Getty Realty Corp. 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is an internally managed net lease REIT focused on convenience stores, car washes, automotive service centers, drive-thru quick service restaurants, automotive parts retailers and other single-tenant retail properties. The filing covers the three and nine months ended September 30, 2023, with comparative periods ended September 30, 2022.
As of September 30, 2023, the company had 1,080 properties across 40 states and Washington, D.C.; it owned 1,042 properties and leased 38 from third-party landlords. Substantially all properties were leased under triple-net arrangements. The portfolio had a 9.0-year weighted-average remaining lease term, excluding renewal options.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | Year-to-date 2023 | Year-to-date 2022 |
|---|---|---|---|---|
| Total revenues | $50.5 million | $42.0 million | $138.2 million | $122.5 million |
| Rental property revenues | $48.8 million | $41.5 million | $134.9 million | $121.3 million |
| Operating income | $24.0 million | $20.2 million | $66.0 million | $82.7 million |
| Net earnings | $16.0 million | $13.3 million | $43.6 million | $62.7 million |
| Diluted earnings per share | $0.31 | $0.27 | $0.85 | $1.31 |
| FFO | $27.7 million | $23.7 million | $78.7 million | $86.8 million |
| AFFO | $29.4 million | $25.8 million | $85.1 million | $76.0 million |
Q3 operating margin was approximately 47.6% and net margin was approximately 31.8%. For the first nine months, operating margin was approximately 47.8% and net margin was approximately 31.6%.
- Q3 revenue increased 20.3%, primarily from acquisitions, redevelopment rent commencements, contractual rent increases, higher tenant reimbursements and increased interest income from construction and development financing.
- Q3 net earnings increased 20.5%, while diluted EPS increased to $0.31 from $0.27. Weighted-average diluted shares increased to 50.7 million from 46.8 million.
- Nine-month net earnings declined 30.5%, mainly because 2022 included a significant environmental expense credit and higher gains on property dispositions. Nine-month AFFO increased 11.9%.
- Nine-month operating cash flow was $74.5 million, compared with $67.9 million in the prior-year period.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $1.779 billion | $1.562 billion |
| Real estate, net | $1.484 billion | $1.347 billion |
| Cash and cash equivalents | $5.5 million | $8.7 million |
| Total debt, gross | $750.0 million | $695.0 million |
| Total debt, net | $746.8 million | $691.5 million |
| Stockholders’ equity | $925.9 million | $759.9 million |
- The company had $75.0 million outstanding under its $300.0 million revolving credit facility and approximately $225.0 million of remaining availability. The facility matures in October 2025 and has two six-month extension options.
- Senior unsecured notes totaled $675.0 million, with $50.0 million maturing in 2025 and $625.0 million maturing thereafter. The company was in compliance with material debt covenants at September 30, 2023.
- Financing activities provided $174.0 million during the first nine months, including equity proceeds and net debt financing, compared with a $20.3 million use of cash in the prior-year period.
- The company paid $63.8 million of regular dividends, or $1.29 per share, during the first nine months. Future dividends are not assured and remain subject to cash flow, market conditions and debt covenant compliance.
Investment Activity and Material Changes
- The company invested $266.7 million across 70 properties during the first nine months of 2023, compared with $73.7 million across 21 properties in the prior-year period.
- It acquired 37 fee-simple properties for $193.0 million, including 23 car washes, 10 convenience stores, three drive-thru quick service restaurants and one auto service center.
- It invested $40.0 million in 13 car wash properties under construction, funded an additional $4.2 million of development costs and advanced $46.6 million of construction loans and development financing.
- Five properties were sold during the first nine months, producing a $1.2 million aggregate gain; a lease termination and partial condemnation generated additional gains.
- Real estate, net increased approximately 10.2% from year-end 2022, while common shares outstanding increased from 46.7 million to 52.7 million, primarily due to forward and ATM offering settlements.
- The company settled 2.2 million shares under its February 2023 forward offering for $71.5 million of net proceeds and expects to settle the remaining 1.25 million shares by February 2024 for approximately $40.8 million of proceeds.
Cash Flow, Outlook and Management Commentary
Cash used in investing activities was $252.9 million, driven primarily by property acquisitions and $88.6 million of notes and mortgages receivable issuances. Management expects short-term liquidity needs to be funded by operating cash flow, revolving facility capacity, equity forward settlements and available cash. Longer-term funding may include operating cash flow, debt or equity issuances and property dispositions.
The filing does not provide formal earnings or acquisition guidance. Management continues to emphasize portfolio growth, sale-leaseback transactions, construction financing and redevelopment. Two redevelopment projects began generating rent during the first nine months, and three properties remained under active redevelopment at September 30, 2023.
On October 17, 2023, after the reporting date, the company entered into a $150.0 million senior unsecured term loan agreement. $75.0 million was funded at closing, with an additional $75.0 million available at the company’s option. Interest rate swaps were entered into for a $150.0 million notional amount at an effective fixed rate of 6.13%.
Risks, Contingencies and Unusual Items
- Environmental remediation obligations totaled $22.7 million at September 30, 2023, including $12.4 million for unknown reserve liabilities. Management states that actual future expenditures could be substantially higher than recorded amounts.
- The company remains exposed to environmental litigation involving the Lower Passaic River and MTBE claims in Pennsylvania and Maryland. The proposed $150.0 million Lower Passaic River consent decree remains subject to court approval; the company’s settlement contribution is confidential and was funded through an escrow account.
- The 2022 nine-month results benefited from a $16.6 million net environmental expense credit related to reduced estimates for certain unknown environmental liabilities. This benefit did not recur in 2023.
- Impairment charges were $4.0 million for the first nine months of 2023, compared with $2.2 million in the prior-year period, including $2.3 million related to capitalized environmental asset retirement costs.
- Tenant concentration remains material: ARKO Corp. and Global Partners each represented approximately 15% of total revenues, while APRO, LLC represented approximately 10%.
- Interest-rate exposure is concentrated in the variable-rate revolving facility. The filing estimates that a 1.0% increase in market rates would reduce 2023 net income and cash flows by approximately $0.2 million based on the $75.0 million outstanding at September 30, 2023.
- Key business risks include tenant credit quality, lease renewals, dependence on convenience and automotive industries, access to external capital, interest rates, environmental obligations, litigation, property impairments and maintenance of REIT qualification.
Investor Verification Items
- Verify the timing and proceeds of the remaining February 2023 forward-offering settlement and the settlement of outstanding ATM forward-sale agreements.
- Assess leverage, refinancing requirements and covenant headroom after giving effect to the October 2023 term loan and any additional $75.0 million draw.
- Review the court status and final allocation of the Lower Passaic River consent decree and monitor potential exposure beyond recorded reserves.
- Separate recurring operating performance from the unusually large environmental credit recorded in 2022 and from non-cash revenue, impairment and environmental adjustments.
- Monitor tenant concentration, tenant credit quality and lease expirations, particularly for ARKO, Global Partners and APRO.
- Evaluate whether AFFO growth supports the $1.29 per-share dividend paid through the first nine months and whether future dividends remain sustainable under higher financing costs.