UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended
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.
(Exact name of registrant as specified in its charter)
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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.
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).
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.
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. ☐
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As of November 2, 2022, there were
TABLE OF CONTENTS
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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)
| September 30, |
| December 31, |
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| 2022 | 2021 |
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| (unaudited) | (audited) |
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Assets | |||||||
Investments: | |||||||
Real estate investments: | |||||||
Land and improvements | $ | | $ | | |||
Buildings and improvements |
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Intangible lease assets |
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Total real estate investments |
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Less accumulated depreciation and amortization |
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Real estate investments held for sale, net |
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Operating ground lease assets | | | |||||
Loans and financing receivables, net |
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Net investments |
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Cash and cash equivalents |
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Other assets, net |
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Total assets | $ | | $ | | |||
Liabilities and stockholders’ equity | |||||||
Liabilities: | |||||||
Credit facility | $ | | $ | | |||
Unsecured notes and term loans payable, net | | | |||||
Non-recourse debt obligations of consolidated special purpose entities, net |
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Dividends payable | | | |||||
Operating lease liabilities | | | |||||
Accrued expenses, deferred revenue and other liabilities |
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Total liabilities |
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Stockholders’ equity: | |||||||
Common stock, $ |
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Capital in excess of par value |
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Distributions in excess of retained earnings |
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Accumulated other comprehensive income (loss) |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
See accompanying notes.
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STORE Capital Corporation
Condensed Consolidated Statements of Income
(unaudited)
(In thousands, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, |
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Revenues: |
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Rental revenues | $ | | $ | | $ | | $ | | |||||
Interest income on loans and financing receivables |
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Other income |
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Total revenues |
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Expenses: | |||||||||||||
Interest |
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Property costs |
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General and administrative |
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Merger-related | | — | | — | |||||||||
Depreciation and amortization |
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Provisions for impairment | | | | | |||||||||
Total expenses |
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Other income: | |||||||||||||
(Loss) gain on dispositions of real estate |
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Income (loss) from non-real estate, equity method investments | | | ( | | |||||||||
Income before income taxes | | | | | |||||||||
Income tax expense |
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Net income | $ | | $ | | $ | | $ | | |||||
Net income per share of common stock | |||||||||||||
Basic | $ | | $ | | $ | $ | | ||||||
Diluted | $ | | $ | | $ | $ | | ||||||
Weighted average common shares outstanding: | |||||||||||||
Basic |
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Diluted |
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See accompanying notes.
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STORE Capital Corporation
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, |
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2022 | 2021 | 2022 | 2021 |
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Net income |
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Other comprehensive income (loss): | |||||||||||||
Unrealized gains (losses) on cash flow hedges |
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Cash flow hedge losses reclassified to interest expense |
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Total other comprehensive income |
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Total comprehensive income | $ | | $ | | $ | | $ | |
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 |
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Capital in | in Excess of | Other | Total |
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Common Stock | Excess of | Retained | Comprehensive | Stockholders’ |
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Shares | Par Value | Par Value | Earnings | Income (Loss) | Equity |
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Three Months Ended September 30, 2022 | ||||||||||||||||||
Balance at June 30, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | ||||||
Net income |
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Other comprehensive income |
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Common stock issuance costs |
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Equity-based compensation |
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Shares repurchased under stock compensation plan | — | — | — | — | — | — | ||||||||||||
Common dividends declared ($ | — | — | — | ( | — | ( | ||||||||||||
Balance at September 30, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | | ||||||
Nine Months Ended September 30, 2022 | ||||||||||||||||||
Balance at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income |
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Other comprehensive income |
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Issuance of common stock, net of costs of $ |
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Equity-based compensation |
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Shares repurchased under stock compensation plan | ( | — | ( | ( | — | ( | ||||||||||||
Common dividends declared ($ |
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Balance at September 30, 2022 |
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Distributions | Accumulated |
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Capital in | in Excess of | Other | Total |
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Common Stock | Excess of | Retained | Comprehensive | Stockholders’ |
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Shares | Par Value | Par Value | Earnings | Loss | Equity |
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Three Months Ended September 30, 2021 | ||||||||||||||||||
Balance at June 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income |
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Other comprehensive income |
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Issuance of common stock, net of costs of $ |
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Equity-based compensation |
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Shares repurchased under stock compensation plan | — | — | — | — | — | — | ||||||||||||
Common dividends declared ($ | — | — | — | ( | — | ( | ||||||||||||
Balance at September 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income |
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Other comprehensive income |
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Issuance of common stock, net of costs of $ |
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Equity-based compensation |
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Shares repurchased under stock compensation plan | ( | — | ( | ( | — | ( | ||||||||||||
Common dividends declared ($ | — | — | — | ( | — | ( | ||||||||||||
Balance at September 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | |
See accompanying notes.
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STORE Capital Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Nine Months Ended September 30, |
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2022 | 2021 |
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Operating activities |
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Net income | $ | | $ | | |||
Adjustments to net income: | |||||||
Depreciation and amortization |
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Amortization of deferred financing costs and other noncash interest expense |
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Amortization of equity-based compensation |
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Provisions for impairment | | | |||||
Net gain on dispositions of real estate |
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Loss (income) from non-real estate, equity method investments | | ( | |||||
Distribution received from non-real estate, equity method investment | | — | |||||
Noncash revenue and other |
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Changes in operating assets and liabilities: | |||||||
Other assets | | | |||||
Accrued expenses, deferred revenue and other liabilities |
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Net cash provided by operating activities |
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Investing activities | |||||||
Acquisition of and additions to real estate |
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Investment in loans and financing receivables |
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Collections of principal on loans and financing receivables |
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Proceeds from dispositions of real estate |
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Contribution made to non-real estate, equity method investment | ( | — | |||||
Net cash used in investing activities |
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Financing activities | |||||||
Borrowings under credit facility |
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Repayments under credit facility |
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Borrowings under unsecured notes and term loans payable | | — | |||||
Repayments under unsecured notes and term loans payable | — | ( | |||||
Borrowings under non-recourse debt obligations of consolidated special purpose entities |
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Repayments under non-recourse debt obligations of consolidated special purpose entities |
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Financing costs paid |
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Proceeds from the issuance of common stock |
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Stock issuance costs paid | ( | ( | |||||
Shares repurchased under stock compensation plans | ( | ( | |||||
Dividends paid | ( | ( | |||||
Net cash provided by financing activities |
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Net decrease in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period | $ | | $ | | |||
Reconciliation of cash, cash equivalents and restricted cash: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Restricted cash included in other assets | | | |||||
Total cash, cash equivalents and restricted cash | $ | | $ | | |||
Supplemental disclosure of noncash investing and financing activities: | |||||||
Accrued tenant improvements included in real estate investments | $ | | $ | | |||
Acquisition of real estate assets from borrowers under loans and financing receivables | | | |||||
Accrued financing and stock issuance costs | | | |||||
Supplemental disclosure of cash flow information: | |||||||
Cash paid during the period for interest, net of amounts capitalized | $ | | $ | | |||
Cash paid during the period for income and franchise taxes | | |
See accompanying notes.
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STORE Capital Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 2022
1. Organization
STORE Capital Corporation (“STORE Capital” or “the Company”) was incorporated under the laws of Maryland on May 17, 2011 to acquire single-tenant operational real estate to be leased on a long-term, net basis to companies that operate across a wide variety of industries within the service, retail and manufacturing sectors of the United States economy. From time to time, it also provides mortgage financing to its customers.
On November 21, 2014, the Company completed the initial public offering of its common stock. The shares began trading on the New York Stock Exchange on November 18, 2014 under the ticker symbol “STOR”.
STORE Capital has made an election to qualify, and believes it is operating in a manner to continue to qualify, as a real estate investment trust (“REIT”) for federal income tax purposes beginning with its initial taxable year ended December 31, 2011. As a REIT, it will generally not be subject to federal income taxes to the extent that it distributes all of its taxable income to its stockholders and meets other specific requirements.
Pending Merger Transaction with Affiliates of GIC and Oak Street, a Division of Blue Owl
As previously announced, on September 15, 2022, the Company, Ivory Parent, LLC, a Delaware limited liability company (“Parent”), and Ivory REIT, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Parent Parties”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Merger Sub (the “Merger”). Upon completion of the Merger, Merger Sub will survive and the separate existence of the Company will cease. The Merger and the other transactions contemplated by the Merger Agreement were unanimously approved and declared advisable by the board of directors of the Company (the “Company Board”). The Parent Parties are, as of the date hereof, affiliates of GIC, a global institutional investor, and will be, as of the date on which the closing of the Merger occurs, affiliates of GIC and funds managed or advised by Oak Street Real Estate Capital, a division of Blue Owl Capital, Inc. (collectively, the “Sponsors”).
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of Company common stock will be automatically cancelled and converted into the right to receive an amount in cash equal to $
The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to conduct business in the ordinary course consistent with past practice in all material respects, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the transaction. The Merger Agreement is subject to certain closing conditions, including the approval of the transaction by an affirmative vote of the holders of at least a majority of the outstanding shares of the Company’s common stock entitled to vote thereon and, with respect to the Parent’s obligation to consummate the Merger, the clearance by the Committee on Foreign Investment in the United States of the Merger and the transactions contemplated by the Merger Agreement. The obligations of the parties to consummate the Merger are not subject to any financing condition. Subject to the satisfaction or waiver of such closing conditions, the transaction is expected to close during the first quarter of 2023.
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2. Summary of Significant Accounting Principles
Basis of Accounting and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements and, accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
These condensed consolidated statements include the accounts of STORE Capital and its subsidiaries, which are wholly owned and controlled by the Company through its voting interest. One of the Company’s wholly owned subsidiaries, STORE Capital Advisors, LLC, provides all of the general and administrative services for the day-to-day operations of the consolidated group, including property acquisition and lease origination, real estate portfolio management and marketing, accounting and treasury services. The remaining subsidiaries were formed to acquire and hold real estate investments or to facilitate non-recourse secured borrowing activities. Generally, the initial operations of the real estate subsidiaries are funded by an interest-bearing intercompany loan from STORE Capital, and such intercompany loan is repaid when the subsidiary issues long-term debt secured by its properties. All intercompany account balances and transactions have been eliminated in consolidation.
Certain of the Company’s wholly owned consolidated subsidiaries were formed as special purpose entities. Each special purpose entity is a separate legal entity and is the sole owner of its assets and liabilities. The assets of the special purpose entities are not available to pay or otherwise satisfy obligations to the creditors of any owner or affiliate of the special purpose entity. At September 30, 2022 and December 31, 2021, these special purpose entities held assets totaling $
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
Investment Portfolio
STORE Capital invests in real estate assets through
● | Real Estate Investments – investments are generally made through sale-leaseback transactions in which the Company acquires the real estate from the owner-operators and then leases the real estate back to them through long-term leases which are generally classified as operating leases; the operators become the Company’s long-term tenants (its customers). Certain of the lease contracts that are associated with a sale- |
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leaseback transaction may contain terms, such as a tenant purchase option, which results in the transaction being accounted for as a financing arrangement, due to the adoption of ASC Topic 842, rather than as an investment in real estate subject to an operating lease. |
● | Mortgage Loans Receivable – investments are made by issuing mortgage loans to the owner-operators of the real estate that serve as the collateral for the loans and the operators become long-term borrowers and customers of the Company. On occasion, the Company may also make other types of loans to its customers, such as equipment loans. |
● | Hybrid Real Estate Investments – investments are made through modified sale-leaseback transactions, where the Company acquires land from the owner-operators, leases the land back through long-term leases and simultaneously issues mortgage loans to the operators secured by the buildings and improvements on the land. Prior to 2019, these hybrid real estate investment transactions were generally accounted for as direct financing leases. Subsequent to the adoption of ASC Topic 842, new or modified hybrid real estate investment transactions are generally accounted for as operating leases of the land and mortgage loans on the buildings and improvements. |
Impact of the COVID-19 Pandemic
Since the beginning of the novel coronavirus (“COVID-19”) pandemic in early 2020, the Company has provided to certain tenants rent deferral arrangements in the form of both short-term notes and lease modifications. The FASB provided accounting relief under which concessions provided to tenants in direct response to the COVID-19 pandemic are not required to be evaluated or accounted for as lease modifications in accordance with ASC Topic 842. The Company elected to apply this accounting relief to the rent deferral arrangements it has entered into with its tenants, which primarily affected the timing (but not the amount) of lease and loan payments due to the Company under its contracts; net revenue recognized under these deferral arrangements results in a corresponding increase in receivables that are included in other assets, net on the condensed consolidated balance sheets. For the three and nine months ended September 30, 2022, the Company recognized an additional $
Accounting for Real Estate Investments
Classification and Cost
STORE Capital records the acquisition of real estate properties at cost, including acquisition and closing costs. The Company allocates the cost of real estate properties to the tangible and intangible assets and liabilities acquired based on their estimated relative fair values. Intangible assets and liabilities acquired may include the value of existing in-place leases, above-market or below-market lease value of in-place leases and ground lease-related intangibles, as applicable. Management uses multiple sources to estimate fair value, including independent appraisals and information obtained about each property as a result of its pre-acquisition due diligence and its marketing and leasing activities. Certain of the Company’s lease contracts allow its tenants the option, at their election, to purchase the leased property from the Company at a specified time or times (generally at the greater of the then-fair market value or the Company’s cost, as defined in the lease contracts). Subsequent to the adoption of ASC Topic 842, for real estate assets acquired through a sale-leaseback transaction and subject to a lease contract which contains a purchase option, the Company accounts for such an acquisition as a financing arrangement and records the investment in loans and financing receivables on the condensed consolidated balance sheet; should the purchase option later expire or be removed from the lease contract, the Company would derecognize the asset accounted for as a financing arrangement and recognize the transferred leased asset in real estate investments.
In-place lease intangibles are valued based on management’s estimates of lost rent and carrying costs during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases. In estimating lost rent and carrying costs, management considers market rents, real estate taxes,
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insurance, costs to execute similar leases (including leasing commissions) and other related costs. The value assigned to in-place leases is amortized on a straight-line basis as a component of depreciation and amortization expense typically over the remaining term of the related leases.
The fair value of any above-market or below-market lease is estimated based on the present value of the difference between the contractual amounts to be paid pursuant to the in-place lease and management’s estimate of current market lease rates for the property, measured over a period equal to the remaining term of the lease. Capitalized above-market lease intangibles are amortized over the remaining term of the respective leases as a decrease to rental revenue. Below-market lease intangibles are amortized as an increase in rental revenue over the remaining term of the respective leases plus the fixed-rate renewal periods on those leases, if any. Should a lease terminate early, the unamortized portion of any related lease intangible is immediately recognized in operations.
The Company’s real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties, which generally ranges from
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 $
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
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 $
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
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
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 $
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
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
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
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
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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.
Three Months Ended September 30, | Nine Months Ended September 30, |
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Net income | $ | | $ | | $ | | $ | | |||||
Less: Earnings attributable to unvested restricted shares |
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