STORE CAPITAL CORPORATION In this Quarterly Report on Form 10-Q, we refer toSTORE 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 endedDecember 31, 2021 filed with theSecurities and Exchange Commission onFebruary 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
OnSeptember 15, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withIvory Parent, LLC , aDelaware limited liability company ("Parent"),Ivory REIT, LLC , aDelaware 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 ofSTORE 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 byOak 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 endedSeptember 30, 2022 in an amount of$0.41 per share, which was paid onOctober 17, 2022 to stockholders of record as ofSeptember 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 manageSingle 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 ofSeptember 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 aMaryland 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 theNew York Stock Exchange since our initial public offering, or IPO, inNovember 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 ofSeptember 30, 2022 , our investment portfolio totaled approximately$11.6 billion , consisting of investments in 3,035 property locations acrossthe 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 ofSeptember 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 ofSeptember 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 ofSeptember 30, 2022 , provide for tenant renewal options (generally two 30 Table of Contents 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 endedSeptember 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
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 ofSeptember 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 ofSeptember 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 31
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or interest income due under the related contracts. As ofSeptember 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 ofSeptember 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% atSeptember 30, 2022 .
Unsecured Revolving Credit Facility
Typically, we use our
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 inJune 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 32 Table of Contents
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 atSeptember 30, 2022 . The facility is recourse to us, and, as ofSeptember 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
InNovember 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 ofSeptember 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 ofSeptember 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 inMarch 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 ofSeptember 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. InApril 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 ofSeptember 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
Non-recourse Secured Debt
As ofSeptember 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 ratedAAA or A+ byS&P Global Ratings . The Series 2018-1 transaction inOctober 2018 marked our inaugural issuance of AAA rated notes and our Series 2019-1 transaction inNovember 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 inJune 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 byS&P Global Ratings . As ofSeptember 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 atSeptember 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 endedSeptember 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. 34 Table of Contents Debt Summary As ofSeptember 30, 2022 , our aggregate secured and unsecured long-term debt had an outstanding principal balance of$4.7 billion , a weighted average maturity of 6.2 years and a weighted average interest rate of just over 3.8%. The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as ofSeptember 30, 2022 : Gross Investment Portfolio Assets Special Purpose Outstanding Entity All Other (In millions) Borrowings Subsidiaries Subsidiaries Total STORE Master Funding net-lease mortgage notes payable$ 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, inNovember 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 endedSeptember 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 Weighted Average Sales Agents' Other Offering Shares Sold Price per Share Gross Proceeds Commissions
Expenses Net Proceeds
8,607,771 $ 29.38 $ 252.9 $ (3.1) $ (0.2)$ 249.6 Inception of Program Through September 30, 2022 Weighted Average Sales Agents' Other Offering Shares Sold Price per Share Gross Proceeds Commissions
Expenses Net Proceeds
19,449,302 $ 31.55 $ 613.7 $ (8.5) $
(0.8)
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 endedSeptember 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 endedSeptember 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 35
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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 endedSeptember 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)
As ofSeptember 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
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.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 endedDecember 31, 2021 in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." 36
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Real Estate Portfolio Information
As of
Our real estate portfolio is highly diversified. As ofSeptember 30, 2022 , our 3,035 property locations were operated by 579 customers acrossthe United States . Our customers are typically established regional and national operators. Our largest customer represented approximately 2.9% of our portfolio atSeptember 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 ofSeptember 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 onSeptember 30, 2022 , for all of our leases, loans and financing receivables in place as of that date.
Diversification by Customer
As of
% 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 9Cadence 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 ofSeptember 30, 2022 , our customers' business concepts were diversified across more than 120 industries within the service, retail and manufacturing sectors of theU.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 exceptHawaii . The following table details the top ten geographical locations of the properties as ofSeptember 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
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
% 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
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 ofSeptember 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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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 ofSeptember 30, 2021 to approximately$11.6 billion in gross investment amount representing 3,035 properties atSeptember 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 endedSeptember 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 endedSeptember 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 acrossthe 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 40
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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 endedSeptember 30, 2022 , respectively, as compared to 7.4% and 7.7% for both the three and nine months endedSeptember 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 2021Interest 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 afterSeptember 30, 2021 consisted of$375.0 million of 2.70% senior unsecured notes issued inNovember 2021 and$600.0 million of unsecured floating-rate bank term loans issued inApril 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, sinceSeptember 30, 2021 included$85.9 million of STORE Master Funding Series 2013-3 Class A-2 notes inNovember 2021 and$134.5 million of Series 2014-1, Class A-2 notes inApril 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 ofSeptember 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 ofSeptember 30, 2022 , we had$223.0 million of borrowings outstanding under our revolving credit facility. 41 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 ofSeptember 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 ofSeptember 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
Property-level operating costs primarily include those expenses associated (a) 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 endedSeptember 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, 42 Table of Contents general and administrative expenses for the twelve-month period endedSeptember 30, 2022 represented 0.42% of average portfolio assets as compared to 0.46% for the comparable twelve-month period endedSeptember 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 endedSeptember 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
Provisions for Impairment
During the three and nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 , we recognized a$2.7 million aggregate net loss on the sale of 27 properties. In comparison, for the three months endedSeptember 30, 2021 , we recognized a$10.7 million aggregate net gain on the sale of 25 properties. For the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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. 43 Table of Contents Non-GAAP Measures Our reported results are presented in accordance withU.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 theBoard of Governors of theNational 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. 44 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)
FFO and AFFO for the three months ended
approximately
months ended
and
short-term deferral arrangements entered into in response to the COVID-19 (a) pandemic, we account for these deferral arrangements as rental revenue and a
corresponding increase in receivables. FFO and AFFO for the three months
ended
and 2021, exclude approximately $11.8 million and $19.2 million ,
respectively, collected under these short-term deferral arrangements.
For the nine months ended
performance-based awards granted in 2018 and 2019.
For the nine months ended
amortization of deferred financing costs related to the prepayment of debt.
(c) For the three and nine months ended
and
financing costs related to the prepayment of debt.
(d) Represents transaction costs incurred as a result of the pending Merger.
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