Getty Realty Corp. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Getty Realty is a REIT specializing in owning, leasing and financing convenience-store and gasoline-station properties. As of March 31, 2017, it owned or leased 823 properties across 24 states and Washington, D.C.; 806 were leased under triple-net arrangements. The unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $27.6 million | $28.4 million | Down $0.8 million |
| Operating income | $13.4 million | $11.4 million | Up $1.9 million |
| Operating margin | 48.3% | 40.2% | Improved |
| Earnings from continuing operations | $9.2 million | $7.8 million | Up $1.3 million |
| Net earnings | $9.7 million | $7.7 million | Up $2.0 million |
| Net margin | 35.1% | 27.1% | Improved |
| Net earnings per share | $0.28 | $0.23 | Up $0.05 |
| FFO | $18.2 million | $14.1 million | Up $4.1 million |
| AFFO | $14.5 million | $13.2 million | Up $1.3 million |
| AFFO per share | $0.41 | $0.39 | Up $0.02 |
Rental-property revenue was $24.3 million, essentially flat year over year, while contractual rent due or received increased to $23.9 million from $23.4 million. Tenant reimbursements declined to $2.6 million from $2.9 million, and interest income on notes and mortgages declined to $0.8 million from $1.1 million.
Operating expenses decreased to $14.3 million from $17.0 million. Property costs and general and administrative expenses declined, and environmental expense changed from a $0.8 million charge to a $0.5 million credit. Impairment charges increased to $2.3 million in continuing operations from $2.0 million. Total impairment charges, including discontinued operations, were $3.7 million versus $2.3 million.
Net cash provided by operating activities was $12.9 million, compared with $9.4 million in the prior-year quarter. Investing activities used $2.0 million, primarily reflecting $6.2 million of property acquisitions, partially offset by disposition proceeds and acquisition-deposit refunds. Financing activities used $5.3 million. Cash, cash equivalents and restricted cash ended at $18.8 million, compared with $8.5 million at March 31, 2016.
Balance sheet, debt and liquidity
- Total assets were $876.2 million at March 31, 2017, compared with $877.3 million at December 31, 2016.
- Total debt was $300.0 million principal, or $298.6 million net of issuance costs, essentially unchanged from year-end.
- Debt consisted of $75.0 million outstanding under the credit agreement and $225.0 million of senior unsecured notes, including $50.0 million of 4.75% Series C Notes issued in February 2017.
- The revolving facility had $25.0 million outstanding and matures in June 2018, with an option to extend to June 2019 subject to conditions. The term loan matures in June 2020; senior notes mature from 2021 through 2025.
- Cash and cash equivalents were $18.1 million, and restricted cash was $0.8 million. Management stated that expected operating needs for the next twelve months could be met through operating cash flow, available credit and cash on hand.
- The company was in compliance with all credit-agreement and senior-note covenants as of March 31, 2017.
- Quarterly dividends were $0.28 per share, or approximately $9.7 million in cash dividends paid. Dividend payments remain subject to liquidity, covenant compliance and other conditions.
Material changes versus the prior comparable period
- Net earnings increased 26%, despite slightly lower revenue, primarily because of lower property, environmental and general and administrative expenses, plus higher discontinued-operation earnings.
- Operating cash flow increased 37% to $12.9 million.
- FFO and AFFO increased, but the improvement in FFO was aided by higher impairment charges and other non-cash items excluded from FFO. AFFO benefited from a $3.3 million year-over-year increase in non-cash environmental credits.
- The company acquired five properties for an aggregate $6.2 million and spent $0.2 million on redevelopment construction-in-progress.
- The company issued 168,000 shares under its at-the-market program for $4.3 million of net proceeds and had 34.6 million common shares outstanding at March 31, 2017.
- On February 21, 2017, the company amended its credit agreement and issued $50.0 million of 4.75% Series C senior unsecured notes due 2025.
- The company early adopted accounting guidance on restricted cash and the definition of a business. The first-quarter acquisitions were accounted for as asset acquisitions.
Guidance, outlook, commentary and risks
The filing provides no formal earnings or revenue guidance. Management expects to continue pursuing acquisitions, financing opportunities and redevelopment of selected properties. Seven properties were actively being redeveloped for alternative single-tenant retail uses, and eight additional net-lease properties had signed leases that may be recaptured for redevelopment after required approvals.
Tenant concentration is material: Global Partners represented 21% of total revenue, Chestnut Petroleum 17%, and United Oil 16% for the quarter. Tenant performance is closely tied to the competitive and volatile petroleum-marketing industry.
Environmental obligations remain a significant exposure. The company accrued $68.8 million for prospective environmental remediation liabilities at March 31, 2017, including $45.1 million for preexisting unknown contamination. Management stated that actual future expenditures could be substantially higher than accrued amounts.
Material legal and environmental contingencies include Lower Passaic River matters and MTBE litigation in New Jersey and Pennsylvania. The company had accrued $11.6 million for certain litigation matters but could not estimate losses in excess of accrued amounts with certainty. The EPA-selected Lower Passaic River remedy has an estimated cost of $1.38 billion for the lower eight miles, but the company’s ultimate responsibility remains uncertain and is subject to future negotiations, enforcement proceedings or litigation.
The company has $75.0 million of floating-rate debt. Management estimates that a 1.0 percentage-point increase in market interest rates would reduce 2017 net income and cash flows by approximately $0.6 million, based on assumed average floating-rate borrowings.
Most important facts for investors to verify
- Whether tenant credit quality and the concentration of revenue among three tenants remain stable.
- The timing and terms for refinancing or extending the $25.0 million revolving facility maturing in June 2018.
- Whether environmental remediation liabilities and related cash payments remain within recorded accruals and available insurance or state-fund recoveries.
- Potential exposure from Lower Passaic River and MTBE litigation beyond the $11.6 million litigation accrual.
- Whether AFFO growth is sustained after excluding unusual environmental credits and other non-recurring items.
- The company’s ability to fund acquisitions, redevelopment, debt service and the $0.28-per-share quarterly dividend while maintaining REIT and debt-covenant compliance.