Getty Realty Corp. 2013 Form 10-K Summary
Business context and reporting period
Getty Realty Corp. is a self-administered REIT focused on owning, leasing and financing retail motor-fuel and convenience-store properties. The filing covers the fiscal year ended December 31, 2013; the source is an annual report rather than a standalone fourth-quarter filing. At year-end, the company owned 840 properties and leased 125 properties from third-party landlords, for a total portfolio of 965 properties across 20 states and Washington, D.C.
The portfolio included 755 properties under long-term triple-net leases and 210 transitional properties, substantially all formerly leased to Getty Petroleum Marketing, Inc. Transitional properties included 90 month-to-month license arrangements, 84 properties under the NECG lease and 36 vacant properties.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenues | $102.5 million | $95.8 million | +7.0% |
| Rental-property revenue | $95.9 million | $92.9 million | +$3.0 million |
| Operating income | $39.2 million | $22.9 million | +$16.3 million |
| Earnings from continuing operations | $27.7 million | $13.5 million | +104.7% |
| Earnings from discontinued operations | $42.3 million | $(1.1) million | Material improvement |
| Net earnings | $70.0 million | $12.4 million | +$57.6 million |
| Diluted EPS | $2.08 | $0.37 | +$1.71 |
| FFO | $47.9 million | $33.2 million | +44.1% |
| AFFO | $44.7 million | $28.8 million | +55.4% |
| Cash flow from operations | $43.7 million | $15.9 million | +$27.8 million |
| Cash and cash equivalents | $12.0 million | $16.9 million | $(4.8) million |
| Total debt | $158.0 million | $172.3 million | $(14.3) million |
| Shareholders’ equity | $415.1 million | $372.7 million | +$42.3 million |
Operating margin was approximately 38.3%, continuing-operations earnings margin was approximately 27.0% and reported net-earnings margin was approximately 68.3%. The net-earnings margin was heavily affected by property-disposition gains and recoveries related to the Marketing bankruptcy and should not be viewed as a recurring operating margin.
Property dispositions generated $83.1 million of aggregate proceeds during 2013, including five terminals and a Manhattan property. The company recorded $45.5 million of gains on dispositions in discontinued operations. It also recorded $13.4 million of non-cash impairment charges, including $3.3 million in continuing operations.
Material changes versus the prior comparable period
- Revenue increased primarily from the May 2013 acquisition, higher reimbursed real-estate taxes and municipal charges, and new leasing activity. These benefits were partly offset by a $1.4 million loss from interim fuel-supply arrangements, compared with a $1.8 million gain in 2012.
- Environmental expense increased to $12.0 million from $0.9 million, primarily because of a $9.4 million increase in provisions for environmental litigation losses and legal fees.
- General and administrative expense declined to $5.1 million from $27.6 million, primarily because 2013 included a $15.3 million net credit for bad-debt expense related mainly to recoveries from the Marketing Estate and the Lukoil litigation funding arrangement.
- The company recorded a $4.2 million non-cash allowance for deferred rent receivable related to NECG. The allowance did not reduce operating cash flow.
- Operating cash flow rose substantially to $43.7 million, aided by improved portfolio cash generation and receipts from the Lukoil Settlement.
- Debt was refinanced in February 2013. The company replaced prior borrowings with a $175.0 million senior secured credit agreement and a $100.0 million senior secured Prudential term loan. Year-end borrowings were $58.0 million under the credit agreement and $100.0 million under the term loan.
- The quarterly information was revised because certain property expenses had been classified incorrectly between continuing and discontinued operations. The revision did not affect net income, the balance sheet or cash flows.
Guidance, outlook, commentary and risks
Management did not provide quantitative earnings or revenue guidance. It expects to continue repositioning transitional properties through sales, new leases or modifications to existing leases, but stated that the timing and terms of future transactions cannot be predicted. Approximately 38 transitional properties were under negotiation for long-term triple-net leases at year-end.
Transitional properties remained cash-flow intensive: Property Expenditures were $8.3 million for 2013, including $1.7 million in the fourth quarter, and property expenditures and environmental costs exceeded licensing revenue for occupied month-to-month and vacant properties.
The Marketing bankruptcy produced $34.3 million of cash recoveries in 2013, including $25.1 million under the Litigation Funding Agreement and $6.6 million related to post-petition priority claims. Getty expects possible additional distributions on its remaining unsecured claims, but the amount and timing are uncertain. In January 2014, the IRS issued a favorable ruling regarding the REIT treatment of the Marketing Estate-related cash receipts.
Getty was pursuing evictions at 18 transitional properties. In Connecticut, 13 of 24 operators had resolved their appeals, while 11 remained in occupancy during the appeal process. Management expected a favorable resolution in 2014 and anticipated restructuring the NECG lease afterward.
Environmental and litigation exposure remains significant. Environmental remediation obligations were accrued at $43.5 million at December 31, 2013, and environmental litigation accruals were $11.4 million. The company stated that future costs could materially exceed recorded amounts. The New Jersey MTBE litigation remained unresolved; plaintiffs had indicated a demand of approximately $24.0 million from Getty, although the company disputed the proposal and was pursuing insurance coverage.
Liquidity depends on operating cash flow, available credit and cash balances. The credit agreement matures in August 2015, with a possible one-year extension, and the Prudential term loan matures in February 2021. Both facilities contain financial covenants and restrictions that may limit additional debt or dividends. A hypothetical 0.50% increase in market interest rates was estimated to reduce 2014 net income and cash flow by approximately $0.3 million based on projected floating-rate borrowings.
Getty declared cash dividends of $0.85 per share for 2013, compared with $0.375 per share for 2012. Cash dividends paid totaled $24.4 million in 2013. Future dividends are subject to cash flow, REIT distribution requirements, lender covenants and board approval.
Most important facts for investors to verify
- Separate recurring rental and AFFO performance from the $45.5 million of disposition gains and the Marketing Estate recoveries that materially increased 2013 reported earnings.
- Progress in leasing or selling the remaining 210 transitional properties, including the 36 vacant properties and 115 properties classified as held for sale.
- Resolution of the NECG lease, Connecticut eviction appeals and the related $4.2 million deferred-rent allowance.
- Actual recoveries, timing and tax treatment of Getty’s remaining unsecured claims against the Marketing Estate.
- Environmental remediation spending and potential liabilities beyond the $43.5 million recorded obligation and $11.4 million litigation accrual.
- Exposure to major tenants: CPD NY and NECG represented 21% of rental revenue, while Capitol affiliates represented 15% in 2013.
- Refinancing or repayment plans for the $58.0 million credit-agreement balance maturing in 2015 and compliance with debt covenants.
- Sustainability of the $0.85 per-share dividend relative to recurring AFFO, transitional-property costs and required REIT distributions.