Getty Realty Corp. — Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a Maryland REIT specializing in owning, leasing and financing convenience store and gasoline station properties. As of June 30, 2018, it owned 854 properties and leased 78 properties from third-party landlords, for a total portfolio of 932 properties across 30 states and Washington, D.C. Substantially all properties are leased on a triple-net basis.
This unaudited quarterly report covers the three and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods. The company reported 40.3 million common shares outstanding as of July 26, 2018.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Total revenues | $34.2 million | $29.0 million | $66.4 million | $56.7 million |
| Operating income | $15.9 million | $14.4 million | $30.1 million | $26.3 million |
| Operating margin | 46.4% | 49.8% | 45.4% | 46.5% |
| Earnings from continuing operations | $13.8 million | $14.6 million | $24.0 million | $22.3 million |
| Net earnings | $13.5 million | $15.1 million | $23.6 million | $24.8 million |
| Net earnings per diluted share | $0.33 | $0.43 | $0.58 | $0.71 |
| FFO | $17.6 million | $19.9 million | $35.4 million | $38.1 million |
| AFFO | $17.4 million | $14.9 million | $34.3 million | $29.0 million |
Rental property revenue increased 19.1% in the quarter and 18.8% for the six-month period, primarily from properties acquired during 2018 and the second half of 2017. Revenue from rental properties was $29.0 million for the quarter and $57.3 million year to date. Tenant reimbursements were $4.5 million and $7.5 million, respectively.
Net earnings declined despite higher operating income because 2017 included substantially higher insurance reimbursements and environmental credits. Other income fell to $0.2 million in the quarter and $0.6 million year to date, from $3.9 million and $4.1 million, respectively, in the prior-year periods. Higher interest expense and a loss from discontinued operations also reduced reported earnings.
Property costs were $6.4 million for the quarter and $11.4 million year to date. Environmental expense was $1.4 million for the quarter and $2.7 million year to date, compared with $0.4 million of expense and a $0.1 million credit in the prior-year periods. Depreciation and amortization increased to $5.9 million for the quarter and $11.5 million year to date, primarily due to acquired properties.
Although FFO decreased, AFFO increased 17.1% in the quarter and 17.9% year to date to $0.43 and $0.85 per share, respectively, under the company's definition. AFFO is a non-GAAP measure and may not be comparable with similarly named measures reported by other REITs.
Cash Flow, Balance Sheet, Debt and Liquidity
- Net cash provided by operating activities was $30.8 million for the six months ended June 30, 2018, compared with $21.8 million in 2017.
- Investing activities used $52.3 million, including $55.3 million for property acquisitions and $1.1 million for construction in progress.
- Financing activities provided $20.1 million, including $100.0 million of senior note proceeds and $13.7 million of ATM equity proceeds, partly offset by $115.0 million of credit facility repayments and $25.0 million of cash dividends.
- Cash, cash equivalents and restricted cash totaled $19.4 million at June 30, 2018, including $18.2 million of unrestricted cash and $1.2 million of restricted cash.
- Total debt was $415.0 million gross and $411.2 million net of issuance costs, compared with $380.0 million gross and $379.2 million net at December 31, 2017.
- The company had $40.0 million outstanding under its revolving facility and a $50.0 million term loan. The revolving facility was expanded to $250.0 million and extended to March 2022; the term loan matures in March 2023.
- Senior unsecured notes totaled $325.0 million, with $100.0 million due in 2021, $75.0 million due in 2023, $50.0 million due in 2025 and $100.0 million due in 2028.
- Management stated that expected operating needs for the next 12 months can be met through operating cash flow, available credit, ATM equity proceeds and cash on hand. The company was in compliance with material debt covenants at June 30, 2018.
- A 1% increase in market interest rates, based on $90.0 million of variable-rate borrowings, was estimated to reduce 2018 net income and cash flow by approximately $0.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected the contribution of 32 acquired properties purchased for $55.3 million, including 30 GPM properties acquired for $52.6 million in April 2018.
- Operating income increased 10.0% for the quarter and 14.3% year to date, but operating margins contracted because expenses, depreciation and environmental costs grew faster than revenue.
- Net earnings decreased 10.4% in the quarter and 5.0% year to date. The principal factors were lower insurance reimbursements, lower environmental credits, higher interest expense and losses from discontinued operations.
- Interest expense increased to $5.3 million in the quarter and $10.4 million year to date from $4.3 million and $8.4 million, respectively, due to higher average borrowings and higher variable interest rates.
- Debt increased by $35.0 million gross, while the company issued $13.7 million of common stock under a new $125 million ATM program.
- Quarterly dividends declared increased to $0.32 per share from $0.28; dividends paid for the six-month period totaled $25.7 million, or $0.64 per share.
- Environmental remediation obligations declined to $61.8 million from $63.6 million at year-end, but estimates remain subject to significant uncertainty.
Guidance, Outlook, Risks and Unusual Items
No formal earnings or revenue guidance was provided. Management expects to continue pursuing acquisitions, redevelopment and alternative uses for selected properties. Nine properties were actively being redeveloped at June 30, 2018, and rent commenced on two redevelopment projects during the first six months. Five properties within the net lease portfolio had signed leases for future recapture and redevelopment.
- Environmental remediation obligations totaled $61.8 million, including $45.1 million for future liabilities related to preexisting unknown contamination. Management stated that actual future expenditures could be substantially higher than amounts recorded.
- The company faces material environmental litigation and regulatory matters involving the Lower Passaic River, MTBE contamination in New Jersey, Pennsylvania and Maryland, and a former Uniondale, New York property. Accrued litigation matters totaled $12.3 million, but the company cannot reliably estimate potential losses above accrued amounts.
- On June 30, 2018, Occidental filed a CERCLA cost recovery and contribution complaint naming more than 120 defendants, including Getty, concerning the Lower Passaic River. Getty intends to defend the claims.
- The estimated cost of the EPA-selected remedy for the lower eight miles of the Lower Passaic River is approximately $1.38 billion, while the broader RI/FS preferred remedy estimate is approximately $483 million to $725 million. Getty's ultimate share, if any, remains uncertain.
- The company remains contingently liable for environmental obligations contractually assigned to tenants or other counterparties if they fail to perform.
- Tenant concentration is material: Global Partners represented 18% of six-month revenue, United Oil 13% and Chestnut Petroleum 11%. Tenant performance is closely tied to the competitive and volatile petroleum marketing industry.
- The company had a remaining commitment of up to $8.1 million to fund certain tenant capital expenditures.
- Adoption of the new revenue recognition guidance and related cash flow guidance had no material impact. The company was evaluating the effect of the new lease accounting standard, effective January 1, 2019, and expected to record lease liabilities and right-of-use assets for leases where it is a lessee.
- No significant subsequent events were reported through the issuance date. Disclosure controls and procedures were considered effective, and no material changes to internal control over financial reporting were identified.
Most Important Facts for Investors to Verify
- Whether acquisition-driven rental growth and AFFO growth continue to offset higher interest expense, depreciation and environmental costs.
- The remaining capacity and covenant headroom under the $250 million revolving facility, as well as debt maturities beginning with the $100 million note maturity in 2021.
- The ultimate cost and allocation of Lower Passaic River remediation and related CERCLA litigation exposure.
- Whether environmental remediation obligations and litigation accruals adequately capture potential future cash requirements.
- Tenant credit quality and concentration, particularly Global Partners, United Oil and Chestnut Petroleum.
- The sustainability of the $0.64-per-share first-half dividend relative to AFFO, operating cash flow and debt-service requirements.
- The effects of future ATM equity issuance on per-share results and shareholder dilution.
- The impact of adopting lease accounting requirements in 2019, particularly for leases where Getty is a lessee.