Getty Realty Corp. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a U.S. REIT specializing in owning, leasing and financing convenience store and gasoline station properties. For the quarter ended March 31, 2018, the company owned 824 properties and leased 78 properties from third-party landlords across 28 states and Washington, D.C. Substantially all properties are leased on a triple-net basis.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $32.1 million | $27.6 million | +16.2% |
| Revenue from rental properties | $28.3 million | $23.9 million | +18.4% |
| Operating income | $14.2 million | $11.9 million | +19.4% |
| Operating margin | 44.2% | 43.0% | +120 bps |
| Earnings from continuing operations | $10.2 million | $7.7 million | +31.7% |
| Net earnings | $10.0 million | $9.7 million | +3.4% |
| Basic and diluted EPS | $0.25 | $0.28 | Down $0.03 |
| FFO | $17.8 million | $18.2 million | -2.0% |
| AFFO | $16.8 million | $14.2 million | +18.8% |
| AFFO per share | $0.42 | $0.40 | +5.0% |
| Operating cash flow | $17.3 million | $12.9 million | +33.6% |
Net earnings included a $0.1 million loss from discontinued operations in 2018 compared with $2.0 million of earnings in 2017. Net earnings margin was approximately 31.2% in 2018 versus 35.1% in 2017; the decline primarily reflects the absence of prior-year discontinued-operation gains and higher interest expense.
Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and restricted cash totaled $19.1 million at March 31, 2018, compared with $20.8 million at December 31, 2017.
- Total assets were $1.061 billion and shareholders’ equity was $551.5 million at March 31, 2018.
- Total debt was $375.0 million before $3.4 million of unamortized issuance costs, compared with $380.0 million before costs at year-end 2017.
- Debt consisted of $150.0 million under the credit agreement and $225.0 million of senior unsecured notes. The reported debt-to-total-assets ratio was approximately 35.3% before issuance costs.
- On March 23, 2018, the company amended and restated its credit agreement, increasing revolving capacity from $175.0 million to $250.0 million and extending revolving and term-loan maturities to March 2022 and March 2023, respectively.
- Senior notes mature in 2021, 2023 and 2025. No scheduled debt maturities occur in 2018–2020.
- Management stated that expected operating needs for the next 12 months can be met through operating cash flow, available borrowings, potential ATM equity proceeds and existing cash.
- Cash dividends paid were $12.8 million, or $0.32 per share, compared with $9.7 million, or $0.28 per share, in Q1 2017. Dividend payment remains subject to cash flow, market conditions and debt covenant compliance.
Material Changes Versus the Prior Comparable Period
- Rental revenue growth was primarily attributable to the Empire and Applegreen properties acquired in September and October 2017, which contributed approximately $3.9 million of Q1 2018 revenue.
- No property acquisitions occurred in Q1 2018, compared with five properties acquired for $6.2 million in Q1 2017.
- Operating cash flow increased by $4.4 million, while financing cash usage increased to $20.5 million, mainly due to debt repayment, higher dividends and credit agreement refinancing costs.
- Interest expense increased to $5.1 million from $4.1 million due primarily to higher average borrowings.
- Environmental expense was $1.2 million versus a $0.5 million credit in Q1 2017, reflecting higher environmental legal fees and remediation costs.
- Total impairment charges declined to $2.8 million from $3.7 million, while depreciation and amortization increased to $5.6 million from $4.4 million.
- FFO declined modestly because of changes in net earnings, gains on dispositions and depreciation, while AFFO increased due largely to lower environmental estimate adjustments and other excluded items.
Outlook, Commentary, Risks and Unusual Items
- The company is actively redeveloping 10 properties and spent approximately $0.3 million on construction-in-progress during the quarter. It had five vacant properties and six additional properties expected to be recaptured for redevelopment after required approvals.
- As a subsequent event, on April 17, 2018, the company acquired 30 properties for $52.2 million and entered into a 15-year unitary lease with GPM Investments, LLC.
- Environmental remediation obligations totaled $63.4 million at March 31, 2018, including $45.3 million related to future liabilities for preexisting unknown contamination. Management cautioned that actual future expenditures could substantially exceed recorded amounts.
- The company accrued $12.3 million for certain legal matters. Material contingencies include Lower Passaic River claims, MTBE litigation in New Jersey, Pennsylvania and Maryland, and Uniondale, New York litigation. Losses beyond accrued amounts cannot be estimated reliably and could materially affect liquidity, earnings or dividends.
- Tenants are concentrated in the petroleum marketing and convenience-store industries. The three largest tenant groups represented approximately 17%, 14% and 12% of Q1 2018 revenue, respectively.
- A 1% increase in market interest rates applied to the company’s $150.0 million of variable-rate borrowings would reduce estimated 2018 net income and cash flow by approximately $1.1 million, based on the filing’s assumptions.
- The company adopted revenue recognition and cash-flow presentation standards in 2018 without a material financial statement impact. It continues to evaluate the 2019 lease standard and expects recognition of lease liabilities and right-of-use assets for leases where it is a lessee.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes were reported to the risk factors in the 2017 Form 10-K.
Investor Verification Checklist
- Verify the sustainability of rental growth from the Empire, Applegreen and subsequent GPM acquisitions, including tenant credit quality and lease escalations.
- Reconcile AFFO growth and the $0.42 per-share AFFO figure to the company’s non-GAAP adjustments and assess dividend coverage.
- Review debt covenant headroom, available revolver capacity, floating-rate exposure and refinancing requirements beginning in 2021.
- Monitor environmental remediation costs, insurance and state UST fund recoveries, particularly the $63.4 million accrued obligation and potential unrecorded exposure.
- Track developments in the Lower Passaic River, MTBE and Uniondale litigation and compare potential outcomes with recorded legal accruals.
- Assess tenant concentration and exposure to volatility in fuel sales, convenience-store operations and petroleum marketing.
- Evaluate the company’s redevelopment pipeline, vacant properties, capital funding commitments of up to $8.4 million and future equity issuance under the $125 million ATM program.