STORE CAPITAL Corp [STOR] Filings

10-Q 1 stor-20220331x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2022


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

For the transition period from to .

Commission File No. 001-36739

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

45-2280254

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

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

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

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

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


Large accelerated filer ☒	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☐

		Emerging growth company ☐

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

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	STOR	New York Stock Exchange

As of May 3, 2022, there were 280,567,570 shares of the registrant’s $0.01 par value common stock outstanding.

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TABLE OF CONTENTS

Part I. - FINANCIAL INFORMATION	Page
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	3
Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited)	4
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021 (unaudited)	5
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45
Item 4. Controls and Procedures	46
Part II. - OTHER INFORMATION	46
Item 1. Legal Proceedings	46
Item 1A. Risk Factors	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	47
Item 4. Mine Safety Disclosures	47
Item 5. Other Information	47
Item 6. Exhibits	48
Signatures	49

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)


	March 31,		December 31,
	2022		2021
	(unaudited)		(audited)
Assets
Investments:
Real estate investments:
Land and improvements	$	3,239,050	$	3,133,402
Buildings and improvements		7,096,841		6,802,918
Intangible lease assets		59,216		54,971
Total real estate investments		10,395,107		9,991,291
Less accumulated depreciation and amortization		(1,224,223)		(1,159,292)
		9,170,884		8,831,999
Real estate investments held for sale, net		33,234		25,154
Operating ground lease assets		32,960		33,318
Loans and financing receivables, net		736,410		697,269
Net investments		9,973,488		9,587,740
Cash and cash equivalents		39,340		64,269
Other assets, net		118,320		121,073
Total assets	$	10,131,148	$	9,773,082

Liabilities and stockholders’ equity
Liabilities:
Credit facility	$	359,000	$	130,000
Unsecured notes payable, net		1,783,440		1,782,813
Non-recourse debt obligations of consolidated special purpose entities, net		2,410,834		2,425,708
Dividends payable		107,644		105,415
Operating lease liabilities		37,330		37,637
Accrued expenses, deferred revenue and other liabilities		145,909		147,380
Total liabilities		4,844,157		4,628,953
Stockholders’ equity:
Common stock, $0.01 par value per share, 375,000,000 shares authorized, 279,595,851 and 273,806,225 shares issued and outstanding, respectively		2,796		2,738
Capital in excess of par value		5,910,856		5,745,692
Distributions in excess of retained earnings		(624,558)		(602,137)
Accumulated other comprehensive loss		(2,103)		(2,164)
Total stockholders’ equity		5,286,991		5,144,129
Total liabilities and stockholders’ equity	$	10,131,148	$	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 March 31,
	2022		2021
Revenues:
Rental revenues	$	202,061	$	169,328
Interest income on loans and financing receivables		14,930		12,563
Other income		5,125		370
Total revenues		222,116		182,261
Expenses:
Interest		43,999		41,828
Property costs		4,241		4,663
General and administrative		17,016		25,006
Depreciation and amortization		72,639		63,567
Provisions for impairment		912		7,350
Total expenses		138,807		142,414
Other income:
Net gain on dispositions of real estate		6,076		15,670
Loss from non-real estate, equity method investment		(2,157)		(363)
Income before income taxes		87,228		55,154
Income tax expense		206		194
Net income	$	87,022	$	54,960

Net income per share of common stock—basic and diluted	$	0.32	$	0.21
Weighted average common shares outstanding:
Basic		275,003,273		266,366,698
Diluted		275,003,273		266,366,698

See accompanying notes.

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STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)


	Three Months Ended March 31,
	2022		2021
Net income	$	87,022	$	54,960
Other comprehensive income (loss):
Unrealized losses on cash flow hedges		—		(3)
Cash flow hedge losses reclassified to interest expense		61		365
Total other comprehensive income		61		362
Total comprehensive income	$	87,083	$	55,322

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		Loss		Equity
Three Months Ended March 31, 2022
Balance at December 31, 2021	273,806,225	$	2,738	$	5,745,692	$	(602,137)	$	(2,164)	$	5,144,129
Net income	—		—		—		87,022		—		87,022
Other comprehensive income	—		—		—		—		61		61
Issuance of common stock, net of costs of $2,269	5,539,138		55		166,107		—		—		166,162
Equity-based compensation	439,314		3		3,065		81		—		3,149
Shares repurchased under stock compensation plan	(188,826)		—		(4,008)		(1,880)		—		(5,888)
Common dividends declared ($0.385 per share)	—		—		—		(107,644)		—		(107,644)
Balance at March 31, 2022	279,595,851	$	2,796	$	5,910,856	$	(624,558)	$	(2,103)	$	5,286,991

						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 March 31, 2021
Balance at December 31, 2020	266,112,676	$	2,661	$	5,475,889	$	(459,977)	$	(2,795)	$	5,015,778
Net income	—		—		—		54,960		—		54,960
Other comprehensive income	—		—		—		—		362		362
Issuance of common stock, net of costs of $1,961	3,483,051		35		114,068		—		—		114,103
Equity-based compensation	679,586		4		12,901		—		—		12,905
Shares repurchased under stock compensation plan	(267,242)		—		(5,579)		(3,227)				(8,806)
Common dividends declared ($0.36 per share)	—		—		—		(97,897)		—		(97,897)
Balance at March 31, 2021	270,008,071	$	2,700	$	5,597,279	$	(506,141)	$	(2,433)	$	5,091,405

See accompanying notes.

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STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)


	Three Months Ended March 31,
	2022		2021
Operating activities
Net income	$	87,022	$	54,960
Adjustments to net income:
Depreciation and amortization		72,639		63,567
Amortization of deferred financing costs and other noncash interest expense		2,161		2,100
Amortization of equity-based compensation		3,068		12,905
Provisions for impairment		912		7,350
Net gain on dispositions of real estate		(6,076)		(15,670)
Loss from non-real estate, equity method investment		2,157		363
Noncash revenue and other		(1,945)		(2,108)
Changes in operating assets and liabilities:
Other assets		1,798		5,350
Accrued expenses, deferred revenue and other liabilities		(849)		(4,928)
Net cash provided by operating activities		160,887		123,889
Investing activities
Acquisition of and additions to real estate		(467,495)		(246,195)
Investment in loans and financing receivables		(45,721)		(24,914)
Collections of principal on loans and financing receivables		5,090		2,460
Proceeds from dispositions of real estate		52,109		137,471
Net cash used in investing activities		(456,017)		(131,178)
Financing activities
Borrowings under credit facility		266,000		—
Repayments under credit facility		(37,000)		—
Repayments under non-recourse debt obligations of consolidated special purpose entities		(16,075)		(21,686)
Financing costs paid		(45)		(14)
Proceeds from the issuance of common stock		168,431		116,063
Stock issuance costs paid		(2,252)		(2,034)
Shares repurchased under stock compensation plans		(5,888)		(8,806)
Dividends paid		(106,686)		(98,193)
Net cash provided by (used in) financing activities		266,485		(14,670)
Net decrease in cash, cash equivalents and restricted cash		(28,645)		(21,959)
Cash, cash equivalents and restricted cash, beginning of period		70,049		176,576
Cash, cash equivalents and restricted cash, end of period	$	41,404	$	154,617

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	39,340	$	145,565
Restricted cash included in other assets		2,064		9,052
Total cash, cash equivalents and restricted cash	$	41,404	$	154,617

Supplemental disclosure of noncash investing and financing activities:
Accrued tenant improvements included in real estate investments	$	14,951	$	14,515
Accrued financing and stock issuance costs		17		17
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amounts capitalized	$	40,084	$	40,765
Cash paid during the period for income and franchise taxes		100		60

See accompanying notes.

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STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

March 31, 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.

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 March 31, 2022 and December 31, 2021, these special purpose entities held assets totaling $8.9 billion and $8.5 billion, respectively, and had third-party liabilities totaling $2.6 billion and $2.6 billion, respectively. These assets and liabilities are included in the accompanying condensed consolidated balance sheets.

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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-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 months ended March 31, 2022, the Company recognized an additional $0.7 million of net revenue and collected $3.4 million of the receivables associated with these deferral arrangements. During the three months ended March 31, 2021, the Company recognized $2.0 million and collected $5.9 million in repayments of amounts deferred.

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Accounting for Real Estate Investments

Classification and Cost

STORE Capital records the acquisition of real estate properties at cost, including acquisition and closing costs. The Company allocates the cost of real estate properties to the tangible and intangible assets and liabilities acquired based on their estimated relative fair values. Intangible assets and liabilities acquired may include the value of existing in-place leases, above-market or below-market lease value of in-place leases and ground lease-related intangibles, as applicable. Management uses multiple sources to estimate fair value, including independent appraisals and information obtained about each property as a result of its pre-acquisition due diligence and its marketing and leasing activities. Certain of the Company’s lease contracts allow its tenants the option, at their election, to purchase the leased property from the Company at a specified time or times (generally at the greater of the then-fair market value or the Company’s cost, as defined in the lease contracts). Subsequent to the adoption of ASC Topic 842, for real estate assets acquired through a sale-leaseback transaction and subject to a lease contract which contains a purchase option, the Company accounts for such an acquisition as a financing arrangement and records the investment in loans and financing receivables on the condensed consolidated balance sheet; should the purchase option later expire or be removed from the lease contract, the Company would derecognize the asset accounted for as a financing arrangement and recognize the transferred leased asset in real estate investments.

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

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

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

Revenue Recognition

STORE Capital leases real estate to its tenants under long-term net leases that are predominantly classified as operating leases. The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that provide for specific contractual escalations, rental revenue is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, straight-line operating lease receivables, calculated as the aggregate difference between the rental revenue recognized on a straight-line basis and scheduled rents, represent unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the leases; these receivables are included in other assets, net on the condensed consolidated balance sheets. The Company reviews its straight-line operating lease receivables for collectibility on a contract by contract basis and any amounts not considered substantially collectible are written off against rental revenues. As of March 31, 2022 and December 31, 2021, the Company had $40.9 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

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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 3.8% of the Company’s investment portfolio is subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales (for most of these leases, the contingent rent payment is for a temporary period); historically, contingent rent recognized has been less than 2.0% of rental revenues.

The Company reviews its operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. In the event that the collectibility of lease payments with respect to any tenant is not probable, a direct write-off of the receivable is made and any future rental revenue is recognized only when the tenant makes a rental payment or when collectibility is again deemed probable.

Direct costs incremental to successful lease origination, offset by any lease origination fees received, are deferred and amortized over the related lease term as an adjustment to rental revenue. The Company periodically commits to fund the construction of new properties for its customers; rental revenue collected during the construction period is deferred and amortized over the remaining lease term when the construction project is complete. Substantially all of the Company’s leases are triple net, which means that the lessees are directly responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance. For a few lease contracts, the Company collects property taxes from its customers and remits those taxes to governmental authorities. Subsequent to the adoption of ASC Topic 842, these property tax payments are presented on a gross basis as part of both rental revenues and property costs in the condensed consolidated statements of income.

Impairment

STORE Capital reviews its real estate investments and related lease intangibles periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. Such events or changes in circumstances may include an expectation to sell certain assets in accordance with the Company’s long-term strategic plans. Management considers factors such as expected future undiscounted cash flows, 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 months ended March 31, 2022, the Company recognized aggregate provisions for the impairment of real estate of $1.2 million. The estimated fair value of the impaired real estate assets at March 31, 2022 was $8.4 million. The Company recognized an aggregate provision for the impairment of real estate of $5.4 million during the three months ended March 31, 2021.

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.

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The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received. As of March 31, 2022 and December 31, 2021, the Company had loans receivable with an aggregate outstanding principal balance of $26.4 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 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. For the three months ended March 31, 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. The Company recognized an estimated $2.0 million of provisions for credit losses for the three months ended March 31, 2021.

Accounting for Operating Ground Lease Assets

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

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

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Cash and Cash Equivalents

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

Restricted Cash

Restricted cash may include reserve account deposits held by lenders, including deposits required to be used for future investment in real estate assets, escrow deposits and cash proceeds from the sale of assets held by a qualified intermediary to facilitate tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code. The Company had $2.1 million and $5.8 million of restricted cash at March 31, 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.

Derivative Instruments and Hedging Activities

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

The Company records its derivatives on the balance sheet at fair value. All derivatives subject to a master netting arrangement in accordance with the associated master International Swap and Derivatives Association agreement have been presented on a net basis by counterparty portfolio for purposes of balance sheet presentation and related disclosures. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the earnings effect of the hedged forecasted transactions in a cash flow hedge. The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to cash flow hedges are reclassified to operations as an adjustment to interest expense as interest payments are made on the hedged debt transaction. As of March 31, 2022, the Company had no derivative instruments in place.

In April 2022, the Company entered into several interest rate swap agreements. One of the interest rate swap agreements has a notional amount of $200 million and was designated as a cash flow hedge of the Company's $200 million floating-rate bank term loan issued in April 2022 and due in May 2029. The remaining interest rate swap agreements have an aggregate notional amount of $400 million and were designated as cash flow hedges of the Company's $400 million floating-rate bank term loan issued in April 2022 and due in May 2027 (Note 4).

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

The Company estimates the fair value of RSAs based on the closing price per share of the common stock on the date of grant and recognizes that amount in general and administrative expense ratably over the vesting period at the greater of the amount amortized on a straight-line basis or the amount vested. During the three months ended March 31, 2022, the Company granted RSAs representing 177,311 shares of restricted common stock to its directors and employees. During the same period, RSAs representing 102,496 shares of restricted stock vested and RSAs representing 35,602 shares were forfeited. In connection with the vesting of RSAs, the Company repurchased 68,351 shares as a result of participant elections to surrender common shares to the Company to satisfy statutory tax withholding obligations under the Company’s equity-based compensation plans. As of March 31, 2022, the Company had 476,637 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 three months ended March 31, 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 three months ended March 31, 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 March 31, 2022, there were 1,635,061 RSUs outstanding.

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Income Taxes

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

Management of the Company determines whether any tax positions taken or expected to be taken meet the “more-likely-than-not” threshold of being sustained by the applicable federal, state or local tax authority. Certain state tax returns filed for 2017 and tax returns filed for 2018 through 2021 are subject to examination by these jurisdictions. As of March 31, 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 March 31, 2022 or December 31, 2021.

Net Income Per Common Share

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


	Three Months Ended March 31,
	2022		2021
Numerator:
Net income	$	87,022	$	54,960
Less: earnings attributable to unvested restricted shares		(102)		(227)
Net income used in basic and diluted income per share	$	86,920	$	54,733
Denominator:
Weighted average common shares outstanding		275,463,866		266,991,452
Less: Weighted average number of shares of unvested restricted stock		(460,593)		(624,754)
Weighted average shares outstanding used in basic income per share		275,003,273		266,366,698
Effects of dilutive securities:
Add: Treasury stock method impact of potentially dilutive securities (a)		—		—
Weighted average shares outstanding used in diluted income per share		275,003,273		266,366,698

(a)	For the three months ended March 31, 2022 and 2021, excludes 144,661 shares and 244,602 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-

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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 March 31, 2022, STORE Capital had investments in 2,965 property locations representing 2,911 owned properties (of which 86 are accounted for as financing arrangements and 23 are accounted for as direct financing receivables), 24 properties where all the related land is subject to an operating ground lease and 30 properties which secure mortgage loans. The gross investment portfolio totaled $11.2 billion at March 31, 2022 and consisted of the gross acquisition cost of the real estate investments totaling $10.4 billion, loans and financing receivables with an aggregate carrying amount of $736.4 million and operating ground lease assets totaling $33.0 million. As of March 31, 2022, approximately 35% of these investments are assets of consolidated special purpose entity subsidiaries and are pledged as collateral under the non-recourse obligations of these special purpose entities (Note 4).

The gross dollar amount of the Company’s investments includes the investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and financing receivables and operating ground lease assets. During the three months ended March 31, 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)	97		466,817
Investment in loans and financing receivables	14		45,721
Sales of real estate	(11)		(52,490)
Principal collections on loans and financing receivables	(1)		(5,090)
Net change in operating ground lease assets (b)			(358)
Provisions for impairment			(912)
Other			(4,607)
Gross investments, March 31, 2022 (c)			11,198,018
Less accumulated depreciation and amortization (c)			(1,224,530)
Net investments, March 31, 2022	2,965	$	9,973,488

(a)	Excludes $15.6 million of tenant improvement advances disbursed in 2022 which were accrued as of December 31, 2021.

(b)	Represents amortization recognized on operating ground lease assets during the three months ended March 31, 2022.

(c)	Includes the dollar amount of investments ($33.5 million) and the accumulated depreciation ($0.3 million) related to real estate investments held for sale at March 31, 2022.

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


	Three Months Ended March 31,
	2022		2021
Rental revenues:
Operating leases (a)(c)	$	201,892	$	169,316
Sublease income - operating ground leases (b)		703		703
Amortization of lease related intangibles and costs		(534)		(691)
Total rental revenues	$	202,061	$	169,328

Interest income on loans and financing receivables:
Mortgage and other loans receivable (c)	$	7,879	$	5,929
Sale-leaseback transactions accounted for as financing arrangements		5,327		4,096
Direct financing receivables		1,724		2,538
Total interest income on loans and financing receivables	$	14,930	$	12,563

(a)	For the three months ended March 31, 2022 and 2021, includes $654,000 and $621,000, respectively, of property tax tenant reimbursement revenue and includes $0.4 million and $3.1 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 months ended March 31, 2022 and 2021, includes $0.7 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.

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 573 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 March 31, 2022. None of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at March 31, 2022, with the largest customer representing 2.9% of the total investment portfolio. On an annualized basis, as of March 31, 2022, the largest customer also represented 3.0% of the Company’s total investment portfolio revenues and the Company’s customers operated their businesses across approximately 895 concepts; the largest of these concepts represented 2.2% 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 March 31, 2022 (dollars in thousands):


				Percentage of
	Number of	Dollar		Total Dollar
	Investment	Amount of		Amount of
	Locations	Investments		Investments
Restaurants	763	$	1,350,702	12	%
Early childhood education centers	277		650,023	6
Metal fabrication	112		642,473	6
Automotive repair and maintenance	241		626,362	6
Health clubs	91		570,156	5
Furniture stores	64		413,447	4
Farm and ranch supply stores	41		377,293	3
All other service industries	1,019		3,906,607	35
All other retail industries	155		1,138,141	10
All other manufacturing industries	202		1,522,814	13
Total (a)	2,965	$	11,198,018	100	%

(a)

Includes the dollar amount of investments ($33.5 million) related to real estate investments held for sale at March 31, 2022.

Real Estate Investments

The weighted average remaining noncancelable lease term of the Company’s operating leases with its tenants at March 31, 2022 was approximately 13.3 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 March 31, 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 March 31, 2022, are as follows (in thousands):


Remainder of 2022	$	628,535
2023		838,444
2024		830,643
2025		827,634
2026		821,328
2027		809,939
Thereafter		6,444,417
Total future minimum rentals (a)	$	11,200,940

(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):


	March 31,		December 31,
	2022		2021
In-place leases	$	39,767	$	35,522
Ground lease-related intangibles		19,449		19,449
Above-market leases		—		—
Total intangible lease assets		59,216		54,971
Accumulated amortization		(24,643)		(25,285)
Net intangible lease assets	$	34,573	$	29,686

Aggregate lease intangible amortization included in expense was $0.9 million during both the three months ended March 31, 2022 and 2021. The amount amortized as a decrease to rental revenue for capitalized above-market lease intangibles was $0.2 million during the three months ended March 31, 2021.

Based on the balance of the intangible assets at March 31, 2022, the aggregate amortization expense is expected to be $2.7 million for the remainder of 2022, $3.2 million in 2023, $2.7 million in 2024, $2.2 million in 2025, $2.1 million in 2026 and $1.9 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 March 31, 2022, STORE Capital had operating ground lease assets aggregating $33.0 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 $755,000 and $794,000 during the three months ended March 31, 2022 and 2021, respectively. The Company also recognized, in rental revenues, sublease revenue associated with its operating ground leases of $703,000 for both the three months ended March 31, 2022 and 2021, respectively.

The future minimum lease payments to be paid under the operating ground leases as of March 31, 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	$	300	$	2,081	$	2,381
2023		4,149		2,629		6,778
2024		55		2,711		2,766
2025		57		2,395		2,452
2026