Getty Realty Corp. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Getty Realty is an internally managed net-lease REIT specializing in convenience, automotive and other single-tenant retail properties. The unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. At quarter-end, the portfolio comprised 1,014 properties in 38 states and Washington, D.C.; 968 were owned and 46 were leased from third-party landlords.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $39.3 million | $37.3 million | +5.5% |
| Rental property revenue | $39.0 million | $37.0 million | +5.5% |
| Operating income | $25.2 million | $24.0 million | +5.0% |
| Net earnings | $18.7 million | $17.9 million | +4.6% |
| Diluted EPS | $0.39 | $0.40 | Down $0.01 |
| FFO | $23.3 million | $19.9 million | +16.8% |
| AFFO | $24.9 million | $22.1 million | +12.5% |
| Net cash from operations | $20.8 million | $19.4 million | +7.3% |
Net earnings margin was approximately 47.7% and operating margin was approximately 64.1%; these margins benefited from a $6.2 million gain on real estate dispositions. FFO was $0.49 per basic and diluted share, and AFFO was $0.52 per basic and diluted share.
- Property costs declined to $4.6 million from $5.3 million, while general and administrative expense declined to $5.1 million from $5.5 million.
- Depreciation and amortization increased to $9.6 million from $8.4 million, primarily due to acquired properties.
- Interest expense increased to $6.5 million from $6.1 million because of higher average borrowings, partly offset by lower average interest rates.
- Impairment charges were $1.0 million, compared with $0.8 million in the prior-year quarter.
- The company declared a quarterly dividend of $0.41 per share and paid $19.5 million of cash dividends.
Cash flow, balance sheet, debt and liquidity
- Cash, cash equivalents and restricted cash increased to $58.7 million at March 31, 2022, from $33.8 million at March 31, 2021; unrestricted cash was $57.0 million.
- Operating cash flow was $20.8 million. Investing activities used $7.9 million, including $7.0 million for two property acquisitions, $10.2 million of acquisition deposits and $10.4 million of disposition proceeds.
- Financing activities provided $19.3 million, reflecting $100.0 million of senior note proceeds, $60.0 million of net repayments under the revolving facility, and $19.5 million of dividend payments.
- Total debt was $625.0 million gross, or $620.8 million net of issuance costs, versus $585.0 million gross and $581.1 million net at December 31, 2021. No revolving-facility borrowings were outstanding at quarter-end, leaving the $300 million facility available subject to covenants and borrowing conditions.
- Senior unsecured notes included $100 million of 3.45% notes due 2032 issued in February 2022. The company expects to issue $125 million of additional 3.65% notes in January 2023, using part of the proceeds to repay the $75 million Series B Notes due June 2023.
- Debt maturities are $75 million in 2023, $50 million in 2025 and $500 million thereafter. Management stated that the company was in compliance with material debt covenants at March 31, 2022.
- Management believes the next twelve months’ operating needs and longer-term liquidity requirements can be met through operating cash flow, available revolver capacity, cash and potential ATM equity proceeds.
Material changes versus the prior comparable period
- Revenue increased primarily from properties acquired during the prior twelve months and contractual rent increases, partially offset by dispositions.
- Acquisition activity moderated to two properties totaling $7.0 million from six properties totaling $21.9 million in Q1 2021.
- The company sold 15 properties and completed one partial condemnation, generating a combined $6.2 million gain, compared with five property sales and a $7.2 million gain in Q1 2021.
- FFO and AFFO grew substantially despite diluted EPS declining, primarily reflecting the effect of a larger share count and lower disposition gains.
- Environmental expense was a $0.1 million credit versus $0.5 million of expense in the prior-year quarter, while environmental remediation obligations declined to $47.0 million from $47.6 million at year-end.
- No shares were issued under the ATM program in Q1 2022, compared with $20.3 million of net proceeds from ATM issuances in Q1 2021.
Outlook, management commentary, risks and unusual items
- Management expects to continue its growth strategy and pursue acquisitions, sale-leasebacks, construction loans and redevelopment opportunities. Five properties were under active redevelopment at March 31, 2022, and six properties were vacant.
- COVID-19 did not have a material adverse effect on reported Q1 2022 results, and there were no outstanding COVID-related lease-concession balances at quarter-end. However, management cautioned that future effects on tenants, rent collections, liquidity and growth plans remain uncertain.
- Environmental remediation is a significant contingency. The company accrued $47.0 million for prospective remediation obligations and stated that actual future net expenditures could be substantially higher. It also has a remaining commitment of up to $6.6 million for certain tenant capital improvements.
- The company faces pending Lower Passaic River and MTBE litigation. It accrued $1.9 million for certain legal matters but cannot estimate potential losses above accrued amounts; adverse outcomes could materially affect results, liquidity, dividends or stock price.
- Tenant concentration is material: Global Partners and ARKO each represented 15% of total revenue, while United Oil represented 12% in Q1 2022.
- Key operating risks include tenant creditworthiness, concentration in convenience, petroleum and automotive industries, interest-rate exposure, environmental obligations, property impairment, access to external capital, inflation, lease renewals and continued REIT qualification.
- The filing contains no specific earnings or acquisition guidance. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile AFFO growth and the $0.41 quarterly dividend to recurring cash generation, including revenue-recognition and environmental adjustments.
- Review the refinancing plan for the 2023 Series B maturity and the terms and timing of the planned January 2023 note issuance.
- Assess debt covenant headroom, interest-rate sensitivity and the availability of the $300 million revolving facility.
- Evaluate tenant concentration and the financial condition of Global Partners, ARKO and United Oil.
- Monitor environmental remediation estimates, insurance recoveries, tenant reimbursements and potential liabilities from the Lower Passaic River and MTBE proceedings.
- Assess whether acquisition, redevelopment and disposition activity supports future portfolio and AFFO growth.