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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from                      to                     .

Commission File No. 001-36739  

STORE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

 

45-2280254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

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

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

STOR

New York Stock Exchange

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

TABLE OF CONTENTS

Part I. - FINANCIAL INFORMATION

Page

Item 1. Financial Statements

3

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

3

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

4

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

5

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

6

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

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

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

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

Item 4. Controls and Procedures

47

Part II. - OTHER INFORMATION

47

Item 1. Legal Proceedings

47

Item 1A. Risk Factors

47

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

49

Item 3. Defaults Upon Senior Securities

49

Item 4. Mine Safety Disclosures

49

Item 5. Other Information

49

Item 6. Exhibits

50

Signatures

51

2

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STORE Capital Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

September 30,

    

December 31,

 

 

2022

2021

 

 

(unaudited)

(audited)

 

Assets

Investments:

Real estate investments:

Land and improvements

$

3,375,710

$

3,133,402

Buildings and improvements

 

7,479,704

 

6,802,918

Intangible lease assets

 

61,968

 

54,971

Total real estate investments

 

10,917,382

 

9,991,291

Less accumulated depreciation and amortization

 

(1,360,599)

 

(1,159,292)

 

9,556,783

 

8,831,999

Real estate investments held for sale, net

 

 

25,154

Operating ground lease assets

32,239

33,318

Loans and financing receivables, net

 

721,209

 

697,269

Net investments

 

10,310,231

 

9,587,740

Cash and cash equivalents

 

46,979

 

64,269

Other assets, net

 

148,771

 

121,073

Total assets

$

10,505,981

$

9,773,082

Liabilities and stockholders’ equity

Liabilities:

Credit facility

$

223,000

$

130,000

Unsecured notes and term loans payable, net

2,381,962

1,782,813

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

 

2,243,167

 

2,425,708

Dividends payable

115,901

105,415

Operating lease liabilities

37,764

37,637

Accrued expenses, deferred revenue and other liabilities

 

159,776

 

147,380

Total liabilities

 

5,161,570

 

4,628,953

Stockholders’ equity:

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

 

2,827

 

2,738

Capital in excess of par value

 

6,000,122

 

5,745,692

Distributions in excess of retained earnings

 

(690,260)

 

(602,137)

Accumulated other comprehensive income (loss)

 

31,722

 

(2,164)

Total stockholders’ equity

 

5,344,411

 

5,144,129

Total liabilities and stockholders’ equity

$

10,505,981

$

9,773,082

See accompanying notes.

3

STORE Capital Corporation

Condensed Consolidated Statements of Income

(unaudited)

(In thousands, except share and per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

 

    

2022

    

2021

    

2022

    

2021

 

Revenues:

    

    

    

    

Rental revenues

$

216,852

$

184,083

$

628,907

$

533,575

Interest income on loans and financing receivables

 

13,409

 

12,973

 

41,378

 

37,196

Other income

 

295

 

2,069

 

6,159

 

2,661

Total revenues

 

230,556

 

199,125

 

676,444

 

573,432

Expenses:

Interest

 

48,519

 

43,367

 

138,426

 

126,904

Property costs

 

4,360

 

4,267

 

10,915

 

14,098

General and administrative

 

13,427

 

17,456

 

46,381

 

58,551

Merger-related

8,014

8,014

Depreciation and amortization

 

78,985

 

67,123

 

227,641

 

195,725

Provisions for impairment

6,750

3,400

12,962

17,350

Total expenses

 

160,055

 

135,613

 

444,339

 

412,628

Other income:

(Loss) gain on dispositions of real estate

 

(2,719)

 

10,721

 

17,013

 

32,271

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

985

1,872

(2,347)

804

Income before income taxes

68,767

76,105

246,771

193,879

Income tax expense

 

182

 

169

 

659

 

552

Net income

$

68,585

$

75,936

$

246,112

$

193,327

Net income per share of common stock

Basic

$

0.24

$

0.28

$

0.88

$

0.72

Diluted

$

0.24

$

0.28

$

0.88

$

0.72

Weighted average common shares outstanding:

Basic

 

282,238,151

 

271,273,253

 

279,386,773

 

269,329,141

Diluted

 

282,238,151

 

271,273,253

 

279,386,773

 

269,329,141

See accompanying notes.

4

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

 

2022

2021

2022

2021

 

Net income

    

$

68,585

    

$

75,936

    

$

246,112

    

$

193,327

Other comprehensive income (loss):

Unrealized gains (losses) on cash flow hedges

 

26,803

 

 

31,145

 

(3)

Cash flow hedge losses reclassified to interest expense

 

857

 

61

 

2,741

 

572

Total other comprehensive income

 

27,660

 

61

 

33,886

 

569

Total comprehensive income

$

96,245

$

75,997

$

279,998

$

193,896

See accompanying notes.

5

STORE Capital Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except share and per share data)

Distributions

Accumulated

 

Capital in

in Excess of

Other

Total

 

Common Stock

Excess of

Retained

Comprehensive

Stockholders’

 

Shares

Par Value

Par Value

Earnings

Income (Loss)

Equity

 

Three Months Ended September 30, 2022

Balance at June 30, 2022

 

282,688,860

$

2,827

$

5,997,378

$

(642,945)

$

4,062

$

5,361,322

Net income

 

68,585

 

68,585

Other comprehensive income

 

27,660

 

27,660

Common stock issuance costs

 

(28)

 

(28)

Equity-based compensation

 

(2,530)

2,772

2

 

2,774

Shares repurchased under stock compensation plan

Common dividends declared ($0.41 per share)

(115,902)

(115,902)

Balance at September 30, 2022

 

282,686,330

$

2,827

$

6,000,122

$

(690,260)

$

31,722

$

5,344,411

Nine Months Ended September 30, 2022

Balance at December 31, 2021

 

273,806,225

$

2,738

$

5,745,692

$

(602,137)

$

(2,164)

$

5,144,129

Net income

 

246,112

 

246,112

Other comprehensive income

 

33,886

 

33,886

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

 

8,607,771

86

249,492

 

249,578

Equity-based compensation

 

475,130

3

9,245

110

 

9,358

Shares repurchased under stock compensation plan

(202,796)

(4,307)

(1,964)

(6,271)

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

 

(332,381)

 

(332,381)

Balance at September 30, 2022

 

282,686,330

$

2,827

$

6,000,122

$

(690,260)

$

31,722

$

5,344,411

Distributions

Accumulated

 

Capital in

in Excess of

Other

Total

 

Common Stock

Excess of

Retained

Comprehensive

Stockholders’

 

Shares

Par Value

Par Value

Earnings

Loss

Equity

 

Three Months Ended September 30, 2021

Balance at June 30, 2021

 

271,688,122

$

2,717

$

5,657,123

$

(541,717)

$

(2,287)

$

5,115,836

Net income

 

 

 

 

75,936

 

 

75,936

Other comprehensive income

 

 

 

 

 

61

 

61

Issuance of common stock, net of costs of $351

 

534,267

 

5

 

18,866

 

 

 

18,871

Equity-based compensation

 

(11,029)

 

 

6,467

 

 

 

6,467

Shares repurchased under stock compensation plan

Common dividends declared ($0.385 per share)

(104,779)

(104,779)

Balance at September 30, 2021

 

272,211,360

$

2,722

$

5,682,456

$

(570,560)

$

(2,226)

$

5,112,392

Nine Months Ended September 30, 2021

Balance at December 31, 2020

 

266,112,676

$

2,661

$

5,475,889

$

(459,977)

$

(2,795)

$

5,015,778

Net income

 

 

 

 

193,327

 

 

193,327

Other comprehensive income

 

 

 

 

 

569

 

569

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

 

5,665,358

 

56

188,329

 

 

 

188,385

Equity-based compensation

 

716,724

 

5

 

24,156

 

 

 

24,161

Shares repurchased under stock compensation plan

(283,398)

(5,918)

(3,427)

(9,345)

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

(300,483)

(300,483)

Balance at September 30, 2021

 

272,211,360

$

2,722

$

5,682,456

$

(570,560)

$

(2,226)

$

5,112,392

See accompanying notes.

6

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

Nine Months Ended September 30,

 

2022

2021

 

Operating activities

    

    

    

Net income

$

246,112

$

193,327

Adjustments to net income:

Depreciation and amortization

 

227,641

195,725

Amortization of deferred financing costs and other noncash interest expense

 

7,357

7,396

Amortization of equity-based compensation

 

9,249

24,161

Provisions for impairment

12,962

17,350

Net gain on dispositions of real estate

 

(17,013)

(32,271)

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

2,347

(804)

Distribution received from non-real estate, equity method investment

468

Noncash revenue and other

 

(4,305)

(6,931)

Changes in operating assets and liabilities:

Other assets

9,344

15,821

Accrued expenses, deferred revenue and other liabilities

 

7,284

1,004

Net cash provided by operating activities

 

501,446

 

414,778

Investing activities

Acquisition of and additions to real estate

 

(1,097,538)

(953,453)

Investment in loans and financing receivables

 

(78,834)

(70,744)

Collections of principal on loans and financing receivables

 

54,616

13,903

Proceeds from dispositions of real estate

 

177,494

270,897

Contribution made to non-real estate, equity method investment

(468)

Net cash used in investing activities

 

(944,730)

 

(739,397)

Financing activities

Borrowings under credit facility

 

724,000

416,000

Repayments under credit facility

 

(631,000)

(307,000)

Borrowings under unsecured notes and term loans payable

600,000

Repayments under unsecured notes and term loans payable

(100,000)

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

 

514,785

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

 

(186,791)

(207,823)

Financing costs paid

 

(3,024)

(10,872)

Proceeds from the issuance of common stock

 

252,873

191,595

Stock issuance costs paid

(3,296)

(3,272)

Shares repurchased under stock compensation plans

(6,271)

(9,345)

Dividends paid

(323,166)

(293,182)

Net cash provided by financing activities

 

423,325

 

190,886

Net decrease in cash, cash equivalents and restricted cash

 

(19,959)

 

(133,733)

Cash, cash equivalents and restricted cash, beginning of period

 

70,049

 

176,576

Cash, cash equivalents and restricted cash, end of period

$

50,090

$

42,843

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents

$

46,979

$

37,018

Restricted cash included in other assets

3,111

5,825

Total cash, cash equivalents and restricted cash

$

50,090

$

42,843

Supplemental disclosure of noncash investing and financing activities:

Accrued tenant improvements included in real estate investments

$

22,773

$

18,428

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

8,945

42,782

Accrued financing and stock issuance costs

66

101

Supplemental disclosure of cash flow information:

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

$

127,903

$

120,575

Cash paid during the period for income and franchise taxes

2,572

2,134

See accompanying notes.

7

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2022

1. Organization

STORE Capital Corporation (“STORE Capital” or “the Company”) was incorporated under the laws of Maryland on May 17, 2011 to acquire single-tenant operational real estate to be leased on a long-term, net basis to companies that operate across a wide variety of industries within the service, retail and manufacturing sectors of the United States economy. From time to time, it also provides mortgage financing to its customers.

On November 21, 2014, the Company completed the initial public offering of its common stock. The shares began trading on the New York Stock Exchange on November 18, 2014 under the ticker symbol “STOR”.

STORE Capital has made an election to qualify, and believes it is operating in a manner to continue to qualify, as a real estate investment trust (“REIT”) for federal income tax purposes beginning with its initial taxable year ended December 31, 2011. As a REIT, it will generally not be subject to federal income taxes to the extent that it distributes all of its taxable income to its stockholders and meets other specific requirements.

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

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

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

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

8

2. Summary of Significant Accounting Principles

Basis of Accounting and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements and, accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

These condensed consolidated statements include the accounts of STORE Capital and its subsidiaries, which are wholly owned and controlled by the Company through its voting interest. One of the Company’s wholly owned subsidiaries, STORE Capital Advisors, LLC, provides all of the general and administrative services for the day-to-day operations of the consolidated group, including property acquisition and lease origination, real estate portfolio management and marketing, accounting and treasury services. The remaining subsidiaries were formed to acquire and hold real estate investments or to facilitate non-recourse secured borrowing activities. Generally, the initial operations of the real estate subsidiaries are funded by an interest-bearing intercompany loan from STORE Capital, and such intercompany loan is repaid when the subsidiary issues long-term debt secured by its properties. All intercompany account balances and transactions have been eliminated in consolidation.

Certain of the Company’s wholly owned consolidated subsidiaries were formed as special purpose entities. Each special purpose entity is a separate legal entity and is the sole owner of its assets and liabilities. The assets of the special purpose entities are not available to pay or otherwise satisfy obligations to the creditors of any owner or affiliate of the special purpose entity. At September 30, 2022 and December 31, 2021, these special purpose entities held assets totaling $9.2 billion and $8.5 billion, respectively, and had third-party liabilities totaling $2.4 billion and $2.6 billion, respectively. These assets and liabilities are included in the accompanying condensed consolidated balance sheets.

Use of Estimates

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

Segment Reporting

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

Investment Portfolio

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

Real Estate Investments – investments are generally made through sale-leaseback transactions in which the Company acquires the real estate from the owner-operators and then leases the real estate back to them through long-term leases which are generally classified as operating leases; the operators become the Company’s long-term tenants (its customers). Certain of the lease contracts that are associated with a sale-

9

leaseback transaction may contain terms, such as a tenant purchase option, which results in the transaction being accounted for as a financing arrangement, due to the adoption of ASC Topic 842, rather than as an investment in real estate subject to an operating lease.
Mortgage Loans Receivable – investments are made by issuing mortgage loans to the owner-operators of the real estate that serve as the collateral for the loans and the operators become long-term borrowers and customers of the Company. On occasion, the Company may also make other types of loans to its customers, such as equipment loans.
Hybrid Real Estate Investments – investments are made through modified sale-leaseback transactions, where the Company acquires land from the owner-operators, leases the land back through long-term leases and simultaneously issues mortgage loans to the operators secured by the buildings and improvements on the land. Prior to 2019, these hybrid real estate investment transactions were generally accounted for as direct financing leases. Subsequent to the adoption of ASC Topic 842, new or modified hybrid real estate investment transactions are generally accounted for as operating leases of the land and mortgage loans on the buildings and improvements.

Impact of the COVID-19 Pandemic

Since the beginning of the novel coronavirus (“COVID-19”) pandemic in early 2020, the Company has provided to certain tenants rent deferral arrangements in the form of both short-term notes and lease modifications. The FASB provided accounting relief under which concessions provided to tenants in direct response to the COVID-19 pandemic are not required to be evaluated or accounted for as lease modifications in accordance with ASC Topic 842. The Company elected to apply this accounting relief to the rent deferral arrangements it has entered into with its tenants, which primarily affected the timing (but not the amount) of lease and loan payments due to the Company under its contracts; net revenue recognized under these deferral arrangements results in a corresponding increase in receivables that are included in other assets, net on the condensed consolidated balance sheets. For the three and nine months ended September 30, 2022, the Company recognized an additional $1.0 million and $2.0 million, respectively, of net revenue and collected $4.6 million and $11.8 million, respectively, of the receivables associated with these deferral arrangements. During the three and nine months ended September 30, 2021, the Company recognized $0.8 million and $5.8 million, respectively, of net revenue and collected $8.0 million and $19.2 million, respectively, in repayments of amounts deferred.

Accounting for Real Estate Investments

Classification and Cost

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

In-place lease intangibles are valued based on management’s estimates of lost rent and carrying costs during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases. In estimating lost rent and carrying costs, management considers market rents, real estate taxes,

10

insurance, costs to execute similar leases (including leasing commissions) and other related costs. The value assigned to in-place leases is amortized on a straight-line basis as a component of depreciation and amortization expense typically over the remaining term of the related leases.

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

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

Revenue Recognition

STORE Capital leases real estate to its tenants under long-term net leases that are predominantly classified as operating leases. The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that provide for specific contractual escalations, rental revenue is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, straight-line operating lease receivables, calculated as the aggregate difference between the rental revenue recognized on a straight-line basis and scheduled rents, represent unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the leases; these receivables are included in other assets, net on the condensed consolidated balance sheets. The Company reviews its straight-line operating lease receivables for collectibility on a contract by contract basis and any amounts not considered substantially collectible are written off against rental revenues. As of September 30, 2022 and December 31, 2021, the Company had $45.2 million and $39.4 million, respectively, of straight-line operating lease receivables. Leases that have contingent rent escalators indexed to future increases in the Consumer Price Index (“CPI”) may adjust over a one-year period or over multiple-year periods. Generally, these escalators increase rent at the lesser of (a) 1 to 1.25 times the increase in the CPI over a specified period or (b) a fixed percentage. Because of the volatility and uncertainty with respect to future changes in the CPI, the Company’s inability to determine the extent to which any specific future change in the CPI is probable at each rent adjustment date during the entire term of these leases and the Company’s view that the multiplier does not represent a significant leverage factor, increases in rental revenue from leases with this type of escalator are recognized only after the changes in the rental rates have actually occurred.

In addition to base rental revenue, certain leases also have contingent rentals that are based on a percentage of the tenant’s gross sales; the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached. Approximately 3.3% of the Company’s investment portfolio is subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales; historically, contingent rent recognized has been less than 2.0% of rental revenues.

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

Direct costs incremental to successful lease origination, offset by any lease origination fees received, are deferred and amortized over the related lease term as an adjustment to rental revenue. The Company periodically commits to fund the construction of new properties for its customers; rental revenue collected during the construction period is deferred and amortized over the remaining lease term when the construction project is complete. Substantially all of the Company’s leases are triple net, which means that the lessees are directly responsible for the payment of all

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property operating expenses, including property taxes, maintenance and insurance. For a few lease contracts, the Company collects property taxes from its customers and remits those taxes to governmental authorities. Subsequent to the adoption of ASC Topic 842, these property tax payments are presented on a gross basis as part of both rental revenues and property costs in the condensed consolidated statements of income.

Impairment

STORE Capital reviews its real estate investments and related lease intangibles periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. Such events or changes in circumstances may include an expectation to sell certain assets in accordance with the Company’s long-term strategic plans. Management considers factors such as expected future undiscounted cash flows, capitalization and discount rates, terminal value, tenant improvements, market trends (such as the effects of leasing demand and competition) and other factors including bona fide purchase offers received from third parties in making this assessment. These factors are classified as Level 3 inputs within the fair value hierarchy, discussed in Fair Value Measurement below. If an asset is determined to be impaired, the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results.

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

Accounting for Loans and Financing Receivables

Loans Receivable – Classification, Cost and Revenue Recognition

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

The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method. A loan receivable is placed on nonaccrual status when the loan has become more than 60 days past due, or earlier if management determines that full recovery of the contractually specified payments of principal and interest is doubtful. While on nonaccrual status, interest income is recognized only when received. As of September 30, 2022 and December 31, 2021, the Company had loans receivable with an aggregate outstanding principal balance of $21.9 million and $28.8 million, respectively, on nonaccrual status.

Direct Financing Receivables – Classification, Cost and Revenue Recognition

Direct financing receivables include hybrid real estate investment transactions completed prior to 2019. The Company recorded the direct financing receivables at their net investment, determined as the aggregate minimum lease payments and the estimated residual value of the leased property less unearned income. The unearned income is recognized over the life of the related contracts so as to produce a constant rate of return on the net investment in the asset. Subsequent to the adoption of ASC Topic 842, existing direct financing receivables will continue to be accounted for in the same manner, unless the underlying contracts are modified.

Impairment and Provision for Credit Losses

The Company accounts for provision of credit losses in accordance with ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC Topic 326”). In accordance with ASC Topic 326, the Company evaluates the collectibility of its loans and financing receivables at the time each financing receivable is issued and subsequently on a quarterly basis utilizing an expected credit loss model

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based on credit quality indicators. The primary credit quality indicator is the implied credit rating associated with each borrower, utilizing two categories, investment grade and non-investment grade. The Company computes implied credit ratings based on regularly received borrower financial statements using Moody’s Analytics RiskCalc. The Company considers the implied credit ratings, loan and financing receivable term to maturity and underlying collateral value and quality, if any, to calculate the expected credit loss over the remaining life of the receivable. Loans are written off against the allowance for credit loss when all or a portion of the principal amount is determined to be uncollectible. For the nine months ended September 30, 2022, the Company recognized an estimated $0.3 million net reduction of prior provisions for credit losses related to its loans and financing receivables; the reduction of the provision for credit losses is included in provisions for impairment on the condensed consolidated statements of income. During the nine months ended September 30, 2022, the Company wrote off $3.7 million of loans receivable against previously established reserves for credit losses. For the nine months ended September 30, 2021, the Company recognized an estimated $2.0 million of provisions for credit losses.

Accounting for Operating Ground Lease Assets

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

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

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash may include reserve account deposits held by lenders, including deposits required to be used for future investment in real estate assets, escrow deposits and cash proceeds from the sale of assets held by a qualified intermediary to facilitate tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code. The Company had $3.1 million and $5.8 million of restricted cash at September 30, 2022 and December 31, 2021, respectively, which are included in other assets, net, on the condensed consolidated balance sheets.

Deferred Costs

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

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Derivative Instruments and Hedging Activities

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

The Company records its derivatives on the balance sheet at fair value. All derivatives subject to a master netting arrangement in accordance with the associated master International Swap and Derivatives Association agreement have been presented on a net basis by counterparty portfolio for purposes of balance sheet presentation and related disclosures. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the earnings effect of the hedged forecasted transactions in a cash flow hedge. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to cash flow hedges are reclassified to operations as an adjustment to interest expense as interest payments are made on the hedged debt transaction.

As of September 30, 2022, the Company had seven interest rate swap agreements in place. One of the interest rate swap agreements has a notional amount of $200.0 million and was designated as a cash flow hedge of the Company's $200.0 million floating-rate bank term loan due in April 2029. The remaining six interest rate swap agreements have an aggregate notional amount of $400.0 million and were designated as cash flow hedges of the Company's $400.0 million floating-rate bank term loan due in April 2027 (Note 4).

Fair Value Measurement

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

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

Share-based Compensation

Directors and employees of the Company have been granted long-term incentive awards, including restricted stock awards (“RSAs”) and restricted stock unit awards (“RSUs”), which provide such directors and employees with

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equity interests as an incentive to remain in the Company’s service and to align their interests with those of the Company’s stockholders.

The Company estimates the fair value of RSAs based on the closing price per share of the common stock on the date of grant and recognizes that amount in general and administrative expense ratably over the vesting period at the greater of the amount amortized on a straight-line basis or the amount vested. During the nine months ended September 30, 2022, the Company granted RSAs representing 233,147 shares of restricted common stock to its directors and employees. During the same period, RSAs representing 166,770 shares of restricted stock vested and RSAs representing 55,622 shares were forfeited. In connection with the vesting of RSAs, the Company repurchased 82,321 shares as a result of participant elections to surrender common shares to the Company to satisfy statutory tax withholding obligations under the Company’s equity-based compensation plans. As of September 30, 2022, the Company had 448,179 shares of restricted common stock outstanding.

The Company’s RSUs granted in 2019 through 2022 contain both a market condition and a performance condition as well as a service condition. The Company values the RSUs with a market condition using a Monte Carlo simulation model and values the RSUs with a performance condition based on the fair value of the awards expected to be earned and recognizes those amounts in general and administrative expense on a tranche-by-tranche basis ratably over the vesting periods. During the nine months ended September 30, 2022, the Company awarded 629,307 RSUs to its executive officers. In connection with the vesting of 297,605 RSUs, the Company repurchased 120,475 shares during the nine months ended September 30, 2022 as a result of participant elections to surrender common shares to the Company to satisfy statutory tax withholding obligations under the Company’s equity-based compensation plan. As of September 30, 2022, there were 1,635,061 RSUs outstanding.

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

Income Taxes

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

Management of the Company determines whether any tax positions taken or expected to be taken meet the “more-likely-than-not” threshold of being sustained by the applicable federal, state or local tax authority. Certain state tax returns filed for 2018 and tax returns filed for 2019 through 2021 are subject to examination by these jurisdictions. As of September 30, 2022, management concluded that there is no tax liability relating to uncertain income tax positions. The Company’s policy is to recognize interest related to any underpayment of income taxes as interest expense and to recognize any penalties as general and administrative expense. There was no accrual for interest or penalties at September 30, 2022 or December 31, 2021.

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Net Income Per Common Share

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

Three Months Ended September 30,

Nine Months Ended September 30,

 

2022

2021

2022

2021

 

Numerator:

    

    

    

    

    

    

    

    

Net income

$

68,585

$

75,936

$

246,112

$

193,327

Less: Earnings attributable to unvested restricted shares

 

(182)

 

(223)

 

(431)

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