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EX-31.2 - EX-31.2 - STORE CAPITAL Corpstor-20170331ex3128e299d.htm
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EX-31.1 - EX-31.1 - STORE CAPITAL Corpstor-20170331ex311a1b4ce.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, 2017

 

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.)

 

8377 East Hartford Drive, Suite 100, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)

 

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

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 4, 2017, there were 171,374,944 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, 2017 (unaudited) and December 31, 2016 

3

Condensed Consolidated Statements of Income for the three months ended March 31, 2017
and 2016 (unaudited)
 

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended
March 31, 2017 and 2016 (unaudited)
 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017
and 2016 (unaudited)
 

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

7

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

25

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

40

Item 4.     Controls and Procedures 

40

Part II. - OTHER INFORMATION 

41

Item 1.     Legal Proceedings 

41

Item 1A.  Risk Factors 

41

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

41

Item 3.     Defaults Upon Senior Securities 

41

Item 4.     Mine Safety Disclosures 

41

Item 5.     Other Information 

41

Item 6.     Exhibits 

42

Signatures 

42

Exhibit Index 

43

2

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,

 

 

 

2017

 

2016

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

1,632,788

 

$

1,536,178

 

Buildings and improvements

 

 

3,522,747

 

 

3,226,791

 

Intangible lease assets

 

 

92,397

 

 

92,337

 

Total real estate investments

 

 

5,247,932

 

 

4,855,306

 

Less accumulated depreciation and amortization

 

 

(333,043)

 

 

(298,984)

 

 

 

 

4,914,889

 

 

4,556,322

 

Loans and direct financing receivables

 

 

262,584

 

 

269,210

 

Net investments

 

 

5,177,473

 

 

4,825,532

 

Cash and cash equivalents

 

 

103,301

 

 

54,200

 

Other assets, net

 

 

91,455

 

 

61,936

 

Total assets

 

$

5,372,229

 

$

4,941,668

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

 —

 

$

48,000

 

Unsecured notes and term loans payable, net

 

 

569,938

 

 

470,190

 

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

 

 

1,958,426

 

 

1,833,481

 

Dividends payable

 

 

49,700

 

 

46,209

 

Accounts payable, accrued expenses and other liabilities

 

 

57,186

 

 

60,533

 

Total liabilities

 

 

2,635,250

 

 

2,458,413

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 171,378,139 and 159,341,955 shares issued and outstanding, respectively

 

 

1,714

 

 

1,593

 

Capital in excess of par value

 

 

2,903,774

 

 

2,631,845

 

Distributions in excess of retained earnings

 

 

(170,314)

 

 

(151,592)

 

Accumulated other comprehensive income

 

 

1,805

 

 

1,409

 

Total stockholders’ equity

 

 

2,736,979

 

 

2,483,255

 

Total liabilities and stockholders’ equity

 

$

5,372,229

 

$

4,941,668

 

 

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,

 

 

 

2017

 

2016

 

Revenues:

 

 

    

    

 

    

 

Rental revenues

 

$

101,905

 

$

80,767

 

Interest income on loans and direct financing receivables

 

 

5,780

 

 

4,415

 

Other income

 

 

286

 

 

52

 

Total revenues

 

 

107,971

 

 

85,234

 

Expenses:

 

 

 

 

 

 

 

Interest

 

 

29,640

 

 

23,435

 

Transaction costs

 

 

 —

 

 

234

 

Property costs

 

 

806

 

 

486

 

General and administrative

 

 

10,243

 

 

8,591

 

Selling stockholder costs

 

 

 —

 

 

800

 

Depreciation and amortization

 

 

35,215

 

 

26,479

 

Provision for impairment of real estate

 

 

4,270

 

 

 —

 

Total expenses

 

 

80,174

 

 

60,025

 

Income from operations before income taxes

 

 

27,797

 

 

25,209

 

Income tax expense

 

 

106

 

 

69

 

Income before gain (loss) on dispositions of real estate

 

 

27,691

 

 

25,140

 

Gain (loss) on dispositions of real estate

 

 

3,699

 

 

(347)

 

Net income

 

$

31,390

 

$

24,793

 

 

 

 

 

 

 

 

 

Net income per share of common stock—basic and diluted

 

$

0.19

 

$

0.18

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

160,810,455

 

 

140,354,143

 

Diluted

 

 

160,810,455

 

 

140,564,379

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.29

 

$

0.27

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Net income

    

$

31,390

    

$

24,793

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedges

 

 

205

 

 

(253)

 

Cash flow hedge losses reclassified to interest expense

 

 

191

 

 

64

 

Total other comprehensive income (loss)

 

 

396

 

 

(189)

 

Total comprehensive income

 

$

31,786

 

$

24,604

 

 

See accompanying notes.

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

Operating activities

 

 

    

    

 

    

 

Net income

 

$

31,390

 

$

24,793

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35,215

 

 

26,479

 

Amortization of deferred financing costs and other noncash interest expense

 

 

2,009

 

 

1,696

 

Amortization of equity-based compensation

 

 

1,874

 

 

1,661

 

Provision for impairment of real estate

 

 

4,270

 

 

 —

 

(Gain) loss on dispositions of real estate

 

 

(3,699)

 

 

347

 

Noncash revenue and other

 

 

(711)

 

 

166

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(1,859)

 

 

(1,942)

 

Accounts payable, accrued expenses and other liabilities

 

 

628

 

 

(587)

 

Net cash provided by operating activities

 

 

69,117

 

 

52,613

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(417,165)

 

 

(273,393)

 

Investment in loans and direct financing receivables

 

 

(8,098)

 

 

(12,550)

 

Collections of principal on loans and direct financing receivables

 

 

14,764

 

 

164

 

Proceeds from dispositions of real estate

 

 

18,256

 

 

665

 

Net cash used in investing activities

 

 

(392,243)

 

 

(285,114)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

295,000

 

 

242,000

 

Repayments under credit facility

 

 

(343,000)

 

 

 —

 

Borrowings under unsecured notes and term loans payable

 

 

100,000

 

 

 —

 

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

 

 

134,961

 

 

 —

 

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

 

 

(9,315)

 

 

(5,309)

 

Financing costs paid

 

 

(2,558)

 

 

(12)

 

Proceeds from the issuance of common stock

 

 

281,021

 

 

 1

 

Stock issuance costs paid

 

 

(9,591)

 

 

(434)

 

Shares repurchased under stock compensation plans

 

 

(1,346)

 

 

(1,719)

 

Dividends paid

 

 

(46,209)

 

 

(38,032)

 

Net cash provided by financing activities

 

 

398,963

 

 

196,495

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

75,837

 

 

(36,006)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

73,166

 

 

83,438

 

Cash, cash equivalents and restricted cash, end of period

 

$

149,003

 

$

47,432

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,301

 

 

30,956

 

Restricted cash included in other assets

 

 

45,702

 

 

16,476

 

Total cash, cash equivalents and restricted cash

 

$

149,003

 

 

47,432

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Accrued tenant improvement advances included in real estate investments

 

$

9,350

 

$

10,726

 

Accrued financing costs

 

 

171

 

 

 —

 

Accrued stock issuance costs

 

 

458

 

 

 —

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

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

 

$

22,472

 

$

19,156

 

Cash paid during the period for income and franchise taxes

 

 

749

 

 

479

 

See accompanying notes.

 

6


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

March 31, 2017

1. Organization

STORE Capital Corporation (STORE Capital or the Company) was incorporated under the laws of 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 manufacturing sectors of the United States economy. From time to time, it also provides 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 were entirely owned by entities managed by a global investment management firm.  Subsequent to the Company’s IPO, STORE Holding sold all of its shares through public offerings and, as of April 1, 2016, no longer owned 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, 2016.  

These condensed 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 of the special purpose entity. At March 31, 2017 and December 31, 2016, these special purpose entities held assets

7


 

totaling $4.6 billion and $4.3 billion, respectively, and had third-party liabilities totaling $2.0 billion and $1.9 billion, respectively.  These assets and liabilities are included in the accompanying condensed 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.

 

Reclassifications

 

Certain reclassifications have been made to prior period balances to conform to the current period presentation.  During the quarter ended December 31, 2016, the Company elected to early adopt Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, described below in Recent Accounting Pronouncements. Under this new guidance, transfers to or from restricted cash which have previously been shown in the operating, investing or financing sections of the statement of cash flows are now required to be shown as part of the total change in cash, cash equivalents and restricted cash in the statement of cash flows. As a result of the adoption of ASU 2016-18, amounts previously shown as part of the change in other assets in the operating section and as transfers from or to restricted deposits in the investing section of the statement of cash flows for the three months ended March 31, 2016 have been retrospectively adjusted as follows:

 

 

 

 

 

 

 

 

 

 

 

 

As Previously

 

As Adjusted

 

Effect of

 

 

Reported

 

per ASU 2016-18

 

Change

Three Months Ended March 31, 2016

    

 

    

    

 

    

 

 

    

Operating Activities

 

 

 

 

 

 

 

 

 

Change in operating assets:  Other assets

 

$

(2,249)

 

$

(1,942)

 

$

307

Net cash provided by operating activities

 

 

52,306

 

 

52,613

 

 

307

Investing Activities

 

 

 

 

 

 

 

 

 

Transfers from restricted deposits

 

 

154

 

 

 —

 

 

(154)

Net cash used in investing activities

 

 

(284,960)

 

 

(285,114)

 

 

(154)

Net decrease in cash, cash equivalents and restricted cash

 

 

(36,159)

 

 

(36,006)

 

 

153

Cash, cash equivalents and restricted cash, beginning of period

 

 

67,115

 

 

83,438

 

 

16,323

Cash, cash equivalents and restricted cash, end of period

 

 

30,956

 

 

47,432

 

 

16,476

 

 

 

 

 

 

 

 

 

 

 

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. Intangible assets and liabilities acquired may include the value of existing in-place leases, above-market or below-market lease value of in-place leases and ground lease intangibles, as applicable. 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. Historically, the Company has expensed transaction costs associated with real estate acquisitions accounted for as business combinations in the period incurred. As discussed in Recent Accounting Pronouncements below, the Company adopted

8


 

ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in January 2017 and, as a result, expects that fewer, if any, of its real estate acquisitions will be accounted for as business combinations.

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 purchase offers received from third parties, in making this assessment. These factors are classified as Level 3 inputs within the fair value hierarchy, discussed in Fair Value Measurements below. 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 condensed consolidated statements of income.

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 $16.8 million and $15.0 million of accrued straight‑line rental revenue, net of allowances of $4.3 million and $4.6 million, at March 31, 2017 and December 31, 2016, respectively, which were included in other

9


 

assets, net, on the condensed 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 2.0% 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 when the collectibility of amounts due pursuant to a lease is no longer reasonably assured or if the tenant’s monthly lease payments become more than 60 days past due, whichever is earlier. The Company reviews its accounts receivable 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 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 term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 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, 2017 and December 31, 2016, 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, 2017 or December 31, 2016.

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.

 

10


 

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

 

Restricted cash primarily consists of reserve account deposits held by lenders, including deposits required to be used for future investment in real estate assets, and escrow deposits. The Company had $45.7 million and $19.0 million of restricted cash and deposits in escrow at March 31, 2017 and December 31, 2016, respectively, which were included in other assets, net, on the condensed consolidated balance sheets. 

 

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 condensed 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, net, on the condensed consolidated balance sheets.

 

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 use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements.  To mitigate this risk, the Company enters into derivative financial instruments only with counterparties with high credit ratings and with major financial institutions with which the Company may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations. 

The Company records its derivatives on the balance sheet at fair value. All derivatives subject to a master netting arrangement in accordance with the associated master International Swap and Derivatives Association agreement have been presented on a net basis by counterparty portfolio for purposes of balance sheet presentation and related disclosures.  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, 2017, the Company had one interest rate floor and five interest rate swap agreements in place.  Two of the swaps, with current notional amounts of $12.0 million and $6.2 million, were designated as cash flow hedges associated with the Company’s secured, variable‑rate mortgage note payable due in 2019 (Note 4). One of the interest rate swaps has a notional amount of $100 million and was designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2019 (Note 4).  The remaining two interest rate swaps and related interest rate floor transaction have an aggregate notional amount of $100 million and were designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2021 (Note 4).

 

11


 

Fair Value Measurement

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

·

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

·

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

·

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

 

Share‑based Compensation

Directors and key employees of the Company have been granted long‑term incentive awards, including restricted stock awards (RSAs) and restricted stock unit awards (RSUs) which provide such directors and employees with equity interests as an incentive to remain in the Company’s service and to align their interests with those of the Company’s stockholders.

The Company estimates the fair value of RSAs at the date of grant and recognizes that amount in general and administrative expense on the condensed consolidated statements of income 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, 2017, the Company granted RSAs representing 97,235 shares of restricted common stock to its directors and key employees.  During the same period, RSAs representing 198,685 shares of previously issued restricted stock vested.  In connection with the vesting of the RSAs, the Company repurchased 56,097 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, 2017, the Company had 358,266 shares of restricted common stock outstanding.

The Company values the RSUs (which contain both a market condition and a service condition) using a Monte Carlo simulation model on the date of grant and recognizes that amount in general and administrative expense on the condensed consolidated statements of income on a tranche by tranche basis ratably over the vesting periods. During the three months ended March 31, 2017, the Company awarded 373,719 RSUs to its executive officers.  At March 31, 2017, there were 1,093,153 RSUs outstanding.

Income Taxes

As a REIT, the Company generally will not be subject to federal income tax. It is still subject, however, 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

12


 

“more‑likely‑than‑not” threshold of being sustained by the applicable federal, state or local tax authority. Certain state tax returns filed for 2012 and tax returns filed for 2013 through 2016 are subject to examination by these jurisdictions. As of March 31, 2017 and December 31, 2016, 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 general and administrative expenses. There was no accrual for interest or penalties at March 31, 2017 or December 31, 2016.

 

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,

 

 

 

 

2017

 

2016

 

 

Numerator:

    

 

    

    

 

    

    

 

Net income

 

$

31,390

 

$

24,793

 

 

Less: earnings attributable to unvested restricted shares

 

 

(104)

 

 

(123)

 

 

Net income used in basic and diluted income per share

 

$

31,286

 

$

24,670

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

161,218,781

 

 

140,867,222

 

 

Less: Weighted average number of shares of unvested restricted stock

 

 

(408,326)

 

 

(513,079)

 

 

Weighted average shares outstanding used in basic income per share

 

 

160,810,455

 

 

140,354,143

 

 

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

 

 

160,810,455

 

 

140,564,379

 

 


(a)

For the three months ended March 31, 2017 and 2016, excludes 142,262 shares and 201,561 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, results of operations or cash flows upon adoption.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. This new standard will be effective for the Company on January 1, 2018, with early adoption permitted.  The Company early adopted the provisions of ASU 2017-01 beginning with the quarter ended March 31, 2017.  As a result, transaction costs associated with the acquisition of real estate subject to an in-place lease will generally be included as part of the cost of the asset or assets acquired rather than expensed as incurred, as fewer, if any, real estate acquisitions will be accounted for as a business combination.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. This guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities no longer present transfers between cash and cash

13


 

equivalents and restricted cash within the statement of cash flows. This new guidance is effective for the Company on January 1, 2018, with early adoption permitted.  Upon adoption, the new guidance is required to be adopted retrospectively. The Company early adopted the provisions of ASU 2016-18 beginning with the quarter ended December 31, 2016 and has applied the provisions retrospectively. The adoption of the new guidance did not have a material impact on the Company’s financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  This new standard will be effective for the Company on January 1, 2018, with early adoption permitted. The Company does not anticipate this standard will have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which changes how entities measure credit losses for most financial assets. This guidance requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. This new standard will be effective for the Company on January 1, 2020, with early adoption permitted beginning on January 1, 2019.  The Company continues to evaluate the impact this new standard will have on its consolidated financial statements.

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. The Company adopted the provisions of ASU 2016-09 beginning with the quarter ended March 31, 2017. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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.  The Company adopted the provisions of ASU 2016-05 beginning with the quarter ended March 31, 2017. The adoption of the new guidance did not have an impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to amend the accounting for leases. 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 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. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The accounting applied by a lessor is largely unchanged under ASU 2016-02; however, the standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing standards, certain of these costs are capitalizable and, therefore, this new standard may result in these costs being expensed as incurred after adoption. Additionally, the new leasing and revenue recognition guidance (discussed below) will impact how lessors account for lease executory costs (such as property taxes, common area maintenance and utilities); the Company is currently in the process of evaluating the impact of this change.  Although primarily a lessor, the Company is also a lessee under several ground lease arrangements and under its corporate office lease; while the Company is still in the process of evaluating these leases under the new guidance, it is likely that the Company will be required to recognize a right-of-use asset and a lease liability for the present value of the minimum lease payments. The standard will also require new disclosures within the notes accompanying the consolidated financial statements. This standard will be effective for the Company on January 1, 2019.  The Company has developed a four phase approach to the implementation of the new leasing standard

14


 

and expects to complete the first two phases in 2017. The Company will continue to assess the method of adoption and the overall impact the adoption will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent updates were issued in 2015 and 2016 to clarify the new guidance and to provide for a one-year deferral of the effective date for the standard, which is January 1, 2018 for the Company. ASU 2014-09 allows for full retrospective or modified retrospective methods of adoption. The Company continues to evaluate the available adoption methods and it has not yet selected which transition method it will apply. The new guidance establishes a principles-based approach for accounting for revenue from contracts with customers, with leases generally excluded from the scope of this standard. This new guidance includes changes to the accounting for sales of real estate properties; however, based on the Company’s preliminary analysis, the new standard is not expected to have a material impact on the Company’s recognition of real estate sales and resulting recognition of a gain or loss. In addition, this new standard may impact how the Company accounts for lease executory costs (such as property taxes, common area maintenance and utilities); the Company is currently in the process of evaluating the significance of this change. The Company expects to make additional disclosures that are required upon the adoption of this standard. 

 

3. Investments

 

At March 31, 2017, STORE Capital had investments in 1,750 property locations representing 1,703 owned properties (of which 38 are accounted for as direct financing receivables), 18 ground lease interests and 29 properties which secure mortgage loans. The gross investment portfolio totaled $5.51 billion at March 31, 2017 and consisted of the gross acquisition cost of the real estate investments totaling $5.25 billion and loans and direct financing receivables with an aggregate carrying amount of $262.6 million. As of March 31, 2017, 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, 2017, 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, 2016

 

1,660

 

$

5,124,516

 

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

 

94

 

 

412,635

 

Investment in loans and direct financing receivables

 

 1

 

 

8,098

 

Sales of real estate

 

(5)

 

 

(15,482)

 

Principal collections on loans and direct financing receivables

 

 —

 

 

(14,764)

 

Provision for impairment of real estate

 

 —

 

 

(4,270)

 

Other

 

 —

 

 

(217)

 

Gross investments, March 31, 2017

 

 

 

 

5,510,516

 

Less accumulated depreciation and amortization

 

 

 

 

(333,043)

 

Net investments, March 31, 2017

 

1,750

 

$

5,177,473

 


(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 $0.3 million of interest capitalized to properties under construction.

(c)

Excludes $13.9 million of tenant improvement advances disbursed in 2017 which were accrued as of December 31, 2016.

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to approximately 370 customers geographically dispersed throughout 48 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, 2017. None of the Company’s customers represented more than

15


 

10% of the Company’s real estate investment portfolio at March 31, 2017, with the largest customer representing approximately 3% of the total investment portfolio. On an annualized basis, the largest customer also represented approximately 3% of the Company’s total annualized investment portfolio revenues as of March 31, 2017. The Company’s customers operate their businesses across more than 440 concepts and the largest of these concepts represented approximately 3% of the Company’s total annualized investment portfolio revenues as of March 31, 2017.

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, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Investments

 

Restaurants

 

730

 

$

1,171,384

 

21

%  

Manufacturing

 

160

 

 

804,859

 

15

 

Furniture stores

 

48

 

 

384,623

 

 7

 

Early childhood education centers

 

169

 

 

372,936

 

 7

 

Movie theaters

 

38

 

 

352,665

 

 6

 

Health clubs

 

62

 

 

313,674

 

 6

 

Lawn and garden equipment and supply stores

 

22

 

 

187,690

 

 3

 

Automotive repair and maintenance

 

85

 

 

156,537

 

 3

 

All other service industries

 

344

 

 

1,330,040

 

24

 

All other retail industries

 

92

 

 

436,108

 

 8

 

 

 

1,750

 

$

5,510,516

 

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.

 

Intangible Lease Assets

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

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2017

 

2016

 

In-place lease assets

 

$

60,811

 

$

61,634

 

Ground lease interest assets

 

 

21,313

 

 

20,430

 

Above-market lease assets

 

 

10,273

 

 

10,273

 

Total intangible lease assets

 

 

92,397

 

 

92,337

 

Accumulated amortization

 

 

(20,972)

 

 

(19,515)

 

Net intangible lease assets

 

$

71,425

 

$

72,822

 

 

Aggregate lease intangible amortization included in expense was $1.6 million during both the three months ended March 31, 2017 and 2016.  The amount amortized as a decrease to rental revenue for capitalized above‑market lease intangibles was $0.3 million during both the three months ended March 31, 2017 and 2016

Based on the balance of the intangible assets at March 31, 2017, the aggregate amortization expense is expected to be $4.7 million for the remainder of 2017, $6.1 million in 2018, $5.9 million in 2019, $5.3 million in 2020, $5.0 million in 2021 and $4.7 million in 2022; the amount expected to be amortized as a decrease to rental revenue is expected to be $0.9 million for the remainder of 2017, $1.2 million in each of the years 2018 through 2020, $0.6 million in 2021 and $0.4 million in 2022.  The weighted average remaining amortization period is approximately nine years for the in‑place lease intangibles, approximately 46 years for the amortizing ground lease interests and approximately seven years for the above‑market lease intangibles.

16


 

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, 2017 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 while the triple-net leases are in effect. At March 31, 2017, nine 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 in place as of March 31, 2017, are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2017

 

$

321,750

 

2018

 

 

428,802

 

2019

 

 

428,555

 

2020

 

 

426,965

 

2021

 

 

424,967

 

2022

 

 

424,466

 

Thereafter

 

 

3,782,138

 

Total future minimum rentals

 

$

6,237,643

 

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, 2017, the Company held 26 loans receivable with an aggregate carrying amount of $138.4 million. Seventeen of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. Five of the mortgage loans are shorter-term loans (mature within the next four 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 nine other loans are primarily loans secured by a tenant’s equipment or other assets and generally require the borrower to make monthly interest‑only payments with a balloon payment at maturity.

17


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Outstanding

 

 

 

Interest

 

Maturity

 

March 31,

 

December 31,

 

Type

 

Rate (a)

 

Date

 

2017

 

2016

 

Five mortgage loans receivable

 

8.87

%  

2017 - 2020

 

$

22,546

 

$

22,599

 

Five mortgage loans receivable (b)

 

8.55

%  

2032 - 2038

 

 

42,954

 

 

43,002

 

Seven mortgage loans receivable (c)

 

8.58

%  

2053 - 2056

 

 

60,535

 

 

70,173

 

Total mortgage loans receivable

 

 

 

 

 

 

126,035

 

 

135,774

 

Equipment and other loans receivable

 

9.13

%  

2017 - 2025

 

 

11,145

 

 

9,233

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

137,180

 

 

145,007

 

Unamortized loan origination costs

 

 

 

 

 

 

1,246

 

 

1,205

 

Direct financing receivables

 

 

 

 

 

 

124,158

 

 

122,998

 

Total loans and direct financing receivables

 

 

 

 

 

$

262,584

 

$

269,210

 


(a)

Represents the weighted average interest rate as of the balance sheet date.

(b)

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

(c)

Interest rates on four of these mortgage loans are subject to increases over the term of the loans. Three of 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. One loan outstanding at December 31, 2016 was repaid in full during the three months ended March 31, 2017.

The long‑term mortgage loans receivable generally allow for prepayments in whole, but not in part, without penalty or with penalties ranging from 1% to 20%, 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

    

 

    

 

 

 

 

Principal

 

Balloon

 

Total

 

 

 

Payments

 

Payments

 

Payments

 

Remainder of 2017

 

$

408

 

$

19,160

 

$

19,568

 

2018

 

 

1,392

 

 

850

 

 

2,242

 

2019

 

 

1,923

 

 

4,374

 

 

6,297

 

2020

 

 

2,090

 

 

1,901

 

 

3,991

 

2021

 

 

1,137

 

 

1,484

 

 

2,621

 

2022

 

 

750

 

 

 —

 

 

750

 

Thereafter

 

 

65,522

 

 

36,189

 

 

101,711

 

Total principal payments

 

$

73,222

 

$

63,958

 

$

137,180

 

 

As of March 31, 2017 and December 31, 2016, the Company had $124.2 million and $123.0 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,

 

 

 

2017

 

2016

 

Minimum lease payments receivable

 

$

301,127

    

$

300,832

 

Estimated residual value of leased assets

 

 

14,815

 

 

14,500

 

Unearned income

 

 

(191,784)

 

 

(192,334)

 

Net investment

 

$

124,158

 

$

122,998

 

As of March 31, 2017, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $8.9 million for the remainder of 2017 and average approximately $12.1 million for each of the next five years.

 

18


 

4. Debt

Credit Facility

As of March 31, 2017, the Company had a $500 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.

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 (SCA), 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, 2017, LIBOR-based 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.

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, 2017, the Company had no borrowings outstanding and a pool of unencumbered assets aggregating approximately $2.56 billion, substantially all 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 $1.0 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, 2017, the Company was in compliance with these covenants.

At March 31, 2017 and December 31, 2016, unamortized financing costs related to the Company’s credit facility totaled $2.5 million and $2.7 million, respectively, and are included in other assets, net, on the condensed consolidated balance sheets.

Unsecured Notes and Term Loans Payable, net

The Company has entered into Note Purchase Agreements (NPAs) with institutional purchasers that provided for the private placement of three series of senior unsecured notes aggregating $375 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 NPAs) 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 any part, of any series of Notes, in an amount not less than 5% of the aggregate principal amount of the series 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 NPAs contain 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 NPAs 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

19


 

will become due and payable at the option of the purchasers. As of March 31, 2017, the Company was in compliance with its covenants under the NPAs. 

In April 2016, the Company entered into a $100 million floating-rate, unsecured five-year term loan; the interest rate on the loan resets monthly at one-month LIBOR plus a credit spread ranging from 1.35% to 2.15%. In March 2017, the Company entered into a second $100 million floating rate, unsecured term note.  This second loan is a two-year loan which has three one-year extension options and the interest rate on the loan resets monthly at one-month LIBOR plus a credit spread ranging from 1.30% to 2.15%.  The credit spread used is based on the Company’s leverage ratio as defined in the loan agreements.

The term loans were arranged with lenders who also participate in the Company’s unsecured revolving credit facility. The financial covenants of the term loans match the covenants of the unsecured credit facility. The term loans are senior unsecured obligations of the Company and are guaranteed by SCA and may be prepaid at any time without penalty.

The Company’s senior unsecured notes and term loans payable are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

 

March 31,

 

December 31,

 

 

 

Date

 

Rate

 

 

2017

 

2016

 

Notes Payable:

 

 

 

 

 

 

 

 

 

 

 

 

Series A issued November 2015

 

Nov. 2022

 

4.95

%  

 

$

75,000

 

$

75,000

 

Series B issued November 2015

 

Nov. 2024

 

5.24

%  

 

 

100,000

 

 

100,000

 

Series C issued April 2016

 

Apr. 2026

 

4.73

%  

 

 

200,000

 

 

200,000

 

Total notes payable

 

 

 

 

 

 

 

375,000

 

 

375,000

 

Term Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan issued March 2017

 

Mar. 2019

 

2.77

% (a)

 

 

100,000

 

 

 —

 

Term Loan issued April 2016

 

Apr. 2021

 

2.69

% (b)

 

 

100,000

 

 

100,000

 

Total term loans

 

 

 

 

 

 

 

200,000

 

 

100,000

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

(5,062)

 

 

(4,810)

 

Total unsecured notes and term loans payable, net

 

 

 

 

 

 

$

569,938

 

$

470,190

 


(a)

Loan is a variable-rate loan which resets monthly at one-month LIBOR + the applicable credit spread which was 1.30% at March 31, 2017.  The Company has entered into an interest rate swap agreement that effectively converts the floating rate to the fixed rate noted as of March 31, 2017.

(b)

Loan is a variable‑rate loan which resets monthly at one-month LIBOR + the applicable credit spread which was 1.35% at March 31, 2017.  The Company has entered into two interest rate swap agreements that effectively convert the floating rate to the fixed rate noted as of March 31, 2017.

20


 

Non‑recourse Debt Obligations of Consolidated Special Purpose Entities, net

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 $128.0 million at March 31, 2017.

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, 2017, the aggregate collateral pool securing the net‑lease mortgage notes was comprised primarily of single-tenant commercial real estate properties with an aggregate investment amount of approximately $2.5 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 $421.4 million at March 31, 2017.

The mortgage notes payable, which are obligations of the consolidated special purpose entities 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.

21


 

The Company’s non-recourse debt obligations of consolidated special purpose entity subsidiaries are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

 

March 31,

 

December 31,

 

 

 

Date

 

Rate

 

 

2017

 

2016

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

 

    

    

 

    

 

$214,500 Series 2012-1, Class A

 

Aug. 2019

 

5.77

%  

 

$

199,852

 

$

200,749

 

$150,000 Series 2013-1, Class A-1

 

Mar. 2020

 

4.16

%  

 

 

140,045

 

 

140,724

 

$107,000 Series 2013-2, Class A-1

 

Jul. 2020

 

4.37

%  

 

 

100,805

 

 

101,265

 

$77,000 Series 2013-3, Class A-1

 

Nov. 2020

 

4.24

%  

 

 

72,982

 

 

73,307

 

$120,000 Series 2014-1, Class A-1

 

Apr. 2021

 

4.21

%  

 

 

118,300

 

 

118,450

 

$95,000 Series 2015-1, Class A-1

 

Apr. 2022

 

3.75

%  

 

 

94,090

 

 

94,208

 

$102,000 Series 2013-1, Class A-2

 

Mar. 2023

 

4.65

%  

 

 

95,231

 

 

95,693

 

$97,000 Series 2013-2, Class A-2

 

Jul. 2023

 

5.33

%  

 

 

91,384

 

 

91,801

 

$100,000 Series 2013-3, Class A-2

 

Nov. 2023

 

5.21

%  

 

 

94,782

 

 

95,204

 

$140,000 Series 2014-1, Class A-2

 

Apr. 2024

 

5.00

%  

 

 

138,017

 

 

138,192

 

$270,000 Series 2015-1, Class A-2

 

Apr. 2025

 

4.17

%  

 

 

267,412

 

 

267,750

 

$200,000 Series 2016-1, Class A-1 (2016)

 

Oct. 2026

 

3.96

%  

 

 

198,550

 

 

199,423

 

$135,000 Series 2016-1, Class A-2 (2017)

 

Apr. 2027

 

4.32

%  

 

 

135,000

 

 

 —

 

Total non-recourse net-lease mortgage notes

 

 

 

 

 

 

 

1,746,450