GETTY REALTY CORP quarterly report, Q3 FY2017

Getty Realty Corp. 2017 Q3 Form 10-Q Summary

Business Context and Reporting Period

Getty Realty Corp. is a REIT focused on owning, leasing and financing convenience store and gasoline station properties. For the quarter ended September 30, 2017, the company owned 792 properties and leased 81 properties from third-party landlords across 27 states and Washington, D.C. Substantially all properties were leased under triple-net arrangements.

The filing presents unaudited results for the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.

Financial Performance and Key Metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Total revenues	$29.5 million	$28.5 million	$86.2 million	$85.6 million
Operating income	$12.7 million	$12.7 million	$39.1 million	$36.2 million
Net earnings	$9.3 million	$8.8 million	$34.2 million	$30.1 million
Net earnings per share	$0.24	$0.26	$0.94	$0.88
FFO	$16.2 million	$16.2 million	$54.3 million	$46.3 million
AFFO	$16.3 million	$15.4 million	$49.5 million	$43.0 million
AFFO per share	$0.42	$0.45	$1.36	$1.26

Q3 operating margin was approximately 43.2%, compared with approximately 44.6% in the prior-year quarter. Nine-month operating margin was approximately 45.4%, compared with approximately 42.3% in 2016. Net margin was approximately 31.7% in Q3 and 39.6% for the first nine months.

Rental property revenue increased to $24.9 million in Q3 and $73.2 million for the first nine months, primarily from 2017 acquisitions.
Operating income increased modestly in Q3 and by $2.9 million for the first nine months.
Interest expense was $4.3 million in Q3 and $12.7 million for the first nine months, slightly above the comparable periods.
Dividends declared were $0.28 per share in Q3 and $0.84 per share for the first nine months, compared with $0.25 and $0.75, respectively, in 2016.

Cash Flow, Balance Sheet, Debt and Liquidity

Cash flow from operations was $40.2 million for the first nine months of 2017, up from $33.0 million in 2016.
Investing cash flow was a use of $137.6 million, primarily reflecting $143.9 million of property acquisitions.
Financing cash flow was $103.0 million, including $112.9 million of net common-stock issuance proceeds, $50.0 million of senior note proceeds, $95.0 million of credit facility repayments and $28.5 million of dividend payments.
Cash, cash equivalents and restricted cash increased to $18.9 million at September 30, 2017, from $13.2 million at December 31, 2016. Cash and cash equivalents alone were $18.0 million.
Total assets increased to $1.005 billion from $877.3 million, largely due to acquisitions and equity financing. Shareholders’ equity increased to $547.8 million from $430.9 million.
Total debt was $320.0 million, or $319.0 million net of issuance costs, compared with $300.0 million, or $298.5 million net, at year-end 2016.
Debt consisted of $95.0 million under the credit agreement and $225.0 million of senior unsecured notes. The revolving facility had $45.0 million outstanding and matures in June 2018, with a potential one-year extension subject to conditions.
Management stated that expected operating needs for the next 12 months can be met through operating cash flow, available credit and cash balances. The company reported compliance with its debt covenants at September 30, 2017.

Material Changes Versus the Prior Comparable Period

The company acquired 64 convenience store and gasoline station properties for $143.9 million, including 49 Empire Properties acquired for $123.1 million and placed under a 15-year unitary lease.
On October 3, 2017, after quarter-end, the company acquired 38 properties for $68.3 million and entered into a 15-year unitary lease with Applegreen.
Common shares outstanding increased to 39.5 million at September 30, 2017, from 34.4 million at December 31, 2016, principally due to a July equity offering and ATM issuance.
The company completed a common equity offering, including the underwriters’ option, generating net proceeds of $104.3 million. It also generated $8.5 million through its ATM program during the first nine months.
Other income increased to $5.0 million for the first nine months, primarily because of a $3.8 million insurance settlement related to environmental settlement costs and legal expenses.
Environmental expenses declined to $0.9 million from $2.7 million for the first nine months, while impairment charges increased to $6.5 million from $5.3 million in continuing operations.
There were no properties classified as held for sale at September 30, 2017; two properties previously held for sale were reclassified as held and used.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal earnings or revenue guidance. Management expects to continue pursuing property acquisitions, redevelopment opportunities and alternative single-tenant net lease uses. Ten properties were actively under redevelopment, and the company spent approximately $1.1 million on construction-in-progress related to redevelopment during the first nine months.

Environmental obligations totaled $64.9 million at September 30, 2017, including $44.7 million for future liabilities related to preexisting unknown contamination. Management stated that actual future expenditures could be substantially higher than accrued amounts.
The company remains exposed to environmental litigation involving the Lower Passaic River and MTBE contamination in New Jersey and Pennsylvania. It stated that the New Jersey MTBE litigation is probable to resolve unfavorably, but it cannot estimate losses beyond recorded accruals with certainty.
Legal-proceeding accruals were $11.5 million at September 30, 2017. The filing states that adverse outcomes could materially affect financial condition, liquidity, dividends or stock price.
Three tenants accounted for significant revenue concentrations: Global Partners represented 21% of nine-month revenue, Chestnut Petroleum 16%, and United Oil 15%.
The company has a remaining commitment of approximately $9.0 million for certain tenant capital improvements and remains contingently liable for environmental obligations if tenants or other counterparties fail to perform.
A 1% increase in market interest rates on $95.0 million of floating-rate borrowings was estimated to reduce 2017 net income and cash flow by approximately $0.2 million.
Impairment measurements rely substantially on Level 3 assumptions, including projected rents, holding periods, capitalization rates and discount rates.
The company early adopted certain accounting standards, including the restricted-cash and business-definition standards. It expected no material impact from the new revenue standard on rental income but was continuing to evaluate the effect of the new lease standard on leases where it is a lessee.

Important Facts for Investors to Verify

Verify the refinancing, extension or repayment plan for the $45.0 million revolving facility maturing in June 2018.
Assess the sustainability of dividend payments relative to AFFO, operating cash flow, debt covenants and REIT distribution requirements.
Review tenant concentration, tenant credit quality and lease guarantees, particularly for Global Partners, Chestnut Petroleum and United Oil.
Evaluate the potential range and timing of environmental remediation and MTBE litigation liabilities beyond the $64.9 million environmental accrual and $11.5 million legal accrual.
Determine whether acquisition-driven growth, including the post-quarter-end Applegreen transaction, produces sufficient incremental cash flow after financing costs.
Reconcile FFO and AFFO to GAAP earnings and review the effects of environmental estimates, impairment charges, insurance recoveries and other unusual items.
Monitor dilution from equity offerings and the company’s ability to maintain leverage and liquidity while funding acquisitions and redevelopment.