Getty Realty Corp. — 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a REIT focused on owning, leasing and financing retail motor-fuel and convenience-store properties. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012. At March 31, 2013, the company owned 894 properties, leased 132 properties from third parties and had 1,026 properties across 21 states.
The company continued repositioning approximately 660 properties formerly leased to bankrupt Getty Petroleum Marketing Inc. (“Marketing”). Ten long-term triple-net leases covered 443 properties, while approximately 155 properties operated under month-to-month licenses and approximately 40 were vacant.
Financial Performance and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $23.8 million | $27.6 million | Down $3.8 million |
| Rental-property revenue | $23.0 million | $26.9 million | Down $3.9 million |
| Operating income | $8.5 million | $6.7 million | Up $1.8 million |
| Earnings from continuing operations | $5.6 million | $5.6 million | Approximately flat |
| Net earnings | $10.4 million | $6.5 million | Up $3.9 million |
| Diluted earnings per share | $0.31 | $0.19 | Up $0.12 |
| Funds from operations | $8.5 million | $10.3 million | Down $1.8 million |
| Adjusted funds from operations | $6.2 million | $9.7 million | Down $3.5 million |
| Diluted AFFO per share | $0.18 | $0.29 | Down $0.11 |
| Net cash from operating activities | $6.6 million | $8.3 million | Down $1.7 million |
Approximate margins based on total revenue were 35.7% for operating income and 43.5% for net earnings in Q1 2013, compared with 24.5% and 23.5%, respectively, in Q1 2012. These comparisons are affected by discontinued operations, property-sale gains, impairment charges and the reversal of Marketing-related reserves.
- Q1 2013 included $8.4 million of gains on real-estate dispositions and $4.0 million of non-cash impairment charges, compared with $0.5 million and $0.4 million, respectively, in Q1 2012.
- Discontinued operations generated $4.7 million in Q1 2013 versus $0.9 million in Q1 2012, primarily because of higher disposition gains.
- General and administrative expense declined to $3.5 million from $10.8 million, principally because Q1 2012 included $10.2 million of bad-debt expense related to Marketing. Getty reversed $2.1 million of previously recorded reserves in Q1 2013 after receiving distributions from the Marketing Estate.
- Rental-property expenses increased to $8.0 million from $6.2 million, primarily because Getty incurred maintenance and other costs on properties not yet under triple-net leases.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | March 31, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $651.0 million | $640.6 million |
| Cash and cash equivalents | $18.7 million | $16.9 million |
| Total debt | $171.9 million | $172.3 million |
| Total liabilities | $274.3 million | $267.8 million |
| Shareholders’ equity | $376.7 million | $372.7 million |
| Environmental remediation obligations | $45.7 million | $46.2 million |
- On February 25, 2013, Getty refinanced debt that had been scheduled to mature in March 2013. The new financing included a $175.0 million senior secured credit agreement maturing in August 2015, with a potential one-year extension, and a $100.0 million senior secured Prudential loan maturing in February 2021 at a fixed 6.0% interest rate.
- At March 31, 2013, borrowings were $71.9 million under the Credit Agreement and $100.0 million under the Prudential loan. Approximately $103.1 million was available under the Credit Agreement before the subsequent May acquisition.
- Operating cash flow was $6.6 million. Investing activities provided $2.7 million, primarily from $15.5 million of property-sale proceeds, while financing activities used $7.4 million, including $4.2 million of dividends and $2.8 million of loan-origination costs.
- Cash dividends paid were $0.125 per share for the quarter. The board approved an increase to $0.20 per share for the dividend payable in April 2013, but management stated that future dividends are not assured.
Material Changes Versus the Prior Comparable Period
- Rental revenue declined because the Master Lease with Marketing had been rejected effective April 30, 2012; Q1 2012 included approximately $13.7 million of contractual rent from Marketing, substantially of which was reserved as uncollectible.
- Operating results were supported by lower bad-debt expense but pressured by higher property maintenance, environmental and interest expenses.
- Interest expense increased to $2.9 million from $1.5 million, reflecting higher borrowing costs and amortization of prior loan-origination costs.
- FFO and AFFO declined despite higher GAAP net earnings, reflecting the effects of disposition gains, impairment charges and non-cash revenue-recognition adjustments.
- As of the filing date, Getty reported 68 additional 2013 property dispositions totaling $21.7 million, including one terminal; the filing states that 54 property dispositions occurred in Q1 2013.
Outlook, Commentary, Risks and Unusual Items
Management stated that it expects operating needs for the next twelve months to be met through operating cash flow, available cash and borrowings under the Credit Agreement. No formal earnings or revenue guidance was provided.
- Getty expects revenue from the former Marketing portfolio to remain below the contractual rent historically due under the Master Lease. It expects elevated repositioning, legal, litigation, eviction, maintenance and property operating costs during 2013.
- Getty had an unpaid Marketing administrative claim of approximately $6.4 million at filing and had received $3.1 million of distributions through March 31, 2013. Further recoveries are uncertain.
- Getty advanced $3.4 million cumulatively under a Litigation Funding Agreement, including $1.8 million in Q1 2013, and recorded a $4.7 million fair-value receivable. Recovery depends substantially on the outcome of litigation against Lukoil-related parties and is not assured.
- Environmental remediation obligations totaled $45.7 million. Management cautioned that actual future costs could be substantially higher than accrued amounts. Significant matters include the Newark terminal, Lower Passaic River claims and one remaining MTBE case.
- Getty committed to co-invest up to $14.1 million in capital improvements under certain new leases. It also remains contingently liable if tenants fail to satisfy certain environmental or underground-storage-tank obligations.
- A 0.50% increase in market interest rates, based on projected average borrowings, was estimated to reduce 2013 net income and cash flow by approximately $0.5 million.
- On May 9, 2013, after quarter-end, Getty acquired 36 properties for $72.5 million, financed with $11.5 million of 1031-exchange proceeds, $57.5 million of Credit Agreement borrowings and cash on hand. The transaction did not affect Q1 results or the March 31 balance sheet.
Important Facts for Investors to Verify
- Whether rental income and cash collections from the repositioned Marketing portfolio stabilize at levels sufficient to support the increased dividend.
- The timing and economics of remaining property sales, new leases and month-to-month license conversions.
- Actual recoveries from the Marketing Estate, the administrative claim and the Lukoil litigation funding arrangement.
- Environmental remediation spending versus the $45.7 million accrued obligation and the adequacy of insurance and reimbursement recoveries.
- Compliance with Credit Agreement and Prudential loan covenants following the May 2013 acquisition and the associated increase in revolving debt.
- The sustainability of AFFO, which declined to $6.2 million, or $0.18 per diluted share, compared with quarterly cash dividends of $0.20 per share approved for payment after the quarter.