Getty Realty Corp. 2011 Form 10-K Summary
Business context and reporting period
Getty Realty Corp. is a REIT specializing in owning, leasing and financing retail motor-fuel, convenience-store and petroleum-terminal properties. The filing covers the fiscal year ended December 31, 2011, including fourth-quarter results. The portfolio comprised 1,149 properties in 21 states, with concentrations in the Northeast and Mid-Atlantic regions.
The central event was the financial distress and Chapter 11 bankruptcy filing of Getty Petroleum Marketing Inc. (“Marketing”), the company’s largest tenant. At year-end, Marketing occupied 797 properties, or approximately 69% of the portfolio, and represented approximately 55% of 2011 total revenues.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenues | $112.9 million | $88.2 million | +28.0% |
| Revenue from rental properties | $110.2 million | $88.1 million | +25.2% |
| Operating income | $16.7 million | $54.9 million | -69.5% |
| Earnings from continuing operations | $11.6 million | $50.0 million | -76.8% |
| Net earnings | $12.5 million | $51.7 million | -75.9% |
| Diluted EPS | $0.37 | $1.84 | -79.9% |
| Funds from operations | $42.1 million | $59.7 million | -29.5% |
| Adjusted FFO | $62.7 million | $58.2 million | +7.6% |
| Cash flow from operations | $61.2 million | $56.9 million | +7.6% |
Reported operating margin fell to approximately 14.8% from 62.2%, and net margin fell to approximately 11.0% from 58.6%. Results were heavily affected by non-cash reserves, impairment charges and environmental accruals tied to Marketing. Adjusted FFO was $1.88 per diluted share versus $2.08 in 2010; FFO was $1.26 per share versus $2.13.
At December 31, 2011, total assets were $635.1 million, shareholders’ equity was $372.2 million and debt was $170.5 million. Cash and cash equivalents were $7.7 million. Net investment in direct-financing leases was $92.6 million. The company invested $167.5 million in property acquisitions and capital expenditures, primarily for the CPD NY and Nouria transactions.
Material changes versus the prior comparable period
- Marketing’s contractual rent and related amounts increased reported revenue, but collection became doubtful. Getty recorded a $19.8 million allowance for deferred rental revenue during 2011, including $8.7 million in the fourth quarter, fully reserving the Master Lease deferred rent receivable.
- Getty recorded an $8.8 million accounts-receivable reserve, primarily for unpaid pre-petition rent and real-estate taxes owed by Marketing.
- Getty accrued $47.9 million for estimated Marketing-related environmental liabilities at 246 properties, compared with total environmental liabilities of $10.9 million at December 31, 2010.
- Non-cash impairment charges totaled $20.2 million for 2011, including approximately $17.0 million recognized in connection with the Marketing environmental accrual. No impairment charge was recorded in 2010.
- General and administrative expense increased to $23.6 million from $8.2 million, principally because of bad-debt reserves, acquisition costs, legal fees and professional fees related to Marketing’s defaults and bankruptcy.
- Getty acquired 59 Mobil-branded properties and provided financing in January 2011 for a total investment of approximately $111.6 million, and acquired 66 Shell-branded properties in March 2011 for approximately $87.0 million. Both transactions were financed substantially with borrowings.
- Getty completed a 3.45 million-share common-stock offering in 2011 and received approximately $92.0 million of net proceeds, used primarily to repay credit-line borrowings.
- The quarterly dividend was reduced from $0.48 per share in the first half of 2011 to $0.25 per share beginning in the third quarter. Cash dividends paid during 2011 totaled $63.4 million.
Fourth-quarter and post-year-end developments
Fourth-quarter 2011 continuing-operations results included a loss of $19.8 million and a net loss of $19.5 million, compared with fourth-quarter 2010 earnings from continuing operations of $12.4 million and net earnings of $12.5 million. Fourth-quarter rental-property revenue was $31.0 million.
Marketing filed for Chapter 11 protection on December 5, 2011 after repeated late or nonpayment of rent. Getty terminated the Master Lease effective December 12, 2011. On March 7, 2012, Getty entered into a bankruptcy stipulation, subject to Bankruptcy Court approval, providing for a process to recapture, re-let or sell the affected properties. Marketing was required to assume or reject the Master Lease by April 30, 2012. As of March 8, 2012, Getty had received $10.8 million of post-petition payments, but estimated that $12.6 million attributable to the first quarter of 2012 remained unpaid and was unlikely to be collected.
Management expected revenue from the former Master Lease portfolio to be below the prior contractual rent after repositioning. It also expected significant property expenditures, capital improvements, environmental remediation, underground-storage-tank replacement, legal costs and potential eviction costs. The filing does not provide a clear total estimate for these future repositioning costs.
Debt, liquidity, outlook and risks
- At year-end, credit-line borrowings were $147.7 million and term-loan borrowings were $22.8 million. Both facilities carried floating interest rates, leaving Getty fully exposed to market-rate changes after its $45.0 million interest-rate swap expired on June 30, 2011.
- On March 9, 2012, the credit agreement and term loan were amended and extended to March 2013. The amended facilities imposed more restrictive covenants, collateral requirements and limits on access to undrawn funds. Getty stated that additional borrowing capacity was severely limited in the short term.
- Approximately $169.7 million of debt was scheduled to mature in 2013 under the amended agreements, including a $21.9 million term-loan balloon payment. Getty will need to refinance, extend or otherwise repay this debt.
- Management stated that operating needs for the next twelve months could be met with operating cash flow and available cash, subject to recapturing, re-letting or selling properties formerly subject to the Master Lease. The filing provides no formal earnings or FFO guidance.
- Material risks include Marketing’s bankruptcy and possible liquidation, lower post-repositioning rents, tenant defaults, property vacancies, environmental and litigation liabilities, restricted financing access, covenant compliance, floating-rate debt, concentration in petroleum marketing and the company’s ability to maintain dividends and REIT status.
Most important facts for investors to verify
- Bankruptcy Court approval and subsequent performance under the Marketing stipulation, including the timing and terms of property recapture.
- Actual rent collections, bad-debt reserves and cash flows from the former Master Lease portfolio.
- Actual repositioning, environmental, tank-removal, capital-improvement and legal costs compared with the $47.9 million Marketing environmental accrual.
- Availability of refinancing or other funding before the March 2013 debt maturities, and compliance with amended credit agreements.
- Sustainability of the $0.25-per-share quarterly dividend given lower expected rent, debt obligations and REIT distribution requirements.
- Resolution and potential exposure from pending environmental litigation, including the remaining MTBE case and Lower Passaic River matters.