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 filing covers the unaudited quarter and six months ended June 30, 2015, compared with the same 2014 periods. As of June 30, 2015, the company owned 823 properties and leased 104 properties from third-party landlords; substantially all properties were leased on a triple-net basis.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenues | $26.2 million | $25.1 million | $50.9 million | $49.6 million |
| Operating income | $7.8 million | $9.3 million | $10.3 million | $19.4 million |
| Net earnings | $11.6 million | $6.6 million | $10.5 million | $16.3 million |
| Net earnings per diluted share | $0.34 | $0.20 | $0.31 | $0.48 |
| FFO | $18.5 million | $9.8 million | $29.0 million | $20.2 million |
| AFFO | $18.5 million | $10.1 million | $29.6 million | $19.4 million |
| FFO per diluted share | $0.55 | $0.29 | $0.86 | $0.60 |
| AFFO per diluted share | $0.55 | $0.30 | $0.87 | $0.58 |
The reported operating margin was approximately 29.6% in the second quarter and 20.2% for the six-month period, compared with approximately 36.9% and 39.2%, respectively, in the prior-year periods. The decline primarily reflected higher impairment, depreciation, environmental and general and administrative expenses. Net margin was approximately 44.3% for the quarter and 20.6% for the six months, influenced by the non-recurring Marketing Estate distributions.
- Cash flow from operating activities was $23.6 million for the six months ended June 30, 2015, compared with $13.8 million in 2014.
- Investing activities used $210.8 million, primarily for property acquisitions and capital expenditures, compared with $21.0 million provided in 2014.
- Financing activities provided $193.9 million, reflecting new borrowings, compared with $39.2 million used in 2014.
- Cash and cash equivalents were $9.8 million at June 30, 2015, compared with $3.1 million at December 31, 2014.
- Total borrowings were approximately $341.3 million, consisting principally of $166.0 million under the revolving facility, a $50.0 million term loan and $175.0 million of Prudential notes, partially offset by the balance-sheet presentation of debt issuance costs and a small mortgage payable.
- Total assets increased to $916.6 million from $687.5 million at December 31, 2014, primarily because of the United Oil acquisition and related financing.
- Cash dividends paid during the first six months were $19.6 million, or $0.58 per share, including $0.44 of regular dividends and a $0.14 special dividend.
Material changes versus the prior comparable period
- The company acquired 78 gasoline-station and convenience-store properties for approximately $216.9 million. The principal transaction was the June 3, 2015 acquisition of 77 properties leased to United Oil for approximately $214.5 million.
- Second-quarter revenue increased 4.5%, while six-month revenue increased 2.8%. The United Oil transaction contributed approximately $1.4 million of revenue in June 2015.
- Operating income fell 16.2% in the quarter and 46.9% for the six months. Six-month impairment charges increased to $8.7 million in continuing operations from $0.6 million in 2014; total continuing and discontinued-operations impairments were $10.8 million versus $3.7 million.
- Net earnings increased in the quarter because of approximately $7.4 million of other income, primarily $6.8 million and approximately $0.6 million received from the Marketing Estate. Six-month net earnings declined because the prior year included $4.4 million of gains on discontinued-property dispositions, versus $0.1 million in 2015.
- FFO increased 43.1% for the quarter and 43.2% for the six months; AFFO increased 83.4% and 52.3%, respectively. These increases were substantially affected by impairments, depreciation, disposition gains and the Marketing Estate distributions, so they should not be viewed as purely recurring operating growth.
- On June 2, 2015, the company refinanced its prior secured credit facility with a $225.0 million senior unsecured Credit Agreement and amended and restated its Prudential note agreement, adding $75.0 million of Series B notes.
Guidance, outlook, commentary, risks and unusual items
- Management stated that operating cash needs for the next twelve months are expected to be met by operating cash flow, available borrowings under the revolving facility and cash on hand. No formal earnings or revenue guidance was provided.
- The company expects to continue pursuing acquisitions, redevelopment and repositioning of transitional properties, but availability of suitable investments and financing on favorable terms is not assured.
- At June 30, 2015, transitional properties included vacant or month-to-month licensed properties and properties subject to leases being restructured. Property expenditures and environmental costs for certain transitional properties exceeded licensing revenue and could negatively affect cash flow and dividends.
- On August 3, 2015, after the reporting date, the company terminated the Ramoco Lease and sold or repositioned all 61 related properties. It sold 48 properties for total consideration of $15.0 million, re-subleased three and recaptured ten for redevelopment or re-leasing.
- Environmental remediation obligations totaled $93.1 million at June 30, 2015, including $46.2 million for future liabilities related to preexisting unknown contamination. Management stated that actual costs could materially exceed accrued amounts.
- The company had accrued $11.3 million for certain legal matters. New Jersey MTBE litigation is considered probable to have an unfavorable outcome; plaintiffs had indicated a claim of approximately $24.0 million against the company, although the ultimate loss remains uncertain. Pennsylvania MTBE and Lower Passaic River matters also remain unresolved.
- NECG-related reserves included $1.6 million of accounts receivable and $6.2 million of deferred rent. Ramoco-related deferred rent of $0.8 million was fully reserved as of June 30, 2015.
- Major tenant concentration remains significant: Global Partners represented 22% of six-month rental revenue, Chestnut-related tenants represented 17%, and United Oil represented 3% after the acquisition.
- The company was in compliance with the material covenants under its Credit Agreement and Restated Prudential Note Purchase Agreement at June 30, 2015. Floating-rate borrowings were $166.0 million; management estimated that a 0.50% increase in market rates would reduce 2015 net income and cash flow by approximately $0.4 million, based on stated assumptions.
Important facts investors should verify
- Whether the United Oil portfolio produces the expected rent and tenant performance after the acquisition and whether purchase-price allocations remain consistent with preliminary estimates.
- The sustainability of AFFO and dividends excluding the non-recurring Marketing Estate distributions and other unusual items.
- Progress and economics of the Ramoco transaction and the continuing restructuring of the NECG portfolio.
- Future impairment charges and the carrying values of transitional properties.
- The adequacy of the $93.1 million environmental accrual and $11.3 million litigation accrual, including potential exposure from New Jersey and Pennsylvania MTBE matters.
- Tenant concentration, counterparty credit quality and compliance with debt covenants as leverage increased materially to fund acquisitions.
- Availability under the revolving facility, refinancing requirements and the effect of rising interest rates on cash flow and dividend capacity.