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STOR Store Capital

Filed: 5 Nov 21, 4:13pm

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, 2021

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 November 3, 2021, there were 272,674,305 shares of the registrant’s $0.01 par value common stock outstanding.

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,

 

 

2021

2020

 

 

(unaudited)

(audited)

 

Assets

Investments:

Real estate investments:

Land and improvements

$

3,025,429

$

2,807,153

Buildings and improvements

 

6,565,092

 

6,059,513

Intangible lease assets

 

54,971

 

61,634

Total real estate investments

 

9,645,492

 

8,928,300

Less accumulated depreciation and amortization

 

(1,098,560)

 

(939,591)

 

8,546,932

 

7,988,709

Real estate investments held for sale, net

 

26,553

 

22,304

Operating ground lease assets

33,653

34,683

Loans and financing receivables, net

 

649,414

 

650,321

Net investments

 

9,256,552

 

8,696,017

Cash and cash equivalents

 

37,018

 

166,381

Other assets, net

 

131,428

 

141,942

Total assets

$

9,424,998

$

9,004,340

Liabilities and stockholders’ equity

Liabilities:

Credit facility

$

109,000

$

Unsecured notes and term loans payable, net

1,411,239

1,509,612

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

 

2,517,136

 

2,212,634

Dividends payable

104,801

95,801

Operating lease liabilities

38,499

39,317

Accrued expenses, deferred revenue and other liabilities

 

131,931

 

131,198

Total liabilities

 

4,312,606

 

3,988,562

Stockholders’ equity:

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 272,211,360 and 266,112,676 shares issued and outstanding, respectively

 

2,722

 

2,661

Capital in excess of par value

 

5,682,456

 

5,475,889

Distributions in excess of retained earnings

 

(570,560)

 

(459,977)

Accumulated other comprehensive loss

 

(2,226)

 

(2,795)

Total stockholders’ equity

 

5,112,392

 

5,015,778

Total liabilities and stockholders’ equity

$

9,424,998

$

9,004,340

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,

 

    

2021

    

2020

    

2021

    

2020

 

Revenues:

    

    

    

    

Rental revenues

$

184,083

$

163,325

$

533,575

$

482,669

Interest income on loans and financing receivables

 

12,973

 

11,021

 

37,196

 

34,374

Other income

 

2,069

 

877

 

2,661

 

4,357

Total revenues

 

199,125

 

175,223

 

573,432

 

521,400

Expenses:

Interest

 

43,367

 

42,090

 

126,904

 

127,816

Property costs

 

4,267

 

3,309

 

14,098

 

14,603

General and administrative

 

17,456

 

14,729

 

58,551

 

35,742

Depreciation and amortization

 

67,123

 

61,119

 

195,725

 

180,753

Provisions for impairment

3,400

2,772

17,350

10,972

Total expenses

 

135,613

 

124,019

 

412,628

 

369,886

Other income:

Net gain on dispositions of real estate

 

10,721

 

3,537

 

32,271

 

6,814

Income from non-real estate, equity method investment

1,872

804

Income before income taxes

76,105

54,741

193,879

158,328

Income tax expense

 

169

 

111

 

552

 

438

Net income

$

75,936

$

54,630

$

193,327

$

157,890

Net income per share of common stock—basic and diluted

$

0.28

$

0.21

$

0.72

$

0.63

Weighted average common shares outstanding:

Basic

 

271,273,253

 

255,308,189

 

269,329,141

 

248,999,635

Diluted

 

271,273,253

 

255,610,628

 

269,329,141

 

248,999,635

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,

 

2021

2020

2021

2020

 

Net income

    

$

75,936

    

$

54,630

    

$

193,327

    

$

157,890

Other comprehensive income (loss):

Unrealized losses on cash flow hedges

 

 

(7)

 

(3)

 

(1,428)

Cash flow hedge losses reclassified to interest expense

 

61

 

363

 

572

 

613

Total other comprehensive income (loss)

 

61

 

356

 

569

 

(815)

Total comprehensive income

$

75,997

$

54,986

$

193,896

$

157,075

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

Equity

 

Three Months Ended September 30, 2021

Balance at June 30, 2021

 

271,688,122

$

2,717

$

5,657,123

$

(541,717)

$

(2,287)

$

5,115,836

Net income

 

75,936

 

75,936

Other comprehensive income

 

61

 

61

Issuance of common stock, net of costs of $351

 

534,267

5

18,866

 

18,871

Equity-based compensation

 

(11,029)

6,467

 

6,467

Shares repurchased under stock compensation plan

Common dividends declared ($0.385 per share)

(104,779)

(104,779)

Balance at September 30, 2021

 

272,211,360

$

2,722

$

5,682,456

$

(570,560)

$

(2,226)

$

5,112,392

Nine Months Ended September 30, 2021

Balance at December 31, 2020

 

266,112,676

$

2,661

$

5,475,889

$

(459,977)

$

(2,795)

$

5,015,778

Net income

 

193,327

 

193,327

Other comprehensive income

 

569

 

569

Issuance of common stock, net of costs of $3,209

 

5,665,358

56

188,329

 

188,385

Equity-based compensation

 

716,724

5

24,156

 

24,161

Shares repurchased under stock compensation plan

(283,398)

(5,918)

(3,427)

(9,345)

Common dividends declared ($1.105 per share) and dividend equivalents on restricted stock units

 

(300,483)

 

(300,483)

Balance at September 30, 2021

 

272,211,360

$

2,722

$

5,682,456

$

(570,560)

$

(2,226)

$

5,112,392

Distributions

Accumulated

 

Capital in

in Excess of

Other

Total

 

Common Stock

Excess of

Retained

Comprehensive

Stockholders’

 

Shares

Par Value

Par Value

Earnings

Loss

Equity

 

Three Months Ended September 30, 2020

Balance at June 30, 2020

 

253,298,352

$

2,533

$

5,109,408

$

(378,308)

$

(3,507)

$

4,730,126

Net income

 

 

 

 

54,630

 

 

54,630

Other comprehensive income

 

 

 

 

 

356

 

356

Issuance of common stock, net of costs of $3,361

 

8,033,069

 

80

 

214,972

 

 

 

215,052

Equity-based compensation

 

17,033

 

 

2,744

 

 

 

2,744

Common dividends declared ($0.36 per share)

(94,184)

(94,184)

Balance at September 30, 2020

 

261,348,454

$

2,613

$

5,327,124

$

(417,862)

$

(3,151)

$

4,908,724

Nine Months Ended September 30, 2020

Balance at December 31, 2019

 

239,822,900

$

2,398

$

4,787,932

$

(302,609)

$

(2,336)

$

4,485,385

Adoption of ASC Topic 326, cumulative adjustment

(2,465)

(2,465)

Net income

 

 

 

 

157,890

 

 

157,890

Other comprehensive loss

 

 

 

 

 

(815)

 

(815)

Issuance of common stock, net of costs of $7,116

 

20,928,023

 

209

540,299

 

 

 

540,508

Equity-based compensation

 

732,511

 

6

 

1,638

 

5

 

 

1,649

Shares repurchased under stock compensation plan

(134,980)

(2,745)

(2,340)

(5,085)

Common dividends declared ($1.06 per share) and dividend equivalents on restricted stock units

(268,343)

(268,343)

Balance at September 30, 2020

 

261,348,454

$

2,613

$

5,327,124

$

(417,862)

$

(3,151)

$

4,908,724

See accompanying notes.

6

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

Nine Months Ended September 30,

 

2021

2020

 

Operating activities

    

    

    

Net income

$

193,327

$

157,890

Adjustments to net income:

Depreciation and amortization

 

195,725

180,753

Amortization of deferred financing costs and other noncash interest expense

 

7,396

6,310

Amortization of equity-based compensation

 

24,161

1,645

Provisions for impairment

17,350

10,972

Net gain on dispositions of real estate

 

(32,271)

(6,814)

Income from non-real estate, equity method investment

(804)

Noncash revenue and other

 

(6,931)

(57,098)

Changes in operating assets and liabilities:

Other assets

15,821

(1,265)

Accrued expenses, deferred revenue and other liabilities

 

1,004

6,259

Net cash provided by operating activities

 

414,778

 

298,652

Investing activities

Acquisition of and additions to real estate

 

(953,453)

(561,913)

Investment in loans and financing receivables

 

(70,744)

(69,165)

Collections of principal on loans and financing receivables

 

13,903

32,125

Proceeds from dispositions of real estate

 

270,897

100,955

Net cash used in investing activities

 

(739,397)

 

(497,998)

Financing activities

Borrowings under credit facility

 

416,000

600,000

Repayments under credit facility

 

(307,000)

(600,000)

Repayments under unsecured notes and term loans payable

(100,000)

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

 

514,785

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

 

(207,823)

(26,783)

Financing costs paid

 

(10,872)

(84)

Proceeds from the issuance of common stock

 

191,595

547,624

Stock issuance costs paid

(3,272)

(7,106)

Shares repurchased under stock compensation plans

(9,345)

(5,085)

Dividends paid

(293,182)

(259,119)

Net cash provided by financing activities

 

190,886

 

249,447

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

 

(133,733)

 

50,101

Cash, cash equivalents and restricted cash, beginning of period

 

176,576

 

111,381

Cash, cash equivalents and restricted cash, end of period

$

42,843

$

161,482

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents

$

37,018

$

144,478

Restricted cash included in other assets

5,825

17,004

Total cash, cash equivalents and restricted cash

$

42,843

$

161,482

Supplemental disclosure of noncash investing and financing activities:

Accrued tenant improvements included in real estate investments

$

18,428

$

22,055

Seller financing provided to purchaser of real estate sold

3,176

Acquisition of real estate assets from borrowers under loans and financing receivables

42,782

23,408

Accrued financing and stock issuance costs

101

81

Supplemental disclosure of cash flow information:

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

$

120,575

$

124,997

Cash paid during the period for income and franchise taxes

2,134

2,109

See accompanying notes.

7

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2021

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, 2020.

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, 2021 and December 31, 2020, these special purpose entities held assets totaling $8.1 billion and $7.7 billion, respectively, and had third-party liabilities totaling $2.6 billion and $2.3 billion, respectively. 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 1 reportable segment.

Investment Portfolio

STORE Capital invests in real estate assets through 3 primary transaction types as summarized below. At the beginning of 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 results 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 issues 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 investment transactions are generally accounted for as operating leases of the land and mortgage loans on the buildings and improvements.

Impact of the COVID-19 Pandemic

Since the beginning of the novel coronavirus (COVID-19) pandemic in early 2020, the Company has provided to certain tenants rent deferral arrangements in the form of both short-term notes and lease modifications. The FASB provided accounting relief under which concessions provided to tenants in direct response to the COVID-19 pandemic are not required to be evaluated or accounted for as lease modifications in accordance with ASC Topic 842. The Company elected to apply this accounting relief to the rent deferral arrangements it has entered into with its tenants, which primarily affected the timing (but not the amount) of lease and loan payments due to the Company under its contracts; net revenue recognized under these deferral arrangements results in a corresponding increase in receivables that are included in other assets, net on the condensed consolidated balance sheets. For the three and nine months ended September 30, 2021, the Company recognized an additional $0.8 million and $5.8 million, respectively, of net revenue and collected $8.0 million and $19.2 million, respectively, of the receivables associated with these deferral arrangements. For the three and nine months ended September 30, 2020, the Company recognized $13.0 million and $51.2 million, respectively, of net revenue associated with deferral arrangements.

9

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, as defined in the lease contracts). Subsequent to the adoption of ASC Topic 842, for real estate assets acquired through a sale-leaseback transaction and subject to a lease contract which contains a purchase option, the Company accounts for such an acquisition as a financing arrangement and records the investment in loans and financing receivables on the condensed consolidated balance sheet; should the purchase option later expire or be removed from the lease contract, the Company would derecognize the asset accounted for as a financing arrangement and recognize the transferred leased asset in real estate investments.

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 or below-market lease 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 selling 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. The Company reviews its straight-line operating lease receivables for collectibility on a contract by contract basis and any amounts not considered substantially collectible are written off against rental revenues. As of September 30, 2021 and December 31, 2020, the Company had $37.3 million and $34.6 million, respectively, of straight-line operating lease receivables. 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

10

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.

In addition to base rental revenue, certain leases also 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. As of September 30, 2021, approximately 6.2% 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 (for most of these leases, the contingent rent payment is for a temporary period); historically, contingent rent recognized has been less than 2.0% of rental revenues.

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 lease payments 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 or when collectibility is again deemed probable.

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. Such events or changes in circumstances may include an expectation to sell certain assets in accordance with the Company’s long-term strategic plans. Management considers factors such as expected future undiscounted cash flows, discount rates, 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 Measurement below. If an asset is determined to be impaired, 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 and nine months ended September 30, 2021, the Company recognized aggregate provisions for the impairment of real estate of $3.4 million and $15.4 million, respectively. For the assets impaired in 2021, the estimated fair value of the impaired real estate assets at the time of impairment was $59.2 million. The Company recognized an aggregate provision for the impairment of real estate of $2.0 million and $10.2 million during the three and nine months ended September 30, 2020, respectively.

Accounting for Loans and Financing Receivables

Loans Receivable – Classification, Cost and Revenue Recognition

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.

11

The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received. As of September 30, 2021 and December 31, 2020, the Company had loans receivable with an aggregate outstanding principal balance of $29.0 million and $39.9 million, respectively, on nonaccrual status.

Direct Financing Receivables – Classification, Cost and Revenue Recognition

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.

Impairment and Provision for Credit Losses

Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC Topic 326) which changed how the Company measures credit losses for loans and financing receivables.

In accordance with ASC Topic 326, the Company evaluates the collectibility of its loans and financing receivables at the time each financing receivable is issued and subsequently on a quarterly basis utilizing an expected credit loss model based on credit quality indicators. The primary credit quality indicator is the implied credit rating associated with each borrower, utilizing 2 categories, investment grade and non-investment grade. The Company computes implied credit ratings based on regularly received borrower financial statements using Moody’s Analytics RiskCalc. The Company considers the implied credit ratings, loan and financing receivable term to maturity and underlying collateral value and quality, if any, to calculate the expected credit loss over the remaining life of the receivable. For the nine months ended September 30, 2021, the Company recognized an estimated $2.0 million of provisions for credit losses related to its loans and financing receivables; the provision for credit losses is included in provisions for impairment on the condensed consolidated statements of income.

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. 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.

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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 may include reserve account deposits held by lenders, including deposits required to be used for future investment in real estate assets, escrow deposits and cash proceeds from the sale of assets held by a qualified intermediary to facilitate tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code. The Company had $5.8 million and $10.2 million of restricted cash at September 30, 2021 and December 31, 2020, respectively, which are included in other assets, net, on the consolidated balance sheets.

Deferred Costs

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

Derivative Instruments and Hedging Activities

The Company may enter into 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, 2021, the Company had 0 derivative instruments in place.

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

13

inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1—Quoted market prices in active markets for identical assets and liabilities that the Company has the ability to access.
Level 2—Significant inputs that are observable, either directly or indirectly. These types of inputs would include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets in inactive markets and market-corroborated inputs.
Level 3—Inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. These types of inputs include the Company’s own assumptions.

Share-based Compensation

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

The Company estimates the fair value of RSAs 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, 2021, the Company granted RSAs representing 179,931 shares of restricted common stock to its directors and key employees. During the same period, RSAs representing 228,106 shares of restricted stock vested and RSAs representing 11,029 shares were forfeited. In connection with the vesting of RSAs, the Company repurchased 63,341 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, 2021, the Company had 580,350 shares of restricted common stock outstanding.

The Company’s RSUs granted in 2018 through 2021 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, 2021, the Company awarded 744,840 RSUs to its executive officers, 170,861 RSUs vested and 65,718 previously awarded RSUs were considered not earned. In connection with the vesting of 547,822 RSUs, the Company repurchased 220,057 shares during the nine months ended September 30, 2021 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, 2021, there were 1,806,436 RSUs outstanding.

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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 2017 and tax returns filed for 2018 through 2021 are subject to examination by these jurisdictions. As of September 30, 2021, management concluded that there is 0 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 expense. There was 0 accrual for interest or penalties at September 30, 2021 or December 31, 2020.

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,

 

2021

2020

2021

2020

 

Numerator:

    

    

    

    

    

    

    

    

Net income

$

75,936

$

54,630

$

193,327

$

157,890

Less: earnings attributable to unvested restricted shares

 

(223)

 

(234)

 

(663)

 

(546)

Net income used in basic and diluted income per share

$

75,713

$

54,396

$

192,664

$

157,344

Denominator:

Weighted average common shares outstanding

 

271,859,415

 

255,942,052

 

269,937,837

 

249,479,941

Less: Weighted average number of shares of unvested restricted stock

 

(586,162)

 

(633,863)

(608,696)

 

(480,306)

Weighted average shares outstanding used in basic income per share

 

271,273,253

 

255,308,189

 

269,329,141

 

248,999,635

Effects of dilutive securities:

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

 

 

302,439

 

 

Weighted average shares outstanding used in diluted income per share

 

271,273,253

 

255,610,628

 

269,329,141

 

248,999,635

(a)For the three months ended September 30, 2021 and 2020, excludes 212,808 shares and 127,940 shares and, for the nine months ended September 30, 2021 and 2020, excludes 226,652 and 77,076 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

15

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 March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

3. Investments

At September 30, 2021, STORE Capital had investments in 2,788 property locations representing 2,735 owned properties (of which 53 are accounted for as financing arrangements and 23 are accounted for as direct financing receivables), 24 properties where all the related land is subject to an operating ground lease and 29 properties which secure mortgage loans. The gross investment portfolio totaled $10.36 billion at September 30, 2021 and consisted of the gross acquisition cost of the real estate investments totaling $9.67 billion, loans and financing receivables with an aggregate carrying amount of $649.4 million and operating ground lease assets totaling $33.7 million. As of September 30, 2021, approximately 37% 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 nine months ended September 30, 2021, 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, 2020

 

2,634

$

9,639,766

Acquisition of and additions to real estate (a) (b)

 

229

995,391

Investment in loans and financing receivables (b)

 

7

70,744

Sales of real estate

 

(82)

(261,431)

Principal collections on loans and financing receivables (b)

(56,685)

Net change in operating ground lease assets (c)

(1,030)

Provisions for impairment

(17,350)

Other

(11,477)

Gross investments, September 30, 2021 (d)

 

10,357,928

Less accumulated depreciation and amortization (d)

 

(1,101,376)

Net investments, September 30, 2021

 

2,788

$

9,256,552

(a)Excludes $20.0 million of tenant improvement advances disbursed in 2021 which were accrued as of December 31, 2020 and includes $0.6 million of interest capitalized to properties under construction.
(b)Includes $42.8 million relating to 3 receivables which were repaid in full through a non-cash property acquisition/principal collection transaction in which the Company acquired the underlying collateral property (buildings and improvements); excludes the impact of the change in the presentation for certain financing receivables during the period.
(c)Represents amortization recognized on operating ground lease assets during the nine months ended September 30, 2021.
(d)Includes the dollar amount of investments ($29.4 million) and the accumulated depreciation ($2.8 million) related to real estate investments held for sale at September 30, 2021.

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

Three Months Ended September 30,

Nine Months Ended September 30,

 

    

2021

    

2020

    

2021

    

2020

 

Rental revenues:

    

    

    

    

    

    

Operating leases (a)(c)

$

183,878

$

163,394

$

533,198

$

482,882

Sublease income - operating ground leases (b)

702

496

2,107

1,600

Amortization of lease related intangibles and costs

 

(497)

 

(565)

 

(1,730)

 

(1,813)

Total rental revenues

$

184,083

$

163,325

$

533,575

$

482,669

Interest income on loans and financing receivables:

Mortgage and other loans receivable (c)

$

6,796

$

4,056

$

17,916

$

13,182

Sale-leaseback transactions accounted for as financing arrangements

 

4,459

 

3,940

 

13,019

 

11,329

Direct financing receivables

 

1,718

 

3,025

 

6,261

 

9,863

Total interest income on loans and financing receivables

$

12,973

$

11,021

$

37,196

$

34,374

(a)For the three months ended September 30, 2021 and 2020, includes $681,000 and $618,000, respectively, of property tax tenant reimbursement revenue and includes $3.3 million and $867,000, respectively, of variable lease revenue. For the nine months ended September 30, 2021 and 2020, includes $1.9 million of property tax tenant reimbursement revenue and includes $9.5 million and $1.0 million, respectively, of variable lease revenue.
(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.
(c)For the three and nine months ended September 30, 2021, includes $0.8 million and $5.8 million, respectively, of revenue that has been deferred related to rent and financing relief arrangements granted as a result of the COVID-19 pandemic with a corresponding increase in receivables which are included in other assets, net on the condensed consolidated balance sheet. For the three and nine months ended September 30, 2020, includes $13.0 million and $51.2 million, respectively, of revenue related to COVID-19 rent and financing relief arrangements.

The Company has elected to account for the lease and nonlease components in its lease contracts 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 approximately 540 customers geographically dispersed throughout 49 states. Only 1 state, Texas (11%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at September 30, 2021. NaN of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at September 30, 2021, with the largest customer representing 3.1% of the total investment portfolio. On an annualized basis, as of September 30, 2021, the largest customer also represented 3.1% of the Company’s total investment portfolio revenues and the Company’s customers operated their businesses across approximately 830 concepts; the largest of these concepts represented 2.3% of the Company’s total investment portfolio revenues.

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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, 2021 (dollars in thousands):

    

    

    

Percentage of

 

Number of

Dollar

Total Dollar

 

Investment

Amount of

Amount of

 

Locations

Investments

Investments

 

Restaurants

 

748

$

1,292,551

 

12

Early childhood education centers

 

262

607,089

 

6

Health clubs

 

90

536,197

 

5

Automotive repair and maintenance

 

207

528,672

 

5

Metal fabrication

 

97

500,754

 

5

Furniture stores

59

414,351

4

Farm and ranch supply stores

 

41

377,293

 

4

All other service industries

 

958

3,707,188

 

36

All other retail industries

 

140

1,044,191

 

10

All other manufacturing industries

 

186

1,349,642

 

13

Total (a)

 

2,788

$

10,357,928

 

100

(a)Includes the dollar amount of investments ($29.4 million) related to real estate investments held for sale at September 30, 2021.

Real Estate Investments

The weighted average remaining noncancelable lease term of the Company’s operating leases with its tenants at September 30, 2021 was approximately 13.5 years. Substantially all 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 September 30, 2021, 16 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, 2021, are as follows (in thousands):

Remainder of 2021

$

189,569

2022

780,079

2023

 

776,880

2024

 

768,707

2025

 

764,831

2026

 

757,641

Thereafter

 

6,351,290

Total future minimum rentals (a)

$

10,388,997

(a)Excludes future minimum rentals to be received under lease contracts associated with sale-leaseback transactions accounted for as financing arrangements. See Loans and Financing Receivables section below.

Substantially all the Company’s leases include 1 or more renewal options (generally 2 to 4 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 presented above do not include any contingent rentals such as lease escalations based on future changes in CPI.

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Intangible Lease Assets

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

    

September 30,

    

December 31,

 

2021

2020

In-place leases

$

35,522

$

37,440

Ground lease-related intangibles

 

19,449

 

19,449

Above-market leases

 

 

4,745

Total intangible lease assets

 

54,971

 

61,634

Accumulated amortization

 

(24,449)

 

(27,935)

Net intangible lease assets

$

30,522

$

33,699

Aggregate lease intangible amortization included in expense was $0.9 million and $1.0 million during the three months ended September 30, 2021 and 2020, respectively, and was $2.6 million and $3.1 million during the nine months ended September 30, 2021 and 2020, respectively. The amount amortized as a decrease to rental revenue for capitalized above-market lease intangibles was $0.3 million during the three months ended September 30, 2020, and was $0.2 million and $0.8 million during the nine months ended September 30, 2021 and 2020, respectively.

Based on the net balance of the intangible assets at September 30, 2021, the aggregate amortization expense is expected to be $0.8 million for the remainder of 2021, $3.2 million in 2022, $2.8 million in 2023, $2.3 million in 2024, $1.8 million in 2025 and $1.7 million in 2026. The weighted average remaining amortization period is approximately seven years for the in-place lease intangibles and approximately 43 years for the amortizing ground lease-related intangibles.

Operating Ground Lease Assets

As of September 30, 2021, STORE Capital had operating ground lease assets aggregating $33.7 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. The Company recognized total lease cost for these operating ground lease assets of $830,000 and $609,000 during the three months ended September 30, 2021 and 2020, respectively, and $2.5 million and $1.8 million during the nine months ended September 30, 2021 and 2020, respectively. The Company also recognized, in rental revenues, sublease revenue associated with its operating ground leases of $702,000 and $496,000 for the three months ended September 30, 2021 and 2020, respectively, and $2.1 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively.

The future minimum lease payments to be paid under the operating ground leases as of September 30, 2021 were as follows (in thousands):

    

    

Ground

    

 

Ground

Leases

Leases

Paid by

Paid by

STORE Capital's

STORE Capital

Tenants (a)

Total

 

Remainder of 2021

$

100

$

1,107

$

1,207

2022

401

2,606

3,007

2023

 

4,149

 

2,628

 

6,777

2024

 

55

 

2,709

 

2,764

2025

 

57

 

2,394

 

2,451

2026

 

57

 

2,231

 

2,288

Thereafter

 

3,071

 

44,491

 

47,562

Total lease payments

7,890

58,166

66,056

Less imputed interest

 

(2,988)

 

(28,691)

 

(31,679)

Total operating lease liabilities - ground leases

$

4,902

$

29,475

$

34,377

(a)STORE Capital’s tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. In the event the tenant fails to make the required ground lease payments, the Company would be primarily

19

responsible for the payment, assuming the Company does not re-tenant the property or sell the leasehold interest. Of the total $58.2 million commitment, $19.0 million is due for periods beyond the current term of the Company’s leases with the tenants. Amounts exclude contingent rent due under 3 leases where the ground lease payment, or a portion thereof, is based on the level of the tenant’s sales.

Loans and Financing Receivables

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

Interest

Maturity

September 30,

December 31,

 

Type

Rate (a)

Date

2021

2020

 

NaN mortgage loans receivable

7.97

%  

2021 - 2023

$

94,382

$

101,793

NaN mortgage loans receivable

 

8.55

%  

2032 - 2037

 

14,502

 

14,673

NaN mortgage loans receivable (b)

 

8.60

%  

2051 - 2060

 

214,529

 

185,525

Total mortgage loans receivable

 

323,413

 

301,991

Equipment and other loans receivable

8.21

%  

2021 - 2027

26,644

31,636

Total principal amount outstanding—loans receivable

 

350,057

 

333,627

Unamortized loan origination costs

 

1,005

 

1,206

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

7.84

%  

2034 - 2043

227,666

204,469

Direct financing receivables

 

78,714

 

117,047

Allowance for credit and loan losses (d)

(8,028)

(6,028)

Total loans and financing receivables

$

649,414

$

650,321

(a)Represents the weighted average interest rate as of the balance sheet date.
(b)NaN 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 sale-leaseback transactions accounted for as financing arrangements rather than as investments in real estate subject to operating leases. Interest rate shown is the weighted average initial rental or capitalization rate on the leases; the leases mature between 2034 and 2043 and the purchase options expire between 2024 and 2039.
(d)Balance includes $2.5 million of loan loss reserves recognized prior to December 31, 2019, $2.5 million of credit loss reserves recognized upon the adoption of ASC Topic 326 on January 1, 2020 and $3.0 million of credit losses recognized since the adoption of ASC Topic 326.

Loans Receivable

At September 30, 2021, the Company held 45 loans receivable with an aggregate carrying amount of $344.7 million. NaN of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property; the interest rates on 11 of the mortgage loans are subject to increases over the term of the loans. NaN of the mortgage loans are shorter-term loans (maturing prior to 2024) that generally require monthly interest-only 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 equipment and other loans generally require the borrower to make monthly interest-only payments with a balloon payment at maturity.

20

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 2021

$

842

$

26,136

$

26,978

2022

1,826

9,201

11,027

2023

 

1,786

 

81,631

 

83,417

2024

 

1,857

 

 

1,857

2025

 

1,748

 

510

 

2,258

2026

 

1,794

 

359

 

2,153

Thereafter

 

172,134

 

50,233

 

222,367

Total principal payments

$

181,987

$

168,070

$

350,057

Sale-Leaseback Transactions Accounted for as Financing Arrangements

As of September 30, 2021 and December 31, 2020, the Company had $227.7 million and $204.5 million, respectively, of investments acquired through sale-leaseback transactions accounted for as financing arrangements rather than as investments in real estate subject to an operating lease; revenue from these arrangements is recognized in interest income rather than as rental revenue. The scheduled future minimum rentals to be received under these agreements (which will be reflected in interest income) as of September 30, 2021, were as follows (in thousands):

Remainder of 2021

$

4,610

2022

18,208

2023

 

18,284

2024

 

18,419

2025

 

18,559

2026

 

18,653

Thereafter

 

233,667

Total future scheduled payments

$

330,400

Direct Financing Receivables

As of September 30, 2021 and December 31, 2020, the Company had $78.7 million and $117.0 million, respectively, of investments accounted for as direct financing leases under previous accounting guidance; the components of these investments were as follows (in thousands):

September 30,

    

December 31,

2021

2020

Minimum lease payments receivable

$

161,330

    

$

242,694

Estimated residual value of leased assets

 

8,938

 

14,800

Unearned income

 

(91,554)

 

(140,447)

Net investment

$

78,714

$

117,047

As of September 30, 2021, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $2.0 million for the remainder of 2021, average approximately $7.9 million for each of the next five years and $119.6 million thereafter.

21

Provision for Credit Losses

In accordance with ASC Topic 326, the Company evaluates the collectibility of its loans and financing receivables at the time each financing receivable is issued and subsequently on a quarterly basis utilizing an expected credit loss model based on credit quality indicators. The Company groups individual loans and financing receivables based on the implied credit rating associated with each borrower. Based on credit quality indicators as of September 30, 2021, $97.2 million of loans and financing receivables were categorized as investment grade and $559.2 million were categorized as non-investment grade. During the nine months ended September 30, 2021, there were $2.0 million of provisions for credit losses recognized, 0 write-offs charged against the allowance and 0 recoveries of amounts previously written off.

As of September 30, 2021, the year of origination for loans and financing receivables with a credit quality indicator of investment grade was NaN in 2021 and 2020, $60.2 million in 2019, NaN in 2018, $2.2 million in 2017, and $34.8 million prior to 2017. The year of origination for loans and financing receivables with a credit quality indicator of non-investment grade was $64.8 million in 2021, $137.9 million in 2020, $181.7 million in 2019, $27.5 million in 2018, $10.3 million in 2017 and $137.0 million prior to 2017.

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 June 2021, the Company amended the credit facility; the amended facility has an immediate availability of $600 million and an accordion feature of $1.0 billion, which allows the size of the facility to be increased up to $1.6 billion. The facility matures in June 2025 and includes 2 six-month extension options, subject to certain conditions and the payment of a 0.0625% extension fee. At September 30, 2021, the Company had $109 million of borrowings outstanding on the facility.

Borrowings under the facility require monthly payments of interest at a rate selected by the Company of either (1) LIBOR plus a credit spread ranging from 0.70% to 1.40%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.40%. 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 0.10% to 0.30%. Currently, the applicable credit spread for LIBOR-based borrowings is 0.85% and the facility fee is 0.20%.

Under the terms of the 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 and secured borrowing ratios. Certain of these ratios are based on the Company’s pool of unencumbered assets, which aggregated approximately $6.5 billion at September 30, 2021.

The facility is recourse to the Company and, as of September 30, 2021, the Company was in compliance with the covenants under the facility.

At September 30, 2021 and December 31, 2020, unamortized financing costs related to the Company’s credit facility totaled $4.0 million and $1.1 million, respectively, and are included in other assets, net, on the condensed consolidated balance sheets.

Unsecured Notes and Term Loans Payable, net

In March 2018, February 2019 and November 2020, the Company completed public offerings of $350 million each in aggregate principal amount of ten-year, senior unsecured notes (Public Notes). The Public Notes have coupon rates of 4.50%, 4.625% and 2.75%, respectively, and interest is payable semi-annually in arrears in March and September of each year for the 2018 and 2019 Public Notes and May and November of each year for the 2020 Public Notes. The notes were issued at 99.515%, 99.260% and 99.558%, respectively, of their principal amounts.

22

The supplemental indentures governing the Public Notes contain various restrictive covenants, including limitations on the Company’s ability to incur additional secured and unsecured indebtedness. As of September 30, 2021, 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 indentures governing these notes.

The Company has entered into Note Purchase Agreements (NPAs) with institutional purchasers that provided for the private placement of 3 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, 2021, the Company was in compliance with its covenants under the NPAs.

In April 2016, the Company entered into a $100 million floating-rate, unsecured five-year term loan. The Company repaid the term loan at maturity in April 2021 and the related swap agreements expired.

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

Maturity

Interest

 

September 30,

December 31,

 

Date

Rate

 

2021

2020

 

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

350,000

Public Notes issued February 2019

Mar. 2029

4.625

%  

350,000

350,000

Public Notes issued November 2020

Nov. 2030

2.75

%  

350,000

350,000

Total notes payable

1,425,000

1,425,000

Term Loans:

Term Loan issued April 2016

100,000

Total term loans

100,000

Unamortized discount

(4,430)

(4,867)

Unamortized deferred financing costs

(9,331)

(10,521)

Total unsecured notes and term loans payable, net

$

1,411,239

$

1,509,612

23

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

During 2012, the Company implemented its STORE Master Funding debt program pursuant to which certain of its consolidated special purpose entities issue multiple series of non-recourse net-lease mortgage notes from time to time that are collateralized by the assets and related leases (collateral) owned by these entities. One of the principal features of the program is that, as additional series of notes are issued, new collateral is contributed to the collateral pool, thereby increasing the size and diversity of the collateral pool for the benefit of all noteholders, including those who invested in prior series. Another feature of the program is the ability to substitute collateral from time to time subject to meeting certain prescribed conditions and criteria. The notes issued under this program are generally segregated into Class A amortizing notes and Class B non-amortizing notes. The Company has retained the Class B notes which aggregate $190.0 million at September 30, 2021.

The Class A notes require monthly principal and interest payments with a balloon payment due at maturity and these notes may be prepaid at any time, subject to a yield maintenance prepayment premium if prepaid more than 24 or 36 months prior to maturity. As of September 30, 2021, the aggregate collateral pool securing the net-lease mortgage notes was comprised primarily of single-tenant commercial real estate properties with an aggregate investment amount of approximately $3.5 billion.

In conjunction with the June 2021 issuance of the STORE Master Funding Series 2021-1 notes, the Company prepaid, without penalty, the Series 2013-1, Class A-2 notes in May 2021 and the Series 2013-2, Class A-2 notes in July 2021; these notes had an aggregate outstanding balance of $170.0 million at the time of prepayment, were scheduled to mature in 2023, and bore interest rates of 4.65% and 5.33%, respectively. During the three and nine months ended September 30, 2021, the Company recognized $0.6 million and $1.1 million, respectively, of accelerated amortization of deferred financing costs associated with the Series 2013-1 and Series 2013-2 debt prepayments.

A number of additional consolidated special purpose entity subsidiaries of the Company have financed their real estate properties with traditional first mortgage debt. The notes generally require monthly principal and interest payments with balloon payments due at maturity. In general, these mortgage notes payable can be prepaid in whole or in part upon payment of a yield maintenance premium. The mortgage notes payable are collateralized by real estate properties owned by these consolidated special purpose entity subsidiaries with an aggregate investment amount of approximately $325.4 million at September 30, 2021.

The mortgage notes payable, which are obligations of the consolidated special purpose entities described in Note 2, contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Although this mortgage debt generally is non-recourse, there are customary limited exceptions to recourse for matters such as fraud, misrepresentation, gross negligence or willful misconduct, misapplication of payments, bankruptcy and environmental liabilities. Certain of the mortgage notes payable also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the Company or one of its tenants.

24

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

Maturity

Interest

 

September 30,

December 31,

 

Date

Rate

 

2021

2020

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

    

$102,000 Series 2013-1, Class A-2

 

 

4.65

%  

$

$

87,607

$97,000 Series 2013-2, Class A-2

 

 

5.33

%  

 

 

84,473

$100,000 Series 2013-3, Class A-2

 

Nov. 2023

 

5.21

%  

 

86,209

 

87,775

$140,000 Series 2014-1, Class A-2

 

Apr. 2024

 

5.00

%  

 

134,867

 

135,392

$150,000 Series 2018-1, Class A-1

Oct. 2024

3.96

%  

142,426

143,552

$50,000 Series 2018-1, Class A-3

Oct. 2024

4.40

%  

49,042

49,417

$270,000 Series 2015-1, Class A-2

Apr. 2025

4.17

%  

261,337

262,350

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

Oct. 2026

3.96

%  

181,246

184,350

$82,000 Series 2019-1, Class A-1

Nov. 2026

2.82

%

78,906

80,172

$46,000 Series 2019-1, Class A-3

Nov. 2026

3.32

%

45,578

45,751

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

Apr. 2027

4.32

%  

123,745

125,798

$228,000 Series 2018-1, Class A-2

Oct. 2027

4.29

%  

216,488

218,198

$164,000 Series 2018-1, Class A-4

Oct. 2027

4.74

%  

160,857

162,087

$168,500 Series 2021-1, Class A-1

Jun. 2028

2.12

%  

168,289

$89,000 Series 2021-1, Class A-3

Jun. 2028

2.86

%  

88,889

$168,500 Series 2021-1, Class A-2

Jun. 2033

2.96

%  

168,289

$89,000 Series 2021-1, Class A-4

Jun. 2033

3.70

%  

88,889

$244,000 Series 2019-1, Class A-2

Nov. 2034

3.65

%

234,793

238,559

$136,000 Series 2019-1, Class A-4

Nov. 2034

4.49

%

134,753

135,263

Total non-recourse net-lease mortgage notes

2,364,603

2,040,744

Non-recourse mortgage notes:

$16,100 note issued February 2014

 

 

4.83

%  

 

 

13,539

$13,000 note issued May 2012

 

May 2022

 

5.195

%  

 

10,062

 

10,355

$26,000 note issued August 2012

 

Sept. 2022

 

5.05

%  

 

20,285

 

20,867

$6,400 note issued November 2012

 

Dec. 2022

 

4.707

%  

 

4,988

 

5,133

$11,895 note issued March 2013

 

Apr. 2023

 

4.7315

%  

 

9,400

 

9,666

$17,500 note issued August 2013

 

Sept. 2023

 

5.46

%  

 

14,336

 

14,695

$10,075 note issued March 2014

 

Apr. 2024

 

5.10

%  

 

8,858

 

9,004

$65,000 note issued June 2016

Jul. 2026

4.75

%

59,527

60,409

$41,690 note issued March 2019

Mar. 2029

4.80

%

41,445

41,690

$6,944 notes issued March 2013

 

Apr. 2038

 

4.50

% (a)

 

5,405

 

5,549

$6,350 notes issued March 2019 (assumed in December 2020)

Apr. 2049

4.64

%

6,134

6,215

Total non-recourse mortgage notes

180,440

197,122

Unamortized discount

 

(530)

 

(386)

Unamortized deferred financing costs

(27,377)

 

(24,846)

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

$

2,517,136

$

2,212,634

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

25

Long-term Debt Maturity Schedule

As of September 30, 2021, the scheduled maturities, including balloon payments, on the Company’s aggregate long-term debt obligations are as follows (in thousands):

    

Scheduled

    

    

 

Principal

Balloon

Payments

Payments

Total

 

Remainder of 2021

$

7,563

$

$

7,563

2022

26,661

109,114

135,775

2023

 

25,492

 

103,721

 

129,213

2024

 

22,331

 

426,914

 

449,245

2025

 

20,037

 

256,612

 

276,649

2026

 

17,926

 

532,142

 

550,068

Thereafter

 

40,208

 

2,381,322

 

2,421,530

$

160,218

$

3,809,825

$

3,970,043

5. Stockholders’ Equity

In November 2020, the Company established its fifth “at the market” equity distribution program, or ATM program, pursuant to which, from time to time, it may offer and sell up to $900 million of registered shares of common stock through a group of banks acting as its sales agents (the 2020 ATM Program).

The following tables outline the common stock issuances under the 2020 ATM Program (in millions except share and per share information):

Three Months Ended September 30, 2021

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

534,267

$

35.98

$

19.2

$

(0.3)

$

-

$

18.9

Nine Months Ended September 30, 2021

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

5,665,358

$

33.82

$

191.6

$

(2.9)

$

(0.3)

$

188.4

Inception of Program Through September 30, 2021

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

9,184,418

$

33.17

$

304.6

$

(4.6)

$

(0.5)

$

299.5

6. Commitments and Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Management believes that the final outcome of such matters will not have a material adverse effect on the Company’s financial position or results of operations.

In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties. As of September 30, 2021, the Company had commitments to its customers to fund improvements to owned or mortgaged real estate properties totaling approximately $143.9 million, of which $128.7 million is expected to be funded

26

in the next twelve months. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts.

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

7. Fair Value of Financial Instruments

The Company’s derivatives are required to be measured at fair value in the Company’s consolidated financial statements on a recurring basis. Derivatives are measured under a market approach, using prices obtained from a nationally recognized pricing service and pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy. The fair value of the Company’s derivative instruments was a liability of $0.4 million at December 31, 2020; the Company had 0 derivatives outstanding at September 30, 2021. Derivative liabilities are included in accrued expenses, deferred revenue and other liabilities on the condensed consolidated balance sheets.

In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based on market conditions and perceived risks at September 30, 2021 and December 31, 2020. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

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

The estimated fair values of the Company’s aggregate long-term debt obligations have been derived based on market observable inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 within the fair value hierarchy. At September 30, 2021, these debt obligations had a carrying value of $3,928.4 million and an estimated fair value of $4,243.9 million. At December 31, 2020, these debt obligations had an aggregate carrying value of $3,722.2 million and an estimated fair value of $4,047.6 million.

27

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

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

Special Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-term, triple-net leases of freestanding, single-tenant properties. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this quarterly report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 26, 2021.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this quarterly report. New risks and uncertainties arise over time and it is not possible for us to predict those events or how they may affect us. Many of the risks identified herein and in our periodic reports have been and will continue to be heightened as a result of the ongoing and numerous adverse effects arising from the novel coronavirus (“COVID-19”) pandemic. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

Overview

We were formed in 2011 to invest in and manage Single Tenant Operational Real Estate, or STORE Property, which is our target market and the inspiration for our name. A STORE Property is a property location at which a company operates its business and generates sales and profits, which makes the location a profit center and, therefore, fundamentally important to that business. Due to the long-term nature of our leases, we focus our acquisition activity on properties that operate in industries we believe have long-term relevance, the majority of which are service industries. Our customers operate their businesses under a wide range of brand names or business concepts. As of September 30, 2021, approximately 830 brand names or business concepts in over 100 industries were represented in our investment portfolio. By acquiring the real estate from the operators and then leasing the real estate back to them, the operators become our long-term tenants, and we refer to them as our customers. Through the execution of these sale-leaseback transactions, we fill a need for our customers by providing them a source of long-term capital that enables them to avoid the need to incur debt and/or employ equity in order to finance the real estate that is essential to their business.

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

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

Since our inception in 2011, we have selectively originated over $12.1 billion of real estate investments. As of September 30, 2021, our investment portfolio totaled approximately $10.3 billion, consisting of investments in 2,788

28

property locations across the United States. All the real estate we acquire is held by our wholly owned subsidiaries, many of which are special purpose bankruptcy remote entities formed to facilitate the financing of our real estate. We predominantly acquire our single-tenant properties directly from our customers in sale-leaseback transactions where our customers sell us their operating properties and then simultaneously enter into long-term triple-net leases with us to lease the properties back. Accordingly, our properties are fully occupied and under lease from the moment we acquire them.

We generate our cash from operations primarily through the monthly lease payments, or “base rent”, we receive from our customers under their long-term leases with us. We also receive interest payments on loans receivable, which are a small part of our portfolio. We refer to the monthly scheduled lease and interest payments due from our customers as “base rent and interest”. Most of our leases contain lease escalations every year or every several years that are based on the lesser of the increase in the Consumer Price Index or a stated percentage (if such contracts are expressed on an annual basis, currently averaging approximately 1.8%), which allows the monthly lease payments we receive to increase somewhat in an inflationary economic environment. As of September 30, 2021, approximately 99% of our leases (based on base rent) were “triple-net” leases, which means that our customers are responsible for all the operating costs such as maintenance, insurance and property taxes associated with the properties they lease from us, including any increases in those costs that may occur as a result of inflation. The remaining leases have some landlord responsibilities, generally related to maintenance and structural component replacement that may be required on such properties in the future, although we do not currently anticipate incurring significant capital expenditures or property-level operating costs under such leases. Because our properties are single tenant properties, almost all of which are under long-term leases, it is not necessary for us to perform any significant ongoing leasing activities on our properties. As of September 30, 2021, the weighted average remaining term of our leases (calculated based on base rent) was approximately 13.5 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term. Leases approximating 99% of our base rent as of that date provide for tenant renewal options (generally two to four five-year options) and leases approximating 11% of our base rent provide our tenants the option, at their election, to purchase the property from us at a specified time or times (generally at the greater of the then fair market value or our cost, as defined in the lease contracts).

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

COVID-19 Pandemic

Since early 2020, the world has been impacted by the pandemic. At various times, the COVID-19 pandemic has primarily impacted us through government mandated limits (i.e., required closing or limits on operations and social distancing requirements) imposed on our tenants’ businesses and continuing public perceptions regarding safety, which have impacted certain tenants’ ability to pay their rent to us. In addition, although 99% of our leases are triple net, meaning that our tenants are generally responsible for the property-level operating costs such as taxes, insurance and maintenance, we may be required make the property tax payment on behalf of the tenant if they are unable to do so.

We have worked directly with our impacted tenants during the pandemic to help them continue to meet their rent payment obligations to us, including providing short-term rent deferral arrangements. These arrangements included a structured rent relief program through which we allowed tenants that were highly and adversely impacted by the pandemic to defer the payment of their rent on a short-term basis. During 2020, we recognized net revenue aggregating approximately $57.1 million related to these deferral arrangements and collected $9.9 million in repayments of the amounts deferred. During the nine months ended September 30, 2021, we recognized an additional $5.8 million of net revenue related to deferral arrangements and collected $19.2 million in repayments of amounts deferred. We expect that the majority of our remaining receivable will be collected before the end of 2022.

As government-mandated restrictions have been lifted, our tenants have increased their business activity and their ability to meet their financial obligations to us under their lease contracts. As a result, our rent and interest

29

collections have returned to pre-pandemic levels and, essentially, all of our properties are open for business.

The Company continues to closely watch for unpredictable factors that could impact its business going forward, including the duration of the pandemic; governmental, business and individual actions in response to the pandemic, including the vaccination process (and related government mandates); and the overall impact on broad economic activity.

Liquidity and Capital Resources

As of September 30, 2021, our investment portfolio stood at approximately $10.3 billion, consisting of investments in 2,788 property locations. Substantially all our cash from operations is generated by our investment portfolio.

Our primary cash expenditures are the principal and interest payments we make on the debt we use to finance our real estate investment portfolio and the general and administrative expenses of managing the portfolio and operating our business. Since substantially all our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us. When a property becomes vacant through a tenant default or expiration of the lease term with no tenant renewal, we incur the property costs not paid by the tenant, as well as those property costs accruing during the time it takes to locate a substitute tenant or sell the property. As of September 30, 2021, the weighted average remaining term of our leases was approximately 13.5 years and the contracts related to just 17 properties, representing less than 0.5% of our annual base rent and interest, are due to expire during the remainder of 2021; more than 80% of our leases have ten years or more remaining in their base lease term. As of September 30, 2021, 16 of our 2,788 properties were vacant and not subject to a lease, which represents a 99.4% occupancy rate. We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations or may be unable to pay such costs in a timely manner. Property costs are generally not significant to our operations, but the amount of property costs can vary quarter to quarter based on the timing of property vacancies and the level of underperforming properties. We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations.

We intend to continue to grow through additional real estate investments. To accomplish this objective, we must continue to identify real estate acquisitions that are consistent with our underwriting guidelines and raise future additional capital to make such acquisitions. We acquire real estate with a combination of debt and equity capital, proceeds from the sale of properties and cash from operations that is not otherwise distributed to our stockholders in the form of dividends. When we sell properties, we generally reinvest the cash proceeds from those sales in new property acquisitions. We also periodically commit to fund the construction of new properties for our customers or to provide them funds to improve and/or renovate properties we lease to them. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts. As of September 30, 2021, we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately $143.9 million, the majority of which is expected to be funded in the next twelve months.

Financing Strategy

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

30

properties) and our annual debt maturities; we have no significant debt maturities until 2024.

As of September 30, 2021, all our long-term debt was fixed rate debt and our weighted average debt maturity was 6.7 years. As part of our long-term debt strategy, we develop and maintain broad access to multiple debt sources. We believe that having access to multiple debt markets increases our financing flexibility because different debt markets may attract different kinds of investors, thus expanding our access to a larger pool of potential debt investors. Also, a particular debt market may be more competitive than another at any particular point in time.

The long-term debt we have issued to date is comprised of both secured non-recourse borrowings, the vast majority of which is investment-grade rated, and senior investment-grade unsecured borrowings. We are currently rated Baa2, BBB and BBB by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, respectively. In October 2021, S&P Global Ratings raised its outlook on the Company to positive from stable and affirmed its BBB issuer credit rating. In conjunction with our investment-grade debt strategy, we target a level of debt net of cash and cash equivalents that approximates 5½ to 6 times our estimated annualized amount of earnings (excluding gains or losses on sales of real estate and provisions for impairment) before interest, taxes, depreciation and amortization (based on our current investment portfolio). Our leverage, expressed as the ratio of debt (net of cash and cash equivalents) to the cost of our investment portfolio, was approximately 39% at September 30, 2021.

Our secured non-recourse borrowings are obtained through multiple debt markets – primarily the asset-backed securities debt market. The vast majority of our secured non-recourse borrowings were made through an investment-grade-rated debt program we designed, which we call our Master Funding debt program. By design, this program provides flexibility not commonly found in most secured non-recourse debt and which is described in Non-recourse Secured Debt below. To a lesser extent, we may also obtain fixed-rate non-recourse mortgage financing through the commercial mortgage-backed securities debt market or from banks and insurance companies secured by specific properties we pledge as collateral.

Our goal is to employ a prudent blend of secured non-recourse debt through our flexible Master Funding debt program, paired with senior unsecured debt that uses our investment grade credit ratings. By balancing the mix of secured and unsecured debt, we can effectively leverage those properties subject to the secured debt in the range of 60%-70% and, at the same time, target a more conservative level of overall corporate leverage by maintaining a large pool of properties that are unencumbered. As of September 30, 2021, our secured non-recourse borrowings had a loan-to-cost ratio of approximately 67% and approximately 37% of our investment portfolio serves as collateral for this long-term debt. The remaining 63% of our portfolio properties, aggregating approximately $6.5 billion at September 30, 2021, are unencumbered and this unencumbered pool of properties provides us the flexibility to access long-term unsecured borrowings. The result is that our growing unencumbered pool of properties can provide higher levels of debt service coverage on the senior unsecured debt than would be the case if we employed only unsecured debt at our overall corporate leverage level. We believe this debt strategy can lead to a lower cost of capital for the Company, especially as we can issue AAA rated debt from our Master Funding debt program, as described further below.

The availability of debt to finance commercial real estate in the United States can, at times, be impacted by economic and other factors that are beyond our control. An example of adverse economic factors occurred during the recession of 2007 to 2009 when availability of debt capital for commercial real estate was significantly curtailed. We seek to reduce the risk that long-term debt capital may be unavailable to us by maintaining the flexibility to issue long-term debt in multiple debt capital markets, both secured and unsecured, and by limiting the period between the time we acquire our real estate and the time we finance our real estate with long-term debt. In addition, we have arranged our unsecured revolving credit facility to have a multi-year term with extension options in order to reduce the risk that short term real estate financing would not be available to us. As we continue to grow our real estate portfolio, we also intend to continue to manage our debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. Because our long-term secured debt generally requires monthly payments of principal, in addition to the monthly interest payments, the resulting principal amortization also reduces our refinancing risk upon maturity of the debt. As our outstanding debt matures, we may refinance the maturing debt as it comes due or choose to repay it using cash and cash equivalents or our unsecured revolving credit facility. For example, as part of our third issuance of senior unsecured public notes in November 2020, we prepaid, without penalty, $92.3 million of STORE Master Funding Series 2015-1 Class A-1 notes and one of our $100 million bank term loans. Similar to these prepayment transactions, we may prepay other existing long-term debt in circumstances where we believe it would be economically advantageous to do so.

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Unsecured Revolving Credit Facility

Typically, we use our $600 million unsecured revolving credit facility to acquire our real estate properties, until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds from which we use to repay the amounts outstanding under our revolving credit facility. As of September 30, 2021, we had $109.0 million outstanding under our unsecured revolving credit facility.

In June 2021, we recast this unsecured revolving credit facility to increase the accordion feature from $800 million to $1.0 billion, which now gives us a maximum borrowing capacity of $1.6 billion. The amended facility matures in June 2025 and includes two six-month extension options, subject to certain conditions. Borrowings under the facility require monthly payments of interest at a rate selected by us of either (1) LIBOR plus a credit spread ranging from 0.70% to 1.40%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.40%. The credit spread used is based on our credit rating as defined in the credit agreement. We are also required to pay a facility fee on the total commitment amount ranging from 0.10% to 0.30%. The amendment reduced the currently applicable credit spread for LIBOR-based borrowings by 15 basis points to 0.85% and the facility fee is 0.20%. The amended credit agreement does allow for a further reduction in the pricing for LIBOR-based borrowings if certain environmental sustainability metrics are met.

Under the terms of the facility, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios and secured borrowing ratios. Certain of these ratios are based on our pool of unencumbered assets, which aggregated approximately $6.5 billion at September 30, 2021. The facility is recourse to us and, as of September 30, 2021, we were in compliance with the financial and nonfinancial covenants under the facility.

Senior Unsecured Term Debt

In November 2020, we completed our third issuance of underwritten public notes in an aggregate principal amount of $350.0 million and, as of September 30, 2021, we had an aggregate principal amount of $1.05 billion of underwritten public notes outstanding. These senior unsecured notes bear a weighted average coupon rate of 3.96% and interest on these notes is paid semi-annually. The supplemental indentures governing our public notes contain various restrictive covenants, including limitations on our ability to incur additional secured and unsecured indebtedness. As of September 30, 2021 we were in compliance with these covenants. Prior to our inaugural issuance of public debt in March 2018, our unsecured long-term debt had been issued through the private placement of notes to institutional investors and through groups of lenders who also participate in our unsecured revolving credit facility; the financial covenants of the privately placed notes are similar to our unsecured revolving credit facility. We repaid our remaining $100 million bank term loan in April 2021 at its maturity and the related interest rate swap agreements expired. The aggregate outstanding principal amount of our unsecured senior notes and term loans payable was $1.4 billion as of September 30, 2021.

Non-recourse Secured Debt

As of September 30, 2021, approximately 34% of our real estate investment portfolio served as collateral for outstanding borrowings under our STORE Master Funding debt program. We believe our STORE Master Funding program allows for flexibility not commonly found in non-recourse debt, often making it preferable to traditional debt issued in the commercial mortgage-backed securities market. Under the program, STORE serves as both master and special servicer for the collateral pool, allowing for active portfolio monitoring and prompt issue resolution. In addition, features of the program allowing for the sale or substitution of collateral, provided certain criteria are met, facilitate active portfolio management. Through this debt program, we arrange for bankruptcy remote, special purpose entity subsidiaries to issue multiple series of investment grade asset backed net lease mortgage notes, or ABS notes, from time to time as additional collateral is added to the collateral pool and leverage can be added in incremental note issuances based on the value of the collateral pool.

The ABS notes are generally issued by our wholly owned special purpose entity subsidiaries to institutional investors through the asset backed securities market. These ABS notes are typically issued in two classes, Class A and Class B. At the time of issuance, the Class A notes represent approximately 70% of the appraised value of the underlying

32

real estate collateral owned by the issuing subsidiaries and are currently rated AAA or A+ by S&P Global Ratings. The Series 2018-1 transaction in October 2018 marked our inaugural issuance of AAA rated notes and our Series 2019-1 transaction in November 2019 marked our first issuance of 15-year notes. We believe these two precedent transactions both broadened the market for our STORE Master Funding debt program and gave us access to lower cost secured debt. In late June 2021, our consolidated special purpose entities issued the tenth series, Series 2021-1, of net lease mortgage notes under the STORE Master Funding debt program consisting of $515 million of notes issued in four Class A tranches as summarized below:

Note Class

Rating (a)

Amount
(in millions)

    

Coupon Rate

Term

    

Maturity Date

Class A-1

AAA

$

168.5

2.12

%

7 years

June 2028

Class A-2

AAA

168.5

2.96

%

12 years

June 2033

Class A-3

A+

89.0

2.86

%

7 years

June 2028

Class A-4

A+

89.0

3.70

%

12 years

June 2033

Total / Weighted Average Coupon Rate

$

515.0

2.80

%

(a)By S&P Global Ratings.

The Series 2021-1 transaction served to further our belief that the market for the STORE Master Funding program is broadening. In conjunction with this transaction, we prepaid, without penalty, $86.7 million of STORE Master Funding Series 2013-1, Class A-2 notes in May 2021 and $83.3 million of Series 2013-2, Class A-2 notes in July 2021. These two prepaid note classes bore a weighted average interest rate of 4.98%. A portion of the net proceeds from the issuance were also used to pay down balances on our revolving credit facility with the remainder representing new incremental term borrowings.

The Class B notes, which are subordinated to the Class A notes as to principal repayment, represent approximately 5% of the appraised value of the underlying real estate collateral and are currently rated BBB by S&P Global Ratings. As of September 30, 2021, there was an aggregate $190.0 million in principal amount of Class B notes outstanding. We have historically retained these Class B notes and they are held by one of our bankruptcy remote, special purpose entity subsidiaries. The Class B notes are not reflected in our financial statements because they eliminate in consolidation. Since the Class B notes are considered issued and outstanding, they provide us with additional financial flexibility in that we may sell them to a third party in the future or use them as collateral for short term borrowings as we have done from time to time in the past.

The ABS notes outstanding at September 30, 2021 totaled $2.4 billion in Class A principal amount and were supported by a collateral pool of approximately $3.5 billion representing 1,138 property locations operated by 211 customers. The amount of debt that can be issued in any new series is determined by the structure of the transaction and the aggregate amount of collateral in the pool at the time of issuance. In addition, the issuance of each new series of notes is subject to the satisfaction of several conditions, including that there is no event of default on the existing note series and that the issuance will not result in an event of default on, or the credit rating downgrade of, the existing note series.

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A significant portion of our cash flow is generated by the special purpose entities comprising our STORE Master Funding debt program. For the nine months ended September 30, 2021, excess cash flow, after payment of debt service and servicing and trustee expenses, totaled $97 million on cash collections of $197 million, which represents an overall ratio of cash collections to debt service, or debt service coverage ratio (as defined in the program documents), of greater than 1.9 to 1 on the STORE Master Funding program. If at any time the debt service coverage ratio generated by the collateral pool is less than 1.3 to 1, excess cash flow from the STORE Master Funding entities will be deposited into a reserve account to be used for payments to be made on the net lease mortgage notes, to the extent there is a shortfall. We currently expect to remain above program minimum debt service coverage ratios for the foreseeable future.

To a lesser extent, we also may obtain debt in discrete transactions through other bankruptcy remote, special purpose entity subsidiaries, which debt is solely secured by specific real estate assets and is generally non-recourse to us (subject to certain customary limited exceptions). These discrete borrowings are generally in the form of traditional mortgage notes payable, with principal and interest payments due monthly and balloon payments due at their respective maturity dates, which typically range from seven to ten years from the date of issuance. Our secured borrowings contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Certain of the notes also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the special purpose entity or the tenant.

Debt Summary

As of September 30, 2021, our aggregate secured and unsecured long-term debt had an outstanding principal balance of $4.0 billion, a weighted average maturity of 6.7 years and a weighted average interest rate of 4.05%. The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as of September 30, 2021:

Gross Investment Portfolio Assets

 

Special Purpose

 

Outstanding

Entity

All Other

 

(In millions)

Borrowings

Subsidiaries

Subsidiaries

Total

 

STORE Master Funding net-lease mortgage notes payable

    

$

2,365

    

$

3,490

    

$

    

$

3,490

Other mortgage notes payable

 

180

 

325

 

 

325

Total non-recourse debt

 

2,545

 

3,815

 

 

3,815

Unsecured notes and term loans payable

1,425

Unsecured credit facility

109

Total unsecured debt (including revolving credit facility)

1,534

Unencumbered real estate assets

 

 

5,216

 

1,327

 

6,543

Total debt

$

4,079

$

9,031

$

1,327

$

10,358

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

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Equity

We access the equity markets in various ways. As part of these efforts, we have established “at the market” equity distribution programs, or ATM programs, pursuant to which, from time to time, we may offer and sell registered shares of our common stock through a group of banks acting as our sales agents. Most recently, in November 2020, we established a $900 million ATM program (the 2020 ATM Program).

The following tables outline the common stock issuances under the 2020 ATM Program (in millions except share and per share information):

Three Months Ended September 30, 2021

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

534,267

$

35.98

$

19.2

$

(0.3)

$

-

$

18.9

Nine Months Ended September 30, 2021

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

5,665,358

$

33.82

$

191.6

$

(2.9)

$

(0.3)

$

188.4

Inception of Program Through September 30, 2021

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

9,184,418

$

33.17

$

304.6

$

(4.6)

$

(0.5)

$

299.5

Cash Flows

Substantially all our cash from operations is generated by our investment portfolio. As shown in the following table, net cash provided by operating activities for the nine months ended September 30, 2021 increased by $116.1 million over the same period in 2020, primarily as a result of the increase in the size of our real estate investment portfolio, which generated additional rental revenue and interest income as well as the impact of the higher level of rent deferral arrangements granted to tenants in 2020 versus 2021. Our investments in real estate, loans and financing receivables during the first nine months of 2021 were $393.1 million more than the same period in 2020. We intentionally reduced our investment activity in early 2020 due to the volatility in the capital markets stemming from the pandemic. During the nine months ended September 30, 2021, our investment activity was primarily funded with a combination of cash from operations, proceeds from the sale of real estate properties, proceeds from the issuance of stock, proceeds from the issuance of long-term debt in June 2021 and borrowings on our revolving credit facility. Investment activity during the same period in 2020 was primarily funded with a combination of cash from operations, proceeds from the issuance of stock and proceeds from the sale of real estate properties. Net cash provided by financing activities was lower for the nine months ended September 30, 2021 as compared to the same period in 2020. Financing activities in 2021 include the proceeds from the issuance of the Series 2021-1 notes under our Master Funding debt program offset by the repayment of our last $100 million bank term loan and two tranches of Master Funding notes in May and July of 2021; the increased level of long-term debt issuance activities in 2021 were more than offset by higher stock issuance activities in 2020. We paid dividends to our stockholders totaling $293.2 million and $259.1 million during the first nine months of 2021 and 2020, respectively; we increased our quarterly dividend in the third quarter of 2021 by 6.9% to an annualized $1.54 per common share.

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Nine Months Ended September 30,

(In thousands)

2021

2020

Net cash provided by operating activities

    

$

414,778

    

$

298,652

   

Net cash used in investing activities

 

(739,397)

 

(497,998)

Net cash provided by financing activities

 

190,886

 

249,447

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

(133,733)

50,101

Cash, cash equivalents and restricted cash, beginning of period

 

176,576

 

111,381

Cash, cash equivalents and restricted cash, end of period

$

42,843

$

161,482

As of September 30, 2021, we had liquidity of $37.0 million on our balance sheet. Management believes that our current cash balance, the nearly $500.0 million of immediate borrowing capacity available on our unsecured revolving credit facility, the cash generated by our operations as well as the $1.0 billion of liquidity available to us under the accordion feature of our recently amended credit facility, is more than sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we currently have made commitments. In order to continue to grow our real estate portfolio in the future beyond the excess cash generated by our operations and our ability to borrow, we would expect to raise additional equity capital through the sale of our common stock.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of September 30, 2021.

Contractual Obligations

As summarized in the table of Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2020, we have contractual obligations related to our unsecured revolving credit facility and long-term debt obligations, interest on those debt obligations, commitments to our customers to fund improvements to real estate properties and operating lease obligations under certain ground leases and our corporate office lease. As disclosed in Liquidity and Capital Resources, during the nine months ended September 30, 2021, certain of our consolidated special purpose entity subsidiaries issued $515 million in aggregate principal amount of non-recourse net-lease mortgage notes. The issuance included equal amounts of seven- and twelve-year notes that bear a weighted average interest rate of 2.80%; in conjunction with this note issuance, we also prepaid, without penalty, $86.7 million in May 2021 and $83.3 million in July 2021 of previously issued non-recourse net lease mortgage notes which bore a weighted average interest rate of 4.98% and were scheduled to mature in 2023.

Recently Issued Accounting Pronouncements

See Note 2 to the September 30, 2021 unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our condensed consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Real Estate Portfolio Information

As of September 30, 2021, our total investment in real estate and loans approximated $10.3 billion, representing investments in 2,788 property locations, substantially all of which are profit centers for our customers. These investments generate cash flows from approximately 760 contracts predominantly structured as net leases. The weighted average non-cancellable remaining term of our leases was approximately 13.5 years.

Our real estate portfolio is highly diversified. As of September 30, 2021, our 2,788 property locations were operated by 538 customers across the United States. Our customers are typically established regional and national operators, with over 70% of our base rent and interest coming from customers with over $50 million in annual revenues. Our largest customer represented approximately 3.1% of our portfolio at September 30, 2021, and our top ten largest customers represented 18.7% of base rent and interest. Our customers operate their businesses across approximately 830 brand names or business concepts in over 100 industries. The largest of the business concepts represented 2.3% of our base rent and interest as of September 30, 2021 and approximately 85% of the concepts represented less than 1% of base rent and interest.

The following tables summarize the diversification of our real estate portfolio based on the percentage of base rent and interest, annualized based on rates in effect on September 30, 2021, for all of our leases, loans and financing receivables in place as of that date.

Diversification by Customer

As of September 30, 2021, our property locations were operated by 538 customers and the following table identifies our ten largest customers:

    

% of

    

 

Base Rent

Number

 

and

of

 

Customer

Interest

Properties

 

LBM Acquisition, LLC (Building materials distribution)

3.1

%

156

Spring Education Group Inc. (Stratford School/Nobel Learning Communities)

2.9

27

Fleet Farm Group LLC

2.3

9

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

2.0

65

Dufresne Spencer Group Holdings, LLC (Ashley Furniture HomeStore)

1.6

25

CWGS Group, LLC (Camping World/Gander Outdoors)

 

1.5

 

20

Great Outdoors Group, LLC (Cabela's)

 

1.4

9

American Multi-Cinema, Inc.

 

1.4

 

14

Zips Holdings, LLC

1.3

43

At Home Stores LLC

1.2

11

All other (528 customers)

 

81.3

 

2,409

Total

 

100.0

%

2,788

37

Diversification by Industry

As of September 30, 2021, our customers’ business concepts were diversified across more than 100 industries within the service, retail and manufacturing sectors of the U.S. economy. The following table summarizes those industries into 80 industry groups:

    

    

    

 

% of

Building

 

Base Rent

Number

Square

 

and

of

Footage 

 

Customer Industry Group

Interest

Properties

(in thousands)

 

Service:

Restaurants—full service

 

7.1

%  

348

 

2,411

Restaurants—limited service

 

5.3

400

 

1,290

Early childhood education centers

 

6.3

262

 

2,756

Automotive repair and maintenance

 

5.2

207

 

1,115

Health clubs

 

5.2

90

 

3,085

Pet care facilities

 

3.5

183

 

1,732

Lumber & construction materials wholesalers

3.5

167

6,865

Movie theaters

 

3.4

36

 

1,790

Behavioral health facilities

3.3

79

1,441

All other service (30 industry groups)

 

23.0

493

 

23,939

Total service

 

65.8

2,265

 

46,424

Retail:

Total retail (18 industry groups)

 

15.2

240

13,675

Total retail

 

15.2

240

 

13,675

Manufacturing:

Metal fabrication

5.2

97

11,965

All other manufacturing (22 industry groups)

13.8

186

24,049

Total manufacturing

 

19.0

283

 

36,014

Total

 

100.0

%  

2,788

 

96,113

Diversification by Geography

Our portfolio is also highly diversified by geography, as our property locations can be found in every state except Hawaii. The following table details the top ten geographical locations of the properties as of September 30, 2021:

% of

 

Base Rent

 

and

Number of

 

State

Interest 

Properties

 

Texas

    

11.2

%   

333

California

 

6.1

80

Illinois

 

5.9

177

Georgia

 

5.5

161

Florida

 

5.2

155

Ohio

5.2

142

Wisconsin

 

5.1

77

Arizona

 

4.6

92

Tennessee

 

3.5

115

Minnesota

 

3.4

87

All other (39 states) (1)

 

44.3

1,369

Total

 

100.0

%  

2,788

(1)Includes one property in Ontario, Canada which represents less than 0.1% of base rent and interest.

38

Contract Expirations

The following table sets forth the schedule of our lease, loan and financing receivable expirations as of September 30, 2021:

    

% of

    

 

Base Rent

 

and

Number of

 

Year of Lease Expiration or Loan Maturity (1)

Interest

Properties (2)

 

Remainder of 2021

0.4

%

17

2022

0.3

10

2023

 

1.1

10

2024

 

0.6

22

2025

 

1.1

24

2026

 

1.4

51

2027

 

1.8

53

2028

 

3.1

67

2029

 

5.5

168

2030

 

3.7

147

Thereafter

 

81.0

2,203

Total

 

100.0

%  

2,772

(1)Expiration year of contracts in place as of September 30, 2021 and excludes any tenant option renewal periods.
(2)Excludes 16 properties that were vacant and not subject to a lease as of September 30, 2021.

Results of Operations

Overview

As of September 30, 2021, our real estate investment portfolio had grown to approximately $10.3 billion, consisting of investments in 2,788 property locations in 49 states, operated by more than 535 customers in various industries. Approximately 94% of the real estate investment portfolio represents commercial real estate properties subject to long-term leases, approximately 6% represents mortgage loan and financing receivables on commercial real estate properties and a nominal amount represents loans receivable secured by our tenants’ other assets.

39

Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

Three Months Ended

Nine Months Ended

 

September 30,

Increase

September 30,

Increase

 

(In thousands)

2021

 

2020

 

(Decrease)

 

2021

 

2020

 

(Decrease)

Total revenues

$

199,125

    

$

175,223

    

$

23,902

    

$

573,432

    

$

521,400

    

$

52,032

Expenses:

Interest

 

43,367

 

42,090

 

1,277

 

126,904

 

127,816

 

(912)

Property costs

 

4,267

 

3,309

 

958

 

14,098

 

14,603

 

(505)

General and administrative

 

17,456

 

14,729

 

2,727

 

58,551

 

35,742

 

22,809

Depreciation and amortization

 

67,123

 

61,119

 

6,004

 

195,725

 

180,753

 

14,972

Provisions for impairment

3,400

 

2,772

628

17,350

10,972

6,378

Total expenses

 

135,613

 

124,019

 

11,594

 

412,628

 

369,886

 

42,742

Other income:

Net gain on dispositions of real estate

 

10,721

 

3,537

 

7,184

 

32,271

 

6,814

 

25,457

Income from non-real estate, equity method investment

1,872

1,872

804

804

Income before income taxes

76,105

54,741

21,364

193,879

158,328

35,551

Income tax expense

 

169

 

111

 

58

 

552

 

438

 

114

Net income

$

75,936

$

54,630

$

21,306

$

193,327

$

157,890

$

35,437

Revenues

The increase in revenues period over period was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues and interest income. Our real estate investment portfolio grew from approximately $9.3 billion in gross investment amount representing 2,587 properties as of September 30, 2020 to approximately $10.3 billion in gross investment amount representing 2,788 properties at September 30, 2021. The weighted average real estate investment amounts outstanding during the three-month periods were approximately $10.1 billion in 2021 and $9.2 billion in 2020. During the nine-month periods, the weighted average real estate investment amounts were approximately $9.9 billion in 2021 and $9.1 billion in 2020. Our real estate investments were made throughout the periods presented and were not all outstanding for the entire period; accordingly, a portion of the increase in revenues between periods is related to recognizing a full year of revenue in 2021 on acquisitions that were made during 2020. Similarly, the full revenue impact of acquisitions made during 2021 will not be seen until the fourth quarter of 2021 and into 2022. A smaller component of the increase in revenues between periods is related to rent escalations recognized on our lease contracts; over time, these rent increases can provide a strong source of revenue growth. During both the three and nine months ended September 30, 2021, we collected $1.8 million in early lease termination fees which are included in other income. Similarly, during the three and nine months ended September 30, 2020, we recognized $0.4 million and $2.8 million of lease termination fee income.

As previously noted, we worked directly with certain of our tenants during the pandemic to help them continue to meet their rent payment obligations to us, including providing short-term rent deferral arrangements, which allowed tenants that were highly and adversely impacted by the pandemic to defer the payment of their rent on a short-term basis.. As restrictions have been lifted and impacted tenants have increased their business activities, our monthly rent and interest collections have increased and deferrals have significantly decreased. During the three and nine months ended September 30, 2021, we recognized net revenue aggregating approximately $0.8 million and $5.8 million, respectively, related to deferral arrangements. We collected $8.0 million and $19.2 million of deferred revenue-related receivables during the three and nine months ended September 30, 2021, respectively. We expect that the majority of our remaining receivable will be collected before the end of 2022.

The majority of our investments are made through sale-leaseback transactions in which we acquire the real estate from the owner-operators and then simultaneously lease the real estate back to them through long-term leases based on the tenant’s business needs. The initial rental or capitalization rates we achieve on sale-leaseback transactions,

40

calculated as the initial annualized base rent divided by the purchase price of the properties, vary from transaction to transaction based on many factors, such as the terms of the lease, the property type including the property’s real estate fundamentals and the market rents in the area on the various types of properties we target across the United States. There are also online commercial real estate auction marketplaces for real estate transactions; properties acquired through these online marketplaces are often subject to existing leases and offered by third party sellers. In general, because we provide tailored customer lease solutions in sale-leaseback transactions, our lease rates historically have been higher and subject to less short-term market influences than what we have seen in the auction marketplace as a whole. In addition, since our real estate lease contracts are a substitute for both borrowings and equity that our customers would otherwise have to commit to their real estate locations, we believe there is a relationship between lease rates and market interest rates and that lease rates are also influenced by overall capital availability. Due to the market disruption occurring as a result of the pandemic, the weighted average lease rate attained on our new investments was 8.3% during the three months ended September 30, 2020 as compared to 7.4% for the same period in 2021. For the nine months ended September 30, 2021 and 2020, the weighted average lease rate attained on our new investments was approximately 7.7% and 8.1%, respectively. We are seeing some capitalization rate compression across the industry and we currently estimate that the weighted average lease rates that we are able to attain may continue to compress as we move through the end of 2021 and into 2022.

Interest Expense

We fund the growth in our real estate investment portfolio with excess cash flow from our operations after dividends and principal payments on debt, net proceeds from periodic sales of real estate, net proceeds from equity issuances and proceeds from issuances of long-term fixed-rate debt. We typically use our unsecured revolving credit facility to temporarily finance the properties we acquire.

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

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

(Dollars in thousands)

2021

 

2020

 

2021

 

2020

 

Interest expense - credit facility

$

9

    

$

1,208

    

$

339

    

$

4,420

Interest expense - credit facility fees

306

307

910

913

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

 

40,545

 

38,668

 

118,868

 

116,673

Capitalized interest

(191)

(175)

(609)

(500)

Amortization of deferred financing costs and other

 

2,698

 

2,082

 

7,396

 

6,310

Total interest expense

$

43,367

$

42,090

$

126,904

$

127,816

Credit facility:

Average debt outstanding

$

1,348

$

347,011

$

40,674

$

334,398

Average interest rate during the period (excluding facility fees)

 

2.7

 

1.4

 

1.1

 

1.8

Long-term debt (secured and unsecured):

Average debt outstanding

$

3,991,406

$

3,612,270

$

3,792,619

$

3,621,185

Average interest rate during the period

 

4.1

 

4.3

 

4.2

 

4.3

Average outstanding long-term debt was slightly higher for both the three and nine month periods ended September 30, 2021 as compared to the same periods in 2020; as a result of the timing of our new debt and repayment transactions, we also had slightly higher levels of interest expense on long-term debt for both the three and nine month periods. Long-term debt added after September 30, 2020 primarily consisted of $350 million of 2.75% senior unsecured notes issued in November 2020 and $515.0 million of STORE Master Funding Series 2021-1 notes, which bear a weighted average interest rate of 2.80%, issued in late June 2021. Long-term debt repaid in full, without penalties, since September 30, 2020 included both of our $100 million bank term loans, $92.3 million of STORE Master Funding Series 2015-1 Class A-1 notes in late 2020, $86.7 million of STORE Master Funding Series 2013-1 Class A-2 notes in May 2021 and $83.3 million of Series 2013-2, Class A-2 notes in July 2021. As a result of STORE Master Funding debt prepayments, we recognized $0.6 million and $1.1 million of accelerated amortization of deferred financing costs during

41

the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, we had $4.0 billion of long-term debt outstanding with a weighted average interest rate of just over 4.0%.

We typically use our revolving credit facility on a short-term, temporary basis to acquire real estate properties until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds of which we generally use to pay down the amounts outstanding under our revolving credit facility. Interest expense associated with our revolving credit facility decreased from 2020 when we had the full amount outstanding on the revolver during a large portion of the year. In June 2021, we amended our revolving credit agreement which included a reduction of 15 basis points on the LIBOR-based borrowings made on the facility. As of September 30, 2021, we had $109.0 million of borrowings outstanding under our revolving credit facility.

Property Costs

Approximately 99% of our leases are triple net, meaning that our tenants are generally responsible for the property-level operating costs such as taxes, insurance and maintenance. Accordingly, we generally do not expect to incur property-level operating costs or capital expenditures, except during any period when one or more of our properties is no longer under lease or when our tenant is unable to meet their lease obligations. Our need to expend capital on our properties is further reduced due to the fact that some of our tenants will periodically refresh the property at their own expense to meet their business needs or in connection with franchisor requirements. As of September 30, 2021, we owned 16 properties that were vacant and not subject to a lease and the lease contracts related to just 13 properties we own are due to expire during the remainder of 2021. We expect to incur some property costs related to the vacant properties until such time as those properties are either leased or sold. The amount of property costs can vary quarter to quarter based on the timing of property vacancies and the level of underperforming properties.

As of September 30, 2021, we had entered into operating ground leases as part of several real estate investment transactions. The ground lease payments made by our tenants directly to the ground lessors are presented on a gross basis in the condensed consolidated statement of income, both as rental revenues and as property costs. For the few lease contracts where we collect property taxes from our tenants and remit those taxes to governmental authorities, we reflect those payments on a gross basis as both rental revenue and as property costs.

The following is a summary of property costs (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

 

2021

2020

2021

2020

 

Property-level operating costs (a)

$

2,639

$

1,964

$

9,370

$

10,606

Ground lease-related intangibles amortization expense

117

118

351

352

Operating ground lease payments made by STORE Capital

108

100

    

287

121

Operating ground lease payments made by STORE Capital tenants

510

344

1,543

1,156

Operating ground lease straight-line rent expense

212

165

621

481

Property taxes payable from tenant impounds

 

681

 

618

 

1,926

 

1,887

Total property costs

$

4,267

$

3,309

$

14,098

$

14,603

(a)Property-level operating costs primarily include those expenses associated with vacant or nonperforming properties, property management costs for the few properties that have specific landlord obligations and the cost of performing property site inspections from time to time.

42

General and Administrative Expenses

General and administrative expenses include compensation and benefits; professional fees such as portfolio servicing, legal, accounting and rating agency fees; and general office expenses such as insurance, office rent and travel costs. General and administrative costs totaled $17.5 million and $58.6 million for the three and nine months ended September 30, 2021 as compared to $14.7 million and $35.7 million for the same periods in 2020. Expenses for the three and nine months ended September 30, 2020 included approximately $2.0 million of executive severance costs. However, excluding noncash stock-based compensation expense from both periods and executive severance from 2020, general and administrative expenses were consistent at 0.43% of average portfolio investment assets for both the three months ended September 30, 2021 and 2020; for the nine month periods, general and administrative expenses excluding noncash stock-based compensation expense and executive severance was 0.46% of average portfolio investment assets in 2021 as compared to 0.47% in 2020.

General and administrative expenses for the first nine months of 2020 were less than expected due to the reversal, in the first quarter, of $6.7 million of previously recognized stock-based compensation expense. The reversal derecognized all prior period expense recorded for certain performance-based restricted stock unit awards (RSUs) granted in 2018 and 2019 that were not expected to vest as the achievement of the performance metrics related to the compound annual growth rate of AFFO per share was deemed not probable at that point in time and previously recognized expense was required to be reversed or derecognized.

General and administrative expenses for the first nine months of 2021 included a cumulative catch-up adjustment of $10.1 million of noncash stock-based compensation expense recognized in the first quarter related to 1) the reinstatement of expense derecognized in the first quarter of 2020, plus 2) the expense related to 2020 and the first quarter of 2021 as a portion of the related performance-based RSUs granted in 2018 and 2019 were now expected to vest.

We expect that general and administrative expenses will continue to rise in some measure as our real estate investment portfolio grows. Certain expenses, such as property related insurance costs and the costs of servicing the properties and loans comprising our real estate portfolio, increase in direct proportion to the increase in the size of the portfolio. However, general and administrative expenses as a percentage of the portfolio have decreased over time due to efficiencies and economies of scale. Expenses also included amounts related to staff additions; our employee base grew from 103 employees on September 30, 2020 to 117 employees as of September 30, 2021.

Depreciation and Amortization Expense

Depreciation and amortization expense, which increases in proportion to the increase in the size of our real estate portfolio, rose from $61.1 million and $180.8 million for the three and nine months ended September 30, 2020 to $67.1 million and $195.7 million for the comparable periods in 2021.

Provisions for Impairment

During the three and nine months ended September 30, 2021, we recognized $3.4 million and $15.4 million, respectively, in provisions for the impairment of real estate and, during the nine months ended September 30, 2021, recognized $2.0 million in provisions for credit losses related to our loans and financing receivables. We recognized $2.0 million and $10.2 million in provisions for the impairment of real estate during the three and nine months ended September 30, 2020, respectively, and recognized $0.8 million in provisions for credit losses during both the three and nine months ended September 30, 2020.

43

Net Gain on Dispositions of Real Estate

As part of our ongoing active portfolio management process, we sell properties from time to time in order to enhance the diversity and quality of our real estate portfolio and to take advantage of opportunities to recycle capital. During the three months ended September 30, 2021, we recognized a $10.7 million aggregate net gain on the sale of 25 properties. In comparison, for the three months ended September 30, 2020, we recognized a $3.5 million aggregate net gain on the sale of 18 properties. For the nine months ended September 30, 2021, we recognized a $32.3 million aggregate net gain on the sale of 82 properties as compared to an aggregate net gain of $6.8 million on the sale of 43 properties in 2020.

Net Income

For the three and nine months ended September 30, 2021, our net income was $75.9 million and $193.3 million, respectively, reflecting increases from $54.6 million and $157.9 million, respectively, for the comparable periods in 2020. The change in net income is primarily comprised of a net increase resulting from the growth in our real estate investment portfolio, which generated additional rental revenues and interest income, and an increased net gain on dispositions of real estate offset by increases in general and administrative and depreciation and amortization expenses as noted above.

Non-GAAP Measures

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

We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as GAAP net income, excluding gains (or losses) from extraordinary items and sales of depreciable property, real estate impairment losses, and depreciation and amortization expense from real estate assets, including the pro rata share of such adjustments of unconsolidated subsidiaries.

To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to certain revenues and expenses that have no impact on our long-term operating performance, such as straight-line rents, amortization of deferred financing costs and stock-based compensation. In addition, in deriving AFFO, we exclude certain other costs not related to our ongoing operations, such as the amortization of lease-related intangibles.

FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains (or losses) on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. Management believes that AFFO provides more useful information to investors and analysts because it modifies FFO to exclude certain additional revenues and expenses such as straight-line rents, including construction period rent deferrals, and the amortization of deferred financing costs, stock-based compensation and lease-related intangibles as such items have no impact on long-term operating performance. As a result, we believe AFFO to be a more meaningful measurement of ongoing performance that allows for greater performance comparability. Therefore, we disclose both

44

FFO and AFFO and reconcile them to the most appropriate GAAP performance metric, which is net income. STORE Capital’s FFO and AFFO may not be comparable to similarly titled measures employed by other companies.

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

 

2021

 

2020

 

2021

 

2020

Net Income

    

$

75,936

    

$

54,630

    

$

193,327

    

$

157,890

Depreciation and amortization of real estate assets

67,061

 

61,051

195,542

180,528

Provision for impairment of real estate

3,400

2,000

15,350

10,200

Net gain on dispositions of real estate

 

(10,721)

 

(3,537)

 

(32,271)

(6,814)

Funds from Operations (a)

 

135,676

 

114,144

 

371,948

 

341,804

Adjustments:

Straight-line rental revenue:

Fixed rent escalations accrued

 

(2,277)

 

(3,354)

 

(6,256)

(7,278)

Construction period rent deferrals

980

 

466

 

2,717

1,402

Amortization of:

Equity-based compensation

 

6,467

 

2,744

 

24,161

1,645

Deferred financing costs and other (b)

2,698

2,082

7,396

6,310

Lease-related intangibles and costs

 

626

 

769

 

2,413

2,298

Provision for loan losses

772

2,000

772

Lease termination fees

(1,785)

(350)

(1,785)

(587)

Capitalized interest

(191)

(175)

(609)

(500)

Income from non-real estate, equity method investment

(1,872)

(804)

Executive severance costs

1,980

1,980

Adjusted Funds from Operations (a)

$

140,322

$

119,078

$

401,181

$

347,846

(a)FFO and AFFO for the three and nine months ended September 30, 2021, include approximately $0.8 million and $5.8 million, respectively, of net revenue that is subject to the short-term deferral arrangements entered into in response to the COVID-19 pandemic; the Company accounts for these deferral arrangements as rental revenue and a corresponding increase in receivables, which are included in other assets, net on the condensed consolidated balance sheet. For the three and nine months ended September 30, 2021, FFO and AFFO exclude $8.0  million and $19.2 million, respectively, collected under these short-term deferral arrangements. For the three and nine months ended September 30, 2020, FFO and AFFO include approximately $13.0 million and $51.2 million, respectively, of net revenue subject to the short-term deferral arrangements and for both the three and nine months ended September 30, 2020, FFO and AFFO exclude $1.3 million collected under these short-term deferral arrangements.
(b)For the three and nine months ended September 30, 2021, includes $0.6 million and $1.1 million, respectively, of accelerated amortization of deferred financing costs related to the prepayment of debt.

45

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our interest rate risk management objective is to limit the impact of future interest rate changes on our earnings and cash flows. We seek to match the cash inflows from our long-term leases with the expected cash outflows on our long-term debt. To achieve this objective, our consolidated subsidiaries primarily borrow on a fixed-rate basis for longer-term debt issuances. At September 30, 2021, all our long-term debt carried a fixed interest rate and the weighted average debt maturity was approximately 6.7 years. We are exposed to interest rate risk between the time we enter into a sale-leaseback transaction and the time we finance the related real estate with long-term fixed-rate debt. In addition, when that long-term debt matures, we may have to refinance the real estate at a higher interest rate. Market interest rates are sensitive to many factors that are beyond our control.

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

We seek to minimize the time period between acquisition of our real estate and the ultimate financing of that real estate with long-term fixed-rate debt.
By using serial issuances of long-term debt, we intend to ladder out our debt maturities to avoid a significant amount of debt maturing during any single period and to minimize the gap between free cash flow and annual debt maturities; free cash flow includes cash from operations less dividends plus proceeds from our sales of properties.
Our secured long-term debt generally provides for some amortization of the principal balance over the term of the debt, which serves to reduce the amount of refinancing risk at debt maturity to the extent that we can refinance the reduced debt balance over a revised long-term amortization schedule.
We seek to maintain a large pool of unencumbered real estate assets to give us the flexibility to choose among various secured and unsecured debt markets when we are seeking to issue new long-term debt.
We may also use derivative instruments, such as interest rate swaps, caps and treasury lock agreements, as cash flow hedges to limit our exposure to interest rate movements with respect to various debt instruments.

In July 2017, the Financial Conduct Authority, or FCA (the authority that regulates LIBOR), first announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR. Subsequently, the Alternative Reference Rates Committee, or ARRC, identified the Secured Overnight Financing Rate, or SOFR, as the preferred alternative to LIBOR for use in derivatives and other financial contracts. On March 5, 2021, the FCA announced that U.S. Dollar (USD) LIBOR will no longer be published after June 30, 2023. This latest announcement has several implications, including setting the spread that may be used to automatically convert contracts from USD LIBOR to SOFR. Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021.

The Company anticipates that LIBOR will continue to be available at least until June 30, 2023. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

At September 30, 2021, the Company’s $600 million unsecured revolving credit facility, which matures in June 2025, is its only contract indexed to LIBOR; as a result, during the recent amendment of this credit facility, alternative reference rate transition language was added to the credit agreement in anticipation of the LIBOR transition. While we expect LIBOR to be available in substantially its current form until June 30, 2023, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the transition to an alternative reference rate could be accelerated.

See our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities. As of September 30, 2021, our market risk has not changed materially from the amounts

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reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness as of September 30, 2021 of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors as disclosed in the section entitled “Risk Factors” beginning on page 13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and filed with the Securities and Exchange Commission on February 26, 2021.

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

During the three months ended September 30, 2021, we did not repurchase any of our equity securities nor did we sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

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Item 6. Exhibits

Exhibit

Description

Location

31.1

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

Filed herewith.

31.2

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

Filed herewith.

32.1

Section 1350 Certification of the Chief Executive Officer.

Furnished herewith.

32.2

Section 1350 Certification of the Chief Financial Officer.

Furnished herewith.

101.INS

Inline XBRL Instance Document – the instance does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Filed herewith.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

Filed herewith.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Filed herewith.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

Filed herewith.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

Filed herewith.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

Filed herewith.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

Filed herewith.

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SIGNATURE

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

STORE CAPITAL CORPORATION

(Registrant)

Date: November 5, 2021

By:

/s/ Catherine Long

Catherine Long

Executive Vice PresidentChief Financial Officer, Treasurer and Assistant Secretary

(Principal Financial Officer)

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