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Section 1: 10-K (10-K)

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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

 

 

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

 

For the fiscal year ended December 31, 2017

or

 

 

 

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

 

For the transition period from                      to                     .  

Commission File No. 001-36739  

 

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Maryland

 

45-2280254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(Address of principal executive offices) (Zip Code)

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

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

 

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

 

New York Stock Exchange

 

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

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

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

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

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

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “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 .  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ◻    No  ☒ 

As of June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the Registrant’s shares of common stock, $0.01 par value, held by non-affiliates of the Registrant, was $4.3 billion based on the last reported sale price of $22.45 per share on the New York Stock Exchange on June 30, 2017.

As of February 21, 2018, there were 194,284,129 shares of the registrant’s common stock outstanding.

 

Documents Incorporated by Reference

Portions of Part III of this Form 10-K are incorporated by reference from the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year.

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

    

 

    

Page
Number

PART I 

 

 

 

 

 

 

 

Item 1. 

 

Business

 

2

Item 1A. 

 

Risk Factors

 

11

Item 1B. 

 

Unresolved Staff Comments

 

27

Item 2. 

 

Properties

 

28

Item 3. 

 

Legal Proceedings

 

31

Item 4. 

 

Mine Safety Disclosures

 

31

 

 

 

 

 

PART II 

 

 

 

 

 

 

 

Item 5. 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

31

Item 6. 

 

Selected Financial Data

 

33

Item 7. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

34

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

52

Item 8. 

 

Financial Statements and Supplementary Data

 

53

Item 9. 

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

81

Item 9A. 

 

Controls and Procedures

 

81

Item 9B. 

 

Other Information

 

81

 

 

 

 

 

PART III 

 

 

 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

 

81

Item 11. 

 

Executive Compensation

 

81

Item 12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

82

Item 13. 

 

Certain Relationships and Related Transactions, and Director Independence

 

82

Item 14. 

 

Principal Accountant Fees and Services

 

82

 

 

 

 

 

PART IV 

 

 

 

 

 

 

 

Item 15. 

 

Exhibits and Financial Statement Schedules

 

83

Item 16.

 

Form 10-K Summary

 

87

 

 

 

 

 


 

Table of Contents

PART I

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

Forward-Looking Statements

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

·

the factors included in this report, including those set forth under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

·

our ability to raise debt and equity capital on attractive terms;

·

the competitive environment in which we operate;

·

the performance and financial condition of our customers;

·

real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for customers in such markets;

·

decreased rental rates or increased vacancy rates;

·

potential defaults (including bankruptcy or insolvency) on, or non-renewal of, leases by customers;

·

real estate acquisition risks, including our ability to identify and complete acquisitions and/or failure of such acquisitions to perform in accordance with projections;

·

potential natural disasters and other potentially catastrophic events such as acts of war and/or terrorism;

·

the general level of interest rates;

·

litigation, including costs associated with defending claims against us as a result of incidents on our properties, and any adverse outcomes;

·

potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or real estate investment trust tax laws;

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·

the impact of changes in the tax code as a result of recent federal tax legislation and uncertainty as to how some of those changes may be applied;

·

financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and that we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms at all;

·

lack of or insufficient amounts of insurance;

·

our inability to comply with the laws, rules and regulations applicable to companies, and in particular, public companies;

·

our ability to maintain our qualification as a real estate investment trust;

·

our ability to retain key personnel; and

·

possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us.

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

 

Item 1. BUSINESS

General

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

S|T|O|R|E continues the investment activities of our senior leadership team, which has been investing in single-tenant operational real estate for over 30 years. We are one of the largest and fastest-growing net-lease REITs, and own a well-diversified portfolio that consists of investments in 1,921 property locations operated by nearly 400 customers across 48 states as of December 31, 2017. Our customers operate across a wide variety of industries within the service, retail and manufacturing sectors of the U.S. economy, with restaurants, furniture stores, early childhood education centers, movie theaters and health clubs representing the top industries in our portfolio.

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

Our Total Investment Portfolio at Period End

 

Picture 1

 

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

2017 Highlights

·

During the year ended December 31, 2017, we invested approximately $1.4 billion in 316 property locations.

·

As of December 31, 2017, our total gross investment in real estate had reached approximately $6.2 billion, of which $3.3 billion was unencumbered. Our long-term outstanding debt totaled $2.3 billion at December 31, 2017, and, at that date, approximately $1.8 billion of our total long-term debt was secured debt and approximately $2.9 billion of our investment portfolio served as collateral for these outstanding borrowings.

·

For the year ended December 31, 2017, we declared dividends totaling $1.20 per share of common stock to our stockholders. In the third quarter of 2017, we raised our quarterly dividend 6.9% from our previous quarterly dividend amount.

·

During 2017, we received an investment grade issuer rating of Baa2 with a stable outlook from Moody’s Investor Service.  We also received credit rating upgrades to BBB, stable outlook, from both S&P Global Ratings and Fitch Ratings.

·

In June 2017, we completed a private placement of 18.6 million shares of our common stock to a wholly owned subsidiary of Berkshire Hathaway at a price of $20.25 per share and received aggregate proceeds of $377.1 million. In March 2017, we completed a follow-on public offering of our common stock in which we received proceeds aggregating $220.8 million, net of underwriters’ discounts and offering expenses.

·

During 2017, we raised aggregate net proceeds of $144.8 million from sales of shares under our initial $400.0 million “at the market”, or ATM, equity offering program. As of December 31, 2017, we had the ability to

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offer and sell up to an additional $90.3 million of our shares of common stock under our initial $400.0 million ATM authorization.

·

In March 2017, we closed on a $100.0 million two-year unsecured bank term loan, which has three one-year extension options.

·

In March 2017, we sold $135.0 million of A+ rated net-lease mortgage notes, coupon rate 4.32%, under the STORE Master Funding debt program.

·

In August 2017, we prepaid, without the incurrence of a prepayment penalty, $198.6 million of STORE Master Funding notes, which bore an interest rate of 5.77% and were scheduled to mature in August 2019.

Our Target Market

We are the leader in providing real estate financing solutions principally to middle-market and larger businesses that own STORE Properties and operate within the broad-based service, retail and manufacturing sectors of the U.S. economy. We have designed our net-lease solutions to provide a long-term, lower-cost way to improve our customers’ capital structures and, thus, be a preferred alternative to real estate ownership. We estimate the market for STORE Properties to exceed $3.3 trillion in market value and to include more than 1.9 million properties.

We define middle-market companies as those having approximate annual gross revenues of between $10 million and $1.0 billion, although approximately 16% of our customers have annual revenues in excess of $1.0 billion. The median annual revenues for our nearly 400 customers is approximately $47 million and, on a weighted average basis, our average customer has revenues of approximately $800 million. Most of our customers do not have credit ratings, while some have ratings from rating agencies that service insurance companies or fixed-income investors. Most of these non-rated companies either prefer to be unrated or are simply too small to issue debt rated by a nationally recognized rating agency in a cost-efficient manner.

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

Our customers typically have the choice to either own or to lease the real estate they use in their daily businesses. They choose to lease for various reasons, including the potential to lower their cost of capital, since leasing supplants traditional financing options and the costlier equity that lenders require be tied up in the real estate. Leasing is also viewed as an attractive alternative to our customers because it generally locks in scheduled payments, at lower levels and for longer periods, than traditional financing options, which are viewed as attractive relative to the amounts funded.

Whether companies elect to rent or own the real estate they use in their businesses is most often a financial decision. For the few highly capitalized large companies that possess investment-grade credit ratings, real estate leasing tends to be viewed as a substitute for corporate borrowings that they could otherwise access (so long as they remain highly rated and equitized). With real estate leases often bearing rental costs that exceed corporate term borrowing costs, such companies elect to rent for strategic reasons. Such reasons may include the long-term flexibility to vacate properties that are no longer strategic, the permanence of lease capital which lessens potential refinancing risk should corporate credit ratings deteriorate, the lack of corporate financial covenants associated with leasing and the ability to harness developers to effectively outsource their real estate development needs. The primary motivations for S|T|O|R|E’s middle market and larger customers tend to be different. For such companies, real estate lease solutions offer the potential to lower their cost of capital. In addition to these primary economic motivations, real estate leasing offers the potential for greater corporate flexibility, which is a hallmark of S|T|O|R|E’s approach and which offers the potential for further tenant wealth creation.  Important tenant concerns include lease assignability, property substitution rights, property closure rights and the ability of S|T|O|R|E to assist with property expansion and lease contract modification. We believe that our customers select us as their landlord of choice principally as a result of our service, comparative business flexibility and the tailored net-lease solutions we provide.

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We believe the demand for our net-lease solutions has grown as a result of the current bank regulatory environment. In our view, the increased scrutiny and regulation of the banking industry in response to the collapse of the housing and mortgage industries from 2007 to 2009, particularly with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the Basel Accords issued by the Basel Committee on Banking Supervision, have constrained aggressive real estate lending practices and limited desirable term debt real estate borrowing options.  Real estate leasing today represents a highly desirable component of corporate capitalization strategies for reasons due, in part, to the unavailability of long-term, fixed rate commercial real estate mortgage financing with important features such as affordable prepayment and modification options or loan assignability.

S|T|O|R|E was formed to capitalize on a large market opportunity resulting from the widespread need amongst middle market and larger companies for efficient corporate real estate capital solutions.  We believe our opportunities include both gaining market share from the fragmented network of net-lease capital providers and growing the market by creating demand for our net-lease solutions that meet the long-term real estate capital needs of these companies.

The estimated $3.3 trillion market of STORE Properties is divided into three primary industry sectors and various industry sub-sectors. The primary sectors and their proportion of the market of STORE Properties are service at 42%, retail at 46% and manufacturing at 12%. The sub-sectors included within each primary sector are summarized in the table below.

Service

 

Retail

 

Manufacturing

Restaurants

 

Big box retail

 

Industrial profit-centers

Education

 

Specialty retail

 

Light manufacturing

Fitness centers

 

Grocery

 

 

Transportation

 

Drug stores

 

 

Automotive services

 

Automotive (new and used)

 

 

Family entertainment

 

 

 

 

 

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

 

 

 

Automotive parts stores

 

Movie theaters

Cold storage facilities

 

Office supplies retailers

Department stores

 

Pet care facilities

Discount stores

 

Rental centers

Early childhood education

 

Secondary education

Family entertainment facilities

 

Supermarkets

Furniture stores

 

Truck stops

Fast food restaurants

 

Wholesale clubs

Full service restaurants

 

 

 

Although many of these industries are represented within our diverse property portfolio, S|T|O|R|E primarily targets service sector properties that represent a broad array of everyday services, such as restaurants and health clubs, are located near customers targeted by the business operating on the property and are for services not readily available online.  Although not our primary focus, the retail sector assets we target are primarily located in retail corridors, tend to be internet resistant and include a high experiential component, such as furniture and hunting and fishing stores. For the manufacturing sector of the market of STORE Properties, we will typically target properties, across a broad array of industries, that are located in industrial parks near customers and suppliers that make a product which is an everyday necessity.  As of December 31, 2017, our portfolio of investments in STORE Properties was diversified across more than 100 industries, of which 67% was in the service sector, 18% was in the retail sector and 15% was in the manufacturing sector, based on annualized revenue.

Our Asset Class: STORE Properties

STORE Properties are a unique asset class that inspired the formation of S|T|O|R|E and our company name. STORE (Single Tenant Operational Real Estate) Properties are profit-center real estate locations on which our customers

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conduct their businesses and generate their revenues and profits. The defining characteristic of STORE Properties is the number of payment sources: STORE Properties have the following three payment sources, whereas all other commercial real estate assets have just two.

·

Unit-Level Profitability. STORE Properties are distinguished by the primary source of their rent payment, which comes directly from the profits produced by the business operations at the real estate locations we own, which we refer to as unit-level profitability. While it is a common perception that the tenant under a lease is the primary source of the rent payment (as distinguished from the business unit operating at the leased site), we have observed a historic pattern in which tenants in corporate insolvencies seek to vacate unprofitable locations while retaining profitable ones, which indicates that the profitability of the location is the main indicator of a tenant’s long-term ability to pay. Because tenants historically retain profitable locations and vacate unprofitable ones in the event of insolvency, it is fundamentally important for S|T|O|R|E to collect and review the unit-level financial statements of our customers at our real estate locations, which is a key component of our business model. As of December 31, 2017, approximately 97% of the properties in our portfolio are subject to unit-level financial reporting requirements. Without access to unit-level financial reporting for the business activities conducted on the properties we own, it is difficult to accurately assess our customer’s business and, thus, the quality of the most important, and primary, source for our rent payments. 

·

Customer Credit Quality. In addition to the unit-level profitability of the business on the real estate we own, our customers’ overall financial health, or credit quality, serves as an additional, but not primary, source of payment. Our customer’s credit can become the primary payment source if our unit is not profitable and our customer is required to divert cash flows from its other profitable locations or utilize other resources to pay our rents. However, we have seen that customer credit quality tends to be subject to greater volatility over time than unit-level profitability, because customer credit quality is not only a function of the unit-level profitability of the operations at our locations, but of the profitability of potentially many other existing and new assets owned and operated by our customer. Corporate financial health is also a function of many other decisions, such as optional changes in capital structure or growth strategies, as well as conditions in the marketplace for our customers’ products and services, that can change over time and that may have profound impacts on customer creditworthiness.

·

Real Estate Residual Value. The final payment source that is common to all real estate investments is the residual value of the underlying real estate, which gives us the opportunity to receive rents from other substitute tenants in the event our property becomes vacant. For S|T|O|R|E, this means more than just looking at comparable lease rates and transactions. Studies we have done underscore the importance of investing in properties at or below their as-new replacement costs. We also review the local markets in which our properties are located and seek to have rents that are at or below prevailing market rents on a per square foot basis for comparable properties. Taking these steps protects S|T|O|R|E and our customers by making it easier for us to assign, sell or sublease properties that our customers may want to sell, reposition or vacate as part of their capital efficiency strategies.

Creating Investment-Grade Contracts

From our inception in 2011, based upon the experiences gained by our founding leadership team over more than thirty years and two prior successful public companies, we have emphasized and uniquely disclosed information regarding the net-lease contracts that we create with our tenants. We believe that our net-lease contracts, and not simply tenant or real estate quality, are central to our potential to deliver superior long-term risk-adjusted rates of return to our stockholders.  Contract quality embodies tenant and real estate characteristics, together with other investment attributes we believe to be highly material. Contract attributes include the prices we pay for the real estate we own, inclusive of the prices relative to new construction cost. As of December 31, 2017, our average investment approximated 82% of replacement cost, a statistic that has been relatively stable since 2015. Other important contract attributes include the ability to receive unit-level financial statements, which allows us to evaluate unit-level cash flows relative to the rents we receive. As of December 31, 2017, the median ability of the properties we own to cover our rents, inclusive of an allowance for indirect costs, approximated 2.1:1, which also has held fairly stable since 2015. Likewise, over many years of providing real estate net-lease capital, we have determined that tenant alignments of interest are highly important. Such alignments of interest can include full parent company recourse, credit enhancements in the form of guarantees, cross default provisions and the

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use of master leases. Master leases are individual lease contracts that bind multiple properties and offer landlords greater security in the event of tenant insolvency and bankruptcy. Whereas individual property leases convey to tenants the options to evaluate the desirability and viability of each individual property they rent in the event of a bankruptcy, master leases bind multiple properties, permitting landlords to benefit from aggregate property performance. As of December 31, 2017, 87% of our multi-property net-lease contracts were in the form of master leases. Contract economic terms are also highly important because they can enhance margins of safety. During 2017, our weighted average initial lease rate was 7.8%, with annual contractual lease escalations averaging an added 1.8% of contract rents. We believe that our initial yields, on average, range from 10% to 15% above those expected by investors seeking real estate investment opportunities through the broker auction market, which provides us greater flexibility to preserve and enhance returns. Other important tenant contract considerations include indemnification provisions, lease renewal rights, and the ability to sublease and assign leases, as well as qualitative considerations, such as alternative real estate use assessment and the composition of a tenant’s capitalization structure.

From the date of our November 2014 initial public offering, S|T|O|R|E’s extensive contract attribute disclosure has uniquely included a tenant credit quality distribution chart, employing computed implied credit ratings applied to regularly received tenant financial statements using Moody’s Analytics RiskCalc. Since tenant credit ratings are merely one component of contract risk, we developed a means to deliver a base quantitative contract quality estimate. Our approach was to modify risk of tenant insolvency, as estimated by the Moody’s algorithm, by our own estimate of the likelihood of property closure, based on the regularly monitored profitability of the properties bound by each lease contract we create. To accomplish this, we established a simple range of property closure likelihood ranging from 10% to 100% based upon property profitability ranges from breakeven to a computed ability to cover our rents twice over. Multiplying tenant estimated insolvency probability (Moody’s Analytics RiskCalc) by our estimate of the probability of property closure results in a contract risk measurement that we call the STORE Score and which we regularly and uniquely disclose.

Picture 2

Our Competitive Strengths

We have a market-leading platform for the acquisition, investment in and management of STORE Properties that simultaneously creates value for stockholders and customers through our five corporate competencies.

·

Investment Origination. S|T|O|R|E was formed to fill a need for efficient long-term real estate capital for middle-market and larger customers. We do this principally through a solutions-oriented approach that includes the use of lease contracts that address our customers’ needs and that strive to provide superior value for our customers over other financial options they may have to capitalize their businesses. A S|T|O|R|E hallmark is our ability to directly market our real estate lease solutions to middle market and larger companies nation-wide, harnessing a geographically focused team of experienced relationship managers at our home office.  Approximately 80% of our investments, by dollar volume, have been originated by our internal origination team through direct new customer solicitations and a  strong level of repeat business from

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existing customers. By creating demand for our services, we maintain a large pipeline of investment opportunities, which we estimate to be $12.2 billion as of December 31, 2017. Our objective is to be both highly selective and achieve higher rates of return than our stockholders could achieve if they sought to acquire profit-center real estate on their own.

·

Investment Underwriting. Our senior leadership team has developed our methods of risk evaluation over 30 years and across investments of more than $16 billion in over 9,200 STORE Properties. Our investment underwriting approach centers on evaluations of unit-level and corporate-level financial performance, together with detailed real estate valuation assessments, which is reflective of the characteristics of the STORE Property asset class. We have combined our underwriting approach with our portfolio management systems to capture and track computed customer credit ratings as well as the performance of the businesses conducted at the properties that we own (unit-level performance). Our focus on STORE Properties, which are profit-centers for our tenants, enables us to create lease contracts having payment performance characteristics that are generally materially superior to the implied credit ratings of our diverse tenant base. Through our underwriting and portfolio management approach, we track, measure and report investment performance, with the investment underwriting goal to create a diverse portfolio centered on investment-grade quality contracts. As of December 31, 2017, we estimate that the net portfolio losses we have experienced due to credit events experienced by our customers have averaged 0.1% per year of the total investments we have made since we began in 2011 based on average annual credit events of 0.8%, average annual net credit losses of 0.2% offset by average annual gains on property sales of 0.1%, which is reflective of our strict underwriting and portfolio management guidelines.

·

Investment Documentation. Because we believe lease contracts are the principal determinants of investment risk, we have always emphasized the importance of lease documentation. The documentation process includes the validation of investment underwriting through third party real estate valuations, property condition and environmental reports, and other due diligence. Our lease documents incorporate lessons learned over decades to forge balanced contracts characterized by important alignments of interest, including strong enforcement provisions.  Altogether, our documentation process, like our approach to investment underwriting, is integral to investment quality and designed to offer our investors a value that most could not create for themselves.

·

Portfolio Management. Net-lease real estate investment portfolios require active management to realize superior risk-adjusted rates of return. S|T|O|R|E represents our senior leadership team’s third, and most highly developed and scalable, servicing platform. We are virtually paperless and can access detailed information on our large diversified portfolio from practically anywhere and at any time. For over 30 years, our senior leadership team has learned how to monitor unit-level profit and loss statements, customer corporate financial statements and the timely payment of property taxes and insurance in order to gauge portfolio quality. Having such systems is central to our ability to effectively monitor and reduce customer credit risk at the property level, which, in turn, allows us to place greater focus on effectively managing the minority of investments that may have higher risks. We believe these systems, when combined with our high degree of financial and operating flexibility, allow us to realize better stockholder risk-adjusted rates of return on our invested capital.

·

Financial Reporting and Treasury. We consider and evaluate our corporate financing strategies with the same emphasis as our real estate investment strategies. Under our financing strategy, borrowings must: prudently improve stockholder returns; be structured to provide portfolio flexibility and minimize our exposure to changes in long-term interest rates; be structured to optimize our cost of financing in a way that will enhance investor rates of return; and contribute to corporate governance by enhancing corporate flexibility. Our senior leadership team has extensive experience with diverse liability strategies. Today, we are one of the few REITs to employ our own A+ rated borrowing source, while simultaneously maintaining investment-grade corporate credit ratings. We have designed and implemented our strategies that add value to our investors by offering a more efficient means to finance real estate than they could otherwise do on their own. At the same time, the flexibility we derive from our liability strategies can also result in important flexibility for our customers.

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Our Business and Growth Strategies

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

·

Focus on Middle-Market and Larger Companies Operating STORE Properties. We believe we have selected the most attractive investment opportunity within the net-lease market, STORE Properties, and targeted the most attractive customer type within that market, middle-market and larger non-investment-grade-rated companies. We focus on this market given its strong fundamentals and the limited long-term financing solutions available to them. Within the net-lease market for STORE Properties, our value proposition is most compelling to middle-market and larger, bank-dependent companies, most of which are not rated by any nationally recognized rating agency due to their size or capital markets preferences, but who have strong credit metrics and operate within broad-based industries having the potential for sustained relevance.

·

Realize Stable Income and Internal Growth. We seek to make investments that generate strong and stable current income as a result of the difference, or spread, between the rate we earn on our assets (primarily our lease revenues) and the rate we pay on our liabilities (primarily our long-term debt). We augment that income with internal growth. We seek to realize superior internal growth through a combination of (1) a target dividend payout ratio that permits a meaningful level of free cash flow reinvestment and (2) cash generated from the estimated 1.8% weighted average annual escalation of base rent and interest in our portfolio (as of December 31, 2017, as if the escalations in all of our leases were expressed on an annual basis). We benefit from contractual rent escalations, as approximately 99% of our leases and loans (as of December 31, 2017, by annualized base rent and interest) have escalations that are either fixed (17% of our leases and loans) or based on the Consumer Price Index, or CPI (82% of our leases and loans). A final means of internal growth is the accretive redeployment of cash realized from the occasional sale of real estate. During 2017, we divested $267.4 million of real estate at a net gain of $13.1 million over our initial cost which we were able to redeploy. We believe these three means of internal growth will enable strong cash flow growth without relying exclusively on future common stock issuances to fund new portfolio investments.

·

Capitalize on Direct Origination Capabilities for External Growth. As the market leader in STORE Property investment originations, we plan to complement our internal growth with external growth driven by continued new investments that are funded through future equity issuances and borrowings to expand our platform and raise investor cash flows.

·

Actively Manage our Balance Sheet to Maximize Capital Efficiency. We seek funding sources that enable us to lock in long-term investment spreads and limit interest rate sensitivity. We also seek to maintain a prudent balance between the use of debt (which includes our own STORE Master Funding program, unsecured term notes, commercial mortgage-backed securities borrowings, insurance borrowings, bank borrowings and possibly preferred stock issuances) and equity financing. During 2017, we received an initial rating of Baa2, stable outlook, from Moody’s Investors Service and received a credit rating upgrade to BBB, stable outlook, from both S&P Global Ratings and Fitch Ratings. As of December 31, 2017, our secured and unsecured long-term debt had an aggregate outstanding principal balance of $2.3 billion, a weighted average maturity of six years and a weighted average interest rate of 4.4%.

·

Increase our portfolio diversity. As of December 31, 2017, we had invested approximately $6.2 billion in 1,921 property locations, substantially all of which are profit centers for our customers. Our portfolio is highly diversified; built on an average transaction size of below $9.0 million, we now have nearly 400 customers (having added an average of approximately 16 new customers quarterly since inception) operating across more than 500 different brand names, or business concepts, across 48 states and over 100 industry groups. Our largest customer represented 3.4% of our portfolio as of December 31, 2017, based on annualized base rent and interest. Our portfolio’s diversity decreases the impact on us of an adverse event affecting a specific customer, industry or region, thereby increasing the stability of our cash flows. We expect

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that additional acquisitions in the future will further increase the diversity of our portfolio and, from time to time, we may sell properties in our portfolio to improve overall portfolio credit quality or diversity.

Competition

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

Employees

As of December 31, 2017, we had 80 full-time employees, all of whom are located in our single office in Scottsdale, Arizona. None of our employees are subject to a collective bargaining agreement. We consider our employee relations to be good.

Insurance

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

Separately, we purchase contingent liability insurance, in excess of our customers’ liability coverage, to provide us with additional security in the event of a catastrophic claim.

Regulations and Requirements

Our properties are subject to various laws and regulations, including regulations relating to fire and safety requirements, as well as affirmative and negative contractual covenants and, in some instances, common area obligations.  Our customers have primary responsibility for complying with these regulations and other requirements pursuant to our lease and loan agreements.  We believe that each of our customers has the necessary permits and approvals to operate and conduct their businesses on our properties.

About Us & Available Information

We were incorporated under the laws of Maryland on May 17, 2011. Since our initial public offering in November 2014, shares of our common stock have traded under the ticker symbol “STOR” on the New York Stock Exchange, or NYSE. Our offices are located at 8377 E. Hartford Drive, Suite 100, Scottsdale, Arizona 85255. We currently lease approximately 27,500 square feet of office space from an unaffiliated third party. Our telephone number is (480) 256-1100 and our website is www.storecapital.com.

 

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

 

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Item 1A.  RISK FACTORS

There are many factors that affect our business, financial condition, operating results, cash flows and distributions, as well as the market prices for our securities.  The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Annual Report.  The risks and uncertainties described below are not the only risks we face.  Additional risks and uncertainties not presently known to us or that we may currently deem immaterial also may impair our business operations.  Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.  See “Forward-Looking Statements.”

Risks Related to Our Business and Operations

The success of our business depends upon the success of our customers’ businesses.

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

Reduced discretionary spending by consumers could reduce the demand for our net‑lease solutions.  

Most of our portfolio is leased to or financed with customers operating service or retail businesses on our property locations.  Restaurants, furniture stores, early childhood education centers, movie theaters and health clubs represent the largest industries in our portfolio; and Art Van Furniture, Ashley Furniture HomeStore, Cabela’s, Mills Fleet Farm and Applebee’s represent the largest concepts in our portfolio.  The success of most of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services.  A downturn in the economy could cause consumers to reduce their discretionary spending, which may have a material adverse effect on us.

Service and retail businesses using physical outlets also face increasing competition from alternate methods of purchasing goods and services, including online service providers and retailers.  As consumers increasingly use alternate methods to obtain goods and services, including the internet, this trend could adversely impact the success of physical service and retail business locations.  Because we lease real estate to service and retail businesses, a decrease in purchases at these locations may have a material adverse effect on us.

Default by one or more of our customers could materially and adversely affect us, and bankruptcy laws will limit our remedies.

Any of our customers may experience a downturn in its business at any time that may significantly weaken its financial condition or cause its failure.  As a result, such customer may decline to extend or renew its lease upon expiration, fail to make rental payments when due or declare bankruptcy.  Any claims against bankrupt customers for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues, if any, that are substantially less than the contractually specified rent we are owed under their leases. This risk is magnified in situations where we lease multiple properties to a single customer under a master lease, as a customer failure or default under a master lease could reduce or eliminate rental revenue from multiple properties.  In addition, any claim we have

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for unpaid past rent will most likely not be paid in full.  If a customer becomes bankrupt or insolvent, federal law may prohibit us from evicting such customer based solely upon such bankruptcy or insolvency.  We may also be unable to re‑lease a terminated or rejected space or re‑lease it on comparable or more favorable terms.  Following a vacancy at a property, we will be responsible for all of the operating costs at such property until it can be sold or re-let, if at all.

Our investments are concentrated in the middle‑market sector, and we would be adversely affected by an economic downturn or an excess of STORE Properties for rent in that sector.    

 

Our target market is middle‑market companies that operate their businesses out of one or more locations that generate unit‑level profitability for the business.  Historically, many companies prefer to own, rather than lease, the real estate they use in their businesses.  A failure to increase demand for our products by, among other ways, failing to convince middle‑market companies to sell and lease back their STORE Properties, a decrease in the demand of middle‑market companies to rent STORE Properties, or an increase in the availability of STORE Properties for rent could materially and adversely affect us.

 

Adverse economic conditions could harm our returns and profitability.

 

Our operating results may be affected by market and economic challenges and uncertainties, which may result from a continued or exacerbated general economic slowdown experienced by the nation as a whole, by the local economies where our properties are located or our customers conduct business, or by the real estate industry in particular.  These economic challenges and uncertainties may:

 

·

result in customer defaults or non-renewals under leases, including as a result of constricted access to credit;

 

·

cause reduced demand for our net-lease solutions, forcing us to offer concessions or reduced rental rates when re-leasing properties; and

 

·

cause adverse capital and credit market conditions that may restrict our operating activities.

 

Also, to the extent we purchase real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracts at the time of our purchases, or the number of companies seeking to acquire properties decreases, the value of our investments may not appreciate or may decrease significantly below the amount we paid. The length and severity of any economic slowdown or downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic slowdown or downturn is prolonged or becomes more severe.

 

Geographic or industry concentrations lessen the diversity of our portfolio and may negatively affect our financial results. 

 

Our operating performance is impacted by the economic conditions affecting the specific markets and industries in which we have concentrations of properties.    As of December 31, 2017, the five states from which we derive the largest amount of our annualized base rent and interest were Texas (12.6%), Illinois (6.9%), Florida (6.4%), Ohio (5.5%) and Georgia (5.2%). In addition, as of December 31, 2017, 19.8% of the dollar amount of our investment portfolio was represented by properties dedicated to, and 20.3% of our annualized base rent and interest was derived from customers operating in, the restaurant industry and, in the future, it is likely we will acquire additional restaurant properties.  As a result of these concentrations, local economic and industry conditions, changes in state or local governmental rules and regulations, acts of nature and other factors in these states could result in a decrease in consumer demand for the products and services offered by our customers operating in those states or industries, which would have an adverse effect on our customers’ revenues, costs and results of operations, thereby adversely affecting their ability to meet their obligations to us. Because the restaurant industry represents a significant portion of our portfolio, a downturn in the restaurant industry may have a material adverse effect on us. As we continue to acquire properties, our portfolio may become more concentrated by customer, industry or geographic area.  Such decreased diversity in our portfolio could cause us to be more sensitive to

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the bankruptcy or insolvency of fewer customers, to changes in consumer trends of a particular industry and to a general economic downturn in a particular geographic area.

 

Failure of our underwriting and risk‑management procedures to accurately evaluate a potential customer’s credit risk could materially and adversely affect our operating results and financial position.

Our success depends in part on the creditworthiness of our customers, which, since they are mostly middle‑market companies, are not rated by any nationally recognized rating agency.  We analyze the creditworthiness of our customers using Moody’s Analytics RiskCalc, our methodology of estimating probability of lease rejection and the STORE Score, each of which may be faulty, deficient, inaccurate, or incomplete or which otherwise may fail to adequately assess default risk.  An expected default frequency, or EDF, score from Moody’s Analytics RiskCalc is not the same as a published credit rating and lacks the extensive company participation that is typically involved when a rating agency publishes a rating.  EDF scores and the financial ratios we calculate are based on financial information provided to us by our customers and prospective customers without independent verification by us, and may reflect only a limited operating history of the customer.  The probability of lease rejection we assign an investment may be inaccurate.  Moreover, the risks we have identified as our principal risks may fail to incorporate significant risks of which we are unaware.  If our underwriting procedures fail to properly assess the unit‑level profitability, customer or corporate credit risk or real estate value of potential investments, then we may invest in properties and lease them to customers who ultimately default, and we may be unable to recover our investment by re‑leasing or selling the related property, which could materially and adversely affect our operating results and financial position.

In addition, we use a proprietary information technology, or IT, platform, which we developed to proactively manage our investment portfolio. Our IT platform offers customer relationship management and general ledger and servicing system integration, and includes the STORE Universal Database System, or SUDS, which provides our management with access to lease abstracts, customer information, document scans, property data and servicing information.  Our IT platform and SUDS may not capture all of the information needed to effectively mitigate the risk of customer default.

We have now, and may have in the future, exposure to contingent rent escalators, which may expose us to inflation risk and can hinder our growth and profitability

A substantial portion of our leases contain rent escalators, pursuant to which the base rent payable by the customer under the lease is periodically increased.  Our leases that have contingent rent escalators indexed to future increases in the Consumer Price Index, or CPI, primarily adjust over a one‑year period but may adjust over multiple‑year periods. Generally, these escalators increase rent at the lesser of (i) 1 to 1.25 times the change in the CPI over a specified period or (ii) a fixed percentage.  Under this formula, during periods of deflation or low inflation, small increases or decreases in the CPI will subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if our rent escalators were based solely on fixed, rather than variable, rates.  Conversely, in periods when inflation is higher, contingent rent increases may not keep up with the rate of inflation.  In either event, our growth and profitability may be adversely affected.  Higher inflation may also have an adverse impact on our customers if increases in their operating expenses exceed increases in revenue, which may adversely affect our customers’ ability to satisfy their financial obligations to us.

We depend on key personnel; the loss of their full service could materially impair our ability to operate successfully.    

As an internally managed company, our overall success and the achievement of our investment objectives depends upon the performance of our senior leadership team, including, in particular, Christopher H. Volk, our Chief Executive Officer and Mary Fedewa, our Chief Operating Officer.  We rely on our senior leadership team to, among other things, identify and consummate acquisitions, design and implement our financing strategies, manage our investments and conduct our day‑to‑day operations.   We cannot guarantee the continued employment of any of the members of our senior leadership team, who may choose to leave our company for any number of reasons, such as other business opportunities, differing views on our strategic direction or other personal reasons.  We rely on the experience, efforts and abilities of these individuals, each of whom would be difficult to replace.  The employment agreements we have entered into with each of these executives do not guarantee their continued service to us.  The loss of services of one or more members of our senior leadership team, or our inability to attract and retain highly qualified personnel, could adversely affect our

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business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective customers and industry personnel, all of which could materially and adversely affect us.

We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth. 

We acquire and intend to continue to acquire STORE Properties.  Our ability to continue to acquire properties we believe to be suitable may be constrained by numerous factors, including the following:

·

We may be unable to locate properties that will produce a sufficient spread between our cost of capital and the lease rate we can obtain from a customer, in which case our ability to profitably grow our company will decrease.

·

Because many customers we approach have historically preferred to own, rather than lease, their real estate, our ability to grow requires that we overcome those preferences and convince customers that it is in their best interests to lease, rather than own, their STORE Properties, and we may be unable to do so.

·

After beginning to negotiate the terms of a transaction and during our real property, legal and financial due‑diligence review with respect to a transaction, we may be unable to reach an agreement with the customer or discover previously unknown matters, conditions or liabilities and may be forced to abandon the opportunity after incurring significant costs and diverting management’s attention.

·

We may fail to have sufficient equity, adequate capital resources or other financing available to complete acquisitions.

We typically acquire only a small percentage (approximately 6%) of all properties that we evaluate (which we refer to as our “pipeline”).  To the extent any of the foregoing decreases our pipeline or otherwise impacts our ability to continue to acquire suitable properties, our ability to grow our business will be adversely affected.

We face significant competition for customers and the acquisition of STORE Properties, which may decrease or prevent increases in the occupancy and rental rates of our properties, and may reduce the number of acquisitions we are able to complete or may increase the cost of these acquisitions. 

We compete with numerous developers, owners and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors rent properties at rates below that which we currently charge our customers, we may be pressured to reduce our rental rates or to offer more substantial rent abatements, customer improvements, early termination rights, below-market renewal options or other lease incentive payments in order to retain customers when our leases expire or obtain new customers. Competition for customers could negatively impact the occupancy and rental rates of our properties, which could materially and adversely affect us.

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

Some of our customers rely on government funding, and their failure to continue to qualify for such funding could adversely impact their ability to make timely lease payments to us.  

Some of our customers operate businesses that depend, to various extents, on government funding or reimbursements. For example, customers operating in the education industry often rely extensively on local, state and federal government funding for their students’ tuition payments. In addition, customers in the healthcare and childcare‑related industries typically receive local, state or federal funding, subsidies or reimbursements. The amount and timing of these government payments depend on various factors beyond our or our customers’ control, including

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government budgets and policies and political issues. Some of these customers also must satisfy certain licensure or certification requirements in order to qualify for government funding, subsidies or reimbursements. As we continue to grow our investment portfolio, we likely will continue to invest in properties leased by customers operating in these industries and expand our business into other industries that rely significantly on payments from government payors.  If these customers fail to receive government funding, when and as needed, including as a result of tightened government budgets, revised funding policies or otherwise, or fail to comply with related regulations, their cash flow could be materially affected leading them to default on their leases and causing an adverse impact on our business.

Some of our customers operate under franchise or license agreements, which, if terminated or not renewed prior to the expiration of their leases with us, would likely impair their ability to pay us rent.    

We frequently invest in properties operated by our customers under franchise or license agreements.  Generally, franchise agreements have terms that end earlier than the respective expiration dates of the related leases.  In addition, a customer’s rights as a franchisee or licensee typically may be terminated and the customer may be precluded from competing with the franchisor or licensor upon termination.  A franchisor’s or licensor’s termination or refusal to renew a franchise or license agreement would likely have a material adverse effect on the ability of the customer to make payments under its lease or loan with us, which could materially and adversely affect us. In addition, we usually have no notice or cure rights with respect to such a termination and have no rights to assignment of any such franchise agreement.  This may have an adverse effect on our ability to mitigate losses arising from a default by a terminated franchisee on any of our leases or loans. 

If a customer defaults under either the ground lease or mortgage loan of a hybrid lease, we may be required to undertake foreclosure proceedings on the mortgage before we can re‑lease or sell the property

In certain circumstances, we may enter into hybrid leases with customers.  A hybrid lease is a modified sale‑leaseback transaction, where the customer sells us land and then we lease the land back to the customer under a ground lease and simultaneously make a mortgage loan to the customer secured by the improvements the customer continues to own.  If a customer defaults under a hybrid lease, we may: (i) evict the customer under the ground lease and assume ownership of the improvements; or (ii) if required by a court, foreclose on the mortgage loan that is secured by the improvements.  Under a ground lease, we as ground lessor generally become the owner of the improvements on the land at lease maturity or if the customer defaults.  If, upon default, a court requires us to foreclose on the mortgage rather than evicting the customer, we might encounter delays and expenses in obtaining possession of the improvements, which in turn could delay our ability to sell or re‑lease the property in a prompt manner, which could materially and adversely affect us.

As leases expire, we may be unable to renew those leases or re‑lease the space on favorable terms or at all

 

As of December 31, 2017, leases and loans representing approximately 14.0% of our annualized base rent and interest will expire prior to 2028.  We cannot guarantee that we will be able to renew leases or re‑lease space without an interruption in the rental revenue from those properties, at or above our current rental rates or without having to offer substantial rent abatements, customer improvement allowances, early termination rights or below‑market renewal options.  The difficulty, delay and cost of renewing leases, re‑leasing space and leasing vacant space could materially and adversely affect us.

Defaults by customers on mortgages we hold could lead to losses on our investments. 

From time to time, we make or assume commercial mortgage loans.  We have also made a limited amount of investments on properties we own or finance in the form of loans secured by equipment or other fixtures owned by our customers.  A default by a customer on its loan payments to us that would prevent us from earning interest or receiving a return of the principal of our loan could materially and adversely affect us.  In the event of a default, we may also experience delays in enforcing our rights as lender and may incur substantial costs in collecting the amounts owed to us and in liquidating any collateral.

Foreclosure and other similar proceedings used to enforce payment of real estate loans are generally subject to principles of equity, which are designed to relieve the indebted party from the legal effect of that party’s default.  Foreclosure and other similar laws may limit our right to obtain a deficiency judgment against the defaulting party after a

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foreclosure or sale.  The application of any of these principles may lead to a loss or delay in the payment on loans we hold.  Further, in the event we have to foreclose on a property, the amount we receive from the foreclosure sale of the property may be inadequate to fully pay the amounts owed to us by the customer and our costs incurred to foreclose, repossess and sell the property.  Any of such events could materially and adversely affect us.

We are subject to litigation in the ordinary course of our business, which could materially and adversely affect us.    

From time to time, we are subject to litigation in connection with the ordinary course operation 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.  We generally seek to have our customers defend, and assume liability for, the matters involving their properties.  In other cases, we may defend ourselves, invoke our insurance coverage or the coverage of our customers, and/or pursue our rights to indemnification that we include in our leases.  Resolution of these types of matters against us may result in our incurrence of significant legal fees and/or require us to pay significant fines, judgments or settlements, which, to the extent uninsured or in excess of insured limits, or not subject to indemnification, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us.   We also may become subject to litigation relating to our financing and other transactions.  Certain types of litigation, if determined adversely to us, may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured and materially and adversely impact our ability to attract directors and officers.

Construction and renovation risks could adversely affect our profitability. 

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

We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our IT networks and related systems.

 

We face risks associated with security breaches, through cyber-attacks or cyber intrusions over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations and, in some cases, may be critical to the operations of certain of our customers. Although we make efforts to maintain the security and integrity of our IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk. A security breach or other significant disruption involving our IT networks and related systems could disrupt the proper functioning of our networks and systems; result in misstated financial reports, violations of loan covenants and/or missed reporting deadlines; result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; require significant management attention and resources to remedy any damages that result; subject us to claims for breach of contract, damages, credits, penalties or termination of

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leases or other agreements; or damage our reputation among our customers and investors generally.

 

Risks Related to the Financing of Our Business

Our growth depends on external sources of capital, which are outside of our control and affect our ability to seize strategic opportunities, satisfy debt obligations and make distributions to our stockholders.

 

We rely on third-party sources to fund our capital needs.  Our access to third-party sources of capital depends, in part, on:

 

·

general market conditions;

·

the market’s perception of our growth potential;

·

our current debt levels;

·

our current and expected future earnings;

·

our cash flows and cash distributions; and

·

the market price per share of our common stock.

In addition, in order to maintain our qualification as a REIT, we are generally required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, and we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, without access to third-party sources of capital, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.

Our operating results and financial condition could be adversely affected if we are unable to make required payments on our debt.

 

Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur, and we are subject to risks normally associated with debt financing, including the risk that our cash flows will be insufficient to meet required payments of principal and interest.  If we are unable to make our debt service payments as required on loans secured by properties we own, a lender could foreclose on the property or properties securing its debt. This could cause us to lose part or all of our investment.

 

Failure of our subsidiaries to make required payments on borrowings secured by a significant portion of our assets could materially and adversely affect us.    

A significant portion of our investment portfolio consists of assets owned by our consolidated, bankruptcy remote, special purpose entity subsidiaries that have been pledged to secure the long‑term borrowings of those subsidiaries.  As of December 31, 2017, the total outstanding principal balance of non‑recourse debt obligations of our consolidated special purpose entity subsidiaries was $1.8 billion and approximately $2.9 billion in assets held by those subsidiaries had been pledged to secure such borrowings.  We or our other consolidated subsidiaries are the equity owners of these special purpose entities, meaning we are entitled to the excess cash flows after debt service and all other required payments are made on the debt of these entities.  If our subsidiaries fail to make the required payments on such indebtedness, distributions of excess cash flows to us may be reduced or suspended and the indebtedness may become immediately due and payable.  If the subsidiaries are unable to pay the accelerated indebtedness, the pledged assets could be foreclosed upon and distributions of excess cash flows to us may be suspended or terminated, which could have a material adverse impact on us. 

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Current market conditions, including increases in interest rates, could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all. 

In the recent past, the credit markets have experienced significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances have materially impacted liquidity in the financial markets, making financing terms for customers less attractive, and in certain cases, have resulted in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness (including indebtedness that requires us to make a lump-sum or “balloon” payment at maturity). Reductions in our available borrowing capacity or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us.  Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us.

The agreements governing some of our indebtedness contain restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions, operate our business or make distributions to our common stockholders. 

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

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

·

incur indebtedness;

·

create liens on assets;

·

sell or substitute assets;

·

modify certain terms of our leases;

·

prepay debt with higher interest rates;

·

manage our cash flows; and

·

make distributions to equity holders.

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

Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on an investment in our company.  

We attempt to mitigate our exposure to interest rate risk by entering into long‑term fixed-rate financing through the combination of periodic debt offerings under our unsecured debt program and STORE Master Funding program, our asset-backed securities conduit, through discrete non‑recourse secured borrowings, through insurance company and bank borrowings, by laddering our borrowing maturities and by using leases that generally provide for rent escalations during the term of the lease.  However, the weighted average term of our borrowings does not match the weighted average term of our investments, and the methods we employ to mitigate our exposure to changes in interest rates involve risks,

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including the risk that the debt markets are volatile and tend to reflect the conditions of the then‑current economic climate.  Our efforts may not be effective in reducing our exposure to interest rate changes.  Failure to effectively mitigate our exposure to changes in interest rates may materially and adversely affect us by increasing our cost of capital and reducing the net returns we earn on our portfolio.

We depend on the asset‑backed securities, or ABS, and the commercial mortgage‑backed securities, or CMBS, markets for a substantial portion of our long‑term debt financing.  

Historically, we have raised a significant amount of debt capital through our STORE Master Funding program, which accesses the ABS market, and, to a lesser extent, through our access to the CMBS market.  A substantial portion of the long‑term debt on our balance sheet has been obtained from debt offerings in the ABS and CMBS markets. This ABS debt is issued by bankruptcy remote, special purpose entities that we or our subsidiaries own.  These special purpose entities issue multiple series of investment‑grade ABS notes from time to time as additional collateral is added to the collateral pool.  Our CMBS debt is generally in the form of first mortgage debt incurred by other special purpose entities that we or our subsidiaries own.  Our ABS and CMBS debt is generally non‑recourse.  However, there are customary limited exceptions to recourse for matters such as fraud, misrepresentation, gross negligence or willful misconduct, misapplication of payments, bankruptcy and environmental liabilities.

We have generally used the proceeds from these ABS and CMBS financings to repay debt and fund real estate acquisitions.  Through December 31, 2017, we had issued seven series of notes under our STORE Master Funding program; an aggregate principal balance of $1.5 billion is outstanding as of December 31, 2017 representing six series of notes.  Collectively these notes are referred to as the “Master Trust Notes” and had a weighted average maturity of six years, as of December 31, 2017. In addition, we had CMBS and other mortgage loans with an aggregate outstanding principal balance of $232 million and an average maturity of six years, as of December 31, 2017.  Our obligations under these loans are generally secured by liens on certain of our properties. In the case of our STORE Master Funding program, subject to certain conditions and limitations, we may substitute real estate collateral for assets in the collateral pool from time to time.  No assurance can be given that the ABS or the CMBS markets will be available to us in the future, whether to refinance existing debt or to raise additional debt capital. Moreover, we view our ability to substitute collateral under our STORE Master Funding program favorably, and no assurance can be given that financing facilities offering similar flexibility will be available to us in the future.

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

General Real Estate Risks

Real estate investments are relatively illiquid.

 

We may desire to sell a property in the future because of changes in market conditions, poor customer performance or default under any mortgage we hold, or to avail ourselves of other opportunities. We may also be required to sell a property in the future to meet debt obligations or avoid a default. Certain types of real estate assets, such as movie theaters, cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price. In addition, the Code limits our ability to sell our properties. We may be required to invest in the restoration or modification of a property before we can sell it. The inability to respond promptly to changes in the performance of our property portfolio could adversely affect our financial condition and ability to service our debt and pay dividends to our stockholders.

 

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Property vacancies could result in significant capital expenditures. 

The loss of a customer, either through lease expiration or customer bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new customer and cause us to incur significant costs in the form of ongoing expenses for property maintenance, taxes, insurance and other expenses. 

Uninsured losses relating to real property may adversely affect our returns.    

Our leases and loan agreements typically require that our customers maintain insurance of the types and in the amounts that are usual and customary for similar types of commercial property, as reviewed by our independent insurance consultant.  Under certain circumstances, however, we may permit certain customers to self‑insure.  Depending on the location of the property or nature of its use, losses of a catastrophic nature, such as those caused by earthquakes, floods, or other accidents may be covered by insurance policies that are held by our customers with limitations, such as large deductibles or co‑payments that a customer may not be able to meet.  In addition, factors such as inflation, changes in building codes and ordinances, environmental considerations and others, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed.  In that situation, the insurance proceeds we receive may not be adequate to restore our economic position with respect to the affected real property.  In the event we experience a substantial or comprehensive loss of any of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures, which may exceed any amounts received under insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements.  The loss of our capital investment in, or anticipated future returns from, our properties due to material uninsured losses could materially and adversely affect us.

Certain provisions of our leases or loan agreements may be unenforceable, which could adversely impact us

 

Our rights and obligations with respect to our leases, mortgage loans or other loans are governed by written agreements. A court could determine that one or more provisions of such an agreement are unenforceable, such as a particular remedy (including rights to indemnification), a loan prepayment provision or a provision governing our security interest in the underlying collateral of a customer. We could be adversely impacted if, for example, this were to happen with respect to a master lease governing our rights relating to multiple properties.

 

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make significant unanticipated expenditures that could materially and adversely affect us. 

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

In addition, our properties are subject to various laws and regulations relating to fire, safety and other regulations, and in some instances, common‑area obligations.  Our customers have primary responsibility for compliance with these requirements pursuant to our lease and loan agreements.  Our customers may not have the financial ability to fully comply with these regulations.  If our customers are unable to comply with these regulations, they may be unable to pay rent on time or may default, or we may have to make substantial capital expenditures to comply with these regulations, which we may not be able to recoup from our customers.  We may also face owner liability for failure to comply with these

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regulations, which may lead to the imposition of fines or an award of damages to private litigants.  Therefore, the failure of our customers to comply with these regulations could materially and adversely affect us.

Environmentally hazardous conditions may adversely affect our operating results.

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

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

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

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

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

In addition, our properties may contain or develop harmful mold.  Exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions.  If our customers or their employees or customers are exposed to mold at any of our properties, we could be required to undertake a costly remediation program to contain or remove the mold from the affected property.  In addition, exposure to mold by our customers or others could subject us to liability if property damage or health concerns arise. 

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

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Risks Related to Our Tax Status and Other Tax Related Matters

Failure to qualify as a REIT would reduce our net earnings available for investment or distribution.    

We have elected to be taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and which involves the determination of various factual matters and circumstances not entirely within our control. We expect that our current organization and methods of operation will enable us to continue to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future.

 

If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax for taxable years ending prior to January 1, 2018) on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to our stockholders in computing our taxable income. Also, unless the Internal Revenue Service, or the IRS, granted us relief under certain statutory provisions, we could not re-elect REIT status until the fifth calendar year after the year in which we first failed to qualify as a REIT. The additional tax liability from the failure to qualify as a REIT would reduce or eliminate the amount of cash available for investment or distribution to our stockholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In addition, we would no longer be required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.

 

Changes to tax law could affect our ability to qualify as a REIT and could adversely affect our stockholders.

U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. For example, the recently enacted tax reform bill, informally known as the Tax Cuts and Jobs Act (“TCJA”), made significant changes to the U.S. federal income tax laws applicable to individuals and corporations, including REITs and their shareholders, and may lessen the relative competitive advantage of operating as a REIT rather than as a C corporation. Technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any time. We cannot predict the long-term effect of the TCJA or any future changes on REITs and their shareholders. Prospective stockholders are urged to consult with their tax advisors with respect to the TCJA and any other regulatory or administrative developments and proposals and their potential effect on an investment in our securities. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.

 

Even if we qualify as a REIT for purposes of the Code, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.   

As a REIT, we are subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth.  We generally must distribute annually at least 90% of our net REIT taxable income to our stockholders, excluding any net capital gain, in order for our distributed earnings to not be subject to corporate income tax.  Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.  If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.  Further, if we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by our taxable REIT subsidiary, or TRS, or if we qualify for a safe harbor from tax.

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We intend to make distributions to our stockholders to comply with the requirements of the Code.  However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short‑term or long‑term basis to meet the 90% distribution requirement of the Code, even if the prevailing market conditions are not favorable for these borrowings.

Dividends paid by REITs generally do not qualify for reduced tax rates.    

In general, the maximum U.S. federal income tax rate for dividends that constitute “qualified dividend income” paid to individuals, trusts and estates is 20%. Unlike dividends received from a corporation that is not a REIT, our distributions generally are not eligible for the reduced rates. Beginning in 2018 and for taxable years prior to 2026, individual stockholders are generally allowed to deduct up to 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations, which would reduce the maximum marginal effective tax rate for individuals on the receipt of such ordinary dividends to 29.6%. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non‑REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common stock.

Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.  

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

As a result of acquiring C corporations in carry-over basis transactions, we may inherit material tax liabilities and other tax attributes from such acquired corporations, and we may be required to distribute earnings and profits. 

From time to time, we have and may continue to acquire C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.

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

We could face possible state and local tax audits and adverse changes in state and local tax laws.    

As discussed in the risk factors above, because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes.  From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability.  A shortfall in tax revenues for states and municipalities in which we own properties may lead to an increase in the frequency and size of such changes.  If such changes occur, we may be required to pay additional state and local taxes.  These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to our stockholders.  In the normal course of business, entities through which we own real estate may also become subject to tax

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audits.  If such entities become subject to state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition.

Risks Related to Our Organization and Structure

Our board of directors may change our investment strategy, financing strategy or leverage policies without stockholder consent.    

Our board of directors has overall authority to oversee our operations and determine our major corporate policies.  This authority includes significant flexibility.  For example, our board of directors can do the following:

·

change any of our strategies, policies or procedures with respect to property acquisitions and divestitures;

·

amend our policies with respect to asset allocation, growth, operations, indebtedness, financing and distributions;

·

within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;

·

employ and compensate affiliates;

·

change creditworthiness standards with respect to customers;

·

make amendments to our equity incentive plans;

·

direct our resources toward investments that do not ultimately appreciate over time; and

·

determine that it is no longer in our best interests to continue to qualify as a REIT.

Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving our stockholders the right to vote.

Our board of directors’ power to increase the number of authorized shares of our stock without stockholder approval may negatively impact our existing stockholders.    

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

Limitations on share ownership and limitations on the ability of our stockholders to effect a change in control of us restrict the transferability of our stock and may prevent takeovers that are beneficial to our stockholders.  

One of the requirements for maintenance of our qualification as a REIT for U.S. federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Code, during the last half of any taxable year.  Our charter contains ownership and transfer restrictions relating to our stock to assist us in complying with this and other REIT ownership requirements, among other purposes.  However, the restrictions may have the effect of preventing a change of control that does not threaten REIT status.  These restrictions include a provision in our charter that generally limits ownership by any person of more than 9.8% of the value of our outstanding stock or 9.8% (in value or by number of shares, whichever is more restrictive) of our outstanding common stock, unless our board of directors exempts the person from such ownership limitation.  Absent

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such an exemption from our board of directors, the transfer of our stock to any person in excess of the applicable ownership limit, or any transfer of shares of such stock in violation of the ownership requirements of the Code for REITs, may be void under certain circumstances, and the intended transferee of such stock will acquire no rights in such shares.  These provisions of our charter may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.

Our rights and the rights of our stockholders to take action against our directors and officers are limited. 

As permitted by Maryland law, our charter limits the liability of our directors and officers to stockholders for money damages, except for liability resulting from:

·

actual receipt of an improper benefit or profit in money, property or services; or

·

active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

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

We will continue to incur significant expenses as a result of being a public company, which will negatively impact our financial performance.    

We incur, and will continue to incur, significant legal, accounting, insurance and other expenses as a result of being a public company.  The Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd‑Frank Act, and the Sarbanes‑Oxley Act, as well as related rules implemented by the SEC and the NYSE, have required changes in corporate governance practices of public companies.  In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd‑Frank Act are expected to require additional changes.  We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes‑Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time‑consuming and costly.  We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers.

Risks Related to Ownership of Our Common Stock

Changes in market conditions and volatility of stock prices could adversely affect the market price of our common stock.    

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

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general market and economic conditions;

·

actual or anticipated variations in our quarterly operating results or dividends or our payment of dividends in shares of our common stock;

·

changes in our funds from operations or earnings estimates;

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·

difficulties or inability to access capital or extend or refinance existing debt;

·

changes in market valuations of similar companies;

·

publication of research reports about us or the real estate industry;

·

the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities;

·

general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective purchasers of our stock to demand a higher annual yield from future dividends;

·

a change in ratings issued by any analyst following us or any nationally recognized statistical rating organization;

·

additions or departures of key management personnel;

·

adverse market reaction to any additional debt we may incur in the future;

·

speculation in the press or investment community;

·

terrorist activity which may adversely affect the markets in which our securities trade, possibly increasing market volatility and causing further erosion of business and consumer confidence and spending;

·

failure to continue to qualify as a REIT;

·

strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;

·

failure to satisfy listing requirements of the NYSE;

·

governmental regulatory action and changes in tax laws; and

·

the issuance of additional shares of our common stock, or the perception that such sales might occur.

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

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

Increases in market interest rates may have an adverse effect on the value of our common stock if prospective purchasers of our common stock expect a higher dividend yield and increased borrowing costs may decrease our funds available for distribution.    

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

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Table of Contents

Future offerings of debt, which would be senior to our common stock upon liquidation, or preferred equity securities, which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock.

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

A substantial portion of our total outstanding common stock may be sold into the market at any time, which could cause the market price of our common stock to drop significantly, even if our business is doing well, and make it difficult for us to sell equity securities in the future. 

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it difficult for us to sell equity securities in the future at times or prices that we deem appropriate. We filed a registration statement on Form S-8 under the Securities Act to register the offer and sale of up to 7,314,221 shares of our common stock or securities convertible into or exchangeable for shares of our common stock that may be issued pursuant to our 2012 Long Term Incentive Plan and our 2015 Omnibus Equity Incentive Plan. Such Form S-8 registration statement automatically became effective upon filing. Accordingly, recipients of shares issued pursuant to such registration statement may generally freely resell those shares in the open market, subject to limitations in the case of any such recipients who are our affiliates. In addition, we issue, and intend to continue to issue, additional equity securities periodically to finance our growth, including through our existing and any future “at the market” offering program.  When we raise additional capital through the issuance of new equity securities, such issuances will dilute the interests of our existing stockholders and could adversely affect the value of their investments.  If our performance or prospects decline and we are unable to access the equity markets when needed in the future, our ability to grow our business will be adversely impacted. 

We may change the dividend policy for our common stock in the future.    

The decision to declare and pay dividends on our common stock, as well as the form, timing and amount of any such future dividends, is at the sole discretion of our board of directors and will depend on our earnings, cash flows, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements under the REIT provisions of the Code, state law and such other factors as our board of directors considers relevant.  Any change in our dividend policy could have a material adverse effect on the market price of our common stock.

 

Item 1B.  UNRESOLVED STAFF COMMENTS

None.

 

 

 

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Item 2.  PROPERTIES

As of December 31, 2017, our total investment in real estate and loans approximated $6.2 billion, representing investments in 1,921 property locations, substantially all of which are profit centers for our customers. These investments generate cash flows from approximately 620 contracts predominantly structured as net leases, mortgage loans and combinations of leases and mortgage loans, or hybrid leases. As of December 31, 2017, the weighted average non‑cancelable remaining term of our leases was approximately 14 years.

Our real estate portfolio is highly diversified. As of December 31, 2017, our 1,921 property locations were operated by nearly 400 customers across 48 states. Our largest customer represented approximately 3% of our portfolio at December 31, 2017, and our top ten largest customers represented less than 19% of our annualized base rent and interest.  Our customers operate their businesses across more than 500 brand names or business concepts in over 100 industries. Our top five concepts as of December 31, 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 December 31, 2017 were restaurants, furniture stores, early childhood education centers, movie theaters and health clubs. Combined, these industries represented 45% 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 December 31, 2017, for all of our leases, loans and direct financing receivables in place as of that date.

Diversification by Customer

As of December 31, 2017, our 1,921 property locations were operated by nearly 400 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)

 

3.4

%

22

 

Bass Pro Group, LLC (Cabela's)

 

2.6

 

 9

 

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

 

2.3

 

15

 

Mills Fleet Farm Group, LLC

 

2.1

 

 8

 

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

 

1.9

 

32

 

US LBM Holdings, LLC (Building materials distribution)

 

1.6

 

37

 

RMH Franchise Holdings, Inc. (Applebee's)

 

1.2

 

29

 

O'Charley's LLC

 

1.2

 

30

 

Automotive Remarketing Group, Inc.

 

1.1

 

 6

 

Stratford School, Inc. (Elementary and middle schools)

 

1.1

 

 4

 

All other (387 customers)

 

81.5

 

1,729

 

Total

 

100.0

%

1,921

 

 

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Table of Contents

Diversification by Concept

As of December 31, 2017, our customers operated their businesses across more than 500 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

 

2.8

%  

18

 

Ashley Furniture HomeStore

 

2.6

 

24

 

Cabela's

 

2.5

 

 8

 

Mills Fleet Farm

 

2.1

 

 8

 

Applebee's

 

1.7

 

43

 

Popeyes Louisiana Kitchen

 

1.3

 

63

 

O'Charley's

 

1.1

 

30

 

America's Auto Auction

 

1.1

 

 6

 

Stratford School

 

1.1

 

 4

 

Starplex Cinemas

 

1.1

 

 7

 

All other (493 concepts)

 

82.6

 

1,710

 

Total

 

100.0

%  

1,921

 

 

Diversification by Industry

As of December 31, 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 76 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

%  

372

 

2,546

 

Restaurants—limited service

 

7.2

 

399

 

1,051

 

Early childhood education centers

 

6.6

 

174

 

1,901

 

Movie theaters

 

6.0

 

39

 

1,873

 

Health clubs

 

5.9

 

71

 

1,973

 

Family entertainment centers

 

4.2

 

26

 

866

 

Automotive repair and maintenance

 

3.1

 

103

 

481

 

All other service (31 industry groups)

 

21.3

 

393

 

11,095

 

Total service

 

67.4

 

1,577

 

21,786

 

Retail:

 

 

 

 

 

 

 

Furniture stores

 

6.7

 

51

 

3,229

 

Farm and ranch supply stores

 

3.1

 

24

 

2,048

 

All other retail (14 industry groups)

 

8.0

 

99

 

4,709

 

Total retail

 

17.8

 

174

 

9,986

 

Manufacturing:

 

 

 

 

 

 

 

Metal fabrication

 

3.8

 

51

 

5,326

 

All other manufacturing (21 industry groups)

 

11.0

 

119

 

12,807

 

Total manufacturing

 

14.8

 

170

 

18,133

 

Total

 

100.0

%  

1,921

 

49,905

 

 

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Table of Contents

Diversification by Geography

Our portfolio is also highly diversified by geography, as our 1,921 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 December 31, 2017:

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

 

 

 

 

and

 

Number of

 

State

 

Interest 

 

Properties

 

Texas

    

12.6

%   

203

 

Illinois

 

6.9

 

127

 

Florida

 

6.4

 

119

 

Ohio

 

5.5

 

111

 

Georgia

 

5.2

 

119

 

Tennessee

 

4.4

 

96

 

Arizona

 

3.9

 

75

 

Michigan

 

3.8

 

65

 

California

 

3.8

 

25

 

Minnesota

 

3.6

 

60

 

All other (38 states) (1)

 

43.9

 

921

 

Total

 

100.0

%  

1,921

 


(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 December 31, 2017:

 

 

 

 

 

 

 

 

    

% of

    

 

 

 

 

Annualized

 

 

 

 

 

Base Rent

 

 

 

 

 

and

 

Number of

 

Year of Lease Expiration or Loan Maturity (1)

 

Interest

 

Properties (2)

 

2018

 

0.5

%

 9

 

2019

 

0.7

 

12

 

2020

 

0.4

 

 4

 

2021

 

0.7

 

 6

 

2022

 

0.5

 

 7

 

2023

 

1.3

 

29

 

2024

 

0.9

 

16

 

2025

 

1.8

 

23

 

2026

 

2.4

 

54

 

2027

 

4.8

 

70

 

Thereafter

 

86.0

 

1,683

 

Total

 

100.0

%  

1,913

 


(1)

Expiration year of contracts in place as of December 31, 2017, excluding any tenant option renewal periods.

(2)

Excludes eight properties which were vacant and not subject to a lease as of December 31, 2017.

 

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Table of Contents

Item 3.  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 4.  MINE SAFETY DISCLOSURES

Not Applicable.

PART II

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

    

High

    

Low

    

Declared

 

2017

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31

 

$

25.90

 

$

22.27

 

$

0.29

 

Quarter ended June 30

 

 

25.32

 

 

19.65

 

 

0.29

 

Quarter ended September 30

 

 

26.14

 

 

21.59

 

 

0.31

 

Quarter ended December 31

 

 

26.58

 

 

24.11

 

 

0.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

    

High

    

Low

    

Declared

 

2016

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31

 

$

26.35

 

$

22.01

 

$

0.27

 

Quarter ended June 30

 

 

29.47

 

 

24.81

 

 

0.27

 

Quarter ended September 30

 

 

31.44

 

 

28.21

 

 

0.29

 

Quarter ended December 31

 

 

29.50

 

 

23.60

 

 

0.29

 

On February 21, 2018, the closing sale price of our common stock was $22.90 per share on the NYSE, and there were 47 holders of record of the 194,284,129 outstanding shares of our common stock.  Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.  We have determined that, for federal income tax purposes, approximately 97.23% of the distributions paid in 2017 represented taxable income and 2.77% represented a return of capital.

Distributions

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

Issuer Purchases of Equity Securities

During the three months ended December 31, 2017, the Company did not repurchase any of its equity securities.

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Table of Contents

Stock Performance Graph

The following performance chart compares, for the period from November 18, 2014 (our first trading day on the NYSE) through December 31, 2017, the cumulative total stockholder return on our common stock with that of the Standard & Poor’s 500 Composite Stock Index, or the S&P 500, and the MSCI U.S. REIT Index.  The chart assumes $100.00 was invested on November 18, 2014 and assumes the reinvestment of any dividends.  The historical stock price performance reflected in the following graph is not necessarily indicative of future stock price performance.

Picture 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period Ending

 

Index

11/18/2014

    

12/31/2014

    

6/30/2015

    

12/31/2015

 

6/30/2016

 

12/31/2016

    

6/30/2017

    

12/31/2017

 

STORE Capital Corporation

100

 

111.40

 

106.01

 

125.40

 

162.38

 

139.23

 

131.83

 

154.06

 

S&P 500

100

 

100.60

 

101.84

 

101.99

 

105.90

 

114.19

 

124.66

 

139.12

 

MSCI US REIT (RMS)

100

 

103.86

 

97.44

 

106.48

 

120.92

 

115.64

 

118.79

 

121.50

 

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

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Table of Contents

Item 6.  SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial and other information of the Company as of and for each of the years ended December 31, 2017, 2016, 2015, 2014 and 2013. The table should be read in conjunction with the Company’s consolidated financial statements and the notes thereto and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

(Dollars in thousands, except per share data)

2017

 

2016

 

2015

 

 

2014

 

2013

 

Statement of Operations Data:

 

    

    

 

    

 

 

    

 

 

 

    

 

    

    

Total revenues

$

452,847

 

$

376,343

 

$

284,762

 

$

190,441

 

$

108,904

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

120,478

 

 

105,180

 

 

81,782

 

 

67,959

 

 

39,180

 

Transaction costs

 

 —

 

 

523

 

 

1,156

 

 

2,804

 

 

2,643

 

Property costs

 

4,773

 

 

4,067

 

 

1,515

 

 

473

 

 

127

 

General and administrative

 

40,990

 

 

33,972

 

 

27,972

 

 

19,494

 

 

14,132

 

Selling stockholder costs

 

 —

 

 

800

 

 

 —

 

 

 —

 

 

 —

 

Depreciation and amortization

 

150,279

 

 

119,618

 

 

88,615

 

 

57,025

 

 

30,349

 

Provisions for impairment

 

13,440

 

 

1,720

 

 

1,000

 

 

 —

 

 

 —

 

Total expenses

 

329,960

 

 

265,880

 

 

202,040

 

 

147,755

 

 

86,431

 

Income from continuing operations before income taxes

 

122,887

 

 

110,463

 

 

82,722

 

 

42,686

 

 

22,473

 

Income tax expense

 

453

 

 

358

 

 

274

 

 

180

 

 

155

 

Income from continuing operations

 

122,434

 

 

110,105

 

 

82,448

 

 

42,506

 

 

22,318

 

Income from discontinued operations, net of tax

 

 —

 

 

 —

 

 

 —

 

 

1,140

 

 

3,995

 

Income before gain on dispositions of real estate investments

 

122,434

 

 

110,105

 

 

82,448

 

 

43,646

 

 

26,313

 

Gain on dispositions of real estate investments, net of tax

 

39,604

 

 

13,220

 

 

1,322

 

 

4,493

 

 

 

Net income

$

162,038

 

$

123,325

 

$

83,770

 

$

48,139

 

$

26,313

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations—basic and diluted

$

0.90

 

$

0.82

 

$

0.68

 

$

0.59

 

$

0.44

 

Net income —basic and diluted

 

0.90

 

 

0.82

 

 

0.68

 

 

0.61

 

 

0.52

 

Cash dividends declared

 

1.2000

 

 

1.1200

 

 

1.0400

 

 

0.9898

 

 

0.8743

 

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate investments, at cost(1)

$

5,962,457

 

$

4,855,306

 

$

3,766,600

 

$

2,694,557

 

$

1,643,635

 

Carrying amount of loans and direct financing receivables

 

271,453

 

 

269,210

 

 

213,342

 

 

111,354

 

 

66,917

 

Total investment portfolio, gross(1)

 

6,233,910

 

 

5,124,516

 

 

3,979,942

 

 

2,805,911

 

 

1,710,552

 

Less accumulated depreciation and amortization(1)

 

(428,900)

 

 

(298,984)

 

 

(184,182)

 

 

(98,671)

 

 

(42,342)

 

Net investments

 

5,805,010

 

 

4,825,532

 

 

3,795,760

 

 

2,707,240

 

 

1,668,210

 

Cash and cash equivalents

 

42,937

 

 

54,200

 

 

67,115

 

 

136,313

 

 

61,814

 

Total assets

 

5,899,777

 

 

4,941,668

 

 

3,911,388

 

 

2,882,703

 

 

1,759,204

 

Credit facilities

 

290,000

 

 

48,000

 

 

 —

 

 

 

 

 

Senior unsecured notes and term loan payable, net

 

570,595

 

 

470,190

 

 

172,442

 

 

 

 

 

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

 

1,736,306

 

 

1,833,481

 

 

1,597,505

 

 

1,253,242

 

 

964,681

 

Total liabilities

 

2,728,835

 

 

2,458,413

 

 

1,851,595

 

 

1,300,019

 

 

985,290

 

Total stockholders’ equity

 

3,170,942

 

 

2,483,255

 

 

2,059,793

 

 

1,582,684

 

 

773,914

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from Operations(2)

$

283,930

 

$

230,904

 

$

171,705

 

$

99,383

 

$

54,843

 

Adjusted Funds from Operations(2)

$

306,077

 

$

245,829

 

$

183,475

 

$

109,876

 

$

61,739

 

Number of investment property locations (at period end)

 

1,921

 

 

1,660

 

 

1,325

 

 

947

 

 

622

 

% of owned properties subject to a lease contract (at period end)

 

99.6

%  

 

99.5

%  

 

99.8

%  

 

100

%  

 

100

%  


(1)

Includes the dollar amount of investments ($18.7 million and $9.4 million) and the accumulated depreciation and amortization ($2.0 million and $0.4 million) related to real estate investments held for sale at December 31, 2017 and 2013, respectively.

(2)

For definitions and reconciliations of Funds from Operations and Adjusted Funds from Operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non‑GAAP Measures.”

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the “Selected Consolidated Financial Data” and “Business” sections, as well as the consolidated financial statements and related notes in Part II, Item 8 in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategies for our business, includes forward‑looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” and the “Forward‑Looking Statements” sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward‑looking statements.

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. 

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA made significant changes to the U.S. federal income tax laws applicable to individuals and corporations, including REITs and their shareholders, generally effective for tax years beginning after December 31, 2017. While we believe our analysis and computations of the tax effects, if any, of the TCJA are properly reflected in our financial statements, technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any time, which increases the uncertainty as to the long-term effect of the TCJA on us. Likewise, we are still in the process of reviewing the TCJA’s impact on us, our customers and our stockholders.

Our shares of common stock have been listed on the New York Stock Exchange since our initial public offering, or IPO, in November 2014 and trade under the ticker symbol “STOR.”

Since our inception in 2011, we have selectively originated over $6.7 billion of real estate investments. As of December 31, 2017, our investment portfolio totaled approximately $6.2 billion, consisting of investments in 1,921 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 December 31, 2017, approximately 98% of our leases (based on

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annualized base rent) were “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 December 31, 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 at the corporate level 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 commercial real estate auction marketplace, 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 December 31, 2017, our investment portfolio had grown to approximately $6.2 billion, consisting of investments in 1,921 property locations with base rent and interest aggregating approximately $41.8 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 or sell the property.  Lease contracts related to just three of our properties are due to mature in 2018; 86% of our leases have ten years or more remaining in their base lease term.  As of December 31, 2017, eight of our 1,921 properties were vacant and not subject to a lease, which represents a 99.6% occupancy rate. We expect to incur some property costs from time to time in periods 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 well-publicized hurricanes that hit Texas and Florida in 2017; however, all but 16 suffered no damage or only minor damage from those storms. Fifteen of these properties have reopened for business, while one, located in Texas, remains closed and under repair. The tenant that operates this property, which represents less than 0.1% of our investment portfolio, is performing under the terms of its lease agreement and, to the extent not covered by its insurance policy, is 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 generally 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

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to them. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts. As of December 31, 2017, we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately $157.9 million, of which $155.9 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 December 31, 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. During 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; having multiple investment-grade debt ratings allows us to take a more strategic approach to accessing debt markets.  Also, in conjunction with our investment-grade unsecured debt strategy, we target a level of debt (net of cash and cash equivalents) that approximates 5½ to 6 times an estimated annualized amount of earnings before interest, taxes, depreciation and amortization, based on our current investment portfolio (Adjusted EBITDA); this equates to a ratio of debt to portfolio cost of 45% at the midpoint of our targeted range.  As of December 31, 2017, we estimate that the ratio of our net debt to Adjusted EBITDA on a run-rate basis was 5.7 times.

Our goal is to employ a prudent blend of secured non-recourse debt through a flexible debt program we designed and which we call our Master Funding debt program, paired with traditional senior unsecured debt that uses our investment grade credit ratings. 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 47% of our investment portfolio serves as collateral for this long-term debt. The remaining 53% of our portfolio properties, aggregating approximately $3.3 billion at December 31, 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 at our overall corporate leverage level. We believe this debt strategy can lead to a lower cost of capital for the Company.

As part of our long-term debt strategy, we develop and maintain 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.  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 the asset-backed securities debt market. To a lesser extent, we may also obtain fixed-rate non‑recourse mortgage financing through the commercial mortgage-backed securities debt market or 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

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