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EX-31.1 - EX-31.1 - STORE CAPITAL Corpstor-20160331ex3116eb3a0.htm
EX-31.2 - EX-31.2 - STORE CAPITAL Corpstor-20160331ex312831166.htm
EX-32.1 - EX-32.1 - STORE CAPITAL Corpstor-20160331ex3212f57ae.htm
EX-32.2 - EX-32.2 - STORE CAPITAL Corpstor-20160331ex322d19b16.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

 

 

 

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

 

For the quarterly period ended March 31, 2016

 

OR

 

 

 

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

 

For the transition period from                      to                     .  

Commission File No. 001-36739  

 

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Maryland

 

45-2280254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(Address of principal executive offices) (Zip Code)

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

 

 

 

 

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

 

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

 

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

 

 

 

 

 

Large Accelerated Filer 

 

 

Accelerated Filer 

 

 

 

 

Non-accelerated Filer 

 

 

Smaller Reporting Company 

(Do not check if a smaller reporting company)

 

 

 

 

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

 

As of May 5, 2016, there were 140,879,806 shares of the registrant’s $0.01 par value common stock outstanding.

 

 

 


 

TABLE OF CONTENTS

 

Part I. - FINANCIAL INFORMATION 

Page

Item 1.     Financial Statements 

3

Condensed Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015 

3

Condensed Consolidated Statements of Income for the three months ended March 31, 2016 and 2015 (unaudited) 

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (unaudited) 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited) 

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

7

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 

38

Part II. - OTHER INFORMATION 

 

Item 1.     Legal Proceedings 

39 

Item 1A.  Risk Factors 

39 

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

39 

Item 3.     Defaults Upon Senior Securities 

39 

Item 4.     Mine Safety Disclosures 

39 

Item 5.     Other Information 

39 

Item 6.     Exhibits 

39 

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)

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

1,276,762

 

$

1,187,482

 

Buildings and improvements

 

 

2,666,134

 

 

2,490,394

 

Intangible lease assets

 

 

92,063

 

 

88,724

 

Total real estate investments

 

 

4,034,959

 

 

3,766,600

 

Less accumulated depreciation and amortization

 

 

(210,626)

 

 

(184,182)

 

 

 

 

3,824,333

 

 

3,582,418

 

Real estate investments held for sale, net

 

 

2,274

 

 

 —

 

Loans and direct financing receivables

 

 

225,710

 

 

213,342

 

Net investments

 

 

4,052,317

 

 

3,795,760

 

Cash and cash equivalents

 

 

30,956

 

 

67,115

 

Other assets

 

 

52,090

 

 

48,513

 

Total assets

 

$

4,135,363

 

$

3,911,388

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

242,000

 

$

 —

 

Unsecured term notes payable, net

 

 

172,527

 

 

172,442

 

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

 

 

1,593,612

 

 

1,597,505

 

Dividends payable

 

 

38,037

 

 

38,032

 

Accounts payable and accrued expenses

 

 

34,482

 

 

36,196

 

Other liabilities

 

 

8,356

 

 

7,420

 

Total liabilities

 

 

2,089,014

 

 

1,851,595

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 140,879,389 and 140,858,765 shares issued and outstanding, respectively

 

 

1,409

 

 

1,409

 

Capital in excess of par value

 

 

2,162,788

 

 

2,162,130

 

Distributions in excess of retained earnings

 

 

(117,366)

 

 

(103,453)

 

Accumulated other comprehensive loss

 

 

(482)

 

 

(293)

 

Total stockholders’ equity

 

 

2,046,349

 

 

2,059,793

 

Total liabilities and stockholders’ equity

 

$

4,135,363

 

$

3,911,388

 

 

See accompanying notes.

3


 

STORE Capital Corporation

Condensed Consolidated Statements of Income

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

Revenues:

 

 

    

    

 

    

 

Rental revenues

 

$

80,767

 

$

58,838

 

Interest income on loans and direct financing receivables

 

 

4,415

 

 

2,598

 

Other income

 

 

52

 

 

23

 

Total revenues

 

 

85,234

 

 

61,459

 

Expenses:

 

 

 

 

 

 

 

Interest

 

 

23,435

 

 

17,229

 

Transaction costs

 

 

234

 

 

259

 

Property costs

 

 

486

 

 

295

 

General and administrative

 

 

8,591

 

 

6,635

 

Selling stockholder costs

 

 

800

 

 

 —

 

Depreciation and amortization

 

 

26,479

 

 

18,892

 

Provision for impairment of real estate

 

 

 —

 

 

1,000

 

Total expenses

 

 

60,025

 

 

44,310

 

Income from operations before income taxes

 

 

25,209

 

 

17,149

 

Income tax expense

 

 

69

 

 

83

 

Income before loss on disposition of real estate

 

 

25,140

 

 

17,066

 

Loss on disposition of real estate

 

 

347

 

 

 —

 

Net income

 

$

24,793

 

$

17,066

 

 

 

 

 

 

 

 

 

Net income per share of common stock—basic and diluted

 

$

0.18

 

$

0.15

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

140,354,143

 

 

114,633,300

 

Diluted

 

 

140,564,379

 

 

114,633,300

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.27

 

$

0.25

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2016

 

2015

 

Net income

    

    

$

24,793

    

$

17,066

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Change in unrealized losses on cash flow hedges

 

 

 

(253)

 

 

(228)

 

Cash flow hedge losses reclassified to interest expense

 

 

 

64

 

 

77

 

Total other comprehensive loss

 

 

 

(189)

 

 

(151)

 

Total comprehensive income

 

 

$

24,604

 

$

16,915

 

 

See accompanying notes.

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

Operating activities

    

 

    

    

 

    

 

Net income

 

$

24,793

 

$

17,066

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,479

 

 

18,892

 

Provision for impairment of real estate

 

 

 —

 

 

1,000

 

Amortization of deferred financing costs and other noncash interest expense

 

 

1,696

 

 

1,397

 

Amortization of equity-based compensation

 

 

1,661

 

 

897

 

Loss on disposition of real estate

 

 

347

 

 

 —

 

Noncash revenue and other

 

 

166

 

 

333

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(2,249)

 

 

(279)

 

Accounts payable and other liabilities

 

 

(587)

 

 

(3,233)

 

Net cash provided by operating activities

 

 

52,306

 

 

36,073

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(273,393)

 

 

(264,245)

 

Investment in loans and direct financing receivables

 

 

(12,550)

 

 

(34,683)

 

Collections of principal on loans and direct financing receivables

 

 

164

 

 

175

 

Proceeds from dispositions of real estate

 

 

665

 

 

48

 

Transfers from restricted deposits

 

 

154

 

 

12,996

 

Net cash used in investing activities

 

 

(284,960)

 

 

(285,709)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

242,000

 

 

172,000

 

Repayments under credit facility

 

 

 —

 

 

(10,000)

 

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

 

 

(5,309)

 

 

(4,782)

 

Financing costs paid

 

 

(12)

 

 

(8)

 

Proceeds from the issuance of common stock

 

 

1

 

 

1

 

Offering costs paid

 

 

(434)

 

 

(441)

 

Shares repurchased under stock compensation plans

 

 

(1,719)

 

 

 —

 

Dividends paid

 

 

(38,032)

 

 

(13,123)

 

Net cash provided by financing activities

 

 

196,495

 

 

143,647

 

Net decrease in cash and cash equivalents

 

 

(36,159)

 

 

(105,989)

 

Cash and cash equivalents, beginning of period

 

 

67,115

 

 

136,313

 

Cash and cash equivalents, end of period

 

$

30,956

 

$

30,324

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Accrued tenant improvement advances included in real estate investments

 

$

10,726

 

$

 —

 

Accrued financing costs

 

 

 —

 

 

494

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

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

 

$

19,156

 

$

15,358

 

Cash paid during the period for income and franchise taxes

 

 

479

 

 

483

 

See accompanying notes.

 

6


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

March 31, 2016

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; the voting interests of STORE Holding are entirely owned by entities managed by a global management investment firm.  At March 31, 2016 and December 31, 2015, there were 140,879,389 shares and 140,858,765 shares, respectively, of the Company’s common stock outstanding, of which 33,336,144 shares and 70,336,144 shares, respectively, were held by STORE Holding.  On April 1, 2016, STORE Holding completed a public offering of all its remaining shares and no longer holds any shares of the Company’s common stock.

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, 2015.

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.

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

7


 

of the special purpose entity. At March 31, 2016 and December 31, 2015, assets totaling $3.6 billion and $3.4 billion, respectively, were held and third-party liabilities totaling $1.6 billion were owed by these special purpose entities and are included in the accompanying consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.

Segment Reporting

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

Accounting for Real Estate Investments

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

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

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

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

Impairment

STORE Capital reviews its real estate investments and related lease intangibles periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. Management considers factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors including bona fide

8


 

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 $10.7 million and $9.5 million of accrued straight‑line rental revenue, net of allowances of $3.8 million and $3.4 million, at March 31, 2016 and December 31, 2015, respectively, which were included in other assets on the consolidated balance sheets.  Leases that have contingent rent escalators indexed to future increases in the Consumer Price Index (CPI) may adjust over a one‑year period or over multiple‑year periods. Generally, these escalators increase rent at the lesser of (a) 1 to 1.25 times the increase in the CPI over a specified period or (b) a fixed percentage. Because of the volatility and uncertainty with respect to future changes in the CPI, the Company’s inability to determine the extent to which any specific future change in the CPI is probable at each rent adjustment date during the entire term of these leases and the Company’s view that the multiplier does not represent a significant leverage factor, increases in rental revenue from leases with this type of escalator are recognized only after the changes in the rental rates have actually occurred.

For leases that have contingent rentals that are based on a percentage of the tenant’s gross sales, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached. Less than 1.3% 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.

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

9


 

term of the related loan receivable using the effective interest method. A loan receivable is placed on nonaccrual status when the loan has become 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received. As of March 31, 2016 and December 31, 2015, there were no loans on nonaccrual status.

Impairment and Provision for Loan Losses

The Company periodically evaluates the collectibility of its loans receivable, including accrued interest, by analyzing the underlying property‑level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. There was no allowance for loan losses at March 31, 2016 or December 31, 2015.

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 $16.5 million and $16.3 million of restricted cash and deposits in escrow at March 31, 2016 and December 31, 2015, respectively, which were included in other assets on the consolidated balance sheets.  Restricted cash primarily consists of reserve account deposits held by lenders.

Deferred Costs

Financing costs related to the issuance of the Company’s long-term debt are deferred and amortized as an increase to interest expense over the term of the related debt instrument using the effective interest method and are reported as a reduction of the related debt balance on the consolidated balance sheets. Deferred financing costs related to the establishment of the Company's credit facility are deferred and amortized to interest expense over the term of the credit facility and are included in other assets on the consolidated balance sheets.

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 March 31, 2016, the Company had entered into two interest rate swap agreements with current notional amounts of $12.3 million and $6.4 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 three months ended March 31, 2016, the Company granted restricted share awards (RSAs) representing 89,121 shares of restricted common stock to its executive officers and certain directors and other employees.  During the same period, 212,967 shares of restricted stock vested.  In connection with the vesting of the RSAs, the Company repurchased 68,497 shares as a result of participant elections to surrender common shares to the Company to satisfy statutory minimum tax withholding obligations under the Company’s equity-based compensation plans. As of March 31, 2016, the Company had 453,805 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.

During the three months ended March 31, 2016, the Company awarded 371,214 restricted stock units (RSUs) to its executive officers.  At March 31, 2016, there were 719,434 RSUs outstanding.  The Company values the restricted stock units, which contain both a market condition and a service condition, awarded to its executive officers using a Monte Carlo simulation model on the date of grant and recognizes that amount in general and administrative expense on a tranche by tranche basis ratably over the vesting periods.

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. Certain state tax returns filed for 2011 and tax returns filed for 2012 through 2015 are subject to examination by these jurisdictions. As of March 31, 2016 and December 31, 2015, management concluded that there is no tax liability relating to uncertain income tax positions. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as operating expenses. There was no accrual for interest or penalties at March 31, 2016 or December 31, 2015.

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 shares, which contain rights to receive non‑forfeitable dividends, as participating securities requiring the two‑class method of computing net income per common share. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted income per common share (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2016

 

2015

 

Numerator:

    

    

 

    

    

 

    

 

Net income

 

 

$

24,793

 

$

17,066

 

Less: earnings attributable to unvested restricted shares

 

 

 

(123)

 

 

(143)

 

Net income used in basic and diluted income per share

 

 

$

24,670

 

$

16,923

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

140,867,222

 

 

115,215,833

 

Less: Weighted average number of shares of unvested restricted stock

 

 

 

(513,079)

 

 

(582,533)

 

Weighted average shares outstanding used in basic income per share

 

 

 

140,354,143

 

 

114,633,300

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

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

 

 

 

210,236

 

 

 

Weighted average shares outstanding used in diluted income per share

 

 

 

140,564,379

 

 

114,633,300

 


(a)

For the three months ended March 31, 2016 and 2015, excludes 201,561 shares and 199,528 shares, respectively, related to unvested restricted shares as the effect would have been antidilutive.

Recent Accounting Pronouncements

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

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which is intended to simplify the accounting for and presentation of certain aspects related to share-based payments to employees. The guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance will be effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company does not anticipate this standard to have a material impact on its financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This new guidance clarifies that the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship, provided that all other hedge criteria continue to be met.  This standard will be effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company does not anticipate this standard to have a material impact on its financial position, results of operations and cash flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases: Topic 842. The new standard requires lessees to classify leases as either finance or operating leases based on certain criteria and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  The new standard requires

13


 

lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard also eliminates current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. The guidance supersedes previously issued guidance under ASC Topic 840 Leases. This standard will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating this new standard but does not expect it to have a material impact on its financial position, results of operations and cash flows.

 

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers: Topic 606. This guidance establishes a principles‑based approach for accounting for revenue from contracts with customers. Lease contracts generally are excluded from the scope of this guidance. During 2015 various amendments were made and this standard will be effective for annual reporting periods beginning after December 15, 2017, 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.

3. Investments

At March 31, 2016, STORE Capital had investments in 1,397 property locations representing 1,360 owned properties (of which 28 are accounted for as direct financing receivables), 14 ground lease interests and 23 properties which secure certain mortgage loans. The gross investment portfolio totaled $4.26 billion at March 31, 2016 and consisted of the gross acquisition cost of the real estate investments totaling $4.04 billion and loans and direct financing receivables with an aggregate carrying amount of $225.7 million. As of March 31, 2016, more than half of these investments are assets of consolidated special purpose entity subsidiaries and are pledged as collateral under the non‑recourse obligations of these special purpose entities (Note 4).

During the three months ended March 31, 2016, 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, 2015

 

1,325

 

$

3,979,942

 

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

 

65

 

 

271,981

 

Investment in loans and direct financing receivables

 

8

 

 

12,550

 

Sales of real estate

 

(1)

 

 

(1,112)

 

Principal collections on loans and direct financing receivables

 

 —

 

 

(164)

 

Other

 

 —

 

 

(18)

 

Gross investments, March 31, 2016 (d)

 

 

 

 

4,263,179

 

Less accumulated depreciation and amortization (d)

 

 

 

 

(210,862)

 

Net investments, March 31, 2016

 

1,397

 

$

4,052,317

 


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

(c)

Excludes $12.1 million of tenant improvement advances disbursed in 2016 which were accrued as of December 31, 2015.

(d)

Includes the dollar amount of investments ($2.5 million) and the accumulated depreciation ($0.3 million) related to real estate held for sale as of March 31, 2016.

14


 

The following table shows information regarding the diversification of the Company’s total investment portfolio among the different industries in which its tenants and borrowers operate as of March 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Investments

 

Restaurants

 

652

 

$

1,035,956

 

24

%  

Industrial

 

103

 

 

539,966

 

13

 

Movie theaters

 

37

 

 

324,491

 

8

 

Health clubs

 

53

 

 

290,381

 

7

 

Early childhood education centers

 

137

 

 

266,229

 

6

 

Furniture stores

 

27

 

 

175,690

 

4

 

Sporting goods and hobby stores

 

16

 

 

131,585

 

3

 

Lawn and garden equipment and supply stores

 

18

 

 

123,724

 

3

 

All other service industries

 

285

 

 

1,086,476

 

25

 

All other retail industries

 

69

 

 

288,681

 

7

 

 

 

1,397

 

$

4,263,179

 

100

%  


(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.

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to over 320 customers geographically dispersed throughout 47 states. Only one state, Texas (12%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at March 31, 2016. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at March 31, 2016, 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 March 31, 2016. The Company’s customers operate their businesses across more than 340 concepts and the largest of these concepts represented 3% of the Company’s annualized investment portfolio revenues as of March 31, 2016.

Intangible Lease Assets

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

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

In-place lease assets

 

$

61,742

 

$

58,403

 

Ground lease interest assets

 

 

20,048

 

 

20,048

 

Above-market lease assets

 

 

10,273

 

 

10,273

 

Total intangible lease assets

 

 

92,063

 

 

88,724

 

Accumulated amortization

 

 

(13,909)

 

 

(12,038)

 

Net intangible lease assets

 

$

78,154

 

$

76,686

 

15


 

Aggregate lease intangible amortization included in expense was $1.6 million and $1.4 million during the three months ended March 31, 2016 and 2015, 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 March 31, 2016 and 2015, respectively.

Based on the balance of the intangible assets at March 31, 2016, the aggregate amortization expense is expected to be $4.8 million for the remainder of 2016, $6.3 million in 2017, $6.1 million in 2018, $5.9 million in 2019, $5.3 million in 2020 and $5.0 million in 2021 and the amount expected to be amortized as a decrease to rental revenue is expected to be $0.9 million for the remainder of 2016, $1.2 million in each of the years 2017 through 2020 and $0.6 million in 2021.The weighted average remaining amortization period is approximately ten years for the in‑place lease intangibles, approximately 47 years for the amortizing ground lease interests and approximately eight years for the above‑market lease intangibles.

Real Estate Investments

The Company’s investment properties are leased to tenants under long‑term operating leases that typically include one or more renewal options. The weighted average remaining noncancelable lease term at March 31, 2016 was approximately 14 years. Substantially all of the leases are triple‑net, which provide that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance; therefore, STORE Capital is generally not responsible for repairs or other capital expenditures related to the properties. At March 31, 2016, two 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 March 31, 2016, are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2016

 

$

251,717

 

2017

 

 

335,883

 

2018

 

 

336,070

 

2019

 

 

336,209

 

2020

 

 

334,551

 

2021

 

 

332,762

 

Thereafter

 

 

2,974,308

 

Total future minimum rentals

 

$

4,901,500

 

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

Loans and Direct Financing Receivables

At March 31, 2016, the Company held 21 loans receivable with an aggregate carrying amount of $113.9 million. Sixteen of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. The five other loans are primarily loans secured by the tenant’s equipment or other assets.  Four of the mortgage loans are shorter‑term loans (mature within the next five years) that require either monthly interest‑only payments with a balloon payment at maturity or monthly interest-only payments for an established period and then monthly principal and interest 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 or earlier upon the occurrence of certain other events. The other loans generally require the borrower to make monthly interest‑only payments with a balloon payment at maturity.

16


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

 

    

 

 

 

 

 

Stated

 

 

 

Amount Outstanding

 

 

 

Interest

 

Maturity

 

March 31,

 

December 31,

 

Type

 

Rate

 

Date

 

2016

 

2015

 

Mortgage loan receivable

 

9.09

%  

Jan. 2017

 

$

2,781

 

$

2,781

 

Mortgage loan receivable

 

10.00

%  

Dec. 2017

 

 

1,000

 

 

1,000

 

Mortgage loan receivable

 

8.50

%  

Jan. 2018

 

 

134

 

 

134

 

Mortgage loan receivable

 

7.80

%  

Dec. 2020

 

 

2,000

 

 

2,000

 

Mortgage loan receivable

 

8.35

%  

Jan. 2028

 

 

3,757

 

 

3,761

 

Mortgage loan receivable

 

8.75

%  

Jul. 2032

 

 

23,876

 

 

23,900

 

Mortgage loan receivable (a)

 

7.88

%  

Jul. 2032

 

 

2,146

 

 

 —

 

Mortgage loan receivable (a)

 

7.94

%  

Jul. 2032

 

 

4,920

 

 

 —

 

Mortgage loan receivable

 

8.73

%  

Feb. 2038

 

 

2,418

 

 

 —

 

Mortgage loan receivable

 

9.00

%  

Mar. 2053

 

 

14,530

 

 

14,543

 

Mortgage loan receivable

 

8.75

%  

Jun. 2053

 

 

6,330

 

 

6,336

 

Mortgage loan receivable

 

8.50

%  

Jun. 2053

 

 

6,731

 

 

6,737

 

Mortgage loan receivable

 

8.25

%  

Aug. 2053

 

 

3,322

 

 

3,325

 

Mortgage loans receivable (b)

 

8.50

%  

Feb. 2055

 

 

28,412

 

 

28,435

 

Mortgage loan receivable (a)

 

7.50

%  

Dec. 2055

 

 

3,084

 

 

3,086

 

Total mortgage loans receivable

 

 

 

 

 

 

105,441

 

 

96,038

 

Equipment loan receivable

 

7.75

%  

Mar. 2017

 

 

3,063

 

 

3,063

 

Equipment loan receivable

 

8.75

%  

May 2022

 

 

642

 

 

642

 

Equipment loan receivable

 

7.00

%  

Aug. 2023

 

 

238

 

 

244

 

Other loan receivable

 

9.00

%  

Nov. 2020

 

 

250

 

 

250

 

Other loan receivable

 

10.00

%  

Feb. 2021

 

 

3,000

 

 

 —

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

112,634

 

 

100,237

 

Unamortized loan origination costs

 

 

 

 

 

 

1,239

 

 

1,190

 

Direct financing receivables

 

 

 

 

 

 

111,837

 

 

111,915

 

Total loans and direct financing receivables

 

 

 

 

 

$

225,710

 

$

213,342

 


(a)

Interest rates on these mortgage loans are subject to increases over the term of the loans.

(b)

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 2016

 

$

316

 

$

 —

 

$

316

 

2017

 

 

534

 

 

6,843

 

 

7,377

 

2018

 

 

1,073

 

 

134

 

 

1,207

 

2019

 

 

1,300

 

 

 —

 

 

1,300

 

2020

 

 

1,413

 

 

1,901

 

 

3,314

 

2021

 

 

937

 

 

1,381

 

 

2,318

 

Thereafter

 

 

66,685

 

 

30,117

 

 

96,802

 

Total principal payments

 

$

72,258

 

$

40,376

 

$

112,634

 

17


 

As of March 31, 2016 and December 31, 2015, the Company had $111.8 million and $111.9 million, respectively, of investments accounted for as direct financing leases; the components of the investments accounted for as direct financing receivables were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

 

2016

 

2015

 

Minimum lease payments receivable

 

$

281,735

    

$

284,287

 

Estimated residual value of leased assets

 

 

13,374

 

 

13,374

 

Unearned income

 

 

(183,272)

 

 

(185,746)

 

Net investment

 

$

111,837

 

$

111,915

 

 

 

 

 

As of March 31, 2016, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $7.8 million for the remainder of 2016 and average approximately $10.7 million for each of the next five years.

 

 

4. Debt

Credit Facilities

As of March 31, 2016, the Company had a $400 million unsecured revolving credit facility with a group of lenders. The facility, which was put in place in September 2014 and amended in September 2015, is used to partially fund real estate acquisitions pending the issuance of long-term, fixed-rate debt and includes an accordion feature that allows the size of the facility to be increased up to $800 million.  In April 2016, the Company increased the total commitment under the facility to $500 million by accessing $100 million of availability under the accordion feature. 

The amended facility matures in September 2019 and includes a one-year extension option subject to certain conditions and the payment of a 0.15% 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) LIBOR plus a credit spread ranging from 1.35% to 2.15%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.35% to 1.15%. The credit spread used is based on the Company’s leverage ratio as defined in the credit agreement; as of March 31, 2016, borrowings under the facility bear interest at LIBOR plus 1.35%. The Company must also pay a non-use fee of 0.15% or 0.25% on the unused portion of the facility, depending upon the amount of borrowings outstanding. Prior to the amendment in September 2015, borrowings under this facility required 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 credit agreement, plus a credit spread ranging from 0.75% to 1.50%.

Borrowing availability under the facility is limited to 50% of the value of the Company’s eligible unencumbered assets at any point in time. At March 31, 2016, the Company had $242 million of borrowings outstanding and a pool of unencumbered assets aggregating approximately $1.82 billion, most of which are eligible unencumbered assets as defined in the credit agreement.

The Company is subject to various financial and nonfinancial covenants under the revolving credit facility including a maximum total leverage ratio of 65%, a minimum EBITDA to fixed charges ratio of 1.5 to 1, minimum consolidated net worth of $1 billion plus 75% of any additional equity raised after September 2015, a maximum dividend payout ratio limited to 95% of Funds from Operations and a maximum unsecured debt leverage ratio of 50%, all as defined in the credit agreement. As of March 31, 2016, the Company was in compliance with these covenants.

At March 31, 2016 and December 31, 2015, unamortized financing costs related to the Company’s credit facility totaled $2.9 million and $3.2 million, respectively.

18


 

Unsecured Term Notes Payable

In November 2015, the Company entered into a Note Purchase Agreement (NPA) with a group of institutional purchasers that provided for the private placement of two series of senior unsecured notes aggregating $175 million (the Notes).  Interest on the Notes is payable semi-annually in arrears in May and November of each year. On each interest payment date, the interest rate on each series of Notes may be increased by 1.0% should the Company’s Applicable Credit Rating (as defined in the NPA) fail to be an investment-grade credit rating; the increased interest rate would remain in effect until the next interest payment date on which the Company obtains an Applicable Credit Rating that is an investment grade credit rating. The Company may prepay at any time all, or from time to time any part of, any series of Notes, in an amount not less than 5% of the aggregate principal amount of any series of Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a Make-Whole Amount (as defined in the NPA).  The Notes are senior unsecured obligations of the Company and are guaranteed by SCA.

The NPA contains a number of financial covenants that are similar to the Company’s unsecured credit facility as summarized above, including the maximum total leverage ratio, the minimum EBITDA to fixed charges ratio and the minimum consolidated net worth amount, as well as a maximum secured debt leverage ratio, a maximum unsecured debt leverage ratio and a minimum interest coverage ratio on unsecured debt.  Subject to the terms of the NPA and the Notes, upon certain events of default, including, but not limited to, (i) a payment default under the Notes, and (ii) a default in the payment of certain other indebtedness by the Company or its subsidiaries, all amounts outstanding under the Notes will become due and payable at the option of the purchasers. As of March 31, 2016, the Company was in compliance with its covenants under the NPA. 

On April 28, 2016, the Company entered into another note purchase agreement for the private placement of $200 million of 4.73% Senior Notes, Series C due April 2026.  Payment terms and financial covenants applicable to these additional notes are equivalent to those in the NPA noted above.

In addition, in April 2016, the Company entered into a $100 million floating-rate, unsecured five-year term loan with the same group of lenders participating in its unsecured revolving credit facility.  Concurrent with the closing of this loan, the Company entered into interest rate swaps that effectively convert the floating rate to a fixed rate, which was approximately 2.7% at closing, for the term of the loan.  The financial covenants of the unsecured term loan match the covenants of the unsecured revolving credit facility.

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 March 31, 2016.

The Class A notes require monthly principal and interest payments with a balloon payment due at maturity and these notes may be prepaid at any time, subject to a yield maintenance prepayment premium. As of March 31, 2016, 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 $2.1 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 $328.3 million at March 31, 2016.

The mortgage notes payable, which are obligations of the consolidated special purpose entities as described in Note 2, contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Although this mortgage debt generally is non‑recourse, there are customary limited exceptions to recourse for matters such as fraud, misrepresentation, gross negligence or willful misconduct, misapplication of payments, bankruptcy and environmental liabilities. Certain of the mortgage notes payable also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the Company or one of its tenants. As of March 31, 2016, the Company had one variable-rate mortgage note (outstanding principal balance of $18.7 million) which had effectively been converted to a fixed-rate note through the use of two interest rate swaps. The Company has an agreement with the counterparty to the interest rate swaps which contains a provision that, if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its interest rate swap obligations. As of March 31, 2016, the termination value of the Company’s interest rate swaps was a liability of approximately $0.5 million.

20


 

The Company’s long-term debt obligations are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coupon

 

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

 

March 31,

 

December 31,

 

 

 

Date

 

Rate

 

 

2016

 

2015

 

Unsecured term notes payable:

 

 

 

 

 

 

 

 

 

 

 

 

$75,000 Series A

 

Nov. 2022

 

4.95

%  

 

$

75,000

 

$

75,000

 

$100,000 Series B

 

Nov. 2024

 

5.24

%  

 

 

100,000

 

 

100,000

 

Total unsecured term notes

 

 

 

 

 

 

 

175,000

 

 

175,000

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

 

    

    

 

    

 

$214,500 Series 2012-1, Class A

 

Aug. 2019

 

5.77

%  

 

 

203,369

 

 

204,218

 

$150,000 Series 2013-1, Class A-1

 

Mar. 2020

 

4.16

%  

 

 

142,714

 

 

143,361

 

$107,000 Series 2013-2, Class A-1

 

Jul. 2020

 

4.37

%  

 

 

102,609

 

 

103,046

 

$77,000 Series 2013-3, Class A-1

 

Nov. 2020

 

4.24

%  

 

 

74,258

 

 

74,568

 

$120,000 Series 2014-1, Class A-1

 

Apr. 2021

 

4.21

%  

 

 

118,900

 

 

119,050

 

$95,000 Series 2015-1, Class A-1

 

Apr. 2022

 

3.75

%  

 

 

94,565

 

 

94,683

 

$102,000 Series 2013-1, Class A-2

 

Mar. 2023

 

4.65

%  

 

 

97,045

 

 

97,486

 

$97,000 Series 2013-2, Class A-2

 

Jul. 2023

 

5.33

%  

 

 

93,019

 

 

93,415

 

$100,000 Series 2013-3, Class A-2

 

Nov. 2023

 

5.21

%  

 

 

96,439

 

 

96,841

 

$140,000 Series 2014-1, Class A-2

 

Apr. 2024

 

5.00

%  

 

 

138,717

 

 

138,892

 

$270,000 Series 2015-1, Class A-2

 

Apr. 2025

 

4.17

%  

 

 

268,763

 

 

269,100

 

Total non-recourse net-lease mortgage notes

 

 

 

 

 

 

 

1,430,398

 

 

1,434,660

 

Non-recourse mortgage notes payable:

 

 

 

 

 

 

 

 

 

 

 

 

$4,000 note issued August 2006 (a)

 

Sept. 2016

 

6.33

% (a)

 

 

3,189

 

 

3,208

 

$3,800 note issued September 2006 (b)

 

Oct. 2016

 

6.47

% (b)

 

 

3,439

 

 

3,454

 

$7,088 note issued April 2007 (c)

 

May 2017

 

6.00

% (c)

 

 

6,541

 

 

6,569

 

$4,400 note issued August 2007 (d)

 

Sept. 2017

 

6.7665

% (d)

 

 

3,672

 

 

3,700

 

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

 

Jan. 2018

 

4.778

%  

 

 

7,172

 

 

7,242

 

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

 

Jan. 2019

 

5.275

% (e)

 

 

18,730

 

 

18,851

 

$6,500 note issued December 2012

 

Dec. 2019

 

4.806

%  

 

 

6,018

 

 

6,057

 

$2,956 note issued June 2013

 

Jun. 2020

 

3.441

% (f)

 

 

2,731

 

 

2,744

 

$16,100 note issued February 2014

 

Mar. 2021

 

4.83

%  

 

 

15,427

 

 

15,516

 

$13,000 note issued May 2012

 

May 2022

 

5.195

%  

 

 

11,964

 

 

12,038

 

$14,950 note issued July 2012

 

Aug. 2022

 

4.95

%  

 

 

13,415

 

 

13,507

 

$26,000 note issued August 2012

 

Sept. 2022

 

5.05

%  

 

 

24,079

 

 

24,229

 

$6,400 note issued November 2012

 

Dec. 2022

 

4.707

%  

 

 

5,942

 

 

5,980

 

$11,895 note issued March 2013

 

Apr. 2023

 

4.7315

%  

 

 

11,141

 

 

11,210

 

$17,500 note issued August 2013

 

Sept. 2023

 

5.46

%  

 

 

16,654

 

 

16,744

 

$10,075 note issued March 2014

 

Apr. 2024

 

5.10

%  

 

 

9,803

 

 

9,841

 

$21,125 note issued July 2015

 

Aug. 2025

 

4.36

%

 

 

21,125

 

 

21,125

 

$7,750 note issued February 2013

 

Mar. 2038

 

4.81

% (g)

 

 

7,250

 

 

7,295

 

$6,944 notes issued March 2013

 

Apr. 2038

 

4.50

% (h)

 

 

6,475

 

 

6,504

 

Total non-recourse mortgage notes payable

 

 

 

 

 

 

 

194,767

 

 

195,814

 

Total non-recourse debt obligations of consolidated special purpose entities

 

 

 

 

 

 

 

1,625,165

 

 

1,630,474

 

Total long-term debt obligations

 

 

 

 

 

 

 

1,800,165

 

 

1,805,474

 

Unamortized net (discount) premium

 

 

 

 

 

 

 

(47)

 

 

27

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

(33,979)

 

 

(35,554)

 

Total long-term debt obligations, net

 

 

 

 

 

 

$

1,766,139

 

$

1,769,947

 


(a)

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

(b)

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

(c)

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

(d)

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

(e)

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 $12.3 million portion and a $6.4 million portion of this mortgage note payable to fixed rates of 5.299% and 5.230%, respectively.