Getty Realty Corp. — Form 10-Q Summary
Business context and reporting period
Getty Realty Corp. is a U.S. REIT focused on owning, leasing and financing convenience-store and gasoline-station properties. For the quarter ended September 30, 2019, the company owned 867 properties and leased 69 properties from third-party landlords, for a total portfolio of 936 properties across 33 states and Washington, D.C. Substantially all properties are leased under triple-net arrangements.
The financial statements are unaudited and presented under U.S. GAAP. The company adopted the new lease standard, ASU 2016-02, on January 1, 2019. The adoption materially increased balance-sheet assets and liabilities for lessee right-of-use assets and lease liabilities but did not materially affect operations.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Total revenue | $36.4 million | $34.7 million | +5.0% |
| Net earnings | $11.9 million | $10.9 million | +8.6% |
| Operating income | $12.5 million | $17.1 million | -26.8% |
| Basic and diluted EPS | $0.28 | $0.27 | +$0.01 |
| FFO | $19.1 million | $17.9 million | +7.1% |
| AFFO | $18.1 million | $17.9 million | +1.6% |
| FFO per share | $0.46 | $0.44 | +$0.02 |
| AFFO per share | $0.43 | $0.44 | -$0.01 |
Q3 net earnings margin was approximately 32.6%, compared with 31.5% in the prior-year quarter. Operating margin declined to approximately 34.3% from 49.2%, primarily because of higher environmental expenses and property costs. The filing does not provide a separately defined adjusted operating margin.
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Total revenue | $104.8 million | $101.1 million | +3.7% |
| Net earnings | $36.0 million | $34.5 million | +4.3% |
| Operating income | $46.8 million | $50.4 million | -7.1% |
| Operating cash flow | $58.0 million | $48.7 million | +19.1% |
| FFO | $56.6 million | $53.3 million | +6.3% |
| AFFO | $53.8 million | $52.1 million | +3.3% |
| Dividends paid | $43.7 million | $38.8 million | +$4.9 million |
Liquidity, debt and capital resources
- Cash, cash equivalents and restricted cash totaled $37.6 million at September 30, 2019, versus $48.7 million at December 31, 2018.
- Net cash provided by operating activities was $58.0 million for the first nine months, while investing activities used $39.0 million and financing activities used $30.1 million.
- Total debt was $450.0 million principal, or $446.8 million net of issuance costs, compared with $445.0 million principal and $441.6 million net at year-end 2018.
- The company had no borrowings outstanding under its revolving facility or term loan at September 30, 2019. The revolving facility capacity was increased to $300.0 million and matures in March 2022, with a potential one-year extension subject to conditions.
- Senior unsecured notes totaled $450.0 million, including $125.0 million of Series F, G and H notes issued in September 2019 at a 3.52% rate and maturing in 2029. Scheduled note maturities include $100.0 million in 2021, $75.0 million in 2023 and $275.0 million thereafter.
- Management stated that the company was in compliance with material debt covenants and expected operating needs for the next twelve months to be met through operating cash flow, revolver availability, ATM proceeds and cash balances.
- The company issued 283,000 shares under its ATM program during the first nine months and received $8.8 million of net proceeds. The ATM program permits aggregate sales of up to $125.0 million.
Material changes versus the prior comparable period
- Rental-property revenue increased 5.3% in Q3 and 3.8% for the first nine months, driven mainly by acquired properties, contractual rent escalations and higher tenant reimbursements.
- Q3 environmental expense rose to $5.7 million from $1.2 million, principally because of a $4.6 million increase in environmental litigation accruals.
- Q3 other income increased to $5.6 million from an expense of $0.1 million, primarily reflecting $4.5 million of insurance reimbursements for environmental costs and $1.1 million from a legal settlement.
- Nine-month environmental expense increased to $7.4 million from $3.6 million, while impairment charges declined to $2.4 million from $4.8 million.
- Interest expense increased to $18.2 million for the first nine months from $16.4 million, reflecting higher average borrowings.
- Property acquisitions declined to 14 properties costing $43.3 million, compared with 39 properties costing $74.7 million in the prior-year period.
- The company completed three redevelopment projects during the first nine months and had six properties actively under redevelopment at September 30, 2019.
Outlook, risks, contingencies and unusual items
- Management expects to continue pursuing acquisitions, redevelopment projects and alternative uses for selected properties, but provided no quantitative earnings or revenue guidance.
- Environmental matters remain a significant risk. The company accrued $58.8 million for prospective environmental remediation obligations at September 30, 2019, including $45.7 million for preexisting unknown contamination. Management stated that future actual expenditures could be substantially higher than recorded amounts.
- Environmental litigation accruals totaled $16.6 million at September 30, 2019, compared with $12.2 million at December 31, 2018. The filing identifies potential exposure from Lower Passaic River, MTBE and Uniondale matters and states that losses in excess of accrued amounts could materially affect financial condition, liquidity or dividends.
- The company received $4.8 million of insurance reimbursements and $2.6 million of legal settlements during the first nine months. These items materially affected GAAP earnings and were excluded or adjusted in AFFO.
- Three tenants represented significant revenue concentrations for the first nine months: Global Partners subsidiaries at 18%, United Oil at 13% and Chestnut subsidiaries at 11%.
- Tenant performance is linked to the petroleum marketing and convenience-store industries, which are competitive and volatile. Tenant credit quality, lease renewals, environmental obligations and access to capital are key risks.
- The company paid $1.05 per share in regular dividends during the first nine months. Dividend payments are subject to financial condition, debt covenants, market conditions and continued REIT qualification; future dividends are not assured.
- The company has a remaining commitment of up to $7.2 million to fund certain tenant capital improvements.
- Management reported effective disclosure controls as of September 30, 2019 and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile AFFO growth and per-share performance after removing environmental accruals, insurance reimbursements, legal settlements and other unusual items.
- Review the timing, scope and potential magnitude of environmental liabilities beyond the $58.8 million remediation accrual and $16.6 million litigation accrual.
- Assess tenant concentration and the financial condition of Global Partners, United Oil and Chestnut, which collectively accounted for approximately 42% of nine-month revenue.
- Evaluate upcoming debt maturities, especially the $100.0 million due in 2021, against recurring operating cash flow and available credit capacity.
- Confirm the sustainability of the $1.05-per-share dividend and compliance with REIT distribution requirements and debt covenants.
- Monitor the effect of the 2019 acquisitions, redevelopment pipeline and contractual rent escalations on recurring cash flow.
- Consider that FFO and AFFO are non-GAAP measures and may not be comparable with similarly named measures reported by other REITs.