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EX-32.1 - EX-32.1 - STORE CAPITAL Corpstor-20150630ex3210d5812.htm
EX-10.2 - EX-10.2 - STORE CAPITAL Corpstor-20150630ex1022d1ce3.htm
EX-31.2 - EX-31.2 - STORE CAPITAL Corpstor-20150630ex31205d010.htm
EX-31.1 - EX-31.1 - STORE CAPITAL Corpstor-20150630ex311d4cb8a.htm
EX-32.2 - EX-32.2 - STORE CAPITAL Corpstor-20150630ex322ae6cab.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 June 30, 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 August 13, 2015, there were 126,858,765 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 June 30, 2015 (unaudited) and December 31, 2014 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014 (unaudited) 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014 (unaudited) 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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 

24 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

38 

Item 4.     Controls and Procedures 

39 

Part II. - OTHER INFORMATION 

 

Item 1.     Legal Proceedings 

40 

Item 1A.  Risk Factors 

40 

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

40 

Item 3.     Defaults Upon Senior Securities 

40 

Item 4.     Mine Safety Disclosures 

40 

Item 5.     Other Information 

40 

Item 6.     Exhibits 

40 

Signatures 

40 

Exhibit Index 

41 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

June 30,

    

December 31,

 

 

 

2015

 

2014

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

1,032,120

 

$

843,843

 

Buildings and improvements

 

 

2,189,415

 

 

1,790,530

 

Intangible lease assets

 

 

73,642

 

 

60,184

 

Total real estate investments

 

 

3,295,177

 

 

2,694,557

 

Less accumulated depreciation and amortization

 

 

(137,784)

 

 

(98,671)

 

 

 

 

3,157,393

 

 

2,595,886

 

Real estate investments held for sale, net

 

 

10,633

 

 

 —

 

Loans and direct financing receivables

 

 

168,273

 

 

111,354

 

Net investments

 

 

3,336,299

 

 

2,707,240

 

Cash and cash equivalents

 

 

66,244

 

 

136,313

 

Deferred costs, net

 

 

42,277

 

 

37,136

 

Other assets

 

 

43,039

 

 

32,923

 

Total assets

 

$

3,487,859

 

$

2,913,612

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

 —

 

$

 

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

 

 

1,638,811

 

 

1,284,151

 

Dividends payable

 

 

31,715

 

 

13,123

 

Accounts payable and accrued expenses

 

 

25,650

 

 

30,486

 

Other liabilities

 

 

6,030

 

 

3,168

 

Total liabilities

 

 

1,702,206

 

 

1,330,928

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 126,858,765 and 115,212,541 shares issued and outstanding, respectively

 

 

1,269

 

 

1,152

 

Capital in excess of par value

 

 

1,862,951

 

 

1,636,203

 

Distributions in excess of retained earnings

 

 

(78,239)

 

 

(54,405)

 

Accumulated other comprehensive loss

 

 

(328)

 

 

(266)

 

Total stockholders’ equity

 

 

1,785,653

 

 

1,582,684

 

Total liabilities and stockholders’ equity

 

$

3,487,859

 

$

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 June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues:

 

 

    

    

 

    

 

 

    

    

 

    

 

Rental revenues

 

$

65,662

 

$

42,609

 

$

124,500

 

$

80,143

 

Interest income on loans and direct financing receivables

 

 

3,217

 

 

2,059

 

 

5,815

 

 

3,849

 

Other income

 

 

21

 

 

354

 

 

44

 

 

359

 

Total revenues

 

 

68,900

 

 

45,022

 

 

130,359

 

 

84,351

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

20,637

 

 

16,637

 

 

37,866

 

 

31,042

 

Transaction costs

 

 

607

 

 

1,160

 

 

866

 

 

1,558

 

Property costs

 

 

356

 

 

108

 

 

651

 

 

145

 

General and administrative

 

 

7,210

 

 

4,883

 

 

13,845

 

 

9,066

 

Depreciation and amortization

 

 

21,568

 

 

13,149

 

 

40,460

 

 

24,710

 

Provision for impairment of real estate

 

 

 —

 

 

 —

 

 

1,000

 

 

 —

 

Total expenses

 

 

50,378

 

 

35,937

 

 

94,688

 

 

66,521

 

Income from continuing operations before income taxes

 

 

18,522

 

 

9,085

 

 

35,671

 

 

17,830

 

Income tax expense

 

 

83

 

 

50

 

 

166

 

 

102

 

Income from continuing operations

 

 

18,439

 

 

9,035

 

 

35,505

 

 

17,728

 

Income from discontinued operations

 

 

 —

 

 

250

 

 

 —

 

 

1,096

 

Income before gain on dispositions of real estate investments

 

 

18,439

 

 

9,285

 

 

35,505

 

 

18,824

 

Gain on dispositions of real estate investments

 

 

1,195

 

 

1,137

 

 

1,195

 

 

1,137

 

Net income

 

$

19,634

 

$

10,422

 

$

36,700

 

$

19,961

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.17

 

$

0.14

 

$

0.31

 

$

0.28

 

Discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

0.02

 

Net income

 

$

0.17

 

$

0.15

 

$

0.31

 

$

0.30

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

117,507,861

 

 

70,413,343

 

 

116,078,522

 

 

66,739,688

 

Diluted

 

 

117,507,861

 

 

70,413,343

 

 

116,078,522

 

 

66,739,688

 

Dividends declared per common share

 

$

0.2500

 

$

0.2455

 

$

0.5000

 

$

0.4850

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

    

$

19,634

    

$

10,422

    

$

36,700

    

$

19,961

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized losses on cash flow hedges

 

 

12

 

 

(230)

 

 

(216)

 

 

(340)

 

Cash flow hedge losses reclassified to interest expense

 

 

77

 

 

80

 

 

154

 

 

159

 

Total other comprehensive income (loss)

 

 

89

 

 

(150)

 

 

(62)

 

 

(181)

 

Total comprehensive income

 

$

19,723

 

$

10,272

 

$

36,638

 

$

19,780

 

 

See accompanying notes.

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2015

 

2014

 

Operating activities

    

    

 

    

    

 

    

 

Net income

 

 

$

36,700

 

$

19,961

 

Adjustments to net income:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

40,460

 

 

24,710

 

Provision for impairment of real estate

 

 

 

1,000

 

 

 —

 

Amortization of deferred financing costs and other noncash interest expense

 

 

 

3,051

 

 

2,812

 

Amortization of equity-based compensation

 

 

 

2,159

 

 

1,140

 

Gain on dispositions of real estate

 

 

 

(1,195)

 

 

(2,106)

 

Noncash revenue and other

 

 

 

(121)

 

 

(1,004)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Deferred costs

 

 

 

(826)

 

 

(848)

 

Other assets

 

 

 

(598)

 

 

864

 

Accounts payable and other liabilities

 

 

 

1,639

 

 

384

 

Net cash provided by operating activities

 

 

 

82,269

 

 

45,913

 

Investing activities

 

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

 

(629,499)

 

 

(522,644)

 

Investment in loans and direct financing receivables

 

 

 

(61,519)

 

 

(40,713)

 

Collections of principal on loans and direct financing receivables

 

 

 

4,579

 

 

5,975

 

Proceeds from disposition of real estate

 

 

 

11,948

 

 

16,628

 

Transfers (to) from restricted deposits

 

 

 

(7,646)

 

 

684

 

Net cash used in investing activities

 

 

 

(682,137)

 

 

(540,070)

 

Financing activities

 

 

 

 

 

 

 

 

Borrowings under credit facilities

 

 

 

356,000

 

 

252,080

 

Repayments under credit facilities

 

 

 

(356,000)

 

 

(252,080)

 

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

 

 

 

364,840

 

 

286,089

 

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

 

 

 

(9,883)

 

 

(8,573)

 

Financing costs paid

 

 

 

(7,868)

 

 

(8,944)

 

Proceeds from the issuance of common stock

 

 

 

234,141

 

 

290,412

 

Offering costs paid

 

 

 

(9,486)

 

 

 —

 

Dividends paid

 

 

 

(41,945)

 

 

(31,948)

 

Net cash provided by financing activities

 

 

 

529,799

 

 

527,036

 

Net (decrease) increase in cash and cash equivalents

 

 

 

(70,069)

 

 

32,879

 

Cash and cash equivalents, beginning of period

 

 

 

136,313

 

 

61,814

 

Cash and cash equivalents, end of period

 

 

$

66,244

 

$

94,693

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

 

 

Accrued tenant improvement advances included in real estate investments

 

 

$

10,666

 

$

4,765

 

Non-recourse debt obligations assumed in conjunction with acquisition of property

 

 

$

 —

 

$

23,259

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

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

 

 

$

34,200

 

$

27,716

 

Cash paid during the period for income and franchise taxes

 

 

$

862

 

$

405

 

See accompanying notes.

 

6


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

June 30, 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. In June 2015, the Company completed a follow-on stock offering in which the Company issued and sold 11,562,500 shares of common stock and STORE Holding sold 9,712,500 shares from its holdings of the Company’s common stock.  At June 30, 2015, there were 126,858,765 shares of the Company’s common stock outstanding, of which 72,436,144 shares were held by STORE Holding, representing a 57.1% 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 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, 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.

7


 

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 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 June 30, 2015 and December 31, 2014, assets totaling $3.1 billion and $2.5 billion, respectively, were held and third-party liabilities totaling $1.7 billion and $1.3 billion, respectively, 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.

8


 

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 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. 

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 $7.0 million and $4.7 million of accrued straight‑line rental revenue, net of allowances of $2.5 million and $1.7 million, at June 30, 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. Approximately 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 June 30, 2015, the Company had a $0.6 million provision for uncollectible contractual rent payments due from tenants; there was no provision at December 31, 2014.

9


 

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.

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 June 30, 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 June 30, 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 $23.4 million and $15.4 million of restricted cash and deposits in escrow at June 30, 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.

10


 

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 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 June 30, 2015, the Company had entered into two interest rate swap agreements with current notional amounts of $12.6 million and $6.5 million that were designated as cash flow hedges associated with the Company’s secured, variable‑rate mortgage note payable due in 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.

11


 

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 interest 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 six months ended June 30, 2015, the Company granted restricted share awards (RSAs) representing 86,746 shares of restricted common stock to its executive officers and certain directors and other employees.  During the same period, 161,979 shares of restricted stock vested and 3,022 shares of restricted stock were forfeited. As of June 30, 2015, the Company had 577,651 shares of restricted common stock 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 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 June 30, 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 June 30, 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 June 30, 2015 or December 31, 2014.

12


 

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 common 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 June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

Net income

 

$

19,634

 

$

10,422

 

$

36,700

 

$

19,961

 

Less: preferred stock dividends

 

 

 —

 

 

(8)

 

 

 —

 

 

(8)

 

Net income attributable to common stockholders

 

 

19,634

 

 

10,414

 

 

36,700

 

 

19,953

 

Less: earnings attributable to unvested restricted shares

 

 

(142)

 

 

(120)

 

 

(285)

 

 

(236)

 

Net income used in basic and diluted income per share

 

$

19,492

 

$

10,294

 

$

36,415

 

$

19,717

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

118,086,159

 

 

70,899,341

 

 

116,658,926

 

 

67,188,542

 

Less: Weighted average number of shares of unvested restricted stock

 

 

(578,298)

 

 

(485,998)

 

 

(580,404)

 

 

(448,854)

 

Weighted average shares outstanding used in basic income per share

 

 

117,507,861

 

 

70,413,343

 

 

116,078,522

 

 

66,739,688

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding used in diluted income per share

 

 

117,507,861

 

 

70,413,343

 

 

116,078,522

 

 

66,739,688

 


(a)

For the three months ended June 30, 2015 and 2014, excludes 160,971 shares and 49,451 shares, respectively, and for the six months ended June 30, 2015 and 2014, excludes 184,605 shares and 65,217 shares, respectively, related to unvested restricted shares as the effect would be antidilutive.

13


 

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 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 July 9, 2015, the FASB decided to defer by one year the effective date of the standard for public companies which will now be effective for annual reporting periods beginning after December 15, 2017 and early adoption is 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 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.   

14


 

 

3. Investments

At June 30, 2015, STORE Capital had investments in 1,175 property locations representing 1,162 owned properties (of which 15 are accounted for as direct financing receivables), eight ground lease interests and five properties which secure certain mortgage loans. The gross acquisition cost of the real estate investments totaled $3.31 billion at June 30, 2015. In addition, the Company held loans and direct financing receivables with an aggregate carrying amount at June 30, 2015 of $168.3 million. As of June 30, 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 six months ended June 30, 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)

 

227

 

 

624,742

 

Investment in loans and direct financing receivables

 

6

 

 

61,519

 

Sales of real estate

 

(4)

 

 

(11,559)

 

Principal collections on loans and direct financing receivables

 

(1)

 

 

(4,579)

 

Provision for impairment of real estate

 

 

 

 

(1,000)

 

Other

 

 

 

 

(21)

 

Gross investments, June 30, 2015 (d)

 

 

 

 

3,475,013

 

Less accumulated depreciation and amortization (d)

 

 

 

 

(138,714)

 

Net investments, June 30, 2015

 

1,175

 

$

3,336,299

 


(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)

Includes $0.4 million of interest capitalized to properties under construction.

(c)

Excludes $15.4 million of tenant improvement advances disbursed in 2015 which were accrued as of December 31, 2014.

(d)

Includes the dollar amount of investments ($11.5 million) and the accumulated depreciation ($0.9 million) related to real estate investments held for sale at June 30, 2015.

15


 

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 June 30, 2015 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Investments

 

Restaurants

 

581

 

$

947,584

 

27

%  

Health clubs

 

46

 

 

253,571

 

7

 

Early childhood education centers

 

127

 

 

244,035

 

7

 

Movie theaters

 

30

 

 

237,860

 

7

 

Furniture stores

 

24

 

 

146,645

 

4

 

Sporting goods stores

 

15

 

 

122,693

 

4

 

Colleges and professional schools

 

6

 

 

79,101

 

2

 

All other service industries

 

213

 

 

782,754

 

23

 

All other retail industries

 

56

 

 

235,610

 

7

 

All industrial

 

77

 

 

425,160

 

12

 

 

 

1,175

 

$

3,475,013

 

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 274 customers geographically dispersed throughout 46 states. Only one state, Texas (12%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at June 30, 2015. None of the Company’s 274 customers represented more than 10% of the Company’s real estate investment portfolio at June 30, 2015, with the largest customer representing less than 3% of the total investment portfolio. On an annualized basis, the largest customer also represented less than 3% of the Company’s annualized investment portfolio revenues as of June 30, 2015. The Company’s customers operate their businesses across 259 concepts and the largest of these concepts represented 3% of the Company’s annualized investment portfolio revenues as of June 30, 2015.

Intangible Lease Assets

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

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2015

 

2014

 

In-place lease assets

 

$

56,346

(a)

$

47,359

 

Above-market lease assets

 

 

10,273

 

 

5,526

 

Ground lease interest assets

 

 

7,299

 

 

7,299

 

Total intangible lease assets

 

 

73,918

 

 

60,184

 

Accumulated amortization

 

 

(9,354)

(a)

 

(6,006)

 

Net intangible lease assets

 

$

64,564

 

$

54,178

 


(a)

Includes the dollar amount of in-place lease intangibles ($276,000) and the accumulated amortization ($47,000) related to real estate investments held for sale at June 30, 2015.

16


 

Aggregate lease intangible amortization included in expense was $1.4 million and $0.9 million during the three months ended June 30, 2015 and 2014, respectively, and was $2.8 million and $1.7 million during the six months ended June 30, 2015 and 2014, respectively. The amount amortized as a decrease to rental revenue for capitalized above‑market lease intangibles was $0.3 million and $0.2 million during the three months ended June 30, 2015 and 2014, respectively, and was $0.5 million and $0.2 million for the six months ended June 30, 2015 and 2014, respectively.  

Based on the balance of the intangible assets at June 30, 2015, the aggregate amortization expense is expected to be $2.8 million for the remainder of 2015, $5.6 million in 2016, $5.5 million in 2017, $5.3 million in 2018, $5.0 million in 2019 and $4.4 million in 2020 and the amount expected to be amortized as a decrease to rental revenue is expected to be $0.6 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 10 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 June 30, 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 June 30, 2015,  six of the Company’s properties were vacant and not subject to a lease.

Scheduled future minimum rentals to be received under the remaining noncancelable term of the operating leases at June 30, 2015, are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2015

    

$

138,498

 

2016

 

 

277,639

 

2017

 

 

277,863

 

2018

 

 

277,911

 

2019

 

 

277,816

 

2020

 

 

275,865

 

Thereafter

 

 

2,607,991

 

Total future minimum rentals

 

$

4,133,583

 

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 June 30, 2015, the Company held 12 loans receivable with an aggregate carrying amount of $92.4 million. Ten of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. The two other loans are secured by the tenant’s equipment.    One of the mortgage loans is a short‑term loan that requires monthly interest‑only payments with a  balloon payment 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 loans require the borrower to make monthly interest‑only payments for an established period and then either monthly principal and interest payments through maturity or a  balloon payment at maturity.

17


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Stated

    

 

    

 

 

    

 

 

 

 

 

Interest

 

Maturity

 

June 30,

 

December 31,

 

Type

 

Rate

 

Date

 

2015

 

2014

 

Mortgage loan receivable

 

8.50

%  

 

 

$

 —

 

$

4,300

 

Mortgage loan receivable

 

9.09

%  

Jan. 2017

 

 

1,933

 

 

1,933

 

Mortgage loan receivable

 

8.35

%  

Jan. 2028

 

 

3,769

 

 

3,775

 

Mortgage loan receivable

 

8.75

%  

Jul. 2032

 

 

23,947

 

 

23,998

 

Mortgage loan receivable

 

7.45

%  

Jan. 2035

 

 

498

 

 

 —

 

Mortgage loan receivable

 

9.00

%  

Mar. 2053

 

 

14,569

 

 

14,595

 

Mortgage loan receivable

 

8.75

%  

Jun. 2053

 

 

6,346

 

 

6,357

 

Mortgage loan receivable

 

8.50

%  

Jun. 2053

 

 

6,749

 

 

6,697

 

Mortgage loan receivable

 

8.25

%  

Aug. 2053

 

 

3,331

 

 

3,337

 

Mortgage loans receivable (a)

 

8.50

%  

Feb. 2055

 

 

28,479

 

 

 —

 

Total mortgage loans receivable

 

 

 

 

 

 

89,621

 

 

64,992

 

Equipment loan receivable

 

10.00

%  

 

 

 

 —

 

 

94

 

Equipment loan receivable

 

7.75

%  

Mar. 2017

 

 

1,063

 

 

 —

 

Equipment loan receivable

 

8.75

%  

May 2022

 

 

642

 

 

 —

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

91,326

 

 

65,086

 

Unamortized loan origination costs

 

 

 

 

 

 

1,035

 

 

497

 

Direct financing receivables

 

 

 

 

 

 

75,912

 

 

45,771

 

Total loans and direct financing receivables

 

 

 

 

 

$

168,273

 

$

111,354

 


(a)

Represents two  mortgage loans receivable secured by a single property.  The loans have an initial interest rate of 8.50% and are subject to increases over the term of the loans.  The loans allow 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

 

$

159

 

$

 —

 

$

159

 

2016

 

 

332

 

 

 —

 

 

332

 

2017

 

 

423

 

 

2,996

 

 

3,419

 

2018

 

 

507

 

 

 

 

507

 

2019

 

 

552

 

 

 

 

552

 

2020

 

 

602

 

 

 

 

602

 

Thereafter

 

 

61,886

 

 

23,869

 

 

85,755

 

Total principal repayments

 

$

64,461

 

$

26,865

 

$

91,326

 

As of June 30, 2015, the Company had $75.9 million of investments in transactions accounted for as direct financing leases; the components of the investments accounted for as direct financing receivables were as follows (in thousands):

 

 

 

 

 

 

Minimum lease payments receivable

    

$

197,935

 

Estimated residual value of leased assets

 

 

9,174

 

Unearned income

 

 

(131,197)

 

Net investment

 

$

75,912

 

 

 

18


 

4. Debt

Credit Facilities

In September 2014, the Company entered into a $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 recent leverage ratio calculations, borrowings under the facility made on or after April 1, 2015 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 June 30, 2015, the Company had no 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 June 30, 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 was subject to the same borrowing limitations and covenants as the unsecured revolving credit facility discussed above and borrowings under this loan facility required 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.   This facility expired in accordance with its terms in July 2015.

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 discussed 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 June 30, 2015 and December 31, 2014, unamortized financing costs related to the Company’s credit facility totaled $1.9 million and $2.4 million, respectively.

19


 

Non‑Recourse Debt Obligations of Consolidated Special Purpose Entities

During 2012, the Company implemented the STORE Master Funding debt 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 $108.0 million at June 30, 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 June 30, 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 $2.0 billion.

A number of additional consolidated special purpose entity subsidiaries of the Company have financed their real estate properties with traditional first mortgage debt. The notes generally require monthly principal and interest payments with balloon payments due 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 $327.8 million at June 30, 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 June 30, 2015, the Company had one variable-rate mortgage note (outstanding principal balance of $19.1 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 June 30, 2015, the termination value of the Company’s interest rate swaps was a liability of approximately $0.4 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 June 30, 2015 and December 31, 2014, unamortized financing costs related to all non‑recourse debt obligations of the consolidated special purpose entities totaled $35.9 million and $30.9 million, respectively.

20


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coupon

 

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

 

June 30,

 

December 31,

 

 

 

Date

 

Rate

 

 

2015

 

2014

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

 

    

    

 

    

 

Series 2012-1, Class A

 

Aug. 2019

 

5.77

%  

 

$

205,883

 

$

207,503

 

Series 2013-1, Class A-1

 

Mar. 2020

 

4.16

%  

 

 

144,634

 

 

145,876

 

Series 2013-2, Class A-1

 

Jul. 2020

 

4.37

%  

 

 

103,903

 

 

104,740

 

Series 2013-3, Class A-1

 

Nov. 2020

 

4.24

%  

 

 

75,175

 

 

75,767

 

Series 2014-1, Class A-1

 

Apr. 2021

 

4.21

%  

 

 

119,350

 

 

119,650

 

Series 2015-1, Class A-1

 

Apr. 2022

 

3.75

%  

 

 

94,921

 

 

 —

 

Series 2013-1, Class A-2

 

Mar. 2023

 

4.65

%  

 

 

98,351

 

 

99,196

 

Series 2013-2, Class A-2

 

Jul. 2023

 

5.33

%  

 

 

94,193

 

 

94,951

 

Series 2013-3, Class A-2

 

Nov. 2023

 

5.21

%  

 

 

97,629

 

 

98,398

 

Series 2014-1, Class A-2

 

Apr. 2024

 

5.00

%  

 

 

139,242

 

 

139,592

 

Series 2015-1, Class A-2

 

Apr. 2025

 

4.17

%  

 

 

269,775

 

 

 —

 

Non-recourse mortgage notes payable:

 

 

 

 

 

 

 

 

 

 

 

 

$21,443 note issued July 2005 (a)

 

Aug. 2015

 

5.26

% (a)

 

 

18,746

 

 

18,956

 

$4,000 note issued August 2006 (b)

 

Sept. 2016

 

6.33

% (b)

 

 

3,272

 

 

3,326

 

$3,800 note issued September 2006 (c)

 

Oct. 2016

 

6.47

% (c)

 

 

3,483

 

 

3,512

 

$7,088 note issued April 2007 (d)

 

May 2017

 

6.00

% (d)

 

 

6,623

 

 

6,676

 

$4,400 note issued August 2007 (e)

 

Sept. 2017

 

6.7665

% (e)

 

 

3,754

 

 

3,807

 

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

 

Jan. 2018

 

4.778

%  

 

 

7,377

 

 

7,511

 

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

 

Jan. 2019

 

5.275

% (f)

 

 

19,085

 

 

19,317

 

$6,500 note issued December 2012

 

Dec. 2019

 

4.806

%  

 

 

6,133

 

 

6,207

 

$2,956 note issued June 2013

 

Jun. 2020

 

3.184

% (g)

 

 

2,792

 

 

2,827

 

$16,100 note issued February 2014

 

Mar. 2021

 

4.83

%  

 

 

15,688

 

 

15,857

 

$13,000 note issued May 2012

 

May 2022

 

5.195

%  

 

 

12,183

 

 

12,326

 

$14,950 note issued July 2012

 

Aug. 2022

 

4.95

%  

 

 

13,686

 

 

13,863

 

$26,000 note issued August 2012

 

Sept. 2022

 

5.05

%  

 

 

24,519

 

 

24,805

 

$6,400 note issued November 2012

 

Dec. 2022

 

4.707

%  

 

 

6,054

 

 

6,127

 

$11,895 note issued March 2013

 

Apr. 2023

 

4.7315

%  

 

 

11,345

 

 

11,478

 

$17,500 note issued August 2013

 

Sept. 2023

 

5.46

%  

 

 

16,919

 

 

17,091

 

$10,075 note issued March 2014

 

Apr. 2024

 

5.10

%  

 

 

9,913

 

 

9,984

 

$7,750 note issued February 2013

 

Mar. 2038

 

4.81

% (h)

 

 

7,382

 

 

7,468

 

$6,944 notes issued March 2013

 

Apr. 2038

 

4.50

% (i)

 

 

6,602

 

 

6,684

 

 

 

 

 

 

 

 

 

1,638,612

 

 

1,283,495

 

Unamortized net premium

 

 

 

 

 

 

 

199

 

 

656

 

Total non-recourse debt obligations of consolidated special purpose entities

 

 

 

 

 

 

$

1,638,811

 

$

1,284,151

 


(a)

Note was assumed in June 2014 at a premium; estimated effective yield at assumption of 3.69%.  Subsequent to June 30, 2015, this note was refinanced in the amount of $21.1 million; the new note has an interest rate of 4.36% and matures in August 2025.

(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 $6.5 million portion of this mortgage note payable to fixed rates of 5.299% and 5.230%, respectively.

(g)

Note is a variable‑rate note which resets monthly at one‑month LIBOR + 3.00%; rate shown is effective rate at June 30, 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.

21


 

As of June 30, 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

 

$

10,524

 

$

18,710

(a)

$

29,234

 

2016

 

 

21,613

 

 

6,549

 

 

28,162

 

2017

 

 

22,341

 

 

9,921

 

 

32,262

 

2018

 

 

22,895

 

 

6,665

 

 

29,560

 

2019

 

 

21,590

 

 

213,539

 

 

235,129

 

2020

 

 

15,767

 

 

295,986

 

 

311,753

 

Thereafter

 

 

43,237

 

 

929,275

 

 

972,512

 

 

 

$

157,967

 

$

1,480,645

 

$

1,638,612

 

 


(a)

The note payable to which this balloon payment related was refinanced subsequent to June 30, 2015; the new note payable matures in August 2025.

 

 

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 $60.5 million and $31.9 million during the six months ended June 30, 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.  In June 2015, the Company completed a follow-on stock offering in which the Company issued and sold 11,562,500 shares of common stock and STORE Holding sold 9,712,500 shares from its holdings of the Company’s common stock.  The Company received $224.7 million in proceeds, net of both underwriters’ discount and offering expenses, in connection with this offering. STORE Holding held 72,436,144 of the Company’s common shares at June 30, 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 and six months ended June 30, 2014 included $24,000 and $127,000, respectively, of income from real estate operations and $226,000 and $969,000, respectively, 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.

 

22


 

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. As of June 30, 2015, the Company had approximately $52.6 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 June 30, 2015 and December 31, 2014 was a liability of $328,000 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 June 30, 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. 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 June 30, 2015,  these debt obligations had a carrying value of $1,638.8 million and an estimated fair value of $1,735.6 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.

23


 

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 privately 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”.  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.  In June 2015, we completed a follow-on stock offering in which the Company issued and sold 11,562,500 shares of our common stock and STORE Holding sold 9,712,500 shares from its holdings of the Company’s common stock.  STORE Holding is still our primary stockholder, owning approximately 57% of our outstanding common stock as of June 30, 2015.

Since our inception in 2011, we have selectively originated a real estate investment portfolio totaling $3.5 billion, consisting of investments in 1,175 property locations across 46 states as of June 30, 2015. All of the real

24


 

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 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 June 30, 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 June 30, 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 June 30, 2015, our investment portfolio had grown to $3.5 billion, consisting of investments in 1,175 property locations with base rent and interest aggregating approximately $24.2 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 managing 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. During the first six months of 2015, leases associated with three properties due to expire in 2015 were renewed by the tenant and one property was vacated upon lease expiration.  As of June 30, 2015, our portfolio was 99.5% occupied. One of the six vacant properties was sold in early July; accordingly, we expect that we will incur some property costs 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 under our STORE Master Funding debt 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

25


 

collateral. By matching the expected cash inflows from our long‑term real estate leases with the expected cash outflows of our 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 June 30, 2015, we had no significant near-term debt maturities, with balloon payments due during the remainder of 2015 representing just $19 million, or 1.1%, 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. On July 30, 2015, we refinanced the debt that was scheduled to mature in August 2015 with nonrecourse fixed-rate debt due in August 2025. 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 June 30, 2015 is comprised, almost exclusively, of secured non-recourse borrowings with a weighted average loan-to-cost ratio of 69% and approximately 68% of our portfolio serves as collateral for this long-term debt.  The remaining portfolio properties, aggregating approximately $1.1 billion, are unencumbered and this unencumbered pool of properties provides us flexibility for future secured or unsecured 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 unsecured credit facility to acquire our real estate properties, until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds from which we use to repay the amounts outstanding under our revolving 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 0.2% 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 June 30, 2015, we had no borrowings outstanding on this credit facility and we had a pool of unencumbered assets aggregating approximately $1.1 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

26


 

guaranty from STORE Capital Acquisitions, LLC, one of our direct wholly‑owned subsidiaries. We remain in compliance with these covenants.

As of June 30, 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 $108.0 million in principal amount outstanding at June 30, 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 June 30, 2015 totaled $1.4 billion in Class A principal amount supported by a collateral pool valued at $2.0 billion representing 792 property locations operated by 181 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.

A significant portion of our cash flows is generated by the special purpose entities comprising our STORE Master Funding debt program. For the six months ended June 30, 2015, excess cash flow, after payment of debt service and servicing and trustee expenses, totaled $32 million on cash collections of $73 million, which represents an overall ratio of cash collections to debt service of greater than 1.75 to 1 on the STORE Master Funding program. If at any time the debt service coverage ratio (as defined in the STORE Master Funding program documents) generated by the collateral pool is less than 1.3 to 1, excess cash flow from the STORE 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 STORE 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.

27


 

As of June 30, 2015, the long‑term, non‑recourse debt of our consolidated special purpose entities had an aggregate outstanding principal balance of approximately $1.6 billion, a weighted average maturity of 7.0 years and a weighted average interest rate of 4.71%.  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 June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Investment Amount

 

 

 

 

 

 

Special Purpose

 

 

 

 

 

 

 

 

 

Outstanding

 

Entity

 

All Other

 

 

 

 

(In millions)

 

Borrowings

 

Subsidiaries

 

Subsidiaries

 

Total

 

STORE Master Funding net-lease mortgage notes payable

    

$

1,443

    

$

2,034

    

$

    

$

2,034

 

Other mortgage notes payable

 

 

196

 

 

328

 

 

 

 

328

 

Total long-term debt

 

 

1,639

 

 

2,362

 

 

 —

 

 

2,362

 

Unsecured credit facility

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Unencumbered real estate assets

 

 

 

 

736

 

 

377

 

 

1,113

 

 

 

$

1,639

 

$

3,098

 

$

377

 

$

3,475

 

 

Our decision to use STORE Master Funding or non‑recourse traditional mortgage loan borrowings depends on borrowing costs, debt terms, debt flexibility and the tenant and industry diversification levels of the collateral pool. As we continue to acquire real estate, we expect to balance the overall degree of leverage on our portfolio by growing a pool of portfolio assets that are unencumbered. A growing pool of unencumbered assets will increase our financial flexibility by providing us with assets that could support unsecured financing or that could serve as substitute collateral for existing debt. Should market factors, which are beyond our control, adversely impact our access to these debt sources at economically feasible rates, our ability to grow through additional real estate acquisitions will be limited to any undistributed amounts available from our operations and any additional equity capital raises.

On June 9, 2015, we completed a follow-on stock offering in which the Company issued and sold 11,562,500 shares of our common stock and STORE Holding sold 9,712,500 shares from its holdings of the Company’s common stock at a price to the public of $20.25 per share.  We generated approximately $225 million of net proceeds from this offering which were used to pay down $100 million of borrowings outstanding under our credit facility and to fund approximately $94 million of our real estate acquisition transactions that closed late in the second quarter. 

As shown in the table below, net cash provided by operating activities rose primarily due to the increase in the size of our real estate investment portfolio. Our real estate investing activities have grown in volume as we continue to make headway into our target market by identifying and acquiring real estate, primarily through sale‑leaseback transactions. Real estate investment activity in the first half of 2015 was primarily funded with a combination of cash on hand from our November 2014 IPO, cash from operations, proceeds from the April 2015 issuance of notes under our STORE Master Funding debt program and a portion of the proceeds from our follow-on common stock offering in JuneDuring the six months ended June 30, 2014, real estate investment activity was funded with cash from operations and proceeds from the issuance of STORE Master Funding notes, as well as with proceeds from the issuance of common stock in our private stock offerings. Dividends paid during the six months ended June 30, 2015 totaled $41.9 million which included $28.8 million paid in the second quarter and $13.1 million paid in the first quarter.  Dividends paid during the first quarter of 2015 represented a pro-rated dividend for the period from the closing of the IPO through

28


 

December 31, 2014. Dividends paid during the six months ended June 30, 2014 totaled $31.9 million. Cash and cash equivalents totaled $66.2 million and $136.3 million at June 30, 2015 and December 31, 2014, respectively.

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In thousands)

 

2015

 

2014

 

Net cash provided by operating activities

    

$

82,269

    

$

45,913

    

Net cash used in investing activities

 

 

(682,137)

 

 

(540,070)

 

Net cash provided by financing activities

 

 

529,799

 

 

527,036

 

Net (decrease) increase in cash and cash equivalents

 

 

(70,069)

 

 

32,879

 

Cash and cash equivalents, beginning of period

 

 

136,313

 

 

61,814

 

Cash and cash equivalents, end of period

 

$

66,244

 

$

94,693

 

Management believes that the cash generated by our operations, together with our cash and cash equivalents at June 30, 2015, our current borrowing capacity on our revolving credit facility and our access to long‑term debt capital, will be sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we currently have made commitments. In order to continue to grow our real estate portfolio in the future beyond the excess cash generated by our operations and our ability to borrow, we intend to raise additional equity capital through the sale of our common stock.

Real Estate Portfolio Information

As of June 30, 2015, our total investment in real estate and loans approximated $3.5 billion, representing investments in 1,175 property locations, substantially all of which are profit centers for our customers.  These investments generate cash flows from more than 400 contracts predominantly structured as net leases, mortgage loans and combinations of leases and mortgage loans, or hybrid leases.  As of June 30, 2015, only six of our single‑tenant properties were vacant and not subject to leases.  The weighted average non‑cancellable remaining term of our leases was approximately 15 years. 

Our real estate portfolio is highly diversified.  As of June 30, 2015, our 1,175 property locations were operated by 274 customers across 46 states.  None of our customers represented more than 3% of our portfolio at June 30, 2015, and our top ten largest customers represented less than 17% of annualized base rent and interest.  Our customers operate their businesses across 259 brand names or business concepts in more than 75 industries.  Our top five concepts as of June 30, 2015 were Ashley Furniture HomeStore, Gander Mountain, Applebee’s, Popeyes Louisiana Kitchen and Starplex Cinemas; combined, these concepts represented 13% of annualized base rent and interest.  Our top five industries as of June 30, 2015 are restaurants, health clubs, early childhood education centers, movie theaters and furniture stores.  Combined, these industries represented 53% of annualized base rent and interest. 

29


 

The following tables summarize the diversification of our real estate portfolio based on the percentage of base rent and interest, annualized based on rates in effect on June 30, 2015, for all of our leases, loans and direct financing receivables in place as of that date.

Diversification by Customer

As of June 30, 2015, our 1,175 property locations were operated by 274 customers and the following table identifies our ten largest customers:

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

Number

 

 

 

and

 

of

 

Customer

 

Interest

 

Properties

 

Gander Mountain Company

 

2.92

%

12

 

SMH Theatres, Inc. (1)

 

2.49

 

10

 

O'Charley's LLC

 

1.96

 

30

 

Sailormen, Inc.

 

1.56

 

41

 

FreedomRoads, LLC

 

1.52

 

8

 

Bellisio Foods, Inc.

 

1.47

 

2

 

Rainbow Early Education Holding, LLC

 

1.40

 

34

 

Hill Country Holdings, LLC

 

1.23

 

6

 

Conn's, Inc.

 

1.22

 

7

 

RMH Franchise Holdings, Inc.

 

1.21

 

17

 

All other (264 customers)

 

83.02

 

1,008

 

Total

 

100.00

%

1,175

 


(1)

SMH Theatres, Inc. has announced that it has entered into an agreement to be acquired by AMC Entertainment Holdings, Inc., subject to regulatory approval and customary closing conditions.

30


 

Diversification by Concept

As of June 30, 2015, our customers operated their businesses across 259 concepts and the following table identifies the top ten concepts:

 

 

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

Number

 

 

 

and

 

of

 

Customer Business Concept

 

Interest

 

Properties

 

Ashley Furniture HomeStore

 

3.00

%  

17

 

Gander Mountain

 

2.92

 

12

 

Applebee's

 

2.49

 

36

 

Popeyes Louisiana Kitchen

 

2.07

 

57

 

Starplex Cinemas

 

2.06

 

8

 

O'Charley's

 

1.96

 

30

 

FreedomRoads

 

1.52

 

8

 

KFC

 

1.47

 

49

 

Bellisio Foods

 

1.47

 

2

 

Rainbow Child Care Center

 

1.40

 

34

 

All other (249 concepts)

 

79.64

 

922

 

Total

 

100.00

%  

1,175

 

 

Diversification by Industry

As of June 30, 2015, our customers’ business concepts were diversified across more than 75 industries within the service, retail and industrial sectors of the U.S. economy.  The following table summarizes those industries:

 

 

 

 

 

 

 

 

 

 

    

% of

    

 

    

 

 

 

 

Annualized

 

 

 

Building

 

 

 

Base Rent

 

Number

 

Square

 

 

 

and

 

of

 

Footage 

 

Customer Industry

 

Interest

 

Properties

 

(in thousands)

 

Service:

 

 

 

 

 

 

 

Restaurants—full service

 

17.59

%  

279

 

2,039

 

Restaurants—limited service

 

9.62

 

302

 

881

 

Health clubs

 

7.35

 

46

 

1,499

 

Early childhood education centers

 

7.30

 

127

 

1,318

 

Movie theaters

 

6.80

 

30

 

1,131

 

Colleges and professional schools

 

2.70

 

6

 

466

 

Automotive repair and maintenance

 

1.89

 

42

 

168

 

Family entertainment

 

1.67

 

6

 

336

 

All other service (33 industries)

 

17.99

 

165

 

5,051

 

Total service:

 

72.91

 

1,003

 

12,889

 

Retail:

 

 

 

 

 

 

 

Furniture stores

 

4.36

 

24

 

1,440

 

Sporting goods stores

 

3.44

 

15

 

983

 

All other retail (11 industries)

 

6.82

 

56

 

2,507

 

Total retail:

 

14.62

 

95

 

4,930

 

Industrial:

 

 

 

 

 

 

 

All industrial (25 industries)

 

12.47

 

77

 

8,370

 

Total

 

100.00

%  

1,175

 

26,189

 

31


 

Diversification by Geography

Our portfolio is also highly diversified by geography, as our 1,175 property locations can be found in 46 of the 50 states (excluding Alaska, Delaware, Hawaii and Rhode Island).  The following table details the top ten geographical locations of the properties as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

 

 

 

 

and

 

Number of

 

State

 

Interest 

 

Properties

 

Texas

    

12.28

%   

91

 

Illinois

 

7.52

 

80

 

Ohio

 

6.10

 

70

 

Tennessee

 

5.88

 

74

 

Georgia

 

5.80

 

82

 

Florida

 

4.50

 

63

 

Arizona

 

4.19

 

39

 

Pennsylvania

 

4.14

 

32

 

California

 

3.88

 

22

 

North Carolina

 

3.74

 

78

 

All other (36 states) (1)

 

41.97

 

544

 

Total

 

100.00

%  

1,175

 

 

 

 

 

 

 


(1)

Includes one property in Ontario, Canada which represents less than 0.2% of annualized base rent and interest.

Contract Expirations

The following table sets forth the schedule of our lease, loan and direct financing receivable expirations as of June 30, 2015:

 

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

 

 

 

 

and

 

Number of

 

Year of Lease Expiration or Loan Maturity (1)

 

Interest

 

Properties (2)

 

Remainder of 2015

 

 —

%  

 —

 

2016

 

0.01

 

 —

 

2017

 

0.34

 

4

 

2018

 

0.42

 

3

 

2019

 

0.97

 

9

 

2020

 

0.72

 

4

 

2021

 

1.26

 

7

 

2022

 

0.36

 

4

 

2023

 

3.04

 

38

 

2024

 

1.99

 

21

 

Thereafter

 

90.89

 

1,079

 

Total

 

100.00

%  

1,169

 


(1)

Expiration year of contracts in place as of June 30, 2015 and excludes any tenant option renewal periods.

(2)

Excludes six properties which were vacant and not subject to a lease as of June 30, 2015.

32


 

Recently Issued Accounting Pronouncements

See Note 2 to the June 30, 2015 unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our condensed consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have not made any material changes to these policies during the periods covered by this quarterly report. 

33


 

Results of Operations

Overview

As of June 30, 2015, our real estate investment portfolio had grown to $3.5 billion. Approximately 95% of the real estate investment portfolio represents commercial real estate properties subject to long‑term leases, 5% represents mortgage loans and direct financing receivables primarily on commercial real estate buildings (located on land we own and lease to our customers) and a nominal amount represents loans receivable secured by our tenants’ other assets. Of our 1,175 property locations, only six properties were vacant and not subject to a lease as of June 30, 2015.

Three and Six months Ended June 30, 2015 Compared to Three and Six months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

 

June 30,

 

Increase

 

June 30,

 

Increase

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

2015

 

2014

 

(Decrease)

 

Total revenues

    

$

68,900

    

$

45,022

    

$

23,878

    

$

130,359

    

$

84,351

    

$

46,008

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

20,637

 

 

16,637

 

 

4,000

 

 

37,866

 

 

31,042

 

 

6,824

 

Transaction costs

 

 

607

 

 

1,160

 

 

(553)

 

 

866

 

 

1,558

 

 

(692)

 

Property costs

 

 

356

 

 

108

 

 

248

 

 

651

 

 

145

 

 

506

 

General and administrative

 

 

7,210

 

 

4,883

 

 

2,327

 

 

13,845

 

 

9,066

 

 

4,779

 

Depreciation and amortization

 

 

21,568

 

 

13,149

 

 

8,419

 

 

40,460

 

 

24,710

 

 

15,750

 

Provisions for impairment of real estate

 

 

 —

 

 

 —

 

 

 —

 

 

1,000

 

 

 —

 

 

1,000

 

Total expenses

 

 

50,378

 

 

35,937

 

 

14,441

 

 

94,688

 

 

66,521

 

 

28,167

 

Income from continuing operations before income taxes

 

 

18,522

 

 

9,085

 

 

9,437

 

 

35,671

 

 

17,830

 

 

17,841

 

Income tax expense

 

 

83

 

 

50

 

 

33

 

 

166

 

 

102

 

 

64

 

Income from continuing operations

 

 

18,439

 

 

9,035

 

 

9,404

 

 

35,505

 

 

17,728

 

 

17,777

 

Income from discontinued operations

 

 

 —

 

 

250

 

 

(250)

 

 

 —

 

 

1,096

 

 

(1,096)

 

Income before gain on dispositions of real estate investments

 

 

18,439

 

 

9,285

 

 

9,154

 

 

35,505

 

 

18,824

 

 

16,681

 

Gain on dispositions of real estate investments

 

 

1,195

 

 

1,137

 

 

58

 

 

1,195

 

 

1,137

 

 

58

 

Net income

 

$

19,634

 

$

10,422

 

$

9,212

 

$

36,700

 

$

19,961

 

$

16,739

 

Revenues

The increase in revenues period over period is driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues and interest income. The weighted average real estate investment amounts outstanding during the three-month periods were $3.29 billion in 2015 and $2.10 billion in the comparable period of 2014.  During the six-month periods, the weighted average real estate investment amounts outstanding were $3.11 billion in 2015 and $1.97 billion in 2014. Our real estate investment portfolio grew from $1.7 billion in gross investment amount representing 622 properties at the beginning of 2014 to $3.5 billion in gross investment amount representing 1,175 properties at June 30, 2015. Our real estate investments were made throughout the periods presented and were not all outstanding for the entire periods presented; accordingly, the vast majority of the increase in revenues between periods is primarily related to recognizing revenue in 2015 for acquisitions that were made during the latter half of 2014. Similarly, the full revenue impact of acquisitions made during the first six months of 2015 will not be seen until the second half of 2015.

34


 

The initial rental or capitalization rates we receive on sale‑leaseback transactions, calculated as the initial annualized base rent divided by the purchase price of the properties, vary from transaction to transaction based on many factors, such as the terms of the lease, the property type including the property’s real estate fundamentals and the market rents in the area on the various types of properties we target across the United States. The majority of our transactions are sale‑leaseback transactions where we acquire the property and simultaneously negotiate a lease directly with the tenant based on their business needs. There are also online commercial real estate auction marketplaces for real estate transactions; properties acquired through these online marketplaces are often subject to existing leases and offered by third‑party sellers. In general, because we provide tailored customer lease solutions in sale-leaseback transactions, our lease rates historically have been higher and subject to less short-term market influences than what we have seen in the auction marketplace as a whole. In addition, since our real estate leases represent an alternative for our customers to other forms of corporate capitalization, lease rates can also be influenced by changes in interest rates and overall capital availability. During 2015, we have experienced little change in the weighted average lease rate achieved as compared to the same period in 2014.  The weighted average initial real estate capitalization rate on the properties we acquired during the three months ended June 30, 2015 and 2014 was approximately 8.2% and 8.3%, respectively, and was approximately 8.3% and 8.4%, respectively, during the six months ended June 30, 2015 and 2014.

Interest Expense

The increases in interest expense, as summarized in the table below, are due primarily to an increase in long‑term borrowings used to partially fund the acquisition of properties for our growing real estate investment portfolio. We funded the growth in our real estate investment portfolio with added equity and long‑term fixed-rate debt, using our credit facilities to temporarily finance the properties we acquired.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

 

2015

 

2014

 

 

2015

 

2014

 

Interest expense— credit facilities (includes non-use fees)

    

$

463

    

$

760

 

    

$

846

    

$

1,519

 

Interest expense—non-recourse debt obligations of consolidated special purpose entities

 

 

18,721

 

 

14,399

 

 

 

34,387

 

 

26,711

 

Capitalized interest

 

 

(201)

 

 

 —

 

 

 

(418)

 

 

 —

 

Amortization of deferred financing costs and other

 

 

1,654

 

 

1,478

 

 

 

3,051

 

 

2,812

 

Total interest expense

 

$

20,637

 

$

16,637

 

 

$

37,866

 

$

31,042

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average debt outstanding

 

$

56,440

 

$

66,338

 

 

$

46,204

 

$

69,147

 

Average interest rate (includes non-use fees)

 

 

3.3

%  

 

4.6

%  

 

 

3.7

%  

 

4.4

%  

Non-recourse debt obligations of consolidated special purpose entities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average debt outstanding

 

$

1,581,074

 

$

1,175,201

 

 

$

1,431,938

 

$

1,087,289

 

Average interest rate

 

 

4.7

%  

 

4.9

%  

 

 

4.8

%  

 

4.9

%  

The average amount of long-term debt outstanding was $1.58 billion during the three months ended June 30, 2015, up from $1.18 billion during the same period in 2014 and, for the six months ended June 30, 2015, the average amount of long-term debt outstanding was $1.43 billion up from $1.09 billion for the same period in 2014.  The increase in debt outstanding is the primary driver for the increase in interest expense on long-term debt for the periods presented.  Long-term debt added after June 30, 2014 included the April 2015 series of STORE Master Funding net‑lease mortgage notes payable aggregating $365 million in principal amount and $3.8 million of traditional mortgage debt. 

The increase in long-term debt outstanding was partially offset by a decrease in borrowings outstanding on our credit facilities.  The average debt outstanding on our credit facilities decreased from $66.3 million during the three months ended June 30, 2014 to $56.4 million during the same period in 2015, primarily due to the issuance of the STORE Master Funding notes early in the second quarter and the cash proceeds from the follow-on stock offering in June 2015. The average debt outstanding on our credit facilities decreased from $69.1 million during the six months ended June 30, 2015 to $46.2 million during the same period in 2015 primarily due to the availability of net equity

35


 

proceeds from our IPO that we used to make real estate investments during the first quarter of 2015.  From time to time, we may have construction activities on one or more of our real estate properties; interest capitalized as a part of those activities represented $0.2 million and $0.4 million during the three and six months ended June 30, 2015, respectively. 

Interest expense was also impacted by weighted average interest rates on both our long-term debt and our credit facilities, which are lower in 2015 than in 2014.  For example, we were able to achieve a lower weighted average borrowing cost of 4.1% on the April 2015 issuance of STORE Master Funding notes as compared to the 4.6% weighted average rate of our STORE Master Funding notes issued in May of 2014.

Transaction Costs

Our real estate acquisitions have been predominantly sale‑leaseback transactions in which acquisition and closing costs were capitalized as part of the investment in the property. We also occasionally acquire properties subject to an existing lease. Costs incurred on real estate transactions where we acquired properties that are subject to an existing lease were expensed to operations as incurred. Transaction costs expensed during the three and six months ended June 30, 2015 totaled $0.6 million and  $0.9 million, respectively, as compared to $1.2 million and $1.6 million, respectively, incurred during the same periods in 2014. Whether the real estate we acquire is subject to an existing lease or not determines how we account for the related transaction costs and, accordingly, may cause variability in the level of such costs expensed to operations from year to year.

Property Costs

Approximately 97% of our leases are triple-net, meaning that our tenants are generally responsible for the property-level operating costs such as taxes, insurance and maintenance. Accordingly, we generally do not expect to incur property-level operating costs or capital expenditures, except during any period where one or more of our properties is no longer under lease. Our need to expend capital on our properties is further reduced due to the fact that some of our tenants will periodically refresh the property at their own expense to meet their business needs or in connection with franchisor requirements.  As of June 30, 2015, only six of our properties were vacant and not subject to a lease and we have no scheduled lease maturities during the remainder of 2015; we expect to incur some property costs related to the vacant properties until such time as those properties are either leased or sold

General and Administrative Expenses

General and administrative expenses include compensation and benefits; professional fees such as portfolio servicing, legal and accounting fees; and general office expenses such as insurance, office rent and travel costs. General and administrative costs totaled $7.2 million and $13.8 million for the three and six months ended June 30, 2015, respectively, as compared to $4.9 million and $9.1 million, respectively, for the same periods in 2014 with the increase being primarily due to the growth of our portfolio and related staff additions, and to the increased costs of being a public company. Expenses, such as property‑related insurance costs and the costs of servicing the properties and loans comprising our real estate portfolio, increase in direct proportion to the increase in the size of the portfolio. Personnel were added to expand our portfolio management and servicing team and other operations support functions, which contributed to the increase in compensation and employee benefits expense. Our number of employees grew from 47 employees at June 30, 2014 to 55 employees as of June 30, 2015.  A portion of the increase in general and administrative expenses was due to costs related to being a public company, including the costs of public company governance and reporting and meeting other regulatory requirements. We expect that general and administrative expenses will continue to rise in some measure as our real estate investment portfolio grows; however, we expect that such expenses as a percentage of the portfolio will decrease over time due to efficiencies and economies of scale.

36


 

Depreciation and Amortization Expense

Depreciation and amortization expense, which increases in proportion to the increase in the size of our real estate portfolio, rose from $13.1 million and $24.7 million for the three and six months ended June 30, 2014, respectively, to $21.6 million and $40.5 million, respectively, for the comparable periods in 2015.  

Net Income

For the three months ended June 30, 2015, our net income rose to $19.6 million from the $10.4 million in net income reported for the comparable period in 2014. Our net income rose to $36.7 million for the six months ended June 30, 2015 from the $20.0 million in net income reported for the same period 2014. The increase in net income is primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues and interest income. Net income for the six months ended June 30, 2015, includes the impact of a $1.0 million provision for impairment of one property based on the likelihood that the property may be sold in the near term. 

We sell properties from time to time in order to enhance the diversity and quality of our real estate portfolio.  For the three and six months ended June 30, 2015, net income includes a $1.2 million aggregate gain on the sale of four properties.  During the six months ended June 30, 2014,  net income includes a $2.1 million aggregate gain on the sale of six properties;  five of these six properties were sold in the second quarter of 2014 and represented an aggregate gain of $1.4 million.

Non‑GAAP Measures

Our reported results are presented in accordance with GAAP. We also disclose Funds from Operations, or FFO, and Adjusted Funds from Operations, or AFFO, both of which are non‑GAAP measures. We believe these two non‑GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs. FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.

We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as GAAP net income, excluding gains (or losses) from extraordinary items and sales of depreciable property, real estate impairment losses and depreciation and amortization expense from real estate assets, including the pro rata share of such adjustments of unconsolidated subsidiaries. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to non‑cash revenues and expenses such as straight‑line rents, amortization of deferred financing costs and stock‑based compensation. In addition, in deriving AFFO, we exclude transaction costs associated with acquiring real estate subject to existing leases.

FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. Management believes that AFFO provides more useful information to investors and analysts because it modifies FFO to exclude additional non-cash revenues and expenses such as straight‑line rents, amortization of deferred financing costs and stock‑based compensation as such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. Additionally, in deriving AFFO, we exclude transaction costs associated with acquiring real estate subject to existing leases. We view transaction costs to be a part of our investment in the real estate we acquire, similar to the treatment of acquisition and closing costs on our sale-leaseback transactions, which are capitalized as a part of the investment in the asset. We believe that transaction costs are not an ongoing cost of the portfolio in place at the end of each reporting period and, for these reasons, we add back the portion expensed when computing AFFO.  As a result, we believe AFFO to be a more meaningful measurement of ongoing performance that

37


 

allows for greater performance comparability.  Therefore, we disclose both FFO and AFFO and reconcile them to the most appropriate GAAP performance metric, which is net income.  STORE Capital’s FFO and AFFO may not be comparable to similarly titled measures employed by other companies.

The following is a reconciliation of net income (which we believe is the most comparable GAAP measure) to FFO and AFFO.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

 

2014

 

2015

 

2014

 

Net income

    

$

19,634

    

$

10,422

    

$

36,700

    

$

19,961

 

Depreciation and amortization of real estate assets

 

 

21,483

 

 

13,074

 

 

40,293

 

 

24,565

 

Provisions for impairment of real estate

 

 

 —

 

 

 —

 

 

1,000

 

 

 —

 

Gain on dispositions of real estate

 

 

(1,195)

 

 

(1,363)

 

 

(1,195)

 

 

(2,106)

 

Funds from Operations

 

 

39,922

 

 

22,133

 

 

76,798

 

 

42,420

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line rental revenue, net

 

 

(991)

 

 

(886)

 

 

(1,099)

 

 

(1,502)

 

Transaction costs

 

 

607

 

 

1,160

 

 

866

 

 

1,558

 

Non-cash equity-based compensation

 

 

1,263

 

 

767

 

 

2,160

 

 

1,140

 

Non-cash interest expense

 

 

1,654

 

 

1,478

 

 

3,051

 

 

2,812

 

Amortization of lease-related intangibles and costs

 

 

335

 

 

340

 

 

555

 

 

449

 

Adjusted Funds from Operations

 

$

42,790

 

$

24,992

 

$

82,331

 

$

46,877

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Our interest rate risk management objective is to limit the impact of future interest rate changes on our earnings and cash flows. We seek to match the cash inflows from our long‑term leases with the expected cash outflows on our long‑term debt. To achieve this objective, our consolidated subsidiaries primarily borrow on a fixed‑rate basis for longer‑term debt issuances. At June 30, 2015, substantially all of our outstanding long‑term debt carried a fixed interest rate and the weighted average debt maturity was approximately seven years. We are exposed to interest rate risk between the time we enter into a sale‑leaseback transaction and the time we finance the related real estate with long‑term fixed‑rate debt. In addition, when that long‑term debt matures, we may have to refinance the real estate at a higher interest rate. Market interest rates are sensitive to many factors that are beyond our control.

We address interest rate risk by employing the following strategies to help insulate us from any adverse impact of rising interest rates:

·

We seek to minimize the time period between acquisition of our real estate and the ultimate financing of that real estate with long‑term fixed‑rate debt.

·

By using serial issuances of long-term debt, we intend to ladder out our debt maturities to avoid a significant amount of debt maturing during any single period.

·

We choose long‑term debt that generally provides for some amortization of the principal balance over the term of the debt, which serves to reduce the amount of refinancing risk at debt maturity to the extent that we can refinance the reduced debt balance over a revised long-term amortization schedule. 

·

We strive to grow our free cash flow such that, over time, our cash flow from operating activities, after principal payments on our debt, plus cash flows from property sales and principal collected on our loans receivable, each year exceeds that year’s scheduled debt maturities.

See our Annual Report on Form 10-K for the year ended December 31, 2014 under the heading “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities.  As of June 30, 2015, our market risk has not changed materially from the amounts reported in our Annual Report on Form 10-K for the year ended December 31, 2014.

38


 

 

 

 

Item 4.  Controls and Procedures.

Disclosure Controls and Procedures

The disclosure controls and procedures of the Company are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. As a result, our disclosure controls and procedures are designed to provide reasonable assurance that such disclosure controls and procedures will meet their objectives.

As of June 30, 2015, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures of the Company as defined in Rule 13a-15(e) under the Exchange Act.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s design and operation of these disclosure controls and procedures are effective at the reasonable assurance level described above.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second fiscal quarter to which this report relates that materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of the Company.

39


 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

From time to time, we become party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business and the business of our tenants.   Since our organization in May 2011, we have not been a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to us.

Item 1A.  Risk Factors.

 

There have been no material changes to the risk factors as disclosed in the section entitled “Risk Factors” beginning on page 11 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and filed with the Securities and Exchange Commission.  Please review the Risk Factors set forth in the Form 10-K.

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

During the three months ended June 30, 2015, the Company did not repurchase any of its equity securities, nor did it sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Item 3.  Defaults Upon Senior Securities.

 

None.

Item 4.  Mine Safety Disclosures.

 

None.

Item 5.  Other Information.

 

None.

Item 6.  Exhibits

 

The exhibits filed or furnished with this Report are set forth in the Exhibit Index.


SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

STORE CAPITAL CORPORATION
                (Registrant)

 

DateAugust 14, 2015By: /s/ Catherine Long

      Catherine Long
      Executive Vice President and Chief Financial Officer

         (Principal Financial and Accounting Officer)

40


 

 

 

 

 

 

 

 

EXHIBIT INDEX

 

 

 

 

Exhibit No.

 

Description

4.1

 

Fourth Amended and Restated Master Indenture dated as of April 16, 2015, among STORE Master Funding I, LLC, STORE Master Funding II, LLC, STORE Master Funding III, LLC, STORE Master Funding IV, LLC, STORE Master Funding V, LLC and STORE Master Funding VI, LLC, each a Delaware limited liability company, collectively as issuers, and Citibank, N.A., as indenture trustee, relating to Net-Lease Mortgage Notes (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 16, 2015 and filed with the Securities and Exchange Commission on April 20, 2015 (Commission File No. 001-36739)).

4.2

 

Series 2015-1 Indenture Supplement dated as of April 16, 2015, among STORE Master Funding I, LLC, STORE Master Funding II, LLC, STORE Master Funding III, LLC, STORE Master Funding IV, LLC, STORE Master Funding V, LLC and STORE Master Funding VI, LLC, each a Delaware limited liability company, and Citibank, N.A., as indenture trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated April 16, 2015 and filed with the Securities and Exchange Commission on April 20, 2015 (Commission File No. 001-36739)).

10.1

 

Fourth Amended and Restated Property Management and Servicing Agreement dated as of April 16, 2015, among STORE Master Funding I, LLC, STORE Master Funding II, LLC, STORE Master Funding III, LLC, STORE Mastering Funding IV, LLC, STORE Master Funding V, LLC and STORE Master Funding VI, LLC, each a Delaware limited liability company, collectively as issuers, STORE Capital Corporation, a Maryland corporation, as property manager and special servicer, and Midland Loan Services, Inc., a Delaware corporation, as back-up manager and Citibank, N.A., as indenture trustee (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 16, 2015 and filed with the Securities and Exchange Commission on April 20, 2015 (Commission File No. 001-36739)).

10.2

 

First Amendment to the Fourth Amended and Restated Property Management and Servicing Agreement effective as of July 10, 2015.

31.1

 

Rule 13a-14(a) Certification of the Chief Executive Officer.

31.2

 

Rule 13a-14(a) Certification of the Chief Financial Officer.

32.1

 

Section 1350 Certification of the Chief Executive Officer.

32.2

 

Section 1350 Certification of the Chief Financial Officer.

99.1

 

Bridge Loan Credit Agreement dated as of April 8, 2015 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated April 8, 2015 and filed with the Securities and Exchange Commission on April 13, 2015 (Commission File No. 001-36739)).

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Definition Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

41