Getty Realty Corp. — 2014 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 unaudited filing covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013. At quarter-end, the company owned 812 properties and leased 122 properties from third-party landlords, for a total portfolio of 934 properties across 20 states and Washington, D.C.
The portfolio included 755 properties under long-term triple-net leases and 179 transitional properties, primarily properties formerly leased to Getty Petroleum Marketing Inc. The company operated as one reportable segment.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $24.3 million | $22.9 million | +$1.5 million |
| Rental property revenue | $23.6 million | $22.1 million | +$1.6 million |
| Operating income | $10.2 million | $8.2 million | +$2.0 million |
| Earnings from continuing operations | $7.7 million | $5.3 million | +$2.4 million |
| Net earnings | $9.6 million | $10.4 million | -$0.7 million |
| Diluted earnings per share | $0.29 | $0.31 | -$0.02 |
| Funds from operations | $10.5 million | $8.5 million | +$2.0 million |
| Adjusted funds from operations | $9.1 million | $6.2 million | +$2.9 million |
| Diluted AFFO per share | $0.27 | $0.18 | +$0.09 |
| Net cash from operating activities | $8.0 million | $6.6 million | +$1.4 million |
Operating margin was approximately 41.8% in Q1 2014 versus 35.7% in Q1 2013. Net earnings margin was approximately 39.6% versus 45.3%, while continuing-operations margin increased to approximately 31.8% from 23.2%. The decline in total net earnings and GAAP EPS primarily reflected lower gains from property dispositions, despite improved continuing operations.
Operating expenses decreased to $14.2 million from $14.7 million. Rental property expenses declined to $5.9 million from $7.4 million, and general and administrative expenses declined to $3.7 million from $4.8 million. These benefits were partly offset by a $1.3 million allowance for uncollectible accounts, compared with a $1.3 million recovery in the prior-year quarter.
Cash Flow, Balance Sheet, Debt and Liquidity
| Balance-sheet item | March 31, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $664.0 million | $682.4 million |
| Cash and cash equivalents | $7.9 million | $12.0 million |
| Restricted cash | $1.5 million | $1.0 million |
| Credit-line borrowings | $43.0 million | $58.0 million |
| Term loan | $100.0 million | $100.0 million |
| Total liabilities | $245.8 million | $267.3 million |
| Shareholders’ equity | $418.2 million | $415.1 million |
Net cash from operating activities was $8.0 million. Investing activities provided $11.4 million, including $6.2 million of real-estate disposition proceeds and a $4.8 million increase in cash held for property acquisitions. Financing activities used $23.5 million, including $15.0 million of net credit-line repayments and $8.4 million of cash dividends. Cash declined by $4.1 million to $7.9 million.
Total debt was $143.0 million at quarter-end. The $150.0 million revolving facility was scheduled to mature in August 2015, with a potential one-year extension, and borrowings were approximately 2.7% at March 31, 2014. The $100.0 million secured Prudential term loan bears fixed interest at 6.0% and matures in February 2021. Management stated that expected operating cash flow, available borrowings and cash should meet operating needs for the next twelve months.
The company paid $8.4 million of dividends during the quarter, consisting of a regular quarterly dividend of $0.20 per share and a special dividend of $0.05 per share. Future dividends remain subject to cash flow, debt covenants, REIT requirements and other conditions.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of additional rental revenue from the May 2013 acquisition of 36 properties from Capitol Petroleum Group for $72.5 million.
- Continuing-operations earnings increased 46% to $7.7 million, driven by higher rental revenue, lower rental property expenses, lower general and administrative costs and lower interest expense.
- Net earnings declined 7% because gains on dispositions fell to $3.2 million from $8.4 million. The company sold 28 properties in Q1 2014 versus 54 in Q1 2013.
- FFO increased to $10.5 million from $8.5 million, and AFFO increased to $9.1 million from $6.2 million.
- Transitional-property expenditures declined to approximately $1.1 million from $2.4 million, but 41 transitional properties remained vacant and 54 were subject to month-to-month licenses.
- The company increased its NECG-related bad-debt reserve by approximately $0.5 million and recorded an $0.8 million non-cash allowance against deferred rent receivable. The total NECG-related deferred rent receivable reserve was approximately $5.6 million.
- The filing revised Q1 2013 continuing-operations results for a $0.2 million classification error involving rental property expenses; the revision did not affect net earnings or cash flows.
- The company recorded a $0.4 million out-of-period adjustment in Q1 2014 related to previously misstated prepaid real-estate taxes and real-estate tax expense.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expects to continue pursuing acquisitions, financing opportunities and the repositioning of transitional properties through sales, new leases and modifications of existing leases. Subsequent to quarter-end, the company reported sales of 17 additional transitional properties for an aggregate $2.4 million. No formal earnings guidance was provided.
The company expects a restructuring of the NECG lease after resolution of ongoing Connecticut eviction proceedings. Fourteen of 24 former operators had reached agreements or vacated, while 10 remained in occupancy during appeals. Management anticipated a favorable resolution in 2014 but provided no assurance.
- Tenant concentration: CPD NY and NECG together generated 20% of Q1 2014 rental revenue. Capitol affiliates generated another 16%. Financial distress or default by major tenants could materially affect revenue, liquidity and dividends.
- Transitional-property risk: Property expenditures and environmental costs exceed licensing revenue for certain vacant or month-to-month properties. Repositioning may require additional costs, capital and management attention and may produce less net revenue than the former Marketing master lease.
- Environmental obligations: Accrued environmental remediation obligations were $42.0 million. Management stated that actual future expenditures could be substantially higher than recorded amounts.
- Litigation: The company accrued approximately $11.2 million for certain legal matters. In the New Jersey MTBE litigation, plaintiffs had indicated a demand of approximately $24.0 million from the company, although management disputed the proposal and stated that insurance coverage was being pursued. Losses could exceed accrued amounts.
- Interest-rate risk: A hypothetical 0.50% increase in market rates on projected floating-rate borrowings was estimated to reduce 2014 net income and cash flow by approximately $0.2 million.
- Debt covenants: Credit agreements include leverage, loan-to-value, coverage, net-worth and restricted-payment covenants. Defaults could increase interest rates, restrict revolver draws and accelerate debt.
- Unusual and non-cash items: Q1 results included $1.7 million of impairment charges, a $0.8 million deferred-rent allowance, the $0.4 million out-of-period adjustment and significant non-cash revenue-recognition adjustments.
Most Important Facts for Investors to Verify
- Whether NECG eviction proceedings and the anticipated lease restructuring are resolved on favorable terms.
- The collectability of rents and deferred rent from NECG, CPD/Chestnut affiliates and Capitol affiliates.
- The pace and pricing of remaining transitional-property sales and re-leasing.
- Whether environmental and MTBE litigation liabilities remain within recorded accruals and the availability of insurance recoveries.
- Compliance with debt covenants and the company’s ability to refinance or repay the revolving facility before its 2015 maturity.
- The sustainability of operating cash flow, AFFO and the $0.20 regular quarterly dividend plus any special dividends.
- The impact of non-cash straight-line rent, deferred-rent reserves, impairments and disposition gains when assessing recurring earnings.