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EX-32.2 - EX-32.2 - STORE CAPITAL Corpstor-20170930ex322d5cb07.htm
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EX-31.2 - EX-31.2 - STORE CAPITAL Corpstor-20170930ex312c33361.htm
EX-31.1 - EX-31.1 - STORE CAPITAL Corpstor-20170930ex311759567.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 September 30, 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 November 2, 2017, there were 190,015,680 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 September 30, 2017 (unaudited) and December 31, 2016 

3

Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2017 and 2016 (unaudited)
 

4

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited) 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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 

26

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

42

Item 4.     Controls and Procedures 

43

Part II. - OTHER INFORMATION 

43

Item 1.     Legal Proceedings 

43

Item 1A.  Risk Factors 

43

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

43

Item 3.     Defaults Upon Senior Securities 

43

Item 4.     Mine Safety Disclosures 

43

Item 5.     Other Information 

44

Item 6.     Exhibits 

44

Signatures 

44

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)

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

1,788,412

 

$

1,536,178

 

Buildings and improvements

 

 

3,763,510

 

 

3,226,791

 

Intangible lease assets

 

 

88,671

 

 

92,337

 

Total real estate investments

 

 

5,640,593

 

 

4,855,306

 

Less accumulated depreciation and amortization

 

 

(393,037)

 

 

(298,984)

 

 

 

 

5,247,556

 

 

4,556,322

 

Loans and direct financing receivables

 

 

273,265

 

 

269,210

 

Net investments

 

 

5,520,821

 

 

4,825,532

 

Cash and cash equivalents

 

 

34,986

 

 

54,200

 

Other assets, net

 

 

58,910

 

 

61,936

 

Total assets

 

$

5,614,717

 

$

4,941,668

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

82,000

 

$

48,000

 

Unsecured notes and term loans payable, net

 

 

570,376

 

 

470,190

 

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

 

 

1,741,343

 

 

1,833,481

 

Dividends payable

 

 

58,904

 

 

46,209

 

Accrued expenses, deferred revenue and other liabilities

 

 

68,888

 

 

60,533

 

Total liabilities

 

 

2,521,511

 

 

2,458,413

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 190,013,411 and 159,341,955 shares issued and outstanding, respectively

 

 

1,900

 

 

1,593

 

Capital in excess of par value

 

 

3,284,353

 

 

2,631,845

 

Distributions in excess of retained earnings

 

 

(194,671)

 

 

(151,592)

 

Accumulated other comprehensive income

 

 

1,624

 

 

1,409

 

Total stockholders’ equity

 

 

3,093,206

 

 

2,483,255

 

Total liabilities and stockholders’ equity

 

$

5,614,717

 

$

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

    

    

 

    

 

 

    

    

 

    

 

Rental revenues

 

$

104,039

 

$

91,759

 

$

314,093

 

$

259,666

 

Interest income on loans and direct financing receivables

 

 

5,502

 

 

5,023

 

 

16,729

 

 

14,101

 

Other income

 

 

1,003

 

 

216

 

 

1,901

 

 

435

 

Total revenues

 

 

110,544

 

 

96,998

 

 

332,723

 

 

274,202

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

31,379

 

 

27,121

 

 

91,938

 

 

76,427

 

Transaction costs

 

 

 —

 

 

155

 

 

 —

 

 

490

 

Property costs

 

 

1,335

 

 

807

 

 

3,272

 

 

2,519

 

General and administrative

 

 

10,255

 

 

8,104

 

 

29,787

 

 

25,240

 

Selling stockholder costs

 

 

 —

 

 

 —

 

 

 —

 

 

800

 

Depreciation and amortization

 

 

37,589

 

 

31,112

 

 

110,200

 

 

86,626

 

Provision for impairment of real estate

 

 

7,670

 

 

 —

 

 

11,940

 

 

 —

 

Total expenses

 

 

88,228

 

 

67,299

 

 

247,137

 

 

192,102

 

Income from operations before income taxes

 

 

22,316

 

 

29,699

 

 

85,586

 

 

82,100

 

Income tax expense

 

 

81

 

 

89

 

 

334

 

 

248

 

Income before gain on dispositions of real estate

 

 

22,235

 

 

29,610

 

 

85,252

 

 

81,852

 

Gain on dispositions of real estate, net of tax

 

 

6,345

 

 

6,733

 

 

35,778

 

 

9,533

 

Net income

 

$

28,580

 

$

36,343

 

$

121,030

 

$

91,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock—basic and diluted

 

$

0.15

 

$

0.24

 

$

0.69

 

$

0.62

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

189,656,095

 

 

153,143,726

 

 

174,481,758

 

 

146,491,617

 

Diluted

 

 

190,043,107

 

 

153,462,048

 

 

174,481,758

 

 

146,747,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.31

 

$

0.29

 

$

0.89

 

$

0.83

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net income

    

$

28,580

    

$

36,343

    

$

121,030

    

$

91,385

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedges

 

 

34

 

 

245

 

 

(328)

 

 

(2,101)

 

Cash flow hedge losses reclassified to interest expense

 

 

116

 

 

277

 

 

543

 

 

568

 

Total other comprehensive income (loss)

 

 

150

 

 

522

 

 

215

 

 

(1,533)

 

Total comprehensive income

 

$

28,730

 

$

36,865

 

$

121,245

 

$

89,852

 

 

See accompanying notes.

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

Operating activities

 

 

    

    

 

    

 

Net income

 

$

121,030

 

$

91,385

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

110,200

 

 

86,626

 

Amortization of deferred financing costs and other noncash interest expense

 

 

8,127

 

 

5,319

 

Amortization of equity-based compensation

 

 

5,880

 

 

5,219

 

Provision for impairment of real estate

 

 

11,940

 

 

 —

 

Gain on dispositions of real estate, net of tax

 

 

(35,778)

 

 

(9,533)

 

Noncash revenue and other

 

 

3,318

 

 

(620)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(3,884)

 

 

(3,031)

 

Accrued expenses, deferred revenue and other liabilities

 

 

8,572

 

 

7,594

 

Net cash provided by operating activities

 

 

229,405

 

 

182,959

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(978,944)

 

 

(849,286)

 

Investment in loans and direct financing receivables

 

 

(28,844)

 

 

(30,660)

 

Collections of principal on loans and direct financing receivables

 

 

23,099

 

 

1,590

 

Proceeds from dispositions of real estate

 

 

202,412

 

 

44,231

 

Net cash used in investing activities

 

 

(782,277)

 

 

(834,125)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

401,000

 

 

445,000

 

Repayments under credit facility

 

 

(367,000)

 

 

(400,000)

 

Borrowings under unsecured notes and term loans payable

 

 

100,000

 

 

300,000

 

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

 

 

134,961

 

 

65,000

 

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

 

 

(231,578)

 

 

(22,831)

 

Financing costs paid

 

 

(2,748)

 

 

(4,243)

 

Proceeds from the issuance of common stock

 

 

658,110

 

 

389,564

 

Stock issuance costs paid

 

 

(10,325)

 

 

(13,684)

 

Shares repurchased under stock compensation plans

 

 

(1,346)

 

 

(1,719)

 

Dividends paid

 

 

(151,014)

 

 

(117,448)

 

Net cash provided by financing activities

 

 

530,060

 

 

639,639

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(22,812)

 

 

(11,527)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

73,166

 

 

83,438

 

Cash, cash equivalents and restricted cash, end of period

 

$

50,354

 

$

71,911

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,986

 

$

30,044

 

Restricted cash included in other assets

 

 

15,368

 

 

41,867

 

Total cash, cash equivalents and restricted cash

 

$

50,354

 

$

71,911

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Accrued tenant improvements included in real estate investments

 

$

22,323

 

$

16,375

 

Seller financing provided to purchasers of real estate sold

 

 

 —

 

 

17,479

 

Acquisition of collateral property securing a mortgage note receivable

 

 

2,000

 

 

 —

 

Accrued financing costs

 

 

33

 

 

 —

 

Accrued stock issuance costs

 

 

53

 

 

366

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

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

 

$

79,360

 

$

64,937

 

Cash paid during the period for income and franchise taxes

 

 

1,488

 

 

1,029

 

See accompanying notes.

 

6


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 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 September 30, 2017 and December 31, 2016, these special purpose entities held assets

7


 

totaling $5.0 billion and $4.3 billion, respectively, and had third-party liabilities totaling $1.8 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 nine months ended September 30, 2016 have been retrospectively adjusted as follows:

 

 

 

 

 

 

 

 

 

 

 

 

As Previously

 

As Adjusted

 

Effect of

 

 

Reported

 

per ASU 2016-18

 

Change

Nine Months Ended September 30, 2016

    

 

    

    

 

    

 

 

    

Operating Activities

 

 

 

 

 

 

 

 

 

Change in operating assets:  Other assets

 

$

(3,222)

 

$

(3,031)

 

$

191

Net cash provided by operating activities

 

 

182,768

 

 

182,959

 

 

191

Investing Activities

 

 

 

 

 

 

 

 

 

Transfers to restricted deposits

 

 

(25,353)

 

 

 —

 

 

25,353

Net cash used in investing activities

 

 

(859,478)

 

 

(834,125)

 

 

25,353

Net decrease in cash, cash equivalents and restricted cash

 

 

(37,071)

 

 

(11,527)

 

 

25,544

Cash, cash equivalents and restricted cash, beginning of period

 

 

67,115

 

 

83,438

 

 

16,323

Cash, cash equivalents and restricted cash, end of period

 

 

30,044

 

 

71,911

 

 

41,867

 

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 ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in January 2017 and, as a

8


 

result, expects that fewer, if any, of its real estate acquisitions will be accounted for as business combinations and, consequently, that minimal, if any, transaction costs will be expensed subsequent to adoption.

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.

During the nine months ended September 30, 2017, the Company recognized an aggregate provision for impairment of real estate of $11.9 million, representing $7.6 million recognized in the third quarter related to two properties which became vacant during the quarter and $4.3 million recognized in the first quarter associated with a property sold in the second quarter.  The estimated fair value of the impaired real estate assets at September 30, 2017 was $12.7 million; there were no impaired assets as of December 31, 2016.

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. In certain circumstances, 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

9


 

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 $19.5 million and $15.0 million of accrued straight‑line rental revenue, net of allowances of $2.9 million and $4.6 million, at September 30, 2017 and December 31, 2016, respectively, which were included in other 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 1.5% of the Company’s investment portfolio is subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales.

The Company suspends revenue recognition 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 September 30, 2017, there was one mortgage loan receivable with an outstanding principal balance of $6.3 million on nonaccrual status.  There were no loans on nonaccrual status at December 31, 2016.

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 September 30, 2017 or December 31, 2016.

10


 

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

 

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 $15.4 million and $19.0 million of restricted cash and deposits in escrow at September 30, 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 September 30, 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 $11.8 million and $6.2 million, were designated as cash flow

11


 

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).

 

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 nine months ended September 30, 2017, the Company granted RSAs representing 120,140 shares of restricted common stock to its directors and key employees.  During the same period, RSAs representing 213,233 shares of previously issued restricted stock vested and RSAs representing 9,307 shares of previously issued restricted stock were forfeited.  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 tax withholding obligations under the Company’s equity-based compensation plans. As of September 30, 2017, the Company had 357,316 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 nine months ended September 30, 2017, the Company awarded 373,719 RSUs to its executive officers.  At September 30, 2017, there were 1,093,153 RSUs outstanding.

12


 

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 “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 September 30, 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 September 30, 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

Net income

 

$

28,580

 

$

36,343

 

$

121,030

 

$

91,385

 

Less: earnings attributable to unvested restricted shares

 

 

(105)

 

 

(133)

 

 

(320)

 

 

(380)

 

Net income used in basic and diluted income per share

 

$

28,475

 

$

36,210

 

$

120,710

 

$

91,005

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

190,015,850

 

 

153,602,720

 

 

174,856,940

 

 

146,967,323

 

Less: Weighted average number of shares of unvested restricted stock

 

 

(359,755)

 

 

(458,994)

 

 

(375,182)

 

 

(475,706)

 

Weighted average shares outstanding used in basic income per share

 

 

189,656,095

 

 

153,143,726

 

 

174,481,758

 

 

146,491,617

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

387,012

 

 

318,322

 

 

 —

 

 

255,577

 

Weighted average shares outstanding used in diluted income per share

 

 

190,043,107

 

 

153,462,048

 

 

174,481,758

 

 

146,747,194

 


(a)

For the three months ended September 30, 2017 and 2016, excludes 110,001 shares and 216,141 shares, respectively, and for the nine months ended September 30, 2017 and 2016, excludes 106,265 shares and 196,446 shares, respectively, related to unvested restricted shares as the effect would have been antidilutive. 

13


 

Recent Accounting Pronouncements

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

In May 2014, with subsequent updates in 2015 and 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a principles-based approach for accounting for revenue from contracts with customers.  The standard does not apply to revenue recognition for lease contracts or to the interest income recognized from loans receivable, which together represent over 99% of the Company’s revenue. ASU 2014-09 is effective for the Company on January 1, 2018 with early adoption permitted and allows for full retrospective or modified retrospective methods of adoption. In accordance with the Company’s implementation plan for adoption, it has evaluated its revenue streams and identified the very few that fall within the scope of this new accounting standard including any impact to the accounting for sales of real estate assets. The Company expects to complete its in-depth review of the revenue contracts and related performance obligations in the fourth quarter of 2017 and finalize the revision of its internal accounting procedures and controls around the revenue recognition process. The Company currently expects to adopt the standard on January 1, 2018 using the modified retrospective method for transition under the standard, in which case the cumulative effect of applying the standard, if any, would be recognized at the date of initial application; the Company currently does not anticipate a material cumulative effect adjustment. This new revenue guidance includes changes to the accounting for sales of real estate properties; however, based on the Company’s 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. The Company will consider whether any additional disclosures required upon the adoption of this standard are applicable to the Company’s 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; during the first nine months of 2017, the Company capitalized $1.5 million of initial direct costs which are included in other assets on the condensed consolidated balance sheet. Although primarily a lessor, the Company is also a lessee under several ground lease arrangements and under its corporate office lease. The Company has completed its initial inventory and evaluation of these leases and expects that it will be required to recognize a right-of-use asset and a lease liability for the present value of the minimum lease payments. The Company is in the process of preparing and reviewing the initial estimates of the amount of its right-of-use assets and lease liabilities; based on the Company’s current list of contracts under which it is a lessee, the Company estimates that its right-of-use assets to be recognized upon adoption will be less than 1% of total assets. Approximately 98% of the Company’s lease contracts (under which the Company is the lessor) are “triple-net” leases, which means that its tenants are responsible for making the payments to third parties for operating expenses such as, property taxes, insurance and common area maintenance (“CAM”) costs associated with the properties the Company leases to them.  Under the current lease accounting guidance, these payments made by its tenants to third parties are excluded from lease payments and rental revenue.  Upon adoption of the new lease accounting standard in 2019, these lease executory cost payments will be accounted for as activities or costs that are not components of the lease contract.  As a result, the Company may be required to show these payments made by its tenants on a gross basis (for example, both as property tax expense and as corresponding revenue from the tenant who makes the payment directly to the third party) in its consolidated statements of income. Although there is not expected to be any impact to net income or cash flows as a result of a gross presentation, it would have the impact of increasing both reported revenues and property expenses.  The Company is continuing to quantify the impact of this potential gross up and will evaluate any

14


 

ongoing implementation guidance available on this topic.  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 and expects to complete the first two phases in 2017, which include the initial inventory and evaluation of its lease contracts, as a lessee, and the identification of changes needed to the Company’s processes and systems impacted by the new standard. Future phases to be completed in 2018 include the implementation of updates and enhancements to the Company’s internal control framework, accounting systems and related documentation surrounding its lease accounting processes and preparation of any additional disclosures that will be required.

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 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 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 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 specified transactions, such as particular debt and insurance claim related cash flows, 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 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 equivalents and restricted cash within the statement of cash flows. Upon adoption, the new guidance is required to be adopted retrospectively. As permitted, 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 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 considered to be a business. The Company early adopted the provisions of ASU 2017-01 in the first quarter of 2017, as permitted.  For periods prior to the Company’s adoption of this new guidance in 2017, acquisitions of real estate that were subject to an existing lease were accounted for as business combinations where the associated transaction costs were expensed as incurred, whereas the recently adopted guidance generally will treat

15


 

such transactions as the acquisition of property.  As a result, beginning in 2017, 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 May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications and is expected to reduce diversity in practice.  The 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 August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results.  This new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item.  The standard will be effective for the Company on January 1, 2019, with early adoption permitted, using a modified retrospective approach.  As the Company has not had any ineffectiveness associated with its cash flow hedges, the adoption of this standard will not have a material impact on its consolidated financial statements.

 

 

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3. Investments

 

At September 30, 2017, STORE Capital had investments in 1,826 property locations representing 1,777 owned properties (of which 38 are accounted for as direct financing receivables), 19 ground lease interests and 30 properties which secure mortgage loans. The gross investment portfolio totaled $5.91 billion at September 30, 2017 and consisted of the gross acquisition cost of the real estate investments totaling $5.64 billion and loans and direct financing receivables with an aggregate carrying amount of $273.3 million. As of September 30, 2017, approximately 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 nine months ended September 30, 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)(d)

 

204

 

 

979,869

 

Investment in loans and direct financing receivables

 

 3

 

 

28,844

 

Sales of real estate

 

(40)

 

 

(182,198)

 

Principal collections on loans and direct financing receivables (d)

 

(1)

 

 

(25,099)

 

Provision for impairment of real estate

 

 —

 

 

(11,940)

 

Other

 

 —

 

 

(134)

 

Gross investments, September 30, 2017

 

 

 

 

5,913,858

 

Less accumulated depreciation and amortization

 

 

 

 

(393,037)

 

Net investments, September 30, 2017

 

1,826

 

$

5,520,821

 


(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 $0.8 million of interest capitalized to properties under construction.

(c)

Excludes $23.4 million of tenant improvement advances disbursed in 2017 which were accrued as of December 31, 2016.

(d)

One loan receivable was repaid in full through a $2.0 million non-cash transaction in which the Company acquired the underlying mortgaged property and leased it back to the borrower.

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to approximately 380 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 September 30, 2017. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at September 30, 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 September 30, 2017. The Company’s customers operate their businesses across approximately 480 concepts and the largest of these concepts represented approximately 3% of the Company’s total annualized investment portfolio revenues as of September 30, 2017.

17


 

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 September 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Investments

 

Restaurants

 

727

 

$

1,176,632

 

20

%  

Early childhood education centers

 

170

 

 

379,084

 

 7

 

Furniture stores

 

46

 

 

371,453

 

 6

 

Movie theaters

 

39

 

 

355,393

 

 6

 

Health clubs

 

67

 

 

343,455

 

 6

 

Family entertainment centers

 

25

 

 

231,893

 

 4

 

Farm and ranch supply stores

 

22

 

 

198,854

 

 3

 

All manufacturing industries

 

156

 

 

769,090

 

13

 

All other service industries

 

475

 

 

1,487,016

 

25

 

All other retail industries

 

99

 

 

600,988

 

10

 

 

 

1,826

 

$

5,913,858

 

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):

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

In-place lease assets

 

$

57,816

 

$

61,634

 

Ground lease interest assets

 

 

21,363

 

 

20,430

 

Above-market lease assets

 

 

9,492

 

 

10,273

 

Total intangible lease assets

 

 

88,671

 

 

92,337

 

Accumulated amortization

 

 

(23,220)

 

 

(19,515)

 

Net intangible lease assets

 

$

65,451

 

$

72,822

 

 

Aggregate lease intangible amortization included in expense was $1.5 million and $1.6 million during the three months ended September 30, 2017 and 2016, respectively, and was $4.8 million during both the nine-month periods ended September 30, 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 September 30, 2017 and 2016 and was $0.9 million during both the nine months ended September 30, 2017 and 2016.

Based on the balance of the intangible assets at September 30, 2017, the aggregate amortization expense is expected to be $1.5 million for the remainder of 2017, $5.8 million in 2018, $5.6 million in 2019, $5.1 million in 2020, $4.7 million in 2021 and $4.5 million in 2022; the amount expected to be amortized as a decrease to rental revenue is expected to be $0.3 million for the remainder of 2017, $1.1 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.

18


 

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 September 30, 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 September 30, 2017, the Company owned 19 properties that 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 September 30, 2017, are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2017

 

$

113,052

 

2018

 

 

452,475

 

2019

 

 

451,699

 

2020

 

 

450,079

 

2021

 

 

449,344

 

2022

 

 

449,466

 

Thereafter

 

 

4,209,774

 

Total future minimum rentals

 

$

6,575,889

 

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 September 30, 2017, the Company held 29 loans receivable with an aggregate carrying amount of $148.8 million. Eighteen of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. Six of the mortgage loans are shorter-term loans (maturing prior to 2023) 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 interest rates on ten of the mortgage loans are subject to increases over the term of the loans.  The 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Outstanding

 

 

 

Interest

 

Maturity

 

September 30,

 

December 31,

 

Type

 

Rate (a)

 

Date

 

2017

 

2016

 

Six mortgage loans receivable (b)

 

8.60

%  

2017 - 2022

 

$

29,171

 

$

22,599

 

Five mortgage loans receivable

 

8.57

%  

2032 - 2038

 

 

42,863

 

 

43,002

 

Seven mortgage loans receivable (c)

 

8.70

%  

2053 - 2056

 

 

64,608

 

 

70,173

 

Total mortgage loans receivable

 

 

 

 

 

 

136,642

 

 

135,774

 

Eleven equipment and other loans receivable

 

9.29

%  

2017 - 2025

 

 

10,912

 

 

9,233

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

147,554

 

 

145,007

 

Unamortized loan origination costs

 

 

 

 

 

 

1,256

 

 

1,205

 

Direct financing receivables

 

 

 

 

 

 

124,455

 

 

122,998

 

Total loans and direct financing receivables

 

 

 

 

 

$

273,265

 

$

269,210

 


19


 

(a)

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

(b)

One loan outstanding at December 31, 2016 was repaid in full during the nine months ended September 30, 2017 through a $2.0 million non-cash transaction in which the Company acquired the underlying mortgaged property and leased it back to the borrower.

(c)

Four of these mortgage loans allow for prepayment in whole, but not in part, with penalties ranging from 20% to 70% depending on the timing of the prepayment. Two loans outstanding at December 31, 2016 were either repaid in full or sold during the nine months ended September 30, 2017 and the Company collected $0.1 million in prepayment penalty fees.

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

 

$

238

 

$

18,056

 

$

18,294

 

2018

 

 

1,534

 

 

850

 

 

2,384

 

2019

 

 

2,188

 

 

4,374

 

 

6,562

 

2020

 

 

2,355

 

 

 —

 

 

2,355

 

2021

 

 

1,301

 

 

1,484

 

 

2,785

 

2022

 

 

841

 

 

8,408

 

 

9,249

 

Thereafter

 

 

69,709

 

 

36,216

 

 

105,925

 

Total principal payments

 

$

78,166

 

$

69,388

 

$

147,554

 

 

As of September 30, 2017 and December 31, 2016, the Company had $124.5 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):

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Minimum lease payments receivable

 

$

296,280

    

$

300,832

 

Estimated residual value of leased assets

 

 

14,815

 

 

14,500

 

Unearned income

 

 

(186,640)

 

 

(192,334)

 

Net investment

 

$

124,455

 

$

122,998

 

As of September 30, 2017, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $3.0 million for the remainder of 2017 and average approximately $12.2 million for each of the next five years.

4. Debt

Credit Facility

As of September 30, 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. Through June 30, 2017, borrowings under this facility required monthly payments of interest at a rate selected by the Company of

20


 

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 Company was also required to 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. Subsequent to June 30, 2017, the Company made the election to base the credit spread on the Company’s credit rating as defined in the credit agreement and, as a result, borrowings under the facility now require monthly payments of interest at a rate selected by the Company of either (1) LIBOR plus a credit spread ranging from 0.85% to 1.55%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.55%; in addition, the Company is now required to pay a facility fee on the total commitment amount ranging from 0.125% to 0.30%.  Currently, the applicable credit spread for LIBOR-based borrowings is 1.00% and the facility fee is 0.20%.

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 September 30, 2017, the Company had $82 million of borrowings outstanding and a pool of unencumbered assets aggregating approximately $3.0 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 September 30, 2017, the Company was in compliance with these covenants.

At September 30, 2017 and December 31, 2016, unamortized financing costs related to the Company’s credit facility totaled $2.0 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 will become due and payable at the option of the purchasers. As of September 30, 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%.  Subsequent to June 30, 2017, the Company made the election to base the credit spread on the Company’s credit rating as defined in the loan agreements; as a result, the interest rate on both term loans now resets monthly at one-month LIBOR plus a credit spread ranging from 0.90% to 1.75%; the credit spread currently applicable to the Company is 1.10%.

21


 

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, 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

 

 

September 30,

 

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