Annual Statements Open main menu

STORE CAPITAL LLC - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

 

 

 

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

 

For the quarterly period ended September 30, 2017

 

OR

 

 

 

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

 

For the transition period from                      to                     .  

Commission File No. 001-36739  

 

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Maryland

 

45-2280254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

8377 East Hartford Drive, Suite 100, Scottsdale, Arizona 85255

(Address of principal executive offices) (Zip Code)

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

 

 

 

 

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

 

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

 

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

 

 

 

 

 

Large accelerated filer ☒

 

 

Accelerated filer ☐

 

 

 

 

Non-accelerated filer ☐

 

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

 

Emerging growth company ☐

 

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

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

 

As of November 2, 2017, there were 190,015,680 shares of the registrant’s $0.01 par value common stock outstanding.

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

Part I. - FINANCIAL INFORMATION 

Page

Item 1.     Financial Statements 

3

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 

3

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

4

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

5

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

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

7

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

26

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

42

Item 4.     Controls and Procedures 

43

Part II. - OTHER INFORMATION 

43

Item 1.     Legal Proceedings 

43

Item 1A.  Risk Factors 

43

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

43

Item 3.     Defaults Upon Senior Securities 

43

Item 4.     Mine Safety Disclosures 

43

Item 5.     Other Information 

44

Item 6.     Exhibits 

44

Signatures 

44

2

2


 

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

1,788,412

 

$

1,536,178

 

Buildings and improvements

 

 

3,763,510

 

 

3,226,791

 

Intangible lease assets

 

 

88,671

 

 

92,337

 

Total real estate investments

 

 

5,640,593

 

 

4,855,306

 

Less accumulated depreciation and amortization

 

 

(393,037)

 

 

(298,984)

 

 

 

 

5,247,556

 

 

4,556,322

 

Loans and direct financing receivables

 

 

273,265

 

 

269,210

 

Net investments

 

 

5,520,821

 

 

4,825,532

 

Cash and cash equivalents

 

 

34,986

 

 

54,200

 

Other assets, net

 

 

58,910

 

 

61,936

 

Total assets

 

$

5,614,717

 

$

4,941,668

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

82,000

 

$

48,000

 

Unsecured notes and term loans payable, net

 

 

570,376

 

 

470,190

 

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

 

 

1,741,343

 

 

1,833,481

 

Dividends payable

 

 

58,904

 

 

46,209

 

Accrued expenses, deferred revenue and other liabilities

 

 

68,888

 

 

60,533

 

Total liabilities

 

 

2,521,511

 

 

2,458,413

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

1,900

 

 

1,593

 

Capital in excess of par value

 

 

3,284,353

 

 

2,631,845

 

Distributions in excess of retained earnings

 

 

(194,671)

 

 

(151,592)

 

Accumulated other comprehensive income

 

 

1,624

 

 

1,409

 

Total stockholders’ equity

 

 

3,093,206

 

 

2,483,255

 

Total liabilities and stockholders’ equity

 

$

5,614,717

 

$

4,941,668

 

 

See accompanying notes.

3


 

Table of Contents

STORE Capital Corporation

Condensed Consolidated Statements of Income

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenues:

 

 

    

    

 

    

 

 

    

    

 

    

 

Rental revenues

 

$

104,039

 

$

91,759

 

$

314,093

 

$

259,666

 

Interest income on loans and direct financing receivables

 

 

5,502

 

 

5,023

 

 

16,729

 

 

14,101

 

Other income

 

 

1,003

 

 

216

 

 

1,901

 

 

435

 

Total revenues

 

 

110,544

 

 

96,998

 

 

332,723

 

 

274,202

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

31,379

 

 

27,121

 

 

91,938

 

 

76,427

 

Transaction costs

 

 

 —

 

 

155

 

 

 —

 

 

490

 

Property costs

 

 

1,335

 

 

807

 

 

3,272

 

 

2,519

 

General and administrative

 

 

10,255

 

 

8,104

 

 

29,787

 

 

25,240

 

Selling stockholder costs

 

 

 —

 

 

 —

 

 

 —

 

 

800

 

Depreciation and amortization

 

 

37,589

 

 

31,112

 

 

110,200

 

 

86,626

 

Provision for impairment of real estate

 

 

7,670

 

 

 —

 

 

11,940

 

 

 —

 

Total expenses

 

 

88,228

 

 

67,299

 

 

247,137

 

 

192,102

 

Income from operations before income taxes

 

 

22,316

 

 

29,699

 

 

85,586

 

 

82,100

 

Income tax expense

 

 

81

 

 

89

 

 

334

 

 

248

 

Income before gain on dispositions of real estate

 

 

22,235

 

 

29,610

 

 

85,252

 

 

81,852

 

Gain on dispositions of real estate, net of tax

 

 

6,345

 

 

6,733

 

 

35,778

 

 

9,533

 

Net income

 

$

28,580

 

$

36,343

 

$

121,030

 

$

91,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock—basic and diluted

 

$

0.15

 

$

0.24

 

$

0.69

 

$

0.62

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

189,656,095

 

 

153,143,726

 

 

174,481,758

 

 

146,491,617

 

Diluted

 

 

190,043,107

 

 

153,462,048

 

 

174,481,758

 

 

146,747,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.31

 

$

0.29

 

$

0.89

 

$

0.83

 

 

See accompanying notes.

4


 

Table of Contents

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net income

    

$

28,580

    

$

36,343

    

$

121,030

    

$

91,385

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedges

 

 

34

 

 

245

 

 

(328)

 

 

(2,101)

 

Cash flow hedge losses reclassified to interest expense

 

 

116

 

 

277

 

 

543

 

 

568

 

Total other comprehensive income (loss)

 

 

150

 

 

522

 

 

215

 

 

(1,533)

 

Total comprehensive income

 

$

28,730

 

$

36,865

 

$

121,245

 

$

89,852

 

 

See accompanying notes.

5


 

Table of Contents

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

Operating activities

 

 

    

    

 

    

 

Net income

 

$

121,030

 

$

91,385

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

110,200

 

 

86,626

 

Amortization of deferred financing costs and other noncash interest expense

 

 

8,127

 

 

5,319

 

Amortization of equity-based compensation

 

 

5,880

 

 

5,219

 

Provision for impairment of real estate

 

 

11,940

 

 

 —

 

Gain on dispositions of real estate, net of tax

 

 

(35,778)

 

 

(9,533)

 

Noncash revenue and other

 

 

3,318

 

 

(620)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(3,884)

 

 

(3,031)

 

Accrued expenses, deferred revenue and other liabilities

 

 

8,572

 

 

7,594

 

Net cash provided by operating activities

 

 

229,405

 

 

182,959

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(978,944)

 

 

(849,286)

 

Investment in loans and direct financing receivables

 

 

(28,844)

 

 

(30,660)

 

Collections of principal on loans and direct financing receivables

 

 

23,099

 

 

1,590

 

Proceeds from dispositions of real estate

 

 

202,412

 

 

44,231

 

Net cash used in investing activities

 

 

(782,277)

 

 

(834,125)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

401,000

 

 

445,000

 

Repayments under credit facility

 

 

(367,000)

 

 

(400,000)

 

Borrowings under unsecured notes and term loans payable

 

 

100,000

 

 

300,000

 

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

 

 

134,961

 

 

65,000

 

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

 

 

(231,578)

 

 

(22,831)

 

Financing costs paid

 

 

(2,748)

 

 

(4,243)

 

Proceeds from the issuance of common stock

 

 

658,110

 

 

389,564

 

Stock issuance costs paid

 

 

(10,325)

 

 

(13,684)

 

Shares repurchased under stock compensation plans

 

 

(1,346)

 

 

(1,719)

 

Dividends paid

 

 

(151,014)

 

 

(117,448)

 

Net cash provided by financing activities

 

 

530,060

 

 

639,639

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(22,812)

 

 

(11,527)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

73,166

 

 

83,438

 

Cash, cash equivalents and restricted cash, end of period

 

$

50,354

 

$

71,911

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,986

 

$

30,044

 

Restricted cash included in other assets

 

 

15,368

 

 

41,867

 

Total cash, cash equivalents and restricted cash

 

$

50,354

 

$

71,911

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Accrued tenant improvements included in real estate investments

 

$

22,323

 

$

16,375

 

Seller financing provided to purchasers of real estate sold

 

 

 —

 

 

17,479

 

Acquisition of collateral property securing a mortgage note receivable

 

 

2,000

 

 

 —

 

Accrued financing costs

 

 

33

 

 

 —

 

Accrued stock issuance costs

 

 

53

 

 

366

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

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

 

$

79,360

 

$

64,937

 

Cash paid during the period for income and franchise taxes

 

 

1,488

 

 

1,029

 

See accompanying notes.

 

6


 

Table of Contents

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2017

1. Organization

STORE Capital Corporation (STORE Capital or the Company) was incorporated under the laws of Maryland on May 17, 2011 to acquire single‑tenant operational real estate to be leased on a long‑term, net basis to companies that operate across a wide variety of industries within the service, retail and manufacturing sectors of the United States economy. From time to time, it also provides mortgage financing to its customers.

On November 21, 2014, the Company completed the initial public offering (IPO) of its common stock.  The shares began trading on the New York Stock Exchange on November 18, 2014 under the ticker symbol “STOR”.  The Company was originally formed as a wholly owned subsidiary of STORE Holding Company, LLC (STORE Holding), a Delaware limited liability company; the voting interests of STORE Holding were entirely owned by entities managed by a global investment management firm.  Subsequent to the Company’s IPO, STORE Holding sold all of its shares through public offerings and, as of April 1, 2016, no longer owned any shares of the Company’s common stock. 

STORE Capital has made an election to qualify, and believes it is operating in a manner to continue to qualify, as a real estate investment trust (REIT) for federal income tax purposes beginning with its initial taxable year ended December 31, 2011. As a REIT, it will generally not be subject to federal income taxes to the extent that it distributes all of its taxable income to its stockholders and meets other specific requirements.

2. Summary of Significant Accounting Principles

Basis of Accounting and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of interim periods are not necessarily indicative of the results for the entire year.  Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements and, accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

These condensed consolidated statements include the accounts of STORE Capital and its subsidiaries, which are wholly owned and controlled by the Company through its voting interest. One of the Company’s wholly owned subsidiaries, STORE Capital Advisors, LLC, provides all of the general and administrative services for the day‑to‑day operations of the consolidated group, including property acquisition and lease origination, real estate portfolio management and marketing, accounting and treasury services. The remaining subsidiaries were formed to acquire and hold real estate investments or to facilitate non‑recourse secured borrowing activities. Generally, the initial operations of the real estate subsidiaries are funded by an interest‑bearing intercompany loan from STORE Capital, and such intercompany loan is repaid when the subsidiary issues long‑term debt secured by its properties. All intercompany account balances and transactions have been eliminated in consolidation.

Certain of the Company’s wholly owned consolidated subsidiaries were formed as special purpose entities. Each special purpose entity is a separate legal entity and is the sole owner of its assets and liabilities. The assets of the special purpose entities are not available to pay or otherwise satisfy obligations to the creditors of any owner or affiliate of the special purpose entity. At September 30, 2017 and December 31, 2016, these special purpose entities held assets

7


 

Table of Contents

totaling $5.0 billion and $4.3 billion, respectively, and had third-party liabilities totaling $1.8 billion and $1.9 billion, respectively.  These assets and liabilities are included in the accompanying condensed consolidated balance sheets.

 

Use of Estimates

 

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

 

Reclassifications

 

Certain reclassifications have been made to prior period balances to conform to the current period presentation.  During the quarter ended December 31, 2016, the Company elected to early adopt Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, described below in Recent Accounting Pronouncements. Under this new guidance, transfers to or from restricted cash which have previously been shown in the operating, investing or financing sections of the statement of cash flows are now required to be shown as part of the total change in cash, cash equivalents and restricted cash in the statement of cash flows. As a result of the adoption of ASU 2016-18, amounts previously shown as part of the change in other assets in the operating section and as transfers from or to restricted deposits in the investing section of the statement of cash flows for the nine months ended September 30, 2016 have been retrospectively adjusted as follows:

 

 

 

 

 

 

 

 

 

 

 

 

As Previously

 

As Adjusted

 

Effect of

 

 

Reported

 

per ASU 2016-18

 

Change

Nine Months Ended September 30, 2016

    

 

    

    

 

    

 

 

    

Operating Activities

 

 

 

 

 

 

 

 

 

Change in operating assets:  Other assets

 

$

(3,222)

 

$

(3,031)

 

$

191

Net cash provided by operating activities

 

 

182,768

 

 

182,959

 

 

191

Investing Activities

 

 

 

 

 

 

 

 

 

Transfers to restricted deposits

 

 

(25,353)

 

 

 —

 

 

25,353

Net cash used in investing activities

 

 

(859,478)

 

 

(834,125)

 

 

25,353

Net decrease in cash, cash equivalents and restricted cash

 

 

(37,071)

 

 

(11,527)

 

 

25,544

Cash, cash equivalents and restricted cash, beginning of period

 

 

67,115

 

 

83,438

 

 

16,323

Cash, cash equivalents and restricted cash, end of period

 

 

30,044

 

 

71,911

 

 

41,867

 

Segment Reporting

 

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

 

Accounting for Real Estate Investments

STORE Capital records the acquisition of real estate properties at cost, including acquisition and closing costs. The Company allocates the cost of real estate properties to the tangible and intangible assets and liabilities acquired based on their estimated relative fair values. Intangible assets and liabilities acquired may include the value of existing in-place leases, above-market or below-market lease value of in-place leases and ground lease intangibles, as applicable. Management uses multiple sources to estimate fair value, including independent appraisals and information obtained about each property as a result of its pre‑acquisition due diligence and its marketing and leasing activities. Historically, the Company has expensed transaction costs associated with real estate acquisitions accounted for as business combinations in the period incurred. As discussed in Recent Accounting Pronouncements below, the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in January 2017 and, as a

8


 

Table of Contents

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

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

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

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

Impairment

STORE Capital reviews its real estate investments and related lease intangibles periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. Management considers factors such as expected future undiscounted cash flows, estimated residual value, market trends (such as the effects of leasing demand and competition) and other factors, including bona fide purchase offers received from third parties, in making this assessment. These factors are classified as Level 3 inputs within the fair value hierarchy, discussed in Fair Value Measurements below. An asset is considered impaired if the carrying value of the asset exceeds its estimated undiscounted cash flows and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results.

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

Revenue Recognition

STORE Capital leases real estate to its tenants under long‑term net leases that are predominantly classified as operating leases. Direct costs associated with lease origination, offset by any lease origination fees received, are deferred and amortized over the related lease term as an adjustment to rental revenue. Substantially all of the leases are triple net, which provide that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance. In certain circumstances, the Company may collect property taxes from its customers and remit those taxes to governmental authorities; such property taxes are presented on a net basis in the condensed consolidated statements of income.

The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that provide for specific contractual escalations, rental revenue is recognized on a straight‑line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, accrued rental revenue, calculated as the aggregate difference

9


 

Table of Contents

between the rental revenue recognized on a straight‑line basis and scheduled rents, represents unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the lease. The Company provides an estimated reserve for uncollectible straight‑line rental revenue based on management’s assessment of the risks inherent in those lease contracts, giving consideration to industry default rates for long‑term receivables. There was $19.5 million and $15.0 million of accrued straight‑line rental revenue, net of allowances of $2.9 million and $4.6 million, at September 30, 2017 and December 31, 2016, respectively, which were included in other assets, net, on the condensed consolidated balance sheets.  Leases that have contingent rent escalators indexed to future increases in the Consumer Price Index (CPI) may adjust over a one‑year period or over multiple‑year periods. Generally, these escalators increase rent at the lesser of (a) 1 to 1.25 times the increase in the CPI over a specified period or (b) a fixed percentage. Because of the volatility and uncertainty with respect to future changes in the CPI, the Company’s inability to determine the extent to which any specific future change in the CPI is probable at each rent adjustment date during the entire term of these leases and the Company’s view that the multiplier does not represent a significant leverage factor, increases in rental revenue from leases with this type of escalator are recognized only after the changes in the rental rates have actually occurred.

For leases that have contingent rentals that are based on a percentage of the tenant’s gross sales, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached. Less than 1.5% of the Company’s investment portfolio is subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales.

The Company suspends revenue recognition when the collectibility of amounts due pursuant to a lease is no longer reasonably assured or if the tenant’s monthly lease payments become more than 60 days past due, whichever is earlier. The Company reviews its accounts receivable for collectibility on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. In the event that the collectibility of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write‑off of the specific receivable will be made.

Loans Receivable

STORE Capital holds its loans receivable for long‑term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any.

Revenue Recognition

The Company recognizes interest income on loans receivable using the effective‑interest method applied on a loan‑by‑loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received.  As of September 30, 2017, there was one mortgage loan receivable with an outstanding principal balance of $6.3 million on nonaccrual status.  There were no loans on nonaccrual status at December 31, 2016.

Impairment and Provision for Loan Losses

The Company periodically evaluates the collectibility of its loans receivable, including accrued interest, by analyzing the underlying property‑level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. There was no allowance for loan losses at September 30, 2017 or December 31, 2016.

10


 

Table of Contents

Direct Financing Receivables

Certain of the Company’s real estate investment transactions are accounted for as direct financing leases. The Company records the direct financing receivables at their net investment, determined as the aggregate minimum lease payments and the estimated residual value of the leased property less unearned income. The unearned income is recognized over the life of the related contracts so as to produce a constant rate of return on the net investment in the asset.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. The Company invests cash primarily in money‑market funds of a major financial institution, consisting predominantly of U.S. Government obligations.

 

Restricted Cash

 

Restricted cash primarily consists of reserve account deposits held by lenders, including deposits required to be used for future investment in real estate assets, and escrow deposits. The Company had $15.4 million and $19.0 million of restricted cash and deposits in escrow at September 30, 2017 and December 31, 2016, respectively, which were included in other assets, net, on the condensed consolidated balance sheets. 

 

Deferred Costs

  

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

 

Derivative Instruments and Hedging Activities

The Company may enter into derivatives contracts as part of its overall financing strategy to manage the Company’s exposure to changes in interest rates associated with current and/or future debt issuances. The Company does not use derivatives for trading or speculative purposes. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements.  To mitigate this risk, the Company enters into derivative financial instruments only with counterparties with high credit ratings and with major financial institutions with which the Company may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations. 

The Company records its derivatives on the balance sheet at fair value. All derivatives subject to a master netting arrangement in accordance with the associated master International Swap and Derivatives Association agreement have been presented on a net basis by counterparty portfolio for purposes of balance sheet presentation and related disclosures.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the earnings effect of the hedged forecasted transactions in a cash flow hedge. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to cash flow hedges are reclassified to operations as an adjustment to interest expense as interest payments are made on the hedged debt transaction.

As of September 30, 2017, the Company had one interest rate floor and five interest rate swap agreements in place.  Two of the swaps, with current notional amounts of $11.8 million and $6.2 million, were designated as cash flow

11


 

Table of Contents

hedges associated with the Company’s secured, variable‑rate mortgage note payable due in 2019 (Note 4). One of the interest rate swaps has a notional amount of $100 million and was designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2019 (Note 4).  The remaining two interest rate swaps and related interest rate floor transaction have an aggregate notional amount of $100 million and were designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2021 (Note 4).

 

Fair Value Measurement

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

·

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

·

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

·

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

 

Share‑based Compensation

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

The Company estimates the fair value of RSAs at the date of grant and recognizes that amount in general and administrative expense on the condensed consolidated statements of income ratably over the vesting period at the greater of the amount amortized on a straight‑line basis or the amount vested. The fair value of the RSAs is based on the per-share price of the common stock on the date of the grant. Prior to the Company’s IPO, the fair value was based on the per‑share price of the common stock issued in the Company’s private equity offerings. During the nine months ended September 30, 2017, the Company granted RSAs representing 120,140 shares of restricted common stock to its directors and key employees.  During the same period, RSAs representing 213,233 shares of previously issued restricted stock vested and RSAs representing 9,307 shares of previously issued restricted stock were forfeited.  In connection with the vesting of the RSAs, the Company repurchased 56,097 shares as a result of participant elections to surrender common shares to the Company to satisfy statutory tax withholding obligations under the Company’s equity-based compensation plans. As of September 30, 2017, the Company had 357,316 shares of restricted common stock outstanding.

The Company values the RSUs (which contain both a market condition and a service condition) using a Monte Carlo simulation model on the date of grant and recognizes that amount in general and administrative expense on the condensed consolidated statements of income on a tranche by tranche basis ratably over the vesting periods. During the nine months ended September 30, 2017, the Company awarded 373,719 RSUs to its executive officers.  At September 30, 2017, there were 1,093,153 RSUs outstanding.

12


 

Table of Contents

Income Taxes

As a REIT, the Company generally will not be subject to federal income tax. It is still subject, however, to state and local income taxes and to federal income and excise tax on its undistributed income. STORE Investment Corporation is the Company’s wholly owned taxable REIT subsidiary (TRS) created to engage in non‑qualifying REIT activities. The TRS is subject to federal, state and local income taxes.

Management of the Company determines whether any tax positions taken or expected to be taken meet the “more‑likely‑than‑not” threshold of being sustained by the applicable federal, state or local tax authority. Certain state tax returns filed for 2012 and tax returns filed for 2013 through 2016 are subject to examination by these jurisdictions. As of September 30, 2017 and December 31, 2016, management concluded that there is no tax liability relating to uncertain income tax positions. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as general and administrative expenses. There was no accrual for interest or penalties at September 30, 2017 or December 31, 2016.

 

Net Income Per Common Share

Net income per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted common shares, which contain rights to receive non‑forfeitable dividends, as participating securities requiring the two‑class method of computing net income per common share. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted income per common share (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

Net income

 

$

28,580

 

$

36,343

 

$

121,030

 

$

91,385

 

Less: earnings attributable to unvested restricted shares

 

 

(105)

 

 

(133)

 

 

(320)

 

 

(380)

 

Net income used in basic and diluted income per share

 

$

28,475

 

$

36,210

 

$

120,710

 

$

91,005

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

190,015,850

 

 

153,602,720

 

 

174,856,940

 

 

146,967,323

 

Less: Weighted average number of shares of unvested restricted stock

 

 

(359,755)

 

 

(458,994)

 

 

(375,182)

 

 

(475,706)

 

Weighted average shares outstanding used in basic income per share

 

 

189,656,095

 

 

153,143,726

 

 

174,481,758

 

 

146,491,617

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

387,012

 

 

318,322

 

 

 —

 

 

255,577

 

Weighted average shares outstanding used in diluted income per share

 

 

190,043,107

 

 

153,462,048

 

 

174,481,758

 

 

146,747,194

 


(a)

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

13


 

Table of Contents

Recent Accounting Pronouncements

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

In May 2014, with subsequent updates in 2015 and 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a principles-based approach for accounting for revenue from contracts with customers.  The standard does not apply to revenue recognition for lease contracts or to the interest income recognized from loans receivable, which together represent over 99% of the Company’s revenue. ASU 2014-09 is effective for the Company on January 1, 2018 with early adoption permitted and allows for full retrospective or modified retrospective methods of adoption. In accordance with the Company’s implementation plan for adoption, it has evaluated its revenue streams and identified the very few that fall within the scope of this new accounting standard including any impact to the accounting for sales of real estate assets. The Company expects to complete its in-depth review of the revenue contracts and related performance obligations in the fourth quarter of 2017 and finalize the revision of its internal accounting procedures and controls around the revenue recognition process. The Company currently expects to adopt the standard on January 1, 2018 using the modified retrospective method for transition under the standard, in which case the cumulative effect of applying the standard, if any, would be recognized at the date of initial application; the Company currently does not anticipate a material cumulative effect adjustment. This new revenue guidance includes changes to the accounting for sales of real estate properties; however, based on the Company’s analysis, the new standard is not expected to have a material impact on the Company’s recognition of real estate sales and resulting recognition of a gain or loss. The Company will consider whether any additional disclosures required upon the adoption of this standard are applicable to the Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to amend the accounting for leases. The new standard requires lessees to classify leases as either finance or operating leases based on certain criteria and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard also eliminates current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The accounting applied by a lessor is largely unchanged under ASU 2016-02; however, the standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing standards, certain of these costs are capitalizable and, therefore, this new standard may result in these costs being expensed as incurred after adoption; during the first nine months of 2017, the Company capitalized $1.5 million of initial direct costs which are included in other assets on the condensed consolidated balance sheet. Although primarily a lessor, the Company is also a lessee under several ground lease arrangements and under its corporate office lease. The Company has completed its initial inventory and evaluation of these leases and expects that it will be required to recognize a right-of-use asset and a lease liability for the present value of the minimum lease payments. The Company is in the process of preparing and reviewing the initial estimates of the amount of its right-of-use assets and lease liabilities; based on the Company’s current list of contracts under which it is a lessee, the Company estimates that its right-of-use assets to be recognized upon adoption will be less than 1% of total assets. Approximately 98% of the Company’s lease contracts (under which the Company is the lessor) are “triple-net” leases, which means that its tenants are responsible for making the payments to third parties for operating expenses such as, property taxes, insurance and common area maintenance (“CAM”) costs associated with the properties the Company leases to them.  Under the current lease accounting guidance, these payments made by its tenants to third parties are excluded from lease payments and rental revenue.  Upon adoption of the new lease accounting standard in 2019, these lease executory cost payments will be accounted for as activities or costs that are not components of the lease contract.  As a result, the Company may be required to show these payments made by its tenants on a gross basis (for example, both as property tax expense and as corresponding revenue from the tenant who makes the payment directly to the third party) in its consolidated statements of income. Although there is not expected to be any impact to net income or cash flows as a result of a gross presentation, it would have the impact of increasing both reported revenues and property expenses.  The Company is continuing to quantify the impact of this potential gross up and will evaluate any

14


 

Table of Contents

ongoing implementation guidance available on this topic.  The standard will also require new disclosures within the notes accompanying the consolidated financial statements. This standard will be effective for the Company on January 1, 2019.  The Company has developed a four-phase approach to the implementation of the new leasing standard and expects to complete the first two phases in 2017, which include the initial inventory and evaluation of its lease contracts, as a lessee, and the identification of changes needed to the Company’s processes and systems impacted by the new standard. Future phases to be completed in 2018 include the implementation of updates and enhancements to the Company’s internal control framework, accounting systems and related documentation surrounding its lease accounting processes and preparation of any additional disclosures that will be required.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This new guidance clarifies that the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship, provided that all other hedge criteria continue to be met.  The Company adopted the provisions of ASU 2016-05 beginning with the quarter ended March 31, 2017. The adoption of the new guidance did not have an impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify the accounting for and presentation of certain aspects related to share-based payments to employees. The guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the provisions of ASU 2016-09 beginning with the quarter ended March 31, 2017. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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

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

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. This guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities no longer present transfers between cash and cash equivalents and restricted cash within the statement of cash flows. Upon adoption, the new guidance is required to be adopted retrospectively. As permitted, the Company early adopted the provisions of ASU 2016-18 beginning with the quarter ended December 31, 2016 and has applied the provisions retrospectively. The adoption of the new guidance did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets; if so, the set of transferred assets and activities is not considered to be a business. The Company early adopted the provisions of ASU 2017-01 in the first quarter of 2017, as permitted.  For periods prior to the Company’s adoption of this new guidance in 2017, acquisitions of real estate that were subject to an existing lease were accounted for as business combinations where the associated transaction costs were expensed as incurred, whereas the recently adopted guidance generally will treat

15


 

Table of Contents

such transactions as the acquisition of property.  As a result, beginning in 2017, transaction costs associated with the acquisition of real estate subject to an in-place lease will generally be included as part of the cost of the asset or assets acquired rather than expensed as incurred, as fewer, if any, real estate acquisitions will be accounted for as a business combination.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications and is expected to reduce diversity in practice.  The standard will be effective for the Company on January 1, 2018 with early adoption permitted.  The Company does not anticipate this standard will have a material impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results.  This new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item.  The standard will be effective for the Company on January 1, 2019, with early adoption permitted, using a modified retrospective approach.  As the Company has not had any ineffectiveness associated with its cash flow hedges, the adoption of this standard will not have a material impact on its consolidated financial statements.

 

 

16


 

Table of Contents

3. Investments

 

At September 30, 2017, STORE Capital had investments in 1,826 property locations representing 1,777 owned properties (of which 38 are accounted for as direct financing receivables), 19 ground lease interests and 30 properties which secure mortgage loans. The gross investment portfolio totaled $5.91 billion at September 30, 2017 and consisted of the gross acquisition cost of the real estate investments totaling $5.64 billion and loans and direct financing receivables with an aggregate carrying amount of $273.3 million. As of September 30, 2017, approximately half of these investments are assets of consolidated special purpose entity subsidiaries and are pledged as collateral under the non‑recourse obligations of these special purpose entities (Note 4).

During the nine months ended September 30, 2017, the Company had the following gross real estate and loan activity (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

Number of

    

Dollar

 

 

 

Investment

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Gross investments, December 31, 2016

 

1,660

 

$

5,124,516

 

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

 

204

 

 

979,869

 

Investment in loans and direct financing receivables

 

 3

 

 

28,844

 

Sales of real estate

 

(40)

 

 

(182,198)

 

Principal collections on loans and direct financing receivables (d)

 

(1)

 

 

(25,099)

 

Provision for impairment of real estate

 

 —

 

 

(11,940)

 

Other

 

 —

 

 

(134)

 

Gross investments, September 30, 2017

 

 

 

 

5,913,858

 

Less accumulated depreciation and amortization

 

 

 

 

(393,037)

 

Net investments, September 30, 2017

 

1,826

 

$

5,520,821

 


(a)

The dollar amount of investments includes the investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and direct financing receivables.

(b)

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

(c)

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

(d)

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

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to approximately 380 customers geographically dispersed throughout 48 states. Only one state, Texas (12%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at September 30, 2017. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at September 30, 2017, with the largest customer representing approximately 3% of the total investment portfolio. On an annualized basis, the largest customer also represented approximately 3% of the Company’s total annualized investment portfolio revenues as of September 30, 2017. The Company’s customers operate their businesses across approximately 480 concepts and the largest of these concepts represented approximately 3% of the Company’s total annualized investment portfolio revenues as of September 30, 2017.

17


 

Table of Contents

The following table shows information regarding the diversification of the Company’s total investment portfolio among the different industries in which its tenants and borrowers operate as of September 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments (a)

 

Investments

 

Restaurants

 

727

 

$

1,176,632

 

20

%  

Early childhood education centers

 

170

 

 

379,084

 

 7

 

Furniture stores

 

46

 

 

371,453

 

 6

 

Movie theaters

 

39

 

 

355,393

 

 6

 

Health clubs

 

67

 

 

343,455

 

 6

 

Family entertainment centers

 

25

 

 

231,893

 

 4

 

Farm and ranch supply stores

 

22

 

 

198,854

 

 3

 

All manufacturing industries

 

156

 

 

769,090

 

13

 

All other service industries

 

475

 

 

1,487,016

 

25

 

All other retail industries

 

99

 

 

600,988

 

10

 

 

 

1,826

 

$

5,913,858

 

100

%  


(a)

The dollar amount of investments includes the investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and direct financing receivables.

 

Intangible Lease Assets

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

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

In-place lease assets

 

$

57,816

 

$

61,634

 

Ground lease interest assets

 

 

21,363

 

 

20,430

 

Above-market lease assets

 

 

9,492

 

 

10,273

 

Total intangible lease assets

 

 

88,671

 

 

92,337

 

Accumulated amortization

 

 

(23,220)

 

 

(19,515)

 

Net intangible lease assets

 

$

65,451

 

$

72,822

 

 

Aggregate lease intangible amortization included in expense was $1.5 million and $1.6 million during the three months ended September 30, 2017 and 2016, respectively, and was $4.8 million during both the nine-month periods ended September 30, 2017 and 2016.  The amount amortized as a decrease to rental revenue for capitalized above‑market lease intangibles was $0.3 million during both the three months ended September 30, 2017 and 2016 and was $0.9 million during both the nine months ended September 30, 2017 and 2016.

Based on the balance of the intangible assets at September 30, 2017, the aggregate amortization expense is expected to be $1.5 million for the remainder of 2017, $5.8 million in 2018, $5.6 million in 2019, $5.1 million in 2020, $4.7 million in 2021 and $4.5 million in 2022; the amount expected to be amortized as a decrease to rental revenue is expected to be $0.3 million for the remainder of 2017, $1.1 million in each of the years 2018 through 2020, $0.6 million in 2021 and $0.4 million in 2022.  The weighted average remaining amortization period is approximately nine years for the in‑place lease intangibles, approximately 46 years for the amortizing ground lease interests and approximately seven years for the above‑market lease intangibles.

18


 

Table of Contents

Real Estate Investments

The Company’s investment properties are leased to tenants under long‑term operating leases that typically include one or more renewal options. The weighted average remaining noncancelable lease term at September 30, 2017 was approximately 14 years. Substantially all of the leases are triple net, which provide that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance; therefore, STORE Capital is generally not responsible for repairs or other capital expenditures related to the properties while the triple-net leases are in effect. At September 30, 2017, the Company owned 19 properties that were vacant and not subject to a lease.

Scheduled future minimum rentals to be received under the remaining noncancelable term of the operating leases in place as of September 30, 2017, are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2017

 

$

113,052

 

2018

 

 

452,475

 

2019

 

 

451,699

 

2020

 

 

450,079

 

2021

 

 

449,344

 

2022

 

 

449,466

 

Thereafter

 

 

4,209,774

 

Total future minimum rentals

 

$

6,575,889

 

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

Loans and Direct Financing Receivables

At September 30, 2017, the Company held 29 loans receivable with an aggregate carrying amount of $148.8 million. Eighteen of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. Six of the mortgage loans are shorter-term loans (maturing prior to 2023) that require either monthly interest-only payments with a balloon payment at maturity or monthly interest-only payments for an established period and then monthly principal and interest payments with a balloon payment at maturity. The remaining mortgage loans receivable generally require the borrowers to make monthly principal and interest payments based on a 40-year amortization period with balloon payments, if any, at maturity or earlier upon the occurrence of certain other events. The interest rates on ten of the mortgage loans are subject to increases over the term of the loans.  The other loans are primarily loans secured by a tenant’s equipment or other assets and generally require the borrower to make monthly interest‑only payments with a balloon payment at maturity.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Outstanding

 

 

 

Interest

 

Maturity

 

September 30,

 

December 31,

 

Type

 

Rate (a)

 

Date

 

2017

 

2016

 

Six mortgage loans receivable (b)

 

8.60

%  

2017 - 2022

 

$

29,171

 

$

22,599

 

Five mortgage loans receivable

 

8.57

%  

2032 - 2038

 

 

42,863

 

 

43,002

 

Seven mortgage loans receivable (c)

 

8.70

%  

2053 - 2056

 

 

64,608

 

 

70,173

 

Total mortgage loans receivable

 

 

 

 

 

 

136,642

 

 

135,774

 

Eleven equipment and other loans receivable

 

9.29

%  

2017 - 2025

 

 

10,912

 

 

9,233

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

147,554

 

 

145,007

 

Unamortized loan origination costs

 

 

 

 

 

 

1,256

 

 

1,205

 

Direct financing receivables

 

 

 

 

 

 

124,455

 

 

122,998

 

Total loans and direct financing receivables

 

 

 

 

 

$

273,265

 

$

269,210

 


19


 

Table of Contents

(a)

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

(b)

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

(c)

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

The long‑term mortgage loans receivable generally allow for prepayments in whole, but not in part, without penalty or with penalties ranging from 1% to 20%, depending on the timing of the prepayment, except as noted in the table above. All other loans receivable allow for prepayments in whole or in part without penalty. Absent prepayments, scheduled maturities are expected to be as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Scheduled

    

 

    

 

 

 

 

Principal

 

Balloon

 

Total

 

 

 

Payments

 

Payments

 

Payments

 

Remainder of 2017

 

$

238

 

$

18,056

 

$

18,294

 

2018

 

 

1,534

 

 

850

 

 

2,384

 

2019

 

 

2,188

 

 

4,374

 

 

6,562

 

2020

 

 

2,355

 

 

 —

 

 

2,355

 

2021

 

 

1,301

 

 

1,484

 

 

2,785

 

2022

 

 

841

 

 

8,408

 

 

9,249

 

Thereafter

 

 

69,709

 

 

36,216

 

 

105,925

 

Total principal payments

 

$

78,166

 

$

69,388

 

$

147,554

 

 

As of September 30, 2017 and December 31, 2016, the Company had $124.5 million and $123.0 million, respectively, of investments accounted for as direct financing leases; the components of the investments accounted for as direct financing receivables were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Minimum lease payments receivable

 

$

296,280

    

$

300,832

 

Estimated residual value of leased assets

 

 

14,815

 

 

14,500

 

Unearned income

 

 

(186,640)

 

 

(192,334)

 

Net investment

 

$

124,455

 

$

122,998

 

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

4. Debt

Credit Facility

As of September 30, 2017, the Company had a $500 million unsecured revolving credit facility with a group of lenders. The facility, which was put in place in September 2014 and amended in September 2015, is used to partially fund real estate acquisitions pending the issuance of long-term, fixed-rate debt and includes an accordion feature that allows the size of the facility to be increased up to $800 million.

The amended facility matures in September 2019 and includes a one-year extension option subject to certain conditions and the payment of a 0.15% extension fee. The facility is recourse to the Company and includes a guaranty from STORE Capital Acquisitions, LLC (SCA), one of the Company’s direct wholly owned subsidiaries. Through June 30, 2017, borrowings under this facility required monthly payments of interest at a rate selected by the Company of

20


 

Table of Contents

either (1) LIBOR plus a credit spread ranging from 1.35% to 2.15%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.35% to 1.15%. The Company was also required to pay a non-use fee of 0.15% or 0.25% on the unused portion of the facility, depending upon the amount of borrowings outstanding. Subsequent to June 30, 2017, the Company made the election to base the credit spread on the Company’s credit rating as defined in the credit agreement and, as a result, borrowings under the facility now require monthly payments of interest at a rate selected by the Company of either (1) LIBOR plus a credit spread ranging from 0.85% to 1.55%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.55%; in addition, the Company is now required to pay a facility fee on the total commitment amount ranging from 0.125% to 0.30%.  Currently, the applicable credit spread for LIBOR-based borrowings is 1.00% and the facility fee is 0.20%.

Borrowing availability under the facility is limited to 50% of the value of the Company’s eligible unencumbered assets at any point in time. At September 30, 2017, the Company had $82 million of borrowings outstanding and a pool of unencumbered assets aggregating approximately $3.0 billion, substantially all of which are eligible unencumbered assets as defined in the credit agreement.

The Company is subject to various financial and nonfinancial covenants under the revolving credit facility including a maximum total leverage ratio of 65%, a minimum EBITDA to fixed charges ratio of 1.5 to 1, minimum consolidated net worth of $1.0 billion plus 75% of any additional equity raised after September 2015, a maximum dividend payout ratio limited to 95% of Funds from Operations and a maximum unsecured debt leverage ratio of 50%, all as defined in the credit agreement. As of September 30, 2017, the Company was in compliance with these covenants.

At September 30, 2017 and December 31, 2016, unamortized financing costs related to the Company’s credit facility totaled $2.0 million and $2.7 million, respectively, and are included in other assets, net, on the condensed consolidated balance sheets.

Unsecured Notes and Term Loans Payable, net

The Company has entered into Note Purchase Agreements (NPAs) with institutional purchasers that provided for the private placement of three series of senior unsecured notes aggregating $375 million (the Notes).  Interest on the Notes is payable semi-annually in arrears in May and November of each year. On each interest payment date, the interest rate on each series of Notes may be increased by 1.0% should the Company’s Applicable Credit Rating (as defined in the NPAs) fail to be an investment-grade credit rating; the increased interest rate would remain in effect until the next interest payment date on which the Company obtains an Applicable Credit Rating that is an investment grade credit rating. The Company may prepay at any time all, or any part, of any series of Notes, in an amount not less than 5% of the aggregate principal amount of the series then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a Make-Whole Amount (as defined in the NPA).  The Notes are senior unsecured obligations of the Company and are guaranteed by SCA.

The NPAs contain a number of financial covenants that are similar to the Company’s unsecured credit facility as summarized above, including the maximum total leverage ratio, the minimum EBITDA to fixed charges ratio and the minimum consolidated net worth amount, as well as a maximum secured debt leverage ratio, a maximum unsecured debt leverage ratio and a minimum interest coverage ratio on unsecured debt.  Subject to the terms of the NPAs and the Notes, upon certain events of default, including, but not limited to, (i) a payment default under the Notes, and (ii) a default in the payment of certain other indebtedness by the Company or its subsidiaries, all amounts outstanding under the Notes will become due and payable at the option of the purchasers. As of September 30, 2017, the Company was in compliance with its covenants under the NPAs. 

In April 2016, the Company entered into a $100 million floating-rate, unsecured five-year term loan; the interest rate on the loan resets monthly at one-month LIBOR plus a credit spread ranging from 1.35% to 2.15%. In March 2017, the Company entered into a second $100 million floating-rate, unsecured term note.  This second loan is a two-year loan which has three one-year extension options and the interest rate on the loan resets monthly at one-month LIBOR plus a credit spread ranging from 1.30% to 2.15%.  Subsequent to June 30, 2017, the Company made the election to base the credit spread on the Company’s credit rating as defined in the loan agreements; as a result, the interest rate on both term loans now resets monthly at one-month LIBOR plus a credit spread ranging from 0.90% to 1.75%; the credit spread currently applicable to the Company is 1.10%.

21


 

Table of Contents

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

 

September 30,

 

December 31,

 

 

 

Date

 

Rate

 

 

2017

 

2016

 

Notes Payable:

 

 

 

 

 

 

 

 

 

 

 

 

Series A issued November 2015

 

Nov. 2022

 

4.95

%  

 

$

75,000

 

$

75,000

 

Series B issued November 2015

 

Nov. 2024

 

5.24

%  

 

 

100,000

 

 

100,000

 

Series C issued April 2016

 

Apr. 2026

 

4.73

%  

 

 

200,000

 

 

200,000

 

Total notes payable

 

 

 

 

 

 

 

375,000

 

 

375,000

 

Term Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan issued March 2017

 

Mar. 2019

 

2.57

% (a)

 

 

100,000

 

 

 —

 

Term Loan issued April 2016

 

Apr. 2021

 

2.44

% (a)

 

 

100,000

 

 

100,000

 

Total term loans

 

 

 

 

 

 

 

200,000

 

 

100,000

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

(4,624)

 

 

(4,810)

 

Total unsecured notes and term loans payable, net

 

 

 

 

 

 

$

570,376

 

$

470,190

 


(a)

Loan is a variable‑rate loan which resets monthly at one-month LIBOR + the applicable credit spread which was 1.10% at September 30, 2017.  The Company has entered into interest rate swap agreements that effectively convert the floating rate to the fixed rate noted above as of September 30, 2017.

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

During 2012, the Company implemented the STORE Master Funding debt program pursuant to which certain of its consolidated special purpose entities issue multiple series of non‑recourse net‑lease mortgage notes from time to time that are collateralized by the assets and related leases (collateral) owned by these entities.  One of the principal features of the program is that, as additional series of notes are issued, new collateral is contributed to the collateral pool thereby increasing the size and diversity of the collateral pool for the benefit of all noteholders, including those who invested in prior series. Another feature of the program is the ability to substitute collateral from time to time subject to meeting certain prescribed conditions and criteria. The notes are generally segregated into Class A amortizing notes and Class B non‑amortizing notes. The Company has retained each of the Class B notes which aggregate $128.0 million at September 30, 2017.

The Class A notes require monthly principal and interest payments with a balloon payment due at maturity and these notes may be prepaid at any time, subject to a yield maintenance prepayment premium if prepaid more than 24 months prior to maturity. In August 2017, the Company prepaid the STORE Master Funding Series 2012-1, Class A notes (issued in August 2012 and scheduled to mature in August 2019), which bore an interest rate of 5.77% and had an outstanding balance of $198.6 million at the time of prepayment and recognized $2.0 million of accelerated amortization of deferred financing costs associated with this debt.  As of September 30, 2017, the aggregate collateral pool securing the net‑lease mortgage notes was comprised primarily of single-tenant commercial real estate properties with an aggregate investment amount of approximately $2.6 billion.

A number of additional consolidated special purpose entity subsidiaries of the Company have financed their real estate properties with traditional first mortgage debt. The notes generally require monthly principal and interest payments with balloon payments due at maturity. In general, these mortgage notes payable can be prepaid in whole or in part upon payment of a yield maintenance premium. The mortgage notes payable are collateralized by real estate properties owned by these consolidated special purpose entity subsidiaries with an aggregate investment amount of approximately $392.0 million at September 30, 2017.

The mortgage notes payable, which are obligations of the consolidated special purpose entities described in Note 2, contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s

22


 

Table of Contents

ability to incur additional indebtedness on the underlying real estate. Although this mortgage debt generally is non‑recourse, there are customary limited exceptions to recourse for matters such as fraud, misrepresentation, gross negligence or willful misconduct, misapplication of payments, bankruptcy and environmental liabilities. Certain of the mortgage notes payable also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the Company or one of its tenants.  The Company did not make the September 1, 2017 through November 1, 2017 scheduled payments of interest and principal due on a $12.9 million note scheduled to mature in August 2022 (see table below) because the two properties that secure this note were not generating sufficient cash flow to cover the debt service.  The Company is currently in discussions with the lender regarding a resolution of this matter, although no assurances can be made as to the outcome of these discussions.  As of the date of this report, the lender has not declared an event of default.  Should the lender declare an event of default, the note would bear interest at a default rate equal to 9.95% per annum.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Balance

 

 

 

Maturity

 

Interest

 

 

September 30,

 

December 31,

 

 

 

Date

 

Rate

 

 

2017

 

2016

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

 

    

    

 

    

 

$214,500 Series 2012-1, Class A

 

 

 

 

 

 

$

 —

 

$

200,749

 

$150,000 Series 2013-1, Class A-1

 

Mar. 2020

 

4.16

%  

 

 

138,663

 

 

140,724

 

$107,000 Series 2013-2, Class A-1

 

Jul. 2020

 

4.37

%  

 

 

99,869

 

 

101,265

 

$77,000 Series 2013-3, Class A-1

 

Nov. 2020

 

4.24

%  

 

 

72,320

 

 

73,307

 

$120,000 Series 2014-1, Class A-1

 

Apr. 2021

 

4.21

%  

 

 

118,000

 

 

118,450

 

$95,000 Series 2015-1, Class A-1

 

Apr. 2022

 

3.75

%  

 

 

93,852

 

 

94,208

 

$102,000 Series 2013-1, Class A-2

 

Mar. 2023

 

4.65

%  

 

 

94,291

 

 

95,693

 

$97,000 Series 2013-2, Class A-2

 

Jul. 2023

 

5.33

%  

 

 

90,536

 

 

91,801

 

$100,000 Series 2013-3, Class A-2

 

Nov. 2023

 

5.21

%  

 

 

93,922

 

 

95,204

 

$140,000 Series 2014-1, Class A-2

 

Apr. 2024

 

5.00

%  

 

 

137,667

 

 

138,192

 

$270,000 Series 2015-1, Class A-2

 

Apr. 2025

 

4.17

%  

 

 

266,737

 

 

267,750

 

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

 

Oct. 2026

 

3.96

%  

 

 

196,777

 

 

199,423

 

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

 

Apr. 2027

 

4.32

%  

 

 

134,021

 

 

 —

 

Total non-recourse net-lease mortgage notes

 

 

 

 

 

 

 

1,536,655

 

 

1,616,766

 

Non-recourse mortgage notes payable:

 

 

 

 

 

 

 

 

 

 

 

 

$2,956 note issued June 2013

 

 

 

 

 

 

 

 —

 

 

2,663

 

$7,088 note issued April 2007

 

 

 

 

 

 

 

 —

 

 

6,457

 

$4,400 note issued August 2007

 

 

 

 

 

 

 

 —

 

 

3,586

 

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

 

Jan. 2018

 

4.778

%  

 

 

6,740

 

 

6,960

 

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

 

Jan. 2019

 

5.275

% (a)

 

 

17,970

 

 

18,359

 

$6,500 note issued December 2012

 

Dec. 2019

 

4.806

%  

 

 

5,777

 

 

5,900

 

$16,100 note issued February 2014

 

Mar. 2021

 

4.83

%  

 

 

14,879

 

 

15,159

 

$13,000 note issued May 2012

 

May 2022

 

5.195

%  

 

 

11,500

 

 

11,737

 

$14,950 note issued July 2012

 

Aug. 2022

 

4.95

%  

 

 

12,874

 

 

13,135

 

$26,000 note issued August 2012

 

Sept. 2022

 

5.05

%  

 

 

23,150

 

 

23,625

 

$6,400 note issued November 2012

 

Dec. 2022

 

4.707

%  

 

 

5,707

 

 

5,827

 

$11,895 note issued March 2013

 

Apr. 2023

 

4.7315

%  

 

 

10,712

 

 

10,931

 

$17,500 note issued August 2013

 

Sept. 2023

 

5.46

%  

 

 

16,092

 

 

16,380

 

$10,075 note issued March 2014

 

Apr. 2024

 

5.10

%  

 

 

9,573

 

 

9,691

 

$21,125 note issued July 2015

 

Aug. 2025

 

4.36

%

 

 

21,099

 

 

21,125

 

$65,000 note issued June 2016

 

Jul. 2026

 

4.75

%

 

 

63,886

 

 

64,614

 

$7,750 note issued February 2013

 

Mar. 2038

 

4.81

% (b)

 

 

6,972

 

 

7,114

 

$6,944 notes issued March 2013

 

Apr. 2038

 

4.50

% (c)

 

 

6,194

 

 

6,330

 

Total non-recourse mortgage notes payable

 

 

 

 

 

 

 

 233,125

 

 

249,593

 

Unamortized net (discount) premium

 

 

 

 

 

 

 

(399)

 

 

(336)

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

(28,038)

 

 

(32,542)

 

Total non-recourse debt obligations of consolidated special purpose entities, net

 

 

 

 

 

 

$

1,741,343

 

$

1,833,481

 


(a)

Note is a variable‑rate note which resets monthly at one-month LIBOR + 3.50%. The Company has entered into two interest rate

23


 

Table of Contents

swap agreements that effectively convert the floating rate on an $11.8 million portion and a $6.2 million portion of this mortgage note payable to fixed rates of 5.299% and 5.230%, respectively.

(b)

Interest rate is effective until March 2023 and will reset to greater of (1) initial rate plus 400 basis points or (2) Treasury rate plus 400 basis points.

(c)

Interest rate is effective until March 2023 and will reset to the lender’s then prevailing interest rate.

Credit Risk Related Contingent Features

The Company has an agreement with a derivative counterparty which provides that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company has agreements with other derivative counterparties which provide that the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.    As of September 30, 2017, the termination value of the Company’s interest rate swaps that were in a liability position was approximately $0.1 million, which includes accrued interest but excludes any adjustment for nonperformance risk.

Long-term Debt Maturity Schedule

As of September 30, 2017, the scheduled maturities, including balloon payments, on the Company’s aggregate long-term debt obligations are expected to be as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Scheduled

    

 

    

 

 

 

 

 

Principal

 

Balloon

 

 

 

 

 

 

Payments

 

Payments

 

Total

 

Remainder of 2017

 

$

6,537

 

$

 —

 

$

6,537

 

2018

 

 

26,432

 

 

6,664

 

 

33,096

 

2019

 

 

26,953

 

 

122,686

 

 

149,639

 

2020

 

 

23,860

 

 

293,632

 

 

317,492

 

2021

 

 

21,016

 

 

229,366

 

 

250,382

 

2022

 

 

20,506

 

 

211,493

 

 

231,999

 

Thereafter

 

 

56,436

 

 

1,299,199

 

 

1,355,635

 

 

 

$

181,740

 

$

2,163,040

 

$

2,344,780

 

 

 

 

 

5. Stockholders’ Equity

In June 2017, the Company completed a private placement of 18,621,674 shares of its common stock to a non-affiliated investor and received aggregate proceeds of $377.1 million.  The issuance and sale of the shares were made pursuant to a stock purchase agreement and there were no underwriter discounts or commissions associated with the sale.  During the first quarter of 2017, the Company completed a follow-on stock offering in which the Company issued and sold 9,947,500 shares of its common stock.  The Company received $220.8 million in proceeds, net of both underwriters’ discount and offering expenses, in connection with this offering. 

In September 2016, the Company established an “at the market” equity distribution program, or ATM program, pursuant to which, from time to time, it offers and sells registered shares of its common stock up to a maximum amount of $400 million through a group of banks acting as its sales agents. During the first quarter of 2017, the Company issued and sold 2,047,546 shares of common stock under the program at a weighted average share price of $25.02, raising $51.2 million in gross proceeds, or $50.3 million in net proceeds after the payment of sales agents’ commissions of $0.8 million and offering expenses. Since the program began in 2016, the Company has issued and sold an aggregate of 8,132,647 shares of common stock under the program at a weighted average share price of $26.25 and raised approximately $213.5 million in aggregate gross proceeds, or approximately $209.4 million in aggregate net proceeds after the payment of sales agents’ commissions of $3.2 million and offering expenses.

The Company declared dividends payable to common stockholders totaling $163.7 million and $124.6 million during the nine months ended September 30, 2017 and 2016, respectively. 

24


 

Table of Contents

 

6. Commitments and Contingencies

In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties.  As of September 30, 2017, the Company had commitments to its customers to fund improvements to owned or mortgaged real estate properties totaling approximately $108.7 million, of which $101.0 million is expected to be funded in the next twelve months.  These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts.

The Company has employment agreements with each of its executive officers that provide for minimum annual base salaries, and annual cash and equity incentive compensation based on the satisfactory achievement of reasonable performance criteria and objectives to be adopted by the Company’s Board of Directors each year.  In the event an executive officer’s employment terminates under certain circumstances, the Company would be liable for cash severance, continuation of healthcare benefits and, in some instances, accelerated vesting of equity awards that he or she has been awarded as part of the Company’s incentive compensation program.

7. Fair Value of Financial Instruments

 

The Company’s derivatives are required to be measured at fair value in the Company’s consolidated financial statements on a recurring basis.  Derivatives are measured under a market approach, using prices obtained from a nationally recognized pricing service and pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy.  At September 30, 2017 and December 31, 2016, the fair value of the Company’s derivative instruments was an asset of $1.7 million and $1.6 million, respectively, included in other assets, net, on the condensed consolidated balance sheets, and a liability of $57,000 and $180,000, respectively, included in accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets.

In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based upon market conditions and perceived risks at September 30, 2017 and December 31, 2016. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and tenant deposits. Generally these assets and liabilities are short‑term in duration and are recorded at fair value on the consolidated balance sheets. The Company believes the carrying value of the borrowings on its credit facility approximate fair value based on their nature, terms and variable interest rate. Additionally, the Company believes the carrying values of its fixed‑rate loans receivable approximate fair values based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads.

The estimated fair values of the Company’s aggregate long-term debt obligations have been derived based on market observable inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 within the fair value hierarchy. At September 30, 2017, these debt obligations had a carrying value of $2,311.7 million and an estimated fair value of $2,415.1 million. At December 31, 2016, these debt obligations had an aggregate carrying value of $2,303.7 million and an estimated fair value of $2,353.6 million.

25


 

Table of Contents

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

In this Quarterly Report on Form 10-Q, we refer to STORE Capital Corporation, a Maryland corporation, as “we,” “us,” “our” or “the Company” unless we specifically state otherwise or the context indicates otherwise.

Special Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (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 that 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 quarterly 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” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on February 24, 2017.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this quarterly 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.

Overview

We were formed in 2011 to invest in and manage Single Tenant Operational Real Estate, or STORE Property, which is our target market and the inspiration for our name. A STORE Property is a 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. Due to the long-term nature of our leases, we focus our acquisition activity on properties that operate in industries we believe have long-term relevance, the majority of which are service industries. Examples of single-tenant operational real estate in the service industry sector include restaurants, early childhood education centers, movie theaters and health clubs. By acquiring the real estate from the operators and then leasing the real estate back to them, the operators become our long‑term tenants, and we refer to them as our customers. Through the execution of these sale-leaseback transactions, we fill a need for our customers by providing them a source of long‑term capital that enables them to avoid the need to incur debt and/or employ equity in order to finance the real estate that is essential to their business.

We are a Maryland corporation organized as an internally managed real estate investment trust, or REIT.  As a REIT, we will generally not be subject to federal income tax to the extent that we distribute all of our taxable income to our stockholders and meet other requirements. 

The growth of our Company from inception in May 2011 until our IPO in November 2014 was funded by STORE Holding Company, LLC, or STORE Holding, a Delaware limited liability company, substantially all of which was owned, directly or indirectly, by certain investment funds managed by Oaktree Capital Management, L.P. In November 2014, we took the Company public on the New York Stock Exchange and now our common stock trades under the ticker symbol “STOR”. Subsequent to the Company’s IPO, STORE Holding sold all of its shares through a series of public offerings and, as of April 1, 2016, no longer owned any shares of the Company’s common stock. 

Since our inception in 2011, we have selectively originated real estate investments of approximately

26


 

Table of Contents

$6.4 billion.  As of September 30, 2017, our investment portfolio totals approximately $5.9 billion, consisting of investments in 1,826 property locations across 48 states. All of the real estate we acquire is held by our wholly owned subsidiaries, many of which are special purpose bankruptcy remote entities formed to facilitate the financing of our real estate. We predominantly acquire our single‑tenant properties directly from our customers in sale‑leaseback transactions where our customers sell us their operating properties and then simultaneously enter into long‑term triple‑net leases with us to lease the properties back. Accordingly, our properties are fully occupied and under lease from the moment we acquire them.

We generate our cash from operations primarily through the monthly lease payments, or “base rent”, we receive from our customers under their long‑term leases with us. We also receive interest payments on loans receivable, which are a small part of our portfolio. We refer to the monthly scheduled lease and interest payments due from our customers as “base rent and interest”. Most of our leases contain lease escalations every year or every several years that are based on the lesser of the increase in the Consumer Price Index or a stated percentage (if such contracts are expressed on an annual basis, currently averaging approximately 1.8%), which allows the monthly lease payments we receive to increase somewhat in an inflationary economic environment. As of September 30, 2017, approximately 98% of our leases (based on annualized base rent) are “triple-net” leases, which means that our customers are responsible for all of the operating costs such as maintenance, insurance and property taxes, associated with the properties they lease from us, including any increases in those costs that may occur as a result of inflation. The remaining leases have some landlord responsibilities, generally related to maintenance and structural component replacement that may be required on such properties in the future, although we do not currently anticipate incurring significant capital expenditures or property costs under such leases. Because our properties are single‑tenant properties, almost all of which are under long‑term leases, it is not necessary for us to perform any significant ongoing leasing activities on our properties. As of September 30, 2017, the weighted average remaining term of our leases (calculated based on annualized base rent) was approximately 14 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term. Leases approximating 99% of our base rent as of that date provide for tenant renewal options (generally two to four five‑year options) and leases approximating 9% of our base rent provide our tenants the option, at their election, to purchase the property from us at a specified time or times (generally at the greater of the then‑fair market value or our cost).

We have dedicated an internal team to review and analyze ongoing tenant financial performance, both corporately and at each property we own, in order to identify properties that may no longer be part of our long-term strategic plan.  As part of that continuous active-management process, we may decide to sell properties where we believe the property no longer meets our long-term goals.  Because generally we have been able to originate assets at lease rates above the online auction market, we have been able to sell these assets on a one-off basis, typically for a gain.  This gain acts to partially offset any possible losses we may experience in the real estate portfolio.

Liquidity and Capital Resources

At the beginning of 2017, our real estate investment portfolio totaled $5.1 billion, consisting of investments in 1,660 property locations with base rent and interest due from our customers aggregating approximately $34.9 million per month, excluding future rent payment escalations. By September 30, 2017, our investment portfolio had grown to approximately $5.9 billion, consisting of investments in 1,826 property locations with base rent and interest aggregating approximately $39.5 million per month. Substantially all of our cash from operations is generated by our investment portfolio.

Our primary cash expenditures are the principal and interest payments we make on the debt we use to finance our real estate investment portfolio and the general and administrative expenses of managing the portfolio and operating our business. Since substantially all of our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us.  When a property becomes vacant through a tenant default or expiration of the lease term with no tenant renewal, we incur the property costs not paid by the tenant, as well as those property costs accruing during the time it takes to locate a substitute tenant.  We have no lease contracts due to mature during the remainder of 2017 and leases related to just three properties are due to mature in 2018; 91% of our leases have ten years or more remaining in their base lease term.  As of September 30, 2017, we owned 19 properties that were vacant and not subject to a lease; subsequent to September 30, 2017, we re-leased eight of these properties and sold one, resulting in an occupancy rate of 99.5%.  We expect to incur some property costs from time to time in periods

27


 

Table of Contents

during which properties that become vacant are being remarketed. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations.  The amount of such property costs can vary quarter to quarter based on the timing of property vacancies and the level of underperforming properties; however, we do not anticipate that such costs will be significant to our operations. Some of our properties are located in the areas impacted by the recent hurricanes that hit Texas and Florida; however, all but 16 suffered no damage or only minor damage from those storms.  Seven of these properties have reopened for business, while nine, all located in Texas, remain closed and are under repair.  The tenants who operate these nine properties, which represent less than 0.2% of our investment portfolio, are performing under the terms of their lease agreements and, to the extent not covered by their insurance policies, are responsible for the repairs.

We intend to continue to grow through additional real estate investments. To accomplish this objective, we must identify real estate acquisitions that are consistent with our underwriting guidelines and raise future additional capital to make such acquisitions. We acquire real estate with a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders in the form of dividends.  When we sell properties, we will often reinvest the cash proceeds from those sales in new property acquisitions. We also periodically commit to fund the construction of new properties for our customers or to provide them funds to improve and/or renovate properties we lease to them. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts.  As of September 30, 2017, we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately $108.7 million, of which $101.0 million is expected to be funded in the next twelve months.

Our debt capital is initially provided on a short-term, temporary basis through a multi-year, variable‑rate unsecured revolving credit facility with a group of banks. We manage our long-term leverage position through the strategic and economic issuance of long-term fixed-rate debt on both a secured and unsecured basis. By matching the expected cash inflows from our long‑term real estate leases with the expected cash outflows of our long‑term fixed‑rate debt, we “lock in”, for as long as is economically feasible, the expected positive difference between our scheduled cash inflows on the leases and the cash outflows on our debt payments. By “locking in” this difference, or “spread”, we seek to reduce the risk that increases in interest rates would adversely impact our profitability.  In addition, we may use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate swaps and caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. We also ladder our debt maturities in order to minimize the gap between our free cash flow, or cash from operations less dividends, and our annual debt maturities.

As of September 30, 2017, all of our long‑term debt was fixed‑rate debt or was effectively converted to a fixed‑rate for the term of the debt and our weighted average debt maturity was approximately six years. In conjunction with our investment-grade unsecured debt strategy, we are targeting a level of debt (net of cash and cash equivalents) that approximates 5½ to 6 times our earnings before interest, taxes, depreciation and amortization.

Our long-term debt strategy focuses on developing and maintaining broad access to multiple debt sources. We believe that having access to multiple debt markets increases our financing flexibility because different debt markets may attract different kinds of investors, thus expanding our access to a larger pool of potential debt investors. Also, a particular debt market may be more competitive than another at any particular point in time. To complement our long-term secured borrowing program, we use our investment-grade credit ratings to issue senior unsecured long-term debt. In June 2017, we received a rating of Baa2, stable outlook, from Moody’s Investors Service and we are currently rated BBB, stable outlook, by both Standard & Poor’s Ratings Services and Fitch Ratings.

Our goal is to employ a prudent blend of secured non-recourse debt paired with senior unsecured debt. By balancing the mix of secured and unsecured debt, we can effectively leverage those properties subject to the secured debt in the range of 60%-70% and, at the same time, target a more conservative level of overall corporate leverage by maintaining a large pool of properties that are unencumbered.  Our secured non-recourse borrowings have a current weighted average loan-to-cost ratio of approximately 60% and approximately 50% of our investment portfolio serves as collateral for this long-term debt.  The remaining 50% of our portfolio properties, aggregating approximately $3.0 billion at September 30, 2017, are unencumbered and this unencumbered pool of properties provides us the flexibility to access long-term unsecured borrowings.  The result is that our growing unencumbered pool of properties can provide higher levels of debt service coverage on the senior unsecured debt than would be the case if we employed only unsecured debt

28


 

Table of Contents

at our overall corporate leverage level. We believe this debt strategy can lead to a lower cost of capital for the Company.

The long-term debt we have issued to date is comprised of both secured non-recourse borrowings and senior unsecured borrowings. Our secured non-recourse borrowings are obtained through multiple debt markets – primarily either the asset-backed or commercial mortgage-backed securities debt markets. To a lesser extent, we may also obtain fixed-rate non‑recourse mortgage financing from banks and insurance companies secured by specific properties we pledge as collateral. The vast majority of our secured non-recourse borrowings were made through our own STORE Master Funding program, which provides flexibility not commonly found in most secured non-recourse debt and which is described further below. 

The availability of debt to finance commercial real estate in the United States can, at times, be impacted by economic and other factors that are beyond our control. An example of adverse economic factors occurred during the recession of 2007 to 2009 when availability of debt capital for commercial real estate was significantly curtailed. We seek to reduce the risk that long‑term debt capital may be unavailable to us by maintaining the flexibility to issue long-term debt in multiple debt capital markets, both secured and unsecured, and by limiting the period between the time we acquire our real estate and the time we finance our real estate with long‑term debt. In addition, we have arranged our short‑term credit facility (described below) to have a multi‑year term in order to reduce the risk that short‑term real estate financing would not be available to us. As we grow our real estate portfolio, we also intend to manage our debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. Because our long-term secured debt generally requires monthly payments of principal, in addition to the monthly interest payments, the resulting principal amortization also reduces our refinancing risk upon maturity of the debt.  As our outstanding debt matures, we may refinance the maturing debt as it comes due or choose to repay it using cash and cash equivalents or our revolving credit facility.  During the nine months ended September 30, 2017, we repaid two maturing secured notes payable which had aggregate balloon payments of $9.9 million.  In August 2017, we prepaid, with no prepayment penalty, our first issuance of STORE Master Funding notes (Series 2012-1, Class A notes, issued in August 2012 and scheduled to mature in August 2019), which bore an interest rate of 5.77% and had an outstanding balance of $198.6 million at the time of prepayment. We have one $100 million extendible bank term loan scheduled to mature in 2019 and no other significant debt maturities until 2020, when the STORE Master Funding seven-year notes issued in 2013 are due to mature.  Similar to the STORE Master Funding Series 2012-1 prepayment, we may prepay other existing long-term debt in circumstances where we believe it would be economically advantageous to do so.

Typically, we use our $500 million unsecured credit facility to acquire our real estate properties, until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds from which we use to repay the amounts outstanding under our revolving credit facility. The facility, which includes an accordion feature that allows the size of the facility to be increased up to $800 million, matures in September 2019 and includes a one-year extension option subject to certain conditions and the payment of a 0.15% extension fee. Subsequent to June 30, 2017, we made the election to base the credit spread on our credit rating as defined in the credit agreement and, as a result, the facility now bears interest at a rate selected by us equal to either (1) LIBOR plus a credit spread ranging from 0.85% to 1.55% or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.55%.  We are also required to pay a facility fee on the total commitment amount ranging from 0.125% to 0.30%. Prior to June 30, 2017, borrowings under the facility generally bore interest at one-month LIBOR plus a leverage-based credit spread ranging from 1.35% to 2.15%.  We were also required to pay a fee of either 0.15% or 0.25% assessed on the average unused portion of the facility, depending upon the amount of borrowings outstanding. Availability under the facility is limited to 50% of the value of our eligible unencumbered assets at any point in time. At September 30, 2017, we had $82 million of borrowings outstanding on this credit facility and we had a pool of unencumbered assets aggregating approximately $3.0 billion, substantially all of which can serve as eligible unencumbered assets under the credit facility. Corporate covenants under this facility include: maximum leverage of 65%, minimum EBITDA to fixed charges ratio of 1.5 to 1, minimum net worth of $1.0 billion plus 75% of new net equity proceeds, and a maximum dividend payout ratio limited to 95% of Funds from Operations, all as defined in the credit agreement. The facility is recourse to us and includes a guaranty from STORE Capital Acquisitions, LLC, one of our direct wholly owned subsidiaries. We remain in compliance with these covenants.

As summarized below, about 43% of our real estate investment portfolio serves as collateral for outstanding borrowings under our STORE Master Funding debt program. Through this debt program, we arrange for bankruptcy remote, special purpose entity subsidiaries to issue multiple series of investment‑grade asset‑backed net‑lease mortgage

29


 

Table of Contents

notes, or ABS notes, from time to time as additional collateral is added to the collateral pool. We believe our STORE Master Funding program allows for flexibility not commonly found in nonrecourse debt, often making it preferable to traditional debt issued in the commercial mortgage-backed securities market. Under the program, STORE serves as master and special servicer for the collateral pool, allowing for active portfolio monitoring and prompt issue resolution. In addition, features of the program allowing for the sale or substitution of collateral, provided certain criteria are met, facilitate active portfolio management.

The ABS notes are generally issued to institutional investors through the asset‑backed securities market. These ABS notes are typically issued in two classes, Class A and Class B. At the time of issuance, the Class A notes represent approximately 70% of the appraised value of the underlying real estate collateral and are currently rated A+ by Standard & Poor’s Ratings Services. The Class B notes, which are subordinated to the Class A notes as to principal repayment, represent approximately 5% of the appraised value of the underlying real estate collateral and are currently rated BBB by Standard & Poor’s Ratings Services.  We have historically retained the Class B notes of each series, which aggregate $128.0 million in principal amount outstanding at September 30, 2017 and are held by one of our bankruptcy remote, special purpose entity subsidiaries. The Class B notes are not reflected in our financial statements because they eliminate in consolidation. Since the Class B notes are considered issued and outstanding, they provide us with additional financial flexibility in that we may sell them to a third party in the future or use them as collateral for short‑term borrowings as we have done from time to time in the past.

In March 2017, we sold $135 million of A+ rated notes under the STORE Master Funding secured debt program.  These notes, which were originally issued in October 2016 and had been retained by the Company for future sale, have an interest rate of 4.32% and a remaining term at the time of the sale of approximately 10 years. 

The ABS notes outstanding at September 30, 2017 totaled $1.5 billion in Class A principal amount, supported by a collateral pool valued at approximately $2.6 billion representing 975 property locations operated by 176 customers. The amount of debt that can be issued in any new series is determined by the structure of the transaction and the amount of collateral that has been added to the pool. In addition, the issuance of each new series of notes is subject to the satisfaction of several conditions, including that there is no event of default on the existing note series and that the issuance will not result in an event of default on, or the credit rating downgrade of, the existing note series.

A significant portion of our cash flows is generated by the special purpose entities comprising our STORE Master Funding debt program. For the nine months ended September 30, 2017, excess cash flow, after payment of debt service and servicing and trustee expenses, totaled $74 million on cash collections of $159 million, which represents an overall ratio of cash collections to debt service, or debt service coverage ratio (as defined in the STORE Master Funding program documents), of greater than 1.85 to 1 on the STORE Master Funding program. If at any time the debt service coverage ratio generated by the collateral pool is less than 1.3 to 1, excess cash flow from the STORE Master Funding entities will be deposited into a reserve account to be used for payments to be made on the net‑lease mortgage notes, to the extent there is a shortfall. We anticipate that the debt service coverage ratio for the STORE Master Funding program will remain well above program minimums.

From time to time, we also may obtain debt in discrete transactions through other bankruptcy remote, special purpose entity subsidiaries, which debt is solely secured by specific real estate assets and is generally non‑recourse to us (subject to certain customary limited exceptions). These discrete borrowings are generally in the form of traditional mortgage notes payable, with principal and interest payments due monthly and balloon payments due at their respective maturity dates, which typically range from seven to ten years from the date of issuance. We generally obtain discrete secured borrowings from institutional commercial mortgage lenders, who subsequently securitize (that is, sell) the loans within the commercial mortgage‑backed securities, or CMBS, market. We also have occasionally used similar types of financing from insurance companies and commercial banks. Our secured borrowings contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Certain of the notes also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the special purpose entity or the tenant.  We did not make the September 1, 2017 through November 1, 2017 scheduled payments of interest and principal due on a $12.9 million note, which bears interest at 4.95% and is scheduled to mature in August 2022, because the two properties that secure this note were not generating sufficient cash flow to cover the debt service.  We are currently in discussions with the lender

30


 

Table of Contents

regarding a resolution of this matter, although no assurances can be made as to the outcome of these discussions.  As of the date of this report, the lender has not declared an event of default.  Should the lender declare an event of default, the note would bear interest at a default rate equal to 9.95% per annum.

To date, our unsecured long-term debt has been issued through the private placement of notes to institutional investors and through groups of lenders who also participate in our unsecured revolving credit facility.  In March 2017, we added a $100 million floating-rate, unsecured two-year term loan, which has three one-year extension options. Concurrent with the closing of each of our floating-rate bank term loans, we entered into interest rate swaps that effectively convert the floating rates to fixed rates.

As of September 30, 2017, our aggregate secured and unsecured long‑term debt had an outstanding principal balance of $2.34 billion, a weighted average maturity of 6.0 years and a weighted average interest rate of 4.4%.  The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Investment Amount

 

 

 

 

 

 

Special Purpose

 

 

 

 

 

 

 

 

 

Outstanding

 

Entity

 

All Other

 

 

 

 

(In millions)

 

Borrowings

 

Subsidiaries

 

Subsidiaries

 

Total

 

STORE Master Funding net-lease mortgage notes payable

    

$

1,537

    

$

2,554

    

$

    

$

2,554

 

Other mortgage notes payable

 

 

233

 

 

392

 

 

 

 

392

 

Unsecured notes and term loans payable

 

 

575

 

 

 —

 

 

 —

 

 

 —

 

Unsecured credit facility

 

 

82

 

 

 —

 

 

 —

 

 

 —

 

Total debt

 

 

2,427

 

 

2,946

 

 

 —

 

 

2,946

 

Unencumbered real estate assets

 

 

 

 

2,322

 

 

646

 

 

2,968

 

 

 

$

2,427

 

$

5,268

 

$

646

 

$

5,914

 

Our decision to use senior unsecured term debt, STORE Master Funding or other non‑recourse traditional mortgage loan borrowings depends on borrowing costs, debt terms, debt flexibility and the tenant and industry diversification levels of our real estate assets. As we continue to acquire real estate, we expect to balance the overall degree of leverage on our portfolio by growing a pool of portfolio assets that are unencumbered. A growing pool of unencumbered assets will increase our financial flexibility by providing us with assets that could support senior unsecured financing or that could serve as substitute collateral for existing debt. Should market factors, which are beyond our control, adversely impact our access to these debt sources at economically feasible rates, our ability to grow through additional real estate acquisitions will be limited to any undistributed amounts available from our operations and any additional equity capital raises.

We access the equity markets in various ways.  In June 2017, we completed a private placement of 18,621,674 shares of our common stock to a wholly owned subsidiary of Berkshire Hathaway at a purchase price of $20.25 per share and received aggregate proceeds of $377.1 million.  The issuance and sale of the shares were made pursuant to a stock purchase agreement and there were no underwriter discounts or commissions associated with the sale.  We used the proceeds from this offering to prepay the STORE Master Funding Series 2012-1, Class A, indebtedness and to fund real estate acquisitions during the third quarter.  In addition, during the first quarter of 2017, we completed a follow-on stock offering in which the Company issued and sold 9,947,500 shares of common stock at a price to the public of $23.10 per share.  We raised approximately $220.8 million of proceeds, net of both underwriters’ discount and offering expenses, from this offering, which was used to pay down amounts then outstanding under our credit facility and to fund real estate acquisitions. 

In September 2016, we established an “at the market” equity distribution program, or ATM program, under which, from time to time, we offer and sell registered shares of our common stock up to a maximum amount of $400 million through a group of banks acting as our sales agents.  During the first quarter of 2017, we issued and sold 2,047,546 shares under the program at a weighted average share price of $25.02, raising $51.2 million in gross proceeds and $50.3 million in net proceeds after the payment of sales agents’ commissions of $0.8 million and offering expenses. We did not sell any shares under the ATM program during the second or third quarter of 2017.  Since the program began

31


 

Table of Contents

in 2016, we have issued and sold an aggregate of 8,132,647 shares under the program at a weighted average share price of $26.25, raising $213.5 million in aggregate gross proceeds and $209.4 million in aggregate net proceeds after the payment of sales agents’ commissions of $3.2 million and offering expenses. The net proceeds were primarily used to fund real estate acquisitions.

Substantially all of our cash from operations is generated by our investment portfolio. As shown in the following table, net cash provided by operating activities increased $46.4 million from the same period in 2016, primarily due to the increase in the size of our real estate investment portfolio which generated additional rent and interest revenues. Real estate investment activity was primarily funded with a combination of cash from operations, proceeds from the sale of real estate properties, proceeds from the issuance of long-term debt and proceeds from the issuance of stock.  The decrease in net cash used in investing activities is primarily due to an increase of $179.7 million in proceeds from the sale of real estate and collections of principal on our loans and direct financing receivables which increased from $45.8 million for 2016 to $225.5 million in 2017.  Net proceeds from the issuance of common stock increased $271.9 million to $647.8 million during 2017 from $375.9 million during the first nine months of 2016, whereas net proceeds from the issuance of long-term debt decreased $128.5 million from the same period in 2016.  As compared to the first nine months of 2016, we repaid $208.7 million more of long-term debt during the same period of 2017 primarily related to the STORE Master Funding Series 2012-1 notes which were prepaid in August 2017.  Additionally, we paid dividends to our stockholders totaling $151.0 million and $117.4 million during the first nine months of 2017 and 2016, respectively.  Our quarterly dividend was increased by 7.4% during the third quarter of 2016 to an annualized $1.16 per common share. We also increased our quarterly dividend in the third quarter of 2017 by 6.9% to an annualized $1.24 per common share; this increase will impact our cash payments for dividends in future quarters.

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

(In thousands)

 

2017

 

2016

 

Net cash provided by operating activities

    

$

229,405

    

$

182,959

    

Net cash used in investing activities

 

 

(782,277)

 

 

(834,125)

 

Net cash provided by financing activities

 

 

530,060

 

 

639,639

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(22,812)

 

 

(11,527)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

73,166

 

 

83,438

 

Cash, cash equivalents and restricted cash, end of period

 

$

50,354

 

$

71,911

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,986

    

$

30,044

   

Restricted cash included in other assets

 

 

15,368

 

 

41,867

 

Total cash, cash equivalents and restricted cash

 

$

50,354

 

$

71,911

 

Management believes that the cash generated by our operations, our current borrowing capacity on our revolving credit facility and our access to long‑term debt capital, will be sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we currently have made commitments. In order to continue to grow our real estate portfolio in the future beyond the excess cash generated by our operations and our ability to borrow, we intend to raise additional equity capital through the sale of our common stock.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of September 30, 2017.

Contractual Obligations

As summarized in the table of Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2016, we have contractual obligations related to our credit facility and long-term debt obligations, interest on those debt obligations, commitments to fund improvements to real estate properties and operating lease obligations under certain ground leases and our corporate office lease.  As disclosed in Liquidity and Capital Resources, during the first nine months of 2017, we entered into two long-term debt obligations: (1) a $100 million two-year bank term loan, which has three one-year extension options, and has been effectively converted to a fixed rate of 2.57% through the use

32


 

Table of Contents

of an interest rate swap, and (2) $135 million of STORE Master Funding net-lease mortgage notes, which have an interest rate of 4.32% and a remaining term of approximately 10 years.  In the third quarter of 2017, we prepaid the STORE Master Funding Series 2012-1, Class A notes (issued in August 2012 and scheduled to mature in August 2019), which bore an interest rate of 5.77% and had an outstanding balance of $198.6 million at the time of prepayment.

Recently Issued Accounting Pronouncements

See Note 2 to the September 30, 2017 unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our condensed consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have not made any material changes to these policies during the periods covered by this quarterly report. 

33


 

Table of Contents

Real Estate Portfolio Information

As of September 30, 2017, our total investment in real estate and loans approximated $5.9 billion, representing investments in 1,826 property locations, substantially all of which are profit centers for our customers.  These investments generate cash flows from approximately 580 contracts predominantly structured as net leases, mortgage loans and combinations of leases and mortgage loans, or hybrid leases.  The weighted average non‑cancellable remaining term of our leases was approximately 14 years.

Our real estate portfolio is highly diversified.  As of September 30, 2017, our 1,826 property locations were operated by over 380 customers across 48 states.  Our largest customer represented approximately 3% of our portfolio at September 30, 2017, and our top ten largest customers represented less than 19% of annualized base rent and interest.  Our customers operate their businesses across 480 brand names or business concepts in over 100 industries.  Our top five concepts as of September 30, 2017 were Art Van Furniture, Ashley Furniture HomeStore, Cabela’s, Mills Fleet Farm and Applebee’s; combined, these concepts represented 12% of annualized base rent and interest.  Our top five industries as of September 30, 2017 are restaurants, early childhood education centers, furniture stores, movie theaters and health clubs.  Combined, these industries represented 46% of annualized base rent and interest.

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 September 30, 2017, for all of our leases, loans and direct financing receivables in place as of that date.

Diversification by Customer

As of September 30, 2017, our 1,826 property locations were operated by over 380 customers and the following table identifies our ten largest customers:

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

Number

 

 

 

and

 

of

 

Customer

 

Interest

 

Properties

 

AVF Parent, LLC (Art Van Furniture)

 

2.9

%

17

 

Bass Pro Group, LLC (Cabela's)

 

2.8

 

 9

 

American Multi-Cinema, Inc. (Starplex/Carmike/Showplex/AMC)

 

2.4

 

15

 

Mills Fleet Farm Group, LLC

 

2.0

 

 6

 

Cadence Education, Inc. (Early childhood/elementary education)

 

2.0

 

32

 

US LBM Holdings, LLC (Building materials distribution)

 

1.7

 

37

 

RMH Franchise Holdings, Inc. (Applebee's)

 

1.4

 

33

 

O'Charley's LLC

 

1.2

 

30

 

Automotive Remarketing Group, Inc.

 

1.2

 

 6

 

Stratford School, Inc. (Elementary and middle schools)

 

1.1

 

 4

 

All other (372 customers)

 

81.3

 

1,637

 

Total

 

100.0

%

1,826

 

 

34


 

Table of Contents

Diversification by Concept

As of September 30, 2017, our customers operated their businesses across 480 concepts and the following table identifies the top ten concepts:

 

 

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

Number

 

 

 

and

 

of

 

Customer Business Concept

 

Interest

 

Properties

 

Art Van Furniture

 

2.9

%  

17

 

Ashley Furniture HomeStore

 

2.7

 

24

 

Cabela's

 

2.6

 

 8

 

Mills Fleet Farm

 

2.0

 

 6

 

Applebee's

 

2.0

 

47

 

Popeyes Louisiana Kitchen

 

1.4

 

63

 

O'Charley's

 

1.2

 

30

 

Stratford School

 

1.1

 

 4

 

Starplex Cinemas

 

1.1

 

 7

 

Captain D's

 

1.1

 

73

 

All other (470 concepts)

 

81.9

 

1,547

 

Total

 

100.0

%  

1,826

 

 

Diversification by Industry

As of September 30, 2017, our customers’ business concepts were diversified across more than 100 industries within the service, retail and manufacturing sectors of the U.S. economy.  The following table summarizes those industries into 75 industry groups:

 

 

 

 

 

 

 

 

 

 

    

% of

    

 

    

 

 

 

 

Annualized

 

 

 

Building

 

 

 

Base Rent

 

Number

 

Square

 

 

 

and

 

of

 

Footage 

 

Customer Industry Group

 

Interest

 

Properties

 

(in thousands)

 

Service:

 

 

 

 

 

 

 

Restaurants—full service

 

13.1

%  

335

 

2,348

 

Restaurants—limited service

 

7.4

 

392

 

1,048

 

Early childhood education centers

 

6.8

 

170

 

1,878

 

Movie theaters

 

6.3

 

39

 

1,873

 

Health clubs

 

6.0

 

67

 

1,915

 

Family entertainment centers

 

4.2

 

25

 

836

 

Automotive repair and maintenance

 

3.0

 

95

 

460

 

All other service (31 industry groups)

 

22.2

 

380

 

10,997

 

Total service

 

69.0

 

1,503

 

21,355

 

Retail:

 

 

 

 

 

 

 

Furniture stores

 

6.3

 

46

 

2,980

 

Farm and ranch supply stores

 

3.1

 

22

 

1,859

 

All other retail (14 industry groups)

 

8.2

 

99

 

4,743

 

Total retail

 

17.6

 

167

 

9,582

 

Manufacturing:

 

 

 

 

 

 

 

Metal fabrication

 

3.3

 

47

 

4,520

 

All other manufacturing (20 industry groups)

 

10.1

 

109

 

11,111

 

Total manufacturing

 

13.4

 

156

 

15,631

 

Total

 

100.0

%  

1,826

 

46,568

 

35


 

Table of Contents

Diversification by Geography

Our portfolio is also highly diversified by geography, as our 1,826 property locations can be found in 48 of the 50 states (excluding Delaware and Rhode Island).  The following table details the top ten geographical locations of the properties as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

 

 

 

 

and

 

Number of

 

State

 

Interest 

 

Properties

 

Texas

    

12.5

%   

192

 

Illinois

 

7.1

 

127

 

Florida

 

6.5

 

112

 

Ohio

 

5.7

 

104

 

Georgia

 

5.5

 

114

 

Tennessee

 

4.4

 

89

 

California

 

3.9

 

25

 

Arizona

 

3.8

 

74

 

Michigan

 

3.8

 

64

 

Minnesota

 

3.8

 

60

 

All other (38 states) (1)

 

43.0

 

865

 

Total

 

100.0

%  

1,826

 


(1)

Includes two properties in Ontario, Canada which represent 0.5% of annualized base rent and interest.

Contract Expirations

The following table sets forth the schedule of our lease, loan and direct financing receivable expirations as of September 30, 2017:

 

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

 

 

 

 

and

 

Number of

 

Year of Lease Expiration or Loan Maturity (1)

 

Interest

 

Properties (2)

 

Remainder of 2017

 

0.3

%

11

 

2018

 

0.3

 

 3

 

2019

 

0.7

 

 8

 

2020

 

0.4

 

 4

 

2021

 

0.8

 

 6

 

2022

 

0.5

 

 7

 

2023

 

1.4

 

31

 

2024

 

0.9

 

17

 

2025

 

1.9

 

23

 

2026

 

2.6

 

54

 

Thereafter

 

90.2

 

1,643

 

Total

 

100.0

%  

1,807

 


(1)

Expiration year of contracts in place as of September 30, 2017 and excludes any tenant option renewal periods.

(2)

Excludes 19 properties which were vacant and not subject to a lease as of September 30, 2017.

 

36


 

Table of Contents

Results of Operations

Overview

As of September 30, 2017, our real estate investment portfolio had grown to approximately $5.9 billion, consisting of investments in 1,826 property locations in 48 states, operated by over 380 customers in various industries. Over 95% of the real estate investment portfolio represents commercial real estate properties subject to long‑term leases, 4% represents mortgage loan and direct financing receivables primarily on commercial real estate buildings (located on land we own and lease to our customers) and a nominal amount represents loans receivable secured by our tenants’ other assets.

Three and Nine Months Ended September 30, 2017 Compared to Three and Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30,

 

Increase

 

September 30,

 

Increase

 

(In thousands)

 

2017

 

2016

 

(Decrease)

 

2017

 

2016

 

(Decrease)

 

Total revenues

 

$

110,544

    

$

96,998

    

$

13,546

    

$

332,723

    

$

274,202

    

$

58,521

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

31,379

 

 

27,121

 

 

4,258

 

 

91,938

 

 

76,427

 

 

15,511

 

Transaction costs

 

 

 —

 

 

155

 

 

(155)

 

 

 —

 

 

490

 

 

(490)

 

Property costs

 

 

1,335

 

 

807

 

 

528

 

 

3,272

 

 

2,519

 

 

753

 

General and administrative

 

 

10,255

 

 

8,104

 

 

2,151

 

 

29,787

 

 

25,240

 

 

4,547

 

Selling stockholder costs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

800

 

 

(800)

 

Depreciation and amortization

 

 

37,589

 

 

31,112

 

 

6,477

 

 

110,200

 

 

86,626

 

 

23,574

 

Provision for impairment of real estate

 

 

7,670

 

 

 —

 

 

7,670

 

 

11,940

 

 

 —

 

 

11,940

 

Total expenses

 

 

88,228

 

 

67,299

 

 

20,929

 

 

247,137

 

 

192,102

 

 

55,035

 

Income from operations before income taxes

 

 

22,316

 

 

29,699

 

 

(7,383)

 

 

85,586

 

 

82,100

 

 

3,486

 

Income tax expense

 

 

81

 

 

89

 

 

(8)

 

 

334

 

 

248

 

 

86

 

Income before gain on dispositions of real estate

 

 

22,235

 

 

29,610

 

 

(7,375)

 

 

85,252

 

 

81,852

 

 

3,400

 

Gain on dispositions of real estate, net of tax

 

 

6,345

 

 

6,733

 

 

(388)

 

 

35,778

 

 

9,533

 

 

26,245

 

Net income

 

$

28,580

 

$

36,343

 

$

(7,763)

 

$

121,030

 

$

91,385

 

$

29,645

 

 

Revenues

The increase in revenues period over period was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues and interest income. Our real estate investment portfolio grew from approximately $4.8 billion in gross investment amount representing 1,576 properties as of September 30, 2016 to approximately $5.9 billion in gross investment amount representing 1,826 properties at September 30, 2017. The weighted average real estate investment amounts outstanding during the three-month periods were approximately $5.7 billion in 2017 and $4.7 billion in 2016. During the nine-month periods, the weighted average real estate investment amounts outstanding were approximately $5.5 billion in 2017 and $4.4 billion in 2016.  Our real estate investments were made throughout the periods presented and were not all outstanding for the entire period; accordingly, a large portion of the increase in revenues between periods is related to recognizing revenue in 2017 on acquisitions that were made during 2016. Similarly, the full revenue impact of acquisitions made during the first nine months of 2017 will not be seen until the fourth quarter of 2017 and into 2018. Revenues for the third quarter of 2017 include a $4.6 million charge related to accelerated amortization of lease incentives associated with terminated lease contracts.

The initial rental or capitalization rates we receive on sale‑leaseback transactions, calculated as the initial annualized base rent divided by the purchase price of the properties, vary from transaction to transaction based on many factors, such as the terms of the lease, the property type including the property’s real estate fundamentals and the market rents in the area on the various types of properties we target across the United States. The majority of our transactions are sale‑leaseback transactions where we acquire the property and simultaneously negotiate a lease directly with the tenant based on the tenant’s business needs. There are also online commercial real estate auction marketplaces for real estate transactions; properties acquired through these online marketplaces are often subject to existing leases and offered by third‑party sellers. In general, because we provide tailored customer lease solutions in sale-leaseback transactions, our lease rates historically have been higher and subject to less short-term market influences than what we have seen in the

37


 

Table of Contents

auction marketplace as a whole. In addition, since our real estate leases represent an alternative for our customers to other forms of corporate capitalization, lease rates can also be influenced by changes in interest rates and overall capital availability. For the nine months ended September 30, 2017, we experienced a decrease of 0.2% in the weighted average lease rate achieved as compared to the same period in 2016 and, based on our most recent experience, our expectation for the future is that lease rates will remain relatively flat for the near term. The weighted average initial real estate capitalization rate on the properties we acquired during the third quarters of 2017 and 2016 was approximately 7.8% and 8.2%, respectively, and was approximately 7.8% and 8.0% on the properties we acquired during the first nine months of 2017 and 2016, respectively.

Interest Expense

The increase in interest expense, as summarized in the table below, was due primarily to an increase in long‑term borrowings used to partially fund the acquisition of properties for our growing real estate investment portfolio. We fund the growth in our real estate investment portfolio with long‑term fixed-rate debt, net proceeds from the occasional sales of real estate, net proceeds from equity issuances and excess cash flow from our operations after dividends and principal payments on our debt. We use our credit facility to temporarily finance the properties we acquire.

The following table summarizes our interest expense for the periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2017

 

2016

 

 

2017

 

2016

 

Interest expense - credit facility

 

$

10

    

$

74

 

    

$

959

    

$

915

 

Interest expense - credit facility fees

 

 

264

 

 

323

 

 

 

773

 

 

758

 

Interest expense - long-term debt (secured and unsecured)

 

 

27,336

 

 

25,105

 

 

 

82,906

 

 

70,043

 

Capitalized interest

 

 

(268)

 

 

(212)

 

 

 

(827)

 

 

(607)

 

Amortization of deferred financing costs and other

 

 

4,037

 

 

1,831

 

 

 

8,127

 

 

5,318

 

Total interest expense

 

$

31,379

 

$

27,121

 

 

$

91,938

 

$

76,427

 

Credit facility:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average debt outstanding

 

$

1,783

 

$

13,728

 

 

$

56,520

 

$

60,202

 

Average interest rate during the period (excluding facility fees)

 

 

2.2

%  

 

2.2

%  

 

 

2.3

%  

 

2.0

%  

Long-term debt (secured and unsecured):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average debt outstanding

 

$

2,458,229

 

$

2,152,832

 

 

$

2,454,548

 

$

1,992,639

 

Average interest rate during the period

 

 

4.4

%  

 

4.6

%  

 

 

4.5

%  

 

4.7

%  

The average amount of long-term debt outstanding was approximately $2.5 billion during the three months ended September 30, 2017, up from approximately $2.2 billion for the same period in 2016 and, for the nine months ended September 30, 2017, the average amount of long-term debt outstanding was approximately $2.5 billion, up from approximately $2.0 billion for the same period in 2016.  The increase in long-term debt outstanding is the primary driver for the increase in interest expense on long-term debt. This increase was slightly offset by a decrease in the weighted average interest rate of the long-term debt. Long-term debt added after September 30, 2016 included $100 million of unsecured bank term debt we issued in March 2017, which bears an interest rate of 2.77%, and the STORE Master Funding net‑lease mortgage notes we sold in October 2016 and March 2017, aggregating $335.0 million, which bear a weighted average interest rate of 4.1%.  During the third quarter of 2017, we prepaid approximately $198.6 million of STORE Master Funding Series 2012-1, Class A notes, which were not scheduled to mature until August 2019 and, as a result, recognized a $2.0 million charge to interest expense for the accelerated amortization of the related deferred financing costs.  As of September 30, 2017, we had $2.3 billion of long-term debt outstanding with a weighted average interest rate of 4.4%.

We use our revolving credit facility on a short-term, temporary basis to acquire real estate properties until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds of which

38


 

Table of Contents

we use to repay the amounts outstanding under our revolving credit facility. We entered the third quarter of 2017 with cash available from our private placement stock offering in late June 2017 and, as a result, did not have any borrowing activity until late September 2017, generating a nominal amount of interest expense, excluding facility fees, associated with our revolving credit facility for the three months ended September 30, 2017.  Similarly, for the three months ended September 30, 2016, we also had a small amount of average borrowings outstanding and incurred $0.1 million of interest expense. For the nine months ended September 30, 2017 and 2016, average borrowings outstanding were $56.5 million and $60.2 million, respectively, and interest expense was $1.0 million and $0.9 million, respectively.  The amount and timing of real estate acquisition activity and debt and/or equity transactions will affect the level of borrowing activity on our credit facility.

From time to time, we may have construction activities on one or more of our real estate properties and interest capitalized as a part of those activities represented $0.3 million and $0.8 million during the three and nine months ended September 30, 2017, respectively, as compared to $0.2 million and $0.6 million, respectively, for the same periods in 2016. 

Transaction Costs

Our real estate acquisitions have been predominantly sale‑leaseback transactions in which acquisition and closing costs are capitalized as part of the investment in the property. We also occasionally acquire properties subject to an existing lease and have historically accounted for those transactions as business combinations in accordance with the then-existing accounting guidance. Accordingly, the costs incurred on properties acquired that were subject to an existing lease have been expensed to operations as incurred. As noted in Note 2 to the condensed consolidated financial statements, we adopted ASU 2017-01 in 2017 and, as a result, expect that fewer, if any, of our real estate acquisitions subject to an existing lease will be accounted for as business combinations under this new accounting guidance and expect that the related closing costs will be capitalized as part of the investment in those properties. Transaction costs expensed during the three and nine months ended September 30, 2016 totaled $0.2 million and $0.5 million, respectively.  As expected, there were no transactions costs expensed during the nine months ended September 30, 2017.

Property Costs

Approximately 98% of our leases are triple net, meaning that our tenants are generally responsible for the property-level operating costs such as taxes, insurance and maintenance. Accordingly, we generally do not expect to incur property-level operating costs or capital expenditures, except during any period when one or more of our properties is no longer under lease. Our need to expend capital on our properties is further reduced due to the fact that some of our tenants will periodically refresh the property at their own expense to meet their business needs or in connection with franchisor requirements. As of September 30, 2017, we owned 19 properties that were vacant and not subject to a lease and no lease contracts are expected to mature during the remainder of 2017. Subsequent to September 30, 2017, we re-leased eight of these vacant properties and sold one more.  We expect to incur some property costs related to the vacant properties until such time as those properties are either leased or sold. 

Included in property costs for the three and nine months ended September 30, 2017 was approximately $117,000 and $348,000, respectively, related to the amortization of ground lease intangibles as compared to $112,000 and $336,000, respectively, for the same periods in 2016. Property costs also include the expense of performing site inspections of our properties from time to time, as well as the property management costs of the few properties we own that have specific landlord property-level expense obligations. 

General and Administrative Expenses

General and administrative expenses include compensation and benefits; professional fees such as portfolio servicing, legal, accounting and rating agency fees; and general office expenses such as insurance, office rent and travel costs. General and administrative costs totaled $10.3 million and $29.8 million for the three and nine months ended September 30, 2017, respectively, as compared to $8.1 million and $25.2 million, respectively, for the same periods in 2016 with the increase primarily due to the growth of our portfolio and related staff additions. Certain expenses, such as property‑related insurance costs and the costs of servicing the properties and loans comprising our real estate portfolio, increase in direct proportion to the increase in the size of the portfolio. Compensation and benefits expense increased

39


 

Table of Contents

partially due to staffing additions to support our growing investment portfolio, as well as an increase in amortization expense related to our stock-based incentive compensation program where our legacy incentive plans are being replaced with public company incentive plans that are more comprehensive and include more of our employees. Our employee base grew from 65 employees at September 30, 2016 to 77 employees as of September 30, 2017. General and administrative expense for the third quarter of 2017 includes a $0.3 million accrued severance payment for an executive officer that announced his resignation in September 2017.  We expect that general and administrative expenses will continue to rise in some measure as our real estate investment portfolio grows; however, we expect that such expenses as a percentage of the portfolio will decrease over time due to efficiencies and economies of scale.

Selling Stockholder Costs

In connection with our IPO, we entered into a registration rights agreement with STORE Holding pursuant to which we agreed to provide certain “demand” registration rights and customary “piggyback” registration rights. The registration rights agreement also provided that we pay certain expenses relating to such registrations and indemnify the registration rights holders against certain liabilities which may arise under securities laws.  We incurred approximately $0.8 million of expenses, primarily registration fees, legal and accounting costs, during the first quarter of 2016 on behalf of STORE Holding related to its sale of all of its holdings of our common stock.

Depreciation and Amortization Expense

Depreciation and amortization expense, which increases in proportion to the increase in the size of our real estate portfolio, rose from $31.1 million and $86.6 million for the three and nine months ended September 30, 2016, respectively, to $37.6 million and $110.2 million, respectively, for the comparable periods in 2017.

Provision for Impairment of Real Estate

During the nine months ended September 30, 2017, we recognized an aggregate provision for impairment of real estate of $11.9 million representing $7.6 million recognized in the third quarter related to two properties which became vacant during the quarter and $4.3 million recognized in the first quarter associated with a property sold in the second quarter (see below). There was no provision for impairment of real estate recognized in 2016.

Gain on Dispositions of Real Estate

We sell properties from time to time in order to enhance the diversity and quality of our real estate portfolio and to take advantage of opportunities to reinvest the capital. During the three months ended September 30, 2017, we recognized a $6.3 million aggregate gain, net of tax, on the sale of 12 properties.  In comparison, for the three months ended September 30, 2016, we recognized a $6.7 million aggregate gain, net of tax, on the sale of 16 properties. For the nine months ended September 30, 2017, we recognized a $35.8 million aggregate gain, net of tax, on the sale of 40 properties as compared to a $9.5 million aggregate gain, net of tax, on the sale of 21 properties in the same period in 2016.

Net Income

For the three months ended September 30, 2017, our net income was $28.6 million, a decrease from $36.3 million for the same period a year ago.  Net income for the third quarter of 2017 includes a $4.6 million non-cash charge to revenue related to the accelerated amortization of lease incentives associated with lease contracts that were terminated during the quarter, a $2.0 million accelerated amortization of deferred financing costs associated with the prepayment of our Series 2012-1, Class A, STORE Master Funding debt, and a $7.6 million provision for impairment of real estate recognized on two properties which became vacant during the quarter. 

40


 

Table of Contents

For the nine months ended September 30, 2017, our net income rose to $121.0 million from $91.4 million for the same period in 2016.  Our net income rose primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues and interest income, and due to the increase in gains on dispositions of real estate as described above, offset by the impact of property impairments and accelerated amortization as discussed above.

Non‑GAAP Measures

Our reported results are presented in accordance with GAAP. We also disclose Funds from Operations, or FFO, and Adjusted Funds from Operations, or AFFO, both of which are non‑GAAP measures. We believe these two non‑GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs. FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.

We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as GAAP net income, excluding gains (or losses) from extraordinary items and sales of depreciable property, real estate impairment losses and depreciation and amortization expense from real estate assets, including the pro rata share of such adjustments of unconsolidated subsidiaries. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to certain non‑cash revenues and expenses such as straight‑line rents, amortization of deferred financing costs and stock‑based compensation. In addition, in deriving AFFO, we exclude certain other costs not related to our ongoing operations, such as the amortization of lease-related intangibles and, historically, transaction costs associated with acquiring real estate subject to existing leases.

FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. Management believes that AFFO provides more useful information to investors and analysts because it modifies FFO to exclude certain additional non-cash revenues and expenses such as straight‑line rents, amortization of deferred financing costs and stock‑based compensation as such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. Additionally, in deriving AFFO, we exclude certain other costs, such as the amortization of lease-related intangibles and, historically, transaction costs associated with acquiring real estate subject to existing leases. We believe that these costs are not an ongoing cost of the portfolio in place at the end of each reporting period and, for these reasons, we add back the portion expensed when computing AFFO. Similarly, in 2016 we excluded the offering expenses incurred on behalf of our selling stockholder, STORE Holding, when it exited all of its holdings of STORE Capital common stock, as those costs are not related to our ongoing operations.  As a result, we believe AFFO to be a more meaningful measurement of ongoing performance that allows for greater performance comparability.  Therefore, we disclose both FFO and AFFO and reconcile them to the most appropriate GAAP performance metric, which is net income.  STORE Capital’s FFO and AFFO may not be comparable to similarly titled measures employed by other companies.

41


 

Table of Contents

The following is a reconciliation of net income (which we believe is the most comparable GAAP measure) to FFO and AFFO.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

Net Income

    

$

28,580

    

$

36,343

    

$

121,030

    

$

91,385

    

Depreciation and amortization of real estate assets

 

 

37,397

 

 

30,956

 

 

109,698

 

 

86,236

 

Provision for impairment of real estate

 

 

7,670

 

 

 —

 

 

11,940

 

 

 —

 

Gain on dispositions of real estate, net of tax

 

 

(6,345)

 

 

(6,733)

 

 

(35,778)

 

 

(9,533)

 

Funds from Operations

 

 

67,302

 

 

60,566

 

 

206,890

 

 

168,088

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line rental revenue, net

 

 

(1,185)

 

 

(963)

 

 

(2,962)

 

 

(2,548)

 

Transaction costs

 

 

 —

 

 

155

 

 

 —

 

 

490

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

2,012

 

 

1,796

 

 

5,880

 

 

5,219

 

Deferred financing costs and other noncash interest expense (a)

 

 

4,037

 

 

1,831

 

 

8,127

 

 

5,318

 

Lease-related intangibles and costs (b)

 

 

5,025

 

 

418

 

 

5,642

 

 

1,321

 

Accrued severance costs

 

 

296

 

 

 —

 

 

296

 

 

 —

 

Selling stockholder costs

 

 

 —

 

 

 —

 

 

 —

 

 

800

 

Adjusted Funds from Operations

 

$

77,487

 

$

63,803

 

$

223,873

 

$

178,688

 


(a)

For the third quarter of 2017, includes $2.0 million of accelerated amortization of deferred financing costs related to the prepayment of STORE Master Funding debt.

(b)

For the third quarter of 2017, includes a $4.6 million charge related to accelerated amortization of lease incentives associated with terminated lease contracts.

 

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Our interest rate risk management objective is to limit the impact of future interest rate changes on our earnings and cash flows. We seek to match the cash inflows from our long‑term leases with the expected cash outflows on our long‑term debt. To achieve this objective, our consolidated subsidiaries primarily borrow on a fixed‑rate basis for longer‑term debt issuances. At September 30, 2017, all of our long‑term debt carried a fixed interest rate, or was effectively converted to a fixed‑rate through the use of interest rate swaps for the term of the debt, and the weighted average debt maturity was approximately 6.0 years. We are exposed to interest rate risk between the time we enter into a sale‑leaseback transaction and the time we finance the related real estate with long‑term fixed‑rate debt. In addition, when that long‑term debt matures, we may have to refinance the real estate at a higher interest rate. Market interest rates are sensitive to many factors that are beyond our control. 

We address interest rate risk by employing the following strategies to help insulate us from any adverse impact of rising interest rates:

·

We seek to minimize the time period between acquisition of our real estate and the ultimate financing of that real estate with long‑term fixed‑rate debt.

·

By using serial issuances of long-term debt, we intend to ladder out our debt maturities to avoid a significant amount of debt maturing during any single period.

·

We also ladder our debt maturities in order to minimize the gap between free cash flow, or cash from operations less dividends, and annual debt maturities.

·

Our secured long‑term debt generally provides for some amortization of the principal balance over the term of the debt, which serves to reduce the amount of refinancing risk at debt maturity to the extent that we can refinance the reduced debt balance over a revised long-term amortization schedule. 

42


 

Table of Contents

·

We seek to maintain a large pool of unencumbered real estate assets to give us the flexibility to choose among various secured and unsecured debt markets when we are seeking to issue new long-term debt.

See our Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities.  As of September 30, 2017, our market risk has not changed materially from the amounts reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness as of September 30, 2017 of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third fiscal quarter to which this report relates that materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of the Company.

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are subject to various legal proceedings and claims that arise in the ordinary course of our business, including instances in which we are named as defendants in lawsuits arising out of accidents causing personal injuries or other events that occur on the properties operated by our customers. These matters are generally covered by insurance and/or are subject to our right to be indemnified by our customers that we include in our leases. Management believes that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity. 

Item 1A.  Risk Factors.

 

There have been no material changes to the risk factors as disclosed in the section entitled “Risk Factors” beginning on page 10 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and filed with the Securities and Exchange Commission on February 24, 2017.

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

During the three months ended September 30, 2017, we did not repurchase any of our equity securities nor did we sell any equity securities that were not registered under the Securities Act of 1933.

Item 3.  Defaults Upon Senior Securities.

 

None.

Item 4.  Mine Safety Disclosures.

 

None.

 

43


 

Table of Contents

Item 5.  Other Information.

 

None.

Item 6.  Exhibits

 

 

 

 

 

 

Exhibit

 

Description

 

Location

31.1

 

Rule 13a-14(a) Certification of the Chief Executive Officer.

 

Filed herewith.

31.2

 

Rule 13a-14(a) Certification of the Chief Financial Officer.

 

Filed herewith.

32.1

 

Section 1350 Certification of the Chief Executive Officer.

 

Furnished herewith.

32.2

 

Section 1350 Certification of the Chief Financial Officer.

 

Furnished herewith.

101.INS

 

XBRL Instance Document.

 

Filed herewith.

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

Filed herewith.

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

Filed herewith.

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

Filed herewith.

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

Filed herewith.

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

Filed herewith.

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

STORE CAPITAL CORPORATION

 

                    (Registrant)

 

 

 

Date:  November 3, 2017

By:

/s/ Catherine Long

 

 

Catherine Long

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

44