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EX-31.2 - EX-31.2 - STORE CAPITAL Corpstor-20150331ex312d762f0.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2015.

 

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     .  

Commission File No. 001-36739  

 

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Maryland

 

45-2280254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

8501 East Princess Drive, Suite 190, Scottsdale, Arizona 85255

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (480) 256-1100

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  NO 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  NO 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large Accelerated Filer 

 

 

Accelerated Filer 

 

 

 

 

Non-accelerated Filer 

 

 

Smaller Reporting Company 

(Do not check if a smaller reporting company)

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES  NO 

 

As of May 14, 2015, there were 115,288,537 shares of the registrant’s $0.01 par value common stock outstanding.

 

 

 


 

 

TABLE OF CONTENTS

 

Part I. - FINANCIAL INFORMATION 

Page

Item 1.     Financial Statements 

Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014 

Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 (unaudited)

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)

Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations 

23 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

35 

Item 4.     Controls and Procedures 

36 

Part II. - OTHER INFORMATION 

 

Item 1.     Legal Proceedings 

37 

Item 1A.  Risk Factors 

37 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds 

37 

Item 3.     Defaults Upon Senior Securities 

37 

Item 4.     Mine Safety Disclosures 

38 

Item 5.     Other Information 

38 

Item 6.     Exhibits 

38 

Signatures 

38 

Exhibit Index 

39 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2015

 

2014

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

913,149 

 

$

843,843 

 

Buildings and improvements

 

 

1,960,169 

 

 

1,790,530 

 

Intangible lease assets

 

 

69,589 

 

 

60,184 

 

Total real estate investments

 

 

2,942,907 

 

 

2,694,557 

 

Less accumulated depreciation and amortization

 

 

(117,106)

 

 

(98,671)

 

 

 

 

2,825,801 

 

 

2,595,886 

 

Real estate investments held for sale, net

 

 

6,809 

 

 

 —

 

Loans and direct financing receivables

 

 

145,850 

 

 

111,354 

 

Net investments

 

 

2,978,460 

 

 

2,707,240 

 

Cash and cash equivalents

 

 

30,324 

 

 

136,313 

 

Deferred costs, net

 

 

36,385 

 

 

37,136 

 

Other assets

 

 

20,684 

 

 

32,923 

 

Total assets

 

$

3,065,853 

 

$

2,913,612 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

162,000 

 

$

 

Non-recourse debt obligations of consolidated special purpose entities, net

 

 

1,279,220 

 

 

1,284,151 

 

Dividends payable

 

 

28,822 

 

 

13,123 

 

Accounts payable and accrued expenses

 

 

21,067 

 

 

30,486 

 

Other liabilities

 

 

3,044 

 

 

3,168 

 

Total liabilities

 

 

1,494,153 

 

 

1,330,928 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 115,289,827 and 115,212,541 shares issued and outstanding, respectively

 

 

1,153 

 

 

1,152 

 

Capital in excess of par value

 

 

1,637,124 

 

 

1,636,203 

 

Distributions in excess of retained earnings

 

 

(66,160)

 

 

(54,405)

 

Accumulated other comprehensive loss

 

 

(417)

 

 

(266)

 

Total stockholders’ equity

 

 

1,571,700 

 

 

1,582,684 

 

Total liabilities and stockholders’ equity

 

$

3,065,853 

 

$

2,913,612 

 

 

See accompanying notes.

3


 

STORE Capital Corporation

Condensed Consolidated Statements of Income

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Revenues:

    

 

    

    

 

    

 

Rental revenues

 

$

58,838 

 

$

37,534 

 

Interest income on loans and direct financing receivables

 

 

2,598 

 

 

1,790 

 

Other income

 

 

23 

 

 

 

Total revenues

 

 

61,459 

 

 

39,329 

 

Expenses:

 

 

 

 

 

 

 

Interest

 

 

17,229 

 

 

14,405 

 

Transaction costs

 

 

259 

 

 

398 

 

Property costs

 

 

295 

 

 

37 

 

General and administrative

 

 

6,635 

 

 

4,183 

 

Depreciation and amortization

 

 

18,892 

 

 

11,561 

 

Provision for impairment of real estate

 

 

1,000 

 

 

 —

 

Total expenses

 

 

44,310 

 

 

30,584 

 

Income from continuing operations before income taxes

 

 

17,149 

 

 

8,745 

 

Income tax expense

 

 

83 

 

 

52 

 

Income from continuing operations

 

 

17,066 

 

 

8,693 

 

Income from discontinued operations

 

 

 —

 

 

846 

 

Net income

 

$

17,066 

 

$

9,539 

 

Net income per share of common stock—basic and diluted:

 

 

 

 

 

 

 

Continuing operations

 

$

0.15 

 

$

0.14 

 

Discontinued operations

 

 

 —

 

 

0.01 

 

Net income

 

$

0.15 

 

$

0.15 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

114,633,300 

 

 

63,025,215 

 

Diluted

 

 

114,633,300 

 

 

63,025,215 

 

Dividends declared per common share

 

$

0.2500 

 

$

0.2395 

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Net income

    

$

17,066 

    

$

9,539 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Change in unrealized losses on cash flow hedges

 

 

(228)

 

 

(110)

 

Cash flow hedge losses reclassified to interest expense

 

 

77 

 

 

79 

 

Total other comprehensive loss

 

 

(151)

 

 

(31)

 

Total comprehensive income

 

$

16,915 

 

$

9,508 

 

 

See accompanying notes.

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Operating activities

    

 

    

    

 

    

 

Net income

 

$

17,066 

 

$

9,539 

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

18,892 

 

 

11,561 

 

Provision for impairment of real estate

 

 

1,000 

 

 

 —

 

Amortization of deferred financing costs

 

 

1,546 

 

 

1,359 

 

Amortization of debt (premium) and discount, net

 

 

(149)

 

 

(25)

 

Amortization of equity-based compensation

 

 

897 

 

 

373 

 

Gain on dispositions of real estate

 

 

 —

 

 

(743)

 

Noncash revenue and other

 

 

333 

 

 

(496)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Deferred costs

 

 

(361)

 

 

(366)

 

Other assets

 

 

82 

 

 

4,149 

 

Accounts payable and other liabilities

 

 

(3,233)

 

 

(4,375)

 

Net cash provided by operating activities

 

 

36,073 

 

 

20,976 

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(264,245)

 

 

(248,536)

 

Investment in loans and direct financing receivables

 

 

(34,683)

 

 

(36,046)

 

Collections of principal on loans and direct financing receivables

 

 

175 

 

 

4,884 

 

Proceeds from disposition of real estate

 

 

48 

 

 

6,687 

 

Transfers from (to) restricted deposits

 

 

12,996 

 

 

(2,903)

 

Net cash used in investing activities

 

 

(285,709)

 

 

(275,914)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facilities

 

 

172,000 

 

 

167,080 

 

Repayments under credit facilities

 

 

(10,000)

 

 

 —

 

Borrowings under non-recourse debt obligations of consolidated special purpose entities

 

 

 —

 

 

26,175 

 

Repayments under non-recourse debt obligations of consolidated special purpose entities

 

 

(4,782)

 

 

(4,291)

 

Financing costs paid

 

 

(8)

 

 

(487)

 

Proceeds from the issuance of common stock

 

 

 

 

75,001 

 

Offering costs paid

 

 

(441)

 

 

 —

 

Dividends paid

 

 

(13,123)

 

 

(15,140)

 

Net cash provided by financing activities

 

 

143,647 

 

 

248,338 

 

Net decrease in cash and cash equivalents

 

 

(105,989)

 

 

(6,600)

 

Cash and cash equivalents, beginning of period

 

 

136,313 

 

 

61,814 

 

Cash and cash equivalents, end of period

 

$

30,324 

 

$

55,214 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

 

Accrued tenant improvement advances included in real estate investments

 

$

 —

 

$

1,885 

 

Accrued financing costs

 

$

494 

 

 

 —

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest, net of amounts capitalized

 

$

15,358 

 

$

12,805 

 

Cash paid during the period for income and franchise taxes

 

$

483 

 

$

209 

 

See accompanying notes.

 

6


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

March 31, 2015

1. Organization and Formation Activities

STORE Capital Corporation (STORE Capital or the Company) was formed in Maryland on May 17, 2011 to acquire single‑tenant operational real estate to be leased on a long‑term, net basis to companies that operate across a wide variety of industries within the service, retail and industrial sectors of the United States economy. From time to time, it may also provide mortgage financing to its customers.

On November 21, 2014, the Company completed the initial public offering (IPO) of its common stock.  The shares began trading on the New York Stock Exchange on November 18, 2014 under the ticker symbol “STOR”.  The Company was originally formed as a wholly-owned subsidiary of STORE Holding Company, LLC (STORE Holding), a Delaware limited liability company. In March 2015, STORE Holding redeemed all of its Series A membership interests that were held by members of the Company’s board and senior management through the distribution of common shares of the Company to those members. Following this redemption, the voting interests of STORE Holding are entirely owned by entities managed by a global investment management firm. At March 31, 2015, there were 115,289,827 shares of the Company’s common stock outstanding, of which 82,148,644 shares were held by STORE Holding, representing a 71.25% ownership of the Company.

STORE Capital has made an election to qualify, and believes it is operating in a manner to continue to qualify, as a real estate investment trust (REIT) for federal income tax purposes beginning with its initial taxable year ended December 31, 2011. As a REIT, it will generally not be subject to federal income taxes to the extent that it distributes all of its taxable income to its stockholders and meets other specific requirements.

2. Summary of Significant Accounting Principles

Basis of Accounting and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of interim periods are not necessarily indicative of the results for the entire year.  Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements and, accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

These consolidated statements include the accounts of STORE Capital Corporation and its subsidiaries which are wholly‑owned and controlled by the Company through its voting interest. One of the Company’s wholly‑owned subsidiaries, STORE Capital Advisors, LLC, provides all of the general and administrative services for the day‑to‑day operations of the consolidated group, including property acquisition and lease origination, real estate portfolio management and marketing, accounting and treasury services. The remaining subsidiaries were formed to acquire and hold real estate investments or to facilitate non‑recourse secured borrowing activities. Generally, the initial operations of the real estate subsidiaries are funded by an interest‑bearing intercompany loan from STORE Capital Corporation, and such intercompany loan is repaid when the subsidiary issues long‑term debt secured by its properties. All intercompany account balances and transactions have been eliminated in consolidation.

Certain of the Company’s wholly‑owned consolidated subsidiaries were formed as special purpose entities. Each special purpose entity is a separate legal entity and is the sole owner of its assets and liabilities. The assets of the

7


 

special purpose entities are not available to pay or otherwise satisfy obligations to the creditors of any owner or affiliate of the special purpose entity. At March 31, 2015 and December 31, 2014, assets totaling $2.7 billion and $2.5 billion, respectively, were held and third-party liabilities totaling $1.3 billion were owed by these special purpose entities and are included in the accompanying consolidated balance sheets.

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, the disclosure of contingent assets and liabilities 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 Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 280, Segment Reporting, established standards for the manner in which enterprises report information about operating segments. The Company views its operations as one reportable segment.

Accounting for Real Estate Investments

STORE Capital records the acquisition of real estate properties at cost, including acquisition and closing costs. The Company allocates the cost of real estate properties to the tangible and intangible assets and liabilities acquired based on their estimated relative fair values. Real estate properties subject to an existing in‑place lease at the date of acquisition are recorded as business combinations and each tangible and intangible asset and liability acquired is recorded at fair value. Management uses multiple sources to estimate fair value, including independent appraisals and information obtained about each property as a result of its pre‑acquisition due diligence and its marketing and leasing activities. The Company expenses transaction costs associated with real estate acquisitions accounted for as business combinations in the period incurred.

In‑place lease intangibles are valued based on management’s estimates of lost rent and carrying costs during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases. In estimating lost rent and carrying costs, management considers market rents, real estate taxes, insurance, costs to execute similar leases including leasing commissions and other related costs. The value assigned to in‑place leases is amortized on a straight‑line basis as a component of depreciation and amortization expense typically over the remaining term of the related leases.

The fair value of any above‑market and below‑market leases is estimated based on the present value of the difference between the contractual amounts to be paid pursuant to the in‑place lease and management’s estimate of current market lease rates for the property, measured over a period equal to the remaining term of the lease. Capitalized above‑market lease intangibles are amortized over the remaining term of the respective leases as a decrease to rental revenue. Below‑market lease intangibles are amortized as an increase in rental revenue over the remaining term of the respective leases plus the fixed‑rate renewal periods on those leases, if any. Should a lease terminate early, the unamortized portion of any related lease intangible is immediately recognized in operations.

The Company’s real estate portfolio is depreciated using the straight‑line method over the estimated remaining useful life of the properties, which generally ranges from 30 to 40 years for buildings and is 15 years for land improvements. Properties classified as held for sale are recorded at the lower of their carrying value or their fair value, less anticipated closing costs. Any properties classified as held for sale are not depreciated.

Impairment

STORE Capital reviews its real estate investments and related lease intangibles periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. Management considers factors such as expected future undiscounted cash flows, estimated residual

8


 

value, market trends (such as the effects of leasing demand and competition) and other factors including bona fide purchase offers received from third parties in making this assessment. These factors are classified as Level 3 inputs within the fair value hierarchy. An asset is considered impaired if the carrying value of the asset exceeds its estimated undiscounted cash flows and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results. During the three months ended March 31, 2015, the Company recorded a  provision for impairment of its real estate of $1.0 million.  No impairment charges were recorded during the three months ended March 31, 2014.

Revenue Recognition

STORE Capital leases real estate to its tenants under long‑term net leases that are predominantly classified as operating leases. Direct costs associated with lease origination, offset by any lease origination fees received, are deferred and amortized over the related lease term as an adjustment to rental revenue. Substantially all of the leases are triple‑net, which provide that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance. The Company may collect property taxes from its customers and remit those taxes to governmental authorities; such property taxes are presented on a net basis in the consolidated income statements.

The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that provide for specific contractual escalations, rental revenue is 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, represents unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the lease. The Company provides an estimated reserve for uncollectible straight‑line rental revenue based on management’s assessment of the risks inherent in those lease contracts, giving consideration to industry default rates for long‑term receivables. There was $5.8 million and $4.7 million of accrued straight‑line rental revenue, net of allowances of $2.1 million and $1.7 million, at March 31, 2015 and December 31, 2014, respectively, included in other assets on the consolidated balance sheets.  Leases that have contingent rent escalators indexed to future increases in the Consumer Price Index (CPI) may adjust over a one‑year period or over multiple‑year periods. Generally, these escalators increase rent at the lesser of (a) 1 to 1.25 times the increase in the CPI over a specified period or (b) a fixed percentage. Because of the volatility and uncertainty with respect to future changes in the CPI, the Company’s inability to determine the extent to which any specific future change in the CPI is probable at each rent adjustment date during the entire term of these leases and the Company’s view that the multiplier does not represent a significant leverage factor, increases in rental revenue from leases with this type of escalator are recognized only after the changes in the rental rates have actually occurred.

For leases that have contingent rentals that are based on a percentage of the tenant’s gross sales, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached. Less than 1.5% of the Company’s investment portfolio is subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales.

The Company suspends revenue recognition if the collectibility of amounts due pursuant to a lease is not reasonably assured or if the tenant’s monthly lease payments become more than 60 days past due, whichever is earlier. The Company reviews its rent receivables for collectibility 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 operates and economic conditions in the area where the property is located. In the event that the collectibility of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write‑off of the specific rent receivable will be made. As of March 31, 2015, the Company had a $0.3 million provision for uncollectible contractual rent payments due from tenants; there was no provision at December 31, 2014.

Loans Receivable

STORE Capital holds its loans receivable for long‑term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any.

9


 

Revenue Recognition

The Company recognizes interest income on loans receivable using the effective‑interest method applied on a loan‑by‑loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective interest method. A loan receivable is placed on nonaccrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received. As of March 31, 2015 and December 31, 2014, there were no loans on nonaccrual status.

Impairment and Provision for Loan Losses

The Company periodically evaluates the collectibility of its loans receivable, including accrued interest, by analyzing the underlying property‑level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. There was no allowance for loan losses at March 31, 2015 or December 31, 2014.

Direct Financing Receivables

Certain of the Company’s real estate investment transactions are accounted for as direct financing leases. The Company records the direct financing receivables at their net investment, determined as the aggregate minimum lease payments and the estimated residual value of the leased property less unearned income. The unearned income is recognized over the life of the related contracts so as to produce a constant rate of return on the net investment in the asset.

Cash and Cash Equivalents

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 a major financial institution, consisting predominantly of U.S. Government obligations.

Restricted Cash and Escrow Deposits

The Company had $2.4 million and $15.4 million of restricted cash and deposits in escrow at March 31, 2015 and December 31, 2014, respectively which were included in other assets on the consolidated balance sheets.

Deferred Costs

Deferred costs consist principally of financing costs related to the issuance of the Company’s debt. Deferred financing costs are amortized as an increase to interest expense over the term of the related debt instrument using the effective interest method.  Deferred costs also include lease origination costs, which are amortized as a decrease to rental revenue over the term of the respective lease.

Derivative Instruments and Hedging Activities

The Company may enter into derivatives contracts as part of its overall financing strategy to manage the Company’s exposure to changes in interest rates associated with current and/or future debt issuances. The Company does not use derivatives for trading or speculative purposes. The Company records its derivatives on the balance sheet at fair value as either an asset or liability. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives qualifying as a hedge of the exposure to

10


 

variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the earnings effect of the hedged forecasted transactions in a cash flow hedge. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to cash flow hedges are reclassified to operations as an adjustment to interest expense as interest payments are made on the hedged debt transaction.

As of March 31, 2015, the Company had entered into two interest rate swap agreements with current notional amounts of $12.6 million and $6.6 million that were designated as cash flow hedges associated with the Company’s secured, variable‑rate mortgage note payable due 2019 (Note 4).

Fair Value Measurement

The Company estimates fair value of financial and non-financial assets and liabilities based on the framework established in fair value accounting guidance.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

·

Level 1—Quoted market prices in active markets for identical assets and liabilities that the Company has the ability to access.

·

Level 2—Significant inputs that are observable, either directly or indirectly. These types of inputs would include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets in inactive markets and market‑corroborated inputs.

·

Level 3—Inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. These types of inputs include the Company’s own assumptions.

Share‑based Compensation

Certain directors and employees of the Company have been granted long‑term incentive awards, including restricted shares and stock units of the Company’s common stock and profits interests units issued by STORE Holding, which provide them with equity interests as an incentive to remain in the Company’s service and align executives’ interests with those of the Company’s equity holders.

During the three months ended March 31, 2015, the Company granted restricted share awards (RSAs) representing 79,018 shares of restricted common stock to its executive officers and certain directors and other employees.  During the same period, 153,331 shares of restricted stock vested and 1,732 shares of restricted stock were forfeited. As of March 31, 2015, the Company had 579,861 restricted common shares outstanding. The Company estimates the fair value of RSAs at the date of grant and recognizes that amount in general and administrative expense ratably over the vesting period at the greater of the amount amortized on a straight‑line basis or the amount vested. The fair value of the RSAs is based on the per-share price of the common stock on the date of the grant. Prior to the Company’s IPO, the fair value was based on the per‑share price of the common stock issued in the Company’s private equity offerings.

In March 2015, the Company issued 348,220 restricted stock units (RSUs) with both a market condition and a service condition to its executive officers.  The number of common shares to be received at vesting will range from zero to 100% of the total RSUs granted based on total shareholder return (TSR) on the Company’s common stock measured against the benchmark TSR of a peer group over a three-year performance period ending December 31, 2017.  The TSR is a measure of stock price appreciation plus dividends paid during the measurement period.  To the extent market and service conditions are met, the RSUs vest 50% at the end of 2017 and, subject to continued employment, 50% at the end

11


 

of 2018. The Company valued the RSUs using a Monte Carlo simulation model on the date of grant which resulted in a grant date fair value of $4.4 million.  The Monte Carlo simulation was computed based on a volatility assumption of 23.51%, a risk-free interest rate of 0.84% and a dividend yield of zero. The RSUs accrue dividend equivalents which are paid only if the award vests. At March 31, 2015, there were 348,220 RSUs outstanding.

Income Taxes

As a REIT, the Company generally will not be subject to federal income tax; however, it is still subject to state and local income taxes and to federal income and excise tax on its undistributed income. STORE Investment Corporation is the Company’s wholly‑owned taxable REIT subsidiary (TRS) created to engage in non‑qualifying REIT activities. The TRS is subject to federal, state and local income taxes.

Management of the Company determines whether any tax positions taken or expected to be taken meet the “more‑likely‑than‑not” threshold of being sustained by the applicable federal, state or local tax authority. Tax returns filed for 2011 through 2014 are subject to examination by these jurisdictions. As of March 31, 2015 and December 31, 2014, management concluded that there is no tax liability relating to uncertain income tax positions. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as operating expenses. There was no accrual for interest or penalties at March 31, 2015 or December 31, 2014.

Net Income Per Common Share

Net income per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted stock, which contain rights to receive non‑forfeitable dividends, as participating securities requiring the two‑class method of computing net income per common share. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted income per common share (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Numerator:

    

 

    

    

 

    

 

Net income

 

$

17,066 

 

$

9,539 

 

Less: earnings attributable to unvested restricted shares

 

 

(143)

 

 

(116)

 

Net income used in basic and diluted income per share

 

$

16,923 

 

$

9,423 

 

Denominator:

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

115,215,833 

 

 

63,436,513 

 

Less: Weighted average number of shares of unvested restricted stock

 

 

(582,533)

 

 

(411,298)

 

Weighted average shares outstanding used in basic income per share

 

 

114,633,300 

 

 

63,025,215 

 

Effects of dilutive securities:

 

 

 

 

 

 

 

Add: Treasury stock method impact of potentially dilutive securities (a)

 

 

 

 

 

Weighted average shares outstanding used in diluted income per share

 

 

114,633,300 

 

 

63,025,215 

 


(a)

For the three months ended March 31, 2015 and 2014, excludes 199,528 shares and 62,745 shares, respectively, related to unvested restricted shares as the effect would be antidilutive.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or the SEC. The Company adopts the new pronouncements as of the specified effective date. When permitted, the Company may elect to early adopt the new pronouncements. Unless otherwise discussed, these new accounting pronouncements include technical corrections to existing guidance or introduce new guidance related to specialized industries or entities and therefore will have minimal, if any, impact on the Company’s financial position or results of operations upon adoption.

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014‑09, Revenue from Contracts with Customers: Topic 606. This new guidance establishes a principles‑based approach for accounting for revenue from

12


 

contracts with customers. Lease contracts covered by Topic 840, Leases, are excluded from the scope of this new guidance. At the time of issuance, this new standard was effective for public companies for annual reporting periods beginning after December 15, 2016 and early adoption was not permitted. On April 29, 2015, the FASB issued an exposure draft regarding deferral of the effective date of the standard.  The exposure draft proposes that the effective date of the standard for public companies will be for annual reporting periods beginning after December 15, 2017 and early adoption would be permitted but only as of an annual reporting period beginning after December 15, 2016.  As leases are excluded from this guidance, the Company does not anticipate this standard to have a material impact on its financial position, results of operations and cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.  This guidance was issued to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability and, therefore, make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums.  This new standard is effective for public companies for annual reporting periods beginning after December 15, 2015, with early adoption permitted.  Upon adoption, the new guidance is required to be applied retrospectively.  The Company is currently evaluating the impact of the adoption of this new standard which is expected to result in reclassifications of certain deferred costs on the Company’s balance sheets but will not have an impact on its results of operations or cash flows.   

13


 

 

3. Investments

At March 31, 2015, STORE Capital had investments in 1,073 property locations representing 1,059 owned properties (of which 12 are accounted for as direct financing receivables), eight ground lease interests and six properties which secure certain mortgage loans. The gross acquisition cost of real estate investments totaled $2.95 billion at March 31, 2015. In addition, the Company held loans and direct financing receivables with an aggregate carrying amount at March 31, 2015 of $145.8 million. As of March 31, 2015, a substantial portion of these investments are assets of consolidated special purpose entity subsidiaries and are pledged as collateral under the non‑recourse obligations of these special purpose entities (Note 4).

During the three months ended March 31, 2015, the Company had the following gross real estate and loan activity (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

Number of

    

Dollar

 

 

 

Investment

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Gross investments, December 31, 2014

 

947 

 

$

2,805,911 

 

Acquisition of and additions to real estate (b)(c)

 

123 

 

 

256,833 

 

Investment in loans and direct financing receivables

 

 

 

34,683 

 

Sales of real estate

 

 —

 

 

(48)

 

Principal collections on loans and direct financing receivables

 

 —

 

 

(175)

 

Provision for impairment of real estate

 

 

 

 

(1,000)

 

Other

 

 

 

 

(11)

 

Gross investments, March 31, 2015 (d)

 

 

 

 

3,096,193 

 

Less accumulated depreciation and amortization (d)

 

 

 

 

(117,733)

 

Net investments, March 31, 2015

 

1,073 

 

$

2,978,460 

 


(a)

The dollar amount of investments includes the investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and direct financing receivables.

(b)

Excludes $7.4 million of tenant improvement advances disbursed in 2015 which were accrued as of December 31, 2014.

(c)

Includes $0.2 million of interest capitalized to properties under construction.

(d)

Includes the dollar amount of investments ($7.4 million) and the accumulated depreciation ($0.6 million) related to real estate investments held for sale at March 31, 2015.

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The following table shows information regarding the diversification of the Company’s total investment portfolio among the different industries in which its tenants and borrowers operate as of March 31, 2015 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Investments

 

Restaurants

 

540 

 

$

866,861 

 

28 

%  

Health clubs

 

44 

 

 

243,689 

 

 

Early childhood education centers

 

121 

 

 

229,183 

 

 

Movie theaters

 

27 

 

 

210,866 

 

 

Sporting goods stores

 

15 

 

 

122,693 

 

 

Furniture stores

 

22 

 

 

121,566 

 

 

Colleges and professional schools

 

 

 

79,101 

 

 

All other service industries

 

178 

 

 

672,043 

 

22 

 

All other retail industries

 

53 

 

 

223,768 

 

 

All industrial

 

67 

 

 

326,423 

 

11 

 

 

 

1,073 

 

$

3,096,193 

 

100 

%  


(a)

The dollar amount of investments includes the gross investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and direct financing receivables.

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to 246 customers geographically dispersed throughout 46 states. Only one state, Texas (13%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at March 31, 2015. None of the Company’s 246 customers represented more than 10% of the Company’s real estate investment portfolio at March 31, 2015, with the largest customer representing less than 4% of the total investment portfolio. On an annualized basis, the largest customer also represented less than 4% of the Company’s annualized investment portfolio revenues as of March 31, 2015. The Company’s customers operate their businesses across 227 concepts and none of these concepts represented more than 4% of the Company’s annualized investment portfolio revenues as of March 31, 2015.

Intangible Lease Assets

The following details intangible lease assets and related accumulated amortization (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2015

 

2014

 

In-place lease assets

 

$

52,017 

 

$

47,359 

 

Above-market lease assets

 

 

10,273 

 

 

5,526 

 

Ground lease interest assets

 

 

7,299 

 

 

7,299 

 

Total intangible lease assets

 

 

69,589 

 

 

60,184 

 

Accumulated amortization

 

 

(7,606)

 

 

(6,006)

 

Net intangible lease assets

 

$

61,983 

 

$

54,178 

 

 

15


 

Aggregate lease intangible amortization included in expense was $1.4 million and $0.8 million during the three months ended March 31, 2015 and 2014, respectively. The amount amortized as a decrease to rental revenue for capitalized above‑market lease intangibles was $231,000 for the three months ended March 31, 2015.

Based on the balance of the intangible assets at March 31, 2015, the aggregate amortization expense is expected to be $3.9 million for the remainder of 2015, $5.1 million in 2016, $5.0 million in 2017, $4.8 million in 2018, $4.6 million in 2019 and $4.1 million in 2020 and the amount expected to be amortized as a decrease to rental revenue is expected to be $0.9 million for the remainder of 2015 and $1.2 million in each of the next five years. The weighted average remaining amortization period is approximately 11 years for the in‑place lease intangibles, approximately nine years for the above‑market lease intangibles and approximately 75 years for the amortizing ground lease interests.

Real Estate Investments

The Company’s investment properties are leased to tenants under long‑term operating leases that typically include one or more renewal options. The weighted average remaining noncancelable lease term at March 31, 2015 was approximately 15 years. Substantially all of the leases are triple‑net, which provide that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance; therefore, STORE Capital is generally not responsible for repairs or other capital expenditures related to the properties. At March 31, 2015, all of the properties were subject to a lease.

Scheduled future minimum rentals to be received under the remaining noncancelable term of the operating leases at March 31, 2015, are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2015

    

$

186,836 

 

2016

 

 

249,820 

 

2017

 

 

249,906 

 

2018

 

 

250,041 

 

2019

 

 

250,203 

 

2020

 

 

248,557 

 

Thereafter

 

 

2,278,194 

 

Total future minimum rentals (a)

 

$

3,713,557 

 


(a)

Includes $43.2 million (approximately $3.6 million annually through February 2027) of future rentals associated with two leases terminated subsequent to March 31, 2015.

Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum lease payments do not include any contingent rentals such as lease escalations based on future changes in CPI.

Loans and Direct Financing Receivables

At March 31, 2015, the Company held 11 loans receivable with an aggregate carrying amount of $95.8 million and had $50.0 million of investments in transactions accounted for as direct financing leases. Ten of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. The other loan is secured by a tenant’s equipment.

Two of the mortgage loans are short‑term loans and require monthly interest‑only payments with balloon payments at maturity. The remaining mortgage loans receivable generally require the borrowers to make monthly principal and interest payments based on a 40‑year amortization period with balloon payments, if any, at maturity. The other secured loan requires the borrower to make monthly interest‑only payments with a balloon payment at maturity.

16


 

The Company’s loans and direct financing receivables are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Stated

    

 

    

 

 

    

 

 

 

 

 

Interest

 

Maturity

 

March 31,

 

December 31,

 

Type

 

Rate

 

Date

 

2015

 

2014

 

Mortgage loan receivable

 

8.50 

%  

Apr. 2015

 

$

4,300 

 

$

4,300 

 

Mortgage loan receivable

 

9.09 

%  

Jan. 2017

 

 

1,933 

 

 

1,933 

 

Mortgage loan receivable

 

8.35 

%  

Jan. 2028

 

 

3,772 

 

 

3,775 

 

Mortgage loan receivable

 

8.75 

%  

Jul. 2032

 

 

23,969 

 

 

23,998 

 

Mortgage loan receivable

 

7.45 

%  

Jan. 2035

 

 

500 

 

 

 —

 

Mortgage loan receivable

 

9.00 

%  

Mar. 2053

 

 

14,580 

 

 

14,595 

 

Mortgage loan receivable

 

8.75 

%  

Jun. 2053

 

 

6,352 

 

 

6,357 

 

Mortgage loan receivable

 

8.50 

%  

Jun. 2053

 

 

6,691 

 

 

6,697 

 

Mortgage loan receivable

 

8.25 

%  

Aug. 2053

 

 

3,335 

 

 

3,337 

 

Mortgage loan receivable (a)

 

8.50 

%  

Feb. 2055

 

 

28,500 

 

 

 —

 

Total mortgage loans receivable

 

 

 

 

 

 

93,932 

 

 

64,992 

 

Equipment loan receivable

 

 

 

 

 

 

 —

 

 

94 

 

Equipment loan receivable

 

7.75 

%  

Mar. 2017

 

 

1,063 

 

 

 —

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

94,995 

 

 

65,086 

 

Unamortized loan origination costs

 

 

 

 

 

 

883 

 

 

497 

 

Direct financing receivables

 

 

 

 

 

 

49,972 

 

 

45,771 

 

Total loans and direct financing receivables

 

 

 

 

 

$

145,850 

 

$

111,354 

 


(a)

Mortgage loan receivable has an initial interest rate of 8.50% and is subject to increases over the term of the loan.  The loan allows for prepayment in whole, but not in part, with penalties ranging from 20% to 70% depending on the timing of the prepayment.

The long‑term mortgage loans receivable generally allow for prepayments in whole, but not in part, without penalty or with penalties typically ranging from 1% to 5%, depending on the timing of the prepayment, except as noted in the table above. All other loans receivable allow for prepayments in whole or in part without penalty. Absent prepayments, scheduled maturities are expected to be as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Scheduled

    

Balloon

    

Total

 

 

 

Principal

 

Payments

 

Payments

 

Remainder of 2015

 

$

233 

 

$

4,300 

 

$

4,533 

 

2016

 

 

332 

 

 

 —

 

 

332 

 

2017

 

 

361 

 

 

2,996 

 

 

3,357 

 

2018

 

 

394 

 

 

 

 

394 

 

2019

 

 

429 

 

 

 

 

429 

 

2020

 

 

449 

 

 

 

 

449 

 

Thereafter

 

 

61,632 

 

 

23,869 

 

 

85,501 

 

Total principal repayments

 

$

63,830 

 

$

31,165 

 

$

94,995 

 

The components of the investments accounted for as direct financing receivables as of March 31, 2015 were as follows (in thousands):

 

 

 

 

 

 

Minimum lease payments receivable

    

$

129,018 

 

Estimated residual value of leased assets

 

 

5,076 

 

Unearned income

 

 

(84,122)

 

Net investment

 

$

49,972 

 

 

17


 

4. Debt

Credit Facilities

In September 2014, the Company entered into a new $300 million unsecured revolving credit facility with a group of lenders which replaced the Company’s previous two secured credit facilities that aggregated $300 million. The  facility is used to partially fund real estate acquisitions pending the issuance of long-term, fixed-rate debt.

This facility, which includes an accordion feature that allows the size of the facility to be increased up to $500 million, is for an initial term of three years and includes a one-year extension option subject to certain conditions and the payment of a 0.2% extension fee. The facility is recourse to the Company and includes a guaranty from STORE Capital Acquisitions, LLC, one of the Company’s direct wholly-owned subsidiaries. Borrowings under this facility require monthly payments of interest at a rate selected by the Company of either (1) one-month LIBOR plus a credit spread ranging from 1.75% to 2.50%, or (2) the Base Rate, as defined in the agreement, plus a credit spread ranging from 0.75% to 1.50%. The credit spread used is based on the Company’s leverage ratio as defined in the agreement; based on the most recent leverage ratio calculations, borrowings under the facility made on or after April 1, 2015 will bear interest at one-month LIBOR plus 1.75%. The Company must also pay a 0.25% non-use fee on the unused portion of the facility. Borrowing availability under the facility is limited to 50% of the value of the Company’s eligible unencumbered assets at any point in time. At March 31, 2015, the Company had $162 million of borrowings outstanding and a pool of eligible unencumbered assets aggregating approximately $1.1 billion.

The Company is subject to various financial and nonfinancial covenants under this unsecured credit facility including a maximum leverage of 65%,  a  minimum EBITDA to fixed charges ratio of 1.5 to 1, minimum consolidated net worth of $600 million plus 75% of additional equity raised after September 2014, and a maximum dividend payout ratio limited to 95% of Funds from Operations, all as defined in the agreement. As of March 31, 2015, the Company was in compliance with these covenants.

On April 8, 2015, the Company entered into a four-month (including the one-month extension option),  $50 million unsecured loan facility with a bank as a temporary supplement to borrowing capacity under its unsecured revolving credit facility.  This loan facility is subject to the same borrowing limitations and covenants as the unsecured revolving credit facility discussed above.    Borrowings under this loan facility require monthly payments of interest at a rate selected by the Company of either (1) one-month LIBOR plus 2.00%, or (2) the Base Rate, as defined in the agreement.  

Prior to September 19, 2014, the Company had two bank credit facilities that were secured by real estate properties which were pledged as collateral under the facilities as well as the Company’s equity interests in certain of its special purpose entity subsidiaries and the Company’s holdings of the Class B notes issued under its STORE Master Funding debt program (see below). These previous secured credit facilities bore interest at one-month LIBOR plus a credit spread ranging from 2.45% to 3.00%.

The financing costs related to the establishment of the Company’s credit facilities are deferred and amortized to interest expense over the term of the credit facilities. At March 31, 2015 and December 31, 2014, unamortized financing costs related to the Company’s credit facility totaled $2.1 million and $2.4 million, respectively.

18


 

Non‑Recourse Debt Obligations of Consolidated Special Purpose Entities

During 2012, the Company implemented a debt issuance program pursuant to which certain of its consolidated special purpose entities issue multiple series of non‑recourse net‑lease mortgage notes from time to time that are collateralized by the assets owned by these entities and their related leases (collateral). One of the principal features of the program is that, as additional series of notes are issued, new collateral is contributed to the collateral pool thereby increasing the size and diversity of the collateral pool for the benefit of all noteholders, including those who invested in prior series. Another feature of the program is the ability to substitute collateral from time to time subject to meeting certain prescribed conditions and criteria. The notes are generally segregated into Class A amortizing notes and Class B non‑amortizing notes. The Company has retained each of the Class B notes which aggregate $78.0 million at March 31, 2015.

The Class A notes require monthly principal and interest payments with a balloon payment due at maturity and these notes may be prepaid at any time, subject to a yield maintenance prepayment premium. As of March 31, 2015, the aggregate collateral pool securing the net‑lease mortgage notes is comprised primarily of single tenant commercial real estate properties with an aggregate investment amount of approximately $1.6 billion.

On April 16, 2015, the consolidated special purpose entities issued an additional series of net-lease mortgage notes consisting of $365.0 million of Class A notes and $30.0 million of Class B notes.  The Class A notes are segregated into two tranches:  $95.0 million of seven-year notes with an interest rate of 3.75% and $270.0 million of ten-year notes with an interest rate of 4.17%.  The Class B notes were retained by the Company.

A number of additional consolidated special purpose entity subsidiaries of the Company have financed their owned real estate properties with traditional first mortgage debt. The notes require monthly principal and interest payments with balloon payments at maturity. In general, these mortgage notes payable can be prepaid in whole or in part upon payment of a yield maintenance premium. The mortgage notes payable are collateralized by real estate properties owned by these consolidated special purpose entity subsidiaries with an aggregate investment amount of approximately $327.3 million at March 31, 2015.

The mortgage notes payable, which are obligations of the consolidated special purpose entities as described in Note 2, contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Although this mortgage debt generally is non‑recourse, there are customary limited exceptions to recourse for matters such as fraud, misrepresentation, gross negligence or willful misconduct, misapplication of payments, bankruptcy and environmental liabilities. Certain of the mortgage notes payable also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the Company or one of its tenants. As of March 31, 2015, the Company had one variable-rate mortgage note (outstanding principal balance of $19.2 million) which had effectively been converted to a fixed-rate note through the use of two interest rate swaps. The Company has an agreement with the counterparty to the interest rate swaps which contains a provision that, if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its interest rate swap obligations. As of March 31, 2015, the termination value of the Company’s interest rate swaps was a liability of approximately $0.5 million.

Financing costs related to the issuance of the non‑recourse debt obligations are deferred and amortized to interest expense over the terms of the related notes. As of March 31, 2015 and December 31, 2014, unamortized financing costs related to all non‑recourse debt obligations of the consolidated special purpose entities totaled $30.1 million and $30.9 million, respectively.

19


 

The non‑recourse debt obligations of the consolidated special purpose entity subsidiaries are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coupon

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

March 31,

 

December 31,

 

 

 

Date

 

Rate

 

2015

 

2014

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

    

    

 

    

 

Series 2012-1, Class A

 

Aug. 2019

 

5.77 

%  

$

206,698 

 

$

207,503 

 

Series 2013-1, Class A-1

 

Mar. 2020

 

4.16 

%  

 

145,259 

 

 

145,876 

 

Series 2013-2, Class A-1

 

Jul. 2020

 

4.37 

%  

 

104,324 

 

 

104,740 

 

Series 2013-3, Class A-1

 

Nov. 2020

 

4.24 

%  

 

75,473 

 

 

75,767 

 

Series 2014-1, Class A-1

 

Apr. 2021

 

4.21 

%  

 

119,500 

 

 

119,650 

 

Series 2013-1, Class A-2

 

Mar. 2023

 

4.65 

%  

 

98,776 

 

 

99,196 

 

Series 2013-2, Class A-2

 

Jul. 2023

 

5.33 

%  

 

94,574 

 

 

94,951 

 

Series 2013-3, Class A-2

 

Nov. 2023

 

5.21 

%  

 

98,016 

 

 

98,398 

 

Series 2014-1, Class A-2

 

Apr. 2024

 

5.00 

%  

 

139,417 

 

 

139,592 

 

Non-recourse mortgage notes payable:

 

 

 

 

 

 

 

 

 

 

 

$21,443 note issued July 2005 (a)

 

Aug. 2015

 

5.26 

% (a)

 

18,849 

 

 

18,956 

 

$4,000 note issued August 2006 (b)

 

Sept. 2016

 

6.33 

% (b)

 

3,299 

 

 

3,326 

 

$3,800 note issued September 2006 (c)

 

Oct. 2016

 

6.47 

% (c)

 

3,498 

 

 

3,512 

 

$7,088 note issued April 2007 (d)

 

May 2017

 

6.00 

% (d)

 

6,648 

 

 

6,676 

 

$4,400 note issued August 2007 (e)

 

Sept. 2017

 

6.7665 

% (e)

 

3,780 

 

 

3,807 

 

$8,000 note issued January 2012; assumed in December 2013

 

Jan. 2018

 

4.778 

%  

 

7,444 

 

 

7,511 

 

$20,530 note issued December 2011 and amended February 2012

 

Jan. 2019

 

5.275 

% (f)

 

19,202 

 

 

19,317 

 

$6,500 note issued December 2012

 

Dec. 2019

 

4.806 

%  

 

6,170 

 

 

6,207 

 

$2,956 note issued June 2013

 

Jun. 2020

 

3.173 

% (g)

 

2,812 

 

 

2,827 

 

$16,100 note issued February 2014

 

Mar. 2021

 

4.83 

%  

 

15,771 

 

 

15,857 

 

$13,000 note issued May 2012

 

May 2022

 

5.195 

%  

 

12,253 

 

 

12,326 

 

$14,950 note issued July 2012

 

Aug. 2022

 

4.95 

%  

 

13,774 

 

 

13,863 

 

$26,000 note issued August 2012

 

Sept. 2022

 

5.05 

%  

 

24,660 

 

 

24,805 

 

$6,400 note issued November 2012

 

Dec. 2022

 

4.71 

%  

 

6,090 

 

 

6,127 

 

$11,895 note issued March 2013

 

Apr. 2023

 

4.73 

%  

 

11,410 

 

 

11,478 

 

$17,500 note issued August 2013

 

Sept. 2023

 

5.46 

%  

 

17,003 

 

 

17,091 

 

$10,075 note issued March 2014

 

Apr. 2024

 

5.10 

%  

 

9,947 

 

 

9,984 

 

$7,750 note issued February 2013

 

Mar. 2038

 

4.81 

% (h)

 

7,424 

 

 

7,468 

 

$6,944 notes issued March 2013

 

Apr. 2038

 

4.50 

% (i)

 

6,643 

 

 

6,684 

 

 

 

 

 

 

 

 

1,278,714 

 

 

1,283,495 

 

Unamortized net premium

 

 

 

 

 

 

506 

 

 

656 

 

Total non-recourse debt obligations of consolidated special purpose entities

 

 

 

 

 

$

1,279,220 

 

$

1,284,151 

 


(a)

Note was assumed in June 2014 at a premium; estimated effective yield at assumption of 3.69%.

(b)

Note was assumed in July 2012 at a premium; estimated effective yield at assumption of 5.15%.

(c)

Note was assumed in April 2014 at a premium; estimated effective yield at assumption of 3.88%.

(d)

Note was assumed in December 2013 at a premium; estimated effective yield at assumption of 4.45%.

(e)

Note was assumed in September 2014 at a premium; estimated effective yield at assumption of 3.40%.

(f)

Note is a variable‑rate note which resets monthly at one‑month LIBOR + 3.50%. The Company has entered into two interest rate swap agreements that effectively convert the floating rate on a $12.6 million portion and a $6.6 million portion of this mortgage note payable to fixed rates of 5.299% and 5.230%, respectively (Note 2).

(g)

Note is a variable‑rate note which resets monthly at one‑month LIBOR + 3.00%; rate shown is effective rate at March 31, 2015.

(h)

Interest rate is effective for first 10 years and will reset to greater of (1) initial rate plus 400 basis points or (2) Treasury rate plus 400 basis points.

(i)

Interest rate is effective for first 10 years and will reset to the lender’s then prevailing interest rate.

20


 

As of March 31, 2015, the scheduled debt maturities, including balloon payments, during the next five years and thereafter are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Scheduled

    

Balloon

    

 

 

 

 

 

Principal

 

Payments

 

Total

 

Remainder of 2015

 

$

14,408 

 

$

18,710 

 

$

33,118 

 

2016

 

 

19,789 

 

 

6,549 

 

 

26,338 

 

2017

 

 

20,517 

 

 

9,921 

 

 

30,438 

 

2018

 

 

21,070 

 

 

6,665 

 

 

27,735 

 

2019

 

 

19,765 

 

 

213,539 

 

 

233,304 

 

2020

 

 

13,942 

 

 

295,985 

 

 

309,927 

 

Thereafter

 

 

36,906 

 

 

580,948 

 

 

617,854 

 

 

 

$

146,397 

 

$

1,132,317 

 

$

1,278,714 

 

 

 

5. Stockholders Equity

On November 3, 2014, the Company’s board of directors declared a 1.67‑for‑one split of its common stock effected through a dividend to its stockholders. The stock dividend was treated as a stock split for accounting purposes; the $0.01 par value of the common stock was unchanged. The Company declared dividends payable to common stockholders totaling $28.8 million and $15.1 million during the three months ended March 31, 2015 and 2014, respectively.  

On March 30, 2015, STORE Holding redeemed all of its Series A membership interests that were held by members of the Company’s board and senior management through the distribution of 653,382 common shares of the Company to those members.  STORE Holding held 82,148,644 of the Company’s common shares at March 31, 2015 and 82,802,026 common shares at December 31, 2014.    

6. Income from Discontinued Operations

Periodically, the Company may sell real estate properties it owns. Effective January 1, 2014, the Company adopted ASU No. 2014‑08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014‑08), under which only disposals representing a strategic shift in operations of the Company and that have (or will have) a major effect on the Companys operations and financial results are to be presented as discontinued operations. The Company was required to continue to classify any property disposal or property classified as held for sale as of December 31, 2013 as discontinued operations prospectively; therefore, the gains and losses from these property dispositions and all operations from these properties were reclassified to discontinued operations, net of any related income tax, in the consolidated statements of income. This presentation has no impact on net income or cash flow. The Company did not classify any additional property disposals as discontinued operations subsequent to December 31, 2013.

Amounts reclassified to discontinued operations during the three months ended March 31, 2014 included $103,000 of income from real estate operations and $743,000 of gain on disposition of properties related to assets that had been classified as held for sale prior to the Companys adoption of ASU 2014‑08.

 

7. Commitments and Contingencies

In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Companys customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties. At the time the Company purchases a property, the Company may also agree to fund future improvements to the property.

21


 

As of March 31, 2015, the Company had approximately $39.0 million in commitments to fund improvements to real estate properties previously acquired which will generally result in increases to the rental revenue due under the related contracts.

The Company has employment agreements with each of its executive officers which will expire in November 2018.  The agreements provide for minimum annual base salaries and annual incentive compensation based on the satisfactory achievement of reasonable performance criteria and objectives to be adopted by the Company’s Board of Directors each year.  In addition, each officer is eligible to receive equity awards as determined by the Company’s Board of Directors. In the event an executive officer is terminated without cause or terminates employment for good reason, the Company is liable for a lump‑sum severance payment in an amount equal to, in the case of the Company’s Chief Executive Officer, the sum of (i) two times his base salary and (ii) two times the target cash bonus for which he was eligible in the prior fiscal year (whether or not received); and, in the case of the Company’s other executive officers, the sum of (i) 1.5 times his or her base salary and (ii) 1.5 times the target cash bonus for which he or she was eligible in the prior fiscal year (whether or not received); plus, in the case of all executive officers, certain other specified termination benefits.  In the event of a termination without cause, as defined in the employment agreements, the executive officer is entitled to immediate vesting of any and all outstanding unvested shares of the Company’s restricted stock that he or she has been awarded as part of the Company’s incentive compensation program.  For unvested RSUs, in the event of a qualified termination, as defined in the award agreement, the executive officer is entitled to a portion of any earned award, as determined under the award agreement, based on the elapsed performance period.

8. Fair Value of Financial Instruments

 

The Company’s derivatives are required to be measured at fair value in the Company’s consolidated financial statements on a recurring basis.  Derivatives are measured under a market approach, using prices obtained from a nationally recognized pricing service and pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy. The fair value of the Company’s derivatives  (interest rate swaps) at March 31, 2015 and December 31, 2014 was a liability of $417,000 and $266,000, respectively, included in other liabilities on the consolidated balance sheets.

In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based upon market conditions and perceived risks at March 31, 2015 and December 31, 2014. These estimates require managements judgment and may not be indicative of the future fair values of the assets and liabilities.

Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash and escrow deposits, accounts receivable, accounts payable and tenant deposits. Generally these assets and liabilities are short‑term in duration and are recorded at fair value on the consolidated balance sheets. The Company believes that the carrying value of borrowings under its credit facility approximate fair value based upon their nature, terms and variable interest rate. Additionally, the Company believes the carrying values of its fixed‑rate loans receivable approximate fair values based on market quotes for comparable instruments or discounted cash flow analysis using estimates of the amount and timing of future cash flows, market rates and credit spreads.

The estimated fair values of the non‑recourse debt obligations of consolidated special purpose entities have been derived based on market observable inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 within the fair value hierarchy. At March 31, 2015, the Companys non‑recourse debt obligations of consolidated special purpose entities had a carrying value of $1,279.2 million and an estimated fair value of $1,377.7 million. At December 31, 2014, these debt obligations had a carrying value of $1,284.2 million and an estimated fair value of $1,349.0 million.

22


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-term, triple-net leases of freestanding, single-tenant properties.  Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements.  Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.  Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this quarterly report may not prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.  For a further discussion of these and other factors that could impact future results, performance or transactions, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 10, 2015.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this quarterly report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

Overview

We were formed in 2011 to invest in and manage Single Tenant Operational Real Estate, or STORE Properties, which is our target market and the inspiration for our name.  A STORE Property is a property location at which a company operates its business and generates sales and profits, which makes the location a profit center and, therefore, fundamentally important to that business. Examples of operational real estate include restaurants, early childhood education centers, health clubs, movie theaters, sporting goods stores, furniture stores and colleges and professional schools.  By acquiring the real estate from the operators and then leasing the real estate back to them, they become our long‑term tenants, and we refer to them as our customers. We provide a source of long‑term capital to our customers by enabling them to avoid the need to incur debt and employ equity in order to finance the real estate that is essential to their business.

We are a Maryland corporation organized as an internally managed real estate investment trust, or REIT.  As a REIT, we will generally not be subject to federal income tax to the extent that we distribute all of our taxable income to our stockholders and meet other requirements. 

The growth of our Company from inception in May 2011 until November 2014 was funded by STORE Holding Company, LLC, or STORE Holding, a Delaware limited liability company, all of which is owned, directly or indirectly, by certain investment funds managed by Oaktree Capital Management, L.P.  In November 2014, we took the Company public on the New York Stock Exchange and now our common stock trades under the ticker symbol “STOR”.  STORE Holding is still our primary stockholder, owning approximately 71% of our outstanding common stock as of March 31, 2015. In November 2014, prior to our initial public offering, or IPO, our board of directors declared a stock split effected through the distribution of 1.67 shares for each share of common stock then outstanding; accordingly, all share and per share information included in this report has been retroactively restated to take into account the effect of the stock split.

Since our inception in 2011, we have selectively originated a real estate investment portfolio totaling $3.1 billion, consisting of investments in 1,073 property locations across 46 states as of March 31, 2015. All of the real estate we acquire is held by our wholly-owned subsidiaries, many of which are special purpose bankruptcy remote entities formed to facilitate the financing of our real estate. We predominantly acquire our single‑tenant properties directly from our customers in sale‑leaseback transactions where our customers sell us their operating properties and then

23


 

simultaneously enter into long‑term triple‑net leases with us to lease the properties back. Accordingly, our properties are fully occupied and under lease from the moment we acquire them.

We generate our cash from operations primarily through the monthly lease payments, or “base rent”, we receive from our customers under their long‑term leases with us. We also receive interest payments on loans receivable, which are a small part of our portfolio. We refer to the monthly scheduled lease and interest payments due from our customers as “base rent and interest”. Most of our leases contain lease escalations every year or every several years that are based on the lesser of the increase in the Consumer Price Index, or CPI, or a stated percentage (if expressed on an annual basis, currently averaging approximately 1.7%), which allows the monthly lease payments we receive to rise somewhat in an inflationary economic environment. As of March 31, 2015, approximately 97% of our leases (based on annualized base rent) are referred to as “triple net”, which means that our customer is responsible for all of the maintenance, insurance and property taxes associated with the properties they lease from us, including any increases in those costs that may occur as a result of inflation. The remaining leases have some landlord responsibilities, generally related to maintenance and structural component replacement that may be required on such properties in the future, although we do not currently anticipate incurring significant capital expenditures or property costs under such leases. Since our properties are single‑tenant properties under long‑term leases, it is not necessary for us to perform any significant ongoing leasing activities on our properties. As of March 31, 2015, the weighted average remaining term of our leases (calculated based on annualized base rent) was approximately 15 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term. Leases approximating 98% of our base rent as of that date provide for tenant renewal options (generally two to four five‑year options) and leases approximating 6% of our base rent provide our tenant the option, at their election, to purchase the property from us at a specified time or times (generally at the greater of the then‑fair market value or our cost).

Liquidity and Capital Resources

At the beginning of 2015, our real estate investment portfolio totaled $2.8 billion, consisting of investments in 947 property locations with base rent and interest due from our customers aggregating approximately $19.8 million per month, excluding future rent payment escalations. By March 31, 2015, our investment portfolio had grown to $3.1 billion, consisting of investments in 1,073 property locations with base rent and interest aggregating approximately $21.9 million per month. Substantially all of our cash from operations is generated by our real estate portfolio.

Our primary cash expenditures are the monthly principal and interest payments we make on the debt we use to finance our real estate investment portfolio and the general and administrative expenses of servicing the portfolio and operating our business. Since substantially all of our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us.  When a property becomes vacant through a tenant default or expiration of the lease term with no tenant renewal, we would incur these property costs during the time it would take to locate a substitute tenant.  Also, we will occasionally incur nominal property‑level expenses that are not paid by our customers, such as the costs of periodically making site inspections of our properties. As of March 31, 2015, our portfolio was 100% occupied and leases on only four properties are scheduled to expire during the remainder of 2015, representing less than one-third of one percent of our annualized base rent and interest.  In April 2015, leases associated with two of these four properties were renewed by the tenant.  As of May 1, 2015, six of our properties were vacant and not subject to a lease. Accordingly, we expect that our property costs will be at an elevated level, as compared to our historical experience, during the period that these vacant properties are being remarketed.

We intend to continue to grow primarily through additional real estate investments. To accomplish this objective, we must continue to identify real estate acquisitions which are consistent with our underwriting guidelines and raise future additional capital. We acquire real estate with a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. 

Our debt capital is provided on a temporary basis through our variable‑rate unsecured revolving credit facility with a group of banks, until our short-term borrowings are sufficiently large to enable the economic issuance of long-term fixed-rate notes from our Master Funding program. We also, from time to time, obtain fixed-rate non‑recourse mortgage financing from banks and insurance companies secured by specific property we pledge as collateral. By matching the expected cash inflows from our long‑term real estate leases with the expected cash outflows of our

24


 

long‑term fixed‑rate debt, we “lock in”, for as long as is economically feasible, the expected positive difference between our scheduled cash inflows on the leases and the cash outflows on our debt payments. By “locking in” this difference, or “spread”, we seek to reduce the risk that increases in interest rates would adversely impact our profitability. In addition, we may use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. We target a level of debt within a range of six to seven times our earnings before interest, taxes, depreciation and amortization.

The availability of debt to finance commercial real estate in the United States can, at times, be impacted by economic and other factors that are beyond our control. An example of this is the period during the recession of 2007 to 2009 when availability of debt capital for commercial real estate was significantly curtailed. We seek to reduce the risk that long‑term debt capital may be unavailable to us by limiting the period between the time we acquire our real estate and the time we finance our real estate with long‑term debt. In addition, we have arranged our short‑term debt facility (described below) to have a multi‑year term in order to reduce the risk that short‑term real estate financing would not be available to us. As we grow our real estate portfolio, we also intend to manage our debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. As of March 31, 2015, we had no significant near-term debt maturities, with balloon payments due during the remainder of 2015 representing just $19 million, or 1.5%, of our total long-term debt, and our weighted average debt maturity is approximately seven years. As our outstanding debt matures, we may refinance this maturing debt as it comes due or choose to repay it using cash and cash equivalents or our revolving credit facility. Because our long-term debt generally requires monthly payments of principal, in addition to the monthly interest payments, the resulting principal amortization reduces our refinancing risk upon maturity of the debt. The long-term debt we have issued as of March 31, 2015 is comprised, almost exclusively, of secured non-recourse borrowings with a weighted average loan-to-cost ratio of 67% and approximately 61% of our portfolio serves as collateral for this long-term debt.  The remaining portfolio properties, aggregating almost $1.2 billion, are unencumbered and this unencumbered pool of properties provides us flexibility for future borrowings or as substitute collateral for existing indebtedness. 

We raise debt capital through several different markets, including the asset‑backed and commercial mortgage‑backed securities markets, as well as the market for term debt financing. We believe that having access to multiple debt markets increases our financing flexibility because different debt markets may attract different debt investors, thus increasing our access to a potentially larger pool of debt investors. Also, a particular debt market may be more competitive than another at any particular point in time. In addition to these sources of debt capital, our senior leadership team has prior experience with senior secured lines of credit and senior unsecured term debt, which may be deployed as we continue to grow the business and implement our asset‑liability management strategies.

Typically, we use our short‑term unsecured credit facility to acquire our real estate properties, until those borrowings are sufficiently large to warrant the economic issuance of term notes under our Master Funding conduit, the proceeds from which we use to repay the amounts outstanding under our credit facility. In September 2014, we entered into a $300 million unsecured revolving credit facility with a group of lenders, which replaced our two previous secured credit facilities. This facility, which includes an accordion feature that allows the size of the facility to be increased up to $500 million, is for an initial term of three years and includes a one‑year extension option subject to certain conditions and the payment of a 20 basis point extension fee. The facility bears interest at a rate selected by us equal to either one‑month LIBOR plus a leverage‑based credit spread ranging from 1.75% to 2.50%, or a Base Rate, as defined in the debt agreement, plus a leverage‑based credit spread ranging from 0.75% to 1.50%, and also includes a fee of 0.25% assessed on the average unused portion of the facility. Availability under the facility is limited to 50% of the value of our eligible unencumbered assets at any point in time. At March 31, 2015, we had $162 million of borrowings outstanding on this credit facility and we had a pool of unencumbered assets aggregating approximately $1.2 billion, substantially all of which is eligible as collateral under the credit facility.  Covenants under this facility include: maximum leverage of 65%, minimum fixed charge coverage of 1.5x, minimum net worth of $600 million plus 75% of new net equity proceeds, and a maximum dividend payout ratio limited to 95% of Funds from Operations, all as defined in the agreement. The facility is recourse to us and includes a guaranty from STORE Capital Acquisitions, LLC, one of our direct wholly‑owned subsidiaries. We remain in compliance with these covenants.

25


 

As of March 31, 2015, essentially all of our long‑term debt was fixed‑rate debt, or was effectively converted to a fixed‑rate for the term of the debt. Our primary long‑term debt funding option is STORE Master Funding, which we began to use in 2012. As summarized below, a large portion of our real estate investment portfolio serves as collateral for outstanding borrowings under this debt program. Through this debt program, we arrange for bankruptcy remote, special purpose entity subsidiaries to issue multiple series of investment‑grade asset‑backed net‑lease mortgage notes, or ABS notes, from time to time as additional collateral is added to the collateral pool. The ABS notes are generally issued to institutional investors through the asset‑backed securities market. These ABS notes are issued in two classes, Class A and Class B. The Class A notes, which represent approximately 70% of the appraised value of the underlying real estate collateral, are currently rated A+ by Standard & Poor’s Ratings Services. The Class A notes generally require monthly payments of principal and interest with balloon payments due at their respective maturity dates, either seven or 10 years from the date of issuance. We have historically retained the Class B notes, which are subordinated to the Class A notes as to principal repayment. The Class B notes, currently rated BBB by Standard & Poor’s Rating Services, aggregate $78.0 million in principal amount outstanding at March 31, 2015 and are held by one of our bankruptcy remote, special purpose entity subsidiaries. The Class B notes are not reflected in our financial statements because they eliminate in consolidation. Since these Class B notes are issued and outstanding, they provide us with additional financial flexibility in that we may sell them to a third party in the future or use them as collateral for short‑term borrowings as we have done from time to time in the past.

The ABS notes outstanding at March 31, 2015 totaled $1.1 billion in Class A principal amount supported by a collateral pool valued at $1.6 billion representing 647 property locations operated by 146 customers. The amount of debt that can be issued in any new series is determined by the structure of the transaction and the amount of collateral that has been added to the pool. In addition, the issuance of each new series of notes is subject to the satisfaction of several conditions, including that there is no event of default on the existing note series and that the issuance will not result in an event of default on, or the credit rating downgrade of, the existing note series.

On April 16, 2015, our consolidated special purpose entities issued an additional series of STORE Master Funding net-lease mortgage notes consisting of $365.0 million of Class A notes and $30.0 million of Class B notes.  The Class A notes are segregated into two tranches:  $95.0 million of 7-year notes with an interest rate of 3.75% and $270.0 million of 10-year notes with an interest rate of 4.17%.  The Class B notes were retained by usThe net proceeds from the issuance of the net-lease mortgage notes were used to pay-off the then-existing outstanding balances on our credit facilities and provided liquidity to continue to acquire real estate assets.

A significant portion of our cash flows are generated by the special purpose entities comprising our Master Funding debt program. For the twelve months ended March 31, 2015, excess cash flow, after payment of debt service and servicing and trustee expenses, totaled $55 million on cash collections of $128 million, which represents an overall ratio of cash collections to debt service of approximately 1.7 to 1 on the Master Funding program. If at any time the debt service coverage ratio (as defined in the program documents) generated by the collateral pool is less than 1.3 to 1, excess cash flow from the Master Funding entities will be deposited into a reserve account to be used for payments to be made on the net‑lease mortgage notes, to the extent there is a shortfall. We anticipate that the debt service coverage ratio for the Master Funding program will remain well above program minimums.

To complement STORE Master Funding, we also obtain debt in discrete transactions through other bankruptcy remote, special purpose entity subsidiaries, which debt is solely secured by specific real estate assets and is generally non‑recourse to us (subject to certain customary limited exceptions). These discrete borrowings are generally in the form of traditional mortgage notes payable, with principal and interest payments due monthly and balloon payments due at their respective maturity dates, which typically range from seven to 10 years from the date of issuance. We generally obtain discrete secured borrowings from institutional commercial mortgage lenders, who subsequently securitize (that is, sell) the loans within the commercial mortgage‑backed securities, or CMBS, market. We have also occasionally used similar types of financing from insurance companies and commercial banks. Our secured borrowings contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Certain of the notes also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the special purpose entity or the tenant.

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As of March 31, 2015, the long‑term, non‑recourse debt of our consolidated special purpose entities had an aggregate outstanding principal balance of approximately $1.3 billion, a weighted average maturity of 6.6 years and a weighted average interest rate of 4.89%.  The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Investment Amount

 

 

 

 

 

 

Special Purpose

 

 

 

 

 

 

 

 

 

Outstanding

 

Entity

 

All Other

 

 

 

 

(In millions)

 

Borrowings

 

Subsidiaries

 

Subsidiaries

 

Total

 

STORE Master Funding net-lease mortgage notes payable

    

$

1,082 

    

$

1,573 

    

$

    

$

1,573 

 

Other mortgage notes payable

 

 

197 

 

 

327 

 

 

 

 

327 

 

Total long-term debt

 

 

1,279 

 

 

1,900 

 

 

 —

 

 

1,900  </