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, 2020 filed with theSecurities and Exchange Commission onFebruary 26, 2021 . 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. Our customers operate their businesses under a wide range of brand names or business concepts. As ofSeptember 30, 2021 , approximately 830 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 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 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." Since our inception in 2011, we have selectively originated over$12.1 billion of real estate investments. As ofSeptember 30, 2021 , our investment portfolio totaled approximately$10.3 billion , consisting of investments in 2,788 28 property locations acrossthe United States . All 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 1.8%), which allows the monthly lease payments we receive to increase somewhat in an inflationary economic environment. As ofSeptember 30, 2021 , approximately 99% of our leases (based on base rent) were "triple-net" leases, which means that our customers are responsible for all 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 ofSeptember 30, 2021 , the weighted average remaining term of our leases (calculated based on base rent) was approximately 13.5 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 acquire assets and originate new leases 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
Since early 2020, the world has been impacted by the pandemic. At various times, the COVID-19 pandemic has primarily impacted us through government mandated limits (i.e., required closing or limits on operations and social distancing requirements) imposed on our tenants' businesses and continuing public perceptions regarding safety, which have impacted certain tenants' ability to pay their rent to us. In addition, although 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, we may be required make the property tax payment on behalf of the tenant if they are unable to do so. We have worked directly with our impacted tenants during the pandemic 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. During 2020, we recognized net revenue aggregating approximately$57.1 million related to these deferral arrangements and collected$9.9 million in repayments of the amounts deferred. During the nine months endedSeptember 30, 2021 , we recognized an additional$5.8 million of net revenue related to deferral arrangements and collected$19.2 million in repayments of amounts deferred. We expect that the majority of our remaining receivable will be collected before the end of 2022. As government-mandated restrictions have been lifted, our tenants have increased their business activity and their ability to meet their financial obligations to us under their lease contracts. As a result, our rent and interest 29
collections have returned to pre-pandemic levels and, essentially, all of our properties are open for business.
The Company continues to closely watch for unpredictable factors that could impact its business going forward, including the duration of the pandemic; governmental, business and individual actions in response to the pandemic, including the vaccination process (and related government mandates); and the overall impact on broad economic activity.
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. As ofSeptember 30, 2021 , the weighted average remaining term of our leases was approximately 13.5 years and the contracts related to just 17 properties, representing less than 0.5% of our annual base rent and interest, are due to expire during the remainder of 2021; more than 80% of our leases have ten years or more remaining in their base lease term. As ofSeptember 30, 2021 , 16 of our 2,788 properties were vacant and not subject to a lease, which represents a 99.4% 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 or may be unable to pay such costs in a timely manner. 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. We intend to continue to grow through additional real estate investments. To accomplish this objective, we must continue to 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 ofSeptember 30, 2021 , we had commitments to our customers to fund improvements to owned or mortgaged real estate properties totaling approximately$143.9 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
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properties) and our annual debt maturities; we have no significant debt maturities until 2024.
As ofSeptember 30, 2021 , all our long-term debt was fixed rate debt and our weighted average debt maturity was 6.7 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. InOctober 2021 ,S&P Global Ratings raised its outlook on the Company to positive from stable and affirmed its BBB issuer credit rating. 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 leverage, expressed as the ratio of debt (net of cash and cash equivalents) to the cost of our investment portfolio, was approximately 39% atSeptember 30, 2021 . 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 ofSeptember 30, 2021 , our secured non-recourse borrowings had a 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$6.5 billion atSeptember 30, 2021 , 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. 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 continue to grow our real estate portfolio, we also intend to continue 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 our third issuance of senior unsecured public notes inNovember 2020 , we prepaid, without penalty,$92.3 million of STORE Master Funding Series 2015-1 Class A-1 notes and one of our$100 million bank term loans. Similar to these prepayment transactions, we may prepay other existing long-term debt in circumstances where we believe it would be economically advantageous to do so. 31
Unsecured Revolving Credit Facility
Typically, we use our$600 million 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. As ofSeptember 30, 2021 , we had$109.0 million outstanding under our unsecured revolving credit facility. InJune 2021 , we recast this unsecured revolving credit facility to increase the accordion feature from$800 million to$1.0 billion , which now gives us a maximum borrowing capacity of$1.6 billion . The amended facility matures inJune 2025 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 0.70% to 1.40%, or (2) the Base Rate, as defined in the credit agreement, plus a credit spread ranging from 0.00% to 0.40%. 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 0.10% to 0.30%. The amendment reduced the currently applicable credit spread for LIBOR-based borrowings by 15 basis points to 0.85% and the facility fee is 0.20%. The amended credit agreement does allow for a further reduction in the pricing for LIBOR-based borrowings if certain environmental sustainability metrics are met. 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 and secured borrowing ratios. Certain of these ratios are based on our pool of unencumbered assets, which aggregated approximately$6.5 billion atSeptember 30, 2021 . The facility is recourse to us and, as ofSeptember 30, 2021 , we were in compliance with the financial and nonfinancial covenants under the facility.
Senior Unsecured Term Debt
InNovember 2020 , we completed our third issuance of underwritten public notes in an aggregate principal amount of$350.0 million and, as ofSeptember 30, 2021 , we had an aggregate principal amount of$1.05 billion of underwritten public notes outstanding. These senior unsecured notes bear a weighted average coupon rate of 3.96% and interest on these notes is paid semi-annually. The supplemental indentures governing our public notes contain various restrictive covenants, including limitations on our ability to incur additional secured and unsecured indebtedness. As ofSeptember 30, 2021 we were in compliance with these covenants. 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 lenders who also participate in our unsecured revolving credit facility; the financial covenants of the privately placed notes are similar to our unsecured revolving credit facility. We repaid our remaining$100 million bank term loan inApril 2021 at its maturity and the related interest rate swap agreements expired. The aggregate outstanding principal amount of our unsecured senior notes and term loans payable was$1.4 billion as ofSeptember 30, 2021 .
Non-recourse Secured Debt
As ofSeptember 30, 2021 , 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 32 real estate collateral owned by the issuing subsidiaries and are currently ratedAAA or A+ byS&P Global Ratings . The Series 2018-1 transaction inOctober 2018 marked our inaugural issuance of AAA rated notes and our Series 2019-1 transaction inNovember 2019 marked our first issuance of 15-year notes. We believe these two precedent transactions both broadened the market for our STORE Master Funding debt program and gave us access to lower cost secured debt. In lateJune 2021 , our consolidated special purpose entities issued the tenth series, Series 2021-1, of net lease mortgage notes under the STORE Master Funding debt program consisting of$515 million of notes issued in four Class A tranches as summarized below: Amount Note Class Rating (a) (in millions) Coupon Rate Term Maturity Date Class A-1 AAA $ 168.5 2.12 % 7 years June 2028 Class A-2 AAA 168.5 2.96 % 12 years June 2033 Class A-3 A+ 89.0 2.86 % 7 years June 2028 Class A-4 A+ 89.0 3.70 % 12 years June 2033
Total / Weighted Average $ Coupon Rate 515.0 2.80 % (a) By S&P Global Ratings.
The Series 2021-1 transaction served to further our belief that the market for the STORE Master Funding program is broadening. In conjunction with this transaction, we prepaid, without penalty,$86.7 million of STORE Master Funding Series 2013-1, Class A-2 notes inMay 2021 and$83.3 million of Series 2013-2, Class A-2 notes inJuly 2021 . These two prepaid note classes bore a weighted average interest rate of 4.98%. A portion of the net proceeds from the issuance were also used to pay down balances on our revolving credit facility with the remainder representing new incremental term borrowings. 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 byS&P Global Ratings . As ofSeptember 30, 2021 , there was an aggregate$190.0 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 atSeptember 30, 2021 totaled$2.4 billion in Class A principal amount and were supported by a collateral pool of approximately$3.5 billion representing 1,138 property locations operated by 211 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. 33
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 endedSeptember 30, 2021 , excess cash flow, after payment of debt service and servicing and trustee expenses, totaled$97 million on cash collections of$197 million , which represents an overall ratio of cash collections to debt service, or debt service coverage ratio (as defined in the program documents), of greater than 1.9 to 1 on the STORE Master Funding program. 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 ofSeptember 30, 2021 , our aggregate secured and unsecured long-term debt had an outstanding principal balance of$4.0 billion , a weighted average maturity of 6.7 years and a weighted average interest rate of 4.05%. The following is a summary of the outstanding balance of our borrowings as well as a summary of the portion of our real estate investment portfolio that is either pledged as collateral for these borrowings or is unencumbered as ofSeptember 30, 2021 : Gross Investment Portfolio Assets Special Purpose Outstanding Entity All Other (In millions) Borrowings Subsidiaries Subsidiaries Total STORE Master Funding net-lease mortgage notes payable$ 2,365 $ 3,490 $ -$ 3,490 Other mortgage notes payable 180 325 - 325 Total non-recourse debt 2,545 3,815 - 3,815 Unsecured notes and term loans payable 1,425 - - - Unsecured credit facility 109 - - - Total unsecured debt (including revolving credit facility) 1,534 - - - Unencumbered real estate assets - 5,216 1,327 6,543 Total debt$ 4,079 $ 9,031$ 1,327 $ 10,358
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.
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Equity
We access the equity markets in various ways. As part of these efforts, we have established "at the market" equity distribution programs, or ATM programs, 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. Most recently, inNovember 2020 , we established a$900 million ATM program (the 2020 ATM Program).
The following tables outline the common stock issuances under the 2020 ATM Program (in millions except share and per share information):
Three Months Ended September 30, 2021
Weighted Average Sales Agents' Other Offering
Shares Sold Price per Share Gross Proceeds Commissions Expenses Net Proceeds 534,267 $ 35.98 $ 19.2 $ (0.3) $ -$ 18.9 Nine Months Ended September 30, 2021 Weighted Average Sales Agents' Other Offering Shares Sold Price per Share Gross Proceeds Commissions
Expenses Net Proceeds
5,665,358 $ 33.82 $ 191.6 $ (2.9) $ (0.3)$ 188.4 Inception of Program Through September 30, 2021 Weighted Average Sales Agents' Other Offering Shares Sold Price per Share Gross Proceeds Commissions
Expenses Net Proceeds
9,184,418 $ 33.17 $ 304.6 $ (4.6) $ (0.5)$ 299.5 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 endedSeptember 30, 2021 increased by$116.1 million over the same period in 2020, primarily as a result of the increase in the size of our real estate investment portfolio, which generated additional rental revenue and interest income as well as the impact of the higher level of rent deferral arrangements granted to tenants in 2020 versus 2021. Our investments in real estate, loans and financing receivables during the first nine months of 2021 were$393.1 million more than the same period in 2020. We intentionally reduced our investment activity in early 2020 due to the volatility in the capital markets stemming from the pandemic. During the nine months endedSeptember 30, 2021 , our investment activity was primarily funded with a combination of cash from operations, proceeds from the sale of real estate properties, proceeds from the issuance of stock, proceeds from the issuance of long-term debt inJune 2021 and borrowings on our revolving credit facility. Investment activity during the same period in 2020 was primarily funded with a combination of cash from operations, proceeds from the issuance of stock and proceeds from the sale of real estate properties. Net cash provided by financing activities was lower for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. Financing activities in 2021 include the proceeds from the issuance of the Series 2021-1 notes under our Master Funding debt program offset by the repayment of our last$100 million bank term loan and two tranches of Master Funding notes in May and July of 2021; the increased level of long-term debt issuance activities in 2021 were more than offset by higher stock issuance activities in 2020. We paid dividends to our stockholders totaling$293.2 million and$259.1 million during the first nine months of 2021 and 2020, respectively; we increased our quarterly dividend in the third quarter of 2021 by 6.9% to an annualized$1.54 per common share. 35 Nine Months Ended September 30, (In thousands) 2021 2020
Net cash provided by operating activities$ 414,778 $ 298,652 Net cash used in investing activities (739,397)
(497,998)
Net cash provided by financing activities 190,886
249,447
Net (decrease) increase in cash, cash equivalents and restricted cash (133,733) 50,101 Cash, cash equivalents and restricted cash, beginning of period 176,576
111,381
Cash, cash equivalents and restricted cash, end of period $ 42,843
As ofSeptember 30, 2021 , we had liquidity of$37.0 million on our balance sheet. Management believes that our current cash balance, the nearly$500.0 million of immediate borrowing capacity available on our unsecured revolving credit facility, the cash generated by our operations as well as the$1.0 billion of liquidity available to us under the accordion feature of our recently amended 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
Contractual Obligations
As summarized in the table of Contractual Obligations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , 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. As disclosed in Liquidity and Capital Resources, during the nine months endedSeptember 30, 2021 , certain of our consolidated special purpose entity subsidiaries issued$515 million in aggregate principal amount of non-recourse net-lease mortgage notes. The issuance included equal amounts of seven- and twelve-year notes that bear a weighted average interest rate of 2.80%; in conjunction with this note issuance, we also prepaid, without penalty,$86.7 million inMay 2021 and$83.3 million inJuly 2021 of previously issued non-recourse net lease mortgage notes which bore a weighted average interest rate of 4.98% and were scheduled to mature in 2023.
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, 2020 in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." 36
Real Estate Portfolio Information
As of
Our real estate portfolio is highly diversified. As ofSeptember 30, 2021 , our 2,788 property locations were operated by 538 customers acrossthe 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 3.1% of our portfolio atSeptember 30, 2021 , and our top ten largest customers represented 18.7% of base rent and interest. Our customers operate their businesses across approximately 830 brand names or business concepts in over 100 industries. The largest of the business concepts represented 2.3% of our base rent and interest as ofSeptember 30, 2021 and approximately 85% 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 onSeptember 30, 2021 , 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 PropertiesLBM Acquisition, LLC (Building materials distribution) 3.1
% 156
2.9 27
Fleet Farm Group LLC 2.3 9Cadence Education, Inc. (Early childhood/elementary education) 2.0
65
Dufresne Spencer Group Holdings, LLC (Ashley Furniture HomeStore) 1.6
25
CWGS Group, LLC (Camping World/Gander Outdoors) 1.5
20
Great Outdoors Group, LLC (Cabela's ) 1.4
9
American Multi-Cinema, Inc. 1.4 14
Zips Holdings, LLC 1.3 43
At Home Stores LLC 1.2 11
All other (528 customers) 81.3 2,409
Total 100.0 % 2,788
37
Diversification by Industry
As ofSeptember 30, 2021 , our customers' business concepts were diversified across more than 100 industries within the service, retail and manufacturing sectors of theU.S. economy. The following table summarizes those industries into 80 industry groups: % of Building Base Rent Number Square and of Footage Customer Industry Group Interest Properties (in thousands) Service: Restaurants-full service 7.1 % 348 2,411 Restaurants-limited service 5.3 400 1,290
Early childhood education centers 6.3 262 2,756 Automotive repair and maintenance 5.2
207 1,115 Health clubs 5.2 90 3,085 Pet care facilities 3.5 183 1,732
Lumber & construction materials wholesalers 3.5
167 6,865 Movie theaters 3.4 36 1,790 Behavioral health facilities 3.3 79 1,441
All other service (30 industry groups) 23.0 493 23,939 Total service 65.8 2,265 46,424
Retail:
Total retail (18 industry groups) 15.2
240 13,675 Total retail 15.2 240 13,675 Manufacturing: Metal fabrication 5.2 97 11,965
All other manufacturing (22 industry groups) 13.8
186 24,049 Total manufacturing 19.0 283 36,014 Total 100.0 % 2,788 96,113 Diversification by Geography Our portfolio is also highly diversified by geography, as our property locations can be found in every state exceptHawaii . The following table details the top ten geographical locations of the properties as ofSeptember 30, 2021 : % of Base Rent and Number of State Interest Properties Texas 11.2 % 333 California 6.1 80 Illinois 5.9 177 Georgia 5.5 161 Florida 5.2 155 Ohio 5.2 142 Wisconsin 5.1 77 Arizona 4.6 92 Tennessee 3.5 115 Minnesota 3.4 87 All other (39 states) (1) 44.3 1,369 Total 100.0 % 2,788
(1) Includes one property in
base rent and interest.
38
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 2021 0.4 % 17
2022 0.3 10
2023 1.1 10
2024 0.6 22
2025 1.1 24
2026 1.4 51
2027 1.8 53
2028 3.1 67
2029 5.5 168
2030 3.7 147
Thereafter 81.0 2,203
Total 100.0 % 2,772
(1) Expiration year of contracts in place as of
any tenant option renewal periods.
(2) Excludes 16 properties that were vacant and not subject to a lease as of
September 30, 2021 . Results of Operations Overview
As ofSeptember 30, 2021 , our real estate investment portfolio had grown to approximately$10.3 billion , consisting of investments in 2,788 property locations in 49 states, operated by more than 535 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.
39
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
(In thousands) 2021 2020 (Decrease) 2021 2020 (Decrease)
Total revenues $ 199,125 $ 175,223 $ 23,902 $ 573,432 $ 521,400 $ 52,032
Expenses:
Interest 43,367 42,090 1,277 126,904 127,816 (912)
Property costs 4,267 3,309 958 14,098 14,603 (505)
General and administrative 17,456 14,729 2,727 58,551 35,742 22,809
Depreciation and amortization 67,123 61,119 6,004 195,725 180,753 14,972
Provisions for impairment 3,400 2,772 628 17,350 10,972 6,378
Total expenses 135,613 124,019 11,594 412,628 369,886 42,742
Other income:
Net gain on dispositions of
real estate 10,721 3,537 7,184 32,271 6,814 25,457
Income from non-real estate,
equity method investment 1,872 - 1,872 804 - 804
Income before income taxes 76,105 54,741 21,364 193,879 158,328 35,551
Income tax expense 169 111 58 552 438 114
Net income $ 75,936 $ 54,630 $ 21,306 $ 193,327 $ 157,890 $ 35,437
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. Our real estate investment portfolio grew
from approximately $9.3 billion in gross investment amount representing 2,587
properties as of September 30, 2020 to approximately $10.3 billion in gross
investment amount representing 2,788 properties at September 30, 2021 . The
weighted average real estate investment amounts outstanding during the
three-month periods were approximately $10.1 billion in 2021 and $9.2 billion in
2020. During the nine-month periods, the weighted average real estate investment
amounts were approximately $9.9 billion in 2021 and $9.1 billion in 2020. Our
real estate investments were made throughout the periods presented and were not
all outstanding for the entire period; accordingly, a portion of the increase in
revenues between periods is related to recognizing a full year of revenue in
2021 on acquisitions that were made during 2020. Similarly, the full revenue
impact of acquisitions made during 2021 will not be seen until the fourth
quarter of 2021 and into 2022. 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. During both the three and nine months ended September 30, 2021 ,
we collected $1.8 million in early lease termination fees which are included in
other income. Similarly, during the three and nine months ended September 30,
2020 , we recognized $0.4 million and $2.8 million of lease termination fee
income.
As previously noted, we worked directly with certain of our tenants during the
pandemic to help them continue to meet their rent payment obligations to us,
including providing short-term rent deferral arrangements, which allowed tenants
that were highly and adversely impacted by the pandemic to defer the payment of
their rent on a short-term basis.. As restrictions have been lifted and impacted
tenants have increased their business activities, our monthly rent and interest
collections have increased and deferrals have significantly decreased. During
the three and nine months ended September 30, 2021 , we recognized net revenue
aggregating approximately $0.8 million and $5.8 million , respectively, related
to deferral arrangements. We collected $8.0 million and $19.2 million of
deferred revenue-related receivables during the three and nine months ended
September 30, 2021 , respectively. We expect that the majority of our remaining
receivable will be collected before the end of 2022.
The majority of our investments are made 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,
40
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. Due to the market disruption occurring as a result of the
pandemic, the weighted average lease rate attained on our new investments was
8.3% during the three months ended September 30, 2020 as compared to 7.4% for
the same period in 2021. For the nine months ended September 30, 2021 and 2020,
the weighted average lease rate attained on our new investments was
approximately 7.7% and 8.1%, respectively. We are seeing some capitalization
rate compression across the industry and we currently estimate that the weighted
average lease rates that we are able to attain may continue to compress as we
move through the end of 2021 and into 2022.
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) 2021 2020 2021 2020Interest expense - credit facility $ 9$ 1,208 $ 339 $ 4,420 Interest expense - credit facility fees 306 307 910 913 Interest expense - long-term debt (secured and unsecured) 40,545 38,668 118,868 116,673 Capitalized interest (191) (175) (609) (500) Amortization of deferred financing costs and other 2,698 2,082 7,396 6,310 Total interest expense$ 43,367 $ 42,090 $ 126,904 $ 127,816 Credit facility: Average debt outstanding$ 1,348 $ 347,011 $ 40,674 $ 334,398 Average interest rate during the period (excluding facility fees) 2.7 % 1.4 %
1.1 % 1.8 %
Long-term debt (secured and
unsecured):
Average debt outstanding $ 3,991,406 $ 3,612,270 $ 3,792,619 $ 3,621,185
Average interest rate during the
period 4.1 % 4.3 % 4.2 % 4.3 %
Average outstanding long-term debt was slightly higher for both the three and nine month periods endedSeptember 30, 2021 as compared to the same periods in 2020; as a result of the timing of our new debt and repayment transactions, we also had slightly higher levels of interest expense on long-term debt for both the three and nine month periods. Long-term debt added afterSeptember 30, 2020 primarily consisted of$350 million of 2.75% senior unsecured notes issued inNovember 2020 and$515.0 million of STORE Master Funding Series 2021-1 notes, which bear a weighted average interest rate of 2.80%, issued in lateJune 2021 . Long-term debt repaid in full, without penalties, sinceSeptember 30, 2020 included both of our$100 million bank term loans,$92.3 million of STORE Master Funding Series 2015-1 Class A-1 notes in late 2020,$86.7 million of STORE Master Funding Series 2013-1 Class A-2 notes inMay 2021 and$83.3 million of Series 2013-2, Class A-2 notes inJuly 2021 . As a result of STORE Master Funding debt prepayments, we recognized$0.6 million and$1.1 million of accelerated amortization of deferred financing costs during 41
the three and nine months ended
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 decreased from 2020 when we had the full amount outstanding on the revolver during a large portion of the year. InJune 2021 , we amended our revolving credit agreement which included a reduction of 15 basis points on the LIBOR-based borrowings made on the facility. As ofSeptember 30, 2021 , we had$109.0 million of borrowings outstanding under our revolving credit facility.
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 ofSeptember 30, 2021 , we owned 16 properties that were vacant and not subject to a lease and the lease contracts related to just 13 properties we own are due to expire during the remainder of 2021. We expect to incur some property costs related to the vacant properties until such time as those properties are either leased or sold. The amount of property costs can vary quarter to quarter based on the timing of property vacancies and the level of underperforming properties. As ofSeptember 30, 2021 , 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,
2021 2020 2021 2020
Property-level operating costs (a) $ 2,639 $ 1,964 $ 9,370 $ 10,606
Ground lease-related intangibles
amortization expense 117 118 351 352
Operating ground lease payments made
by STORE Capital 108 100 287 121
Operating ground lease payments made
by STORE Capital tenants 510 344 1,543 1,156
Operating ground lease straight-line
rent expense 212 165 621 481
Property taxes payable from tenant
impounds 681 618 1,926 1,887
Total property costs $ 4,267 $ 3,309 $ 14,098 $ 14,603
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.
42
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$17.5 million and$58.6 million for the three and nine months endedSeptember 30, 2021 as compared to$14.7 million and$35.7 million for the same periods in 2020. Expenses for the three and nine months endedSeptember 30, 2020 included approximately$2.0 million of executive severance costs. However, excluding noncash stock-based compensation expense from both periods and executive severance from 2020, general and administrative expenses were consistent at 0.43% of average portfolio investment assets for both the three months endedSeptember 30, 2021 and 2020; for the nine month periods, general and administrative expenses excluding noncash stock-based compensation expense and executive severance was 0.46% of average portfolio investment assets in 2021 as compared to 0.47% in 2020. General and administrative expenses for the first nine months of 2020 were less than expected due to the reversal, in the first quarter, of$6.7 million of previously recognized stock-based compensation expense. The reversal derecognized all prior period expense recorded for certain performance-based restricted stock unit awards (RSUs) granted in 2018 and 2019 that were not expected to vest as the achievement of the performance metrics related to the compound annual growth rate of AFFO per share was deemed not probable at that point in time and previously recognized expense was required to be reversed or derecognized. General and administrative expenses for the first nine months of 2021 included a cumulative catch-up adjustment of$10.1 million of noncash stock-based compensation expense recognized in the first quarter related to 1) the reinstatement of expense derecognized in the first quarter of 2020, plus 2) the expense related to 2020 and the first quarter of 2021 as a portion of the related performance-based RSUs granted in 2018 and 2019 were now expected to vest. We expect that general and administrative expenses will continue to rise in some measure as our real estate investment portfolio grows. 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. However, general and administrative expenses as a percentage of the portfolio have decreased over time due to efficiencies and economies of scale. Expenses also included amounts related to staff additions; our employee base grew from 103 employees onSeptember 30, 2020 to 117 employees as ofSeptember 30, 2021 .
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
Provisions for Impairment
During the three and nine months endedSeptember 30, 2021 , we recognized$3.4 million and$15.4 million , respectively, in provisions for the impairment of real estate and, during the nine months endedSeptember 30, 2021 , recognized$2.0 million in provisions for credit losses related to our loans and financing receivables. We recognized$2.0 million and$10.2 million in provisions for the impairment of real estate during the three and nine months endedSeptember 30, 2020 , respectively, and recognized$0.8 million in provisions for credit losses during both the three and nine months endedSeptember 30, 2020 . 43
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 endedSeptember 30, 2021 , we recognized a$10.7 million aggregate net gain on the sale of 25 properties. In comparison, for the three months endedSeptember 30, 2020 , we recognized a$3.5 million aggregate net gain on the sale of 18 properties. For the nine months endedSeptember 30, 2021 , we recognized a$32.3 million aggregate net gain on the sale of 82 properties as compared to an aggregate net gain of$6.8 million on the sale of 43 properties in 2020. Net Income
For the three and nine months endedSeptember 30, 2021 , our net income was$75.9 million and$193.3 million , respectively, reflecting increases from$54.6 million and$157.9 million , respectively, for the comparable periods in 2020. 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, and an increased net gain on dispositions of real estate offset by increases in general and administrative and depreciation and amortization expenses 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 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 44
FFO and AFFO and reconcile them to the most appropriate GAAP performance metric,
which is net income.
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) 2021 2020 2021 2020
Net Income $ 75,936 $ 54,630 $ 193,327 $ 157,890
Depreciation and amortization of real
estate assets 67,061 61,051 195,542 180,528
Provision for impairment of real
estate 3,400 2,000 15,350 10,200
Net gain on dispositions of real
estate (10,721) (3,537) (32,271) (6,814)
Funds from Operations (a) 135,676 114,144 371,948 341,804
Adjustments:
Straight-line rental revenue: Fixed rent escalations accrued (2,277) (3,354) (6,256) (7,278) Construction period rent deferrals 980 466 2,717 1,402 Amortization of: Equity-based compensation 6,467 2,744 24,161 1,645 Deferred financing costs and other (b) 2,698 2,082 7,396 6,310 Lease-related intangibles and costs 626
769 2,413 2,298 Provision for loan losses - 772 2,000 772 Lease termination fees (1,785) (350) (1,785) (587) Capitalized interest (191) (175) (609) (500) Income from non-real estate, equity method investment (1,872) - (804) - Executive severance costs - 1,980 - 1,980
Adjusted Funds from Operations (a) $ 140,322
FFO and AFFO for the three and nine months ended
approximately
that is subject to the short-term deferral arrangements entered into in
response to the COVID-19 pandemic; the Company accounts 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
(a) sheet. For the three and nine months ended
exclude
short-term deferral arrangements. For the three and nine months ended
deferral arrangements and for both the three and nine months ended September
30, 2020, FFO and AFFO exclude
deferral arrangements.
For the three and nine months ended
financing costs related to the prepayment of debt.
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