Getty Realty Corp. — Form 10-Q Summary
Business context and reporting period
Getty Realty Corp. is a REIT specializing in owning, leasing and financing retail motor fuel and convenience-store properties. The unaudited filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. At September 30, 2015, the company owned 764 properties, leased 102 properties from third parties and leased 771 properties to tenants under long-term triple-net leases.
Key financial metrics
| Metric | Three months ended Sept. 30, 2015 | Three months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2014 |
|---|---|---|---|---|
| Total revenues | $30.0 million | $24.9 million | $80.9 million | $74.5 million |
| Operating income | $11.2 million | $10.0 million | $21.3 million | $29.4 million |
| Net earnings | $7.0 million | $10.2 million | $17.5 million | $26.5 million |
| Net earnings per diluted share | $0.21 | $0.30 | $0.52 | $0.79 |
| FFO | $14.2 million | $12.4 million | $43.2 million | $32.6 million |
| AFFO | $12.8 million | $11.8 million | $42.4 million | $31.2 million |
| AFFO per diluted share | $0.38 | $0.35 | $1.25 | $0.93 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $34.4 million | $22.4 million |
Calculated margins were approximately 37.3% operating and 23.5% net for the third quarter, compared with approximately 40.1% and 41.1%, respectively, in the prior-year quarter. For the nine-month period, operating margin was approximately 26.3% versus 39.4%, while net margin was approximately 21.6% versus 35.6%.
- Rental-property revenue increased to $29.1 million in the third quarter and $78.5 million for the nine months.
- At September 30, total assets were $906.9 million, including $681.3 million of net real estate, $94.5 million of direct-financing lease investments and $3.8 million of cash.
- Total liabilities were $504.6 million and shareholders’ equity was $402.3 million.
- Debt consisted primarily of $156.0 million borrowed under credit facilities and $175.0 million of Prudential notes. Total principal debt was approximately $331.0 million, excluding the $0.3 million mortgage payable.
- Cash dividends paid during the first nine months totaled $27.0 million, or $0.80 per share, including regular and special dividends.
Material changes versus the prior comparable period
- Revenue growth was driven principally by approximately $3.7 million of third-quarter revenue and $4.8 million of year-to-date revenue from the United Oil acquisition, which closed in June 2015.
- The company acquired 79 gasoline stations and convenience-store properties for approximately $218.3 million, including the 77-property United Oil portfolio purchased for approximately $214.5 million.
- Property acquisitions and capital expenditures rose to $218.6 million of cash outflows for the nine months, compared with $6.4 million in 2014.
- Financing cash inflows increased to $175.9 million from a $52.9 million outflow in the prior-year period, reflecting the new credit agreement and additional Prudential borrowings.
- Interest expense increased to $4.5 million for the quarter and $10.2 million year to date, compared with $2.4 million and $7.4 million, respectively, due to higher borrowings and acquisition financing.
- Net earnings declined despite higher revenue, largely because of higher impairment charges, depreciation, interest expense and losses from discontinued operations. Nine-month impairment charges totaled $15.3 million versus $6.6 million in 2014.
- FFO and AFFO increased despite the decline in GAAP net earnings, reflecting the exclusion of real-estate depreciation, impairment charges, disposition gains and other non-recurring or non-cash items.
- The company received $7.4 million from the Getty Petroleum Marketing bankruptcy estate during the first nine months, recorded in other income. A further distribution of approximately $10.8 million was received on November 3, 2015, after the reporting date.
Debt, liquidity and outlook
- On June 2, 2015, the company replaced its prior secured revolving facility with a $225.0 million senior unsecured credit agreement consisting of a $175.0 million revolving facility maturing in June 2018 and a $50.0 million term loan maturing in June 2020.
- At September 30, borrowings were $106.0 million under the revolving facility and $50.0 million under the term loan. The reported interest rate on Credit Agreement borrowings was approximately 3.4%.
- The Restated Prudential Note Purchase Agreement included $100.0 million of Series A Notes bearing 6.0% interest and maturing in February 2021, plus $75.0 million of Series B Notes bearing 5.35% interest and maturing in June 2023.
- Management stated that operating needs for the next twelve months were expected to be met through operating cash flow, credit-agreement borrowings and available cash. The filing does not provide a specific forecast for revenue, earnings, FFO or AFFO.
- The company was in compliance with the material terms and financial covenants of its credit agreements at September 30, 2015. A 0.50% increase in market interest rates was estimated to reduce 2015 net income and cash flow by approximately $0.2 million based on projected floating-rate borrowings.
Risks, contingencies and unusual items
- Environmental remediation obligations totaled $91.3 million at September 30, 2015, including $45.9 million for future liabilities related to preexisting unknown contamination. Actual costs may exceed recorded amounts.
- The company remains contingently liable for environmental obligations and underground-storage-tank costs if tenants or other counterparties fail to perform. Transitional and vacant properties generate expenses that exceed related licensing revenue.
- NECG-related reserves included $2.0 million of accounts-receivable reserves and a full reserve against a $6.1 million deferred-rent receivable. Discussions regarding further restructuring of the NECG lease were ongoing.
- The company accrued $11.4 million for certain legal proceedings. New Jersey MTBE litigation was considered probable to resolve unfavorably, but the ultimate loss and any amount above the accrued estimate remained uncertain. Plaintiffs had indicated a claim of approximately $24.0 million against the company, although management disputed the proposal. Pennsylvania MTBE litigation also remained unresolved.
- The company recorded approximately $3.9 million of deferred gain related to the August 2015 sale of 48 properties to Ramoco affiliates for total consideration of $15.0 million, including seller financing.
- Major tenant concentration remained material: Global Partners represented 21% of nine-month rental revenue, Chestnut Petroleum represented 17%, and United Oil represented 7%.
- Dividend payments are not assured and may be restricted by debt covenants, cash flow, market conditions, REIT requirements and the company’s financial condition.
Important facts for investors to verify
- Reconcile the substantial increase in real estate assets and debt with the operating contribution and tenant credit quality of the United Oil portfolio.
- Assess recurring AFFO after excluding the $7.4 million Marketing Estate distribution and other unusual items.
- Monitor environmental liabilities, remediation spending, insurance recoveries and potential exposure beyond the $91.3 million recorded obligation.
- Review the ultimate outcomes and adequacy of reserves for New Jersey and Pennsylvania MTBE litigation and other environmental claims.
- Evaluate tenant concentration, particularly Global Partners, Chestnut Petroleum and United Oil, and the effect of petroleum-industry conditions on rent coverage.
- Confirm available borrowing capacity, covenant headroom, floating-rate exposure and debt maturities.
- Track the restructuring or disposition of transitional properties and the impact on rental income, operating expenses and dividends.