Getty Realty Corp. 2017 Form 10-K Summary
Business context and reporting period
Getty Realty Corp. is a self-managed REIT specializing in owning, leasing and financing convenience store and gasoline station properties. This filing covers the fiscal year ended December 31, 2017, with comparisons primarily to 2016. At year-end, the Company owned 828 properties and leased 79 properties from third-party landlords, for a total portfolio of 907 properties in 28 states and Washington, D.C. Approximately 890 properties were leased under triple-net arrangements, generally requiring tenants to pay taxes, maintenance, repairs, insurance and most environmental operating costs.
The portfolio remains concentrated in the Northeast and Mid-Atlantic regions; New York, Massachusetts and Connecticut represented 50.2% of properties. The Company operated as a single segment and had 30 employees as of March 1, 2018.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $120.2 million | $115.3 million | +4.2% |
| Rental property revenue | $101.3 million | $96.7 million | +$4.6 million |
| Operating income | $53.3 million | $48.0 million | +$5.3 million |
| Earnings from continuing operations | $45.0 million | $39.8 million | +13.1% |
| Net earnings | $47.2 million | $38.4 million | +22.8% |
| Net earnings per diluted share | $1.26 | $1.12 | +$0.14 |
| Funds from operations | $74.6 million | $64.2 million | +16.2% |
| Adjusted funds from operations | $62.0 million | $57.1 million | +8.7% |
| AFFO per diluted share | $1.66 | $1.67 | -$0.01 |
| Net cash from operating activities | $56.7 million | $36.9 million | +$19.8 million |
| Total debt, net | $379.2 million | $298.5 million | +$80.6 million |
| Shareholders’ equity | $553.7 million | $430.9 million | +$122.8 million |
Operating income represented approximately 44.3% of total revenue, compared with approximately 41.6% in 2016. Net earnings included $2.1 million from discontinued operations, compared with a $1.4 million loss in 2016. FFO and AFFO are non-GAAP measures and should be evaluated with the Company’s GAAP results. The Company revised its AFFO definition in the fourth quarter of 2017 and restated prior-year AFFO for comparability.
Cash and cash equivalents were $20.0 million at year-end, plus $0.8 million of restricted cash. Net cash used in investing activities was $206.2 million, primarily reflecting $214.0 million of property acquisitions. Net cash provided by financing activities was $157.1 million, supported by debt issuance, borrowings and equity issuance.
Material changes versus the prior comparable period
- The Company acquired 103 properties for an aggregate purchase price of $214.0 million, compared with 3 properties and a redevelopment parcel acquired for $7.7 million in 2016.
- The Empire transaction added 49 properties for $123.1 million, and the Applegreen transaction added 38 properties for $68.7 million. Both portfolios were simultaneously leased under long-term triple-net unitary leases.
- The property portfolio increased from 829 properties at year-end 2016 to 907 properties at year-end 2017. Gross real estate before accumulated depreciation increased to $971.0 million from $782.2 million.
- The Company issued approximately $104.3 million of net equity proceeds in a July 2017 offering, including the underwriters’ full exercise of their additional-share option, and raised $13.5 million through its ATM program.
- Total debt increased to $380.0 million before unamortized issuance costs, including $50.0 million of new 4.75% Series C senior notes due 2025. The revolving facility balance increased to $105.0 million from $75.0 million.
- Interest expense increased to $17.8 million from $16.6 million due to higher average borrowings and acquisition financing.
- Other income increased to $8.5 million from $2.0 million, primarily due to $6.4 million of legal settlements and judgments and $1.8 million of insurance reimbursements. These items contributed to reported earnings but are excluded from AFFO under the revised definition.
- Impairment charges declined to $9.3 million from $12.8 million. The Company sold 12 properties during 2017 and had no properties classified as held for sale at year-end.
- Quarterly cash dividends increased from $0.28 per share in the first three quarters of 2017 to $0.32 per share in the fourth quarter. Dividends declared for the year totaled $1.16 per share.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide specific 2018 earnings or acquisition guidance in the filing. Management expects to continue reviewing acquisitions, financing opportunities and redevelopment projects, subject to investment availability and capital-market conditions. The Company stated that operating needs for the next twelve months were expected to be met through operating cash flow, borrowings, equity issuance capacity, cash and cash equivalents.
- Liquidity and refinancing: The $175.0 million revolving facility was scheduled to mature in June 2018, with an option to extend it to June 2019 subject to compliance with the credit agreement. The $50.0 million term loan matures in June 2020. Senior notes mature in 2021, 2023 and 2025. The Company reported compliance with material debt covenants at December 31, 2017.
- Interest-rate exposure: $155.0 million of credit-agreement borrowings carried floating rates. Management estimated that a 1.00% increase in market rates would reduce 2018 net income and cash flow by approximately $1.6 million, based on the stated assumptions.
- Environmental obligations: Prospective environmental remediation obligations totaled $63.6 million at year-end, including $18.5 million of reasonably estimable obligations and $45.0 million for preexisting unknown contamination. The Company stated that actual future expenditures could be substantially higher than recorded amounts.
- Litigation: Accrued environmental and other litigation liabilities totaled $12.3 million. Material matters included MTBE litigation in New Jersey, Pennsylvania and Maryland, the Uniondale, New York matter, and Lower Passaic River claims. The Company believed the New Jersey MTBE litigation would probably be resolved unfavorably but could not estimate losses beyond accrued amounts.
- Tenant concentration: Global Partners accounted for 21% of total revenue, United Oil for 15%, and Chestnut Petroleum for 13% in 2017. Tenant defaults, financial distress or industry weakness could materially affect rental cash flow.
- Redevelopment: Nine properties were under active redevelopment, with $1.6 million spent on construction-in-progress during 2017. The Company had also signed leases on four properties expected to be recaptured for redevelopment after required approvals.
- Sector and geographic concentration: Substantially all tenants depend on petroleum marketing, convenience-store sales or related subtenant income. The Company also remains exposed to competition, fuel-market volatility, alternative-fuel adoption, regional economic conditions, environmental regulation, insurance limitations and changes in interest rates.
- Tax and REIT status: The Company must distribute at least 90% of taxable income to maintain REIT status. Failure to qualify or debt-covenant restrictions could limit distributions and increase tax exposure. The 2017 federal tax reform introduced additional uncertainty for REIT investors and tenants.
- Unusual items and estimates: Results were affected by legal settlements, insurance reimbursements, environmental estimate changes, impairment charges and discontinued operations. Real estate impairment and environmental liabilities depend on significant management estimates and could change materially.
Most important facts for an investor to verify
- Confirm the status, refinancing or extension of the revolving credit facility that was scheduled to mature in June 2018.
- Assess tenant credit quality and exposure to Global Partners, United Oil and Chestnut Petroleum, including the deterioration in CF United LLC’s reported net income from $24.3 million in 2016 to $4.7 million in 2017.
- Review environmental accrual assumptions, state UST-fund recoveries, insurance coverage, and potential liabilities beyond the $63.6 million remediation accrual and $12.3 million litigation accrual.
- Reconcile reported net earnings, FFO and AFFO, including the impact of the revised AFFO definition and the $6.4 million legal settlement and $1.8 million insurance reimbursement.
- Evaluate acquisition underwriting and leverage following the $214.0 million of 2017 acquisitions, the $80.6 million increase in net debt, and the related equity dilution.
- Monitor redevelopment spending, approvals, lease-up performance and the ability to monetize vacant properties; eight properties were vacant and nine were under redevelopment at year-end.
- Verify dividend sustainability against AFFO, debt covenants, required REIT distributions and future environmental or litigation cash needs.