Business Context and Reporting Period
Getty Realty Corp. is a REIT specializing in owning, leasing and financing convenience store and gasoline station properties. As of June 30, 2017, it owned or leased 825 properties across 25 states and Washington, D.C.; 806 properties were under triple-net leases. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenues | $29.0 million | $28.6 million | $56.7 million | $57.0 million |
| Operating income | $14.5 million | $12.2 million | $26.3 million | $23.5 million |
| Net earnings | $15.1 million | $13.6 million | $24.8 million | $21.3 million |
| Net earnings per share | $0.43 | $0.40 | $0.71 | $0.62 |
| FFO | $19.9 million | $16.0 million | $38.1 million | $30.1 million |
| AFFO | $18.7 million | $14.5 million | $33.2 million | $27.6 million |
| AFFO per share | $0.53 | $0.42 | $0.95 | $0.81 |
| Cash flow from operating activities | Not provided for the quarter | Not provided for the quarter | $21.8 million | $19.0 million |
Operating margin was approximately 49.8% in the second quarter and 46.5% for the first six months of 2017, compared with approximately 42.5% and 41.2%, respectively, in the prior-year periods. The second-quarter improvement primarily reflected lower impairments and environmental expenses and a $3.8 million insurance settlement recorded in other income.
- At June 30, 2017, total assets were $887.4 million and shareholders’ equity was $442.0 million, compared with $877.3 million and $430.9 million, respectively, at December 31, 2016.
- Cash and cash equivalents were $14.4 million, with restricted cash of $0.8 million.
- Total debt was $310.0 million, or $308.8 million net of issuance costs, compared with $300.0 million, or $298.5 million net, at year-end 2016.
- Debt consisted of $85.0 million under the credit agreement and $225.0 million of senior unsecured notes. The notes included $50.0 million of Series C notes issued in February 2017.
- The revolving facility had $35.0 million outstanding at June 30, 2017 and was scheduled to mature in June 2018, with a possible one-year extension subject to conditions. The company reported compliance with all debt covenants.
- The company paid $19.6 million of regular dividends during the first six months, or $0.56 per share. Future dividends are not assured.
Material Changes Versus the Prior Comparable Period
- Second-quarter total revenue increased 1.5% year over year, while first-half revenue decreased 0.6%. Rental property revenue increased 2.8% in the quarter and 1.2% for the six months, primarily from properties acquired in 2017.
- First-half tenant reimbursements decreased to $6.1 million from $6.5 million, and interest income on notes and mortgages receivable decreased to $1.5 million from $2.0 million.
- Second-quarter net earnings increased 11.3%; first-half net earnings increased 16.6%. Results benefited from lower operating expenses, higher operating income, increased discontinued-operations earnings and the insurance settlement.
- FFO increased 24.7% in the quarter and 26.5% for the first six months. AFFO increased 29.6% in the quarter and 20.2% for the first six months.
- Environmental expense was a $0.1 million credit for the first six months of 2017 versus a $1.8 million expense in 2016. This included $5.7 million of credits from decreases in estimated remediation costs.
- Impairments were $0.9 million in the second quarter and $4.7 million for the first six months, compared with $2.1 million and $4.8 million, respectively, in 2016.
- Investing cash flow changed from $18.4 million provided in the first half of 2016 to $15.2 million used in 2017, primarily due to $17.8 million of property acquisitions and lower collections of notes receivable.
- During the first half, Getty acquired 10 properties for $17.8 million, spent $0.7 million on redevelopment and issued 232,000 shares under its ATM program for $5.9 million of net proceeds.
Outlook, Commentary, Risks and Unusual Items
- Management stated that operating cash needs for the next 12 months are expected to be met by operating cash flow, credit-facility borrowings and available cash. No specific earnings or revenue guidance was provided.
- Getty had an agreement to acquire 49 Empire Petroleum properties for $123.0 million, with an expected closing before the end of the third quarter of 2017. The transaction was subject to closing conditions and was expected to be funded with the revolving facility.
- After quarter-end, Getty announced a planned $70.1 million acquisition lease-back transaction with Applegreen involving 42 properties, expected to close before the end of the fourth quarter of 2017. Completion was not assured.
- On July 10, 2017, Getty completed a common-stock offering, including the underwriters’ overallotment, for net proceeds of $104.5 million. Proceeds were used first to repay revolving-facility borrowings and were expected to support acquisitions and other corporate purposes.
- Environmental remediation obligations totaled $64.6 million at June 30, 2017, including $44.7 million for preexisting unknown contamination. Management stated that actual future expenditures could be substantially higher than recorded amounts.
- Getty faced material uncertainty relating to the Lower Passaic River remediation proceedings and MTBE litigation in New Jersey and Pennsylvania. The company had accrued $11.6 million for certain legal matters but could not estimate potential losses above accrued amounts with certainty.
- The Lower Passaic River remedy selected by the EPA for the lower eight miles had an estimated cost of approximately $1.38 billion; Getty’s ultimate liability, if any, remained uncertain.
- Three tenants represented significant revenue concentrations for the first half: Global Partners at 22%, United Oil at 16% and Chestnut Petroleum at 15%. Tenant performance is highly dependent on the competitive and volatile petroleum marketing industry.
- The company’s principal market risks were environmental liabilities, tenant credit quality, lease renewals, reliance on external capital, interest-rate changes, future impairments and maintaining REIT qualification. A 1% increase in market interest rates on the reported floating-rate borrowings was estimated to reduce 2017 net income and cash flow by approximately $0.4 million.
- Getty early adopted accounting guidance for restricted cash and the definition of a business in 2017. It expected other pending accounting standards, including new lease and revenue guidance, to have no material impact, although evaluation remained ongoing.
Investor Verification Checklist
- Verify the closing, financing and expected economics of the Empire and Applegreen acquisition lease-back transactions.
- Reconcile the post-quarter-end $104.5 million equity offering, revolving-debt repayment and resulting leverage and liquidity.
- Assess the sustainability of AFFO, including the effects of the $3.8 million insurance settlement and environmental estimate changes.
- Monitor environmental remediation obligations, UST replacement commitments and potential liabilities beyond the $64.6 million accrual.
- Review developments in the Lower Passaic River and New Jersey and Pennsylvania MTBE proceedings, including any indemnification or settlement activity.
- Evaluate concentration risk from Global Partners, United Oil and Chestnut Petroleum and the ability of tenants to satisfy lease and environmental obligations.
- Confirm the June 2018 revolving-facility maturity, extension options, covenant compliance and refinancing requirements.
- Confirm future dividend capacity given REIT distribution requirements, debt covenants, acquisition funding needs and reliance on external capital.