STORE CAPITAL LLC - Annual Report: 2015 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

 

For the fiscal year ended December 31, 2015 

or

 

 

For the transition period from                      to                     .  

Commission File No. 001-36739  

 

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

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

(Address of principal executive offices) (Zip Code)

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

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ◻ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ◻    No  ☒ 

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the Registrant’s shares of common stock, $0.01 par value, held by non-affiliates of the Registrant, was $1.1 billion based on the last reported sale price of $20.10 per share on the New York Stock Exchange on June 30, 2015.

 

As of February 22, 2016, there were 140,879,389 shares of the registrant’s common stock outstanding.

 

Documents Incorporated by Reference

 

Portions of Part III of this Form 10-K are incorporated by reference from the registrant’s definitive proxy statement for its 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year.

 

 

TABLE OF CONTENTS

 

 

 

 

 

PART I

In this Annual Report on Form 10-K, or this Annual Report, we refer to STORE Capital Corporation, a Maryland corporation, as “we,” “us,” “our,” “the Company” or “S|T|O|R|E,” unless we specifically state otherwise or the context indicates otherwise.

Forward-Looking Statements

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-term, triple-net leases of freestanding, single-tenant properties.  Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements.  Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.  Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Annual Report may not prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.  For a further discussion of these and other factors that could impact future results, performance or transactions, see “Item 1A. Risk Factors” elsewhere in this Annual Report.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

Item 1.  BUSINESS

General

S|T|O|R|E is an internally managed net‑lease real estate investment trust, or REIT, that is the leader in the acquisition, investment and management of Single Tenant Operational Real Estate, or STORE Properties, which is our target market and the inspiration for our name. A STORE Property is a real property location at which a company operates its business and generates sales and profits, which makes the location a profit center and, therefore, fundamentally important to that business.

S|T|O|R|E continues the investment activities of our senior leadership team, which has been investing in single‑tenant operational real estate for over 35 years.  We are one of the largest and fastest‑growing net‑lease REITs, and own a large, well‑diversified portfolio that consists of investments in 1,325 property locations operated by more than 300 customers across 46 states as of December 31, 2015.  Our customers operate across a wide variety of industries within the service, retail and industrial sectors of the U.S. economy, with restaurants, movie theaters, health clubs, early childhood education centers and furniture stores representing the top industries in our portfolio.

The following table depicts the growth in our investment portfolio since our inception in 2011.

Our Total Investment Portfolio at Quarter End

 

 

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to in this Annual Report as the “Code,” commencing with our initial taxable year ended December 31, 2011. To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than our net capital gains) to our stockholders annually. 

Prior to December 7, 2015, we were a “controlled company” (within the meaning of the rules of the New York Stock Exchange, or NYSE) because a large portion of our common stock was owned indirectly by certain investment funds managed by Oaktree Capital Management, L.P., or Oaktree.  As of the closing of an equity offering of our common stock on December 7, 2015, Oaktree’s indirect ownership of the outstanding shares of our common stock fell to just under 50%.  As a result, we no longer are a controlled company and no longer qualify for exemptions from certain corporate governance requirements. Subsequent to December 31, 2015, Oaktree’s indirect ownership of the outstanding shares of our common stock fell to just under 40% as a result of a secondary offering by STORE Holding Company, LLC, or STORE Holding, the entity through which Oaktree owns its indirect interest in our common stock. Oaktree is a global investment management firm specializing in alternative investments with approximately $97 billion in assets under management as of December 31, 2015.

2015 Highlights

Our Target Market

We are the leader in providing real estate financing solutions principally to middle‑market and larger businesses that own STORE Properties and operate within the broad-based service, retail and industrial sectors of the U.S. economy.  Our net‑lease solutions are designed to provide a long‑term, lower‑cost way to improve our customers’ capital structures and, thus, be a preferred alternative to real estate ownership.    We estimate the market for STORE Properties to exceed $2.5 trillion in market value and to include more than 1.6 million properties.

We define middle‑market companies as those having approximate annual gross revenues of between $20 million and $300 million, although some of our customers have annual revenues substantially in excess of $300 million.  Most of our customers do not have credit ratings, while some have ratings from rating agencies that service insurance companies or fixed‑income investors.  Most of these non-rated companies either prefer to be unrated or are simply too small to issue debt rated by a nationally recognized rating agency in a cost‑efficient manner.

The financing marketplace for STORE Properties is highly fragmented, with few participants addressing the long‑term capital needs of middle‑market and larger non-rated companies.  While we believe our net‑lease financing solutions can add value to a wide variety of companies, we believe the largest underserved market and, therefore, our greatest opportunity is non-rated, bank‑dependent, middle‑market and larger companies that generally have less access to efficient sources of long‑term capital.

We believe the demand for our net‑lease solutions is even greater today as a result of the current bank regulatory environment.  In our view, the increased scrutiny and regulation of the banking industry over the past several years in response to the collapse of the housing and mortgage industries from 2007 to 2009, particularly with the passage of the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the Basel Accords issued by the Basel Committee on Banking Supervision, have made commercial banks even less responsive to the long‑term capital needs of the middle‑market companies we target.  These companies have historically depended on commercial banks for much of their financing. 

S|T|O|R|E was formed to capitalize on this market opportunity and address the capital needs of middle‑market and larger non-rated companies by offering them a superior alternative to financing their profit‑center real estate with traditional mortgage or bank debt and their own equity.  We believe our opportunities include both gaining market

share from the fragmented network of net‑lease capital providers and growing the market by creating demand for our net‑lease solutions that meet the long‑term real estate capital needs of these companies.

Our target market of STORE Properties is divided into three primary sectors and various sub-sectors.  The primary sectors and their proportion of our target market are service at 47%, retail at 37% and industrial at 16%.  The sub-sectors included within each primary sector are summarized in the table below.

 

Within the sub‑sectors, the market for STORE Properties is further subdivided into a wide variety of industries within the service, retail and industrial sectors, such as:

 

Many of these industries are represented within our diverse property portfolio.

Our Asset Class:  STORE Properties

Single Tenant Operational Real Estate, or STORE Properties, is a unique asset class that inspired the formation of S|T|O|R|E and our company name.  STORE Properties are profit-center real estate locations on which our tenants conduct their businesses and generate their revenues and profits.  The defining characteristic of STORE Properties is the number of payment sources:  STORE Properties have the following three payment sources, whereas all other commercial real estate assets have just two.

The following diagram illustrates the three sources of payment that are common among STORE Properties:

The S|T|O|R|E Credit Pyramid

 

The investment, management and capitalization competencies we have developed over more than 35 years, like our credit pyramid, arise from the distinctive characteristics of the large asset class of STORE Properties we address.

Our Competitive Strengths

Our objective is to build upon our market‑leading platform for the acquisition, investment and management of STORE Properties that simultaneously creates value for stockholders and customers through our five corporate

competencies.  Each member of our senior leadership team is primarily responsible for one of our five competencies, which are described below:

The following table compares our tenant credit ratings (determined using Moody’s RiskCalc) with the STORE Score:

Our Business and Growth Strategies

Our objective is to continue to create stockholder value through sustained investment and management activities designed to grow distributable cash flows and deliver attractive risk-adjusted rates of return from a growing, diverse portfolio of STORE Properties. To accomplish this, our principal business and growth strategies are as follows:

Competition

We face competition in the acquisition and financing of STORE Properties from numerous investors, including but not limited to traded and non‑traded public REITs, private equity investors and other institutional investment funds, as well as private wealth management advisory firms that serve high net worth investors (also known as family offices), some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the willingness to accept more risk.  We also believe that competition for real estate financing comes from middle‑market business owners themselves, many of whom have had a historic preference to own, rather than lease, the real estate they use in their businesses.  The competition we face may increase the demand for STORE Properties and, therefore, reduce the number of suitable acquisition opportunities available to us or increase the price we must pay to acquire STORE Properties.  This competition will increase if investments in real estate become more attractive relative to other forms of investment.

Employees

As of December 31, 2015, we had 60 full‑time employees, all of whom are located in our single office in Scottsdale, Arizona. None of our employees are subject to a collective bargaining agreement.  We consider our employee relations to be good.

Principal Executive Offices

Our principal offices are located at 8501 East Princess Drive, Suite 190, Scottsdale, Arizona 85255.  We currently occupy approximately 14,500 square feet of space leased from an unaffiliated third party.  We believe that our offices are adequate for our present operations and that adequate additional space will be available in or around our current office location if needed in the future.

Insurance

Our leases and loan agreements typically require our tenants and borrowers to maintain insurance of the types and in the amounts that are usual and customary for similar commercial properties, including commercial general liability, fire and extended loss insurance provided by reputable companies, with commercially reasonable exclusions, deductibles and limits, all as verified by our independent insurance consultant.  

Separately, we purchase contingent liability insurance, in excess of our tenants’ and borrowers’ liability coverage, to provide us with additional security in the event of a catastrophic claim. Also, we purchase property coverage, on a case-by-case basis, where we believe such additional insurance is warranted.

Regulation

Our properties are subject to various laws and regulations, including regulations relating to fire and safety requirements, affirmative and negative covenants and, in some instances, common area obligations.  Our tenants and borrowers have primary responsibilities for compliance with these requirements pursuant to our lease and loan agreements.  We believe that each of our tenants and borrowers have the necessary permits and approvals to operate and

conduct their businesses on our properties.

Environmental Matters

General.  All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to human health and the environment. Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons, including owners or operators, for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal.  These laws and regulations apply to past and present business operations of our tenants and borrowers and the use, storage, handling and contracting for recycling or disposal of hazardous substances or wastes.  Our tenants and borrowers are obligated to comply with environmental laws.  Our leases and loans typically impose obligations on our tenants and borrowers to indemnify us from all or most compliance costs we may experience as a result of the environmental conditions on our properties.  If a tenant or borrower fails to, or cannot, comply we may be required to pay such costs.  We are not aware of any environmental condition with respect to any of our properties which would have a material adverse effect on our business, financial condition or results of operations.  We cannot predict whether new or more stringent laws relating to the environment will be enacted in the future or how such laws will impact the operations of businesses at our properties. Costs associated with an environmental event could be substantial.

Superlien Laws.  Under the laws of many states, contamination on a site may give rise to a lien on the site for clean‑up costs. In several states, such a lien has priority over all existing liens, including those of existing mortgages. In these states, the lien of a mortgage may lose its priority to such a “superlien.”

CERCLA.  The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA, imposes strict liability on present and past “owners” and “operators” of a contaminated site for the costs of clean‑up.  A secured lender may be liable as an “owner” or “operator” of a contaminated site if agents or employees of the lender have participated in the management of such site or in the operations of the tenant.  Excluded from CERCLA’s definition of “owner” or “operator” however, is a person “who without participating in the management of the facility, holds indicia of ownership primarily to protect his security interest.”  This is the so called “secured creditor exemption.” 

Liability is not limited to the original or unamortized principal balance of a loan or to the value of the site securing a loan.  CERCLA provides substantial protection to lenders by defining the activities in which a lender can engage and still have the benefit of the secured creditor exemption. In order for a lender to be deemed to have participated in the management of a site, the lender must actually participate in the operational affairs of the site or our tenant or borrower. CERCLA provides that “merely having the capacity to influence, or unexercised right to control” operations does not constitute participation in management.  A lender may lose the protection of the secured creditor exemption only if it exercises decision‑making control over our tenant’s or borrower’s environmental compliance and hazardous substance handling and disposal practices, or assumes responsibility for substantially all operational functions at the site or overall management encompassing day‑to‑day decision making with regard to environmental compliance.  CERCLA also provides that a lender will continue to have the benefit of the secured creditor exemption even if it forecloses on a site, purchases it at a foreclosure sale or accepts a deed‑in‑lieu of foreclosure provided that the lender seeks to sell the site at the earliest practicable commercially reasonable time on commercially reasonable terms. 

With respect to most of the assets in our investment portfolio, we are the owner of the real property.  However, with respect to a few of the assets in our investment portfolio, we are not the owner of the property but have a mortgage loan on the property.  We believe we meet the secured creditor exemption.

Certain Other Federal and State Laws.  Many states have statutes similar to CERCLA, and not all of those statutes provide for a secured creditor exemption.  In addition, under federal law, there is potential liability relating to hazardous wastes and underground storage tanks under the Federal Resource Conservation and Recovery Act, or RCRA.  The definition of “hazardous substances” under CERCLA specifically excludes petroleum products.  Subtitle I of RCRA governs underground petroleum storage tanks.  The protections accorded to lenders under CERCLA are also accorded to the holders of security interests in underground petroleum storage tanks if the lender does not participate in management of the underground storage tanks and is not otherwise engaged in petroleum production, refining or

marketing.  It should be noted, however, that liability for cleanup of petroleum contamination may be governed by state law, which may not provide for any specific protection for secured creditors.

In a few states, transfers of some types of sites are conditioned upon cleanup of contamination prior to transfer. In these cases, a lender that becomes the owner of a site through foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean up the contamination before selling or otherwise transferring the site.

Also, certain federal, state and local laws govern the removal, encapsulation or disturbance of asbestos‑containing materials, or ACMs, in the event of the remodeling, renovation or demolition of a building. Such laws, as well as common law standards, may impose liability for releases of ACMs and may provide for third parties to seek recovery from owners or operators of sites for personal injuries associated with such releases.

Beyond statute‑based environmental liability, there exist common law causes of action (for example, actions based on nuisance or on toxic tort resulting in death, personal injury or damage to site) related to hazardous environmental conditions on a site.  While it may be more difficult to hold a lender liable in such cases, unanticipated or uninsured liabilities of our tenant or borrower may jeopardize the tenant’s or borrower’s ability to meet its lease or loan obligations.

Additional Considerations.  The cost of remediating hazardous substance contamination at a site can be substantial. If a lender becomes liable, it can bring an action for contribution against the owner or operator who created the environmental hazard, but that individual or entity may be without substantial assets.

If a lender forecloses on a mortgage secured by a site on which business operations are subject to environmental laws and regulations, the lender will be required to operate the site in accordance with those laws and regulations.  Such compliance may result in substantial expense.

In addition, a lender may be obligated to disclose environmental conditions on a site to government entities and/or to prospective buyers (including prospective buyers at a foreclosure sale or following foreclosure).  Such disclosure may decrease the amount that prospective buyers are willing to pay for the affected site, sometimes substantially, and thereby decrease the ability of the lender to recoup its investment in a loan upon foreclosure.

Emerging Growth Company Status

As of December 31, 2015, we determined that we no longer qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, which means that we are no longer able to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Available Information

We electronically file with the Securities and Exchange Commission our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, pursuant to Section 13(a) of the Exchange Act.  You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports on the day of filing with the SEC on our website at www.storecapital.com, or by sending an email message to info@storecapital.com.  

 

Item 1A.  RISK FACTORS

There are many factors that affect our business and the results of our operations, some of which are beyond our control.  The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Annual Report.  Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of

this Annual Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

Risks Related to Our Business

Our business depends on our customers successfully operating their businesses on real estate we own or finance for them, and their failure to do so could materially and adversely affect our business.  Substantially all of our properties are leased by customers operating a business at those locations where sales and profits are generated for their businesses.  We underwrite and evaluate investment risk based on our belief that the most important, and primary, source of payment for our leases and loans is unit‑level profitability.  While a tenant may have other sources of payment to meet its obligations, we believe the success of our investments materially depends upon whether our customers successfully operate their businesses, and thus generate unit‑level profitability, at the location or locations we are acquiring or financing.  Our customers may be adversely affected by many factors beyond our control that might render one or more of their locations uneconomic.  These factors include poor management, changing demographics, a downturn in general economic conditions or changes in consumer trends that decrease demand for our customers’ products or services.  The occurrence of any of these may cause our customers to fail to pay rent when due, fail to pay real estate taxes when due, fail to pay insurance premiums when due or become insolvent or declare bankruptcy, any of which could materially and adversely affect our business.

Our investments are and are expected to continue to be concentrated in the single‑tenant, middle‑market sector, and if the demand of single‑tenant, middle‑market companies for net‑lease financing fails to increase or decreases, or if the supply of net‑lease financing increases in this sector, we could be materially and adversely affected.  Our target market is middle‑market companies that operate their businesses out of one or more locations that generate unit‑level profitability for the business.  Historically, many companies prefer to own, rather than lease, the real estate they use in their businesses.  A failure to increase demand for our products by, among other ways, failing to convince middle‑market companies to sell and lease back their STORE Properties, or a decrease in the demand of middle‑market companies to rent STORE Properties or an increase in the availability of STORE Properties for rent could materially and adversely affect us.

Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.  In order to maintain our qualification as a REIT, we are required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flows. Consequently, we may rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:

If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.

We depend on the asset‑backed securities, or ABS, and the commercial mortgage‑backed securities, or CMBS, markets for a substantial portion of our long‑term debt financing.  We depend on, and we likely will continue to depend on, the ABS and CMBS markets for a substantial portion of our long‑term debt financing.  Substantially all of the long‑term debt on our balance sheet has been obtained from debt offerings in the ABS and CMBS markets. This ABS debt is issued by bankruptcy remote, special purpose entities that we or our subsidiaries own.  These special purpose entities issue multiple series of investment‑grade ABS notes from time to time as additional collateral is added to the collateral pool.  Our CMBS debt is generally in the form of first mortgage debt incurred by other special purpose entities that we or our subsidiaries own.  Our ABS and CMBS debt is generally non‑recourse.  However, 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.

Historically, we have raised a significant amount of debt capital through our STORE Master Funding program, which accesses the ABS market and, to a lesser extent, through our access to the CMBS market.  We have generally used the proceeds from these financings to repay debt and fund real estate acquisitions.  As of December 31, 2015, we had issued notes under our STORE Master Funding program in six series with an aggregate outstanding principal balance of $1.4 billion.  Collectively these notes are referred to as the “Master Trust Notes” and had a weighted average maturity of 6.5 years, as of December 31, 2015. In addition, we had CMBS and other mortgage loans with an aggregate outstanding principal balance of $196 million and an average maturity of seven years, as of December 31, 2015.  Our obligations under these loans are generally secured by liens on certain of our properties. In the case of our STORE Master Funding program, subject to certain conditions and limitations, we may substitute real estate collateral for assets in the collateral pool from time to time.  No assurance can be given that the ABS or the CMBS markets will be available to us in the future, whether to refinance existing debt or to raise additional debt capital. Moreover, we view our ability to substitute collateral under our STORE Master Funding program favorably, and no assurance can be given that financing facilities offering similar flexibility will be available to us in the future.

In the event of a disruption in the financial markets for ABS or CMBS debt, our ability to obtain long‑term debt may be materially and adversely affected.  As a result, we may acquire real estate assets at a lower than anticipated growth rate, or we may be unable to acquire additional real estate assets.  In addition, this disruption may affect our return on equity as a result of the decrease in the availability of long‑term debt or leverage for us.  Furthermore, a reduction in the difference, or spread, between the rate we earn on our assets and the rate we pay on our liabilities (primarily our long‑term debt), which would occur if the interest rates available to us on future debt issuances increase faster than the lease rates we can charge our customers on STORE Properties we acquire and lease back to them, could have a material and adverse effect on our financial condition.

A significant portion of our assets have been pledged to secure the borrowings of our subsidiaries, and the failure of our subsidiaries to make the required payments could materially and adversely affect us.  A significant portion of our investment portfolio consists of assets owned by our consolidated, bankruptcy remote, special purpose entity subsidiaries that have been pledged to secure the long‑term borrowings of those subsidiaries.  As of December 31, 2015, the total outstanding principal balance of non‑recourse debt obligations of our consolidated special purpose entity subsidiaries was $1.6 billion, and approximately $2.4 billion in assets held by those subsidiaries had been pledged to secure those borrowings.  We or our other consolidated subsidiaries are the equity owners of these special purpose entities, meaning we are entitled to the excess cash flows after debt service and all other required payments are made on the debt of these entities.  If our subsidiaries fail to make the required payments on this indebtedness, distributions of excess cash flows to us may be reduced or suspended and the indebtedness may become immediately due and payable.  If the subsidiaries are unable to pay the accelerated indebtedness, the pledged assets could be foreclosed upon and distributions of excess cash flows to us may be suspended or terminated.  In this case, our ability to make distributions to our stockholders could be materially and adversely affected.

Failure to mitigate our exposure to interest rate volatility changes may materially and adversely affect us.  We attempt to mitigate our exposure to interest rate risk by entering into long‑term fixed-rate financing through the combination of periodic debt offerings under STORE Master Funding, our ABS conduit, through discrete non‑recourse

secured borrowings, through insurance company and bank borrowings, by laddering our borrowing maturities and by using leases that generally provide for rent escalations during the term of the lease.  However, the weighted average term of our borrowings does not match the weighted average term of our investments, and the methods we employ to mitigate our exposure to changes in interest rates involve risks, including the risk that the debt markets are volatile and tend to reflect the conditions of the then‑current economic climate.  Our efforts may not be effective in reducing our exposure to interest rate changes.  Failure to effectively mitigate our exposure to changes in interest rates may materially and adversely affect us by increasing our cost of capital and reducing the net returns we earn on our portfolio.

We attempt to mitigate our exposure to interest rate volatility by using interest rate hedging arrangements. However, these arrangements involve risks and may not be effective in reducing our exposure to interest rate changes. In addition, the counterparties to our hedging arrangements may not honor their obligations. Failure to hedge effectively against changes in interest rates on our borrowings may materially and adversely affect us.

Loss of our key personnel could materially impair our ability to operate successfully.  As an internally managed company, our ability to achieve our investment objectives and to make distributions to our stockholders depends upon the performance of our senior leadership team. We rely on our senior leadership team to, among other things, identify and consummate acquisitions, design and implement our financing strategies, manage our investments and conduct our day‑to‑day operations.  In particular, our success depends upon the performance of Christopher H. Volk, our Chief Executive Officer, and other members of our senior leadership team.

We cannot guarantee the continued employment of any of the members of our senior leadership team, who may choose to leave our company for any number of reasons, such as other business opportunities, differing views on our strategic direction or other personal reasons.  We rely on the experience, efforts and abilities of these individuals, each of whom would be difficult to replace.  The employment agreements we have entered into with each of these executives do not guarantee their continued service to us.  The loss of services of one or more members of our senior leadership team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry personnel, all of which could materially and adversely affect us.

Each member of our senior leadership team holds equity interests, or profits interests, in the form of Series B Units in our principal stockholder, STORE Holding.  The Series B Units are subject to vesting and forfeiture provisions, with 75% of the Series B Units vesting ratably over five years (15% vesting each year on the anniversary of the respective grant dates) and 25% remaining subject to forfeiture if a termination occurs under certain circumstances.   The Series B Units were issued and designed to provide a long-term incentive and, through deferred vesting, to serve as a retention device for our senior leadership team.  In order for the holders of the Series B Units to receive any cash distributions with respect to their Series B Units, the equity investors of STORE Holding must first be returned all of their invested capital plus a specified cash return on such capital, which has not yet occurred.  Once this occurs, members of our senior leadership will be entitled to cash distributions, which may be substantial and may reduce the retention value of the Series B Units.  Also, in the event of a change in control, as defined in the Limited Liability Company Agreement of STORE Holding, dated as of May 17, 2011, as amended (the “LLC Agreement”), each member of our senior leadership team’s vested and unvested Series B Units will be liquidated in accordance with the provisions of the LLC Agreement.    The liquidation of the Series B Units will significantly reduce their retention value and could result in the loss of the services of some or all of the members of our senior leadership team.

Our success depends in part on the creditworthiness of our customers, and we lease most of our properties to non-rated customers.  Our underwriting and risk‑management procedures that we use to evaluate a potential customer’s credit risk may be faulty, deficient or otherwise fail to accurately reflect the risk of our investment.  Our customers are mostly middle‑market companies, which generally are not rated by any nationally recognized rating agency.  We use external and internal tools to evaluate risk and predict the risk of default.  When we review a potential investment, we view our sources of payment to be, in order of priority, unit‑level profitability, tenant credit quality and residual real estate valuation.  Additionally, we review a potential customer’s management team and the macroeconomic trends of the industry in which that customer operates.  We evaluate the risk of company insolvency using a third‑party model, Moody’s Analytics RiskCalc, which is a model for predicting private company defaults based on Moody’s Analytics Credit Research Database and which provides us an Estimated Default Frequency, or EDF, for each of our customers.  We then estimate the risk of lease or loan rejection by assigning a probability of termination

based on the unit‑level fixed charge coverage ratio, or unit FCCRs, at the property or properties we own.  We then estimate the long‑term default risk of an investment by multiplying the EDF score by our estimated probability that our lease will be rejected in bankruptcy, which we call the “STORE Score.”

Our methods may not adequately assess the risk of an investment.  Moody’s Analytics RiskCalc, our methodology of estimating probability of lease rejection and the STORE Score, may be inaccurate, incomplete or otherwise fail to adequately assess default risk.  An EDF score from Moody’s Analytics RiskCalc is not the same as a published credit rating and lacks the extensive company participation that is typically involved when a rating agency publishes a rating.  EDF scores and FCCRs are calculated based on financial information provided to us by our customers and prospective customers without independent verification by us.  The probability of lease rejection we assign an investment based on unit FCCR or other factors may be inaccurate.  Moreover, the risks we have identified as our principal risks may omit significant risks to our investments.  If our underwriting procedures fail to properly assess the unit‑level profitability, tenant or corporate credit risk or real estate value of potential investments, then we may invest in properties that result in tenant defaults, and we may be unable to recover our investment by re‑leasing or selling the related property, which could materially and adversely affect our operating results and financial position.

The agreements governing our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our common stockholders.  The agreements governing our indebtedness contain restrictions and covenants that limit or will limit our ability to operate our business. These covenants, as well as any additional covenants to which we may be subject in the future because of additional indebtedness, could cause us to forego investment opportunities, reduce or eliminate distributions to our common stockholders or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. In addition, the agreements may have cross default provisions, which provide that a default under one of our financing agreements would lead to a default on some or all of our debt financing agreements.

The covenants and other restrictions under our debt agreements may affect, among other things, our ability to:

Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.

The bankruptcy or insolvency of any of our tenants could result in the termination of such tenant’s lease and material losses to us.  A tenant bankruptcy or insolvency could diminish the rental revenue we receive from that property or could force us to “take back” a property as a result of a default or a rejection of the lease by a tenant in bankruptcy.  Any claims against bankrupt tenants for unpaid future rent would be subject to statutory limitations that would likely result in our receipt, if at all, of rental revenues that are substantially less than the contractually specified rent we are owed under their leases.  In addition, any claim we have for unpaid past rent will likely not be paid in full.  If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency.  We may also be unable to re‑lease a terminated or rejected space or re‑lease it on comparable or more favorable terms.

Many of our tenants lease multiple properties from us under master leases.  Bankruptcy laws afford certain protections to a tenant that may also affect the master lease structure.  Subject to certain restrictions, a tenant under a master lease generally is required to assume or reject the master lease as a whole, rather than making the decision on a property‑by‑property basis.  This prevents the tenant from assuming only the better performing properties and terminating the master lease with respect to the poorer performing properties.  If these tenants are considering filing for bankruptcy protection, we may find it necessary to agree to amend their master leases to remove certain underperforming properties rather than risk the tenant rejecting the entire master lease in bankruptcy.  Whether or not a bankruptcy court will require a master lease to be assumed or rejected as a whole depends upon a “facts and circumstances” analysis.  A bankruptcy court will consider a number of factors, including the parties’ intent, the nature and purpose of the relevant documents, whether there was separate and distinct consideration for each property included in the master lease, the provisions contained in the relevant documents and applicable state law.  If a bankruptcy court allows a master lease to be rejected in part, certain underperforming leases related to properties we own could be rejected by the tenant in bankruptcy, thereby adversely affecting payments derived from the properties.  As a result, tenant bankruptcies could materially and adversely affect us.

Our financial monitoring, periodic site inspections and selective property sales may fail to mitigate the risk of customer defaults, and if a customer defaults, we may experience difficulty or a significant delay in re‑leasing or selling the property.  Our portfolio‑management activities, including financial monitoring, periodic site inspections and selective property sales, may be insufficient to prevent or reduce the frequency of tenant defaults.  If a tenant defaults, it will likely cause a significant or complete reduction in our revenue from that property for some time. If a defaulting tenant is unable to recover financially, we may have to re‑lease or sell the property.  Re‑leasing or selling properties may take a significant amount of time, during which the property might have a negative cash flow to us and we may incur other related expenses.  We may also have to renovate the property, reduce the rent or provide an initial rent abatement or other incentive to attract a potential tenant or buyer before we can re‑lease or sell the property. During this period, we likely will incur ongoing expenses for property maintenance, taxes, insurance and other costs.  Therefore, tenant defaults could materially and adversely affect us.

As leases expire, we may be unable to renew those leases or re‑lease the space on favorable terms or at all.  Our success depends in part upon our ability to cause our properties to be occupied and generating revenue.  As of December 31, 2015, leases and loans representing approximately 11% of our annualized base rent and interest will expire prior to 2026.  We cannot guarantee that we will be able to renew leases or re‑lease space (i) without an interruption in the rental revenue from those properties, (ii) at or above our current rental rates, or (iii) without having to offer substantial rent abatements, tenant improvement allowances, early termination rights or below‑market renewal options.  The difficulty, delay and cost of renewing leases, re‑leasing space and leasing vacant space could materially and adversely affect us.

Certain provisions of our leases or loan agreements may be unenforceable, which could adversely impact us.  Our rights and obligations with respect to our leases, mortgage loans or other loans are governed by written agreements. A court could determine that one or more provisions of such an agreement are unenforceable, such as a particular remedy, a loan prepayment provision or a provision governing our security interest in the underlying collateral of a borrower or lessee. We could be adversely impacted if this were to happen with respect to an asset or group of assets.

Our ability to realize future rent increases may be adversely affected by changes in the Consumer Price Index, or CPI.  A substantial portion of our leases contain rent escalators, or provisions that periodically increase the base rent payable by the tenant under the lease.  Our leases that have contingent rent escalators indexed to future increases in the Consumer Price Index primarily adjust over a one‑year period but may adjust over multiple‑year periods. Generally, these escalators increase rent at the lesser of (i) 1 to 1.25 times the change in the CPI over a specified period or (ii) a fixed percentage.  If the product of any increase in the CPI multiplied by the applicable factor is less than the fixed percentage, the increased rent we are entitled to receive will be less than what we otherwise would have been entitled to receive if the rent escalator was based solely on a fixed percentage. Therefore, during periods of deflation or low inflation, small increases or decreases in the CPI will subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on fixed percentages or amounts. 

The geographic concentration of our properties could make us vulnerable to an economic downturn, regulatory changes or acts of nature in those areas, resulting in a decrease in our revenues or other negative impacts on our results

of operations.  As of December 31, 2015, the five states from which we derive the largest amount of our annualized base rent and interest were Texas (12.4%), Illinois (8.2%), Georgia (6.2%), Ohio (5.4%) and Tennessee (5.3%). As a result of these concentrations, the conditions of local economies and real estate markets, changes in state or local governmental rules and regulations, acts of nature and other factors in these states could result in a decrease in the demand for the products offered by the businesses operating on the properties in those states, which would have an adverse impact on our customers’ revenues, costs and results of operations, thereby adversely affecting their ability to meet their obligations to us.

As we continue to acquire properties, we may decrease or fail to increase the diversity of our portfolio.  We have broad authority to invest in any STORE Property that we may identify in the future.  As we continue to acquire properties, our portfolio may become less diverse by tenant, industry or geographic area.  If our portfolio becomes less diverse, the trading price of our common stock may fall, as our business will be more sensitive to the bankruptcy or insolvency of fewer tenants, to changes in consumer trends of a particular industry and to a general economic downturn in a particular geographic area.

We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties, and competition for acquisitions may reduce the number of acquisitions we are able to complete and increase the costs of these acquisitions. We compete with numerous developers, owners and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments in order to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties, which could materially and adversely affect us.

We also face competition for acquisitions of real property from investors, including traded and non-traded public REITs, private equity investors and other institutional investment funds, as well as private wealth management advisory firms that serve high net worth investors (also known as family offices), some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the willingness to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties. This competition will increase if investments in real estate become more attractive relative to other types of investment. Accordingly, competition for the acquisition of real property could materially and adversely affect us.

A decrease in demand for restaurant space or a downturn in the restaurant industry could materially and adversely affect us.  As of December 31, 2015, real estate investments operated by customers in the restaurant industry represented approximately 25.5% of the dollar amount of our investment portfolio and 25.2% of our annualized base rent and interest, and, in the future, it is likely we will acquire additional restaurant properties.  Because the restaurant industry represents a significant portion of our portfolio, a downturn in the restaurant industry may have a material adverse effect on us.

We have investments in industries that depend upon discretionary spending by consumers.  A reduction in the willingness or ability of consumers to use their discretionary income in the businesses of our customers and potential customers could reduce the demand for our net‑lease solutions.  Most of our portfolio is leased to or financed with customers operating service or retail businesses on our property locations.  Restaurants, movie theaters, health clubs, early childhood education centers and furniture stores represent the largest industries in our portfolio; and Ashley Furniture HomeStore, Gander Mountain, Applebee’s, Popeyes Louisiana Kitchen and Starplex Cinemas represent the largest concepts in our portfolio.  The success of most of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services.  A downturn in the economy could cause consumers to reduce their discretionary spending, which may have a material adverse effect on us.

Service and retail businesses using physical outlets also face increasing competition from alternate methods of purchasing goods and services, including online service providers and retailers.  As consumers increasingly use alternate methods to obtain goods and services, including the internet, this trend could adversely impact the success of

physical service centers and retail business locations.  Because we lease real estate to service and retail businesses, a decrease in purchases at these locations may have a material adverse effect on us.

Some of our tenants are subject to government regulation and rely on government funding, which could adversely impact their ability to make timely lease payments to us.  The industries in which some of our tenants operate are subject to government regulation, and these businesses may depend, to various extents, on government funding or reimbursements. For example, tenants in the education industry often rely extensively on local, state and federal government funding for their students’ tuition payments. In addition, tenants in the healthcare and childcare‑related industries typically receive local, state or federal funding, subsidies or reimbursements. The amount and timing of these various fundings, subsidies and reimbursements depend on various factors beyond our or our tenants’ control, including government budgets and policies and political issues. Some of these tenants also must satisfy certain licensure or certification requirements in order to qualify for government funding, subsidies or reimbursements. If these tenants fail to satisfy these requirements or otherwise fail to receive government funding, when and as needed, including as a result of tightened government budgets, revised funding policies or otherwise, their cash flow could be materially affected causing them to default on our leases, which could adversely impact our business. As we continue to grow our investment portfolio, we may continue to invest in these industries and expand our business into other industries that operate in highly regulated environments and rely significantly on payments from government payors. Changes in regulatory requirements or government funding policies affecting our tenants may result in lease defaults, which would reduce our revenues and harm our results of operations and financial position.

We may be unable to identify and complete acquisitions of suitable properties, and the competition for acquisitions may reduce the number of acquisitions we can complete, either of which may impede our growth and the continued diversification of our portfolio.  Our ability to continue to acquire suitable properties may be constrained by numerous factors, including the following:

If any of these risks occur, we may be materially and adversely affected.

Insurance on our properties, which our tenants are typically required to maintain, may not adequately cover all losses, and uninsured losses could materially and adversely affect us.  Our leases and loan agreements typically require that our tenants and borrowers maintain insurance of the types and in the amounts that are usual and customary for similar types of commercial property, as reviewed by our independent insurance consultant.  Under certain circumstances, however, we may permit certain tenants and borrowers to self‑insure.  Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes or floods, may be covered by insurance policies that are held by our tenants with limitations, such as large deductibles or co‑payments that a tenant may not be able to meet.

In addition, factors such as inflation, changes in building codes and ordinances, environmental considerations and others, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed.  In that situation, the insurance proceeds we receive may not be adequate to restore our economic position with respect to the affected real property.  In the event we experience a substantial or comprehensive loss of any of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures, which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements.  The loss of our capital investment in, or anticipated future returns from, our properties due to material uninsured losses could materially and adversely affect us.

Changes in zoning laws may prevent us from restoring a property in the event of a substantial casualty loss.  Due to changes, among other things, in applicable building and zoning ordinances and codes, or zoning laws, affecting certain of our properties that have come into effect after the construction of the properties, certain properties may not comply fully with current zoning laws, including use, parking and setback requirements, but may qualify as permitted non‑conforming uses.  Such changes may limit our or our tenant’s ability to restore the premises of a property to its previous condition in the event of a substantial casualty loss with respect to the property or the ability to refurbish, expand or renovate such property to remain compliant.  If we are unable to restore a property to its prior use after a substantial casualty loss, we may be unable to re‑lease the space at a comparable rent or sell the property at an acceptable price, which may materially and adversely affect us.

Some of our customers operate under franchise or license agreements, which, if terminated or not renewed prior to the expiration of their leases with us, would likely impair their ability to pay us rent.  As of December 31, 2015, 19.5% of our properties (based on investment amount) are operated by our customers under franchise or license agreements.  Generally, franchise agreements have terms that end earlier than the respective expiration dates of the related leases.  In addition, a tenant’s or borrower’s rights as a franchisee or licensee typically may be terminated and the tenant or borrower may be precluded from competing with the franchisor or licensor upon termination.  Usually, we have no notice or cure rights with respect to such a termination and have no rights to assignment of any such franchise agreement.  This may have an adverse effect on our ability to mitigate losses arising from a default on any of our leases or loans.  A franchisor’s or licensor’s termination or refusal to renew a franchise or license agreement would likely have a material adverse effect on the ability of the tenant or borrower to make payments under its lease or loan, which could materially and adversely affect us.

A small percentage of the businesses operating on our properties have limited operating histories, which increases the risk that the tenants operating those businesses may default on rent payments to us. As of December 31, 2015, 39 of the 1,325 properties in our investment portfolio had been open for less than 12 months or were under construction.  The businesses operating on these properties, whether newly constructed or recently opened, may not perform as anticipated, and the tenant may become unable to pay rent to us, which may materially and adversely affect us.

If a tenant defaults under either the ground lease or mortgage loan of a hybrid lease, we may be required to take judicial or administrative action or begin foreclosure proceedings before we can re‑lease or sell the property.  As of December 31, 2015, 5.1% of our annualized base rent and interest was derived from hybrid leases.  A hybrid lease is a modified sale‑leaseback transaction, where the customer sells us their land, leases the land back from us under a ground lease and we simultaneously make a mortgage loan to the customer secured by the improvements the customer continues to own.  If a customer defaults under a hybrid lease, we may: (1) evict the customer under the ground lease and assume ownership of the improvements; or (2) if required by a court, foreclose on the mortgage loan that is secured by the improvements.  Under a ground lease, we as ground lessor generally become the owner of the improvements on the land at lease maturity or if the tenant defaults.  It is possible that a court could require us to foreclose on the mortgage secured by the improvements rather than simply evicting the defaulting tenant under the ground lease.  If foreclosure is required rather than simple eviction, we might encounter delays and expenses in obtaining possession of the land and improvements, which in turn could delay our ability to sell or re‑lease the property in a prompt manner, which could materially and adversely affect us.

We are subject to risks related to owning commercial real estate that could reduce the value of our properties.  The value of our investments in commercial real estate is subject to the following risks, among others:

The occurrence of any of the risks described above may cause the value of our real estate to decline, which could materially and adversely affect us.

Global market and economic conditions may materially and adversely affect us and our tenants.  Our business is sensitive to changes in the overall economic conditions that impact our customers’ financial condition and financing practices.  Adverse economic conditions such as high unemployment levels, interest rates, tax rates and fuel and energy costs may impact the results of our tenants’ operations, which may impact their ability to meet their obligations to us. During periods of economic slowdown, such as the global and U.S. economic downturn of 2008 and 2009, which resulted in increased unemployment, large‑scale business failures and tight credit markets, demand for real estate may decline, resulting in lower rents we can charge or an increased number of defaults under our existing leases.  Accordingly, a decline in economic conditions could materially and adversely affect us.

Illiquidity of real estate investments and restrictions imposed by the Code could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.  Some of the real estate investments we have made and expect to make in the future may be difficult to sell quickly.  Therefore, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial or investment conditions could be limited.  In particular, these risks could arise from weaknesses in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, such as the most recent economic downturn, and changes in laws, regulations or fiscal policies of the jurisdiction in which our properties are located.

In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties, which restrictions are not applicable to other types of real estate companies.  In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest.  Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may materially and adversely affect our operations, cash flows and ability to pay distributions on our common stock.

Inflation may materially and adversely affect us and our tenants. We may experience periods when inflation is greater than the increases in rent provided by many of our leases, in which event rent increases will not keep up with the rate of inflation.  If this occurs, we will not have the source of internal growth we expect.  Also, increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect our customers’ ability to satisfy their financial obligations to us.

Property vacancies could result in significant capital expenditures.  The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new tenant and cause us to incur significant costs in the form of ongoing expenses for property maintenance, taxes, insurance and other expenses.  Many of the leases we enter into or acquire are for properties that are especially suited to the particular business of the tenants operating on those properties.  Because these properties have been designed or physically modified for a particular tenant, if the current lease is terminated or

not renewed, we may be required to renovate the property at substantial costs, decrease the rent we charge or provide other concessions to re‑lease the property.  In addition, if we are required to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed or modified.  This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions, including tenant demand. These limitations may materially and adversely affect us.

The loss of a borrower or the failure of a borrower to make loan payments on a timely basis will reduce our revenues and may cause us to incur substantial costs, which could lead to losses on our investments and reduced returns to our stockholders.  From time to time, we make or assume commercial mortgage loans.  We have also made a limited amount of investments on properties we own or finance in the form of loans secured by equipment or other fixtures owned by our customers.  The success of our loan investments materially depends on the financial stability of our borrowers.  The success of our borrowers depends on each of their individual businesses and their industries, which could be affected by economic conditions in general, changes in consumer trends and preferences and other factors over which neither they nor we have control.  A default of a borrower on its loan payments to us that would prevent us from earning interest or receiving a return of the principal of our loan could materially and adversely affect us.  In the event of a default, we may also experience delays in enforcing our rights as lender and may incur substantial costs in collecting the amounts owed to us and in liquidating any collateral.

Foreclosure and other similar proceedings used to enforce payment of real estate loans are generally subject to principles of equity, which are designed to relieve the indebted party from the legal effect of that party’s default.  Foreclosure and other similar laws may limit our right to obtain a deficiency judgment against the defaulting party after a foreclosure or sale.  The application of any of these principles may lead to a loss or delay in the payment on loans we hold, which in turn could reduce the amounts we have available to make distributions.  Further, in the event we have to foreclose on a property, the amount we receive from the foreclosure sale of the property may be inadequate to fully pay the amounts owed to us by the borrower and our costs incurred to foreclose, repossess and sell the property, which could materially and adversely affect us.

Our investments in mortgage loans may be affected by unfavorable real estate market conditions, which could decrease the value of those loans.  As of December 31, 2015, we had investments in mortgage loans having an aggregate unpaid principal balance of $96 million.  Investments in mortgage loans are subject to the risk of default by the borrowers and interest‑rate risks.  To the extent we incur delays in liquidating defaulted mortgage loans, we may not be able to obtain all amounts due to us under such loans.  Further, the values of the properties securing the mortgage loans may not remain at the levels existing on the dates of origination of those mortgage loans or the dates of our investment in the loans.  If the values of the underlying properties decline, the value of the collateral securing our mortgage loans will also decline, and if we were to foreclose on any of the properties securing the mortgage loans, we may not be able to sell or lease them for an amount equal to the unpaid amounts due to us under the mortgage loans.  As a result, defaults on mortgage loans in which we may invest may materially and adversely affect us.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make significant unanticipated expenditures that could materially and adversely affect us.  Our properties are subject to the Americans with Disabilities Act, or ADA.  Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons.  Compliance with the ADA could require us to modify the properties we own or may purchase to remove architectural and communication barriers in order to make our properties readily accessible to and usable by disabled individuals, and may restrict renovations on our properties.  Failure to comply with the ADA could result in the imposition of fines or an award of damages to private litigants, as well as the incurrence of the costs of making modifications to attain compliance.  Future legislation could impose additional obligations or restrictions on our properties.  Our tenants and borrowers are generally responsible to maintain and repair our properties pursuant to our lease and loan agreements, including compliance with the ADA and other similar laws and regulations, but we could be held liable as the owner of the property for their failure to comply with the ADA or other similar laws and regulations.  Any required changes could involve greater expenditures than anticipated or the changes might be made on a more accelerated basis than anticipated, either of which could adversely affect the ability of our tenants to cover such costs.  If we are subject to liability under the ADA or similar laws and regulations as an owner and our tenants are unable to cover the cost of compliance or if we are required to expend our own funds to comply with the ADA or similar laws and regulations, we could be materially and adversely affected.

In addition, our properties are subject to various laws and regulations relating to fire, safety and other regulations, and in some instances, common‑area obligations.  Our tenants and borrowers have primary responsibility for compliance with these requirements pursuant to our lease and loan agreements.  Our tenants and borrowers may not have the financial ability to fully comply with these regulations.  If our tenants and borrowers are unable to comply with these regulations, they may be unable to pay rent on time or may default, or we may have to make substantial capital expenditures to comply with these regulations, which we may not be able to recoup from our tenants and borrowers.  We may also face owner liability for failure to comply with these regulations, which may lead to the imposition of fines or an award of damages to private litigants.  Therefore, the failure of our tenants and borrowers to comply with these regulations could materially and adversely affect us.

The costs of compliance with or liabilities related to environmental laws may materially and adversely affect us.  Our properties may be subject to known and unknown environmental liabilities under various federal, state and local laws and regulations relating to human health and the environment.  Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons, including owners or operators, for the costs of investigation or remediation of contaminated properties.  These laws and regulations apply to past and present business operations on the properties, and the use, storage, handling and recycling or disposal of hazardous substances or wastes.  We may face liability regardless of our knowledge of the contamination, the timing of the contamination, the cause of the contamination or the party responsible for the contamination of the property.  Our leases and loans typically impose obligations on our tenants and borrowers to indemnify us from all or most compliance costs we may experience as a result of the environmental conditions on our properties, but if a tenant or borrower fails to, or cannot, comply, we may be required to pay such costs.  We cannot predict whether in the future, new or more stringent environmental laws will be enacted or how such laws will impact the operations of businesses on our properties.  Costs associated with an adverse environmental event could be substantial, and the potential liability as to any of our properties is generally not limited under such laws and regulations and could significantly exceed the value of such property.

Under the laws of many states, contamination on a site may give rise to a lien on the site for clean‑up costs.  In several states, such a lien has priority over all existing liens, including those of existing mortgages.  In these states, a lien of a mortgage may lose its priority to such a “superlien.”  If any of the properties on which we have a mortgage are or become contaminated and subject to a superlien, we may not be able to recover the full value of our investment and may be materially and adversely affected.

Certain federal, state and local laws, regulations and ordinances govern the use, removal and/or replacement of underground storage tanks in the event of a release on, or an upgrade or redevelopment of, certain properties.  Such laws, as well as common‑law standards, may impose liability for any releases of hazardous substances associated with the underground storage tanks and may provide for third parties to seek recovery from owners or operators of such properties for damages associated with such releases.  If hazardous substances are released from any underground storage tanks on any of our properties, we may be materially and adversely affected.

In a few states, transfers of some types of sites are conditioned upon cleanup of contamination prior to transfer, including in cases where a lender has become the owner of the site through a foreclosure, deed in lieu of foreclosure or otherwise.  If any of our properties are subject to such contamination, we may be subject to substantial clean‑up costs before we are able to sell or otherwise transfer the property.

Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos‑containing materials in the event of the remodeling, renovation or demolition of a building. Such laws, as well as common‑law standards, may impose liability for releases of ACMs and may impose fines and penalties against us or our tenants for failure to comply with these requirements or provide for third parties to seek recovery from us or our tenants.

If we or our tenants or borrowers become subject to any of the above‑mentioned environmental risks, we may be materially and adversely affected.

Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all.  In the recent past, the credit markets have experienced significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or restructuring

of certain financial institutions. These circumstances have materially impacted liquidity in the financial markets, making financing terms for borrowers less attractive, and in certain cases, have resulted in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness. Reductions in our available borrowing capacity or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us.

Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediation.  When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time.  Some molds may produce airborne toxins or irritants.  Exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions.  If our tenants or their employees or customers are exposed to mold at any of our properties, we could be required to undertake a costly remediation program to contain or remove the mold from the affected property.  In addition, exposure to mold by our tenants or others could subject us to liability if property damage or health concerns arise.  If we were to become subject to significant mold‑related liabilities, we could be materially and adversely affected, which could harm our business.

Our proprietary information technology, or IT, platform may not capture all of the necessary information to allow us to properly monitor and analyze our tenants’ and borrowers’ credit risk, which may materially and adversely affect us.  We have a proprietary IT platform, which we developed to proactively manage our investment portfolio. Our IT platform offers customer relationship management and general ledger and servicing system integration.  Another component of our IT platform is the STORE Universal Database System, or SUDS, which provides our management with access to lease abstracts, tenant information, document scans, property data and servicing information.  Our IT platform and SUDS may not capture all the information needed to mitigate the risk of tenant or borrower default.

We rely on IT in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.  We rely on IT networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information. Although we have taken steps to protect the security of the data maintained in our information systems, our security measures may not be able to prevent the systems’ improper functioning, or the theft of intellectual property, personal information, or personal property, such as in the event of cyber-attacks. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, result in theft of company assets, damage our reputation, subject us to liability claims and could adversely affect our business, financial condition and results of operations.

Our revenues and expenses are not directly correlated and, because a large percentage of our costs and expenses are fixed, we may not be able to adapt our cost structure to offset declines in our revenue.  Most of the expenses associated with our business, such as our office rent, certain acquisition costs, insurance, employee wages and benefits and other general corporate expenses, are relatively inflexible and will not necessarily decrease with a reduction in revenue from our business.  Our expenses also will be affected by inflationary increases, and certain of our cost increases may exceed the rate of inflation in any given period.  By contrast, our revenue is affected by many factors beyond our control, such as the economic conditions of the markets where we own properties.  As a result, we may not be able to fully offset rising costs by increasing our rents, which could have a material and adverse effect on us.

Our future results will suffer if we do not effectively manage our growth.  We expect to continue to grow our business through additional sale-leaseback transactions and possibly other strategic transactions.  Our future success will depend, in part, upon our ability to manage our growth, successfully monitor our internal operations, costs and regulatory compliance, and continue to develop and maintain other necessary systems, processes and internal controls. If we fail to manage our growth effectively, our business may be adversely affected.

We may become subject to litigation, which could materially and adversely affect us.  In the future we may become subject to litigation, including claims relating to our operations, debt and equity offerings and otherwise in the ordinary course of business.  Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against.  We generally intend to defend ourselves, but we cannot be certain of the ultimate outcomes of any claims that may arise.  Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured and materially and adversely impact our ability to attract directors and officers.

Our portfolio of tenants and borrowers may be riskier than portfolios comprised of rated investment‑grade companies.  Most of our customers have not been assigned a credit rating by any nationally recognized rating agency.  Our method of determining creditworthiness of potential customers may be less comprehensive and detailed than the process by which nationally recognized rating agencies assign company credit ratings.  As a result, our investment portfolio of tenants and borrowers may be riskier than a portfolio comprised of rated investment‑grade companies.

We may not acquire the properties that we evaluate in our pipeline.  We actively maintain a multi-billion dollar pipeline of investment opportunities.  However, we typically close only a small percentage (approximately 5%) of all transactions we evaluate.  Transactions may fail to close for a variety of reasons, including the discovery of previously unknown liabilities or other items uncovered during our diligence process.  Similarly, we may never execute binding purchase agreements with respect to properties that are currently subject to non‑binding letters of intent, and properties with respect to which we are negotiating may never lead to the execution of any letter of intent.  For many other reasons, we may not ultimately acquire the remaining properties currently in our pipeline. Accordingly, you should not place undue reliance on the concept of a pipeline as we have referred to in this Annual Report.

Construction and renovation risks could adversely affect our profitability. In certain instances, we provide financing to our customers for the construction and renovation of their properties. We are therefore subject to the risks that this construction or renovation may not be completed.  Construction and renovation costs for a property may exceed a tenant’s original estimates due to increased costs for materials or labor or other costs that are unexpected.  A tenant may also be unable to complete construction or renovation of a property on schedule, which could result in increased debt service expense or construction costs.  These additional expenses may affect the ability of the tenant to make payments to us.

Some of our financing arrangements involve balloon payment obligations, which could materially and adversely affect us if we are unable to refinance or sell on acceptable terms.  Some of our financings require us to make a lump-sum or “balloon” payment at maturity. Our ability to make any balloon payment is uncertain and may depend on our ability to obtain additional financing or our ability to sell our properties. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell our properties at a price sufficient to make the balloon payment, if at all. If the balloon payment is refinanced at a higher rate, it will reduce or eliminate any income from our properties. Our inability to meet a balloon payment obligation, through refinancing or sale proceeds, or refinancing on less attractive terms could materially and adversely affect us. We have certain balloon maturities totaling $23 million in the next three years. If we are unable to refinance these maturities or otherwise retire the indebtedness by that time, we could be materially adversely affected, and could be forced to relinquish the related collateral.

Cybersecurity risks and cyber incidents could adversely affect our business and disrupt operations and expose us to liabilities to tenants, employees, capital providers, and other third parties. Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cybersecurity protection costs, litigation and reputational damage adversely affecting customer or investor confidence. These cyber incidents could negatively impact us, our tenants or the capital markets.

Future investment in international markets could subject us to additional risks. If we expand our operating strategy to include investment in international markets, we could face additional risks, including foreign currency exchange rate fluctuations, operational risks due to local economic and political conditions and laws and policies of the United States affecting foreign investment.

Risks Related to Our Organization and Structure

Oaktree Capital Management, L.P., or Oaktree, by virtue of its ownership and control of STORE Holding (our principal stockholder), has substantial influence over our business, and its interests, and the interests of certain members of our management, may differ from our interests or those of our other stockholders.  As of February 1, 2016, Oaktree indirectly beneficially owned just under 40% of our outstanding shares of common stock.  Pursuant to our stockholders agreement with STORE Holding, Oaktree, as its controlling member, currently has the right to designate three members of our board of directors, which currently consists of nine directors.

The interests of Oaktree may differ from the interests of our other stockholders, and the concentration of stock ownership held indirectly by Oaktree will limit other stockholders’ ability to influence corporate matters. In addition, members of our management have equity interests, or profits interests, in the form of Series B Units in our principal stockholder, STORE Holding, which may cause them to have interests that differ from our other stockholders. The concentration of ownership and voting power of STORE Holding may also delay, defer or even prevent an acquisition by a third party or other change of control of us and may make some transactions more difficult or impossible without the support of Oaktree, even if such events are in the best interests of our other stockholders. The concentration of voting power that Oaktree has may have an adverse effect on the price of our common stock. As a result of this concentration, we may take actions that our other stockholders do not view as beneficial, which may adversely affect our results of operations and financial condition and cause the value of your investment in us to decline.

As of December 7, 2015, we ceased to be a “controlled company” as defined in the NYSE Listed Company Manual and, as a result, no longer qualify for exemptions from certain corporate governance requirements. If we are unable to comply with applicable corporate governance requirements, we may become subject to enforcement actions by the NYSE or delisting. Prior to December 7, 2015, STORE Holding held more than 50% of the voting power for the election of our directors and we relied upon the “controlled company” exception with respect to certain NYSE corporate governance requirements. Pursuant to this exception, we were exempt from the rules that would have otherwise required that our board of directors consist of a majority of independent directors and that our compensation committee and nominating and corporate governance committee be composed entirely of independent directors.

Following the closing of a public offering on December 7, 2015, STORE Holding no longer held more than 50% of the voting power for the election of directors and, as a result, we are no longer a “controlled company” as defined in the NYSE Listed Company Manual. Under the NYSE Listed Company Manual transitional rules, both our nominating and corporate governance committee and compensation committee must consist of a majority of independent directors on or before March 6, 2016, and on or before December 6, 2016, both committees must consist solely of independent directors and our board of directors must consist of a majority of independent directors. At the meeting of our board of directors on February 18, 2016, independent directors were appointed to both committees such that each committee now consists of a majority of independent directors. During this transition period, our stockholders will not have the same protections afforded to stockholders of companies that have committees of their boards of directors that consist solely of independent directors and boards of directors that consist of a majority of independent directors. Further, if, within the phase-in periods, we are not able to recruit additional directors that would qualify as independent, or we are not able to otherwise comply with the NYSE listing requirements, we may be subject to enforcement actions by the NYSE or delisting.

Our board of directors may change our investment strategy, financing strategy or leverage policies without stockholder consent.  Our board of directors may change any of our strategies, policies or procedures with respect to property acquisitions and divestitures, asset allocation, growth, operations, indebtedness, financing and distributions at any time without the consent of our stockholders, which could result in our acquiring properties that are different from, and possibly riskier than, the types of single‑tenant real estate and related investments described in this Annual Report.  These changes could materially and adversely affect us.

Our board of directors’ power to increase the number of authorized shares of our stock without stockholder approval may negatively impact our existing stockholders.  Our charter authorizes us to issue up to 375,000,000 shares of common stock, and up to 125,000,000 shares of preferred stock, $0.01 par value per share. Our charter authorizes our board of directors, with the approval of a majority of the board of directors and without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that we are authorized to issue.  Accordingly, our board of directors could authorize the issuance of shares of common stock or another class or series of stock, including a class or series of preferred stock, that could have the effect of delaying, deferring or preventing a change in control of us that our existing stockholders may view as favorable.  In addition, our board of directors may increase our authorized stock in order to issue additional shares in connection with future financings and other transactions.  These additional issuances could dilute the ownership interests of our existing stockholders.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.  As permitted by Maryland law, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your and our ability to recover damages from such director or officer will be limited. In addition, our charter authorizes us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law.

Termination of the employment agreements with certain members of our senior management team could be costly and prevent a change in control of our company.  The employment agreements with certain members of our senior management team provide that if their employment with us terminates under certain circumstances (including in connection with a change in control of our company), we may be required to pay them significant amounts of severance compensation, including gross-ups for tax liabilities, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders.

If we fail to implement and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.  As a publicly traded company, we are required to comply with the applicable provisions of the Sarbanes‑Oxley Act, which requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting and effective disclosure controls and procedures for making required filings with the SEC.  Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed, which could depress the trading price of our common stock.

Designing and implementing an effective system of integrated internal controls is a continuous effort that requires significant resources and devotion of time.  As part of the ongoing monitoring of internal controls required of publicly traded companies, we may discover significant deficiencies or material weaknesses in our internal controls.  As a result of deficiencies or weaknesses that may be identified in our internal controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover deficiencies or weaknesses, we will make efforts to improve our internal and disclosure controls.  However, we may not be successful. 

Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect

our ability to remain listed with the NYSE.  Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely materially and adversely affect us.

We will continue to incur significant expenses as a result of being a public company, which will negatively impact our financial performance.  We incur, and will continue to incur, significant legal, accounting, insurance and other expenses as a result of being a public company.  The Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd‑Frank Act, and the Sarbanes‑Oxley Act, as well as related rules implemented by the SEC and the NYSE, have required changes in corporate governance practices of public companies.  As of December 31, 2015, we determined that we no longer qualify as an “emerging growth company” under the JOBS Act, and as a result of the additional regulatory and other requirements, we will experience a substantial increase in legal, accounting, insurance and certain other expenses.  In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd‑Frank Act are expected to require additional changes.  We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes‑Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time‑consuming and costly.  We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers.

Risks Related to Our Tax Status and Other Tax Related Matters

We would incur adverse tax consequences if we fail to qualify as a REIT.    We have elected to be taxed as a REIT under the Code.  Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and which involves the determination of various factual matters and circumstances not entirely within our control.  We expect that our current organization and methods of operation will enable us to continue to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future.  In addition, U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect.  The Protecting Americans from Tax Hikes Act (“PATH Act”) was enacted in December 2015, and included numerous changes in the U.S. federal income tax laws applicable to REITs.  The provisions have various effective dates beginning as early as 2016.  We expect that the changes will not materially impact us under our current methods of operation.  Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.

If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to our stockholders in computing our taxable income.  Also, unless the Internal Revenue Service, or the IRS, granted us relief under certain statutory provisions, we could not re‑elect REIT status until the fifth calendar year after the year in which we first failed to qualify as a REIT.  The additional tax liability from the failure to qualify as a REIT would reduce or eliminate the amount of cash available for investment or distribution to our stockholders.  This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In addition, we would no longer be required to make distributions to our stockholders.  Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.

Dividends paid by REITs generally do not qualify for reduced tax rates.    In general, the maximum U.S. federal income tax rate for dividends that constitute “qualified dividend income” paid to individuals, trusts and estates is 20%.  Unlike dividends received from a corporation that is not a REIT, our distributions generally are not eligible for the reduced rates.  Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non‑REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common stock.

We may conduct a portion of our business through taxable REIT subsidiaries, which are subject to certain tax risks.    We have established a taxable REIT subsidiary and may establish others in the future.  Despite our qualification

as a REIT, our taxable REIT subsidiaries must pay income tax on their taxable income.  In addition, we must comply with various tests to continue to qualify as a REIT for federal income tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not constitute permissible income and investments for these tests.  Our dealings with our taxable REIT subsidiaries may adversely affect our REIT qualification.  Furthermore, we may be subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature or are otherwise not permitted under the Code.

Gain on disposition of assets deemed held for sale in the ordinary course of business is subject to 100% tax.  If we sell any of our assets, the IRS may determine that the sale is a disposition of an asset held primarily for sale to customers in the ordinary course of a trade or business.  Gain from this kind of sale generally will be subject to a 100% tax.  Whether an asset is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances of the sale.  Although we will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be so characterized, we cannot assure you that we will be able to do so.

The IRS may treat sale‑leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.  The IRS may take the position that specific sale‑leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans.  If a sale‑leaseback transaction were so re‑characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of re‑characterization unless we elect to make an additional distribution to maintain our REIT status.

REIT distribution requirements limit our available cash.  As a REIT, we are subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth.  We generally must distribute annually at least 90% of our net REIT taxable income, excluding any net capital gain, in order for our distributed earnings to not be subject to corporate income tax.  We intend to make distributions to our stockholders to comply with the requirements of the Code.  However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short‑term or long‑term basis to meet the 90% distribution requirement of the Code, even if the prevailing market conditions are not favorable for these borrowings.

As a result of acquiring C corporations in carry-over basis transactions, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits.  From time to time, we have and may continue to acquire C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.

If we acquire any asset from a corporation that is or has been a C corporation in a carry-over basis transaction, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we will be required to pay tax on such a built-in gain at the highest regular corporate tax rate on this gain to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our stockholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a carry-over basis transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any non-REIT earnings and profits accumulated by the C corporation prior to the acquisition by the close of the taxable year in which we acquire the corporation.

We could face possible state and local tax audits and adverse changes in state and local tax laws.    As discussed in the risk factors above, because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes.  From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability.  A shortfall in tax revenues for states and municipalities in which we own properties may lead to an increase in the frequency and size of such changes. 

If such changes occur, we may be required to pay additional state and local taxes.  These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to our stockholders.  In the normal course of business, entities through which we own real estate may also become subject to tax audits.  If such entities become subject to state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition.

Qualifying as a REIT involves highly technical and complex provisions of the Code. Our qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist.  Even a technical or inadvertent violation could jeopardize our REIT qualification.  Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT.  Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.  Our ability to satisfy the REIT income and asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we will not obtain independent appraisals, and upon our ability to successfully manage the composition of our income and assets on an ongoing basis.  In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

 

Risks Related to Ownership of Our Common Stock

Changes in market conditions and volatility of stock prices could adversely affect the market price of our common stock.    The stock markets, including the NYSE, on which our common stock is listed, have experienced significant price and volume fluctuations.  As a result, the market price of our common stock could be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects.  In addition to the risks discussed or referred to in this “Risk Factors” section, a number of factors could negatively affect the price per share of our common stock, including:

Many of the factors listed above are beyond our control.  These factors may cause the market price of shares of our common stock to decline, regardless of our financial condition, results of operations, business or our prospects.

Furthermore, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us in particular, and these fluctuations could materially reduce the price of our common stock and materially affect the value of your investment.

Limitations on share ownership and limitations on the ability of our stockholders to effect a change in control of us restrict the transferability of our stock and may prevent takeovers that are beneficial to our stockholders.  One of the requirements for maintenance of our qualification as a REIT for U.S. federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Code, during the last half of any taxable year.  Our charter contains ownership and transfer restrictions relating to our stock to assist us in complying with this and other REIT ownership requirements, among other purposes.  However, the restrictions may have the effect of preventing a change of control that does not threaten REIT status.  These restrictions include a provision in our charter that generally limits ownership by any person of more than 9.8% of the value of our outstanding stock or 9.8% (in value or by number of shares, whichever is more restrictive) of our outstanding common stock, unless our board of directors exempts the person from such ownership limitation.  Absent such an exemption from our board of directors, the transfer of our stock to any person in excess of the applicable ownership limit, or any transfer of shares of such stock in violation of the ownership requirements of the Code for REITs, may be void under certain circumstances, and the intended transferee of such stock will acquire no rights in such shares.  These provisions of our charter may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.

Increases in market interest rates may have an adverse effect on the value of our common stock if prospective purchasers of our common stock expect a higher dividend yield and increased borrowing costs may decrease our funds available for distribution.  The market price of our common stock will generally be influenced by the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our common stock to expect a higher dividend yield. However, higher market interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

A substantial portion of our total outstanding common stock may be sold into the market at any time.  This could cause the market price of our common stock to drop significantly, even if our business is doing well, and make it

difficult for us to sell equity securities in the future.  The market price of our common stock could decline as a result of sales of a large number of shares of our common stock or the perception that such sales could occur.  These sales, or the possibility that these sales may occur, also might make it difficult for us to sell equity securities in the future at times or prices that we deem appropriate.

In accordance with the registration rights agreement we entered into with STORE Holding, we filed a registration statement on Form S-3 with the Securities and Exchange Commission on behalf of STORE Holding, pursuant to which STORE Holding may offer and sell from time to time any or all of the shares of our common stock that it owns.  STORE Holding may also sell such shares in the public market in accordance with, and subject to the limitations on sales by affiliates as provided in, Rule 144 under the Securities Act. As of February 1, 2016,  we had 140,858,765 shares of common stock outstanding, of which 56,336,144 shares of our common stock were held by STORE Holding.

We filed a registration statement on Form S-8 under the Securities Act to register the offer and sale of up to 7,314,221 shares of our common stock or securities convertible into or exchangeable for shares of our common stock that may be issued pursuant to our 2012 Long Term Incentive Plan and our 2015 Omnibus Equity Incentive Plan. Such Form S-8 registration statement automatically became effective upon filing. Accordingly, recipients of shares issued pursuant to such registration statement may generally freely resell those shares in the open market, subject to limitations in the case of any such recipients who are our affiliates.

Future offerings of debt, which would be senior to our common stock upon liquidation, or preferred equity securities, which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock. In the future, we may issue debt or preferred equity securities. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings, including convertible preferred stock, may dilute the holdings of our existing stockholders or otherwise reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make distributions to holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk that future offerings may reduce the market price of our common stock and dilute their stock holdings in us.

If we raise additional capital through the issuance of new equity securities, your interest in us will be diluted.  We may, and will likely, have to issue additional equity securities periodically to finance our growth.  If we raise additional capital through the issuance of new equity securities, your interest in us will be diluted, which could cause you to lose all or a portion of your investment.  If we are unable to access the public markets in the future, or if our performance or prospects decrease, we may need to consummate a private placement of our common stock or preferred stock.  In addition, any new securities we may issue, such as preferred stock, may have rights, preferences or privileges senior to those securities held by you.

If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade the outlook of our common stock, the price of our common stock could decline.  The trading market for our common stock depends in part on the research and reports that third‑party securities analysts publish about our company and our industry.  One or more analysts could downgrade the outlook of our common stock or issue other negative commentary about our company or our industry.  In addition, we may be unable or slow to attract additional research coverage.  Furthermore, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline and cause you to lose all or a portion of your investment.

We may change the dividend policy for our common stock in the future.  The decision to declare and pay dividends on our common stock, as well as the form, timing and amount of any such future dividends, is at the sole discretion of our board of directors and will depend on our earnings, cash flows, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements

under the REIT provisions of the Code, state law and such other factors as our board of directors considers relevant.  Any change in our dividend policy could have a material adverse effect on the market price of our common stock.

Legislative or regulatory action could adversely affect purchasers of our common stock.  In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in our common stock.  Changes are likely to continue to occur in the future, and these changes could adversely affect our stockholders’ investment in our common stock.  These changes include but are not limited to the reduction or elimination of the corporate income tax under the Code.  Any of these changes could have an adverse effect on an investment in our common stock or on the market value or resale potential of our common stock.  Stockholders are urged to consult with their own tax advisor with respect to the impact that recent legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and their potential effect on their investment in our stock.

 

Item 1B.  UNRESOLVED STAFF COMMENTS

None.

 

Item 2.  PROPERTIES

As of December 31, 2015, our total investment in real estate and loans approximated $4.0 billion, representing investments in 1,325 property locations,  substantially all of which are profit centers for our customers.  These investments generate our cash flows from more than 450 contracts predominantly structured as net leases, mortgage loans and combinations of leases and mortgage loans, or hybrid leases. The weighted average non‑cancelable remaining term of our leases at December 31, 2015 was approximately 14 years.

Our real estate portfolio is highly diversified.  As of December 31, 2015, our 1,325 property locations are operated by over 300 customers across 46 states.  None of our customers represented more than 3% of our portfolio at December 31, 2015, and our top ten largest customers represented less than 17% of annualized base rent and interest.  Our customers operate their businesses across more than 300 brand names or business concepts in more than 80 industries.  Our top five concepts as of December 31, 2015 were Ashley Furniture HomeStore, Gander Mountain, Applebee’s, Popeyes Louisiana Kitchen and Starplex Cinemas; combined, these concepts represented 12% of annualized base rent and interest.  Our top five industries as of December 31, 2015 were restaurants, movie theaters, health clubs, early childhood education centers and furniture stores.  Combined, these industries represented 51% of annualized base rent and interest.  As of December 31, 2015, only two of our single-tenant properties were vacant and not subject to a lease.

The following tables summarize the diversification of our real estate portfolio based on the percentage of base rent and interest, annualized based on rates in effect on December 31, 2015, for all of our leases, loans and direct financing receivables in place as of that date.

Diversification by Customer

As of December 31, 2015, our property locations were operated by over 300 customers and the following table identifies our ten largest customers:

 

 

Diversification by Concept

As of December 31, 2015, our customers operated their businesses across more than 300 concepts and the following table identifies the top ten concepts:

 

 

Diversification by Industry

As of December 31, 2015, our customers’ business concepts were diversified across more than 80 industries within the service, retail and industrial sectors of the U.S. economy.   The following table summarizes those industries:

 

 

Diversification by Geography

Our portfolio is also highly diversified by geography, as our 1,325 property locations can be found in 46 of the 50 states (excluding Alaska, Delaware, Hawaii and Rhode Island).  The following table details the top ten geographical locations of the properties as of December 31, 2015:

 

Contract Expirations

The following table sets forth the schedule of our lease, loan and direct financing receivable expirations as of December 31, 2015:

 

 

Item 3.  LEGAL PROCEEDINGS

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

Item 4.  MINE SAFETY DISCLOSURES

Not Applicable.

PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is listed on the NYSE under the symbol “STOR”.  The following table sets forth the high and low sales prices for the Company’s common stock as reported by the NYSE, and distributions declared per share of common stock, for the periods indicated.  The historical stock prices reflected in the following table are not necessarily indicative of future stock price performance.

On February 22, 2016, the closing sale price of our common stock was $25.64 per share on the NYSE, and there were 28 holders of record of the 140,879,389 outstanding shares of our common stock.  Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.  We have determined that, for federal income tax purposes, approximately 98.58% of the distributions paid in 2015 represented ordinary income and 1.42% represented a return of capital.

Distributions

The Company pays regular quarterly distributions to holders of its common stock.  Future distributions will be at the discretion of our Board of Directors and will depend on our actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors.

Issuer Purchases of Equity Securities

The Company did not repurchase any of its equity securities during the year ended December 31, 2015.

Stock Performance Graph

The following performance chart compares, for the period from November 18, 2014 (our first trading day on the NYSE) through December 31, 2015, the cumulative total stockholder return on our common stock with that of the Standard & Poor’s 500 Composite Stock Index, or the S&P 500, and the MSCI US REIT Index.  The chart assumes

$100.00 was invested on November 18, 2014 and assumes the reinvestment of any dividends.  The historical stock price performance reflected in the following graph is not necessarily indicative of future stock price performance.

The performance graph and the related chart and text are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(c) of Regulation S-K, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any filing of ours, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Item 6.  SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial and other information of the Company as of and for each of the years ended December 31, 2015, 2014, 2013 and 2012 and for the period from inception (May 17, 2011) through December 31, 2011. The table should be read in conjunction with the Company’s consolidated financial statements and the notes thereto and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.