Getty Realty Corp. — 1Q 2015 Form 10-Q Summary
Business context and reporting period
Getty Realty Corp. is a REIT that owns, leases and finances retail motor-fuel and convenience-store properties. The unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. At quarter-end, the company owned 751 properties, leased 106 properties from third parties and operated across 19 states and Washington, D.C.
Key financial metrics
| Metric | 1Q 2015 | 1Q 2014 | Change |
|---|---|---|---|
| Total revenue | $24.7 million | $24.5 million | +$0.2 million |
| Revenue from rental properties | $23.9 million | $23.8 million | +$0.2 million |
| Operating income | $2.5 million | $10.1 million | -$7.6 million |
| Operating margin | 10.3% | 41.4% | Down materially |
| Net income (loss) | $(1.1) million | $9.6 million | -$10.8 million |
| Net margin | (4.6%) | 39.4% | Down materially |
| FFO | $10.5 million | $10.5 million | Approximately flat |
| AFFO | $11.0 million | $9.3 million | +$1.7 million |
| Diluted EPS | $(0.04) | $0.29 | Down $0.33 |
| Diluted AFFO per share | $0.33 | $0.28 | +$0.05 |
| Cash flow from operations | $6.3 million | $8.0 million | -$1.7 million |
At March 31, 2015, total assets were $682.8 million, cash and cash equivalents were $6.6 million, and shareholders’ equity was $398.7 million. Debt consisted primarily of $31.5 million outstanding under the revolving credit facility, a $100.0 million term loan and a $0.3 million mortgage payable. The company stated that it was in compliance with material debt covenants.
The revolving credit agreement provides a $150.0 million facility, subject to conditions, with $31.5 million drawn at quarter-end. It was scheduled to mature in August 2015, with an option to extend to August 2016. The $100.0 million Prudential term loan bears interest at 6.00% and matures in February 2021.
Material changes versus the prior comparable period
- Revenue increased modestly, primarily from higher existing-portfolio rental revenue and reimbursable pass-through costs.
- Operating income declined substantially because continuing-operations impairment charges increased to $6.7 million from $0.2 million, environmental expenses increased to $1.9 million from $0.9 million, and depreciation and amortization increased to $3.6 million from $2.3 million.
- Total non-cash impairment charges increased to $7.9 million from $1.7 million.
- Discontinued operations shifted from $1.9 million of earnings to a $1.1 million loss, primarily because gains on property dispositions declined to $0.1 million from $3.2 million.
- FFO remained approximately flat, while AFFO increased because of lower revenue-recognition adjustments and lower deferred-rent collection reserves.
- Cash dividends paid increased to $12.2 million, or $0.36 per share, including a $0.22 regular dividend and a $0.14 special dividend, compared with $8.4 million, or $0.25 per share, in 1Q 2014.
- Borrowings under the credit line increased by $6.5 million during the quarter on a net basis, while cash increased to $6.6 million from $3.1 million at December 31, 2014.
Guidance, outlook, commentary and unusual items
Management did not provide formal earnings guidance. It stated that operating cash needs for the next twelve months were expected to be met through operating cash flow, credit-facility borrowings and available cash, but noted that acquisitions and capital expenditures could require additional capital.
- The company recorded a $94.9 million environmental remediation liability, including $48.0 million for future liabilities related to preexisting unknown contamination. Management stated that actual costs could be substantially higher than accrued amounts.
- Environmental expenses included $1.2 million of non-cash accretion expense. Property carrying values were increased by $5.3 million for environmental remediation estimates, contributing to impairment charges.
- NECG and Ramoco remained transitional or restructured tenant relationships. Getty reserved the full $6.3 million deferred-rent receivable associated with NECG and $0.8 million associated with Ramoco. Both tenants were reported current on rent under amended agreements at quarter-end.
- The company had 39 properties that were vacant or subject to month-to-month licenses and 120 properties in two unitary leases undergoing restructuring. These properties generated expenses that exceeded licensing revenue in some cases and could pressure cash flow and dividends.
- Getty had a remaining commitment of up to $13.3 million to co-invest with tenants in certain capital improvements over approximately five years.
- On April 22, 2015, after quarter-end, Getty received $6.8 million from the Marketing bankruptcy estate on general unsecured claims and an additional $0.6 million related to a funding-agreement dispute. Additional distributions were possible but uncertain.
- Material contingencies included New Jersey and Pennsylvania MTBE litigation, Lower Passaic River matters and other environmental claims. The company had accrued $11.1 million for certain legal matters, but potential losses in excess of accrued amounts could not be estimated reliably.
- The company’s tenant base is concentrated in the petroleum marketing industry. CPD NY and NECG represented 22% of rental revenue, while Capitol affiliates represented 16% in each comparable quarter, creating tenant and industry concentration risk.
Most important facts for investors to verify
- Whether the revolving credit facility was refinanced, extended or repaid before its scheduled August 2015 maturity.
- The sustainability of cash dividends relative to AFFO, environmental spending, transitional-property costs and debt-service requirements.
- Changes in the NECG and Ramoco lease restructurings, including properties removed, rent concessions and collectability of deferred rent.
- Actual cash payments and revisions to the $94.9 million environmental remediation liability.
- Outcomes, settlements and insurance recoveries related to MTBE, Lower Passaic River and other environmental litigation.
- Timing and total amount of future distributions from the Marketing bankruptcy estate.
- Whether elevated impairment charges and discontinued-operation losses recur as transitional properties are sold or re-leased.
- The company’s continued compliance with debt covenants and its ability to fund the $13.3 million tenant capital-investment commitment.