Getty Realty Corp. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Getty Realty Corp. is an internally managed REIT specializing in owning, leasing and financing convenience store, gasoline station, automotive-service and related retail properties. The filing covers the fiscal year ended December 31, 2019, with comparisons primarily to fiscal 2018. As of year-end, the portfolio included 945 properties across 33 states and Washington, D.C., consisting of 877 owned properties and 68 properties leased from third-party landlords. Substantially all properties are leased under triple-net arrangements.
The portfolio had 931 properties under triple-net leases, approximately a 10-year weighted-average contractual lease term excluding renewal options, five properties under redevelopment and nine vacant properties. New York, Massachusetts and Connecticut represented 45.9% of properties.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $140.7 million | $136.1 million | +$4.5 million |
| Rental-property revenues | $137.7 million | $133.0 million | +$4.7 million |
| Net earnings | $49.7 million | $47.7 million | +$2.0 million |
| Basic and diluted EPS | $1.19 | $1.17 | +$0.02 |
| FFO | $77.8 million | $73.6 million | +5.8% |
| AFFO | $71.8 million | $69.7 million | +3.1% |
| Basic AFFO per share | $1.72 | $1.71 | +$0.01 |
| Net cash from operating activities | $76.8 million | $66.4 million | +$10.4 million |
| Total assets | $1.212 billion | $1.162 billion | +$49.8 million |
| Total debt, net | $467.1 million | $441.6 million | +$25.4 million |
| Stockholders’ equity | $589.4 million | $581.2 million | +$8.3 million |
Operating income was $66.8 million, compared with $67.3 million in 2018. Interest expense increased to $24.6 million from $22.3 million, primarily because of higher average borrowings. Other income increased to $7.6 million from $2.7 million, including $4.9 million of environmental insurance reimbursements and $2.7 million of legal settlements and judgments.
Approximate reported margins were 47.5% for operating income and 35.3% for net earnings in 2019, compared with 49.5% and 35.1%, respectively, in 2018. These comparisons are affected by depreciation, impairment, environmental items and other unusual income and expenses.
Cash flow, liquidity and capital structure
- Operating cash flow was $76.8 million. Investing activities used $82.6 million, principally for $87.2 million of property acquisitions. Financing activities used $19.3 million.
- Cash, cash equivalents and restricted cash declined to $23.7 million at year-end from $48.7 million.
- The company had $20.0 million outstanding under its $300.0 million unsecured revolving facility, which matures in March 2022 and may be extendable to March 2023 subject to compliance and lender approval.
- Senior unsecured notes totaled $450.0 million, with maturities ranging from February 2021 through September 2029. Total debt before issuance costs was $470.0 million.
- Debt maturities include $100.0 million of notes due in 2021, $20.0 million on the revolving facility in March 2022, and $75.0 million of notes due in 2023. The company reported compliance with material debt covenants.
- The company issued $125.0 million of senior notes in September 2019, repaid the $50.0 million term loan and increased revolving-facility capacity from $250.0 million to $300.0 million.
- The company raised $14.2 million through its ATM equity program and paid $56.9 million of regular cash dividends. Dividends declared were $1.42 per share, compared with $1.31 in 2018.
Material changes versus the prior comparable period
- Acquisitions decreased in number but increased in total value: 27 properties for $87.2 million in 2019 versus 41 properties for $78.0 million in 2018. Major 2019 transactions included six properties in the Los Angeles area for $24.7 million and four car-wash properties in Las Vegas for $14.1 million.
- The property portfolio grew to 945 properties from 933, while owned properties increased to 877 from 859.
- Rental revenue increased primarily from properties acquired in 2019 and the second half of 2018. Contractual rental income increased to $119.3 million from $114.1 million.
- Property costs increased to $25.0 million from $23.6 million, general and administrative expense increased to $15.2 million from $14.7 million, and depreciation and amortization increased to $25.2 million from $23.6 million.
- Impairment charges declined to $4.0 million from $6.2 million, while environmental expense increased to $5.4 million from $4.2 million, principally because of higher environmental litigation accruals.
- Environmental remediation obligations declined to $50.7 million from $59.8 million, including $38.3 million for future liabilities related to preexisting unknown contamination and $12.4 million for reasonably estimable remediation obligations.
- The company adopted the new lease accounting standard in 2019. This resulted in recognition of operating right-of-use assets of $21.2 million and operating lease liabilities of $21.8 million at year-end; management stated that the adoption did not materially affect operations.
Guidance, outlook, risks and unusual items
The company did not provide formal earnings or acquisition guidance in the filing. Management expects to continue pursuing acquisitions, financing opportunities and redevelopment projects, while stating that operating cash needs for the next twelve months are expected to be met through operating cash flow, revolver borrowings, ATM proceeds and available cash.
- Tenant concentration is material: Global Partners subsidiaries represented 18% of 2019 revenue, United Oil represented 13%, and Chestnut subsidiaries represented 11%. Tenant defaults, bankruptcies or declining petroleum-market profitability could reduce rent collections.
- Substantially all tenants depend on petroleum marketing, convenience-store sales or subtenant rental income. Industry volatility, lower fuel demand, alternative-fuel adoption and higher wholesale fuel prices could affect tenant creditworthiness.
- Environmental exposure remains significant. The company is contingently liable if tenants or other counterparties fail to satisfy contractual obligations, and future remediation costs could exceed recorded accruals.
- Material environmental litigation includes MTBE proceedings in New Jersey, Pennsylvania and Maryland, Uniondale, New York litigation, and claims related to the Lower Passaic River and former Newark terminal. The company stated that New Jersey MTBE litigation is probably likely to be resolved unfavorably, but it could not estimate losses above accrued amounts.
- Environmental litigation accruals were $17.8 million at year-end, compared with $12.2 million in 2018. The filing states that ultimate losses could exceed accrued amounts.
- The Lower Passaic River remedy selected by the EPA has an estimated cost of $1.38 billion for the lower eight miles, although Getty stated that its current agreements do not obligate it to fund or perform that remedy and that material exposure was not considered reasonably likely based on currently known facts.
- The company is exposed to floating-rate debt and LIBOR transition risk. A hypothetical 1% increase in market rates on $20.0 million of floating-rate borrowings would reduce estimated 2020 net income and cash flow by approximately $0.2 million, before considering future borrowing changes.
- Other risks include geographic concentration, future impairment charges, availability of external capital, REIT qualification, dividend restrictions under debt covenants, redevelopment execution, insurance limitations and counterparty risk.
Unusual 2019 items included $4.9 million of environmental insurance reimbursements, $2.7 million of legal settlements and judgments, $5.9 million of environmental litigation accruals and $4.0 million of property impairment charges. FFO and AFFO are non-GAAP measures and should not be treated as substitutes for GAAP net earnings or operating cash flow.
Most important facts for investors to verify
- Tenant credit quality, lease coverage and concentration, particularly for Global Partners, United Oil and Chestnut.
- The expected timing and ultimate cost of environmental remediation obligations and pending MTBE, Uniondale and Lower Passaic River matters.
- Refinancing plans for the $100.0 million of notes due in 2021 and the $20.0 million revolver balance maturing in March 2022.
- Sustainability of dividends relative to AFFO, operating cash flow, debt covenants and REIT distribution requirements.
- Execution and returns from the acquisition and redevelopment pipeline, including the remaining $7.1 million capital-improvement funding commitment.
- The impact of tenant defaults, petroleum-industry changes, interest rates and future impairment charges on recurring cash flow.
- Reported financial statements and internal controls: PricewaterhouseCoopers LLP issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2019.