Getty Realty Corp. — Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is an internally managed REIT focused on acquiring, financing and developing convenience, automotive and other single-tenant retail properties. The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
- Portfolio: 1,021 properties in 38 states and Washington, D.C.; 978 owned and 43 leased from third-party landlords.
- Substantially all properties are leased on a triple-net basis.
- Significant nine-month revenue concentrations were Global Partners at 16%, ARKO at 14% and United Oil at 11%.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenues | $42.0 million | $40.1 million | $122.5 million | $116.1 million |
| Rental property revenues | $41.5 million | $39.7 million | $121.3 million | $114.9 million |
| Operating income | $20.2 million | $20.0 million | $82.7 million | $62.9 million |
| Net earnings | $13.3 million | $14.0 million | $62.7 million | $44.8 million |
| Diluted EPS | $0.27 | $0.30 | $1.31 | $0.98 |
| Operating cash flow | Not separately provided | Not separately provided | $67.9 million | $58.7 million |
| FFO | $23.7 million | $22.0 million | $86.8 million | $64.0 million |
| AFFO | $25.8 million | $24.2 million | $76.0 million | $69.7 million |
- Calculated operating margin was approximately 48.1% in Q3 2022 versus 50.0% in Q3 2021, and approximately 67.5% for the first nine months of 2022 versus 54.2% in the prior-year period. The nine-month comparison was materially affected by the environmental expense credit described below.
- Q3 rental revenue increased primarily from acquired properties and contractual rent escalations, partly offset by dispositions.
- Q3 interest expense increased to $6.9 million from $6.2 million; nine-month interest expense increased to $20.4 million from $18.5 million, primarily because of higher average borrowings.
- Cash, cash equivalents and restricted cash totaled $13.1 million at September 30, 2022, compared with $26.5 million at year-end 2021.
- Dividends paid during the first nine months were $58.7 million, or $1.23 per share. The quarterly dividend declared in Q3 was $0.41 per share.
Balance Sheet, Debt and Liquidity
- Total assets were $1.489 billion at September 30, 2022, compared with $1.467 billion at December 31, 2021. Net real estate increased to $1.295 billion from $1.271 billion.
- Total debt was $625.0 million, or $621.2 million net of issuance costs, versus $585.0 million, or $581.1 million net, at year-end 2021.
- The $300 million unsecured revolving facility had no borrowings outstanding at September 30, 2022 and matures in October 2025, with two six-month extension options subject to conditions.
- Senior unsecured notes totaled $625 million, with $75 million scheduled for 2023 and $50 million scheduled for 2025; the remaining $500 million matures thereafter.
- The company expects to issue $125 million of notes due in 2033 in January 2023 and use part of the proceeds to repay the $75 million 5.35% Series B Notes due June 2023.
- Management stated that the company was in compliance with material debt covenants as of September 30, 2022 and believed operating needs and liquidity requirements could be met through operating cash flow, its revolver, ATM proceeds and available cash.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4.7% in Q3 and 5.5% for the first nine months, driven by acquisitions and contractual rent increases.
- Net earnings declined 5.1% in Q3 despite higher revenue, primarily reflecting higher depreciation and interest expense and lower gains on dispositions.
- Nine-month net earnings rose 39.9%, primarily because the company recorded a $16.6 million net credit to environmental expense after removing $17.1 million of previously accrued unknown environmental reserve liabilities.
- Operating cash flow increased $9.2 million to $67.9 million, while investing cash usage declined to $60.9 million from $119.7 million because property acquisitions fell to $63.3 million from $126.6 million.
- The company acquired 16 properties for $63.3 million during the first nine months, versus 77 properties for $126.6 million in the prior-year period.
- Financing cash flow changed from $13.0 million provided in the prior-year period to $20.3 million used, reflecting repayment of revolver borrowings, higher dividends and lower ATM proceeds, partly offset by $100 million of senior-note proceeds.
- The company entered into forward sale agreements for 714,136 shares at an average gross price of $30.22 per share; no shares had been settled by September 30, 2022.
Outlook, Commentary, Risks and Unusual Items
- No formal earnings or acquisition guidance was provided. Management expects to continue pursuing acquisitions, redevelopment and sale-leaseback opportunities, subject to market conditions and available capital.
- COVID-19 had not materially adversely affected reported results through the period, but management continued to identify potential effects on tenants, rent collections, liquidity and growth plans.
- Environmental remediation is a significant judgmental and contingent liability. Accrued prospective environmental obligations were $29.2 million at September 30, 2022, down from $47.6 million at year-end 2021. Management stated that actual future expenditures could substantially exceed recorded amounts.
- The prior $50 million pollution legal liability policy expired in July 2022; a new five-year policy with a $25 million aggregate limit covers a subset of higher-risk properties and is subject to retentions and limitations.
- Pending matters include Lower Passaic River environmental proceedings and MTBE litigation in Pennsylvania and Maryland. The company cannot estimate potential losses beyond accrued amounts with certainty and stated that adverse outcomes could materially affect results, liquidity, dividends or stock price.
- The Lower Passaic River remedy selected by the EPA has an estimated cost of $1.38 billion for the lower eight miles, although responsibility is shared among numerous parties and the company believes its ultimate exposure is uncertain.
- Other risks include tenant concentration and creditworthiness, interest-rate exposure, dependence on external capital, lease renewals, real estate market conditions, inflation, potential impairment charges, REIT qualification and restrictions on dividends under debt covenants.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the $16.6 million environmental credit is nonrecurring and how future UST removals may affect environmental reserves and earnings.
- The timing and terms of the planned January 2023 note issuance and repayment of the Series B Notes.
- Future settlement, dilution and cash proceeds associated with the 714,136-share forward sale agreements.
- Tenant concentration, rent collections and financial performance of Global Partners, ARKO and United Oil.
- Compliance with debt covenants, availability under the $300 million revolving facility and exposure to changing interest rates.
- The ultimate liability and insurance recoveries associated with the Lower Passaic River and MTBE proceedings.
- Whether AFFO, dividends and operating cash flow remain sufficient to support the company’s distribution policy and planned acquisitions.