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Section 1: 10-Q (10-Q)

stor_Current Folio_10Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

 

 

 

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

 

For the quarterly period ended September 30, 2018

 

OR

 

 

 

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

 

For the transition period from                      to                     .  

Commission File No. 001-36739  

 

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Maryland

 

45-2280254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(Address of principal executive offices) (Zip Code)

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

 

 

 

 

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

 

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

 

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

 

 

 

 

 

Large accelerated filer ☒

 

 

Accelerated filer ☐

 

 

 

 

Non-accelerated filer ☐

 

 

Smaller reporting company ☐

 

 

 

 

 

 

Emerging growth company ☐

 

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

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

 

As of November 1, 2018, there were 212,839,096 shares of the registrant’s $0.01 par value common stock outstanding.

 

 

 


 

TABLE OF CONTENTS

 

Part I. - FINANCIAL INFORMATION 

Page

Item 1.     Financial Statements 

3

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 

3

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 (unaudited) 

4

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (unaudited) 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited) 

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

7

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

25

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

43

Item 4.     Controls and Procedures 

43

Part II. - OTHER INFORMATION 

44

Item 1.     Legal Proceedings 

44

Item 1A.  Risk Factors 

44

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

44

Item 3.     Defaults Upon Senior Securities 

44

Item 4.     Mine Safety Disclosures 

44

Item 5.     Other Information 

44

Item 6.     Exhibits 

44

Signatures 

45

2

2


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

2,148,884

 

$

1,898,342

 

Buildings and improvements

 

 

4,619,316

 

 

3,958,003

 

Intangible lease assets

 

 

85,148

 

 

87,402

 

Total real estate investments

 

 

6,853,348

 

 

5,943,747

 

Less accumulated depreciation and amortization

 

 

(541,759)

 

 

(426,931)

 

 

 

 

6,311,589

 

 

5,516,816

 

Real estate investments held for sale, net

 

 

 —

 

 

16,741

 

Loans and direct financing receivables

 

 

351,990

 

 

271,453

 

Net investments

 

 

6,663,579

 

 

5,805,010

 

Cash and cash equivalents

 

 

25,598

 

 

42,937

 

Other assets, net

 

 

62,569

 

 

51,830

 

Total assets

 

$

6,751,746

 

$

5,899,777

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

359,000

 

$

290,000

 

Unsecured notes and term loans payable, net

 

 

916,372

 

 

570,595

 

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

 

 

1,681,060

 

 

1,736,306

 

Dividends payable

 

 

69,912

 

 

60,068

 

Accrued expenses, deferred revenue and other liabilities

 

 

106,700

 

 

71,866

 

Total liabilities

 

 

3,133,044

 

 

2,728,835

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 211,855,230 and 193,766,854 shares issued and outstanding, respectively

 

 

2,119

 

 

1,938

 

Capital in excess of par value

 

 

3,858,416

 

 

3,381,090

 

Distributions in excess of retained earnings

 

 

(250,174)

 

 

(214,845)

 

Accumulated other comprehensive income

 

 

8,341

 

 

2,759

 

Total stockholders’ equity

 

 

3,618,702

 

 

3,170,942

 

Total liabilities and stockholders’ equity

 

$

6,751,746

 

$

5,899,777

 

 

See accompanying notes.

3


 

STORE Capital Corporation

Condensed Consolidated Statements of Income

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenues:

 

 

    

    

 

    

 

 

    

    

 

    

 

Rental revenues

 

$

129,778

 

$

104,039

 

$

374,091

 

$

314,093

 

Interest income on loans and direct financing receivables

 

 

6,867

 

 

5,502

 

 

18,667

 

 

16,729

 

Other income

 

 

360

 

 

1,003

 

 

1,294

 

 

1,901

 

Total revenues

 

 

137,005

 

 

110,544

 

 

394,052

 

 

332,723

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

31,833

 

 

31,379

 

 

93,097

 

 

91,938

 

Property costs

 

 

755

 

 

1,335

 

 

2,837

 

 

3,272

 

General and administrative

 

 

11,509

 

 

10,255

 

 

33,212

 

 

29,787

 

Depreciation and amortization

 

 

45,781

 

 

37,589

 

 

132,307

 

 

110,200

 

Provisions for impairment

 

 

 —

 

 

7,670

 

 

2,608

 

 

11,940

 

Total expenses

 

 

89,878

 

 

88,228

 

 

264,061

 

 

247,137

 

Income from operations before income taxes

 

 

47,127

 

 

22,316

 

 

129,991

 

 

85,586

 

Income tax expense

 

 

130

 

 

81

 

 

337

 

 

334

 

Income before gain on dispositions of real estate

 

 

46,997

 

 

22,235

 

 

129,654

 

 

85,252

 

Gain on dispositions of real estate, net of tax

 

 

1,228

 

 

6,345

 

 

30,732

 

 

35,778

 

Net income

 

$

48,225

 

$

28,580

 

$

160,386

 

$

121,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock—
basic and diluted

 

$

0.23

 

$

0.15

 

$

0.80

 

$

0.69

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

207,165,838

 

 

189,656,095

 

 

200,501,376

 

 

174,481,758

 

Diluted

 

 

207,932,531

 

 

190,043,107

 

 

201,039,328

 

 

174,481,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.33

 

$

0.31

 

$

0.95

 

$

0.89

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net income

    

$

48,225

    

$

28,580

    

$

160,386

    

$

121,030

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gain on cash flow hedges

 

 

 —

 

 

 —

 

 

4,288

 

 

 —

 

Unrealized gains (losses) on cash flow hedges

 

 

296

 

 

34

 

 

2,250

 

 

(328)

 

Cash flow hedge (gains) losses reclassified to interest expense

 

 

(474)

 

 

116

 

 

(956)

 

 

543

 

Total other comprehensive (loss) income

 

 

(178)

 

 

150

 

 

 5,582

 

 

215

 

Total comprehensive income

 

$

48,047

 

$

28,730

 

$

165,968

 

$

121,245

 

 

See accompanying notes.

 

 

 

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

Operating activities

 

 

 

  

 

 

 

Net income

 

$

160,386

 

$

121,030

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

132,307

 

 

110,200

 

Amortization of deferred financing costs and other noncash interest expense

 

 

5,971

 

 

8,127

 

Amortization of equity-based compensation

 

 

5,949

 

 

5,880

 

Provisions for impairment

 

 

2,608

 

 

11,940

 

Gain on dispositions of real estate, net of tax

 

 

(30,732)

 

 

(35,778)

 

Gain on extinguishment of debt

 

 

(814)

 

 

 —

 

Noncash revenue and other

 

 

949

 

 

3,318

 

Payments received in settlement of cash flow hedges

 

 

4,288

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(3,100)

 

 

(3,884)

 

Accrued expenses, deferred revenue and other liabilities

 

 

5,261

 

 

8,572

 

Net cash provided by operating activities

 

 

283,073

 

 

229,405

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(1,053,730)

 

 

(978,944)

 

Investment in loans and direct financing receivables

 

 

(87,109)

 

 

(28,844)

 

Collections of principal on loans and direct financing receivables

 

 

3,457

 

 

23,099

 

Proceeds from dispositions of real estate

 

 

167,533

 

 

202,412

 

Net cash used in investing activities

 

 

(969,849)

 

 

(782,277)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

709,000

 

 

401,000

 

Repayments under credit facility

 

 

(640,000)

 

 

(367,000)

 

Borrowings under unsecured notes and term loans payable

 

 

348,303

 

 

100,000

 

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

 

 

 —

 

 

134,961

 

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

 

 

(25,974)

 

 

(231,578)

 

Financing costs paid

 

 

(5,908)

 

 

(2,748)

 

Proceeds from the issuance of common stock

 

 

481,424

 

 

658,110

 

Stock issuance costs paid

 

 

(7,795)

 

 

(10,325)

 

Shares repurchased under stock compensation plans

 

 

(2,835)

 

 

(1,346)

 

Dividends paid

 

 

(185,660)

 

 

(151,014)

 

Net cash provided by financing activities

 

 

670,555

 

 

530,060

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(16,221)

 

 

(22,812)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

49,178

 

 

73,166

 

Cash, cash equivalents and restricted cash, end of period

 

$

32,957

 

$

50,354

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,598

 

$

34,986

 

Restricted cash included in other assets

 

 

7,359

 

 

15,368

 

Total cash, cash equivalents and restricted cash

 

$

32,957

 

$

50,354

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Accrued tenant improvements included in real estate investments

 

$

39,188

 

$

22,323

 

Net real estate assets surrendered to lender

 

 

12,573

 

 

 —

 

Acquisition of collateral property securing a mortgage note receivable

 

 

 —

 

 

2,000

 

Non-recourse debt obligation assumed by purchaser of real estate

 

 

20,845

 

 

 —

 

Non-recourse debt forgiven by lender in exchange for collateral assets

 

 

12,874

 

 

 —

 

Accrued financing and stock issuance costs

 

 

1,363

 

 

86

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

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

 

$

82,339

 

$

79,360

 

Cash paid during the period for income and franchise taxes

 

 

1,785

 

 

1,488

 

See accompanying notes.

 

6


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2018

1. Organization

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

On November 21, 2014, the Company completed the initial public offering of its common stock.  The shares began trading on the New York Stock Exchange on November 18, 2014 under the ticker symbol “STOR”.

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

2. Summary of Significant Accounting Principles

Basis of Accounting and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of interim periods are not necessarily indicative of the results for the entire year.  Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements and, accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

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

Certain of the Company’s wholly owned consolidated subsidiaries were formed as special purpose entities. Each special purpose entity is a separate legal entity and is the sole owner of its assets and liabilities. The assets of the special purpose entities are not available to pay or otherwise satisfy obligations to the creditors of any owner or affiliate of the special purpose entity. At September 30, 2018 and December 31, 2017, these special purpose entities held assets totaling $5.9 billion and $5.2 billion, respectively, and had third-party liabilities totaling $1.8 billion.  These assets and liabilities are included in the accompanying condensed consolidated balance sheets.

 

 

7


 

Use of Estimates

 

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

 

Segment Reporting

 

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

 

Accounting for Real Estate Investments

STORE Capital records the acquisition of real estate properties at cost, including acquisition and closing costs. The Company allocates the cost of real estate properties to the tangible and intangible assets and liabilities acquired based on their estimated relative fair values. Intangible assets and liabilities acquired may include the value of existing in-place leases, above-market or below-market lease value of in-place leases and ground lease intangibles, as applicable. Management uses multiple sources to estimate fair value, including independent appraisals and information obtained about each property as a result of its pre‑acquisition due diligence and its marketing and leasing activities.

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

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

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

Impairment

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

8


 

The estimated fair value of the impaired real estate assets at December 31, 2017 was $12.6 million.  There were no impaired real estate assets as of September 30, 2018.

Revenue Recognition

STORE Capital leases real estate to its tenants under long‑term net leases that are predominantly classified as operating leases. Direct costs associated with lease origination, offset by any lease origination fees received, are deferred and amortized over the related lease term as an adjustment to rental revenue. The Company periodically commits to fund the construction of new properties for its customers; rental revenue collected during the construction period is deferred and amortized over the remaining lease term when the construction project is complete. Substantially all of the leases are triple-net, which means that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance. For a few lease contracts, the Company collects property taxes from its customers and remits those taxes to governmental authorities; such property taxes are presented on a net basis in the condensed consolidated statements of income.

The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that provide for specific contractual escalations, rental revenue is recognized on a straight‑line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, accrued rental revenue, calculated as the aggregate difference between the rental revenue recognized on a straight‑line basis and scheduled rents, represents unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the lease. The Company provides an estimated reserve for uncollectible straight‑line rental revenue based on management’s assessment of the risks inherent in those lease contracts, giving consideration to industry default rates for long‑term receivables. There was $24.5 million and $20.9 million of accrued straight‑line rental revenue, net of allowances of $4.1 million and $2.9 million, at September 30, 2018 and December 31, 2017, respectively, which were included in other assets, net, on the condensed consolidated balance sheets. Leases that have contingent rent escalators indexed to future increases in the Consumer Price Index (CPI) may adjust over a one‑year period or over multiple‑year periods. Generally, these escalators increase rent at the lesser of (a) 1 to 1.25 times the increase in the CPI over a specified period or (b) a fixed percentage. Because of the volatility and uncertainty with respect to future changes in the CPI, the Company’s inability to determine the extent to which any specific future change in the CPI is probable at each rent adjustment date during the entire term of these leases and the Company’s view that the multiplier does not represent a significant leverage factor, increases in rental revenue from leases with this type of escalator are recognized only after the changes in the rental rates have actually occurred.

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

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

Loans Receivable

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

Revenue Recognition

The Company recognizes interest income on loans receivable using the effective‑interest method applied on a loan‑by‑loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the

9


 

term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received.  As of September 30, 2018, there was one loan receivable with an outstanding principal balance of $3.0 million on nonaccrual status. There were two loans receivable with an aggregate outstanding principal balance of $5.4 million on nonaccrual status at December 31, 2017.

Impairment and Provision for Loan Losses

The Company periodically evaluates the collectibility of its loans receivable, including accrued interest, by analyzing the underlying property‑level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. At September 30, 2018 and December 31, 2017, there was $2.5 million and $1.5 million, respectively, of allowances for loan losses, which were included in loans and direct financing receivables on the condensed consolidated balance sheets, related to one outstanding loan receivable. During the nine months ended September 30, 2018, the Company recognized $2.6 million of provisions for loan losses which is included in provisions for impairment on the condensed consolidated statement of income; $1.6 million of this amount was recognized during the first quarter of 2018 as part of a write-off of one loan receivable, net of collateral assets acquired and $1.0 million was recognized in the second quarter of 2018.

Direct Financing Receivables

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

 

Cash and Cash Equivalents

 

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

 

Restricted Cash

 

Restricted cash primarily consists of reserve account deposits held by lenders, including deposits required to be used for future investment in real estate assets, and escrow deposits. The Company had $7.4 million and $6.2 million of restricted cash and deposits in escrow at September 30, 2018 and December 31, 2017, respectively, which were included in other assets, net, on the condensed consolidated balance sheets. 

 

Deferred Costs

  

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

 

10


 

Derivative Instruments and Hedging Activities

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

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

As of September 30, 2018, the Company had one interest rate floor and five interest rate swap agreements in place.  Two of the swaps, with current notional amounts of $11.5 million and $5.9 million, were designated as cash flow hedges associated with the Company’s secured, variable‑rate mortgage note payable due in 2019 (Note 4). One of the interest rate swaps has a notional amount of $100 million and was designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2019 (Note 4).  The remaining two interest rate swaps and related interest rate floor transaction have an aggregate notional amount of $100 million and were designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2021 (Note 4). In January 2018, the Company entered into a treasury lock agreement which was designated as a cash flow hedge associated with the expected public offering of the senior unsecured notes issued by the Company in March 2018 (Note 4).  The agreement was settled in accordance with its terms in March 2018 and the Company received a $4.3 million payment from the counterparty which was recognized as a deferred gain in accumulated other comprehensive income.

 

Fair Value Measurement

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

·

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

·

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

·

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

11


 

Share‑based Compensation

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

The Company estimates the fair value of RSAs based on the closing price per share of the common stock on the  date of grant and recognizes that amount in general and administrative expense ratably over the vesting period at the greater of the amount amortized on a straight‑line basis or the amount vested. During the nine months ended September 30, 2018, the Company granted RSAs representing 135,496 shares of restricted common stock to its directors and key employees.  During the same period, RSAs representing 192,011 shares of restricted stock vested and RSAs representing 16,235 shares were forfeited.  In connection with the vesting of the RSAs, the Company repurchased 54,833 shares as a result of participant elections to surrender common shares to the Company to satisfy statutory tax withholding obligations under the Company’s equity-based compensation plans. As of September 30, 2018, the Company had 331,001 shares of restricted common stock outstanding.

The Company’s RSUs granted in 2015 through 2017 contain both a market condition and a service condition and RSUs granted in 2018 contain both a market condition and a performance condition as well as a service condition.  The Company values the RSUs with a market condition using a Monte Carlo simulation model and values the RSUs with a performance condition based on the fair value of the awards expected to be earned and recognizes those amounts in general and administrative expense on a tranche by tranche basis ratably over the vesting periods.  During the nine months ended September 30, 2018, the Company awarded 540,975 RSUs to its executive officers and 79,745 RSUs were forfeited. In connection with the vesting of 174,112 RSUs on December 31, 2017, the Company repurchased 59,115 shares during the nine months ended September 30, 2018 as a result of participant elections to surrender common shares to the Company to satisfy statutory tax withholding obligations under the Company’s equity-based compensation plan.  As of September 30, 2018, there were 1,380,271 RSUs outstanding.

Income Taxes

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

Management of the Company determines whether any tax positions taken or expected to be taken meet the “more‑likely‑than‑not” threshold of being sustained by the applicable federal, state or local tax authority. Certain state tax returns filed for 2013 and tax returns filed for 2014 through 2017 are subject to examination by these jurisdictions. As of September 30, 2018 and December 31, 2017, management concluded that there is no tax liability relating to uncertain income tax positions. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as general and administrative expenses. There was no accrual for interest or penalties at September 30, 2018 or December 31, 2017.

 

12


 

Net Income Per Common Share

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

Net income

 

$

48,225

 

$

28,580

 

$

160,386

 

$

121,030

 

Less: earnings attributable to unvested restricted shares

 

 

(109)

 

 

(105)

 

 

(289)

 

 

(320)

 

Net income used in basic and diluted income per share

 

$

48,116

 

$

28,475

 

$

160,097

 

$

120,710

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

207,498,560

 

 

190,015,850

 

 

200,849,404

 

 

174,856,940

 

Less: Weighted average number of shares of unvested restricted stock

 

 

(332,722)

 

 

(359,755)

 

 

(348,028)

 

 

(375,182)

 

Weighted average shares outstanding used in basic income per share

 

 

207,165,838

 

 

189,656,095

 

 

200,501,376

 

 

174,481,758

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

766,693

 

 

387,012

 

 

537,952

 

 

 —

 

Weighted average shares outstanding used in diluted income per share

 

 

207,932,531

 

 

190,043,107

 

 

201,039,328

 

 

174,481,758

 


(a)

For the three months ended September 30, 2018 and 2017, excludes 110,592 shares and 110,001 shares, respectively, and for the nine months ended September 30, 2018 and 2017, excludes 99,495 shares and 106,265 shares, respectively, related to unvested restricted shares as the effect would have been antidilutive.

   

Recent Accounting Pronouncements

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

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606)(ASU 2014-09), which established a principles-based approach for accounting for revenue from contracts with customers. The standard does not apply to revenue recognition for lease contracts or to the interest income recognized from loans receivable, which together represent over 99% of the Company’s revenue streams. This new revenue guidance also included changes to the accounting for sales of real estate properties; however, based on the Company’s analysis, the new standard is not expected to have a material impact on the Company’s recognition of gains or losses in connection with future real estate sales.  The Company adopted the standard on January 1, 2018 using the modified retrospective method for transition and did not recognize a cumulative effect adjustment.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842)(ASU 2016-02) to amend the accounting for leases. The new standard requires lessees to classify leases as either finance or operating leases based on certain criteria and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard also eliminates current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct

13


 

costs and lease executory costs for all entities. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The accounting applied by a lessor is largely unchanged under ASU 2016-02; however, the standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing standards, certain of these costs are capitalizable and, therefore, this new standard may result in these costs being expensed as incurred after adoption; during the nine months ended September 30, 2018, the Company capitalized $1.4 million of initial direct costs which are included in other assets, net, on the condensed consolidated balance sheet. Although primarily a lessor, the Company is also a lessee under several ground lease arrangements and under its corporate office lease. The Company has completed its initial inventory and evaluation of these leases and expects that it will be required to recognize a right-of-use asset and a lease liability for the present value of the minimum lease payments. The Company is in the process of preparing and reviewing the initial estimates of the amount of its right-of-use assets and lease liabilities; based on the Company’s current list of contracts under which it is a lessee, the Company estimates that its right-of-use assets to be recognized upon adoption will be less than 1% of total assets.

Approximately 98% of the Company’s lease contracts (under which the Company is the lessor) are “triple-net” leases, which means that its tenants are responsible for making the payments to third parties for operating expenses such as property taxes and insurance costs associated with the properties the Company leases to them. Under the current lease accounting guidance, these payments are excluded from rental revenue. Under the new lease accounting standard, it was unclear whether the lessor would be required to recognize the payments made by its tenants directly to third parties as rental revenue with an offset to property expense (a gross presentation). At its October 31, 2018 meeting, the FASB tentatively decided to require that lessors exclude from lease payments and rental revenue all costs paid by a lessee directly to a third party. The FASB is expected to amend ASU 2016-02 in December 2018 to reflect this decision, which will allow the Company, as a triple-net lessor, to continue to exclude these payments from revenue and expense (a net presentation).

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

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

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

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

14


 

In September 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred.  Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.  This new guidance, which can be adopted either prospectively or retrospectively, will be effective for the Company on January 1, 2020, with early adoption permitted.  The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

 

 

3. Investments

 

At September 30, 2018, STORE Capital had investments in 2,206 property locations representing 2,150 owned properties (of which 61 are accounted for as direct financing receivables), 20 ground lease interests and 36 properties which secure mortgage loans. The gross investment portfolio totaled $7.2 billion at September 30, 2018 and consisted of the gross acquisition cost of the real estate investments totaling $6.9 billion and loans and direct financing receivables with an aggregate carrying amount of $352.0 million. As of September 30, 2018, approximately 42% of these investments are assets of consolidated special purpose entity subsidiaries and are pledged as collateral under the non‑recourse obligations of these special purpose entities (Note 4).

The gross dollar amount of the Company’s investments includes the investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and direct financing receivables.  During the nine months ended September 30, 2018, the Company had the following gross real estate and loan activity (dollars in thousands):

 

 

 

 

 

 

 

 

    

Number of

    

Dollar

 

 

 

Investment

 

Amount of

 

 

 

Locations

 

Investments

 

Gross investments, December 31, 2017

 

1,921

 

$

6,233,910

 

Acquisition of and additions to real estate (a)

 

314

 

 

1,079,040

 

Investment in loans and direct financing receivables

 

29

 

 

87,109

 

Sales of real estate

 

(55)

 

 

(173,883)

 

Principal collections on loans and direct financing receivables

 

(1)

 

 

(3,457)

 

Provisions for impairment

 

 —

 

 

(2,608)

 

Other (b)

 

(2)

 

 

(14,773)

 

Gross investments, September 30, 2018 

 

 

 

 

7,205,338

 

Less accumulated depreciation and amortization

 

 

 

 

(541,759)

 

Net investments, September 30, 2018

 

2,206

 

$

6,663,579

 


(a)

Excludes $14.2 million of tenant improvement advances disbursed in 2018 which were accrued as of December 31, 2017 and includes $2.0 million of interest capitalized to properties under construction.

(b)

Includes $14.3 million representing the gross carrying amount of two real estate properties surrendered to the lender in exchange for the release of the related indebtedness (Note 4).

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to more than 400 customers geographically dispersed throughout 49 states. Only one state, Texas (12%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at September 30, 2018. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at September 30, 2018, with the largest customer representing 3.2% of the total investment portfolio. On an annualized basis, the largest customer represented 3.1% of the Company’s total annualized investment portfolio revenues as of September 30, 2018. The Company’s customers operate their

15


 

businesses across approximately 575 concepts and the largest of these concepts represented less than 2.5% of the Company’s total annualized investment portfolio revenues as of September 30, 2018.

The following table shows information regarding the diversification of the Company’s total investment portfolio among the different industries in which its tenants and borrowers operate as of September 30, 2018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments

 

Investments

 

Restaurants

 

819

 

$

1,295,374

 

18

%  

Furniture stores

 

55

 

 

432,487

 

 6

 

Early childhood education centers

 

183

 

 

412,167

 

 6

 

Health clubs

 

77

 

 

400,071

 

 5

 

Movie theaters

 

39

 

 

354,896

 

 5

 

Farm and ranch supply stores

 

39

 

 

336,825

 

 5

 

Metal fabrication

 

68

 

 

321,242

 

 5

 

All other service industries

 

688

 

 

2,185,072

 

30

 

All other retail industries

 

104

 

 

647,205

 

 9

 

All other manufacturing industries

 

134

 

 

819,999

 

11

 

 

 

2,206

 

$

7,205,338

 

100

 

Intangible Lease Assets

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

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2018

 

2017

 

In-place leases

 

$

54,293

 

$

56,547

 

Ground lease interests

 

 

21,363

 

 

21,363

 

Above-market leases

 

 

9,492

 

 

9,492

 

Total intangible lease assets

 

 

85,148

 

 

87,402

 

Accumulated amortization

 

 

(27,618)

 

 

(24,184)

 

Net intangible lease assets

 

$

57,530

 

$

63,218

 

 

Aggregate lease intangible amortization included in expense was $1.4 million and $1.5 million during the three months ended September 30, 2018 and 2017, respectively, and was $4.4 million and $4.8 million during the nine months ended September 30, 2018 and 2017, respectively.  The amount amortized as a decrease to rental revenue for capitalized above‑market lease intangibles was $0.3 million during both the three months ended September 30, 2018 and 2017 and was $0.8 million and $0.9 million during the nine months ended September 30, 2018 and 2017, respectively.

Based on the balance of the intangible assets at September 30, 2018, the aggregate amortization expense is expected to be $1.3 million for the remainder of 2018, $5.3 million in 2019, $4.8 million in 2020, $4.5 million in 2021, $4.3 million in 2022 and $3.8 million in 2023; the amount expected to be amortized as a decrease to rental revenue is expected to be $0.3 million for the remainder of 2018, $1.1 million in each of the years 2019 and 2020, $0.6 million in 2021 and $0.4 million in each of the years 2022 and 2023.  The weighted average remaining amortization period is approximately nine years for the in‑place lease intangibles, approximately 45 years for the amortizing ground lease interests and approximately six years for the above‑market lease intangibles.

Real Estate Investments

The Company’s investment properties are leased to tenants under long‑term operating leases that typically include one or more renewal options. The weighted average remaining noncancelable lease term at September 30, 2018 was approximately 14 years. Substantially all of the leases are triple net, which means that the lessees are responsible for

16


 

the payment of all property operating expenses, including property taxes, maintenance and insurance; therefore, the Company is generally not responsible for repairs or other capital expenditures related to the properties while the triple-net leases are in effect. At September 30, 2018, six of the Company’s properties were vacant and not subject to a lease.

Scheduled future minimum rentals to be received under the remaining noncancelable term of the operating leases in place as of September 30, 2018, are as follows (in thousands):

 

 

 

 

 

Remainder of 2018

 

$

137,556

 

2019

 

 

550,965

 

2020

 

 

548,626

 

2021

 

 

547,767

 

2022

 

 

548,025

 

2023

 

 

544,998

 

Thereafter

 

 

5,022,703

 

Total future minimum rentals

 

$

7,900,640

 

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

Loans and Direct Financing Receivables

At September 30, 2018, the Company held 37 loans receivable with an aggregate carrying amount of $167.0 million. Twenty-two of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. Ten of the mortgage loans are shorter-term loans (maturing prior to 2023) that generally require monthly interest-only payments for an established period and then monthly principal and interest payments with a balloon payment at maturity. The remaining mortgage loans receivable generally require the borrowers to make monthly principal and interest payments based on a 40-year amortization period with balloon payments, if any, at maturity or earlier upon the occurrence of certain other events. The interest rates on 11 of the mortgage loans are subject to increases over the term of the loans. The other loans are primarily loans secured by a tenant’s equipment or other assets and generally require the borrower to make monthly interest‑only payments with a balloon payment at maturity.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

Maturity

 

September 30,

 

December 31,

 

Type

 

Rate (a)

 

Date

 

2018

 

2017

 

Ten mortgage loans receivable

 

8.29

%  

 

2018 - 2022

 

$

50,126

 

$

29,079

 

Five mortgage loans receivable

 

8.61

%  

 

2032 - 2038

 

 

41,658

 

 

42,827

 

Seven mortgage loans receivable (b)

 

8.72

%  

 

2053 - 2058

 

 

64,336

 

 

58,752

 

Total mortgage loans receivable

 

 

 

 

 

 

 

156,120

 

 

130,658

 

Fifteen equipment and other loans receivable

 

8.77

%  

 

2018 - 2025

 

 

12,119

 

 

11,944

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

 

168,239

 

 

142,602

 

Unamortized loan origination costs

 

 

 

 

 

 

 

1,269

 

 

1,245

 

Allowance for loan losses

 

 

 

 

 

 

 

(2,538)

 

 

(1,500)

 

Direct financing receivables

 

 

 

 

 

 

 

185,020

 

 

129,106

 

Total loans and direct financing receivables

 

 

 

 

 

 

$

351,990

 

$

271,453

 


(a)

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

(b)

Four of these mortgage loans allow for prepayment in whole, but not in part, with penalties ranging from 20% to 70% depending on the timing of the prepayment.

17


 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

Scheduled

    

 

    

 

 

 

 

Principal

 

Balloon

 

Total

 

 

 

Payments

 

Payments

 

Payments

 

Remainder of 2018

 

$

1,350

 

$

12,647

 

$

13,997

 

2019

 

 

2,455

 

 

9,581

 

 

12,036

 

2020

 

 

1,847

 

 

18,713

 

 

20,560

 

2021

 

 

1,075

 

 

6,207

 

 

7,282

 

2022

 

 

843

 

 

8,474

 

 

9,317

 

2023

 

 

743

 

 

1,203

 

 

1,946

 

Thereafter

 

 

68,884

 

 

34,217

 

 

103,101

 

Total principal payments

 

$

77,197

 

$

91,042

 

$

168,239

 

 

As of September 30, 2018 and December 31, 2017, the Company had $185.0 million and $129.1 million, respectively, of investments accounted for as direct financing leases; the components of the investments accounted for as direct financing receivables were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

 

2018

 

2017

 

Minimum lease payments receivable

 

$

428,666

    

$

305,438

 

Estimated residual value of leased assets

 

 

24,053

 

 

15,521

 

Unearned income

 

 

(267,699)

 

 

(191,853)

 

Net investment

 

$

185,020

 

$

129,106

 

As of September 30, 2018, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $4.4 million for the remainder of 2018 and average approximately $18.0 million for each of the next five years.

 

 

 

4. Debt

Credit Facility

The Company has an unsecured revolving credit facility with a group of lenders that is used to partially fund real estate acquisitions pending the issuance of long-term, fixed-rate debt.  In February 2018, the Company expanded its credit facility from $500 million to $600 million and increased the accordion feature from $300 million to $800 million, which now allows the size of the facility to be increased up to $1.4 billion. The amended facility matures in February 2022 and includes two six-month extension options, subject to certain conditions and the payment of a 0.075% extension fee. At September 30, 2018, the Company had $359.0 million of borrowings outstanding on the facility.

Borrowings under the amended facility require monthly payments of interest at a rate selected by the Company of either (1) LIBOR plus a credit spread ranging from 0.825% to 1.55%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.55%. The credit spread used is based on the Company’s credit rating as defined in the credit agreement. The Company is required to pay a facility fee on the total commitment amount ranging from 0.125% to 0.30%.  Currently, the applicable credit spread for LIBOR-based borrowings is 1.00% and the facility fee is 0.20%.

Under the terms of the amended facility, the Company is subject to various restrictive financial and nonfinancial covenants which, among other things, require the Company to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth. Certain of these ratios are

18


 

based on the Company’s pool of unencumbered assets, which aggregated approximately $4.2 billion at September 30, 2018.

The facility is recourse to the Company and, as of September 30, 2018, the Company was in compliance with the covenants under the facility.

At September 30, 2018 and December 31, 2017, unamortized financing costs related to the Company’s credit facility totaled $3.4 million and $1.7 million, respectively, and are included in other assets, net, on the condensed consolidated balance sheets.

Unsecured Notes and Term Loans Payable, net

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

The NPAs contain a number of financial covenants that are similar to the Company’s unsecured credit facility as summarized above.  Subject to the terms of the NPAs and the Notes, upon certain events of default, including, but not limited to, (i) a payment default under the Notes, and (ii) a default in the payment of certain other indebtedness by the Company or its subsidiaries, all amounts outstanding under the Notes will become due and payable at the option of the purchasers. As of September 30, 2018, the Company was in compliance with its covenants under the NPAs.

In March 2018, the Company completed a public offering of $350 million in aggregate principal amount of senior unsecured notes (Public Notes). The Public Notes have a coupon rate of 4.50% and interest is payable semi-annually in arrears in March and September of each year beginning in September 2018. The notes were issued at 99.515% of their principal amount.

The supplemental indenture governing the Public Notes contains various restrictive covenants, including limitations on the Company’s ability to incur additional secured and unsecured indebtedness.  As of September 30, 2018, the Company was in compliance with these covenants. The Public Notes can be redeemed, in whole or in part, at par within three months of their maturity date or at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued and unpaid interest and (ii) the make-whole premium, as defined in the supplemental indenture governing these notes.

In April 2016, the Company entered into a $100 million floating-rate, unsecured five-year term loan and, in March 2017, the Company entered into a second $100 million floating-rate, unsecured term loan.  This second loan is a two-year loan which has three one-year extension options.  The interest rate on these loans resets monthly at one-month LIBOR plus a credit rating-based credit spread ranging from 0.90% to 1.75%; the credit spread currently applicable to the Company is 1.10%.  The Company has entered into interest rate swap agreements that effectively convert the variable interest rates on the term loans to fixed rates. The term loans were arranged with lenders who also participate in the Company’s unsecured revolving credit facility and, in connection with the Company’s amendment of its credit facility in February 2018 as described above, the terms of these term loans were incorporated into the amended credit facility. The financial covenants of the term loans match the covenants of the unsecured credit facility. The term loans are senior unsecured obligations of the Company and may be prepaid at any time without penalty.

19


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity

 

Interest

 

 

September 30,

 

December 31,

 

 

 

Date

 

Rate

 

 

2018

 

2017

 

Notes Payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A issued November 2015

 

Nov. 2022

 

4.95

%  

 

 

$

75,000

 

$

75,000

 

Series B issued November 2015

 

Nov. 2024

 

5.24

%  

 

 

 

100,000

 

 

100,000

 

Series C issued April 2016

 

Apr. 2026

 

4.73

%  

 

 

 

200,000

 

 

200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public Notes issued March 2018

 

Mar. 2028

 

4.50

%  

 

 

 

350,000

 

 

 —

 

Total notes payable

 

 

 

 

 

 

 

 

725,000

 

 

375,000

 

Term Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan issued March 2017

 

Mar. 2019

 

2.57

% (a)

 

 

 

100,000

 

 

100,000

 

Term Loan issued April 2016

 

Apr. 2021

 

2.44

% (a)

 

 

 

100,000

 

 

100,000

 

Total term loans

 

 

 

 

 

 

 

 

200,000

 

 

200,000

 

Unamortized original issue discount

 

 

 

 

 

 

 

 

(1,605)

 

 

 —

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

 

(7,023)

 

 

(4,405)

 

Total unsecured notes and term loans payable, net