STORE CAPITAL CORPORATION In this Quarterly Report on Form 10-Q, we refer toSTORE Capital Corporation as "we," "us," "our" or "the Company" unless we specifically state otherwise or the context indicates otherwise.
Special Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-term, triple-net leases of freestanding, single-tenant properties. Words such as "expects," "anticipates," "intends," "plans," "likely," "will," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this quarterly report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSecurities and Exchange Commission onFebruary 21, 2020 , as updated in our subsequent reports filed with theSecurities 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 manageSingle Tenant Operational Real Estate , or STORE Property, which is our target market and the inspiration for our name. A STORE Property is a property location at which a company operates its business and generates sales and profits, which makes the location a profit center and, therefore, fundamentally important to that business. Due to the long-term nature of our leases, we focus our acquisition activity on properties that operate in industries we believe have long-term relevance, the majority of which are service industries. Examples of single-tenant operational real estate in the service industry sector include restaurants, early childhood education centers, health clubs and automotive repair and maintenance facilities. By acquiring the real estate from the operators and then leasing the real estate back to them, the operators become our long-term tenants, and we refer to them as our customers. Through the execution of these sale-leaseback transactions, we fill a need for our customers by providing them a source of long-term capital that enables them to avoid the need to incur debt and/or employ equity in order to finance the real estate that is essential to their business. We are aMaryland corporation organized as an internally managed real estate investment trust, or REIT. As a REIT, we will generally not be subject to federal income tax to the extent that we distribute all of our taxable income to our stockholders and meet other requirements. Our shares of common stock have been listed on theNew York Stock Exchange since our initial public offering, or IPO, inNovember 2014 and trade under the ticker symbol "STOR." 29 Since our inception in 2011, we have selectively originated over$10.4 billion of real estate investments. As ofJune 30, 2020 , our investment portfolio totaled approximately$9.2 billion , consisting of investments in 2,554 property locations acrossthe 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 ofJune 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 ofJune 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 10% 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 During the first quarter of 2020, theWorld Health Organization declared the global outbreak of COVID-19 a pandemic. Additionally, inJune 2020 , theNational Bureau of Economic Research announced thatthe United States entered into a recession inFebruary 2020 . The impact of the COVID-19 pandemic in boththe United States and globally has evolved rapidly and it continues to adversely impact commercial activity and cause uncertainty and volatility in the financial markets. In an effort to flatten the infection curve and relieve stress on local healthcare systems, most states inthe United States reacted by instituting quarantines, shelter in place orders, social distancing requirements, and restrictions on travel while also requiring businesses in many of our customers' industries (e.g. restaurants, educational facilities, health clubs, movie theaters and many retail stores) either to be closed or to have limited operations. Among other adverse effects, these actions have created disruptions in supply chains, caused reductions in purchases by consumers and directly and adversely impacted a number of industries in which our tenants operate. The outbreak is expected to continue to have an adverse impact on economic and market conditions and the current global economic slowdown has no known duration or resolution. The rapid development and fluidity of this situation is without precedent in modern history and the ultimate impact of the COVID-19 pandemic at this time is unknown. The COVID-19 pandemic presents a potential negative impact on our tenants' ability to meet their financial obligations to us and increases uncertainty regarding future government and regulatory policy. 30The United States has enacted several relief measures in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") signed into law onMarch 27, 2020 . Many of our middle market and small business tenants have qualified for the financial relief programs provided by the CARES Act, and we estimate that nearly half of our more than 500 customers have received some level of economic benefit from this and other Federal economic stimulus initiatives. Among numerous non-tax provisions designed to aid in economic stabilization, the CARES Act made changes to theU.S. federal income and payroll tax laws applicable to businesses, including REITs and their shareholders, many of which take immediate and even retroactive effect. While we believe our analysis and computations of the tax effects of the CARES Act (including issued guidance) are properly reflected in our financial statements, technical corrections or other amendments to the CARES Act or additional administrative guidance interpreting the CARES Act may be forthcoming at any time, which increases the uncertainty as to the long-term effect of the CARES Act on us. We are still in the process of reviewing the impact of the CARES Act on us, our customers and our stockholders. In addition, lawmakers may pass further measures during 2020 to aid in the COVID-19 pandemic, which could include additional tax legislation. Although many states have begun lifting certain restrictions that have significantly impacted economic activity, certain 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 96 employees have collectively taken many steps to manage the impact to us as well as to assist our customers in managing the impact to them. Steps we have taken include borrowing$450 million under our revolving credit facility as a precautionary measure to increase liquidity and preserve financial flexibility, temporarily reducing real estate acquisition activity until some of the uncertainty in the financial markets subsides, and 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 ofJune 30, 2020 , we had recognized$38.2 million of 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
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. The lease contracts related to just eight of our properties representing less than 0.1% of our annual base rent and interest are due to expire during the remainder of 2020; 82% of our leases have ten years or more remaining in their base lease term. As ofJune 30, 2020 , 14 of our 2,554 properties were vacant and not subject to a lease, which represents a 99.5% occupancy rate. We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations. 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. As the COVID-19 pandemic continues, the level of underperforming properties or future vacancies will be difficult to predict. 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. 31 In order to preserve financial flexibility during the COVID-19 pandemic, we had fully drawn down our credit facility and substantially reduced our new property acquisition activity. As we gain better visibility into the stability of the capital markets and the path of 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 continue to maintain our extensive pipeline of acquisition opportunities that we can turn to as we see that the market can support acquisition activity. 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 ofJune 30, 2020 , we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately$101.7 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 during the remainder of 2020. As ofJune 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 6.5 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 32 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 ofJune 30, 2020 , our secured non-recourse borrowings had a weighted average loan-to-cost ratio of approximately 67% and approximately 38% of our investment portfolio serves as collateral for this long-term debt. The remaining 62% of our portfolio properties, aggregating approximately$5.7 billion atJune 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 inthe 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 as it could be again as a result of the current recession. 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 inOctober 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 inNovember 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 inMarch 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 late March to increase our cash position and preserve financial flexibility in light of the uncertainties in the markets. AtJune 30, 2020 , we had the full$600 million 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 inFebruary 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 33 unencumbered assets, which aggregated approximately$5.7 billion atJune 30, 2020 . The facility is recourse to us and, as ofJune 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 ofJune 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 ofJune 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 inMarch 2018 , our unsecured long-term debt had been issued through the private placement of notes to institutional investors and through groups of lenderswho 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. InMarch 2019 , we amended the related credit agreement, lowered the related credit spread by 10 basis points and extended the original term of the$100 million bank term loan (originally issued inMarch 2017 ) for one year toMarch 2020 , while retaining the three one-year extension options. In the first quarter of 2020, we executed the first of the three options and extended this loan toMarch 2021 . 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 ofJune 30, 2020 .
Non-recourse Secured Debt
As ofJune 30, 2020 , approximately 35% 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 ratedAAA or A+ by S&P Global Ratings. The Series 2018-1 transaction inOctober 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. InNovember 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 ofJune 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, 34 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 atJune 30, 2020 totaled$2.1 billion in Class A principal amount and were supported by a collateral pool of approximately$3.2 billion representing 1,132 property locations operated by 208 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 six months endedJune 30, 2020 , excess cash flow, after payment of debt service and servicing and trustee expenses, totaled$47 million on cash collections of$117 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 aSTORE 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 ofJune 30, 2020 , our aggregate secured and unsecured long-term debt had an outstanding principal balance of$3.6 billion , a weighted average maturity of 6.5 years and a weighted average interest rate of 4.3%. The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as ofJune 30, 2020 : Gross Investment Portfolio Assets Special Purpose Outstanding Entity All Other (In millions) Borrowings Subsidiaries Subsidiaries Total STORE Master Funding net-lease mortgage notes payable$ 2,149 $ 3,168 $ -$ 3,168 Other mortgage notes payable 193 343 - 343 Total non-recourse debt 2,342 3,511 - 3,511 Unsecured notes and term loans payable 1,275 - - - Unsecured credit facility 600 - - - Total unsecured debt (including revolving credit facility) 1,875 - - - Unencumbered real estate assets - 4,429 1,227 5,656 Total debt$ 4,217 $ 7,940$ 1,227 $ 9,167 35
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. InNovember 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). We utilized the ATM program during the first half of 2020 to raise capital in accordance with our strategic plans, as well as part of our efforts to manage liquidity in response to the COVID-19 pandemic.
The following tables outline the common stock issuances under 2019 ATM Program (in millions except share and per share information):
Three Months Ended June 30, 2020
Weighted Average Sales Agents' Other Offering
Shares Sold Price per Share Gross Proceeds Commissions Expenses Net Proceeds
8,767,154 $ 20.50 $ 179.7 $ (2.7)
$ (0.1)
Six Months Ended June 30, 2020
Weighted Average Sales Agents' Other Offering
Shares Sold Price per Share Gross Proceeds Commissions Expenses Net Proceeds
12,894,954 $ 25.53 $ 329.2 $ (3.5)
$ (0.2)
Inception of Program Through June 30, 2020
Weighted Average Sales Agents' Other Offering
Shares Sold Price per Share Gross Proceeds Commissions Expenses Net Proceeds
17,921,320 $ 29.53 $ 529.2 $ (5.4) $ (0.5)$ 523.3 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 six months endedJune 30, 2020 decreased by$34.4 million over the same period in 2019, primarily as a result of the rent deferral arrangements granted to tenants in response to the COVID-19 pandemic. Cash flows from operations for the six months endedJune 30, 2019 include a$6.7 million payment we made in settlement of two treasury lock agreements. In response to the COVID-19 pandemic, we intentionally reduced our investment activity beginning in the first quarter of 2020 due to the volatility in the capital markets; as a result, total investment in real estate, loans and financing receivables during the first six months of 2020 was$381.9 million lower than the same period in 2019. In the first half of 2020, investment activity was primarily funded with a combination of cash from operations, proceeds from the sale of real estate properties, borrowings under our unsecured credit facility 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 higher for the six months endedJune 30, 2020 as compared to the same period in 2019 primarily as a result of borrowings we made on our unsecured revolving credit facility as a precautionary measure in response to the COVID-19 pandemic, as compared to net paydown activity on the facility during the same period in 2019. During the six months 36 endedJune 30, 2019 , financing activities included$384.4 million of net proceeds from the issuance of long-term debt. We paid dividends to our stockholders totaling$170.5 million and$148.8 million during the first six months of 2020 and 2019, respectively; we increased our quarterly dividend in the third quarter of 2019 by 6.1% to an annualized$1.40 per common share.
Six Months Ended June 30,
(In thousands) 2020 2019Net cash provided by operating activities$ 183,838 $
218,281
Net cash used in investing activities (313,915)
(662,597)
Net cash provided by financing activities 731,993
441,554
Net increase (decrease) in cash, cash equivalents and restricted cash 601,916
(2,762)
Cash, cash equivalents and restricted cash, beginning of period 111,381
43,017
Cash, cash equivalents and restricted cash, end of period$ 713,297 $
40,255
As ofJune 30, 2020 , we had immediate liquidity of$699.2 million on our balance sheet. Management believes that our current cash balance, the cash generated by our operations and the$800.0 million of liquidity available to us under the accordion feature of our unsecured revolving 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. As we obtain more visibility on the timing and strength of the economic recovery from the COVID-19 pandemic, we would expect to reduce the amount of cash held on our balance sheet by paying down our credit facility. 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
Contractual Obligations
As summarized in the table of Contractual Obligations in our Annual Report on Form 10-K for the year endedDecember 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
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.S. generally accepted accounting principles, or GAAP, requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our condensed consolidated financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." 37
Real Estate Portfolio Information
As ofJune 30, 2020 , our total investment in real estate and loans approximated$9.2 billion , representing investments in 2,554 property locations, substantially all of which are profit centers for our customers. These investments generate cash flows from approximately 730 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 ofJune 30, 2020 , our 2,554 property locations were operated by 503 customers acrossthe United States . Our largest customer represented approximately 2.8% of our portfolio atJune 30, 2020 , and our top ten largest customers represented 17.1% of base rent and interest. Our customers operate their businesses across more than 725 brand names or business concepts in over 100 industries. 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 onJune 30, 2020 , for all of our leases, loans and financing receivables in place as of that date. Diversification by Customer
As of
% of
Base Rent Number
and of
Customer Interest Properties
Fleet Farm Group LLC 2.8 % 10Bass Pro Group, LLC (Cabela's ) 1.9
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 ) 1.6
19
American Multi-Cinema, Inc. (AMC/Carmike/Starplex) 1.5
14
Dufresne Spencer Group Holdings, LLC (Ashley Furniture HomeStore) 1.4
21
US LBM Holdings, LLC (Building materials distribution) 1.3
48
Zips Holdings, LLC 1.3 41
All other (493 customers) 82.9 2,299
Total 100.0 % 2,554
38
Diversification by Concept
As of
% of
Base Rent Number
and of
Customer Business Concept Interest Properties
Fleet Farm 2.8 % 10
Ashley Furniture HomeStore 2.2 31
Cabela's 1.7 8
Loves Furniture 1.7 23
AMC Theaters 1.5 14
Zips Car Wash 1.3 41
Stratford School 1.2 6
America's Auto Auction 1.1 7
At Home 1.1 9
Carvana 1.1 13
All other (719 concepts) 84.3 2,392
Total 100.0 % 2,554
Diversification by Industry
As of June 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 76
industry groups:
% of Building
Base Rent Number Square
and of Footage
Customer Industry Group Interest Properties (in thousands)
Service:
Restaurants-full service 8.5 % 390 2,673
Restaurants-limited service 5.1 393 1,065Early childhood education centers 6.1 238 2,495 Health clubs 5.3 88 3,130 Automotive repair and maintenance 4.8
173 908 Movie theaters 4.0 38 1,916 Family entertainment centers 3.6 40 1,623
All other service (28 industry groups) 27.0
728 25,060 Total service 64.4 2,088 38,870 Retail: Furniture stores 4.7 62 3,900
Farm and ranch supply stores 4.5 43 4,400 All other retail (16 industry groups) 9.1
126 5,356 Total retail 18.3 231 13,656 Manufacturing: Metal fabrication 4.6 81 9,736
All other manufacturing (22 industry groups) 12.7
154 19,918
Total manufacturing 17.3 235 29,654
Total 100.0 % 2,554 82,180
39
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 June 30, 2020 :
% of
Base Rent
and Number of
State Interest Properties
Texas 10.9 % 267
Illinois 6.1 154
California 5.6 60
Florida 5.5 154
Georgia 5.1 142
Ohio 5.0 135
Wisconsin 4.8 59
Arizona 4.7 86
Tennessee 3.8 115
Minnesota 3.6 89
All other (39 states) (1) 44.9 1,293
Total 100.0 % 2,554
(1) Includes one property in
and interest.
Contract Expirations
The following table sets forth the schedule of our lease, loan and financing
receivable expirations as of
% of
Base Rent
and Number of
Year of Lease Expiration or Loan Maturity (1) Interest Properties (2)
Remainder of 2020 0.3 % 12
2021 0.6 9
2022 0.4 10
2023 0.7 19
2024 0.7 19
2025 1.3 27
2026 1.6 49
2027 2.4 56
2028 3.5 67
2029 6.1 173
Thereafter 82.4 2,099
Total 100.0 % 2,540
(1) Expiration year of contracts in place as of
tenant option renewal periods.
(2) Excludes 14 properties that were vacant and not subject to a lease as ofJune 30, 2020 . 40 Results of Operations Overview As ofJune 30, 2020 , our real estate investment portfolio had grown to approximately$9.2 billion , consisting of investments in 2,554 property locations in 49 states, operated by more than 500 customers in various industries. Approximately 93% of the real estate investment portfolio represents commercial real estate properties subject to long-term leases, approximately 7% represents mortgage loan and financing receivables on commercial real estate properties and a nominal amount represents loans receivable secured by our tenants' other assets. Three and Six Months EndedJune 30, 2020 Compared to Three and Six Months EndedJune 30, 2019 Three Months Ended Six Months Ended June 30, Increase June 30, Increase (In thousands) 2020 2019 (Decrease) 2020 2019 (Decrease) Total revenues$ 168,280 $ 163,787 $ 4,493 $ 346,177 $ 320,425 $ 25,752 Expenses: Interest 44,032 39,429 4,603 85,726 77,497 8,229 Property costs 5,290 2,014 3,276 11,294 4,598 6,696 General and administrative 13,134 14,266 (1,132) 21,013 26,249 (5,236) Depreciation and amortization 60,296 55,000 5,296 119,634 108,716 10,918 Provisions for impairment 5,300 - 5,300 8,200 2,610 5,590 Total expenses 128,052 110,709 17,343
245,867 219,670 26,197
Net gain on dispositions of real estate 531 15,033 (14,502) 3,277 13,105 (9,828) Income from operations before income taxes 40,759 68,111 (27,352) 103,587 113,860 (10,273) Income tax expense 159 147 12 327 340 (13) Net income$ 40,600 $ 67,964 $ (27,364) $ 103,260 $ 113,520 $ (10,260) 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, as offset by rent reductions resulting from the lease modifications negotiated as part of our portfolio management activities as well as the short-term rent reductions granted to certain tenants as a result of the COVID-19 pandemic. Our real estate investment portfolio grew from approximately$8.3 billion in gross investment amount representing 2,389 properties as ofJune 30, 2019 to approximately$9.2 billion in gross investment amount representing 2,554 properties atJune 30, 2020 . The weighted average real estate investment amounts outstanding during the three-month periods were approximately$9.1 billion in 2020 and$8.1 billion in 2019. During the six-month periods, the weighted average real estate investments amounts outstanding were approximately$9.0 billion in 2020 and$7.9 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. Many of our customers have been adversely impacted by the COVID-19 pandemic with customers in certain industries impacted more significantly than others as a result of shelter in place orders and social distancing requirements, as well as government-mandated cessation or limitations of business operations. Industries in our portfolio that have been the most adversely impacted are restaurants, education, including early childhood care centers and elementary schools, health clubs, movie theaters, family entertainment facilities and furniture and home furnishing stores. 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 structured through short-term, interest-bearing notes. We expect the majority of amounts deferred to be collected beginning later this year and throughout 2021. ThroughJune 30, 2020 , we have receivables representing deferred rent and interest payments aggregating approximately$38.2 million related to these deferral arrangements to a limited 41 number of customerswho primarily operate in the industries highly impacted by the pandemic; a portion of these deferrals are expected to continue for several months. To date, we received cash payments representing approximately 85% of July's scheduled rent and interest on our active contracts and estimate that 92% of our properties are open and our tenants are actively operating their businesses. Rent collections and rent deferral arrangements reached in any given month may not be indicative of collections or deferrals in future periods and we are unable to estimate the full impact that the COVID-19 pandemic will have on our future revenues and financial results at this time. 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 acrossthe United States . There are also online commercial real estate auction marketplaces for real estate transactions; properties acquired through these online marketplaces are often subject to existing leases and offered by third-party sellers. In general, because we provide tailored customer lease solutions in sale-leaseback transactions, our lease rates historically have been higher and subject to less short-term market influences than what we have seen in the auction marketplace as a whole. In addition, since our 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. During the second quarter of 2020, the weighted average lease rate attained on our new investments was approximately 0.8% higher as compared to the same period in 2019 and also represented a marked increase from lease rates attained during the previous two quarters, which we attribute to the temporary disruption in the capital markets caused by the sudden onset of the COVID-19 pandemic. The weighted average initial capitalization rate on the properties we acquired during the second quarters of 2020 and 2019 was approximately 8.7% and 7.9%, respectively. In response to the uncertainties surrounding the economic impact of the COVID-19 pandemic, we reduced our real estate investment activity beginning inmid-March 2020 . We cannot predict when the commercial real estate markets will return to order after this wide-spread disruption. Because our sale-leaseback product is a substitute for both borrowings and equity capital for our customers, we do expect that we will return to our planned acquisition activity in a disciplined manner when uncertainty in the financial markets subsides and the path to recovery from the pandemic becomes more visible. Although we cannot predict what lease rates will be as the markets return to normal, our experience is that we could see similar movements in lease rates as market interest rates adjust
in the future. 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.
42
The following table summarizes our interest expense for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2020 2019 2020 2019Interest expense - credit facility$ 2,932 $ 285 $ 3,212 $ 1,823 Interest expense - credit facility fees 303 303 606 603 Interest expense - long-term debt (secured and unsecured) 38,807 36,976 78,005 70,837 Capitalized interest (96) (337) (325) (754) Loss on defeasance of debt - - - 735 Amortization of deferred financing costs and other 2,086 2,202 4,228 4,253 Total interest expense$ 44,032 $ 39,429 $ 85,726 $ 77,497 Credit facility: Average debt outstanding$ 600,000 $ 30,615 $ 328,022 $ 101,542 Average interest rate during the period (excluding facility fees) 2.0 % 3.7 %
2.0 % 3.6 % Long-term debt (secured and unsecured): Average debt outstanding$ 3,621,244 $ 3,336,977 $ 3,625,691 $ 3,216,755 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 afterJune 30, 2019 consisted of$508 million of STORE Master Funding Series 2019-1 notes issued inNovember 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 ofJune 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 six months endedJune 30, 2020 , the average one-month LIBOR was approximately 160 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 an additional$450 million under our revolving credit facility at the end ofMarch 2020 to increase liquidity and preserve financial flexibility. The full$600 million remains outstanding on our facility as ofJune 30, 2020 . As we obtain more visibility on the timing and strength of the economic recovery from the COVID-19 pandemic, we would expect to reduce the amount of cash held on our balance sheet and also reduce the amount outstanding on our 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$0.1 million and$0.3 million during the three and six months endedJune 30, 2020 , respectively, as compared to$0.3 and$0.8 million during the three and six months endedJune 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 ofJune 30, 2020 , we owned 14 properties that were vacant and not subject to a lease and the lease contracts related to just eight properties we own are 43 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 six 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. Although none of our vacancies atJune 30, 2020 are specifically related to the COVID-19 pandemic, we expect that vacancies could increase in the future if the nationwide economic shutdown continues and our tenants are not able to reopen their businesses. As ofJune 30, 2020 , we had entered into operating ground leases as part of several real estate investment transactions. As a result of the adoption of ASC Topic 842 in 2019, 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. Also as a result of the adoption of ASC Topic 842, for the few lease contracts where we collect property taxes from our tenants and remit those taxes to governmental authorities, we now 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 June 30, Six Months Ended June 30,
2020 2019 2020 2019Property-level operating costs (a)$ 3,963 $ 770$ 8,642 $ 1,911 Ground lease-related intangibles amortization expense 117 117 234 234 Operating ground lease payments made by STORE Capital 16 7 21 12 Operating ground lease payments made by STORE Capital tenants 368 412 812 782 Operating ground lease straight-line rent expense 165 164 316 313 Property taxes payable from tenant impounds 661
544 1,269 1,346 Total property costs $ 5,290 $ 2,014$ 11,294 $ 4,598
Property-level operating costs primarily include those expenses associated (a) with vacant or nonperforming properties, property management costs for the
few properties that have specific landlord obligations and the cost of
performing property site inspections from time to time
General and Administrative Expenses
General and administrative expenses include compensation and benefits; professional fees such as portfolio servicing, legal, accounting and rating agency fees; and general office expenses such as insurance, office rent and travel costs. General and administrative costs totaled$13.1 million and$21.0 million for the three and six months endedJune 30, 2020 , respectively, as compared to$14.3 million and$26.2 million , respectively, for the same periods in 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 and approximately$2.0 million of executive severance costs incurred in the second quarter of 2019. These decreases were partially offset by increases due to the growth of our portfolio and related staff additions. Our employee base grew from 92 employees onJune 30, 2019 to 96 employees as ofJune 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, we expect that such expenses as a percentage of the portfolio will decrease over time due to efficiencies and economies of scale. During the six months endedJune 30, 2020 , we incurred a small amount of professional services expenses and other costs related to our response to the COVID-19 pandemic and, although we could incur such additional costs in the future, we do not expect that they will be significant to our operations.
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$55.0 million and$108.7 million for the three and six months endedJune 30, 2019 , respectively, to$60.3 million and$119.6 million , respectively, for the comparable periods in 2020. 44 Provisions for Impairment During the three and six months endedJune 30, 2020 , we recognized$5.3 million and$8.2 million , respectively, in provisions for the impairment of real estate. We recognized$2.6 million in provisions for the impairment of real estate during the six months endedJune 30, 2019 .
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 endedJune 30, 2020 , we recognized a$0.5 million aggregate net gain on the sale of 16 properties. In comparison, for the three months endedJune 30, 2019 , we recognized a$15.0 million aggregate net gain on the sale of 22 properties. For the six months endedJune 30, 2020 , we recognized a$3.3 million aggregate net gain on the sale of 25 properties as compared to an aggregate net gain of$13.1 million on the sale of 26 properties in the same period in 2019. Net Income For the three and six months endedJune 30, 2020 , our net income was$40.6 million and$103.3 million reflecting decreases from$68.0 million and$113.5 million for the comparable periods in 2019. The change in net income is primarily comprised of a net increase resulting from the growth in our real estate investment portfolio, which generated additional rental revenues and interest income, offset by rent reductions primarily related to our properties operating in industries adversely impacted by the COVID-19 pandemic, increased interest expense, higher property costs associated with nonperforming properties and lower aggregate net gains on dispositions of real estate. For the six months endedJune 30, 2020 , net income includes the impact of the derecognition of stock-based compensation expense in the first quarter as noted above.
Non-GAAP Measures
Our reported results are presented in accordance withU.S. generally accepted accounting principles, or GAAP. We also disclose Funds from Operations, or FFO, and Adjusted Funds from Operations, or AFFO, both of which are non-GAAP measures. We believe these two non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs. FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or to cash flows from operations as reported on a statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. We compute FFO in accordance with the definition adopted by theBoard of Governors of theNational Association of Real Estate Investment Trusts , or NAREIT. NAREIT defines FFO as GAAP net income, excluding gains (or losses) from extraordinary items and sales of depreciable property, real estate impairment losses, and depreciation and amortization expense from real estate assets, including the pro rata share of such adjustments of unconsolidated subsidiaries. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to certain revenues and expenses that have no impact on our long-term operating performance, such as straight-line rents, amortization of deferred financing costs and stock-based compensation. In addition, in deriving AFFO, we exclude certain other costs not related to our ongoing operations, such as the amortization of lease-related intangibles.
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
45
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 June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Net Income $ 40,600 $ 67,964 $ 103,260 $ 113,520
Depreciation and amortization of real
estate assets 60,222 54,921 119,477 108,560
Provision for impairment of real estate 5,300 - 8,200 2,610
Net gain on dispositions of real estate (531) (15,033) (3,277) (13,105)
Funds from Operations (a) 105,591 107,852 227,660 211,585
Adjustments:
Straight-line rental revenue:
Fixed rent escalations accrued (2,659) (1,622) (3,924) (2,875)
Construction period rent deferrals 410 389 936 997
Amortization of:
Equity-based compensation 2,473 3,071 (1,099) 4,757
Deferred financing costs and other 2,086 2,202 4,228 4,253
Lease-related intangibles and costs 854 664 1,529 1,357 Lease termination fees - - (237) - Capitalized interest (96) (336) (325) (754) Executive severance costs - 1,956 - 1,956 Loss on defeasance of debt - - - 735 Adjusted Funds from Operations (a)$ 108,659 $ 114,176 $ 228,768 $ 222,011 FFO and AFFO for the three and six months endedJune 30, 2020 , includes
approximately
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.
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