Attached files

file filename
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