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STORE CAPITAL LLC - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

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 2, 2022, there were 282,685,797 shares of the registrant’s $0.01 par value common stock outstanding.

Table of Contents

TABLE OF CONTENTS

Part I. - FINANCIAL INFORMATION

Page

Item 1. Financial Statements

3

Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited)
and December 31, 2021

3

Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2022 and 2021 (unaudited)

4

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended
September 30, 2022 and 2021 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

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

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

Item 4. Controls and Procedures

47

Part II. - OTHER INFORMATION

47

Item 1. Legal Proceedings

47

Item 1A. Risk Factors

47

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

49

Item 3. Defaults Upon Senior Securities

49

Item 4. Mine Safety Disclosures

49

Item 5. Other Information

49

Item 6. Exhibits

50

Signatures

51

2

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

September 30,

    

December 31,

 

 

2022

2021

 

 

(unaudited)

(audited)

 

Assets

Investments:

Real estate investments:

Land and improvements

$

3,375,710

$

3,133,402

Buildings and improvements

 

7,479,704

 

6,802,918

Intangible lease assets

 

61,968

 

54,971

Total real estate investments

 

10,917,382

 

9,991,291

Less accumulated depreciation and amortization

 

(1,360,599)

 

(1,159,292)

 

9,556,783

 

8,831,999

Real estate investments held for sale, net

 

 

25,154

Operating ground lease assets

32,239

33,318

Loans and financing receivables, net

 

721,209

 

697,269

Net investments

 

10,310,231

 

9,587,740

Cash and cash equivalents

 

46,979

 

64,269

Other assets, net

 

148,771

 

121,073

Total assets

$

10,505,981

$

9,773,082

Liabilities and stockholders’ equity

Liabilities:

Credit facility

$

223,000

$

130,000

Unsecured notes and term loans payable, net

2,381,962

1,782,813

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

 

2,243,167

 

2,425,708

Dividends payable

115,901

105,415

Operating lease liabilities

37,764

37,637

Accrued expenses, deferred revenue and other liabilities

 

159,776

 

147,380

Total liabilities

 

5,161,570

 

4,628,953

Stockholders’ equity:

Common stock, $0.01 par value per share, 375,000,000 shares authorized, 282,686,330 and 273,806,225 shares issued and outstanding, respectively

 

2,827

 

2,738

Capital in excess of par value

 

6,000,122

 

5,745,692

Distributions in excess of retained earnings

 

(690,260)

 

(602,137)

Accumulated other comprehensive income (loss)

 

31,722

 

(2,164)

Total stockholders’ equity

 

5,344,411

 

5,144,129

Total liabilities and stockholders’ equity

$

10,505,981

$

9,773,082

See accompanying notes.

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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,

 

    

2022

    

2021

    

2022

    

2021

 

Revenues:

    

    

    

    

Rental revenues

$

216,852

$

184,083

$

628,907

$

533,575

Interest income on loans and financing receivables

 

13,409

 

12,973

 

41,378

 

37,196

Other income

 

295

 

2,069

 

6,159

 

2,661

Total revenues

 

230,556

 

199,125

 

676,444

 

573,432

Expenses:

Interest

 

48,519

 

43,367

 

138,426

 

126,904

Property costs

 

4,360

 

4,267

 

10,915

 

14,098

General and administrative

 

13,427

 

17,456

 

46,381

 

58,551

Merger-related

8,014

8,014

Depreciation and amortization

 

78,985

 

67,123

 

227,641

 

195,725

Provisions for impairment

6,750

3,400

12,962

17,350

Total expenses

 

160,055

 

135,613

 

444,339

 

412,628

Other income:

(Loss) gain on dispositions of real estate

 

(2,719)

 

10,721

 

17,013

 

32,271

Income (loss) from non-real estate, equity method investments

985

1,872

(2,347)

804

Income before income taxes

68,767

76,105

246,771

193,879

Income tax expense

 

182

 

169

 

659

 

552

Net income

$

68,585

$

75,936

$

246,112

$

193,327

Net income per share of common stock

Basic

$

0.24

$

0.28

$

0.88

$

0.72

Diluted

$

0.24

$

0.28

$

0.88

$

0.72

Weighted average common shares outstanding:

Basic

 

282,238,151

 

271,273,253

 

279,386,773

 

269,329,141

Diluted

 

282,238,151

 

271,273,253

 

279,386,773

 

269,329,141

See accompanying notes.

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STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

 

2022

2021

2022

2021

 

Net income

    

$

68,585

    

$

75,936

    

$

246,112

    

$

193,327

Other comprehensive income (loss):

Unrealized gains (losses) on cash flow hedges

 

26,803

 

 

31,145

 

(3)

Cash flow hedge losses reclassified to interest expense

 

857

 

61

 

2,741

 

572

Total other comprehensive income

 

27,660

 

61

 

33,886

 

569

Total comprehensive income

$

96,245

$

75,997

$

279,998

$

193,896

See accompanying notes.

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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

Income (Loss)

Equity

 

Three Months Ended September 30, 2022

Balance at June 30, 2022

 

282,688,860

$

2,827

$

5,997,378

$

(642,945)

$

4,062

$

5,361,322

Net income

 

68,585

 

68,585

Other comprehensive income

 

27,660

 

27,660

Common stock issuance costs

 

(28)

 

(28)

Equity-based compensation

 

(2,530)

2,772

2

 

2,774

Shares repurchased under stock compensation plan

Common dividends declared ($0.41 per share)

(115,902)

(115,902)

Balance at September 30, 2022

 

282,686,330

$

2,827

$

6,000,122

$

(690,260)

$

31,722

$

5,344,411

Nine Months Ended September 30, 2022

Balance at December 31, 2021

 

273,806,225

$

2,738

$

5,745,692

$

(602,137)

$

(2,164)

$

5,144,129

Net income

 

246,112

 

246,112

Other comprehensive income

 

33,886

 

33,886

Issuance of common stock, net of costs of $3,296

 

8,607,771

86

249,492

 

249,578

Equity-based compensation

 

475,130

3

9,245

110

 

9,358

Shares repurchased under stock compensation plan

(202,796)

(4,307)

(1,964)

(6,271)

Common dividends declared ($1.18 per share) and dividend equivalents on restricted stock units

 

(332,381)

 

(332,381)

Balance at September 30, 2022

 

282,686,330

$

2,827

$

6,000,122

$

(690,260)

$

31,722

$

5,344,411

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

See accompanying notes.

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STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

Nine Months Ended September 30,

 

2022

2021

 

Operating activities

    

    

    

Net income

$

246,112

$

193,327

Adjustments to net income:

Depreciation and amortization

 

227,641

195,725

Amortization of deferred financing costs and other noncash interest expense

 

7,357

7,396

Amortization of equity-based compensation

 

9,249

24,161

Provisions for impairment

12,962

17,350

Net gain on dispositions of real estate

 

(17,013)

(32,271)

Loss (income) from non-real estate, equity method investments

2,347

(804)

Distribution received from non-real estate, equity method investment

468

Noncash revenue and other

 

(4,305)

(6,931)

Changes in operating assets and liabilities:

Other assets

9,344

15,821

Accrued expenses, deferred revenue and other liabilities

 

7,284

1,004

Net cash provided by operating activities

 

501,446

 

414,778

Investing activities

Acquisition of and additions to real estate

 

(1,097,538)

(953,453)

Investment in loans and financing receivables

 

(78,834)

(70,744)

Collections of principal on loans and financing receivables

 

54,616

13,903

Proceeds from dispositions of real estate

 

177,494

270,897

Contribution made to non-real estate, equity method investment

(468)

Net cash used in investing activities

 

(944,730)

 

(739,397)

Financing activities

Borrowings under credit facility

 

724,000

416,000

Repayments under credit facility

 

(631,000)

(307,000)

Borrowings under unsecured notes and term loans payable

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

 

(186,791)

(207,823)

Financing costs paid

 

(3,024)

(10,872)

Proceeds from the issuance of common stock

 

252,873

191,595

Stock issuance costs paid

(3,296)

(3,272)

Shares repurchased under stock compensation plans

(6,271)

(9,345)

Dividends paid

(323,166)

(293,182)

Net cash provided by financing activities

 

423,325

 

190,886

Net decrease in cash, cash equivalents and restricted cash

 

(19,959)

 

(133,733)

Cash, cash equivalents and restricted cash, beginning of period

 

70,049

 

176,576

Cash, cash equivalents and restricted cash, end of period

$

50,090

$

42,843

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents

$

46,979

$

37,018

Restricted cash included in other assets

3,111

5,825

Total cash, cash equivalents and restricted cash

$

50,090

$

42,843

Supplemental disclosure of noncash investing and financing activities:

Accrued tenant improvements included in real estate investments

$

22,773

$

18,428

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

8,945

42,782

Accrued financing and stock issuance costs

66

101

Supplemental disclosure of cash flow information:

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

$

127,903

$

120,575

Cash paid during the period for income and franchise taxes

2,572

2,134

See accompanying notes.

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STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2022

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.

Pending Merger Transaction with Affiliates of GIC and Oak Street, a Division of Blue Owl

As previously announced, on September 15, 2022, the Company, Ivory Parent, LLC, a Delaware limited liability company (“Parent”), and Ivory REIT, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Parent Parties”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Merger Sub (the “Merger”). Upon completion of the Merger, Merger Sub will survive and the separate existence of the Company will cease. The Merger and the other transactions contemplated by the Merger Agreement were unanimously approved and declared advisable by the board of directors of the Company (the “Company Board”). The Parent Parties are, as of the date hereof, affiliates of GIC, a global institutional investor, and will be, as of the date on which the closing of the Merger occurs, affiliates of GIC and funds managed or advised by Oak Street Real Estate Capital, a division of Blue Owl Capital, Inc. (collectively, the “Sponsors”).

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of Company common stock will be automatically cancelled and converted into the right to receive an amount in cash equal to $32.25 (the “Merger Consideration”), without interest. Except for the payment of its regular quarterly dividend per share of Company common stock for the fiscal quarter ended September 30, 2022 in an amount of $0.41 per share, which was paid on October 17, 2022 to stockholders of record as of September 30, 2022, during the term of the Merger Agreement, the Company may not pay dividends, except as necessary to preserve its tax status as a real estate investment trust; provided that any such dividends would result in an offsetting decrease to the Merger Consideration.

The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to conduct business in the ordinary course consistent with past practice in all material respects, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the transaction. The Merger Agreement is subject to certain closing conditions, including the approval of the transaction by an affirmative vote of the holders of at least a majority of the outstanding shares of the Company’s common stock entitled to vote thereon and, with respect to the Parent’s obligation to consummate the Merger, the clearance by the Committee on Foreign Investment in the United States of the Merger and the transactions contemplated by the Merger Agreement. The obligations of the parties to consummate the Merger are not subject to any financing condition. Subject to the satisfaction or waiver of such closing conditions, the transaction is expected to close during the first quarter of 2023.

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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, 2021.

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, 2022 and December 31, 2021, these special purpose entities held assets totaling $9.2 billion and $8.5 billion, respectively, and had third-party liabilities totaling $2.4 billion and $2.6 billion, respectively. These assets and liabilities are included in the accompanying condensed consolidated balance sheets.

Use of Estimates

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

Segment Reporting

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

Investment Portfolio

STORE Capital invests in real estate assets through three primary transaction types as summarized below. 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-

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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, 2022, the Company recognized an additional $1.0 million and $2.0 million, respectively, of net revenue and collected $4.6 million and $11.8 million, respectively, of the receivables associated with these deferral arrangements. During the three and nine months ended September 30, 2021, the Company recognized $0.8 million and $5.8 million, respectively, of net revenue and collected $8.0 million and $19.2 million, respectively, in repayments of amounts deferred.

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,

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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, 2022 and December 31, 2021, the Company had $45.2 million and $39.4 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 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. Approximately 3.3% of the Company’s investment portfolio is subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales; historically, contingent rent recognized has 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

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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, capitalization and discount rates, terminal value, tenant improvements, 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, 2022, the Company recognized aggregate provisions for the impairment of real estate of $6.8 million and $13.3 million, respectively. For the assets impaired in 2022, the estimated aggregate fair value of the impaired real estate assets at the time of impairment was $59.0 million. The Company recognized an aggregate provision for the impairment of real estate of $3.4 million and $15.4 million during the three and nine months ended September 30, 2021, 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.

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, 2022 and December 31, 2021, the Company had loans receivable with an aggregate outstanding principal balance of $21.9 million and $28.8 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

The Company accounts for provision of credit losses in accordance with ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC Topic 326”). 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

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based on credit quality indicators. The primary credit quality indicator is the implied credit rating associated with each borrower, utilizing two 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. Loans are written off against the allowance for credit loss when all or a portion of the principal amount is determined to be uncollectible. For the nine months ended September 30, 2022, the Company recognized an estimated $0.3 million net reduction of prior provisions for credit losses related to its loans and financing receivables; the reduction of the provision for credit losses is included in provisions for impairment on the condensed consolidated statements of income. During the nine months ended September 30, 2022, the Company wrote off $3.7 million of loans receivable against previously established reserves for credit losses. For the nine months ended September 30, 2021, the Company recognized an estimated $2.0 million of provisions for credit losses.

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.

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 $3.1 million and $5.8 million of restricted cash at September 30, 2022 and December 31, 2021, respectively, which are included in other assets, net, on the condensed consolidated balance sheets.

Deferred Costs

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

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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 are 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, 2022, the Company had seven interest rate swap agreements in place. One of the interest rate swap agreements has a notional amount of $200.0 million and was designated as a cash flow hedge of the Company's $200.0 million floating-rate bank term loan due in April 2029. The remaining six interest rate swap agreements have an aggregate notional amount of $400.0 million and were designated as cash flow hedges of the Company's $400.0 million floating-rate bank term loan due in April 2027 (Note 4).

Fair Value Measurement

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

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

Share-based Compensation

Directors and 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

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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, 2022, the Company granted RSAs representing 233,147 shares of restricted common stock to its directors and employees. During the same period, RSAs representing 166,770 shares of restricted stock vested and RSAs representing 55,622 shares were forfeited. In connection with the vesting of RSAs, the Company repurchased 82,321 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, 2022, the Company had 448,179 shares of restricted common stock outstanding.

The Company’s RSUs granted in 2019 through 2022 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, 2022, the Company awarded 629,307 RSUs to its executive officers. In connection with the vesting of 297,605 RSUs, the Company repurchased 120,475 shares during the nine months ended September 30, 2022 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, 2022, there were 1,635,061 RSUs outstanding.

Pursuant to the Merger Agreement, the Company is restricted from issuing equity awards.

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 2018 and tax returns filed for 2019 through 2021 are subject to examination by these jurisdictions. As of September 30, 2022, management concluded that there is no tax liability relating to uncertain income tax positions. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as general and administrative expense. There was no accrual for interest or penalties at September 30, 2022 or December 31, 2021.

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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,

 

2022

2021

2022

2021

 

Numerator:

    

    

    

    

    

    

    

    

Net income

$

68,585

$

75,936

$

246,112

$

193,327

Less: Earnings attributable to unvested restricted shares

 

(182)

 

(223)

 

(431)

 

(663)

Net income used in basic and diluted income per share

$

68,403

$

75,713

$

245,681

$

192,664

Denominator:

Weighted average common shares outstanding

 

282,687,462

 

271,859,415

 

279,842,522

 

269,937,837

Less: Weighted average number of shares of unvested restricted stock

 

(449,311)

 

(586,162)

(455,749)

 

(608,696)

Weighted average shares outstanding used in basic income per share

 

282,238,151

 

271,273,253

 

279,386,773

 

269,329,141

Effects of dilutive securities:

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

 

 

 

 

Weighted average shares outstanding used in diluted income per share

 

282,238,151

 

271,273,253

 

279,386,773

 

269,329,141

(a)For the three months ended September 30, 2022 and 2021, excludes 86,461 shares and 212,808 shares, respectively, and for the nine months ended September 30, 2022 and 2021, excludes 103,300 shares and 226,652 shares, respectively, related to unvested restricted shares as the effect would have been antidilutive.

Recent Accounting Pronouncements

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

In 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, 2022, STORE Capital had investments in 3,035 property locations representing 2,983 owned properties (of which 93 are accounted for as financing arrangements and 22 are accounted for as direct financing

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receivables), 24 properties where all the related land is subject to an operating ground lease and 28 properties which secure mortgage loans. The gross investment portfolio totaled $11.67 billion at September 30, 2022 and consisted of the gross acquisition cost of the real estate investments totaling $10.9 billion, loans and financing receivables with an aggregate carrying amount of $721.2 million and operating ground lease assets totaling $32.2 million. As of September 30, 2022, approximately 33% 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, 2022, 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, 2021

 

2,866

$

10,748,937

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

 

203

1,110,338

Investment in loans and financing receivables

 

20

78,834

Sales of real estate

 

(51)

(179,788)

Principal collections on loans and financing receivables (b)

(3)

(63,562)

Net change in operating ground lease assets (c)

(1,079)

Provisions for impairment

(12,962)

Other

(9,888)

Gross investments, September 30, 2022

 

11,670,830

Less accumulated depreciation and amortization

 

(1,360,599)

Net investments, September 30, 2022

 

3,035

$

10,310,231

(a)Excludes $20.1 million of tenant improvement advances disbursed in 2022 which were accrued as of December 31, 2021.
(b)Includes $8.9 million relating to a mortgage loan receivable which was repaid in full through a non-cash transaction in which the Company acquired the underlying collateral property (buildings and improvements) and leased them back to a customer.
(c)Represents amortization recognized on operating ground lease assets during the nine months ended September 30, 2022.

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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,

 

    

2022

    

2021

    

2022

    

2021

 

Rental revenues:

    

    

    

    

    

    

Operating leases (a)(c)

$

216,698

$

183,878

$

628,472

$

533,198

Sublease income - operating ground leases (b)

702

702

2,108

2,107

Amortization of lease related intangibles and costs

 

(548)

 

(497)

 

(1,673)

 

(1,730)

Total rental revenues

$

216,852

$

184,083

$

628,907

$

533,575

Interest income on loans and financing receivables:

Mortgage and other loans receivable (c)

$

5,842

$

6,796

$

19,598

$

17,916

Sale-leaseback transactions accounted for as financing arrangements

 

6,183

 

4,459

 

17,196

 

13,019

Direct financing receivables

 

1,384

 

1,718

 

4,584

 

6,261

Total interest income on loans and financing receivables

$

13,409

$

12,973

$

41,378

$

37,196

(a)For the three months ended September 30, 2022 and 2021, includes $709,000 and $681,000, respectively, of property tax tenant reimbursement revenue and includes $0.1 million and $3.3 million, respectively, of variable lease revenue. For the nine months ended September 30, 2022 and 2021, includes $2.1 million and $1.9 million, respectively, of property tax reimbursement revenue and includes $0.9 million and $9.5 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, 2022, includes $1.0 million and $2.0 million, respectively, of revenue that has been recognized 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 sheets. For the three and nine months ended September 30, 2021, includes $0.8 million and $5.8 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 579 customers geographically dispersed throughout 49 states. Only one state, Texas (11%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at September 30, 2022. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at September 30, 2022, with the largest customer representing 2.8% of the total investment portfolio. On an annualized basis, as of September 30, 2022, the largest customer represented 2.9% of the Company’s total investment portfolio revenues and the Company’s customers operated their businesses across approximately 925 concepts; the largest of these concepts represented 2.1% 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, 2022 (dollars in thousands):

    

    

    

Percentage of

 

Number of

Dollar

Total Dollar

 

Investment

Amount of

Amount of

 

Locations

Investments

Investments

 

Restaurants

 

746

$

1,302,375

 

11

Automotive repair and maintenance

 

259

681,427

 

6

Metal fabrication

 

117

675,150

 

6

Early childhood education centers

 

285

659,356

 

6

Health clubs

 

93

595,030

 

5

Furniture stores

64

421,958

3

Farm and ranch supply stores

 

41

377,293

 

3

All other service industries

 

1,052

4,105,417

 

35

All other retail industries

 

154

1,133,172

 

10

All other manufacturing industries

 

224

1,719,652

 

15

Total

 

3,035

$

11,670,830

 

100

Real Estate Investments

The weighted average remaining noncancelable lease term of the Company’s operating leases with its tenants at September 30, 2022 was approximately 13.2 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, 2022, 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, 2022, are as follows (in thousands):

Remainder of 2022

$

218,538

2023

877,300

2024

 

870,528

2025

 

866,956

2026

 

860,649

2027

848,841

Thereafter

 

6,975,473

Total future minimum rentals (a)

$

11,518,285

(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 one or more renewal options (generally two to four five-year options). Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum lease payments 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,

 

2022

2021

In-place leases

$

42,519

$

35,522

Ground lease-related intangibles

 

19,449

 

19,449

Total intangible lease assets

 

61,968

 

54,971

Accumulated amortization

 

(26,323)

 

(25,285)

Net intangible lease assets

$

35,645

$

29,686

Aggregate lease intangible amortization included in expense was $1.0 million and $0.9 million during the three months ended September 30, 2022 and 2021, respectively, and $2.7 million and $2.6 million during the nine months ended September 30, 2022 and 2021, respectively. The amount amortized as a decrease to rental revenue for capitalized above-market lease intangibles was $0.2 million during the nine months ended September 30, 2021.

Based on the balance of the intangible assets at September 30, 2022, the aggregate amortization expense is expected to be $1.0 million for the remainder of 2022, $3.5 million in 2023, $3.0 million in 2024, $2.5 million in 2025, $2.3 million in 2026 and $2.2 million in 2027. The weighted average remaining amortization period is approximately 10 years for the in-place lease intangibles and approximately 42 years for the amortizing ground lease-related intangibles.

Operating Ground Lease Assets

As of September 30, 2022, STORE Capital had operating ground lease assets aggregating $32.2 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 $856,000 and $830,000 during the three months ended September 30, 2022 and 2021, respectively, and $2.4 million and $2.5 million during the nine months ended September 30, 2022 and 2021, respectively. The Company also recognized, in rental revenues, sublease revenue associated with its operating ground leases of $702,000 for both the three months ended September 30, 2022 and 2021 and $2.1 million for both the nine months ended September 30, 2022 and 2021.

The future minimum lease payments to be paid under the operating ground leases as of September 30, 2022 were as follows (in thousands):

    

    

Ground

    

 

Ground

Leases

Leases

Paid by

Paid by

STORE Capital's

STORE Capital

Tenants (a)

Total

 

Remainder of 2022

$

100

$

1,059

$

1,159

2023

4,149

2,629

6,778

2024

 

55

 

2,711

 

2,766

2025

 

57

 

2,395

 

2,452

2026

 

57

 

2,233

 

2,290

2027

57

2,227

2,284

Thereafter

 

3,014

 

42,282

 

45,296

Total lease payments

7,489

55,536

63,025

Less imputed interest

 

(2,728)

 

(27,101)

 

(29,829)

Total operating lease liabilities - ground leases

$

4,761

$

28,435

$

33,196

(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 responsible for the payment, assuming the Company does not re-tenant the property or sell the leasehold interest. Of the total $55.5 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 three leases where the ground lease payment, or a portion thereof, is based on the level of the tenant’s sales.

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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

2022

2021

 

Six mortgage loans receivable

7.98

%  

2022 - 2026

$

114,336

$

114,911

Three mortgage loans receivable

 

8.83

%  

2032 - 2036

 

11,664

 

14,444

Fourteen mortgage loans receivable (b)

 

8.53

%  

2051 - 2062

 

189,081

 

216,547

Total mortgage loans receivable

 

315,081

 

345,902

Equipment and other loans receivable

7.35

%  

2022 - 2036

16,816

25,409

Total principal amount outstanding—loans receivable

 

331,897

 

371,311

Unamortized loan origination costs

 

946

 

1,046

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

7.52

%  

2034 - 2043

332,644

255,483

Direct financing receivables

 

60,981

 

78,637

Allowance for credit and loan losses (d)

(5,259)

(9,208)

Total loans and financing receivables

$

721,209

$

697,269

(a)Represents the weighted average interest rate as of the balance sheet date.
(b)Four of these mortgage loans allow for prepayment in whole, but not in part, with penalties ranging from 20% to 70% depending on the timing of the prepayment.
(c)In accordance with ASC Topic 842, represents 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 2042.
(d)Balance includes $2.5 million of loan loss reserves recognized prior to December 31, 2019, $2.5 million credit loss reserves recognized upon the adoption of ASC Topic 326 on January 1, 2020 and an aggregate $3.9 million of credit losses recognized since the adoption of ASC Topic 326 net of $3.7 million of loans that were written-off against previously established reserves.

Loans Receivable

At September 30, 2022, the Company held 38 loans receivable with an aggregate carrying amount of $328.9 million. Twenty-three of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property; the interest rates on ten of the mortgage loans are subject to increases over the term of the loans. Six of the mortgage loans are shorter-term loans (maturing prior to 2027) 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 payments with a balloon payment at maturity.

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 2022

$

647

$

16,859

$

17,506

2023

2,394

86,928

89,322

2024

 

2,102

 

 

2,102

2025

 

1,896

 

 

1,896

2026

 

1,855

 

20,371

 

22,226

2027

1,553

548

2,101

Thereafter

 

178,566

 

18,178

 

196,744

Total principal payments

$

189,013

$

142,884

$

331,897

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Sale-Leaseback Transactions Accounted for as Financing Arrangements

As of September 30, 2022 and December 31, 2021, the Company had $332.6 million and $255.5 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, 2022, were as follows (in thousands):

Remainder of 2022

$

6,401

2023

25,657

2024

 

25,792

2025

 

25,932

2026

 

26,026

2027

26,126

Thereafter

 

313,369

Total future scheduled payments

$

449,303

Direct Financing Receivables

As of both September 30, 2022 and December 31, 2021, the Company had $61.0 million and $78.6 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,

2022

2021

Minimum lease payments receivable

$

121,436

    

$

159,371

Estimated residual value of leased assets

 

6,889

 

8,938

Unearned income

 

(67,344)

 

(89,672)

Net investment

$

60,981

$

78,637

As of September 30, 2022, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $1.6 million for the remainder of 2022, average approximately $6.5 million for each of the next five years and $87.5 million thereafter.

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, 2022, $170.0 million of loans and financing receivables were categorized as investment grade and $555.5 million were categorized as non-investment grade. During the nine months ended September 30, 2022, there were $0.3 million of net reductions of prior provisions for credit losses recognized, $3.7 million of write-offs charged against the allowance and no recoveries of amounts previously written off.

As of September 30, 2022, the year of origination for loans and financing receivables with a credit quality indicator of investment grade was none in 2022, $35.7 million in 2021, none in 2020, $121.9 million in 2019, none in 2018 and $12.4 million prior to 2018. The year of origination for loans and financing receivables with a credit quality indicator of non-investment grade was $73.8 million in 2022, $77.1 million in 2021, $94.2 million in 2020, $113.1 million in 2019, $31.3 million in 2018 and $166.0 million prior to 2018.

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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. The credit facility has immediate availability of $600.0 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 two six-month extension options, subject to certain conditions and the payment of a 0.0625% extension fee. At September 30, 2022, the Company had $223.0 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 $7.8 billion at September 30, 2022.

The facility is recourse to the Company and, as of September 30, 2022, the Company was in compliance with the covenants under the facility.

At September 30, 2022 and December 31, 2021, unamortized financing costs related to the Company’s credit facility totaled $2.9 million and $3.7 million, respectively, and are included in other assets, net, on the condensed consolidated balance sheets.

Unsecured Notes and Term Loans Payable, net

The Company has completed four public offerings of ten-year unsecured notes (Public Notes). In March 2018, February 2019 and November 2020, the Company completed public offerings of $350.0 million each in aggregate principal amount. In November 2021, the Company completed a public offering of $375.0 million in aggregate principal amount. The Public Notes have coupon rates of 4.50%, 4.625%, 2.75% and 2.70%, respectively, and interest is payable semi-annually in arrears in March and September of each year for the 2018 and 2019 Public Notes, May and November of each year for the 2020 Public Notes, and June and December of each year for the 2021 Public Notes. The notes were issued at 99.515%, 99.260%, 99.558% and 99.877%, respectively, of their principal amounts.

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, 2022, 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.

In April 2022, the Company entered into a term loan agreement under which the Company borrowed an aggregate $600.0 million of floating-rate, unsecured term loans; the loans consist of a $400.0 million five-year loan and a $200.0 million seven-year loan (Term Loans). The interest rate on each of the Term Loans resets daily at Daily Simple SOFR plus an adjustment of 0.10% plus a credit rating-based credit spread ranging from 0.75% to 1.60% on the five-year loan and 1.25% to 2.20% on the seven-year loan. The credit spread currently applicable to the Company is 0.95% for the five-year loan and 1.25% for the seven-year loan. The Company has entered into interest rate swap agreements that effectively convert the floating rates on the Term Loans to a weighted average fixed rate of 3.68%.

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The Term Loans were arranged with a group of lenders that also participate in the Company’s unsecured revolving credit facility. The financial covenants of the Term Loans match the covenants of the unsecured revolving credit facility. As of September 30, 2022, the Company was in compliance with these covenants. The Term Loans are senior unsecured obligations of the Company, require monthly interest payments and may be prepaid at any time; the seven-year loan has a prepayment premium of 2% if repaid in year one and 1% if repaid in year two.

The Company has entered into Note Purchase Agreements (NPAs) with institutional purchasers that provided for the private placement of three series of senior unsecured notes aggregating $375.0 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 revolving 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, 2022, the Company was in compliance with its covenants under the NPAs.

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

Maturity

Interest

 

September 30,

December 31,

 

Date

Rate

 

2022

2021

 

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

Public Notes issued November 2021

Dec. 2031

2.70

%  

375,000

375,000

Total notes payable

1,800,000

1,800,000

Term Loans:

Term Loan issued April 2022

Apr. 2027

3.58

% (a) 

400,000

Term Loan issued April 2022

Apr. 2029

3.88

% (b)

200,000

Total term loans

600,000

Unamortized discount

(4,269)

(4,740)

Unamortized deferred financing costs

(13,769)

(12,447)

Total unsecured notes and term loans payable, net

$

2,381,962

$

1,782,813

(a)Loan is a floating-rate loan which resets daily at Daily Simple SOFR + an adjustment of 0.10% + the applicable credit spread which was 0.95% at September 30, 2022. The Company has entered into six interest rate swap agreements that effectively convert the floating rate to the fixed rate noted as of September 30, 2022.
(b)Loan is a floating-rate loan which resets daily at Daily Simple SOFR + an adjustment of 0.10% + the applicable credit spread which was 1.25% at September 30, 2022. The Company has entered into one interest rate swap agreement that effectively converts the floating rate to the fixed rate noted as of September 30, 2022.

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

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Table of Contents

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, 2022.

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, 2022, 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 $3.6 billion.

In connection with obtaining the Term Loans in April 2022, the Company prepaid, without penalty, $134.5 million of STORE Master Funding Series 2014-1, Class A-2 notes, which bore an interest rate of 5.0% and were scheduled to mature in 2024; and the Company recognized $0.8 million of accelerated amortization of deferred financing costs associated with the prepayment.

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 $250.7 million at September 30, 2022.

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.

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Table of Contents

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

 

2022

2021

 

Non-recourse net-lease mortgage notes:

    

    

    

    

    

 

    

$140,000 Series 2014-1, Class A-2 (a)

 

 

5.00

%  

$

$

134,692

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

Oct. 2024 (b)

3.96

%  

140,927

142,051

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

Oct. 2024 (b)

4.40

%  

48,542

48,917

$270,000 Series 2015-1, Class A-2

Apr. 2025 (b)

4.17

%  

259,987

260,999

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

Oct. 2026 (b)

3.96

%  

176,959

180,190

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

Nov. 2026 (b)

2.82

%

78,283

78,590

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

Nov. 2026 (b)

3.32

%

45,348

45,521

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

Apr. 2027 (b)

4.32

%  

120,909

123,046

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

Oct. 2027 (c)

4.29

%  

214,208

215,918

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

Oct. 2027 (c)

4.74

%  

159,217

160,447

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

Jun. 2028 (b)

2.12

%  

167,447

168,079

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

Jun. 2028 (b)

2.86

%  

88,444

88,778

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

Jun. 2033 (c)

2.96

%  

167,447

168,079

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

Jun. 2033 (c)

3.70

%  

88,444

88,778

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

Nov. 2034 (c)

3.65

%

232,939

233,854

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

Nov. 2034 (c)

4.49

%

134,073

134,583

Total non-recourse net-lease mortgage notes

2,123,174

2,272,522

Non-recourse mortgage notes:

$13,000 note issued May 2012

 

 

5.195

%  

 

 

9,961

$26,000 note issued August 2012

 

 

5.05

%  

 

 

20,085

$6,400 note issued November 2012

 

 

4.707

%  

 

 

4,938

$11,895 note issued March 2013

 

Apr. 2023

 

4.7315

%  

 

9,031

 

9,309

$17,500 note issued August 2013

 

Sept. 2023

 

5.46

%  

 

13,832

 

14,212

$10,075 note issued March 2014

 

Apr. 2024

 

5.10

%  

 

8,655

 

8,808

$65,000 note issued June 2016

Jul. 2026

4.75

%

58,298

59,223

$41,690 note issued March 2019

Mar. 2029

4.80

%

40,823

41,291

$6,944 notes issued March 2013

 

Apr. 2038

 

4.50

% (d)

 

5,161

 

5,332

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

Apr. 2049

4.64

%

6,022

6,106

Total non-recourse mortgage notes

141,822

179,265

Unamortized discount

 

(416)

 

(496)

Unamortized deferred financing costs

(21,413)

 

(25,583)

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

$

2,243,167

$

2,425,708

(a)Notes were repaid, without penalty, in April 2022 using a portion of the proceeds from the aggregate $600.0 million of term loans the Company entered into in April 2022.
(b)Prepayable, without penalty, 24 months prior to maturity.
(c)Prepayable, without penalty, 36 months prior to maturity.
(d)Interest rate is effective until March 2023 and will reset to the lender’s then prevailing interest rate.

Credit Risk Related Contingent Features

The Company has agreements with derivative counterparties, which provide generally that the Company could be declared in default on its derivative obligations if the Company defaults on the underlying indebtedness. As of September 30, 2022, the Company had no interest rate swaps that were in a liability position.

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Table of Contents

Long-term Debt Maturity Schedule

As of September 30, 2022, 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 2022

$

5,749

$

75,000

$

80,749

2023

22,866

22,182

45,048

2024

 

22,154

 

293,798

 

315,952

2025

 

20,037

 

256,612

 

276,649

2026

 

17,926

 

532,142

 

550,068

2027

9,506

860,472

869,978

Thereafter

 

30,702

 

2,495,850

 

2,526,552

$

128,940

$

4,536,056

$

4,664,996

The Company is subject to various restrictions under the Merger Agreement on issuing and assuming additional debt.

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 $900.0 million of registered shares of common stock through a group of banks acting as its sales agents (the 2020 ATM Program).

For the three months ended September 30, 2022, there were no common stock issuances under 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):

Nine Months Ended September 30, 2022

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

8,607,771

$

29.38

$

252.9

$

(3.1)

$

(0.2)

$

249.6

Inception of Program Through September 30, 2022

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

19,449,302

$

31.55

$

613.7

$

(8.5)

$

(0.8)

$

604.4

Pursuant to the Merger Agreement, the Company is restricted from issuing common stock.

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.

As of November 3, 2022, three lawsuits have been filed by purported stockholders against the Company and current members of the Company Board in connection with the Merger. The lawsuits were filed in the United States District Court for the Southern District of New York and are captioned O’Dell v. STORE Capital Corp. et al., No. 1:22-cv-09273 (filed October 28, 2022), Klein v. STORE Capital Corp. et al., No. 1:22-cv-09310 (filed October 31, 2022), and Grossman v. STORE Capital Corp. et al., No. 1:22-cv-09357 (filed November 1, 2022). The complaints generally allege, among other things, that the preliminary proxy statement filed by the Company in connection with the Merger fails to disclose allegedly material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of

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1934, as amended, and Rule 14a-9 thereunder. Plaintiffs in each pending lawsuit seek, among other things, an injunction barring the Merger or, in the alternative, rescission of the Merger to the extent it is already implemented, and an award of damages. Although the ultimate outcome of the matters cannot be predicted with any certainty, the Company believes that each of the lawsuits is without merit.

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, 2022, the Company had commitments to its customers to fund improvements to owned or mortgaged real estate properties totaling approximately $154.4 million, of which $127.9 million is expected to be funded in the next twelve months. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts.

The Company has employment agreements with each of its executive officers that provide for minimum annual base salaries, and annual cash and equity incentive compensation based on the satisfactory achievement of reasonable performance criteria and objectives to be adopted by the Company Board 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. Pursuant to the Merger Agreement, the Company is restricted from issuing equity awards.

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 aggregate fair value of the Company’s derivative instruments was an asset of $33.7 million at September 30, 2022; the Company had no derivatives outstanding at December 31, 2021. Derivative assets are included in other assets, net, 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, 2022 and December 31, 2021. 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, 2022, these debt obligations had an aggregate carrying value of $4,625.1 million and an estimated fair value of $4,279.9 million. At December 31, 2021, these debt obligations had an aggregate carrying value of $4,208.5 million and an estimated fair value of $4,478.4 million.

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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, 2021 filed with the Securities and Exchange Commission on February 25, 2022 and “Part II- Item 1A. Risk Factors” in this quarterly report.

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.

Pending Merger Transaction with Affiliates of GIC and Oak Street, a Division of Blue Owl

On September 15, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ivory Parent, LLC, a Delaware limited liability company (“Parent”), Ivory REIT, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Parent Parties”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, we will merge with and into Merger Sub (the “Merger”). Upon completion of the Merger, Merger Sub will survive and the separate existence of STORE Capital Corporation will cease. The Merger and the other transactions contemplated by the Merger Agreement were unanimously approved and declared advisable by our board of directors (the “Board”). The Parent Parties are, as of the date hereof, affiliates of GIC, a global institutional investor, and will be, as of the date on which the closing of the Merger occurs, affiliates of GIC and funds managed or advised by Oak Street Real Estate Capital, a division of Blue Owl Capital, Inc. (collectively, the “Sponsors”).

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share our common stock will be automatically cancelled and converted into the right to receive an amount in cash equal to $32.25 (the “Merger Consideration”), without interest. Except for the payment of its regular quarterly dividend per share of common stock for the fiscal quarter ended September 30, 2022 in an amount of $0.41 per share, which was paid on October 17, 2022 to stockholders of record as of September 30, 2022, during the term of the Merger Agreement, we may not pay dividends, except as necessary to preserve its tax status as a real estate investment trust; provided that any such dividends would result in an offsetting decrease to the Merger Consideration.

The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants to conduct business in the ordinary course consistent with past practice in all material respects, subject to

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certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the transaction. The Merger Agreement is subject to certain closing conditions, including the approval of the transaction by an affirmative vote of the holders of at least a majority of the outstanding shares of our common stock entitled to vote thereon and, with respect to Parent’s obligation to consummate the Merger, the clearance by the Committee on Foreign Investment in the United States of the Merger and the transactions contemplated by the Merger Agreement. The obligations of the parties to consummate the Merger are not subject to any financing condition. Subject to the satisfaction or waiver of such closing conditions, the transaction is expected to close during the first quarter of 2023. We can provide no assurances regarding whether the Merger will close when expected or at all.

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, 2022, approximately 925 brand names or business concepts in over 120 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 more than $13.8 billion of real estate investments. As of September 30, 2022, our investment portfolio totaled approximately $11.6 billion, consisting of investments in 3,035 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 smaller 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 over the life of the lease contracts. As of September 30, 2022, 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, 2022, the weighted average remaining term of our leases (calculated based on base rent) was approximately 13.2 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 September 30, 2022, provide for tenant renewal options (generally two

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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 with respect to 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.

Since early 2020, the world has been impacted by the COVID-19 pandemic. At various times, the COVID-19 pandemic has primarily impacted us through government mandated limits (i.e., required closures 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. 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 collections have returned to pre-pandemic levels and, essentially, all of our properties are open for business.

We 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 the nine months ended September 30, 2022, we recognized an additional $2.0 million of net revenue related to deferral arrangements and collected $11.8 million in repayments of amounts previously deferred. Our tenants continue to repay the receivables generated as a result of the deferral arrangements, in accordance with their terms.

Liquidity and Capital Resources

As of September 30, 2022, our investment portfolio stood at approximately $11.6 billion, consisting of investments in 3,035 property locations. Substantially all of our cash from operations is generated by our investment portfolio.

Our primary cash expenditures are the principal and interest payments we make on the debt we use to finance our real estate investment portfolio and the general and administrative expenses of managing the portfolio and operating our business. Since substantially all 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, 2022, the weighted average remaining term of our leases was approximately 13.2 years and the contracts related to just 15 property locations, representing 0.2% of our annual base rent and interest, are due to expire during the remainder of 2022; 79% of our leases have ten years or more remaining in their base lease term. As of September 30, 2022, 16 of our 3,035 properties were vacant and not subject to a lease, which represents a 99.5% 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.

To date, we have acquired real estate with a combination of debt and equity capital, proceeds from the sale of properties and cash from operations 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

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or interest income due under the related contracts. As of September 30, 2022, we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately $154.4 million, the majority of which is expected to be funded in the next twelve months.

The Merger Agreement contains provisions which restrict or prohibit certain capital expenditures without the consent of the Parent as well as certain capital transactions typically used to fund our short and long-term liquidity requirements. Until the Merger closes, or the Merger Agreement is terminated, our liquidity requirements will primarily be funded by our cash flow from operations and certain other capital activities allowed under the Merger Agreement. In particular, we are subject to various restrictions under the Merger Agreement on raising additional capital, assuming additional debt, issuing additional equity or debt, repurchasing equity, paying dividends and entering into certain acquisition and disposition transactions, among other restrictions.

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 have managed 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 sought to reduce the risk that increases in interest rates would adversely impact our profitability. In addition, we 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 have also laddered 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 properties) and our annual debt maturities.

As of September 30, 2022, all our long-term debt was fixed-rate debt, or was effectively converted to a fixed-rate for the term of the debt, and our weighted average debt maturity was 6.2 years. As part of our long-term debt strategy, we have developed and maintained broad access to multiple long-term debt sources.

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. In conjunction with our historical investment-grade debt strategy, we targeted 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 42% at September 30, 2022.

Unsecured Revolving Credit Facility

Typically, we use our $600.0 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 have used to repay the amounts outstanding under our revolving credit facility. As of September 30, 2022, we had $223.0 million outstanding under our unsecured revolving credit facility.

Our unsecured revolving credit facility also has an accordion feature of $1.0 billion, which gives us a maximum borrowing capacity of $1.6 billion. The current facility matures in June 2025 and includes two six-month extension options, subject to certain conditions. Borrowings under the current 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 currently applicable credit spread for LIBOR-based borrowings is 0.85% and the facility fee is 0.20%. Our credit agreement does allow for a further reduction in the pricing for LIBOR-based borrowings

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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 to approximately $7.8 billion at September 30, 2022. The facility is recourse to us, and, as of September 30, 2022, we were in compliance with the financial and nonfinancial covenants under the facility. We expect the facility to be prepaid or remain outstanding after the expected closing of the Merger in the first quarter of 2023.

Senior Unsecured Term Debt

In November 2021, we completed our fourth issuance of underwritten public notes in an aggregate principal amount of $375.0 million with a coupon rate of 2.70%, and as of September 30, 2022, we had an aggregate principal amount of $1.4 billion of underwritten public notes outstanding. These senior unsecured notes bear a weighted average coupon rate of 3.63% 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, 2022, we were in compliance with these covenants. We expect the public notes will remain outstanding after the expected closing of the Merger in the first quarter of 2023.

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. The financial covenants of the privately placed notes are similar to our unsecured revolving credit facility, and, as of September 30, 2022, we were in compliance with these covenants. We expect the unsecured private notes to be prepaid or remain outstanding after the expected closing of the Merger in the first quarter of 2023.

In April 2022, we entered into a term loan agreement under which we borrowed an aggregate $600.0 million of floating-rate, unsecured term loans; the loans consist of a $400.0 million five-year loan and a $200.0 million seven-year loan. The interest rate on each of the term loans resets daily at Daily Simple SOFR plus an adjustment of 0.10% plus a credit rating-based credit spread ranging from 0.75% to 1.60% on the five-year loan and 1.25% to 2.20% on the seven-year loan. The applicable credit spread is currently 0.95% for the five-year loan and 1.25% for the seven-year loan. In conjunction with entering into these floating-rate term loans, we also entered into interest rate swap agreements that effectively convert the floating rates to a weighted average fixed rate of 3.68%. Additionally, in connection with the transaction, we paid down outstanding balances on our unsecured revolving credit facility and prepaid, without penalty, $134.5 million of STORE Master Funding Series 2014-1, Class A-2 notes, which bore an interest rate of 5.0% and were scheduled to mature in 2024.

The term loans were arranged with a group of lenders that also participate in our unsecured revolving credit facility. The financial covenants of the term loans match the covenants of the unsecured revolving credit facility. As of September 30, 2022, we were in compliance with these covenants. The term loans are senior unsecured obligations, require monthly interest payments and may be prepaid at any time; the seven-year loan has a prepayment premium of 2% if repaid in year one and 1% if repaid in year two. We expect the term loans to be prepaid or remain outstanding after the expected closing of the Merger in the first quarter of 2023.

The aggregate outstanding principal amount of our unsecured senior notes and term loans payable was $2.4 billion as of September 30, 2022.

Non-recourse Secured Debt

As of September 30, 2022, approximately 31% 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 Capital 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

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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 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 which is evidenced by our most recent Series 2021-1 transaction in June 2021 which was issued at a weighted average coupon rate of 2.80%.

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, 2022, 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, 2022 totaled $2.1 billion in Class A principal amount and were supported by a collateral pool of approximately $3.6 billion representing 1,148 property locations operated by 210 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.

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, 2022, excess cash flow, after payment of debt service and servicing and trustee expenses, totaled $138.9 million on cash collections of $229.1 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 2.5 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. We expect the STORE Master Funding non-recourse notes currently outstanding will remain outstanding after the expected closing of the Merger in the first quarter of 2023.

To a lesser extent, we have obtained 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 have generally been 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.

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Debt Summary

As of September 30, 2022, our aggregate secured and unsecured long-term debt had an outstanding principal balance of $4.7 billion, a weighted average maturity of 6.2 years and a weighted average interest rate of just over 3.8%. 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, 2022:

Gross Investment Portfolio Assets

 

Special Purpose

 

Outstanding

Entity

All Other

 

(In millions)

Borrowings

Subsidiaries

Subsidiaries

Total

 

STORE Master Funding net-lease mortgage notes payable

    

$

2,123

    

$

3,579

    

$

    

$

3,579

Other mortgage notes payable

 

142

 

251

 

 

251

Total non-recourse debt

 

2,265

 

3,830

 

 

3,830

Unsecured notes and term loans payable

2,400

Unsecured credit facility

223

Total unsecured debt (including revolving credit facility)

2,623

Unencumbered real estate assets

 

 

6,496

 

1,345

 

7,841

Total debt

$

4,888

$

10,326

$

1,345

$

11,671

Equity

We have historically accessed the equity markets in various ways. As part of these efforts, we established “at the market” equity distribution programs, or ATM programs, pursuant to which, from time to time, we could 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 $900.0 million ATM program (the 2020 ATM Program) and currently have about $286 million of availability under this program.

For the three months ended September 30, 2022, there were no common stock issuances under 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):

Nine Months Ended September 30, 2022

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

8,607,771

$

29.38

$

252.9

$

(3.1)

$

(0.2)

$

249.6

Inception of Program Through September 30, 2022

Shares Sold

Weighted Average Price per Share

Gross Proceeds

    

Sales Agents' Commissions

 

Other Offering Expenses

 

Net Proceeds

19,449,302

$

31.55

$

613.7

$

(8.5)

$

(0.8)

$

604.4

Pursuant to the Merger Agreement, we are restricted from issuing common stock.

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, 2022 increased by $86.7 million over the same period in 2021, primarily as a result of the increase in the size of our real estate investment portfolio, which generated additional rental revenue and interest income. Our investments in real estate, loans and financing receivables during the first nine months of 2022 were $152.2 million more than the same period in 2021. During the nine months ended September 30, 2022, our investment activity was primarily funded with a combination of cash from operations, borrowings on our revolving credit facility, proceeds from the issuance of stock, proceeds from the sale of

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real estate properties and net proceeds received from our term loan borrowings. Investment activity during the same period in 2021 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 and borrowings on our revolving credit facility. From a financing perspective, our activities provided $423.3 million of net cash during the nine months ended September 30, 2022 as compared to $190.9 million during the same period in 2021. Financing activities in 2022 include the aggregate $600.0 million of bank term loans we entered into in April and $186.8 million of aggregate debt repayments on our secured long-term debt. We paid dividends to our stockholders totaling $323.2 million and $293.2 million during the first nine months of 2022 and 2021, respectively; we increased our quarterly dividend in the third quarter of 2022 to a quarterly amount of $0.41 per common share, up from $0.385 per common share. Under the terms of the Merger Agreement, we may not pay any further dividends, except as necessary to preserve our tax status as a REIT; provided that any such dividends would result in an offsetting decrease to the Merger Consideration.

Nine Months Ended September 30,

Increase

(In thousands)

2022

2021

(Decrease)

Net cash provided by operating activities

    

$

501,446

    

$

414,778

    

$

86,668

   

Net cash used in investing activities

 

(944,730)

 

(739,397)

 

(205,333)

Net cash provided by financing activities

 

423,325

 

190,886

232,439

Net decrease in cash, cash equivalents and restricted cash

$

(19,959)

$

(133,733)

$

113,774

As of September 30, 2022, we had liquidity of $47.0 million on our balance sheet. Management believes that our current cash balance, the $377.0 million of immediate borrowing capacity available on our unsecured revolving credit facility and the cash generated by our operations is sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we currently have made commitments. Under the Merger Agreement, we are subject to various restrictions including equity issuances and other capital markets activities, among other restrictions.

Recently Issued Accounting Pronouncements

See Note 2 to the September 30, 2022 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, 2021 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, 2022, our total investment in real estate and loans approximated $11.6 billion, representing investments in 3,035 property locations, substantially all of which are profit centers for our customers. These investments generate cash flows from approximately 800 contracts predominantly structured as net leases. The weighted average non-cancellable remaining term of our leases was approximately 13.2 years.

Our real estate portfolio is highly diversified. As of September 30, 2022, our 3,035 property locations were operated by 579 customers across the United States. Our customers are typically established regional and national operators. Our largest customer represented approximately 2.9% of our portfolio at September 30, 2022, and our top ten largest customers represented 17.5% of base rent and interest. Our customers operate their businesses across approximately 925 brand names or business concepts in over 120 industries. The largest of the business concepts represented 2.1% of our base rent and interest as of September 30, 2022.

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, 2022, for all of our leases, loans and financing receivables in place as of that date.

Diversification by Customer

As of September 30, 2022, our property locations were operated by 579 customers and the following table identifies our ten largest customers:

    

% of

    

 

Base Rent

Number

 

and

of

 

Customer

Interest

Properties

 

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

2.9

%

28

LBM Acquisition, LLC (Building materials distribution)

2.8

155

Fleet Farm Group LLC

2.1

9

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

2.0

78

Dufresne Spencer Group Holdings, LLC (Ashley Furniture HomeStore)

1.5

30

CWGS Group, LLC (Camping World/Gander Outdoors)

 

1.4

 

20

Zips Holdings, LLC

 

1.3

46

Great Outdoors Group, LLC (Cabela's)

 

1.2

 

8

American Multi-Cinema, Inc.

1.2

14

At Home Holding III Inc.

1.1

11

All other (569 customers)

 

82.5

 

2,636

Total

 

100.0

%

3,035

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Diversification by Industry

As of September 30, 2022, our customers’ business concepts were diversified across more than 120 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

6.5

%  

343

 

2,432

Restaurants—limited service

4.7

403

 

1,278

Early childhood education centers

5.9

285

 

2,938

Automotive repair and maintenance

5.8

259

 

1,504

Health clubs

5.0

93

 

3,260

Pet care facilities

3.3

185

 

1,766

Behavioral health

3.3

97

1,827

Medical and dental

3.2

169

1,535

All other service (33 industry groups)

26.0

601

 

32,827

Total service

63.7

2,435

 

49,367

Retail:

All retail (18 industry groups)

15.2

259

14,774

Total retail

15.2

259

 

14,774

Manufacturing:

Metal fabrication

5.9

117

15,033

Food processing

3.4

33

4,532

All other manufacturing (19 industry groups)

11.8

191

24,609

Total manufacturing

 

21.1

341

 

44,174

Total

 

100.0

%  

3,035

 

108,315

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, 2022:

% of

 

Base Rent

 

and

Number of

 

State

Interest 

Properties

 

Texas

    

10.9

%   

351

Illinois

 

5.9

183

Florida

 

5.5

162

Georgia

 

5.4

170

California

 

5.3

84

Wisconsin

5.1

90

Ohio

 

4.7

153

Arizona

 

4.2

92

Tennessee

 

3.7

126

Michigan

 

3.5

119

All other (39 states) (1)

 

45.8

1,505

Total

 

100.0

%  

3,035

(1)Includes one property in Ontario, Canada which represents less than 0.3% of base rent and interest.

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Contract Expirations

The following table sets forth the schedule of our lease, loan and financing receivable expirations as of September 30, 2022:

    

% of

    

 

Base Rent

 

and

Number of

 

Year of Lease Expiration or Loan Maturity (1)

Interest

Properties (2)

 

Remainder of 2022

0.2

%

15

2023

 

1.1

16

2024

 

0.5

21

2025

 

0.9

23

2026

 

1.4

55

2027

 

1.5

53

2028

 

2.8

67

2029

 

4.5

153

2030

 

3.3

139

2031

4.9

209

Thereafter

 

78.9

2,268

Total

 

100.0

%  

3,019

(1)Expiration year of contracts in place as of September 30, 2022 and excludes any tenant option renewal periods.
(2)Excludes 16 properties that were vacant and not subject to a lease as of September 30, 2022.

Results of Operations

Overview

As of September 30, 2022, our real estate investment portfolio had grown to approximately $11.6 billion, consisting of investments in 3,035 property locations in 49 states, operated by 579 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.

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Table of Contents

Three and Nine Months Ended September 30, 2022 Compared to Three and Nine Months Ended September 30, 2021

Three Months Ended

Nine Months Ended

 

September 30,

Increase

September 30,

Increase

 

(In thousands)

2022

 

2021

 

(Decrease)

 

2022

 

2021

 

(Decrease)

Total revenues

$

230,556

    

$

199,125

    

$

31,431

    

$

676,444

    

$

573,432

    

$

103,012

Expenses:

Interest

 

48,519

 

43,367

 

5,152

 

138,426

 

126,904

 

11,522

Property costs

 

4,360

 

4,267

 

93

 

10,915

 

14,098

 

(3,183)

General and administrative

 

13,427

 

17,456

 

(4,029)

 

46,381

 

58,551

 

(12,170)

Merger-related

8,014

8,014

8,014

8,014

Depreciation and amortization

 

78,985

 

67,123

 

11,862

 

227,641

 

195,725

 

31,916

Provisions for impairment

6,750

 

3,400

3,350

12,962

17,350

(4,388)

Total expenses

 

160,055

 

135,613

 

24,442

 

444,339

 

412,628

 

31,711

Other income:

(Loss) gain on dispositions of real estate

 

(2,719)

 

10,721

 

(13,440)

 

17,013

 

32,271

 

(15,258)

Income (loss) from non-real estate, equity method investments

985

1,872

(887)

(2,347)

804

(3,151)

Income before income taxes

68,767

76,105

(7,338)

246,771

193,879

52,892

Income tax expense

 

182

 

169

 

13

 

659

 

552

 

107

Net income

$

68,585

$

75,936

$

(7,351)

$

246,112

$

193,327

$

52,785

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 $10.3 billion in gross investment amount representing 2,788 properties as of September 30, 2021 to approximately $11.6 billion in gross investment amount representing 3,035 properties at September 30, 2022. The weighted average real estate investment amounts outstanding during the three-month periods were approximately $11.5 billion in 2022 and $10.1 billion in 2021. During the nine-month periods, the weighted average real estate investment amounts were approximately $11.2 billion in 2022 and $9.9 billion in 2021. 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 2022 on acquisitions that were made during 2021. Similarly, the full revenue impact of acquisitions made during 2022 will not be seen until the fourth quarter of 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 the three and nine months ended September 30, 2022, we collected $35,000 and $4.8 million, respectively, in early lease termination fees, primarily related to certain property sales, which are included in other income. Similarly, during the three and nine months ended September 30, 2021, we collected $1.8 million of lease termination fees.

As previously noted, we provided short-term rent deferral arrangements to certain of our tenants during the pandemic to help them continue to meet their rent payment obligations to us. Essentially all of our rent deferral arrangements with our tenants have now ended and our tenants continue to repay previously deferred rent in accordance with their agreements.

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, 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

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Table of Contents

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. The industry experienced capitalization rate compression in 2021, with rates starting to increase in the second quarter of 2022; similarly, the weighted average lease rate we achieved on the investments we closed in the latter half of 2021 and into early 2022 reflected this rate compression, while the lease rate we achieved on investments we closed in the third quarter of 2022 reflected the upward shift. The weighted average lease rate we achieved on our new investments was 7.6% and 7.3% for the three and nine months ended September 30, 2022, respectively, as compared to 7.4% and 7.7% for both the three and nine months ended September 30, 2021, respectively. As noted, we saw upward movement in capitalization rates in the third quarter of 2022 and we expect this upward movement may continue as we move through the remainder of the year.

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)

2022

 

2021

 

2022

 

2021

 

Interest expense - credit facility

$

1,131

    

$

9

    

$

1,999

    

$

339

Interest expense - credit facility fees

306

306

910

910

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

 

45,014

 

40,545

 

130,351

 

118,868

Capitalized interest

(105)

(191)

(2,191)

(609)

Amortization of deferred financing costs and other

 

2,173

 

2,698

 

7,357

 

7,396

Total interest expense

$

48,519

$

43,367

$

138,426

$

126,904

Credit facility:

Average debt outstanding

$

139,043

$

1,348

$

142,432

$

40,674

Average interest rate during the period (excluding facility fees)

 

3.3

%  

 

2.7

%  

 

1.9

%  

 

1.1

%  

Long-term debt (secured and unsecured):

Average debt outstanding

$

4,671,534

$

3,991,406

$

4,491,247

$

3,792,619

Average interest rate during the period

 

3.9

%  

 

4.1

%  

 

3.9

%  

 

4.2

%  

The increase in average outstanding long-term debt was the primary driver for the increase in interest expense on long-term debt. Long-term debt added after September 30, 2021 consisted of $375.0 million of 2.70% senior unsecured notes issued in November 2021 and $600.0 million of unsecured floating-rate bank term loans issued in April 2022; the term loans have been effectively converted to a weighted average fixed-rate of 3.68% through the use of interest rate swaps. Long-term debt repaid in full, without penalties, since September 30, 2021 included $85.9 million of STORE Master Funding Series 2013-3 Class A-2 notes in November 2021 and $134.5 million of Series 2014-1, Class A-2 notes in April 2022. The two series of STORE Master Funding notes that were repaid were scheduled to mature in 2023 and 2024, respectively, and bore a weighted average interest rate of 5.1%. As of September 30, 2022, we had $4.7 billion of long-term debt outstanding with a weighted average interest rate of just over 3.8%.

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 increased from 2021 for both the three- and nine-month periods primarily as a result of the increased level of borrowings outstanding on the revolver during 2022. As of September 30, 2022, we had $223.0 million of borrowings outstanding under our revolving credit facility.

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Table of Contents

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, 2022, we owned 16 properties that were vacant and not subject to a lease and the lease contracts related to just 10 properties we own are due to expire during the remainder of 2022. 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, 2022, 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,

 

2022

2021

2022

2021

 

Property-level operating costs (a)

$

2,678

$

2,639

$

6,058

$

9,370

Ground lease-related intangibles amortization expense

117

117

351

351

Operating ground lease payments made by STORE Capital

134

108

    

267

287

Operating ground lease payments made by STORE Capital tenants

511

510

1,548

1,543

Operating ground lease straight-line rent expense

211

212

617

621

Property taxes payable from tenant impounds

 

709

 

681

 

2,074

 

1,926

Total property costs

$

4,360

$

4,267

$

10,915

$

14,098

(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.

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 $13.4 million and $46.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $17.5 million and $58.6 million, respectively, for the same periods in 2021.

General and administrative expenses for the first nine months of 2021 included $10.1 million related to the expense for certain modified performance-based stock based compensation awards granted in 2018 and 2019; excluding this one-time expense catch-up from 2021 expenses, general and administrative expenses decreased $2.1 million for the first nine months of 2022 as compared to 2021.

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. Excluding noncash, stock-based compensation expense from both periods,

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Table of Contents

general and administrative expenses for the twelve-month period ended September 30, 2022 represented 0.42% of average portfolio assets as compared to 0.46% for the comparable twelve-month period ended September 30, 2021.

Merger-related Expenses

Merger-related expenses include legal fees, investment banking fees and other costs incurred as a result of the pending Merger. For the three and nine months ended September 30, 2022, Merger-related expenses totaled $8.0 million.

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 $67.1 million and $195.7 million for the three and nine months ended September 30, 2021, respectively, to $79.0 million and $227.6 million, respectively, for the comparable periods in 2022.

Provisions for Impairment

During the three and nine months ended September 30, 2022, we recognized $6.8 million and $13.3 million, respectively, in provisions for the impairment of real estate, and during the nine months ended September 30, 2022, recognized a net reduction of $0.3 million in provisions for credit losses related to our loans and financing receivables. We recognized an aggregate $3.4 million and $17.4 million in provisions for the impairment of real estate and credit losses during the three and nine months ended September 30, 2021, respectively.

(Loss) 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, 2022, we recognized a $2.7 million aggregate net loss on the sale of 27 properties. In comparison, for the three months ended September 30, 2021, we recognized a $10.7 million aggregate net gain on the sale of 25 properties. For the nine months ended September 30, 2022, we recognized a $17.0 million aggregate net gain on sale of 51 properties as compared to an aggregate net gain of $32.3 million on the sale of 82 properties for the same period in 2021.

Net Income

For the three months ended September 30, 2022, our net income was $68.6 million reflecting a decrease from $75.9 million for the comparable period in 2021. The change in net income for the quarterly period is primarily comprised of a net increase resulting from the growth in our real estate investment portfolio and lower general and administrative expenses offset by increases in depreciation and amortization, interest expense, Merger-related expenses and a net loss on dispositions of real estate. For the nine months ended September 30, 2022, our net income was $246.1 million, an increase over $193.3 million for the comparable period in 2021. The change in net income for the year-to-date periods 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 lower general and administrative expenses, property costs and impairments which were primarily offset by increases in depreciation and amortization, interest expense, Merger-related expenses and a decrease in the net gain on dispositions of real estate, as noted above.

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Table of Contents

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 and executive severance and transition costs.

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, as applicable, straight-line rents, including construction period rent deferrals, and the amortization of deferred financing costs, stock-based compensation, lease-related intangibles, and executive severance and transition costs 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 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.

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Table of Contents

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

 

2022

 

2021

 

2022

 

2021

Net Income

    

$

68,585

    

$

75,936

    

$

246,112

    

$

193,327

Depreciation and amortization of real estate assets

78,913

 

67,061

227,426

195,542

Provision for impairment of real estate

6,750

3,400

13,250

15,350

Loss (gain) on dispositions of real estate

 

2,719

 

(10,721)

 

(17,013)

(32,271)

Funds from Operations (a)

 

156,967

 

135,676

 

469,775

 

371,948

Adjustments:

Straight-line rental revenue:

Fixed rent escalations accrued

 

(2,308)

 

(2,277)

 

(5,919)

(6,256)

Construction period rent deferrals

772

 

980

 

3,209

2,717

Amortization of:

Equity-based compensation (b)

 

2,772

 

6,467

 

9,249

24,161

Deferred financing costs and other (c)

2,173

2,698

7,357

7,396

Lease-related intangibles and costs

 

678

 

626

 

2,156

2,413

(Reduction in) provisions for loan losses

(288)

2,000

Lease termination fees

(1,785)

(4,174)

(1,785)

Capitalized interest

(105)

(191)

(2,191)

(609)

Merger-related expenses (d)

8,014

8,014

(Income) loss from non-real estate, equity method investments

(985)

(1,872)

2,347

(804)

Adjusted Funds from Operations (a)

$

167,978

$

140,322

$

489,535

$

401,181

(a)FFO and AFFO for the three months ended September 30, 2022 and 2021, include approximately $1.0 million and $0.8 million, respectively, and, for the nine months ended September 30, 2022 and 2021, include approximately $2.0 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, we account for these deferral arrangements as rental revenue and a corresponding increase in receivables. FFO and AFFO for the three months ended September 30, 2022 and 2021, exclude approximately $4.6 million and $8.0 million, respectively, and, for the nine months ended September 30, 2022 and 2021, exclude approximately $11.8 million and $19.2 million, respectively, collected under these short-term deferral arrangements.
(b)For the nine months ended September 30, 2021, stock-based compensation expense included $10.1 million related to the modification of certain performance-based awards granted in 2018 and 2019.
(c)For the nine months ended September 30, 2022, $0.8 million of accelerated amortization of deferred financing costs related to the prepayment of debt. For the three and nine months ended September 30, 2022, includes $0.6 million and $1.1 million, respectively, of accelerated amortization of deferred financing costs related to the prepayment of debt.
(d)Represents transaction costs incurred as a result of the pending Merger.

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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, 2022, all our long-term debt carried a fixed interest rate or was effectively converted to a fixed rate for the term of the debt and the weighted average debt maturity was approximately 6.2 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. Significant increases in interest rates may have an adverse effect on our earnings if we are unable to acquire real estate with lease rates high enough to offset increases in interest rates on our borrowings.

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.

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, 2022, the Company’s $600.0 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, 2021 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, 2022, our market risk has not changed materially from the amounts reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

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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, 2022 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.

As of November 3, 2022, three lawsuits have been filed by purported stockholders against the Company and current members of the Company Board in connection with the Merger. The lawsuits were filed in the United States District Court for the Southern District of New York and are captioned O’Dell v. STORE Capital Corp. et al., No. 1:22-cv-09273 (filed October 28, 2022), Klein v. STORE Capital Corp. et al., No. 1:22-cv-09310 (filed October 31, 2022), and Grossman v. STORE Capital Corp. et al., No. 1:22-cv-09357 (filed November 1, 2022). The complaints generally allege, among other things, that the preliminary proxy statement filed by the Company in connection with the Merger fails to disclose allegedly material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 thereunder. Plaintiffs in each pending lawsuit seek, among other things, an injunction barring the Merger or, in the alternative, rescission of the Merger to the extent it is already implemented, and an award of damages. Although the ultimate outcome of the matters cannot be predicted with any certainty, we believe that each of the lawsuits is without merit.

Item 1A. Risk Factors.

In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in our Annual Report on Form 10-K for the year ended December 31, 2021, in Part I, Item 1A, Risk Factors, and in our other filings with the SEC. These factors may materially affect our business, financial condition and operating results and could cause our actual results to differ materially from expectations. Except as set forth below, there have been no material changes to the risk factors that were discussed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The Merger may not be completed on the terms or timeline currently contemplated or at all.

The completion of the Merger is subject to certain conditions, including, among others (i) approval of the Merger by

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the affirmative vote of the holders of at least a majority of the outstanding shares of our common stock entitled to vote on the Merger and (ii) with respect to the Parent’s obligation to consummate the Merger, the clearance by the Committee on Foreign Investment in the United States. While it is currently anticipated that the Merger will be completed in the first quarter of 2023, there can be no assurance that such conditions will be satisfied in a timely manner or at all, or that an effect, event, development, or change will not transpire that could delay or prevent these conditions from being satisfied. If the Merger is not consummated for any reason, the trading price of our common stock may significantly decline to the extent that the market price of the common stock reflects positive market assumptions that the Merger will be completed and the related benefits will be realized. We may also be subject to additional risks if the Merger is not completed, including:

the obligation to pay a termination fee (as described below);
the obligation to pay significant transaction costs, such as legal, accounting and financial advisory costs that are not contingent on closing; and
reputational harm including relationships with customers and business partners due to the adverse perception of any failure to successfully complete the Merger.

If the Merger Agreement is terminated we may be required to pay significant termination fees.

Subject to certain conditions set forth in the Merger Agreement, we may terminate the Merger Agreement. In certain cases, as set forth in the Merger Agreement, upon terminating the Merger Agreement we would be required to pay a termination fee equal to $274 million if the Merger Agreement is terminated in certain specified circumstances.

The Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company or could result in a competing acquisition proposal being at a lower price than it might otherwise be.

The Merger Agreement contains provisions that, subject to exceptions, restrict the Company’s ability to solicit or negotiate any alternative acquisition proposal. Upon termination of the Merger Agreement under circumstances relating to an alternative acquisition proposal, the Company may be required to pay a termination fee of up to $274 million. These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company’s business from considering or making a competing acquisition proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than the market value proposed to be received or realized in the Merger, or might cause a potential competing acquirer to propose to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and other costs that may become payable in certain circumstances under the Merger Agreement.

Our business may be adversely impacted by the Merger prior to consummation.

The pending Merger could adversely affect our business and operations. For example, the pending Merger may make it difficult for us to retain and attract talented executives and employees and may distract our workforce and management team. Some of our tenants and business partners may defer decisions with respect to transactions with us as a result of the pending Merger. In addition, due to operating restrictions in the Merger Agreement, the Company may be unable, during the pendency of the Merger, to pursue certain transactions, undertake capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.

An adverse judgment in one or more lawsuits challenging the Merger may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

As of November 3, 2022, three lawsuits have been filed by purported stockholders against the Company and current members of the Company Board in connection with the Merger. The complaints generally allege, among other things, that the preliminary proxy statement filed by the Company in connection with the Merger fails to disclose allegedly material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 thereunder.  Plaintiffs in each pending lawsuit seek, among other things, an injunction barring the Merger or, in the alternative, rescission of the Merger to the extent it is already implemented, and an award of damages. Additional lawsuits arising out of the Merger

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may also be filed in the future. No assurance can be made as to the outcome of any lawsuit filed in connection with the Merger, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims.  If the plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such injunction may prevent the completion of the Merger in the expected timeframe or at all. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and divert management’s attention and resources, which could adversely affect the operation of our business.

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

Restrictions on Dividends. Except for the payment of its regular quarterly dividend per share of Company common stock for the fiscal quarter ended September 30, 2022 in an amount of $0.41 per common share, which was paid on October 17, 2022 to stockholders of record as of September 30, 2022, during the term of the Merger Agreement the Company may not pay dividends, except as necessary to preserve its tax status as a real estate investment trust; provided that any such dividends would result in an offsetting decrease to the Merger Consideration.

Unregistered Sales of Equity Securities and Repurchases of Equity Securities. During the three months ended September 30, 2022, we did not purchase 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

2.1

Agreement and Plan of Merger, dated as of September 15, 2022, by and among Ivory Parent, LLC, Ivory REIT, LLC and STORE Capital Corporation **

Incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K of the Company filed on September 15, 2022.

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.

** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request by the SEC.

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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 4, 2022

By:

/s/ Sherry L. Rexroad

Sherry L. Rexroad

Executive Vice PresidentChief Financial Officer, Treasurer and Assistant Secretary

(Principal Financial Officer)

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