Toggle SGML Header (+)


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 March 31, 2019

 

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 ☒

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

STOR

New York Stock Exchange

 

As of May 1, 2019, there were 227,070,089 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 March 31, 2019 (unaudited) and December 31, 2018 

3

Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 (unaudited) 

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018 (unaudited) 

5

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018 (unaudited) 

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited) 

7

Notes to Condensed Consolidated Financial Statements (unaudited) 

8

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

28

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

44

Item 4.     Controls and Procedures 

44

Part II. - OTHER INFORMATION 

45

Item 1.     Legal Proceedings 

45

Item 1A.  Risk Factors 

45

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

45

Item 3.     Defaults Upon Senior Securities 

45

Item 4.     Mine Safety Disclosures 

46

Item 5.     Other Information 

46

Item 6.     Exhibits 

46

Signatures 

47

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)

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

(audited)

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Land and improvements

 

$

2,402,332

 

$

2,280,280

 

Buildings and improvements

 

 

5,120,324

 

 

4,888,440

 

Intangible lease assets

 

 

82,699

 

 

85,148

 

Total real estate investments

 

 

7,605,355

 

 

7,253,868

 

Less accumulated depreciation and amortization

 

 

(631,989)

 

 

(585,913)

 

 

 

 

6,973,366

 

 

6,667,955

 

Real estate investments held for sale, net

 

 

15,291

 

 

 —

 

Operating ground lease assets

 

 

22,111

 

 

 —

 

Loans and financing receivables

 

 

356,999

 

 

351,202

 

Net investments

 

 

7,367,767

 

 

7,019,157

 

Cash and cash equivalents

 

 

37,352

 

 

27,511

 

Other assets, net

 

 

74,223

 

 

67,303

 

Total assets

 

$

7,479,342

 

$

7,113,971

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Credit facility

 

$

 —

 

$

135,000

 

Unsecured notes and term loans payable, net

 

 

1,261,023

 

 

916,720

 

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

 

 

2,037,165

 

 

2,008,592

 

Dividends payable

 

 

74,676

 

 

72,954

 

Operating lease liabilities

 

 

27,559

 

 

 —

 

Accrued expenses, deferred revenue and other liabilities

 

 

89,764

 

 

117,204

 

Total liabilities

 

 

3,490,187

 

 

3,250,470

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 226,290,532 and 221,071,838 shares issued and outstanding, respectively

 

 

2,263

 

 

2,211

 

Capital in excess of par value

 

 

4,286,250

 

 

4,129,082

 

Distributions in excess of retained earnings

 

 

(298,331)

 

 

(267,651)

 

Accumulated other comprehensive loss

 

 

(1,027)

 

 

(141)

 

Total stockholders’ equity

 

 

3,989,155

 

 

3,863,501

 

Total liabilities and stockholders’ equity

 

$

7,479,342

 

$

7,113,971

 

 

See accompanying notes.

3


 

STORE Capital Corporation

Condensed Consolidated Statements of Income

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Revenues:

 

 

    

    

 

    

 

Rental revenues

 

$

149,491

 

$

119,900

 

Interest income on loans and financing receivables

 

 

6,631

 

 

5,521

 

Other income

 

 

516

 

 

421

 

Total revenues

 

 

156,638

 

 

125,842

 

Expenses:

 

 

 

 

 

 

 

Interest

 

 

38,068

 

 

29,339

 

Property costs

 

 

2,584

 

 

1,341

 

General and administrative

 

 

11,983

 

 

10,851

 

Depreciation and amortization

 

 

53,716

 

 

42,310

 

Provisions for impairment

 

 

2,610

 

 

1,570

 

Total expenses

 

 

108,961

 

 

85,411

 

 

 

 

 

 

 

 

 

(Loss) gain on dispositions of real estate

 

 

(1,928)

 

 

9,634

 

Income from operations before income taxes

 

 

45,749

 

 

50,065

 

Income tax expense

 

 

193

 

 

105

 

Net income

 

$

45,556

 

$

49,960

 

 

 

 

 

 

 

 

 

Net income per share of common stock—basic and diluted

 

$

0.20

 

$

0.26

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

222,184,754

 

 

194,686,790

 

Diluted

 

 

222,637,301

 

 

194,876,748

 

 

See accompanying notes.

4


 

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Net income

    

$

45,556

    

$

49,960

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Unrealized (losses) gains on cash flow hedges

 

 

(294)

 

 

5,654

 

Cash flow hedge gains reclassified to interest expense

 

 

(592)

 

 

(108)

 

Total other comprehensive (loss) income

 

 

(886)

 

 

5,546

 

Total comprehensive income

 

$

44,670

 

$

55,506

 

 

See accompanying notes.

 

5


 

STORE Capital Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

in Excess of

 

Other

 

Total

 

 

 

Common Stock

 

Excess of

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Par Value

 

Par Value

 

Earnings

 

(Loss) Income

 

Equity

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

221,071,838

 

$

2,211

 

$

4,129,082

 

$

(267,651)

 

$

(141)

 

$

3,863,501

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

45,556

 

 

 —

 

 

45,556

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(886)

 

 

(886)

 

Issuance of common stock, net of costs of $2,549

 

4,978,510

 

 

50

 

 

158,258

 

 

 —

 

 

 —

 

 

158,308

 

Equity-based compensation

 

386,151

 

 

 2

 

 

1,683

 

 

14

 

 

 —

 

 

1,699

 

Shares repurchased under stock compensation plan

 

(145,967)

 

 

 —

 

 

(2,773)

 

 

(1,535)

 

 

 —

 

 

(4,308)

 

Common dividends declared ($0.33 per share)

 

 —

 

 

 —

 

 

 —

 

 

(74,715)

 

 

 —

 

 

(74,715)

 

Balance at March 31, 2019

 

226,290,532

 

$

2,263

 

$

4,286,250

 

$

(298,331)

 

$

(1,027)

 

$

3,989,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

in Excess of

 

Other

 

Total

 

 

 

Common Stock

 

Excess of

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Par Value

 

Par Value

 

Earnings

 

Income

 

Equity

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

193,766,854

 

$

1,938

 

$

3,381,090

 

$

(214,845)

 

$

2,759

 

$

3,170,942

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

49,960

 

 

 —

 

 

49,960

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,545

 

 

5,545

 

Issuance of common stock, net of costs of $1,891

 

4,114,484

 

 

41

 

 

98,915

 

 

 —

 

 

 —

 

 

98,956

 

Equity-based compensation

 

276,758

 

 

 2

 

 

1,463

 

 

30

 

 

 —

 

 

1,495

 

Shares repurchased under stock compensation plan

 

(113,948)

 

 

(1)

 

 

(2,008)

 

 

(826)

 

 

 —

 

 

(2,835)

 

Common dividends declared ($0.31 per share)

 

 —

 

 

 —

 

 

 —

 

 

(61,393)

 

 

 —

 

 

(61,393)

 

Balance at March 31, 2018

 

198,044,148

 

$

1,980

 

$

3,479,460

 

$

(227,074)

 

$

8,304

 

$

3,262,670

 

 

 

 

See accompanying notes.

 

 

 

 

6


 

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Operating activities

 

 

    

    

 

    

 

Net income

 

$

45,556

 

$

49,960

 

Adjustments to net income:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

53,716

 

 

42,310

 

Amortization of deferred financing costs and other noncash interest expense

 

 

2,051

 

 

2,103

 

Amortization of equity-based compensation

 

 

1,686

 

 

1,466

 

Provisions for impairment

 

 

2,610

 

 

1,570

 

Loss (gain) on dispositions of real estate

 

 

1,928

 

 

(9,634)

 

Loss (gain) on defeasance/extinguishment of debt

 

 

735

 

 

(814)

 

Noncash revenue and other

 

 

(20)

 

 

(855)

 

Payments (made) received in settlement of cash flow hedges

 

 

(6,735)

 

 

4,288

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(874)

 

 

(2,276)

 

Accrued expenses, deferred revenue and other liabilities

 

 

(5,806)

 

 

(880)

 

Net cash provided by operating activities

 

 

94,847

 

 

87,238

 

Investing activities

 

 

 

 

 

 

 

Acquisition of and additions to real estate

 

 

(392,306)

 

 

(281,297)

 

Investment in loans and financing receivables

 

 

(16,910)

 

 

(29,983)

 

Collections of principal on loans and financing receivables

 

 

462

 

 

362

 

Proceeds from dispositions of real estate

 

 

7,714

 

 

49,815

 

Net cash used in investing activities

 

 

(401,040)

 

 

(261,103)

 

Financing activities

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

291,100

 

 

218,000

 

Repayments under credit facility

 

 

(426,100)

 

 

(411,000)

 

Borrowings under unsecured notes and term loans payable

 

 

347,410

 

 

348,303

 

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

 

 

41,690

 

 

 —

 

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

 

 

(14,092)

 

 

(13,101)

 

Financing and defeasance costs paid

 

 

(4,615)

 

 

(5,080)

 

Proceeds from the issuance of common stock

 

 

160,858

 

 

100,848

 

Stock issuance costs paid

 

 

(2,638)

 

 

(1,834)

 

Shares repurchased under stock compensation plans

 

 

(4,308)

 

 

(2,835)

 

Dividends paid

 

 

(74,160)

 

 

(60,653)

 

Net cash provided by financing activities

 

 

315,145

 

 

172,648

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

8,952

 

 

(1,217)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

43,017

 

 

49,178

 

Cash, cash equivalents and restricted cash, end of period

 

$

51,969

 

$

47,961

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,352

 

$

35,116

 

Restricted cash included in other assets

 

 

14,617

 

 

12,845

 

Total cash, cash equivalents and restricted cash

 

$

51,969

 

$

47,961

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Accrued tenant improvements included in real estate investments

 

$

13,113

 

$

19,466

 

Net real estate assets surrendered to lender

 

 

 —

 

 

12,573

 

Acquisition of collateral property securing a mortgage note receivable

 

 

9,170

 

 

 —

 

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

 

 

 —

 

 

12,874

 

Accrued financing and stock issuance costs

 

 

51

 

 

893

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

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

 

$

33,289

 

$

23,817

 

Cash paid during the period for income and franchise taxes

 

 

57

 

 

727

 

See accompanying notes.

 

7


 

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

March 31, 2019

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, 2018.

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 March 31, 2019 and December 31, 2018, these special purpose entities held assets totaling $6.4 billion and $6.1 billion, respectively, and had third-party liabilities totaling $2.1 billion.  These assets and liabilities are included in the accompanying condensed consolidated balance sheets.

 

 

8


 

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.

 

Investment Portfolio

STORE Capital invests in real estate assets through three primary transaction types as summarized below.  Effective January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842)(ASC Topic 842) which had an impact on certain accounting related to the Company’s investment portfolio.

·

Real Estate Investments – investments are generally made through sale-leaseback transactions in which the Company acquires the real estate from the owner-operators and then leases the real estate back to them through long-term leases which are generally classified as operating leases; the operators become the Company’s long‑term tenants (its customers). Certain of the lease contracts that are associated with a sale-leaseback transaction may contain terms, such as a tenant purchase option, which will result in the transaction being accounted for as a financing arrangement due to the adoption of ASC Topic 842 rather than as an investment in real estate subject to an operating lease.

·

Mortgage Loans Receivable – investments are made by issuing mortgage loans to the owner-operators of the real estate that serve as the collateral for the loans and the operators become long-term borrowers and customers of the Company.  On occasion, the Company may also make other types of loans to its customers, such as equipment loans.

·

Hybrid Real Estate Investments – investments are made through modified sale-leaseback transactions, where the Company acquires land from the owner-operators, leases the land back through long-term leases and simultaneously issue mortgage loans to the operators secured by the buildings and improvements on the land.  Prior to 2019, these hybrid real estate investment transactions were generally accounted for as direct financing leases.  Subsequent to the adoption of ASC Topic 842, new or modified hybrid real estate transactions are expected to be accounted for as operating leases of the land and mortgage loans on the buildings and improvements.

Accounting for Real Estate Investments

Classification and Cost

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-related 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. Certain of the Company’s lease contracts allow its tenants the option, at their election, to purchase the leased property from the Company at a specified time or times (generally at the greater of the then‑fair market value or the Company’s cost).  Subsequent to the adoption of ASC Topic 842, for real estate assets acquired through a sale-leaseback transaction subject to a lease contract which contains a purchase option, the Company will account for such acquisition as a

9


 

financing arrangement and record the investment in loans and financing receivables on the condensed consolidated balance sheet.

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.

Revenue Recognition

STORE Capital leases real estate to its tenants under long‑term net leases that are predominantly classified as operating leases.  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, straight-line operating lease receivables, calculated as the aggregate difference between the rental revenue recognized on a straight‑line basis and scheduled rents, represent unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the leases; these receivables are included in other assets, net on the condensed consolidated balance sheets. Prior to 2019, the Company provided for an estimated reserve for uncollectible straight‑line operating lease receivables based on management’s assessment of the risks inherent in those lease contracts, giving consideration to industry default rates for long‑term receivables. At December 31, 2018, there was $25.7 million of straight‑line operating lease receivables, net of an allowance of $4.3 million.  Subsequent to the adoption of ASC Topic 842 in 2019, the Company reviews its straight-line rental revenue for collectibility on a contract by contract basis and any amounts not considered substantially collectible are written off against rental revenues.  The Company had $27.0 million of straight-line operating lease receivables at March 31, 2019.  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. Approximately 2.2% 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; historically, contingent rent recognized has generally been less than 0.1% of rental revenues.

10


 

The Company reviews its operating lease receivables 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 not probable, a direct write‑off of the receivable is made and any future rental revenue is recognized only when the tenant makes a rental payment.

Direct costs incremental to successful 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 Company’s leases are triple net, which means that the lessees are directly 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.  Subsequent to the adoption of ASC Topic 842, these property tax payments are presented on a gross basis as part of both rental revenues and property costs in the condensed consolidated statements of income.

Impairment

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

During the three months ended March 31, 2019, the Company recognized an aggregate provision for the impairment of real estate of $2.6 million.  No impairment of real estate was recognized during the three months ended March 31, 2018. The estimated fair value of impaired real estate assets at March 31, 2019 was $10.0 million.

Accounting for Loans Receivable

Classification and Cost

STORE Capital holds its loans receivable, which are primarily mortgage loans secured by real estate, for long‑term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any.

Revenue Recognition

The Company recognizes interest income on loans receivable using the effective‑interest method applied on a loan‑by‑loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received.  As of March 31, 2019 and December 31, 2018, the Company had loans receivable with an aggregate outstanding principal balance of $21.1 million and $8.5 million, respectively, on nonaccrual status.

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

11


 

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 both March 31, 2019 and December 31, 2018, there was $2.5 million of allowance for loan losses.

Accounting for Direct Financing Receivables

Direct financing receivables include hybrid real estate investment transactions completed prior to 2019.  The Company recorded 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.  Subsequent to the adoption of ASC Topic 842, existing direct financing receivables will continue to be accounted for in the same manner, unless the underlying contracts are modified.

 

Accounting for Operating Ground Lease Assets

As part of certain real estate investment transactions, the Company may enter into long-term operating ground leases as a lessee.  As a result of the adoption of ASC Topic 842, the Company is required to recognize an operating ground lease (or right-of-use) asset and related operating lease liability for each of these operating ground leases.  Operating ground lease assets and operating lease liabilities are recognized based on the present value of the lease payments.  The Company uses its estimated incremental borrowing rate, which is the estimated rate at which the Company could borrow on a collateralized basis with similar payments over a similar term, in determining the present value of the lease payments.

Many of these operating lease contracts include options for the Company to extend the lease; the option periods are included in the minimum lease term only if it is reasonably likely the Company will exercise the option(s).  Rental expense for the operating ground lease contracts is recognized in property costs on a straight-line basis over the lease term.  Some of the contracts have contingent rent escalators indexed to future increases in the CPI and a few contracts have contingent rentals that are based on a percentage of the gross sales of the property; these payments are recognized in expense as incurred.  The payment obligations under these contracts are typically the responsibility of the tenants operating on the properties, in accordance with the Company’s leases with the respective tenants.  As a result, the Company also recognizes sublease rental revenue on a straight-line basis over the term of the Company’s sublease with the tenant; the sublease income is included in rental revenues.

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 $14.6 million and $15.5 million of restricted cash and deposits in escrow at March 31, 2019 and December 31, 2018, 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.

12


 

 

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 March 31, 2019, the Company had one interest rate floor and two interest rate swap agreements in place.  The 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 December 2018, the Company entered into two treasury lock agreements which were designated as cash flow hedges associated with the expected public offering of the senior unsecured notes issued by the Company at the end of February 2019 (Note 4).  The agreements were settled in accordance with their terms in February 2019 and the Company made an aggregate payment of $6.7 million to the counterparties which was recognized as a deferred loss in accumulated other comprehensive loss.

 

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.

13


 

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 three months ended March 31, 2019, the Company granted RSAs representing 103,633 shares of restricted common stock to its directors and key employees.  During the same period, RSAs representing 131,634 shares of restricted stock vested and RSAs representing 7,038 shares were forfeited.  In connection with the vesting of the RSAs, the Company repurchased 41,915 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 March 31, 2019, the Company had 295,962 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 and 2019 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 three months ended March 31, 2019, the Company awarded 525,824 RSUs to its executive officers and 87,638 RSUs were forfeited. In connection with the vesting of 289,556 RSUs on December 31, 2018, the Company repurchased 104,052 shares during the three months ended March 31, 2019 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 March 31, 2019, there were 1,454,047 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 2014 and tax returns filed for 2015 through 2018 are subject to examination by these jurisdictions. As of March 31, 2019 and December 31, 2018, 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 March 31, 2019 or December 31, 2018.

 

14


 

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 March 31,

 

 

 

 

2019

 

2018

 

Numerator:

    

    

 

    

    

 

    

 

Net income

 

 

$

45,556

 

$

49,960

 

Less: earnings attributable to unvested restricted shares

 

 

 

(83)

 

 

(76)

 

Net income used in basic and diluted income per share

 

 

$

45,473

 

$

49,884

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

222,498,630

 

 

195,059,642

 

Less: Weighted average number of shares of unvested restricted stock

 

 

 

(313,876)

 

 

(372,852)

 

Weighted average shares outstanding used in basic income per share

 

 

 

222,184,754

 

 

194,686,790

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

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

 

 

 

452,547

 

 

189,958

 

Weighted average shares outstanding used in diluted income per share

 

 

 

222,637,301

 

 

194,876,748

 


(a)

For the three months ended March 31, 2019 and 2018, excludes 125,317 shares and 105,061 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, will have minimal, if any, impact on the Company’s financial position, results of operations or cash flows upon adoption.

In February 2016, the FASB issued ASC Topic 842 to amend the accounting for leases. The new standard requires lessees and lessors to classify leases as either finance or operating leases and for lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months.  The standard also eliminates current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs, lease modifications, recognition of a lease-related receivables allowance and lease executory costs for all entities.

The Company adopted ASC Topic 842 on January 1, 2019, using the modified retrospective approach in accordance with the provisions of ASU 2018-11, Leases (Topic 842), Targeted Improvements. As such, the Company’s financial statements only reflect the impact of ASC Topic 842 for the current reporting period. There was no impact to beginning retained earnings at the time of adoption and, therefore, no cumulative-effect adjustment was recorded. Upon adoption the Company elected to use certain practical expedients including:

·

a package of practical expedients allowing the Company to not reassess the classification of existing lease contracts, whether existing or expired contracts contain a lease or whether a portion of initial direct costs for existing leases should have been expensed.

·

a practical expedient allowing the Company to not evaluate land easements that existed prior to or at the time of adoption, as leases in accordance with Topic 842.

The new standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in obtaining a lease. Although there have been changes in the manner in which initial direct costs are recorded, the amount recorded has remained materially consistent.  While primarily a lessor, the Company is also a lessee under several operating ground lease contracts and under its corporate office lease. Upon adoption of ASC Topic

15


 

842, the Company recorded a right-of-use asset and a lease liability of approximately $24.9 million and $25.5 million, respectively, in relation to these leases. For most of the operating ground leases, the sublessees, or the Company’s tenants, are responsible for making payment directly to the ground lessors. Prior to the new standard, these amounts were presented on a net basis; however, such amounts are now presented on a gross basis in the consolidated statements of income as both rental revenue and property costs. ASC Topic 842 also requires the Company to assess the probability of collecting substantially all of its rental revenue and make direct adjustments to rental revenue for operating lease receivables that are not believed to be collectible. As such, the Company will no longer recognize an allowance for doubtful accounts. The new standard had no impact on the Company’s cash flows.

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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which clarified that receivables arising from operating leases are within the scope of the leasing standard (Topic 842) discussed above.  This new standard will be effective for the Company on January 1, 2020, with early adoption permitted beginning on January 1, 2019. The Company has loans and direct financing receivables that will be subject to the new guidance and continues to evaluate the impact this new standard will have on its consolidated financial statements.

 

16


 

 

3. Investments

 

At March 31, 2019, STORE Capital had investments in 2,334 property locations representing 2,281 owned properties (of which two are accounted for as financing arrangements and 57 are accounted for as direct financing receivables), 20 properties where all the related land is subject to an operating ground lease and 33 properties which secure mortgage loans. The gross investment portfolio totaled $8.0 billion at March 31, 2019 and consisted of the gross acquisition cost of the real estate investments totaling $7.62 billion, loans and financing receivables with an aggregate carrying amount of $357.0 million and operating ground lease assets totaling $22.1 million. As of March 31, 2019, approximately 39% 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 financing receivables and operating ground lease assets.  During the three months ended March 31, 2019, the Company had the following gross real estate and other investment activity (dollars in thousands):

 

 

 

 

 

 

 

 

    

Number of

    

Dollar

 

 

 

Investment

 

Amount of

 

 

 

Locations

 

Investments

 

Gross investments, December 31, 2018

 

2,255

 

$

7,605,070

 

Acquisition of and additions to real estate (a)

 

83

 

 

385,527

 

Investment in loans and financing receivables

 

 2

 

 

16,910

 

Sales of real estate

 

(4)

 

 

(12,244)

 

Principal collections on loans and financing receivables (b)

 

(2)

 

 

(9,632)

 

Operating ground lease assets, net (c)

 

 —

 

 

22,111

 

Provisions for impairment

 

 

 

 

(2,610)

 

Other

 

 

 

 

(3,246)

 

Gross investments, March 31, 2019 (d)

 

 

 

 

8,001,886

 

Less accumulated depreciation and amortization (d)

 

 

 

 

(634,119)

 

Net investments, March 31, 2019

 

2,334

 

$

7,367,767

 


(a)

Excludes $28.3 million of tenant improvement advances disbursed in 2019 which were accrued as of December 31, 2018 and includes $0.4 million of interest capitalized to properties under construction.

(b)

Includes $9.2 million of non-cash principal collections related to two loans receivable transactions in which the Company acquired two underlying mortgaged properties and leased them back to the borrowers.

(c)

Includes $20.0 million of operating ground lease (or right-of-use) assets recognized upon initial adoption of ASC Topic 842 and $2.1 million of activity (new operating ground lease assets recognized net of asset amortization) during the three months ended March 31, 2019.

(d)

Includes the dollar amount of investments ($17.4 million) and the accumulated depreciation ($2.1 million) related to real estate investments held for sale at March 31, 2019.

 

17


 

The following table summarizes the revenues the Company recognized from its investment portfolio (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Rental revenues:

 

 

    

    

 

    

 

Operating leases (a)

 

$

149,507

 

$

120,416

 

Sublease income - operating ground leases (b)

 

 

508

 

 

 —

 

Amortization of lease related intangibles and costs

 

 

(524)

 

 

(516)

 

Total rental revenues

 

$

149,491

 

$

119,900

 

 

 

 

 

 

 

 

 

Interest income on loans and financing receivables:

 

 

 

 

 

 

 

Mortgage and other loans receivable

 

$

2,970

 

$

2,849

 

Sale-leaseback transactions accounted for as financing arrangements

 

 

82

 

 

 —

 

Direct financing receivables

 

 

3,579

 

 

2,672

 

Total interest income on loans and financing receivables

 

$

6,631

 

$

5,521

 


(a)

For the three months ended March 31, 2019, includes $802,000 of property tax tenant reimbursement revenue and includes $36,000 and $62,000 of variable lease revenue for the three months ended March 31, 2019 and 2018, respectively.

(b)

Represents total revenue recognized for the sublease of properties subject to operating ground leases to the related tenants; includes both payments made by the tenants to the ground lessors and straight-line revenue recognized for scheduled increases in the sublease rental payments.

In connection with the adoption of ASC Topic 842 in 2019, the Company elected to combine qualifying lease and nonlease components and will not allocate the consideration in its lease contracts to the lease and nonlease components and will instead account for them as a single component if the timing and pattern of transfer for the separate components are the same and, if accounted for separately, the lease component would classify as an operating lease.

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to more than 400 customers geographically dispersed throughout all 50 states. Only one state, Texas (11%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at March 31, 2019. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at March 31, 2019, with the largest customer representing 2.8% of the total investment portfolio. On an annualized basis, the largest customer represented 2.7% of the Company’s total annualized investment portfolio revenues as of March 31, 2019. The Company’s customers operate their businesses across approximately 640 concepts and the largest of these concepts represented 2.4% of the Company’s total annualized investment portfolio revenues as of March 31, 2019.

18


 

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 March 31, 2019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Percentage of

 

 

 

Number of

 

Dollar

 

Total Dollar

 

 

 

Investment

 

Amount of

 

Amount of

 

 

 

Locations

 

Investments

 

Investments

 

Restaurants

 

805

 

$

1,288,687

 

16

%  

Furniture stores

 

60

 

 

459,312

 

 6

 

Early childhood education centers

 

197

 

 

444,404

 

 6

 

Health clubs

 

78

 

 

412,818

 

 5

 

Movie theaters

 

40

 

 

373,019

 

 5

 

Farm and ranch supply stores

 

44

 

 

365,105

 

 4

 

Automotive repair and maintenance

 

141

 

 

321,955

 

 4

 

All manufacturing industries

 

222

 

 

1,345,121

 

17

 

All other service industries

 

634

 

 

2,272,779

 

28

 

All other retail industries

 

113

 

 

718,686

 

 9

 

 

 

2,334

 

$

8,001,886

 

100

 

Real Estate Investments

The weighted average remaining noncancelable lease term of the Company’s operating leases with its tenants at March 31, 2019 was approximately 14 years. 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; 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 March 31, 2019, eight 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 March 31, 2019, were as follows (in thousands):

 

 

 

 

 

Remainder of 2019

 

$

461,813

 

2020

 

 

613,279

 

2021

 

 

612,338

 

2022

 

 

612,709

 

2023

 

 

609,785

 

2024

 

 

605,701

 

Thereafter

 

 

5,283,635

 

Total future minimum rentals

 

$

8,799,260

 

Substantially all the Company’s leases include one or more renewal options (generally two to four five-year options).  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.

19


 

Intangible Lease Assets

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

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2019

 

2018

 

In-place leases

 

$

53,758

 

$

54,293

 

Ground lease-related intangibles

 

 

19,449

 

 

21,363

 

Above-market leases

 

 

9,492

 

 

9,492

 

Total intangible lease assets

 

 

82,699

 

 

85,148

 

Accumulated amortization

 

 

(30,610)

 

 

(29,223)

 

Net intangible lease assets

 

$

52,089

 

$

55,925

 

 

Aggregate lease intangible amortization included in expense was $1.7 million and $1.4 million during the three months ended March 31, 2019 and 2018, 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 March 31, 2019 and 2018.

Based on the balance of the intangible assets at March 31, 2019, the aggregate amortization expense is expected to be $3.9 million for the remainder of 2019, $4.7 million in 2020, $4.5 million in 2021, $4.3 million in 2022, $3.8 million in 2023 and $3.1 million in 2024; the amount expected to be amortized as a decrease to rental revenue is expected to be $0.8 million for the remainder of 2019, $1.1 million in 2020, $0.6 million in 2021 and $0.4 million in each of the years 2022 through 2024.  The weighted average remaining amortization period is approximately nine years for the in‑place lease intangibles, approximately 45 years for the amortizing ground lease-related intangibles and approximately six years for the above‑market lease intangibles.

Loans and Financing Receivables

At March 31, 2019, the Company held 39 loans receivable with an aggregate carrying amount of $174.3 million. Twenty-two of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property. Nine 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.

20


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

Maturity

 

March 31,

 

December 31,

 

Type

    

Rate (a)

    

Date

    

2019

    

2018

 

Nine mortgage loans receivable

 

8.35

%  

 

2019 - 2022

 

$

41,037

 

$

49,934

 

Four mortgage loans receivable

 

8.49

%  

 

2032 - 2038

 

 

17,643

 

 

17,666

 

Nine mortgage loans receivable (b)

 

8.62

%  

 

2051 - 2059

 

 

103,354

 

 

88,019

 

Total mortgage loans receivable

 

 

 

 

 

 

 

162,034

 

 

155,619

 

Seventeen equipment and other loans receivable

 

8.79

%  

 

2019 - 2025

 

 

13,561

 

 

12,013

 

Total principal amount outstanding—loans receivable

 

 

 

 

 

 

 

175,595

 

 

167,632

 

Unamortized loan origination costs

 

 

 

 

 

 

 

1,219

 

 

1,249

 

Allowance for loan losses

 

 

 

 

 

 

 

(2,538)

 

 

(2,538)

 

Sale-leaseback transactions accounted for as financing arrangements (c)

 

8.24

%  

 

2034

 

 

11,915

 

 

 —

 

Direct financing receivables

 

 

 

 

 

 

 

170,808

 

 

184,859

 

Total loans and financing receivables

 

 

 

 

 

 

$

356,999

 

$

351,202

 


(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.

(c)

In accordance with ASC Topic 842, represents transactions accounted for as financing arrangements rather than as an investment in real estate subject to an operating lease.  Interest rate shown is the initial rental or capitalization rate on the lease; the lease matures in 2034 and the purchase option expires in 2029.

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 2019

 

$

3,016

 

$

21,588

 

$

24,604

 

2020

 

 

1,943

 

 

10,701

 

 

12,644

 

2021

 

 

1,179

 

 

7,864

 

 

9,043

 

2022

 

 

955

 

 

8,474

 

 

9,429

 

2023

 

 

865

 

 

1,203

 

 

2,068

 

2024

 

 

904

 

 

 —

 

 

904

 

Thereafter

 

 

104,854

 

 

12,049

 

 

116,903

 

Total principal payments

 

$

113,716

 

$

61,879

 

$

175,595

 

As of March 31, 2019 and December 31, 2018, the Company had $170.8 million and $184.9 million, respectively, of investments accounted for as direct financing leases under previous accounting guidance; the components of these investments were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

 

2019

 

2018

 

Minimum lease payments receivable

 

$

391,005

    

$

424,305

 

Estimated residual value of leased assets

 

 

22,610

 

 

24,053

 

Unearned income

 

 

(242,807)

 

 

(263,499)

 

Net investment

 

$

170,808

 

$

184,859

 

As of March 31, 2019, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $12.4 million for the remainder of 2019 and average approximately $16.8 million for each of the next five years.

21


 

Operating Ground Lease Assets

As of March 31, 2019, STORE Capital had operating ground lease assets aggregating $22.1 million.  Typically, the lease payment obligations for these leases are the responsibility of the tenants operating on the properties, in accordance with the Company’s leases with those respective tenants.  During the three months ended March 31, 2019 and 2018, the Company recognized $524,000 and $7,000, respectively, of total lease cost for these operating ground lease assets; for the three months ended March 31, 2019, the Company also recognized in rental revenues $508,000 of sublease revenue associated with its operating ground leases.  The Company’s ground leases have remaining terms ranging from one year to 93 y