to default on debt. Also a critical rating in the evaluations done by ratings firms to determine the grade of the company’s debt.

SRC LeadershipThomas H. Nolan, Jr. – Chairman & CEO- 30 years Real Estate and Portfolio Management experience- Managed over $75 billion of real estate transactions- Prior President of AEW Partners Private Real Estate Equity Funds- Joined SRC in Sept. 2011

Sources: March 2016 Investor Presentation, company website, news reports

Philip D. Joseph, Jr. – Executive Vice President and Chief Financial Officer- 23 years Real Estate experience- Over $35 billion of public and private capital raised in global markets- Previously Global Treasurer of Prologis- Joined SRC in Apr. 2015

Mark L. Manheimer - Executive Vice President – Asset Management- 15 years Banking and Real Estate experience- Previously with Realty Income and Cole Real Estate Investments- Joined SRC in Apr. 2012 (circa IPO)

Gregg A. Seibert – Executive Vice President and Chief Investment Officer- 27 years Real Estate and Net Lease experience- Executive at FFCA for 7 years prior to sale to GE Capital- Joined SRC at inception in Sept. 2003

Key Takeaways• SRC post-IPO has

a mostly new senior mgmt. team

• Experience of new execs is formidable

• Proven ability to deliver on stated goals, as metrics highlighted in communication with investors have improved dramatically since 2012

• Caveat: all of these execs were part of Haggendisaster

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Management Compensation Incentives

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Executive AFFO Debt to EBITDA

Occupancy Acquisitions Individual Performance

Thomas H. Nolan

17.5% 17.5% 17.5% 17.5% 30.0%

Phillip D. Joseph, Jr

17.5% 26.3% 13.1% 13.1% 30.0%

Gregg A. Seibert

17.5% 8.8% 8.8% 35.0% 30.0%

Mark L. Manheimer

17.5% 8.8% 21.9% 21.9% 30.0%

Note: Figures may not add up to 100% due to rounding.

Debt Maturity Schedule

Source: March 2016 Investor Presentation38

$0$100$200$300$400$500$600$700$800

Line of Credit CMBS Debt Unsecured Term Loan

Master Trust Convertible Notes

6.15%

5.80%2.73%

3.00%4.73%

4.55%

5.61%5.37%

NA 6.00%

4.65%

Proactive Risk Management

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Default Risk Termination Risk Expected Loss• Calculates expected

default frequency (EDF) based on a tenant’s financials

• “Shadow ratings” calculated using Moody’s software when actual ratings are unavailable

• Based on unit level profitability (typically FCCR)

• 63.8% of tenants are required to provide P&L statements

• Half of non-reporting tenants are investment grade

• Expected loss is determined by analyzing the potential loss through the sale of an asset or the cost associated with releasing an asset to another party

Average Expected 1-Year Rental Loss

• Each tenant is assigned a risk rating of 1-6• Tenants with ratings of 4-6 are placed on a credit watch list

and reviewed at weekly credit watch meetings• A risk rating of 4 has a 5% expected loss rate

Source: March 2016 Investor Presentation

Development Since IPO

40Source: March 2016 Investor Presentation

Abbreviated Income Statement – Most Pessimistic

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($ in thousands, except per share data)Fiscal Year Ending December 31, 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Revenues:Rentals $255,672 $266,567 $404,402 $574,456 $634,151 $591,199 $581,778 $581,094 $584,011 $586,622Other Income $7,558 $6,548 $15,065 $28,415 $33,184 $35,673 $37,902 $39,797 $41,389 $42,631

Total Revenue $263,230 $273,115 $419,467 $602,871 $667,335 $626,871 $619,681 $620,891 $625,400 $629,253% Growth 3.8% 53.6% 43.7% 10.7% -6.1% -1.1% 0.2% 0.7% 0.6%

Expenses:Interest $169,343 $156,220 $179,267 $220,070 $222,901 $215,402 $221,438 $230,572 $243,019 $255,751Depreciation and Amortization 103,179 104,984 164,054 247,966 260,633 259,115 258,255 261,301 266,069 270,821General & Administrative 27,854 36,252 35,146 44,252 47,730 47,015 46,476 46,567 46,905 47,194Impairments (Recoveries) 5,646 8,918 (185) 36,019 69,734 62,687 61,968 62,089 62,540 62,925Property Costs 4,693 5,176 11,760 23,383 27,715 27,582 27,886 27,940 28,143 28,316Other Expenses 553 1,054 59,079 16,653 9,795 26,896 2,479 2,484 2,502 2,517

Total Expenses $311,268 $312,604 $449,121 $588,343 $638,508 $638,698 $618,502 $630,953 $649,178 $667,525

Operating Income from Continuing Operations ($48,038) ($39,489) ($29,654) $14,528 $28,827 ($11,826) $1,179 ($10,062) ($23,777) ($38,273)% Margin -18.2% -14.5% -7.1% 2.4% 4.3% -1.9% 0.2% -1.6% -3.8% -6.1%

Non-Operating Expenses $0 ($65,044) ($4,810) ($129,500) ($6,324) $0 $0 $0 $0 $0Income Tax (Expense) Benefit 60 (504) (1,113) (673) (601) 0 0 0 0 0

Income (Loss) from Continuing Operations ($47,978) ($72,515) ($33,172) ($50,895) $25,064 ($11,826) $1,179 ($10,062) ($23,777) ($38,273)% Margin -18.2% -26.6% -7.9% -8.4% 3.8% -1.9% 0.2% -1.6% -3.8% -6.1%

Income (Loss) from Discontinued Operations (13,149) (369) (2,077) 3,368 98 0 0 0 0 0Gain (Loss) from Disposition of Assets 0 0 0 13,240 88,978 0 0 0 0 0

Net Income (Loss) ($63,863) ($76,233) $1,677 ($33,799) $114,730 ($11,826) $1,179 ($10,062) ($23,777) ($38,273)% Margin -24.3% -27.9% 0.4% -5.6% 17.2% -1.9% 0.2% -1.6% -3.8% -6.1%

Total Adjustments for FFO 136,838 129,001 137,622 270,674 240,833 321,802 320,223 323,390 328,609 333,747FFO $72,991 $52,831 $139,299 $236,875 $355,563 $309,976 $321,402 $313,329 $304,831 $295,474

% Margin 27.7% 19.3% 33.2% 39.3% 53.3% 49.4% 51.9% 50.5% 48.7% 47.0%

Abbreviated Income Statement - Neutral

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Total Revenue $263,230 $273,115 $419,467 $602,871 $667,335 $672,557 $683,546 $707,676 $738,497 $768,884% Growth 3.8% 53.6% 43.7% 10.7% 0.8% 1.6% 3.5% 4.4% 4.1%


Total Expenses $311,268 $312,604 $449,121 $588,343 $638,508 $624,436 $580,838 $577,775 $603,389 $629,164

Operating Income from Continuing Operations ($48,038) ($39,489) ($29,654) $14,528 $28,827 $48,121 $102,708 $129,900 $135,109 $139,720% Margin -18.2% -14.5% -7.1% 2.4% 4.3% 7.2% 15.0% 18.4% 18.3% 18.2%


Income (Loss) from Continuing Operations ($47,978) ($72,515) ($33,172) ($50,895) $25,064 $48,121 $102,708 $129,900 $135,109 $139,720% Margin -18.2% -26.6% -7.9% -8.4% 3.8% 7.2% 15.0% 18.4% 18.3% 18.2%


Net Income (Loss) ($63,863) ($76,233) $1,677 ($33,799) $114,730 $48,121 $102,708 $129,900 $135,109 $139,720% Margin -24.3% -27.9% 0.4% -5.6% 17.2% 7.2% 15.0% 18.4% 18.3% 18.2%


% Margin 27.7% 19.3% 33.2% 39.3% 53.3% 54.8% 61.6% 63.9% 63.4% 62.9%

Abbreviated Income Statement – Most Optimistic

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Total Revenue $263,230 $273,115 $419,467 $602,871 $667,335 $690,896 $712,033 $750,028 $792,893 $828,258% Growth 3.8% 53.6% 43.7% 10.7% 3.5% 3.1% 5.3% 5.7% 4.5%


Total Expenses $311,268 $312,604 $449,121 $588,343 $638,508 $618,411 $579,666 $574,537 $595,597 $626,481

Operating Income from Continuing Operations ($48,038) ($39,489) ($29,654) $14,528 $28,827 $72,486 $132,367 $175,491 $197,296 $201,777% Margin -18.2% -14.5% -7.1% 2.4% 4.3% 10.5% 18.6% 23.4% 24.9% 24.4%


Income (Loss) from Continuing Operations ($47,978) ($72,515) ($33,172) ($50,895) $25,064 $72,486 $132,367 $175,491 $197,296 $201,777% Margin -18.2% -26.6% -7.9% -8.4% 3.8% 10.5% 18.6% 23.4% 24.9% 24.4%


Net Income (Loss) ($63,863) ($76,233) $1,677 ($33,799) $114,730 $72,486 $132,367 $175,491 $197,296 $201,777% Margin -24.3% -27.9% 0.4% -5.6% 17.2% 10.5% 18.6% 23.4% 24.9% 24.4%


% Margin 27.7% 19.3% 33.2% 39.3% 53.3% 56.1% 63.1% 66.9% 67.5% 66.4%

Abbreviated Balance Sheet – Most Pessimistic

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($ in thousands)Fiscal Year ending December 31, 2014 2015 2016 2017 2018 2019 2020Assets:Real Estate Investments $7,193,796 $7,527,369 $7,439,682 $7,477,714 $7,615,625 $7,753,085 $7,890,159Less: Accumulated Depreciation (752,210) (860,954) (1,120,069) (1,378,324) (1,639,625) (1,905,694) (2,176,515)Other Investments, Net 875,974 760,190 720,643 695,531 681,460 666,794 651,543Cash and Cash Equivalents 176,181 21,790 297,284 138,355 114,071 251,056 115,252Deferred Costs and Other Assets, Net 185,507 179,180 166,400 140,841 144,497 135,902 134,679Goodwill 291,421 291,421 291,421 291,421 291,421 291,421 291,421

Total Assets $7,970,669 $7,918,996 $7,795,361 $7,365,537 $7,207,447 $7,192,564 $6,906,538% Growth -0.6% -1.6% -5.5% -2.1% -0.2% -4.0%

Liabilities:Mortgages and Notes Payable, Net 3,629,998 3,079,787 2,820,153 2,265,417 1,979,920 1,807,135 1,676,019Revolving Credit Facilities $15,114 $0 $0 $0 $395,142 $395,142 $519,523Convertible Notes, Net 678,190 690,098 690,098 690,098 690,098 690,098 690,098Term Loan, Net 0 322,902 290,612 261,551 235,396 211,856 190,670Other liabilities 329,266 336,378 312,385 264,404 271,266 255,131 252,836

Total Liabilities $4,652,568 $4,429,165 $4,113,248 $3,481,470 $3,571,822 $3,359,361 $3,329,146% Growth -4.8% -7.1% -15.4% 2.6% -5.9% -0.9%

Stockholders' Equity:Capital in Excess of Par Value 4,361,320 4,721,323 5,171,319 5,621,314 5,621,314 6,071,310 6,071,310Accumulated Deficit (1,046,249) (1,234,882) (1,492,600) (1,740,645) (1,989,087) (2,241,511) (2,497,320)Common Stock ($0.01 Par Value) $4,113 $4,418 $4,423 $4,427 $4,427 $4,432 $4,432Accumulated Other Comprehensive Loss (1,083) (1,028) (1,028) (1,028) (1,028) (1,028) (1,028)

Total Stockholders' Equity $3,318,101 $3,489,831 $3,682,113 $3,884,068 $3,635,626 $3,833,202 $3,577,393% Growth 5.2% 5.5% 5.5% -6.4% 5.4% -6.7%

Total Liabilities and Stockholders Equity $7,970,669 $7,918,996 $7,795,361 $7,365,537 $7,207,447 $7,192,564 $6,906,538

Abbreviated Balance Sheet - Neutral

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Total Assets $7,970,669 $7,918,996 $7,806,611 $7,390,791 $7,350,027 $7,322,648 $7,283,120% Growth -0.6% -1.4% -5.3% -0.6% -0.4% -0.5%

Liabilities:Mortgages and Notes Payable, Net 3,629,998 3,079,787 2,820,153 2,265,417 1,979,920 1,807,135 1,676,019Revolving Credit Facilities $15,114 $0 $0 $0 $488,418 $880,935 $1,225,282Convertible Notes, Net 678,190 690,098 690,098 690,098 690,098 690,098 690,098Term Loan, Net 0 322,902 290,612 261,551 235,396 211,856 190,670Other liabilities 329,266 336,378 312,385 264,404 278,932 295,057 310,841

Total Liabilities $4,652,568 $4,429,165 $4,113,248 $3,481,470 $3,672,764 $3,885,080 $4,092,910% Growth -4.8% -7.1% -15.4% 5.5% 5.8% 5.3%


Total Stockholders' Equity $3,318,101 $3,489,831 $3,693,363 $3,909,321 $3,677,264 $3,437,568 $3,190,210% Growth 5.2% 5.8% 5.8% -5.9% -6.5% -7.2%


Abbreviated Balance Sheet – Most Optimistic

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Total Assets $7,970,669 $7,918,996 $8,115,272 $8,006,162 $7,633,587 $7,716,932 $7,788,581% Growth -0.6% 2.5% -1.3% -4.7% 1.1% 0.9%

Liabilities:Mortgages and Notes Payable, Net 3,629,998 3,079,787 2,820,153 2,265,417 1,979,920 1,807,135 1,676,019Revolving Credit Facilities $15,114 $0 $0 $0 $176,408 $662,947 $1,101,407Convertible Notes, Net 678,190 690,098 690,098 690,098 690,098 690,098 690,098Term Loan, Net 0 322,902 290,612 261,551 235,396 211,856 190,670Other liabilities 329,266 336,378 312,385 264,404 253,289 277,141 300,660

Total Liabilities $4,652,568 $4,429,165 $4,113,248 $3,481,470 $3,335,110 $3,649,177 $3,958,854% Growth -4.8% -7.1% -15.4% -4.2% 9.4% 8.5%


Total Stockholders' Equity $3,318,101 $3,489,831 $4,002,024 $4,524,692 $4,298,477 $4,067,756 $3,829,726% Growth 5.2% 14.7% 13.1% -5.0% -5.4% -5.9%


Documents

NYSE: SRC | H. Attar, M. Briggs, T. Krauter | Apr. 2016 · portfolio focused on single tenant operationally essential real estate • Operates across 49 states with large clusters