Getty Realty Corp. — 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a REIT focused on owning, leasing and financing convenience store and gasoline station properties. As of March 31, 2016, it owned or leased 842 properties across 23 states and Washington, D.C., including 804 properties under long-term triple-net leases and 38 transitional properties being repositioned, sold or re-leased. The unaudited results cover the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $28.4 million | $24.7 million | 15.1% increase |
| Operating income | $11.4 million | $2.5 million | Increase of $8.9 million |
| Operating margin | 40.2% | 10.2% | Improved |
| Net earnings | $7.7 million | $(1.1) million | Improved by $8.8 million |
| Net earnings per diluted share | $0.23 | $(0.04) | Improved |
| Funds from operations | $14.1 million | $10.5 million | 34.9% increase |
| Adjusted funds from operations | $13.2 million | $11.0 million | 19.2% increase |
| AFFO per share | $0.39 | $0.33 | Increase |
| Cash flow from operating activities | $9.4 million | $6.3 million | 49.4% increase |
Rental property revenue increased to $24.4 million from $20.4 million, primarily reflecting approximately $4.4 million of revenue from the 77-property United Oil portfolio acquired in June 2015. Interest income on notes and mortgages receivable increased to $1.1 million from $0.8 million, while tenant reimbursements declined to $2.9 million from $3.5 million.
Total operating expenses declined to $17.0 million from $22.2 million. Property costs, impairments and environmental expenses decreased, partially offset by higher depreciation and amortization and general and administrative expense. Non-cash impairment charges totaled $2.3 million, including continuing and discontinued operations, compared with $7.9 million in the prior-year quarter.
Cash and cash equivalents were $8.1 million at March 31, 2016, compared with $3.9 million at December 31, 2015. Total assets were $893.4 million and shareholders’ equity was $410.3 million.
Debt, Liquidity and Dividends
Borrowings under the credit agreement were $146.3 million net of issuance costs, comprising $98.0 million drawn on the revolving facility and a $50.0 million term loan. Senior unsecured notes were $174.7 million net of issuance costs, comprising $100.0 million of Series A Notes maturing in February 2021 and $75.0 million of Series B Notes maturing in June 2023. Gross debt outstanding was approximately $323.0 million, excluding the small mortgage payable.
The revolving facility matures in June 2018, subject to a potential one-year extension, and the term loan matures in June 2020. Credit Agreement borrowings carried an approximately 3.0% interest rate at quarter-end. The company was in compliance with all material debt covenants at March 31, 2016. Management stated that operating needs for the next 12 months were expected to be met through operating cash flow, available credit and cash on hand.
Financing activities used $7.7 million of cash, including $11.4 million of dividends paid and $4.0 million of net credit agreement borrowings. Dividends paid during the quarter totaled $15.9 million, or $0.47 per share, including a $0.25 regular quarterly dividend and a $0.22 special cash and stock dividend. Future dividends are not assured and remain subject to cash flow, debt covenants, market conditions and other factors.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the United Oil acquisition completed in June 2015.
- Net earnings changed from a $1.1 million loss to $7.7 million of earnings, aided by higher revenue, lower impairments and lower environmental expense.
- Interest expense increased to $4.2 million from $2.4 million because of higher average borrowings used to fund the United Oil acquisition.
- FFO increased to $14.1 million from $10.5 million, and AFFO increased to $13.2 million from $11.0 million.
- Operating cash flow increased to $9.4 million from $6.3 million.
- The company had no property acquisitions during the quarter, but spent $317,000 on redevelopment activities and completed one redevelopment project.
- Three properties were severed from the NECG Lease and became vacant; one additional property was severed and sold. Four properties remained in the NECG Lease.
Outlook, Risks, Contingencies and Unusual Items
Management expects to continue pursuing acquisitions, redevelopment and alternative-use opportunities, but provided no specific earnings or revenue guidance. The company expects to sell or re-lease its transitional properties over time, although timing and transaction terms remain uncertain. Transitional properties may require operating, environmental and capital expenditures that could reduce liquidity and the ability to pay dividends.
Environmental remediation remains a significant exposure. The company accrued $82.7 million for environmental remediation obligations at March 31, 2016, including $45.6 million for future liabilities related to preexisting unknown contamination. Management noted that actual future expenditures could be substantially higher than recorded amounts.
The EPA issued a March 2016 Record of Decision selecting a remedy for the lower eight miles of the Lower Passaic River with an estimated cost of $1.38 billion. Getty received a notice of potential liability and commencement of negotiations, but the filing states that the notice and related agreements do not currently obligate Getty to fund or perform the remedy. Getty’s ultimate liability remains uncertain.
Getty also faces New Jersey and Pennsylvania MTBE litigation. The company stated that an unfavorable resolution of the New Jersey proceedings is probable, but it cannot estimate losses above accrued amounts with certainty. Aggregate accruals for certain legal matters were approximately $11.3 million at March 31, 2016.
Approximately $148.0 million of borrowings were subject to floating interest rates. Management estimated that a 0.50% increase in market rates would reduce 2016 net income and cash flow by approximately $0.6 million, assuming the quarter-end floating-rate balance remained representative.
Unusual items included non-cash impairments, environmental estimate changes, a $0.2 million increase in non-recurring employee-related expenses, property disposition gains and losses, and the special dividend. On April 28, 2016, Ramoco affiliates repaid approximately $13.9 million of seller financing.
Important Facts for Investors to Verify
- Whether revenue and AFFO growth remain durable after the initial contribution from the United Oil acquisition.
- The credit quality and concentration of major tenants, including Global Partners, Chestnut Petroleum and United Oil.
- The adequacy of the $82.7 million environmental liability accrual and potential exposure from MTBE and Lower Passaic River matters.
- Availability under the revolving credit facility, compliance with leverage and coverage covenants, and refinancing plans for the 2018 maturity.
- The company’s ability to fund the $11.7 million tenant capital-improvement commitment and other redevelopment spending.
- Whether transitional properties can be sold or re-leased on favorable terms without additional impairments.
- The sustainability of the regular and special dividend relative to AFFO, operating cash flow and debt requirements.
- The effect of future interest-rate increases on earnings and cash flow.
- The impact of new lease, revenue-recognition and stock-compensation accounting standards when adopted.