GETTY REALTY CORP annual report, FY2015

Getty Realty Corp. 2015 Form 10-K Summary

Business context and reporting period

Getty Realty Corp. is a self-managed REIT focused on owning, leasing and financing convenience-store and gasoline-station properties. This Form 10-K covers the fiscal year ended December 31, 2015; the filing does not present a standalone fourth-quarter filing, although quarterly data are included.

Portfolio at year-end: 851 properties across 23 states and Washington, D.C., comprising 753 owned and 98 third-party-leased properties.
Net lease portfolio: 805 properties under primarily long-term triple-net leases; 46 properties remained transitional, including 23 vacant properties.
Approximately 57% of properties were concentrated in New York, Massachusetts and Connecticut.

Financial performance and key metrics

Metric	2015	2014	Change
Total revenues	$110.7 million	$99.9 million	Up $10.8 million
Rental revenue from continuing operations	$107.0 million	$96.7 million	Up $10.3 million
Operating income	$34.3 million	$28.8 million	Up $5.4 million
Earnings from continuing operations	$40.4 million	$20.4 million	Up $20.0 million
Net earnings	$37.4 million	$23.4 million	Up $14.0 million
Diluted earnings per share	$1.11	$0.69	Up $0.42
FFO	$69.1 million	$45.3 million	Up $23.8 million
AFFO	$65.2 million	$42.6 million	Up $22.6 million
Operating cash flow	$49.7 million	$29.2 million	Up $20.5 million
Total assets	$899.1 million	$687.5 million	Up $211.6 million
Total debt	$319.3 million	$125.3 million	Up $194.0 million

Operating income represented approximately 31% of total revenue, while net earnings represented approximately 34% of total revenue. These ratios are derived from reported figures and are not company-defined margins.

Cash and cash equivalents were $3.9 million at December 31, 2015, compared with $3.1 million a year earlier; restricted cash was $0.4 million.
Net cash used in investing activities was $204.7 million, primarily reflecting $219.5 million of property acquisitions and capital expenditures.
Net cash provided by financing activities was $155.9 million, primarily reflecting new borrowings used to fund acquisitions.
Annual cash dividends declared were $1.15 per share, including a $0.22 special dividend. Cash dividends paid totaled $35.2 million.

Material changes versus the prior comparable period

Getty acquired 80 properties for $219.2 million, including the June 2015 United Oil transaction involving 77 properties acquired for $214.5 million and simultaneously leased under long-term triple-net leases.
The United Oil properties expanded the portfolio into California, Colorado, Nevada, Oregon and Washington and contributed approximately $10.2 million of 2015 revenue.
Getty sold 84 properties for aggregate proceeds of $25.1 million and leased 58 transitional properties under long-term triple-net leases.
Transitional properties declined from 167 at December 31, 2014 to 46 at December 31, 2015.
The company received approximately $18.2 million from the Marketing bankruptcy estate, recorded as other income. Getty does not expect further distributions.
Discontinued operations shifted from $3.0 million of earnings in 2014 to a $3.0 million loss in 2015, largely because gains on property dispositions declined substantially.
Interest expense increased to $14.5 million from $9.8 million due to higher borrowings and acquisition financing.
Non-cash impairment charges decreased to $17.4 million from $21.5 million.
Environmental expenses increased to $6.2 million from $4.6 million, while general and administrative expenses increased to $16.9 million, including $1.1 million of non-recurring severance and retirement costs.
Getty wrote off $6.0 million of deferred rent receivable and $9.1 million of accounts receivable related to the NECG Lease after restructuring and re-leasing activities.

Debt, liquidity and commitments

On June 2, 2015, Getty replaced its prior credit 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 year-end, borrowings under the Credit Agreement totaled $144.0 million, consisting of $94.0 million drawn on the revolver and $50.0 million under the term loan. The reported interest rate was approximately 3.0% at year-end.
Getty also had $175.0 million of senior unsecured Prudential notes: $100.0 million of Series A Notes bearing 6.0% interest and maturing in February 2021, and $75.0 million of Series B Notes bearing 5.35% interest and maturing in June 2023.
Management stated that operating cash flow, available borrowings and cash were expected to meet operating needs for the next twelve months. The filing does not provide a specific unused borrowing capacity or current ratio.
Contractual obligations totaled $441.7 million, including $319.0 million of debt principal, $84.3 million of estimated environmental remediation expenditures and $11.9 million of capital-improvement commitments.
The company reported compliance with material debt covenants at December 31, 2015. A 0.50% increase in market interest rates was estimated to reduce 2016 net income and cash flow by approximately $0.7 million, based on stated assumptions.

Outlook, commentary, risks and unusual items

Management expects to continue acquiring properties and pursuing redevelopment and alternative-use opportunities, but provided no quantitative earnings, revenue or FFO guidance.
Getty expects to sell, re-lease or redevelop its remaining transitional properties, but stated that timing and transaction terms are uncertain.
Major tenant concentration is material: Global Partners represented 21% of rental revenue, Chestnut Petroleum 16% and United Oil 9% in 2015.
Environmental exposure remains significant. Accrued environmental remediation obligations were $84.3 million at year-end, including $45.4 million for future liabilities related to preexisting unknown contamination. Management stated that actual future costs could exceed recorded amounts.
Getty had accrued $11.3 million for certain legal proceedings. The company believes an unfavorable outcome is probable in the New Jersey MTBE litigation but cannot estimate losses above recorded accruals with certainty. Pennsylvania MTBE litigation and Lower Passaic River matters also remain unresolved.
The EPA issued a March 2016 Record of Decision for part of the Lower Passaic River remediation with an estimated project cost of $1.38 billion; the filing states that Getty’s ultimate liability is uncertain and that existing agreements do not obligate it to fund the selected remedy.
Key structural risks include tenant defaults or bankruptcies, concentration in the petroleum marketing industry and Northeast/Mid-Atlantic markets, floating-rate debt, refinancing needs, environmental regulation, litigation, property impairments and the requirement to distribute at least 90% of taxable income to maintain REIT status.
The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion from PricewaterhouseCoopers LLP.

Important facts for investors to verify

Whether United Oil and other major tenants are meeting lease obligations and whether tenant concentration has changed after year-end.
The amount of available capacity under the revolving credit facility, compliance with leverage and coverage covenants, and refinancing plans for 2018–2023 maturities.
Changes in environmental remediation accruals, recoveries from state UST funds, insurance coverage and potential liabilities from MTBE and Lower Passaic River proceedings.
Progress, expected costs and realized values from the 46 remaining transitional properties and redevelopment pipeline.
The recurring portion of 2015 AFFO after excluding the $18.2 million Marketing Estate distribution and other unusual items.
The sustainability of the $1.15 per-share dividend in light of debt service, environmental obligations, capital commitments and REIT distribution requirements.