Store Capital 10Q 2020 Q3 Quarterly report

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, 2020


☐	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 4, 2020, there were 262,593,616 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, 2020 (unaudited) and December 31, 2019	3
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5
Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (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	48
Item 3. Defaults Upon Senior Securities	48
Item 4. Mine Safety Disclosures	48
Item 5. Other Information	48
Item 6. Exhibits	49
Signatures	50

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,
	2020		2019
	(unaudited)		(audited)
Assets
Investments:
Real estate investments:
Land and improvements	$	2,757,893	$	2,634,285
Buildings and improvements		5,905,626		5,540,749
Intangible lease assets		63,628		73,366
Total real estate investments		8,727,147		8,248,400
Less accumulated depreciation and amortization		(901,714)		(740,124)
		7,825,433		7,508,276
Operating ground lease assets		23,820		24,254
Loans and financing receivables, net		591,414		582,267
Net investments		8,440,667		8,114,797
Cash and cash equivalents		144,478		99,753
Other assets, net		135,293		81,976
Total assets	$	8,720,438	$	8,296,526

Liabilities and stockholders’ equity
Liabilities:
Credit facility	$	—	$	—
Unsecured notes and term loans payable, net		1,263,905		1,262,553
Non-recourse debt obligations of consolidated special purpose entities, net		2,305,642		2,328,489
Dividends payable		94,085		83,938
Operating lease liabilities		29,016		29,347
Accrued expenses, deferred revenue and other liabilities		119,066		106,814
Total liabilities		3,811,714		3,811,141
Stockholders’ equity:
Common stock, $0.01 par value per share, 375,000,000 shares authorized, 261,348,454 and 239,822,900 shares issued and outstanding, respectively		2,613		2,398
Capital in excess of par value		5,327,124		4,787,932
Distributions in excess of retained earnings		(417,862)		(302,609)
Accumulated other comprehensive loss		(3,151)		(2,336)
Total stockholders’ equity		4,908,724		4,485,385
Total liabilities and stockholders’ equity	$	8,720,438	$	8,296,526

See accompanying notes.

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,
	2020		2019		2020		2019
Revenues:
Rental revenues	$	163,325	$	157,965	$	482,669	$	462,920
Interest income on loans and financing receivables		11,021		9,594		34,374		24,066
Other income		877		4,275		4,357		5,273
Total revenues		175,223		171,834		521,400		492,259
Expenses:
Interest		42,090		39,325		127,816		116,822
Property costs		3,309		3,162		14,603		7,760
General and administrative		14,729		13,566		35,742		39,815
Depreciation and amortization		61,119		55,919		180,753		164,635
Provisions for impairment		2,772		7,341		10,972		9,951
Total expenses		124,019		119,313		369,886		338,983

Net gain on dispositions of real estate		3,537		59,290		6,814		72,395
Income from operations before income taxes		54,741		111,811		158,328		225,671
Income tax expense		111		193		438		533
Net income	$	54,630	$	111,618	$	157,890	$	225,138

Net income per share of common stock—basic and diluted	$	0.21	$	0.48	$	0.63	$	0.99
Weighted average common shares outstanding:
Basic		255,308,189		232,052,007		248,999,635		227,349,158
Diluted		255,610,628		232,645,531		248,999,635		227,882,523

See accompanying notes.

STORE Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	54,630	$	111,618	$	157,890	$	225,138
Other comprehensive loss:
Unrealized losses on cash flow hedges		(7)		(78)		(1,428)		(1,246)
Cash flow hedge losses (gains) reclassified to interest expense		363		(169)		613		(986)
Total other comprehensive income (loss)		356		(247)		(815)		(2,232)
Total comprehensive income	$	54,986	$	111,371	$	157,075	$	222,906

See accompanying notes.

STORE Capital Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except share and per share data)


						Distributions		Accumulated
				Capital in		in Excess of		Other		Total
	Common Stock			Excess of		Retained		Comprehensive		Stockholders’
	Shares	Par Value		Par Value		Earnings		Loss		Equity
Three Months Ended September 30, 2020
Balance at June 30, 2020	253,298,352	$	2,533	$	5,109,408	$	(378,308)	$	(3,507)	$	4,730,126
Net income	—		—		—		54,630		—		54,630
Other comprehensive income	—		—		—		—		356		356
Issuance of common stock, net of costs of $3,361	8,033,069		80		214,972		—		—		215,052
Equity-based compensation	17,033		—		2,744		—		—		2,744
Common dividends declared ($0.36 per share)	—		—		—		(94,184)		—		(94,184)
Balance at September 30, 2020	261,348,454	$	2,613	$	5,327,124	$	(417,862)	$	(3,151)	$	4,908,724

Nine Months Ended September 30, 2020
Balance at December 31, 2019	239,822,900	$	2,398	$	4,787,932	$	(302,609)	$	(2,336)	$	4,485,385
Adoption of ASC Topic 326, cumulative adjustment	—		—		—		(2,465)		—		(2,465)
Net income	—		—		—		157,890		—		157,890
Other comprehensive loss	—		—		—		—		(815)		(815)
Issuance of common stock, net of costs of $7,116	20,928,023		209		540,299		—		—		540,508
Equity-based compensation	732,511		6		1,638		5		—		1,649
Shares repurchased under stock compensation plan	(134,980)		—		(2,745)		(2,340)		—		(5,085)
Common dividends declared ($1.06 per share) and dividend equivalents on restricted stock units	—		—		—		(268,343)		—		(268,343)
Balance at September 30, 2020	261,348,454	$	2,613	$	5,327,124	$	(417,862)	$	(3,151)	$	4,908,724

						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, 2019
Balance at June 30, 2019	230,330,323	$	2,303	$	4,424,885	$	(306,573)	$	(2,126)	$	4,118,489
Net income	—		—		—		111,618		—		111,618
Other comprehensive loss	—		—		—		—		(247)		(247)
Issuance of common stock, net of costs of $2,532	4,442,863		44		158,623		—		—		158,667
Equity-based compensation	46,903		1		3,324		—		—		3,325
Shares repurchased under stock compensation plan	(15,987)		—		(311)		(232)		—		(543)
Common dividends declared ($0.35 per share) and dividend equivalents on restricted stock units	—		—		—		(82,218)		—		(82,218)
Balance at September 30, 2019	234,804,102	$	2,348	$	4,586,521	$	(277,405)	$	(2,373)	$	4,309,091

Nine Months Ended September 30, 2019
Balance at December 31, 2018	221,071,838	$	2,211	$	4,129,082	$	(267,651)	$	(141)	$	3,863,501
Net income	—		—		—		225,138		—		225,138
Other comprehensive loss	—		—		—		—		(2,232)		(2,232)
Issuance of common stock, net of costs of $7,244	13,448,509		134		452,546		—		—		452,680
Equity-based compensation	450,898		5		8,077		14		—		8,096
Shares repurchased under stock compensation plan	(167,143)		(2)		(3,184)		(1,846)		—		(5,032)
Common dividends declared ($1.01 per share) and dividend equivalents on restricted stock units	—		—		—		(233,060)		—		(233,060)
Balance at September 30, 2019	234,804,102	$	2,348	$	4,586,521	$	(277,405)	$	(2,373)	$	4,309,091

See accompanying notes.

STORE Capital Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)


	Nine Months Ended September 30,
	2020		2019
Operating activities
Net income	$	157,890	$	225,138
Adjustments to net income:
Depreciation and amortization		180,753		164,635
Amortization of deferred financing costs and other noncash interest expense		6,310		6,452
Amortization of equity-based compensation		1,645		8,083
Provisions for impairment		10,972		9,951
Net gain on dispositions of real estate		(6,814)		(72,395)
Loss on defeasance of debt		—		735
Noncash revenue and other		(57,098)		(1,455)
Payments made in settlement of cash flow hedges		—		(6,735)
Changes in operating assets and liabilities:
Other assets		(1,265)		(3,868)
Accrued expenses, deferred revenue and other liabilities		6,259		5,133
Net cash provided by operating activities		298,652		335,674
Investing activities
Acquisition of and additions to real estate		(561,913)		(1,020,961)
Investment in loans and financing receivables		(69,165)		(143,885)
Collections of principal on loans and financing receivables		32,125		6,820
Proceeds from dispositions of real estate		100,955		409,939
Net cash used in investing activities		(497,998)		(748,087)
Financing activities
Borrowings under credit facility		600,000		521,100
Repayments under credit facility		(600,000)		(656,100)
Borrowings under unsecured notes and term loans payable		—		347,410
Borrowings under non-recourse debt obligations of consolidated special purpose entities		—		41,690
Repayments under non-recourse debt obligations of consolidated special purpose entities		(26,783)		(28,930)
Financing and defeasance costs paid		(84)		(4,627)
Proceeds from the issuance of common stock		547,624		459,924
Stock issuance costs paid		(7,106)		(7,282)
Shares repurchased under stock compensation plans		(5,085)		(5,032)
Dividends paid		(259,119)		(224,975)
Net cash provided by financing activities		249,447		443,178
Net increase in cash, cash equivalents and restricted cash		50,101		30,765
Cash, cash equivalents and restricted cash, beginning of period		111,381		43,017
Cash, cash equivalents and restricted cash, end of period	$	161,482	$	73,782

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	144,478	$	27,553
Restricted cash included in other assets		17,004		46,229
Total cash, cash equivalents and restricted cash	$	161,482	$	73,782

Supplemental disclosure of noncash investing and financing activities:
Accrued tenant improvements included in real estate investments	$	22,055	$	20,522
Seller financing provided to purchaser of real estate sold		3,176		—
Acquisition of collateral property securing a mortgage note receivable		23,408		13,574
Accrued financing and stock issuance costs		81		322
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amounts capitalized	$	124,997	$	108,295
Cash paid during the period for income and franchise taxes		2,109		2,114

See accompanying notes.

STORE Capital Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2020

1. Organization

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

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

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

2. Summary of Significant Accounting Principles

Basis of Accounting and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of interim periods are not necessarily indicative of the results for the entire year. Certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted from these statements and, accordingly, these statements should be read in conjunction with the Company’s audited consolidated financial statements as filed with the SEC in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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, 2020 and December 31, 2019, these special purpose entities held assets totaling $7.4 billion and $7.0 billion, respectively, and had third-party liabilities totaling $2.4 billion. 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 1 reportable segment.

Investment Portfolio

STORE Capital invests in real estate assets through 3 primary transaction types as summarized below. Effective January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) (ASC Topic 842) which had an impact on certain accounting related to the Company’s investment portfolio.

●

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

During the novel coronavirus (COVID-19) pandemic, the Company provided certain tenants rent deferral arrangements in the form of both short-term notes and lease modifications. The FASB has 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 842. The Company has 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. For the three and nine months ended September 30, 2020, the Company recognized $13.0 million and $51.2 million, respectively, of net revenue associated with these deferral arrangements with a corresponding increase in receivables that are included in other assets, net on the condensed consolidated balance sheet. These receivables are expected to be repaid over the next 36 months with the majority being repaid prior to the end of 2021; during both the three and nine months ended September 30, 2020, the Company collected $1.3 million of the receivables related to these deferral arrangements.

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 will account for such acquisition as a financing arrangement and record the investment in loans and financing receivables on the condensed consolidated balance sheet; should the purchase option later expire or be removed from the lease contract, the Company would derecognize the asset accounted for as a financing arrangement and recognize the transferred leased asset in real estate investments.

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

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

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

Revenue Recognition

STORE Capital leases real estate to its tenants under long-term net leases that are predominantly classified as operating leases. The Company’s leases generally provide for rent escalations throughout the lease terms. For leases that provide for specific contractual escalations, rental revenue is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Accordingly, straight-line operating lease receivables, calculated as the aggregate difference between the rental revenue recognized on a straight-line basis and scheduled rents, represent unbilled rent receivables that the Company will receive only if the tenants make all rent payments required through the expiration of the leases; these receivables are included in other assets, net on the condensed consolidated balance sheets. The Company reviews its straight-line operating lease receivables for collectibility on a contract by contract basis and any amounts not considered substantially collectible are written off against rental revenues. As of September 30, 2020 and December 31, 2019, the Company had $35.1 million and $28.3 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 4.6% 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 0.5% of rental revenues.

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

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

Impairment

STORE Capital reviews its real estate investments and related lease intangibles periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. Such events or changes in circumstances may include an expectation to sell certain assets in accordance with the Company’s long-term strategic plans. Management considers factors such as expected future undiscounted cash flows, estimated residual value, 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. An asset is considered impaired if the carrying value of the asset exceeds its estimated undiscounted cash flows and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results.

During the three months ended September 30, 2020, the Company recognized an aggregate provision for the impairment of real estate of $2.0 million. The Company recognized aggregate provisions for the impairment of real estate of $10.2 million and $9.9 million during the nine months ended September 30, 2020 and 2019, respectively. For the assets impaired in 2020, the aggregate estimated fair value of the real estate assets at the time of impairment was $23.5 million.

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, net of expected credit loss, 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, 2020 and December 31, 2019, the Company had loans receivable with an aggregate outstanding principal balance of $46.6 million and $15.6 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.

Provision for Credit Losses

Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC Topic 326) which changed how the Company measures credit losses for loans and financing receivables.

In accordance with ASC Topic 326, the Company evaluates the collectibility of its loans and financing receivables at the time each financing receivable is issued and subsequently on a quarterly basis utilizing an expected credit loss model based on credit quality indicators. The primary credit quality indicator is the implied credit rating associated with each borrower, utilizing 2 categories, investment grade and non-investment grade. The Company computes implied credit ratings based on regularly received borrower financial statements using Moody’s Analytics RiskCalc. The Company considers the implied credit ratings, loan and financing receivable term to maturity and underlying collateral value and quality, if any, to calculate the expected credit loss over the remaining life of the receivable. For both the three and nine months ended September 30, 2020, the Company recognized an estimated $772,000 of provisions for credit losses related to its loans and financing receivables; the provision for credit losses is included in provisions for impairment on the condensed consolidated statements of income.

Prior to the adoption of ASC Topic 326, the Company periodically evaluated the collectibility of its loans receivable, including accrued interest, by analyzing the underlying property-level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan was determined to be impaired when, in management’s judgment based on current information and events, it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific allowances for loan losses were provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeded the estimated fair value of the underlying collateral less disposition costs.

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. As a result of the adoption of ASC Topic 842, 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 $17.0 million and $11.6 million of restricted cash at September 30, 2020 and December 31, 2019, respectively, which are included in other assets, net, on the condensed consolidated balance sheets.

Deferred Costs

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

Derivative Instruments and Hedging Activities

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

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

As of September 30, 2020, the Company had 1 interest rate floor and 2 interest rate swap agreements in place. The 2 interest rate swaps and related interest rate floor transaction have an aggregate notional amount of

$100 million and were designated as a cash flow hedge of the Company’s $100 million variable-rate bank term loan due in 2021 (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 key employees of the Company have been granted long-term incentive awards, including restricted stock awards (RSAs) and restricted stock unit awards (RSUs), which provide such directors and employees with equity interests as an incentive to remain in the Company’s service and to align their interests with those of the Company’s stockholders.

The Company estimates the fair value of RSAs based on the closing price per share of the common stock on the date of grant and recognizes that amount in general and administrative expense ratably over the vesting period at the greater of the amount amortized on a straight-line basis or the amount vested. During the nine months ended September 30, 2020, the Company granted RSAs representing 491,009 shares of restricted common stock to its directors and key employees. During the same period, RSAs representing 121,151 shares of restricted stock vested and RSAs representing 6,051 shares were forfeited. In connection with the vesting of RSAs, the Company repurchased 37,410 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, 2020, the Company had 649,045 shares of restricted common stock outstanding.

The Company’s RSUs granted in 2017 contain a market condition and a service condition and RSUs granted in 2018, 2019 and 2020 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, 2020, the Company awarded 534,141 RSUs to its executive officers. In connection with the vesting of 247,553 RSUs on December 31, 2019, the Company repurchased 97,570 shares during the nine months ended September 30, 2020 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, 2020, there were 1,737,159 RSUs outstanding.

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 2016 and tax returns filed for 2017 through 2019 are subject to examination by these jurisdictions. As of September 30, 2020, management concluded that there is 0 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 0 accrual for interest or penalties at September 30, 2020 or December 31, 2019.

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,
	2020		2019		2020		2019
Numerator:
Net income	$	54,630	$	111,618	$	157,890	$	225,138
Less: earnings attributable to unvested restricted shares		(234)		(139)		(546)		(316)
Net income used in basic and diluted income per share	$	54,396	$	111,479	$	157,344	$	224,822
Denominator:
Weighted average common shares outstanding		255,942,052		232,342,323		249,479,941		227,647,353
Less: Weighted average number of shares of unvested restricted stock		(633,863)		(290,316)		(480,306)		(298,195)
Weighted average shares outstanding used in basic income per share		255,308,189		232,052,007		248,999,635		227,349,158
Effects of dilutive securities:
Add: Treasury stock method impact of potentially dilutive securities (a)		302,439		593,524		—		533,365
Weighted average shares outstanding used in diluted income per share		255,610,628		232,645,531		248,999,635		227,882,523

(a)

For the three months ended September 30, 2020 and 2019, excludes 127,940 shares and 112,784 shares, respectively, and for the nine months ended September 30, 2020 and 2019, excludes 77,076 shares and 111,802 shares, respectively, related to unvested restricted shares as the effect would have been antidilutive.

Recent Accounting Pronouncements

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

In June 2016, the FASB issued ASC Topic 326 which changes how entities measure credit losses for most financial assets. This guidance requires an entity, at each reporting date, to estimate the lifetime “expected credit loss” of a financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected. Under this new standard, the Company records allowances that were not previously required under legacy GAAP.

The standard was effective for the Company on January 1, 2020 and was adopted retrospectively as of the beginning of the period of adoption. As a result, the Company’s investments in loans and certain leases that are accounted for as loans and financing receivables are directly impacted, requiring a cumulative-effect adjustment of $2.5 million to retained earnings upon adoption. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which clarified that receivables arising from operating leases are within the scope of the leasing standard (ASC Topic 842) discussed above. The adoption had no material impact on the Company’s internal controls.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In April 2020, the FASB issued a Staff Question & Answer (“Q&A”) which was intended to reduce the challenges of evaluating the enforceable rights and obligations of leases for concessions granted to lessees in response to the COVID-19 pandemic. The Q&A allows both lessors and lessees to elect not to evaluate whether concessions provided in response to the COVID-19 pandemic are lease modifications. This relief is subject to certain conditions being met, including ensuring the total lease payments are substantially the same or less as compared to the original lease payments prior to the concession being granted. The Company, as lessor, has elected to apply such relief and will therefore not evaluate if lease concessions that were granted in response to the COVID-19 pandemic meet the definition of a lease modification. The Company, as a lessee, has not received any concessions under its ground or other lease agreements resulting from the COVID-19 pandemic.

3. Investments

At September 30, 2020, STORE Capital had investments in 2,587 property locations representing 2,537 owned properties (of which 48 are accounted for as financing arrangements and 40 are accounted for as direct financing receivables), 22 properties where all the related land is subject to an operating ground lease and 28 properties which secure mortgage loans. The gross investment portfolio totaled $9.34 billion at September 30, 2020 and consisted of the gross acquisition cost of the real estate investments totaling $8.73 billion, loans and financing receivables with an aggregate carrying amount of $591.4 million and operating ground lease assets totaling $23.8 million. As of September 30, 2020, approximately 37% of these investments are assets of consolidated special purpose entity subsidiaries and are pledged as collateral under the non-recourse obligations of these special purpose entities (Note 4).

The gross dollar amount of the Company’s investments includes the investment in land, buildings, improvements and lease intangibles related to real estate investments as well as the carrying amount of the loans and financing receivables and operating ground lease assets. During the nine months ended September 30, 2020, the Company had the following gross real estate and other investment activity (dollars in thousands):


	Number of	Dollar
	Investment	Amount of
	Locations	Investments
Gross investments, December 31, 2019	2,504	$	8,854,921
Acquisition of and additions to real estate (a)(b)	124		601,484
Investment in loans and financing receivables (c)	7		72,341
Sales of real estate	(39)		(112,389)
Principal collections on loans and financing receivables (b)	(9)		(56,316)
Net change in operating ground lease assets (d)	—		(434)
Provisions for impairment			(10,972)
Adoption of expected credit loss standard (ASC Topic 326)			(2,465)
Other			(3,789)
Gross investments, September 30, 2020			9,342,381
Less accumulated depreciation and amortization			(901,714)
Net investments, September 30, 2020	2,587	$	8,440,667

(a)	Excludes $16.6 million of tenant improvement advances disbursed in 2020 which were accrued as of December 31, 2019 and includes $0.5 million of interest capitalized to properties under construction.

(b)	NaN loans receivable aggregating $23.4 million were repaid in full through non-cash transactions in which the Company purchased the mortgaged property and leased them back to the borrower.

(c)	Includes $3.2 million related to a mortgage loan made to the purchaser of a real estate property sold.

(d)	Represents new operating ground lease assets recognized net of amortization during the nine months ended September 30, 2020.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Rental revenues:
Operating leases (a)(c)	$	163,394	$	158,023	$	482,882	$	462,959
Sublease income - operating ground leases (b)		496		572		1,600		1,644
Amortization of lease related intangibles and costs		(565)		(630)		(1,813)		(1,683)
Total rental revenues	$	163,325	$	157,965	$	482,669	$	462,920

Interest income on loans and financing receivables:
Mortgage and other loans receivable (c)	$	4,056	$	3,772	$	13,182	$	10,102
Sale-leaseback transactions accounted for as financing arrangements (c)		3,940		2,281		11,329		3,328
Direct financing receivables (c)		3,025		3,541		9,863		10,636
Total interest income on loans and financing receivables	$	11,021	$	9,594	$	34,374	$	24,066

(a)

For the three months ended September 30, 2020 and 2019, includes $618,000 and $595,000, respectively, of property tax tenant reimbursement revenue and includes $867,000 and $29,000, respectively, of variable lease revenue. For both the nine months ended September 30, 2020 and 2019, includes $1.9 million of property tax tenant reimbursement revenue and includes $1.0 million and $0.1 million, respectively, of variable lease revenue.

(b)	Represents total revenue recognized for the sublease of properties subject to operating ground leases to the related tenants; includes both payments made by the tenants to the ground lessors and straight-line revenue recognized for scheduled increases in the sublease rental payments.

(c)

For the three and nine months ended September 30, 2020, includes $13.0 million and $49.4 million, respectively, of operating lease rental revenue and, for the nine months ended September 30, 2020, includes $1.6 million of interest income from mortgage and other loans receivable, $0.1 million of interest income from sale-leaseback transactions accounted for as financing arrangements and $0.1 million of interest income from direct financing receivables that have been deferred related to rent and financing relief arrangements granted as a result of the COVID-19 pandemic with a corresponding increase in receivables which are included in other assets, net on the condensed consolidated balance sheet.

The Company has elected to account for the lease and nonlease components in its lease contracts as a single component if the timing and pattern of transfer for the separate components are the same and, if accounted for separately, the lease component would classify as an operating lease.

Significant Credit and Revenue Concentration

STORE Capital’s real estate investments are leased or financed to approximately 500 customers geographically dispersed throughout 49 states. Only 1 state, Texas (10%), accounted for 10% or more of the total dollar amount of STORE Capital’s investment portfolio at September 30, 2020. NaN of the Company’s customers represented more than 10% of the Company’s real estate investment portfolio at September 30, 2020, with the largest customer representing 2.7% of the total investment portfolio. On an annualized basis, as of September 30, 2020, the largest customer also represented 2.7% of the Company’s total investment portfolio revenues and the Company’s customers operated their businesses across more than 735 concepts; the largest of these concepts represented 2.7% of the Company’s total investment portfolio revenues.

The following table shows information regarding the diversification of the Company’s total investment portfolio among the different industries in which its tenants and borrowers operate as of September 30, 2020 (dollars in thousands):


				Percentage of
	Number of	Dollar		Total Dollar
	Investment	Amount of		Amount of
	Locations	Investments		Investments
Restaurants	777	$	1,268,972	14	%
Early childhood education centers	240		549,239	6
Furniture stores	70		525,098	6
Health clubs	88		497,262	5
Automotive repair and maintenance	172		437,476	5
Metal fabrication	88		425,884	5
Farm and ranch supply stores	43		412,532	4
All other service industries	821		3,145,663	33
All other retail industries	129		919,641	10
All other manufacturing industries	159		1,160,614	12
	2,587	$	9,342,381	100	%

Real Estate Investments

The weighted average remaining noncancelable lease term of the Company’s operating leases with its tenants at September 30, 2020 was approximately 14 years. Substantially all the leases are triple net, which means that the lessees are responsible for the payment of all property operating expenses, including property taxes, maintenance and insurance; therefore, the Company is generally not responsible for repairs or other capital expenditures related to the properties while the triple-net leases are in effect. At September 30, 2020, 11 of the Company’s properties were vacant and not subject to a lease.

Scheduled future minimum rentals to be received under the remaining noncancelable term of the operating leases in place as of September 30, 2020, were as follows (in thousands):


Remainder of 2020	$	168,741
2021		687,125
2022		701,004
2023		697,815
2024		693,645
2025		689,734
Thereafter		5,978,544
Total future minimum rentals (a)	$	9,616,608

(a)

Excludes future minimum rentals to be received under lease contracts associated with sale-leaseback transactions accounted for as financing arrangements. See Loans and Financing Receivables section below.

Substantially all the Company’s leases include 1 or more renewal options (generally 2 to 4 five-year options). Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum lease payments due during the initial lease term only. In addition, the future minimum lease payments presented above do not include any contingent rentals such as lease escalations based on future changes in CPI.

Intangible Lease Assets

The following details intangible lease assets and related accumulated amortization (in thousands):


	September 30,		December 31,
	2020		2019
In-place leases	$	39,433	$	44,425
Ground lease-related intangibles		19,449		19,449
Above-market leases		4,746		9,492
Total intangible lease assets		63,628		73,366
Accumulated amortization		(28,574)		(28,948)
Net intangible lease assets	$	35,054	$	44,418

Aggregate lease intangible amortization included in expense was $1.0 million and $1.3 million during the three months ended September 30, 2020 and 2019, respectively, and was $3.1 million and $4.3 million during the nine months ended September 30, 2020 and 2019, respectively. The amount amortized as a decrease to rental revenue for capitalized above-market lease intangibles was $0.3 million during both the three months ended September 30, 2020 and 2019 and was $0.8 million during both the nine months ended September 30, 2020 and 2019.

Based on the balance of the intangible assets at September 30, 2020, the aggregate amortization expense is expected to be $0.9 million for the remainder of 2020, $3.5 million in 2021, $3.4 million in 2022, $2.9 million in 2023, $2.4 million in 2024 and $1.9 million in 2025; the amount expected to be amortized as a decrease to rental revenue is expected to be $0.2 million for the remainder of 2020 and $0.2 million in 2021. The weighted average remaining amortization period is approximately eight years for the in-place lease intangibles, approximately 43 years for the amortizing ground lease-related intangibles and approximately six months for the above-market lease intangibles.

Operating Ground Lease Assets

As of September 30, 2020, STORE Capital had operating ground lease assets aggregating $23.8 million. Typically, the lease payment obligations for these leases are the responsibility of the tenants operating on the properties, in accordance with the Company’s leases with those respective tenants. The Company recognized total lease cost for these operating ground lease assets of $609,000 and $592,000 during the three months ended September 30, 2020 and 2019, respectively, and $1.8 million and $1.7 million during the nine months ended September 30, 2020 and 2019, respectively. The Company also recognized, in rental revenues, sublease revenue associated with its operating ground leases of $496,000 and $572,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.6 million for both of the nine months ended September 30, 2020 and 2019.

The future minimum lease payments to be paid under the operating ground leases as of September 30, 2020 were as follows (in thousands):


			Ground
	Ground		Leases
	Leases		Paid by
	Paid by		STORE Capital's
	STORE Capital		Tenants (a)		Total
Remainder of 2020	$	100	$	941	$	1,041
2021		401		2,001		2,402
2022		401		1,956		2,357
2023		4,149		1,958		6,107
2024		55		1,981		2,036
2025		57		1,665		1,722
Thereafter		3,128		31,191		34,319
Total lease payments		8,291		41,693		49,984
Less imputed interest		(3,256)		(22,372)		(25,628)
Total operating lease liabilities - ground leases	$	5,035	$	19,321	$	24,356

(a)

STORE Capital’s tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. In the event the tenant fails to make the required ground lease payments, the Company would be primarily responsible for the payment, assuming the Company does not re-tenant the property or sell the leasehold interest. Of the total $41.7 million commitment, $16.5 million is due for periods beyond the current term of the Company’s leases with the tenants. Amounts exclude contingent rent due under three leases where the ground lease payment, or a portion thereof, is based on the level of the tenant’s sales.

Loans and Financing Receivables

The Company’s loans and financing receivables are summarized below (dollars in thousands):


	Interest		Maturity	September 30,		December 31,
Type	Rate (a)		Date	2020		2019
NaN mortgage loans receivable	7.81	%	2020 - 2022	$	31,268	$	33,073
NaN mortgage loans receivable	8.45	%	2032 - 2037		16,292		18,760
NaN mortgage loans receivable (b)	8.73	%	2051 - 2060		168,324		149,766
Total mortgage loans receivable					215,884		201,599
Equipment and other loans receivable	8.41	%	2020 - 2026		33,196		25,066
Total principal amount outstanding—loans receivable					249,080		226,665
Unamortized loan origination costs					1,163		1,197
Sale-leaseback transactions accounted for as financing arrangements (c)	7.87	%	2034 - 2043		204,469		186,614
Direct financing receivables					142,477		170,329
Allowance for credit and loan losses (d)					(5,775)		(2,538)
Total loans and financing receivables				$	591,414	$	582,267

(a)	Represents the weighted average interest rate as of the balance sheet date.

(b)	NaN of these mortgage loans allow for prepayment in whole, but not in part, with penalties ranging from 20% to 70% depending on the timing of the prepayment.

(c)

In accordance with ASC Topic 842, represents sale-leaseback transactions accounted for as financing arrangements rather than as investments in real estate subject to operating leases. Interest rate shown is the weighted average initial rental or capitalization rate on the leases; the leases mature between 2034 and 2043 and the purchase options expire between 2024 and 2039.

(d)	Balance includes $2.5 million of credit loss reserves recognized upon the adoption of ASC Topic 326 on January 1, 2020, $2.5 million of loan loss reserves recognized prior to December 31, 2019 and $0.8 million of credit losses recognized during the nine months ended September 30, 2020.

Loans Receivable

At September 30, 2020, the Company held 51 loans receivable with an aggregate carrying amount of $246.3 million. NaN of the loans are mortgage loans secured by land and/or buildings and improvements on the mortgaged property; the interest rates on 11 of the mortgage loans are subject to increases over the term of the loans. NaN of the mortgage loans are shorter-term loans (maturing prior to 2023) that generally require monthly interest-only payments with a balloon payment at maturity. The remaining mortgage loans receivable generally require the borrowers to make monthly principal and interest payments based on a 40-year amortization period with balloon payments, if any, at maturity or earlier upon the occurrence of certain other events. The equipment and other loans generally require the borrower to make monthly interest-only payments with a balloon payment at maturity.

The long-term mortgage loans receivable generally allow for prepayments in whole, but not in part, without penalty or with penalties ranging from 1% to 20%, depending on the timing of the prepayment, except as noted in the table above. All other loans receivable allow for prepayments in whole or in part without penalty. Absent prepayments, scheduled maturities are expected to be as follows (in thousands):


	Scheduled
	Principal		Balloon		Total
	Payments		Payments		Payments
Remainder of 2020	$	2,363	$	14,428	$	16,791
2021		1,663		24,181		25,844
2022		2,529		9,584		12,113
2023		2,689		6,494		9,183
2024		2,938		—		2,938
2025		1,376		916		2,292
Thereafter		129,747		50,172		179,919
Total principal payments	$	143,305	$	105,775	$	249,080

Sale-Leaseback Transactions Accounted for as Financing Arrangements

As of September 30, 2020, the Company had $204.5 million of investments acquired through sale-leaseback transactions accounted for as financing arrangements rather than as investments in real estate subject to an operating lease; revenue from these arrangements is recognized in interest income rather than as rental revenue. The scheduled future minimum rentals to be received under these agreements (which will be reflected in interest income) as of September 30, 2020, were as follows (in thousands):


Remainder of 2020	$	4,029
2021		16,205
2022		16,330
2023		16,465
2024		16,661
2025		16,869
Thereafter		246,453
Total future scheduled payments	$	333,012

Direct Financing Receivables

As of September 30, 2020 and December 31, 2019, the Company had $142.5 million and $170.3 million, respectively, of investments accounted for as direct financing leases under previous accounting guidance; the components of these investments were as follows (in thousands):


	September 30,		December 31,
	2020		2019
Minimum lease payments receivable	$	300,993	$	378,659
Estimated residual value of leased assets		18,305		22,610
Unearned income		(176,821)		(230,940)
Net investment	$	142,477	$	170,329

As of September 30, 2020, the future minimum lease payments to be received under the direct financing lease receivables are expected to be $3.5 million for the remainder of 2020, average approximately $14.3 million for each of the next five years and $225.8 million thereafter.

Provision for Credit Losses

In accordance with ASC Topic 326, the Company evaluates the collectibility of its loans and financing receivables at the time each financing receivable is issued and subsequently on a quarterly basis utilizing an expected credit loss model based on credit quality indicators. The Company groups individual loans and financing receivables based on the implied credit rating associated with each borrower. Based on credit quality indicators as of September 30, 2020, $99.3 million of loans and financing receivables were categorized as investment grade and $496.7 million were categorized as non-investment grade. During the nine months ended September 30, 2020, there were $0.8 million of provisions for credit losses recognized, 0 write-offs charged against the allowance and 0 recoveries of amounts previously written off.

As of September 30, 2020, the year of origination for loans and financing receivables with a credit quality indicator of investment grade was $57.4 million in 2019, NaN in 2018 and 2017, and $41.9 million prior to 2017. The year of origination for loans and financing receivables with a credit quality indicator of non-investment grade was $68.7 million in 2020, $190.3 million in 2019, $38.8 million in 2018, $13.2 million in 2017 and $185.7 million prior to 2017.

4. Debt

Credit Facility

The Company has an unsecured revolving credit facility with a group of lenders that is used to partially fund real estate acquisitions pending the issuance of long-term, fixed-rate debt. The credit facility has immediate availability of $600 million and an accordion feature of $800 million, which allows the size of the facility to be increased up to $1.4 billion. The facility matures in February 2022 and includes 2 six-month extension options, subject to certain conditions and the payment of a 0.075% extension fee. At September 30, 2020, the Company had 0 borrowings outstanding on the facility.

Borrowings under the facility require monthly payments of interest at a rate selected by the Company of either (1) LIBOR plus a credit spread ranging from 0.825% to 1.55%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.55%. The credit spread used is based on the Company’s credit rating as defined in the credit agreement. The Company is required to pay a facility fee on the total commitment amount ranging from 0.125% to 0.30%. Currently, the applicable credit spread for LIBOR-based borrowings is 1.00% and the facility fee is 0.20%.

Under the terms of the facility, the Company is subject to various restrictive financial and nonfinancial covenants which, among other things, require the Company to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth. Certain of these ratios are based on the Company’s pool of unencumbered assets, which aggregated approximately $5.8 billion at September 30, 2020.

The facility is recourse to the Company and, as of September 30, 2020, the Company was in compliance with the covenants under the facility.

At September 30, 2020 and December 31, 2019, unamortized financing costs related to the Company’s credit facility totaled $1.4 million and $2.1 million, respectively, and are included in other assets, net, on the condensed consolidated balance sheets.

Unsecured Notes and Term Loans Payable, net

In both March 2018 and February 2019, the Company completed public offerings of $350 million in aggregate principal amount of senior unsecured notes (Public Notes). The Public Notes have coupon rates of 4.50% and 4.625%, respectively, and interest is payable semi-annually in arrears in March and September of each year. The notes were issued at 99.515% and 99.260%, respectively, of their principal amounts.

The supplemental indentures governing the Public Notes contain various restrictive covenants, including limitations on the Company’s ability to incur additional secured and unsecured indebtedness. As of September 30, 2020, the Company was in compliance with these covenants. The Public Notes can be redeemed, in whole or in part, at par within three months of their maturity date or at a redemption price equal to the sum of (i) the principal amount of the notes being redeemed plus accrued and unpaid interest and (ii) the make-whole premium, as defined in the supplemental indentures governing these notes.

The Company has entered into Note Purchase Agreements (NPAs) with institutional purchasers that provided for the private placement of 3 series of senior unsecured notes aggregating $375 million (the Notes). Interest on the Notes is payable semi-annually in arrears in May and November of each year. On each interest payment date, the interest rate on each series of Notes may be increased by 1.0% should the Company’s Applicable Credit Rating (as defined in the NPAs) fail to be an investment-grade credit rating; the increased interest rate would remain in effect until the next interest payment date on which the Company obtains an investment grade credit rating. The Company may prepay at any time all, or any part, of any series of Notes, in an amount not less than 5% of the aggregate principal amount of the series then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a Make-Whole Amount (as defined in the NPAs). The Notes are senior unsecured obligations of the Company.

The NPAs contain a number of financial covenants that are similar to the Company’s unsecured credit facility as summarized above. Subject to the terms of the NPAs and the Notes, upon certain events of default, including, but not limited to, (i) a payment default under the Notes, and (ii) a default in the payment of certain other indebtedness by the Company or its subsidiaries, all amounts outstanding under the Notes will become due and payable at the option of the purchasers. As of September 30, 2020, the Company was in compliance with its covenants under the NPAs.

In April 2016, the Company entered into a $100 million floating-rate, unsecured five-year term loan and, in March 2017, the Company entered into a second $100 million floating-rate, unsecured term loan. In March 2020, the Company elected to exercise the first extension option on the 2017 loan for one year to March 2021; the loan has 2 remaining one-year extension options. The interest rate on these loans resets monthly at one-month LIBOR plus a credit rating-based credit spread ranging from 0.90% to 1.75%; the credit spread currently applicable to the Company is 1.10% for the 2016 loan and 1.00% for the 2017 loan. The Company has entered into interest rate swap agreements that effectively convert the variable interest rate on the 2016 term loan to a fixed rate. The term loans were arranged with lenders who also participate in the Company’s unsecured revolving credit facility and the financial covenants of the term loans match the covenants of the unsecured credit facility. The term loans are senior unsecured obligations of the Company and may be prepaid at any time without penalty.

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


	Maturity	Interest		September 30,		December 31,
	Date	Rate		2020		2019
Notes Payable:
Series A issued November 2015	Nov. 2022	4.95	%	$	75,000	$	75,000
Series B issued November 2015	Nov. 2024	5.24	%		100,000		100,000
Series C issued April 2016	Apr. 2026	4.73	%		200,000		200,000

Public Notes issued March 2018	Mar. 2028	4.50	%		350,000		350,000
Public Notes issued February 2019	Mar. 2029	4.625	%		350,000		350,000
Total notes payable					1,075,000		1,075,000
Term Loans:
Term Loan issued March 2017	Mar. 2021	1.16	%		100,000		100,000
Term Loan issued April 2016	Apr. 2021	2.44	%		100,000		100,000
Total term loans					200,000		200,000
Unamortized discount					(3,445)		(3,766)
Unamortized deferred financing costs					(7,650)		(8,681)
Total unsecured notes and term loans payable, net				$	1,263,905	$	1,262,553

Non-recourse Debt Obligations of Consolidated Special Purpose Entities, net

During 2012, the Company implemented its STORE Master Funding debt program pursuant to which certain of its consolidated special purpose entities issue multiple series of non-recourse net-lease mortgage notes from time to time that are collateralized by the assets and related leases (collateral) owned by these entities. One of the principal features of the program is that, as additional series of notes are issued, new collateral is contributed to the collateral pool, thereby increasing the size and diversity of the collateral pool for the benefit of all noteholders, including those who invested in prior series. Another feature of the program is the ability to substitute collateral from time to time subject to meeting certain prescribed conditions and criteria. The notes issued under this program are generally segregated into Class A amortizing notes and Class B non-amortizing notes. The Company has retained the Class B notes which aggregate $155.0 million at September 30, 2020.

The Class A notes require monthly principal and interest payments with a balloon payment due at maturity and these notes may be prepaid at any time, subject to a yield maintenance prepayment premium if prepaid more than 24 or 36 months prior to maturity. As of September 30, 2020, the aggregate collateral pool securing the net-lease mortgage notes was comprised primarily of single-tenant commercial real estate properties with an aggregate investment amount of approximately $3.2 billion.

A number of additional consolidated special purpose entity subsidiaries of the Company have financed their real estate properties with traditional first mortgage debt. The notes generally require monthly principal and interest payments with balloon payments due at maturity. In general, these mortgage notes payable can be prepaid in whole or in part upon payment of a yield maintenance premium. The mortgage notes payable are collateralized by real estate properties owned by these consolidated special purpose entity subsidiaries with an aggregate investment amount of approximately $343.2 million at September 30, 2020.

The mortgage notes payable, which are obligations of the consolidated special purpose entities described in Note 2, contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Although this mortgage debt generally is non-recourse, there are customary limited exceptions to recourse for matters such as fraud, misrepresentation, gross negligence or willful misconduct, misapplication of payments, bankruptcy and environmental liabilities. Certain of the mortgage notes payable also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the Company or one of its tenants.

The Company’s non-recourse debt obligations of consolidated special purpose entity subsidiaries are summarized below (dollars in thousands):


	Maturity	Interest		September 30,		December 31,
	Date	Rate		2020		2019
Non-recourse net-lease mortgage notes:
$95,000 Series 2015-1, Class A-1	Apr. 2022	3.75	%	$	92,427	$	92,783
$102,000 Series 2013-1, Class A-2	Mar. 2023	4.65	%		88,158		89,775
$97,000 Series 2013-2, Class A-2	Jul. 2023	5.33	%		84,975		86,445
$100,000 Series 2013-3, Class A-2	Nov. 2023	5.21	%		88,284		89,773
$140,000 Series 2014-1, Class A-2	Apr. 2024	5.00	%		135,567		136,092
$150,000 Series 2018-1, Class A-1	Oct. 2024	3.96	%		144,060		146,384
$50,000 Series 2018-1, Class A-3	Oct. 2024	4.40	%		49,521		49,708
$270,000 Series 2015-1, Class A-2	Apr. 2025	4.17	%		262,687		263,700
$200,000 Series 2016-1, Class A-1 (2016)	Oct. 2026	3.96	%		185,364		188,347
$82,000 Series 2019-1, Class A-1	Nov. 2026	2.82	%		80,594		81,859
$46,000 Series 2019-1, Class A-3	Nov. 2026	3.32	%		45,808		45,981
$135,000 Series 2016-1, Class A-2 (2017)	Apr. 2027	4.32	%		126,470		128,443
$228,000 Series 2018-1, Class A-2	Oct. 2027	4.29	%		218,971		222,504
$164,000 Series 2018-1, Class A-4	Oct. 2027	4.74	%		162,428		163,043
$244,000 Series 2019-1, Class A-2	Nov. 2034	3.65	%		239,815		243,582
$136,000 Series 2019-1, Class A-4	Nov. 2034	4.49	%		135,433		135,943
Total non-recourse net-lease mortgage notes					2,140,562		2,164,362
Non-recourse mortgage notes:
$16,100 note issued February 2014	Mar. 2021	4.83	%		13,650		13,973
$13,000 note issued May 2012	May 2022	5.195	%		10,450		10,727
$26,000 note issued August 2012	Sept. 2022	5.05	%		21,058		21,608
$6,400 note issued November 2012	Dec. 2022	4.707	%		5,181		5,319
$11,895 note issued March 2013	Apr. 2023	4.7315	%		9,753		10,004
$17,500 note issued August 2013	Sept. 2023	5.46	%		14,812		15,150
$10,075 note issued March 2014	Apr. 2024	5.10	%		9,051		9,188
$65,000 note issued June 2016	Jul. 2026	4.75	%		60,699		61,531
$41,690 note issued March 2019	Mar. 2029	4.80	%		41,690		41,690
$6,944 notes issued March 2013	Apr. 2038	4.50	% (a)		5,620		5,758
Total non-recourse mortgage notes					191,964		194,948
Unamortized discount					(410)		(471)
Unamortized deferred financing costs					(26,474)		(30,350)
Total non-recourse debt obligations of consolidated special purpose entities, net				$	2,305,642	$	2,328,489

(a)	Interest rate is effective until March 2023 and will reset to the lender’s then prevailing interest rate.

Credit Risk Related Contingent Features

The Company has agreements with derivative counterparties, which provide generally that the Company could be declared in default on its derivative obligations if the Company defaults on the underlying indebtedness following acceleration of the indebtedness by the lender. As of September 30, 2020, the termination value of the Company’s interest rate swaps that were in a liability position was approximately $0.8 million, which includes accrued interest but excludes any adjustment for nonperformance risk.

Long-term Debt Maturity Schedule

As of September 30, 2020, the scheduled maturities, including balloon payments, on the Company’s aggregate long-term debt obligations are as follows (in thousands):


	Scheduled
	Principal		Balloon
	Payments		Payments		Total
Remainder of 2020	$	8,549	$	—	$	8,549
2021		33,329		213,466		246,795
2022		28,654		200,829		229,483
2023		24,339		265,357		289,696
2024		19,634		426,914		446,548
2025		17,334		256,612		273,946
Thereafter		39,865		2,072,644		2,112,509
	$	171,704	$	3,435,822	$	3,607,526

5. Stockholders’ Equity

In November 2019, the Company established its fourth “at the market” equity distribution program, or ATM program, pursuant to which, from time to time, it may offer and sell up to $900 million of registered shares of common stock through a group of banks acting as its sales agents (the 2019 ATM Program).

The following tables outline the common stock issuances under the 2019 ATM Program (in millions except share and per share information):


Three Months Ended September 30, 2020
Shares Sold	Weighted Average Price per Share		Gross Proceeds		Sales Agents' Commissions		Other Offering Expenses		Net Proceeds
8,033,069	$	27.19	$	218.4	$	(3.3)	$	(0.1)	$	215.0

Nine Months Ended September 30, 2020
Shares Sold	Weighted Average Price per Share		Gross Proceeds		Sales Agents' Commissions		Other Offering Expenses		Net Proceeds
20,928,023	$	26.17	$	547.6	$	(6.8)	$	(0.3)	$	540.5

Inception of Program Through September 30, 2020
Shares Sold	Weighted Average Price per Share		Gross Proceeds		Sales Agents' Commissions		Other Offering Expenses		Net Proceeds
25,954,389	$	28.81	$	747.6	$	(8.7)	$	(0.6)	$	738.3

6. Commitments and Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Management believes that the final outcome of such matters will not have a material adverse effect on the Company’s financial position or results of operations.

In the normal course of business, the Company enters into various types of commitments to purchase real estate properties. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated to purchase the properties. As of September 30, 2020, the Company had commitments to its customers to fund improvements to owned or mortgaged real estate properties totaling approximately $94.4 million, of which $86.9 million is expected to be funded in the next twelve months. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts.

The Company has employment agreements with each of its executive officers that provide for minimum annual base salaries, and annual cash and equity incentive compensation based on the satisfactory achievement of reasonable performance criteria and objectives to be adopted by the Company’s Board of Directors each year. In the event an executive officer’s employment terminates under certain circumstances, the Company would be liable for cash severance, continuation of healthcare benefits and, in some instances, accelerated vesting of equity awards that he or she has been awarded as part of the Company’s incentive compensation program.

7. Fair Value of Financial Instruments

The Company’s derivatives are required to be measured at fair value in the Company’s consolidated financial statements on a recurring basis. Derivatives are measured under a market approach, using prices obtained from a nationally recognized pricing service and pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy. The fair value of the Company’s derivative instruments was a liability of $0.7 million at September 30, 2020 and an asset of $0.3 million at December 31, 2019; derivative assets are included in other assets, net, and derivative liabilities are included in accrued expenses, deferred revenue and other liabilities on the condensed consolidated balance sheets.

In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based on market conditions and perceived risks at September 30, 2020 and December 31, 2019. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and tenant deposits. Generally these assets and liabilities are short-term in duration and are recorded at fair value on the consolidated balance sheets. The Company believes the carrying value of the borrowings on its credit facility approximate fair value based on their nature, terms and variable interest rate. Additionally, the Company believes the carrying values of its fixed-rate loans receivable approximate fair values based on market quotes for comparable instruments or discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads.

The estimated fair values of the Company’s aggregate long-term debt obligations have been derived based on market observable inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 2 within the fair value hierarchy. At September 30, 2020, these debt obligations had a carrying value of $3,569.5 million and an estimated fair value of $3,739.1 million. At December 31, 2019, these debt obligations had an aggregate carrying value of $3,591.0 million and an estimated fair value of $3,812.7 million.

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

In this Quarterly Report on Form 10-Q, we refer to STORE Capital Corporation as “we,” “us,” “our” or “the Company” unless we specifically state otherwise or the context indicates otherwise.

Special Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-term, triple-net leases of freestanding, single-tenant properties. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this quarterly report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on February 21, 2020, as updated in our subsequent reports filed with the Securities and Exchange Commission on Form 10-Q and Form 8-K.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this quarterly report. New risks and uncertainties arise over time and it is not possible for us to predict those events or how they may affect us. Many of the risks identified herein and in our periodic reports have been and will continue to be heightened as a result of the ongoing and numerous adverse effects arising from the novel coronavirus (“COVID-19”) pandemic. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

Overview

We were formed in 2011 to invest in and manage Single Tenant Operational Real Estate, or STORE Property, which is our target market and the inspiration for our name. A STORE Property is a property location at which a company operates its business and generates sales and profits, which makes the location a profit center and, therefore, fundamentally important to that business. Due to the long-term nature of our leases, we focus our acquisition activity on properties that operate in industries we believe have long-term relevance, the majority of which are service industries. Our customers operate their businesses under a wide range of brand names or business concepts. As of September 30, 2020, more than 735 brand names or business concepts in over 100 industries were represented in our investment portfolio. By acquiring the real estate from the operators and then leasing the real estate back to them, the operators become our long-term tenants, and we refer to them as our customers. Through the execution of these sale-leaseback transactions, we fill a need for our customers by providing them a source of long-term capital that enables them to avoid the need to incur debt and/or employ equity in order to finance the real estate that is essential to their business.

We are a Maryland corporation organized as an internally managed real estate investment trust, or REIT. As a REIT, we will generally not be subject to federal income tax to the extent that we distribute all of our taxable income to our stockholders and meet other requirements.

Our shares of common stock have been listed on the New York Stock Exchange since our initial public offering, or IPO, in November 2014 and trade under the ticker symbol “STOR.”

Since our inception in 2011, we have selectively originated over $10.7 billion of real estate investments. As of September 30, 2020, our investment portfolio totaled approximately $9.3 billion, consisting of investments in 2,587 property locations across the United States. All of the real estate we acquire is held by our wholly owned subsidiaries, many of which are special purpose bankruptcy remote entities formed to facilitate the financing of our real estate. We predominantly acquire our single-tenant properties directly from our customers in sale-leaseback transactions where our customers sell us their operating properties and then simultaneously enter into long-term triple-net leases with us to lease the properties back. Accordingly, our properties are fully occupied and under lease from the moment we acquire them.

We generate our cash from operations primarily through the monthly lease payments, or “base rent”, we receive from our customers under their long-term leases with us. We also receive interest payments on loans receivable, which are a small part of our portfolio. We refer to the monthly scheduled lease and interest payments due from our customers as “base rent and interest”. Most of our leases contain lease escalations every year or every several years that are based on the lesser of the increase in the Consumer Price Index or a stated percentage (if such contracts are expressed on an annual basis, currently averaging approximately 1.9%), which allows the monthly lease payments we receive to increase somewhat in an inflationary economic environment. As of September 30, 2020, approximately 99% of our leases (based on base rent) were “triple-net” leases, which means that our customers are responsible for all of the operating costs such as maintenance, insurance and property taxes associated with the properties they lease from us, including any increases in those costs that may occur as a result of inflation. The remaining leases have some landlord responsibilities, generally related to maintenance and structural component replacement that may be required on such properties in the future, although we do not currently anticipate incurring significant capital expenditures or property-level operating costs under such leases. Because our properties are single-tenant properties, almost all of which are under long-term leases, it is not necessary for us to perform any significant ongoing leasing activities on our properties. As of September 30, 2020, the weighted average remaining term of our leases (calculated based on base rent) was approximately 14 years, excluding renewal options, which are exercisable at the option of our tenants upon expiration of their base lease term. Leases approximating 99% of our base rent as of that date provide for tenant renewal options (generally two to four five-year options) and leases approximating 11% of our base rent provide our tenants the option, at their election, to purchase the property from us at a specified time or times (generally at the greater of the then-fair market value or our cost, as defined in the lease contracts).

We have dedicated an internal team to review and analyze ongoing tenant financial performance, both at the corporate level and at each property we own, in order to identify properties that may no longer be part of our long-term strategic plan. As part of that continuous active-management process, we may decide to sell properties where we believe the property no longer fits within our plan. Because generally we have been able to originate assets at lease rates above the online commercial real estate auction marketplace, we have been able to sell these assets on both opportunistic and strategic bases, typically for a gain. This gain acts to partially offset any possible losses we may experience in the real estate portfolio.

COVID-19 Pandemic

The COVID-19 pandemic has impacted us through government mandated limits (i.e. required closing or limits on operations, social distancing requirements and restrictions on travel) imposed on our tenants’ businesses and continuing public perceptions regarding safety, which impacted our tenants’ ability to pay their rent to us. Our rent and interest collections have increased from 70% in May to 90% in October. Further, nearly all of our properties are currently open for business with two industries – movie theatres and early childhood education – remaining as the industries most impacted by mandated restrictions. Unpredictable factors remain that may impact our business going forward and we continue to closely monitor these factors, including the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; and the overall impact on economic activity.

Although many states have lifted certain restrictions that have significantly impacted economic activity, some states or municipalities are being impacted by renewed and mandated restrictions as cases of the virus have recently risen in certain parts of the country. As restrictions are lifted, our tenants have gradually increased their business activity and, therefore, have improved their ability to meet their financial obligations. The timing and strength of the recovery from the economic impact of the COVID-19 pandemic cannot yet be predicted.

In response to the pandemic, we were able to immediately transition to a remote working environment and our 103 employees have collectively taken steps to manage the impact to us, as well as to assist our customers in managing the impact to them. This includes working directly with our tenants to help them continue to meet their rent payment obligations to us, including providing short-term rent deferral arrangements. These arrangements included a structured rent relief program through which we allowed tenants that were highly and adversely impacted by the pandemic to defer the payment of their rent on a short-term basis. As of September 30, 2020, we had recognized $51.2 million of net revenue associated with deferral arrangements granted under our lease and loan contracts with a corresponding increase in receivables. These receivables are expected to be repaid over the next 36 months with the majority being repaid prior to the end of 2021.

Liquidity and Capital Resources

As of September 30, 2020, our investment portfolio stood at approximately $9.3 billion, consisting of investments in 2,587 property locations. Substantially all our cash from operations is generated by our investment portfolio.

Our primary cash expenditures are the principal and interest payments we make on the debt we use to finance our real estate investment portfolio and the general and administrative expenses of managing the portfolio and operating our business. Since substantially all our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us. When a property becomes vacant through a tenant default or expiration of the lease term with no tenant renewal, we incur the property costs not paid by the tenant, as well as those property costs accruing during the time it takes to locate a substitute tenant or sell the property. As of September 30, 2020, the weighted average remaining term of our leases was approximately 14 years and the lease contracts related to just nine of our properties, representing less than 0.1% of our annual base rent and interest, are due to expire during the remainder of 2020; 83% of our leases have ten years or more remaining in their base lease term. As of September 30, 2020, 11 of our 2,587 properties were vacant and not subject to a lease, which represents a 99.6% occupancy rate. We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations. Property costs are generally not significant to our operations, but the amount of property costs can vary quarter to quarter based on the timing of property vacancies and the level of underperforming properties. We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations.

In order to preserve financial flexibility during the onset of the COVID-19 pandemic, we had fully drawn down our credit facility and temporarily reduced our new property acquisition activity. As we continue to gain better visibility into the path to recovery from the pandemic, we intend to continue to grow through additional real estate investments. To accomplish this objective, we must identify real estate acquisitions that are consistent with our underwriting guidelines and raise future additional capital to make such acquisitions. We acquire real estate with a combination of debt and equity capital, proceeds from the sale of properties and cash from operations that is not otherwise distributed to our stockholders in the form of dividends. When we sell properties, we generally reinvest the cash proceeds from those sales in new property acquisitions. We also periodically commit to fund the construction of new properties for our customers or to provide them funds to improve and/or renovate properties we lease to them. These additional investments will generally result in increases to the rental revenue or interest income due under the related contracts. As of September 30, 2020, we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately $94.4 million, the majority of which is expected to be funded in the next twelve months.

Financing Strategy

Our debt capital is initially provided on a short-term, temporary basis through a multi-year, variable-rate unsecured revolving credit facility with a group of banks. We manage our long-term leverage position through the strategic and economic issuance of long-term fixed-rate debt on both a secured and unsecured basis. By matching the expected cash inflows from our long-term real estate leases with the expected cash outflows of our long-term fixed-rate debt, we “lock in”, for as long as is economically feasible, the expected positive difference between our scheduled cash inflows on the leases and the cash outflows on our debt payments. By locking in this difference, or spread, we seek to

reduce the risk that increases in interest rates would adversely impact our profitability. In addition, we may use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate swaps and caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. We also ladder our debt maturities in order to minimize the gap between our free cash flow (which we define as our cash from operations less dividends plus proceeds from our sale of properties) and our annual debt maturities; we have no significant debt maturities through 2024.

As of September 30, 2020, substantially all our long-term debt was fixed-rate debt or was effectively converted to a fixed rate for the term of the debt and our weighted average debt maturity was 6.2 years. As part of our long-term debt strategy, we develop and maintain broad access to multiple debt sources. We believe that having access to multiple debt markets increases our financing flexibility because different debt markets may attract different kinds of investors, thus expanding our access to a larger pool of potential debt investors. Also, a particular debt market may be more competitive than another at any particular point in time.

The long-term debt we have issued to date is comprised of both secured non-recourse borrowings, the vast majority of which is investment-grade rated, and senior investment-grade unsecured borrowings. We are currently rated Baa2, BBB and BBB by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, respectively. In conjunction with our investment-grade debt strategy, we target a level of debt, net of cash and cash equivalents, that approximates 5½ to 6 times our estimated annualized amount of earnings (excluding gains or losses on sales of real estate and provisions for impairment) before interest, taxes, depreciation and amortization (based on our current investment portfolio).

Our secured non-recourse borrowings are obtained through multiple debt markets – primarily the asset-backed securities debt market. The vast majority of our secured non-recourse borrowings were made through an investment-grade-rated debt program we designed, which we call our Master Funding debt program. By design, this program provides flexibility not commonly found in most secured non-recourse debt and which is described in Non-recourse Secured Debt below. To a lesser extent, we may also obtain fixed-rate non-recourse mortgage financing through the commercial mortgage-backed securities debt market or from banks and insurance companies secured by specific properties we pledge as collateral.

Our goal is to employ a prudent blend of secured non-recourse debt through our flexible Master Funding debt program, paired with senior unsecured debt that uses our investment grade credit ratings. By balancing the mix of secured and unsecured debt, we can effectively leverage those properties subject to the secured debt in the range of 60%-70% and, at the same time, target a more conservative level of overall corporate leverage by maintaining a large pool of properties that are unencumbered. As of September 30, 2020, our secured non-recourse borrowings had a weighted average loan-to-cost ratio of approximately 67% and approximately 37% of our investment portfolio serves as collateral for this long-term debt. The remaining 63% of our portfolio properties, aggregating approximately $5.8 billion at September 30, 2020, are unencumbered and this unencumbered pool of properties provides us the flexibility to access long-term unsecured borrowings. The result is that our growing unencumbered pool of properties can provide higher levels of debt service coverage on the senior unsecured debt than would be the case if we employed only unsecured debt at our overall corporate leverage level. We believe this debt strategy can lead to a lower cost of capital for the Company, especially as we can issue AAA rated debt from our Master Funding debt program, as described further below.

The availability of debt to finance commercial real estate in the United States can, at times, be impacted by economic and other factors that are beyond our control. An example of adverse economic factors occurred during the recession of 2007 to 2009 when availability of debt capital for commercial real estate was significantly curtailed. We seek to reduce the risk that long-term debt capital may be unavailable to us by maintaining the flexibility to issue long-term debt in multiple debt capital markets, both secured and unsecured, and by limiting the period between the time we acquire our real estate and the time we finance our real estate with long-term debt. In addition, we have arranged our unsecured revolving credit facility to have a multi-year term with extension options in order to reduce the risk that short-term real estate financing would not be available to us. As we grow our real estate portfolio, we also intend to manage our debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. Because our long-term secured debt generally requires monthly payments of principal, in addition to the monthly interest payments, the resulting principal amortization also reduces our refinancing risk upon maturity of the debt. As our outstanding debt matures, we may refinance the maturing debt as it comes due or choose to repay it using cash and cash

equivalents or our unsecured revolving credit facility. For example, as part of the STORE Master Funding Series 2018-1 notes issuance in October 2018, we prepaid, without penalty, an aggregate of $233.3 million of STORE Master Funding Series 2013-1 and Series 2013-2 Class A-1 notes that were scheduled to mature in 2020. Also, as part of the STORE Master Funding Series 2019-1 notes issuance in November 2019, we prepaid, without penalty, an aggregate of $186.1 million of STORE Master Funding Series 2013-3 and Series 2014-1 Class A-1 notes. In the first quarter of 2020, we extended one $100 million bank term loan scheduled to mature in March 2020; as a result, there are now no significant debt maturities due for the remainder of 2020. Similar to the STORE Master Funding prepayments described above, we may prepay other existing long-term debt in circumstances where we believe it would be economically advantageous to do so.

Unsecured Revolving Credit Facility

Typically, we use our unsecured revolving credit facility to acquire our real estate properties, until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds from which we use to repay the amounts outstanding under our revolving credit facility. In response to the COVID-19 pandemic, we borrowed an additional $450 million on our unsecured revolving credit facility in March 2020 to increase our cash position and preserve financial flexibility in light of the uncertainties in the markets at that time and repaid this amount in full in August 2020. As of September 30, 2020, we had no amounts outstanding under our unsecured revolving credit facility.

Our unsecured revolving credit facility also has an accordion feature of $800 million, which gives us a maximum borrowing capacity of $1.4 billion. The facility matures in February 2022 and includes two six-month extension options, subject to certain conditions. Borrowings under the facility require monthly payments of interest at a rate selected by us of either (1) LIBOR plus a credit spread ranging from 0.825% to 1.55%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.55%. The credit spread used is based on our credit rating as defined in the credit agreement. We are also required to pay a facility fee on the total commitment amount ranging from 0.125% to 0.30%. The currently applicable credit spread for LIBOR-based borrowings is 1.00% and the facility fee is 0.20%.

Under the terms of the facility, we are subject to various restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth. Certain of these ratios are based on our pool of unencumbered assets, which aggregated approximately $5.8 billion at September 30, 2020. The facility is recourse to us and, as of September 30, 2020, we were in compliance with the financial and nonfinancial covenants under the facility and do not anticipate any compliance issues in the foreseeable future.

Senior Unsecured Term Debt

As of September 30, 2020, we had an aggregate principal amount of $700.0 million of underwritten public notes outstanding. These senior unsecured notes bear a weighted average coupon rate of 4.5625% and interest on these notes is paid semi-annually in March and September of each year. The supplemental indentures governing our public notes contain various restrictive covenants, including limitations on our ability to incur additional secured and unsecured indebtedness. As of September 30, 2020, we were in compliance with these covenants and expect to remain in compliance in the foreseeable future. Prior to our inaugural issuance of public debt in March 2018, our unsecured long-term debt had been issued through the private placement of notes to institutional investors and through groups of lenders who also participate in our unsecured revolving credit facility; the financial covenants of the privately placed notes and bank term loans are similar to our unsecured revolving credit facility. In the first quarter of 2020, we executed the first of three one-year options to extend a $100 million bank term loan. The interest rate on this loan resets monthly at one-month LIBOR plus a credit rating-based credit spread ranging from 0.90% to 1.75%; the credit spread currently applicable to the Company is 1.00%. The aggregate outstanding principal amount of our unsecured senior notes and term loans payable was $1.3 billion as of September 30, 2020.

Non-recourse Secured Debt

As of September 30, 2020, approximately 34% of our real estate investment portfolio served as collateral for outstanding borrowings under our STORE Master Funding debt program. We believe our STORE Master Funding program allows for flexibility not commonly found in non-recourse debt, often making it preferable to traditional debt issued in the commercial mortgage-backed securities market. Under the program, STORE serves as both master and special servicer for the collateral pool, allowing for active portfolio monitoring and prompt issue resolution. In addition, features of the program allowing for the sale or substitution of collateral, provided certain criteria are met, facilitate active portfolio management. Through this debt program, we arrange for bankruptcy remote, special purpose entity subsidiaries to issue multiple series of investment-grade asset-backed net-lease mortgage notes, or ABS notes, from time to time as additional collateral is added to the collateral pool and leverage can be added in incremental note issuances based on the value of the collateral pool.

The ABS notes are generally issued by our wholly owned special purpose entity subsidiaries to institutional investors through the asset-backed securities market. These ABS notes are typically issued in two classes, Class A and Class B. At the time of issuance, the Class A notes represent approximately 70% of the appraised value of the underlying real estate collateral owned by the issuing subsidiaries and are currently rated AAA or A+ by S&P Global Ratings. The Series 2018-1 transaction in October 2018 marked our inaugural issuance of AAA rated notes and we believe it broadens the market for our STORE Master Funding debt program and gives us access to lower cost secured debt. In November 2019, our consolidated special purpose entities issued the ninth series, Series 2019-1, representing $508 million of net-lease mortgage notes under the STORE Master Funding debt program. The Series 2019-1 transaction marked our inaugural issuance of 15-year notes, included $326 million of AAA rated notes and served to solidify our belief that the market for the STORE Master Funding program is broadening. The net proceeds from the issuance of the Class A notes were primarily used to pay down outstanding balances on our credit facility and to prepay, without penalty, STORE Master Funding Series 2013-3 and Series 2014-1 Class A-1 notes aggregating approximately $186.1 million at the time of prepayment; these notes were scheduled to mature in 2020 and 2021 and bore a weighted average interest rate of 4.2%.

The Class B notes, which are subordinated to the Class A notes as to principal repayment, represent approximately 5% of the appraised value of the underlying real estate collateral and are currently rated BBB by S&P Global Ratings. As of September 30, 2020, there was an aggregate $155.0 million in principal amount of Class B notes outstanding. We have historically retained these Class B notes and they are held by one of our bankruptcy remote, special purpose entity subsidiaries. The Class B notes are not reflected in our financial statements because they eliminate in consolidation. Since the Class B notes are considered issued and outstanding, they provide us with additional financial flexibility in that we may sell them to a third party in the future or use them as collateral for short-term borrowings as we have done from time to time in the past.

The ABS notes outstanding at September 30, 2020 totaled $2.1 billion in Class A principal amount and were supported by a collateral pool of approximately $3.2 billion representing 1,128 property locations operated by 207 customers. The amount of debt that can be issued in any new series is determined by the structure of the transaction and the aggregate amount of collateral in the pool at the time of issuance. In addition, the issuance of each new series of notes is subject to the satisfaction of several conditions, including that there is no event of default on the existing note series and that the issuance will not result in an event of default on, or the credit rating downgrade of, the existing note series.

A significant portion of our cash flow is generated by the special purpose entities comprising our STORE Master Funding debt program. For the nine months ended September 30, 2020, excess cash flow, after payment of debt service and servicing and trustee expenses, totaled $70 million on cash collections of $174 million, which represents an overall ratio of cash collections to debt service, or debt service coverage ratio (as defined in the program documents), of nearly 1.7 to 1 on the STORE Master Funding program. For purposes of this debt service coverage ratio calculation, cash collections include the rent paid by tenants using the cash proceeds from short-term notes provided by a STORE Capital subsidiary in connection with the short-term rent deferral arrangements structured as part of our COVID-19 rent relief efforts. If at any time the debt service coverage ratio generated by the collateral pool is less than 1.3 to 1, excess cash flow from the STORE Master Funding entities will be deposited into a reserve account to be used for payments to be

made on the net lease mortgage notes, to the extent there is a shortfall. We currently expect to remain above program minimum debt service coverage ratios for the foreseeable future.

To a lesser extent, we also may obtain debt in discrete transactions through other bankruptcy remote, special purpose entity subsidiaries, which debt is solely secured by specific real estate assets and is generally non-recourse to us (subject to certain customary limited exceptions). These discrete borrowings are generally in the form of traditional mortgage notes payable, with principal and interest payments due monthly and balloon payments due at their respective maturity dates, which typically range from seven to ten years from the date of issuance. Our secured borrowings contain various covenants customarily found in mortgage notes, including a limitation on the issuing entity’s ability to incur additional indebtedness on the underlying real estate. Certain of the notes also require the posting of cash reserves with the lender or trustee if specified coverage ratios are not maintained by the special purpose entity or the tenant.

Debt Summary

As of September 30, 2020, our aggregate secured and unsecured long-term debt had an outstanding principal balance of $3.6 billion, a weighted average maturity of 6.2 years and a weighted average interest rate of 4.3%. The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as of September 30, 2020:


			Gross Investment Portfolio Assets
			Special Purpose
	Outstanding		Entity		All Other
(In millions)	Borrowings		Subsidiaries		Subsidiaries		Total
STORE Master Funding net-lease mortgage notes payable	$	2,141	$	3,166	$	—	$	3,166
Other mortgage notes payable		192		343		—		343
Total non-recourse debt		2,333		3,509		—		3,509
Unsecured notes and term loans payable		1,275		—		—		—
Unsecured credit facility		—		—		—		—
Total unsecured debt (including revolving credit facility)		1,275		—		—		—
Unencumbered real estate assets		—		4,652		1,181		5,833
Total debt	$	3,608	$	8,161	$	1,181	$	9,342

Our decision to use either senior unsecured term debt, STORE Master Funding or other non-recourse traditional mortgage loan borrowings depends on our view of the most strategic blend of unsecured versus secured debt that is needed to maintain our targeted level of overall corporate leverage as well as on borrowing costs, debt terms, debt flexibility and the tenant and industry diversification levels of our real estate assets. As we continue to acquire real estate, we expect to balance the overall degree of leverage on our portfolio by growing our pool of portfolio assets that are unencumbered. Our growing pool of unencumbered assets will increase our financial flexibility by providing us with assets that can support senior unsecured financing or that can serve as substitute collateral for existing debt. Should market factors, which are beyond our control, adversely impact our access to these debt sources at economically feasible rates, our ability to grow through additional real estate acquisitions will be limited to any undistributed amounts available from our operations and any additional equity capital raises.

Equity

We access the equity markets in various ways. In November 2019, we established our fourth “at the market” equity distribution program, or ATM program, pursuant to which, from time to time, we may offer and sell registered shares of our common stock through a group of banks acting as our sales agents. Under this program, we can offer and sell up to a maximum amount of $900 million of common stock (the 2019 ATM Program).

The following tables outline the common stock issuances under 2019 ATM Program (in millions except share and per share information):


Three Months Ended September 30, 2020
Shares Sold	Weighted Average Price per Share		Gross Proceeds		Sales Agents' Commissions		Other Offering Expenses		Net Proceeds
8,033,069	$	27.19	$	218.4	$	(3.3)	$	(0.1)	$	215.0

Nine Months Ended September 30, 2020
Shares Sold	Weighted Average Price per Share		Gross Proceeds		Sales Agents' Commissions		Other Offering Expenses		Net Proceeds
20,928,023	$	26.17	$	547.6	$	(6.8)	$	(0.3)	$	540.5

Inception of Program Through September 30, 2020
Shares Sold	Weighted Average Price per Share		Gross Proceeds		Sales Agents' Commissions		Other Offering Expenses		Net Proceeds
25,954,389	$	28.81	$	747.6	$	(8.7)	$	(0.6)	$	738.3

Cash Flows

Substantially all our cash from operations is generated by our investment portfolio. As shown in the following table, net cash provided by operating activities for the nine months ended September 30, 2020 decreased by $37.0 million over the same period in 2019, primarily as a result of the rent deferral arrangements granted to tenants. Cash flows from operations for the nine months ended September 30, 2019 included a $6.7 million payment we made in settlement of two treasury lock agreements. We intentionally reduced our investment activity beginning in the first quarter of 2020 due to the volatility in the capital markets stemming from the pandemic; as a result, our investments in real estate, loans and financing receivables during the first nine months of 2020 were $533.8 million lower than the same period in 2019. In the first nine months of 2020, investment activity was primarily funded with a combination of cash from operations, proceeds from the sale of real estate properties and proceeds from the issuance of stock. Investment activity during the same period in 2019 was primarily funded with a combination of cash from operations, proceeds from the sale of real estate properties, proceeds from the issuance of long-term debt and proceeds from the issuance of stock. Net cash provided by financing activities was lower for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily as a result of $384.5 million of net proceeds from the issuance of long-term debt received during 2019 offset by net paydown activity on our revolving credit facility during 2019 and increased proceeds from the issuance of stock during 2020. We paid dividends to our stockholders totaling $259.1 million and $225.0 million during the first nine months of 2020 and 2019, respectively; we increased our quarterly dividend in the third quarter of 2020 by 2.9% to an annualized $1.44 per common share.


	Nine Months Ended September 30,
(In thousands)	2020		2019
Net cash provided by operating activities	$	298,652	$	335,674
Net cash used in investing activities		(497,998)		(748,087)
Net cash provided by financing activities		249,447		443,178
Net increase in cash, cash equivalents and restricted cash		50,101		30,765
Cash, cash equivalents and restricted cash, beginning of period		111,381		43,017
Cash, cash equivalents and restricted cash, end of period	$	161,482	$	73,782

As of September 30, 2020, we had liquidity of $144.5 million on our balance sheet. Management believes that our current cash balance, the $600.0 million of immediate borrowing capacity on our unsecured revolving credit facility, the cash generated by our operations as well as the $800.0 million of liquidity available to us under the accordion feature of the credit facility, is more than sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we currently have made commitments. In order to continue to grow our real estate portfolio in the future beyond the excess cash generated by our operations and our ability to borrow, we would expect to raise additional equity capital through the sale of our common stock.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of September 30, 2020.

Contractual Obligations

As summarized in the table of Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2019, we have contractual obligations related to our unsecured revolving credit facility and long-term debt obligations, interest on those debt obligations, commitments to our customers to fund improvements to real estate properties and operating lease obligations under certain ground leases and our corporate office lease.

Recently Issued Accounting Pronouncements

See Note 2 to the September 30, 2020 unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our condensed consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Real Estate Portfolio Information

As of September 30, 2020, our total investment in real estate and loans approximated $9.3 billion, representing investments in 2,587 property locations, substantially all of which are profit centers for our customers. These investments generate cash flows from approximately 740 contracts predominantly structured as net leases. The weighted average non-cancellable remaining term of our leases was approximately 14 years.

Our real estate portfolio is highly diversified. As of September 30, 2020, our 2,587 property locations were operated by 511 customers across the United States. Our customers are typically established regional and national operators, with over 70% of our base rent and interest coming from customers with over $50 million in annual revenues. Our largest customer represented approximately 2.7% of our portfolio at September 30, 2020, and our top ten largest customers represented 16.8% of base rent and interest. Our customers operate their businesses across more than 735 brand names or business concepts in over 100 industries. The largest of the business concepts represented 2.7% of our base rent and interest as of September 30, 2020 and more than 80% of the concepts represented less than 1% of base rent and interest.

The following tables summarize the diversification of our real estate portfolio based on the percentage of base rent and interest, annualized based on rates in effect on September 30, 2020, for all of our leases, loans and financing receivables in place as of that date.

Diversification by Customer

As of September 30, 2020, our property locations were operated by 511 customers and the following table identifies our ten largest customers:


	% of
	Base Rent		Number
	and		of
Customer	Interest		Properties
Fleet Farm Group LLC	2.7	%	10
Bass Pro Group, LLC (Cabela's)	1.8		10
Cadence Education, Inc. (Early childhood/elementary education)	1.8		49
Loves Furniture, Inc.	1.8		23
CWGS Group, LLC (Camping World/Gander Outdoors)	1.7		20
Spring Education Group Inc. (Stratford School/Nobel Learning Communities)	1.5		19
American Multi-Cinema, Inc. (AMC/Carmike/Starplex)	1.5		14
US LBM Holdings, LLC (Building materials distribution)	1.4		51
Dufresne Spencer Group Holdings, LLC (Ashley Furniture HomeStore)	1.3		21
Zips Holdings, LLC	1.3		41
All other (501 customers)	83.2		2,329
Total	100.0	%	2,587

Diversification by Industry

As of September 30, 2020, our customers’ business concepts were diversified across more than 100 industries within the service, retail and manufacturing sectors of the U.S. economy. The following table summarizes those industries into 75 industry groups:



	% of			Building
	Base Rent		Number	Square
	and		of	Footage
Customer Industry Group	Interest		Properties	(in thousands)
Service:
Restaurants—full service	8.5	%	385	2,644
Restaurants—limited service	5.0		392	1,062
Early childhood education centers	5.9		240	2,518
Health clubs	5.2		88	3,130
Automotive repair and maintenance	4.7		172	905
Movie theaters	3.9		37	1,881
Family entertainment centers	3.7		40	1,625
All other service (27 industry groups)	26.5		744	25,437
Total service	63.4		2,098	39,202
Retail:
Furniture stores	5.0		70	4,145
Farm and ranch supply stores	4.5		43	4,399
All other retail (16 industry groups)	9.4		129	5,539
Total retail	18.9		242	14,083
Manufacturing:
Metal fabrication	4.8		88	10,289
All other manufacturing (22 industry groups)	12.9		159	20,849
Total manufacturing	17.7		247	31,138
Total	100.0	%	2,587	84,423

Diversification by Geography

Our portfolio is also highly diversified by geography, as our property locations can be found in every state except Hawaii. The following table details the top ten geographical locations of the properties as of September 30, 2020:


	% of
	Base Rent
	and		Number of
State	Interest		Properties
Texas	10.7	%	266
Illinois	6.1		154
California	5.9		70
Florida	5.4		156
Ohio	5.2		141
Georgia	5.1		143
Wisconsin	4.9		61
Arizona	4.5		85
Tennessee	3.8		117
Minnesota	3.7		90
All other (39 states) (1)	44.7		1,304
Total	100.0	%	2,587

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

Contract Expirations

The following table sets forth the schedule of our lease, loan and financing receivable expirations as of September 30, 2020:


	% of
	Base Rent
	and		Number of
Year of Lease Expiration or Loan Maturity (1)	Interest		Properties (2)
Remainder of 2020	0.2	%	12
2021	0.6		9
2022	0.4		10
2023	0.6		18
2024	0.7		18
2025	1.3		27
2026	1.5		48
2027	2.0		55
2028	3.4		67
2029	6.2		173
Thereafter	83.1		2,139
Total	100.0	%	2,576

(1)	Expiration year of contracts in place as of September 30, 2020 and excludes any tenant option renewal periods.

(2)	Excludes 11 properties that were vacant and not subject to a lease as of September 30, 2020.

Results of Operations

Overview

As of September 30, 2020, our real estate investment portfolio had grown to approximately $9.3 billion, consisting of investments in 2,587 property locations in 49 states, operated by more than 500 customers in various industries. Approximately 94% of the real estate investment portfolio represents commercial real estate properties subject to long-term leases, approximately 6% represents mortgage loan and financing receivables on commercial real estate properties and a nominal amount represents loans receivable secured by our tenants’ other assets.

Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019


	Three Months Ended						Nine Months Ended
	September 30,				Increase		September 30,				Increase
(In thousands)	2020		2019		(Decrease)		2020		2019		(Decrease)
Total revenues	$	175,223	$	171,834	$	3,389	$	521,400	$	492,259	$	29,141
Expenses:
Interest		42,090		39,325		2,765		127,816		116,822		10,994
Property costs		3,309		3,162		147		14,603		7,760		6,843
General and administrative		14,729		13,566		1,163		35,742		39,815		(4,073)
Depreciation and amortization		61,119		55,919		5,200		180,753		164,635		16,118
Provisions for impairment		2,772		7,341		(4,569)		10,972		9,951		1,021
Total expenses		124,019		119,313		4,706		369,886		338,983		30,903

Net gain on dispositions of real estate		3,537		59,290		(55,753)		6,814		72,395		(65,581)
Income from operations before income taxes		54,741		111,811		(57,070)		158,328		225,671		(67,343)
Income tax expense		111		193		(82)		438		533		(95)
Net income	$	54,630	$	111,618	$	(56,988)	$	157,890	$	225,138	$	(67,248)

Revenues

The increase in revenues period over period was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues and interest income, partially offset by temporary rent reductions negotiated as part of our overall rent relief arrangements with our tenants most impacted by the pandemic. Our real estate investment portfolio grew from approximately $8.4 billion in gross investment amount representing 2,417 properties as of September 30, 2019 to approximately $9.3 billion in gross investment amount representing 2,587 properties at September 30, 2020. The weighted average real estate investment amounts outstanding during the three-month periods were approximately $9.2 billion in 2020 and $8.3 billion in 2019. During the nine-month periods, the weighted average real estate investment amounts outstanding were approximately $9.1 billion in 2020 and $8.0 billion in 2019. A smaller component of the increase in revenues between periods is related to rent escalations recognized on our lease contracts; over time, these rent increases can provide a strong source of revenue growth. Additionally, for both the three and nine months ended September 30, 2019, we collected $3.8 million in early lease termination payments which are included in other income. During the three and nine months ended September 30, 2020, we collected $0.4 million and $0.6 million, respectively, of such payments.

The pandemic has primarily impacted us through government mandated limits imposed on our tenants’ businesses and continuing public perceptions regarding safety, which impacted our tenants’ ability to pay rent. Currently, we estimate that nearly 100% of our properties are open for business with two industries – movie theaters and early childhood education – remaining as the most impacted. We have increased our monthly rent and interest collections from 70% in May to 90% in October. We have worked with a number of our tenants on short-term rent deferral arrangements, including through a structured rent relief program under which we allowed such tenants to defer a portion of their rent, with repayment primarily structured through short-term, interest-bearing notes. Through September 30, 2020, we have recognized net revenue aggregating approximately $51.2 million related to these deferral arrangements;

of the aggregate $51.2 million, $38.2 million was recognized in the second quarter and $13.0 million was recognized in the third quarter. These receivables are expected to be repaid over the next 36 months with the majority being repaid prior to the end of 2021.

The majority of our investments are made generally through sale-leaseback transactions in which we acquire the real estate from the owner-operators and then simultaneously lease the real estate back to them through long-term leases based on the tenant’s business needs. The initial rental or capitalization rates we achieve on sale-leaseback transactions, calculated as the initial annualized base rent divided by the purchase price of the properties, vary from transaction to transaction based on many factors, such as the terms of the lease, the property type including the property’s real estate fundamentals and the market rents in the area on the various types of properties we target across the United States. There are also online commercial real estate auction marketplaces for real estate transactions; properties acquired through these online marketplaces are often subject to existing leases and offered by third-party sellers. In general, because we provide tailored customer lease solutions in sale-leaseback transactions, our lease rates historically have been higher and subject to less short-term market influences than what we have seen in the auction marketplace as a whole. In addition, since our real estate lease contracts are a substitute for both borrowings and equity that our customers would otherwise have to commit to their real estate locations, we believe there is a relationship between lease rates and market interest rates and that lease rates are also influenced by overall capital availability. The weighted average initial capitalization rate on the properties we acquired during the third quarters of 2020 and 2019 was approximately 8.3% and 7.7%, respectively. The weighted average initial capitalization rate on the properties we acquired during the nine months ended September 30, 2020 and 2019 was 8.1% and 7.8%, respectively. We expect to see capitalization rates return to 2019 levels by the end of 2020.

Interest Expense

We fund the growth in our real estate investment portfolio with excess cash flow from our operations after dividends and principal payments on debt, net proceeds from periodic sales of real estate, net proceeds from equity issuances and proceeds from issuances of long-term fixed-rate debt. We typically use our unsecured revolving credit facility to temporarily finance the properties we acquire.

The following table summarizes our interest expense for the periods presented:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2020			2019			2020			2019
Interest expense - credit facility	$	1,208		$	328		$	4,420		$	2,151
Interest expense - credit facility fees		307			307			913			910
Interest expense - long-term debt (secured and unsecured)		38,668			36,971			116,673			107,808
Capitalized interest		(175)			(480)			(500)			(1,234)
Loss on defeasance of debt		—			—			—			735
Amortization of deferred financing costs and other		2,082			2,199			6,310			6,452
Total interest expense	$	42,090		$	39,325		$	127,816		$	116,822
Credit facility:
Average debt outstanding	$	347,011		$	38,348		$	334,398		$	80,246
Average interest rate during the period (excluding facility fees)		1.4	%		3.4	%		1.8	%		3.6	%
Long-term debt (secured and unsecured):
Average debt outstanding	$	3,612,270		$	3,329,563		$	3,621,185		$	3,254,771
Average interest rate during the period		4.3	%		4.4	%		4.3	%		4.4	%

The increases in average outstanding long-term debt were the primary driver for the increases in interest expense on long-term debt. Long-term debt added after September 30, 2019 consisted of $508 million of STORE Master Funding Series 2019-1 notes issued in November 2019 which bear a weighted average interest rate of 3.7%. As part of the Series 2019-1 note issuance, we prepaid, without penalty, STORE Master Funding Series 2013-3 and Series 2014-1 Class A-1 notes aggregating approximately $186.1 million at the time of prepayment; these notes were scheduled to mature in 2020 and 2021 and bore a weighted average interest rate of 4.2%. As of September 30, 2020, we had $3.6 billion of long-term debt outstanding with a weighted average interest rate of 4.3%.

We typically use our revolving credit facility on a short-term, temporary basis to acquire real estate properties until those borrowings are sufficiently large to warrant the economic issuance of long-term fixed-rate debt, the proceeds of which we generally use to pay down the amounts outstanding under our revolving credit facility. Interest expense associated with our revolving credit facility increased from 2019 to 2020 due to higher average outstanding borrowings offset by a decrease in the weighted average interest rate incurred on our borrowings due to decreases in one-month LIBOR. During the nine months ended September 30, 2020, the average one-month LIBOR was approximately 170 basis points lower than during the same period in 2019. As noted earlier, as a precautionary measure due to the uncertainty surrounding the COVID-19 pandemic, we borrowed $450 million under our revolving credit facility in March 2020 to increase liquidity and preserve financial flexibility and repaid this amount in full in August 2020. As of September 30, 2020, we had no amounts outstanding under our revolving credit facility.

From time to time, we may fund construction of new properties for our customers and interest capitalized as a part of those activities represented $0.2 million and $0.5 million during the three and nine months ended September 30, 2020, respectively, as compared to $0.5 million and $1.2 million during the three and nine months ended September 30, 2019, respectively.

Property Costs

Approximately 99% of our leases are triple net, meaning that our tenants are generally responsible for the property-level operating costs such as taxes, insurance and maintenance. Accordingly, we generally do not expect to incur property-level operating costs or capital expenditures, except during any period when one or more of our properties is no longer under lease or when our tenant is unable to meet their lease obligations. Our need to expend capital on our properties is further reduced due to the fact that some of our tenants will periodically refresh the property at their own expense to meet their business needs or in connection with franchisor requirements. As of September 30, 2020, we owned 11 properties that were vacant and not subject to a lease and the lease contracts related to just nine properties we own are due to expire during the remainder of 2020. We expect to incur some property costs related to the vacant

properties until such time as those properties are either leased or sold. During the first nine months of 2020, we experienced an increase in property costs primarily related to property taxes accruing on properties where the tenants were not performing on their lease obligations. The amount of property costs can vary quarter to quarter based on the timing of property vacancies and the level of underperforming properties.

As of September 30, 2020, we had entered into operating ground leases as part of several real estate investment transactions. The ground lease payments made by our tenants directly to the ground lessors are presented on a gross basis in the condensed consolidated statement of income, both as rental revenues and as property costs. For the few lease contracts where we collect property taxes from our tenants and remit those taxes to governmental authorities, we reflect those payments on a gross basis as both rental revenue and as property costs.

The following is a summary of property costs (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Property-level operating costs (a)	$	1,964	$	1,858	$	10,606	$	3,769
Ground lease-related intangibles amortization expense		118		118		352		352
Operating ground lease payments made by STORE Capital		100		7		121		19
Operating ground lease payments made by STORE Capital tenants		344		418		1,156		1,200
Operating ground lease straight-line rent expense		165		167		481		480
Property taxes payable from tenant impounds		618		594		1,887		1,940
Total property costs	$	3,309	$	3,162	$	14,603	$	7,760

(a)	Property-level operating costs primarily include those expenses associated with vacant or nonperforming properties, property management costs for the few properties that have specific landlord obligations and the cost of performing property site inspections from time to time.

General and Administrative Expenses

General and administrative expenses include compensation and benefits; professional fees such as portfolio servicing, legal, accounting and rating agency fees; and general office expenses such as insurance, office rent and travel costs. General and administrative costs totaled $14.7 million and $35.7 million for the three and nine months ended September 30, 2020, respectively, as compared to $13.6 million and $39.8 million, respectively, for the same periods in 2019. Expenses for both the three and nine months ended September 30, 2020 include approximately $2.0 million of executive severance costs; expenses for the nine months ended September 30, 2019 also include approximately $2.0 million of executive severance costs incurred in the second quarter of 2019. Expenses decreased as a result of the derecognition of $6.7 million of previously recognized stock-based compensation expense during the first quarter of 2020 related to certain performance-based restricted stock unit awards that were no longer expected to be earned. This decrease was partially offset by increases due to the growth of our portfolio and related staff additions. Our employee base grew from 98 employees on September 30, 2019 to 103 employees as of September 30, 2020. Certain expenses, such as property-related insurance costs and the costs of servicing the properties and loans comprising our real estate portfolio, increase in direct proportion to the increase in the size of the portfolio. We expect that general and administrative expenses will continue to rise in some measure as our real estate investment portfolio grows; however, such expenses as a percentage of the portfolio have decreased over time due to efficiencies and economies of scale.

Depreciation and Amortization Expense

Depreciation and amortization expense, which increases in proportion to the increase in the size of our real estate portfolio, rose from $55.9 million and $164.6 million for the three and nine months ended September 30, 2019, respectively, to $61.1 million and $180.8 million, respectively, for the comparable periods in 2020.

Provisions for Impairment

During the three and nine months ended September 30, 2020, we recognized $2.0 million and $10.2 million, respectively, in provisions for the impairment of real estate and $0.8 million in provisions for credit losses related to our loans and financing receivables. We recognized $7.3 million and $9.9 million in provisions for the impairment of real estate during the three and nine months ended September 30, 2019, respectively.

Net Gain on Dispositions of Real Estate

As part of our ongoing active portfolio management process, we sell properties from time to time in order to enhance the diversity and quality of our real estate portfolio and to take advantage of opportunities to recycle capital. During the three months ended September 30, 2020, we recognized a $3.5 million aggregate net gain on the sale of 18 properties. In comparison, for the three months ended September 30, 2019, we recognized a $59.3 million aggregate net gain on the sale of 54 properties. For the nine months ended September 30, 2020, we recognized a $6.8 million aggregate net gain on the sale of 43 properties as compared to an aggregate net gain of $72.4 million on the sale of 80 properties in the same period in 2019.

Net Income

For the three and nine months ended September 30, 2020, our net income was $54.6 million and $157.9 million reflecting decreases from $111.6 million and $225.1 million for the comparable periods in 2019. The change in net income is primarily the result of lower aggregate net gains on dispositions of real estate.

Non-GAAP Measures

Our reported results are presented in accordance with U.S. generally accepted accounting principles, or GAAP. We also disclose Funds from Operations, or FFO, and Adjusted Funds from Operations, or AFFO, both of which are non-GAAP measures. We believe these two non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs. FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or to cash flows from operations as reported on a statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.

We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as GAAP net income, excluding gains (or losses) from extraordinary items and sales of depreciable property, real estate impairment losses, and depreciation and amortization expense from real estate assets, including the pro rata share of such adjustments of unconsolidated subsidiaries.

To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to certain revenues and expenses that have no impact on our long-term operating performance, such as straight-line rents, amortization of deferred financing costs and stock-based compensation. In addition, in deriving AFFO, we exclude certain other costs not related to our ongoing operations, such as the amortization of lease-related intangibles.

FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains (or losses) on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. Management believes that AFFO provides more useful information to investors and analysts because it modifies FFO to exclude certain additional revenues and expenses such as straight-line rents, including construction period rent deferrals, and the amortization of deferred financing costs, stock-based compensation and lease-related intangibles as such items have no impact on long-term operating performance. As a result, we believe AFFO to be a more meaningful measurement of ongoing performance that allows for greater performance comparability. Therefore, we disclose both FFO and AFFO and reconcile them to the most appropriate GAAP performance metric, which is net income. STORE Capital’s FFO and AFFO may not be comparable to similarly titled measures employed by other companies.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Net Income	$	54,630	$	111,618	$	157,890	$	225,138
Depreciation and amortization of real estate assets		61,051		55,840		180,528		164,400
Provision for impairment of real estate		2,000		7,341		10,200		9,951
Net gain on dispositions of real estate		(3,537)		(59,290)		(6,814)		(72,395)
Funds from Operations (a)		114,144		115,509		341,804		327,094
Adjustments:
Straight-line rental revenue:
Fixed rent escalations accrued		(3,354)		(1,319)		(7,278)		(4,194)
Construction period rent deferrals		466		(144)		1,402		853
Amortization of:
Equity-based compensation		2,744		3,326		1,645		8,083
Deferred financing costs and other		2,082		2,199		6,310		6,452
Lease-related intangibles and costs		769		762		2,298		2,119
Provision for loan losses		772		—		772		—
Lease termination fees		(350)		(3,775)		(587)		(3,775)
Capitalized interest		(175)		(480)		(500)		(1,234)
Executive severance costs		1,980		—		1,980		1,956
Loss on defeasance of debt		—		—		—		735
Adjusted Funds from Operations (a)	$	119,078	$	116,078	$	347,846	$	338,089

(a)

FFO and AFFO for the three and nine months ended September 30, 2020, include approximately $13.0 million and $51.2 million, respectively, of net revenue that is subject to the short-term deferral arrangements entered into in response to the COVID-19 pandemic. We account for these deferral arrangements as rental revenue and a corresponding increase in receivables, which are included in other assets, net on the condensed consolidated balance sheet. For both the three and nine months ended September 30, 2020, FFO and AFFO exclude $1.3 million collected under these short-term deferral arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our interest rate risk management objective is to limit the impact of future interest rate changes on our earnings and cash flows. We seek to match the cash inflows from our long-term leases with the expected cash outflows on our long-term debt. To achieve this objective, our consolidated subsidiaries primarily borrow on a fixed-rate basis for longer-term debt issuances. At September 30, 2020, substantially all our long-term debt carried a fixed interest rate, or was effectively converted to a fixed-rate through the use of interest rate swaps for the term of the debt, and the weighted average debt maturity was approximately 6.2 years. We are exposed to interest rate risk between the time we enter into a sale-leaseback transaction and the time we finance the related real estate with long-term fixed-rate debt. In addition, when that long-term debt matures, we may have to refinance the real estate at a higher interest rate. Market interest rates are sensitive to many factors that are beyond our control.

We address interest rate risk by employing the following strategies to help insulate us from any adverse impact of rising interest rates:

●

We seek to minimize the time period between acquisition of our real estate and the ultimate financing of that real estate with long-term fixed-rate debt.

●

By using serial issuances of long-term debt, we intend to ladder out our debt maturities to avoid a significant amount of debt maturing during any single period and to minimize the gap between free cash flow and annual debt maturities; free cash flow includes cash from operations less dividends plus proceeds from our sales of properties.

●

Our secured long-term debt generally provides for some amortization of the principal balance over the term of the debt, which serves to reduce the amount of refinancing risk at debt maturity to the extent that we can refinance the reduced debt balance over a revised long-term amortization schedule.

●

We seek to maintain a large pool of unencumbered real estate assets to give us the flexibility to choose among various secured and unsecured debt markets when we are seeking to issue new long-term debt.

●

We may also use derivative instruments, primarily cash flow hedges such as interest rate swaps, caps and treasury lock agreements, to limit our exposure to interest rate movements with respect to various debt instruments.

Although substantially all our long-term debt carries a fixed rate, we often temporarily fund our property acquisitions with our revolving credit facility, which carries a variable rate. During the first nine months of 2020, we had average daily outstanding borrowings of $334.4 million on our variable rate credit facility, which bears interest based on one-month LIBOR, plus a credit spread of 1.0% based on our current credit rating.

We monitor our market interest rate risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical adverse change in interest rates. Based on the results of our sensitivity analysis, which assumes a 1% adverse change in interest rates, the estimated market risk exposure for our variable rate debt was approximately $3.3 million for the first nine months of 2020, or approximately 1.1% of net cash provided by operating activities for that period. In addition, we may use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. We do not use derivative instruments for trading or speculative purposes. See Note 2 to our Condensed Consolidated Financial Statements for further information on derivatives.

In July 2017, the Financial Conduct Authority, or FCA (the authority that regulates LIBOR), announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee, or ARRC, has identified the Secured Overnight Financing Rate, or SOFR, as the preferred alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change.

In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

At September 30, 2020, the Company does have contracts that are indexed to LIBOR and continues to monitor and evaluate the related risks, including future negotiations with lenders and other counterparties; the $600 million unsecured revolving credit facility, which matures in February 2022, is the Company’s only contract indexed to LIBOR with a maturity date beyond 2021. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the transition to an alternative reference rate could be accelerated.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness as of September 30, 2020 of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of the Company.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various legal proceedings and claims that arise in the ordinary course of our business, including instances in which we are named as defendants in lawsuits arising out of accidents causing personal injuries or other events that occur on the properties operated by our customers. These matters are generally covered by insurance and/or are subject to our right to be indemnified by our customers that we include in our leases. Management believes that the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.

Item 1A. Risk Factors.

Other than the following, there have been no material changes to the risk factors disclosed in “Item 1A. Risk Factors” beginning on page 13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and filed with the Securities and Exchange Commission on February 21, 2020.

Actual or perceived threats associated with epidemics, pandemics, including COVID-19, or public health crises could have a material adverse effect on our results of operations and the businesses of our customers.

Epidemics, pandemics or other public health crises, including the continued spread of Coronavirus (“COVID-19”), that impact states where our customers operate their businesses or where our properties are located, and preventative measures taken to alleviate any public health crises, including “shelter-in-place” or “stay-at-home” orders issued by local, state or federal authorities, may have a material adverse effect on our and our customers’ businesses, results of operations, liquidity and ability to access capital markets, and may affect our ability as a net-lease real estate

investment trust to acquire properties or lease properties to our customers, who may be unable, as a result of any economic downturn occasioned by public health crises, to make rental payments when due.

The top industries in our portfolio are restaurants, early childhood education centers, health clubs, furniture stores and metal fabrication facilities. Our customers in each of these industries, as well as our customers that operate other service and retail businesses, depend on in-person interactions with their own customers to generate unit-level profitability, and the COVID-19 pandemic has led to a decrease in customers’ willingness to frequent, and mandated “shelter-in-place” or “stay-at-home” orders have prevented customers from frequenting, our customers’ businesses, which may result in our customers’ inability to maintain profitability and make timely rental payments to us under their leases.

Epidemics, pandemics or public health crises, and any current or future “shelter-in-place” or “stay-at-home” orders issued by local, state or federal authorities, may reduce the available workforce of our customers, which could adversely affect our customers’ abilities to maintain unit-level profitability. Risks related to epidemics, pandemics or public health crises could also lead to complete or partial shutdowns of one or more of our customers’ manufacturing facilities or distribution centers, temporary or long-term disruptions in our customers’ supply chains from local, national and international suppliers, or otherwise delay the delivery of inventory or other materials necessary for our customers’ operations. Such disruptions could adversely impact our customers’ ability to generate sufficient revenues, and could force customers to reduce or delay offerings of their products and services, or result in our customers’ bankruptcy or insolvency, which would diminish our ability to receive rental revenue we are owed under their leases.

The spread of COVID-19 has already caused economic downturns on a global scale, and international financial markets may continue to experience significant volatility, which may adversely affect our and our customers’ respective businesses, financial condition, liquidity and results of operations. Additionally, in June 2020, the National Bureau of Economic Research announced that the United States entered into a recession in February 2020. The impact of any epidemic, pandemic or public health crisis on our business, financial condition, liquidity and results of operations will depend on actions taken by local, state, national and international governments and non-governmental organizations, the medical community and other private actors, and the collective response to COVID-19, or any other public health crisis, cannot be readily predicted, and new information may be revealed, or new and unforeseen actions may be taken, to alleviate or worsen the spread and effects of any such public health crisis.

The COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Moreover, many risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the COVID-19 pandemic.

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

During the three months ended September 30, 2020, we did not repurchase any of our equity securities nor did we sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits


Exhibit	Description	Location
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.	Filed herewith.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.	Filed herewith.
32.1	Section 1350 Certification of the Chief Executive Officer.	Furnished herewith.
32.2	Section 1350 Certification of the Chief Financial Officer.	Furnished herewith.
101.INS	Inline XBRL Instance Document – the instance does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.	Filed herewith.
101.SCH	Inline XBRL Taxonomy Extension Schema Document.	Filed herewith.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	Filed herewith.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.	Filed herewith.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.	Filed herewith.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.	Filed herewith.
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)	Filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	STORE CAPITAL CORPORATION
	(Registrant)

Date: November 6, 2020	By:	/s/ Catherine Long
		Catherine Long
		Executive Vice President – Chief Financial Officer, Treasurer and Assistant Secretary
		(Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. senior Avg

Store Capital (STOR) 10-Q2020 Q3 Quarterly report

Content analysis