Getty Realty Corp. — 2012 Q3 Form 10-Q Summary
Business context and reporting period
Getty Realty Corp. is a REIT that owns, leases and finances retail motor-fuel, convenience-store, automotive-service and petroleum-terminal properties. As of September 30, 2012, it owned 968 properties and leased 142 properties from third parties, totaling approximately 1,110 properties across 21 states, concentrated in the Northeast and Mid-Atlantic.
The filing covers the three and nine months ended September 30, 2012. The statements are unaudited. A major reporting issue is the April 30, 2012 rejection of the Master Lease by Getty Petroleum Marketing Inc. (“Marketing”), which previously covered approximately 760 properties and represented a majority of Getty’s historical revenue.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenues | $23.1 million | $25.7 million | $78.4 million | $74.8 million |
| Operating income | $4.2 million | $4.1 million | $16.8 million | $30.1 million |
| Earnings from continuing operations | $1.5 million | $2.8 million | $10.2 million | $26.1 million |
| Net earnings (loss) | $(3.5) million | $5.4 million | $6.6 million | $31.9 million |
| Net earnings (loss) per diluted share | $(0.10) | $0.16 | $0.20 | $0.96 |
| FFO | $6.9 million | $8.5 million | $24.3 million | $41.8 million |
| AFFO | $5.4 million | $19.7 million | $21.4 million | $54.0 million |
| Cash flow from operations | Not separately reported | Not separately reported | $12.3 million | $52.7 million |
Operating margins were approximately 18.2% in Q3 2012 versus 16.1% in Q3 2011, and approximately 21.4% for the first nine months of 2012 versus 40.2% in the prior-year period. The improvement in the quarterly operating margin primarily reflects the absence of the $11.0 million deferred-rent allowance recorded in Q3 2011, while overall profitability declined because of discontinued-operation losses, higher interest expense and elevated repositioning costs.
At September 30, 2012, total assets were $639.5 million, cash and cash equivalents were $16.4 million, total liabilities were $268.6 million and shareholders’ equity was $371.0 million. Real estate held for sale was $23.7 million.
- Debt: $151.7 million outstanding under the $175.0 million secured Credit Agreement at 3.25% and $22.2 million under the Term Loan at 3.50%; combined debt was approximately $173.9 million.
- Maturities: The Credit Agreement and Term Loan both mature in March 2013. A $21.9 million Term Loan balloon payment is due at maturity.
- Liquidity: Management believes operating cash flow and available cash can fund operating needs for the next 12 months, but refinancing or extending both facilities is required to address the March 2013 maturities.
- Dividends: Getty declared dividends of $0.25 per share during the first nine months of 2012 versus $1.21 per share in the comparable 2011 period. Future cash dividends are not assured.
Material changes versus the prior comparable period
- Q3 revenue declined 10.1% to $23.1 million, while nine-month revenue increased 4.8% to $78.4 million, primarily because 2011 acquisitions contributed revenue and because reimbursements for real estate taxes increased.
- Rental property revenue declined to $22.4 million in Q3 from $25.0 million, but increased to $76.3 million for the nine-month period from $72.9 million.
- Rental property expenses increased to $8.3 million in Q3 from $2.9 million and to $22.0 million for nine months from $10.1 million, largely because Getty began paying expenses previously borne by Marketing.
- General and administrative expense increased to $5.0 million in Q3 from $2.7 million and to $26.1 million for nine months from $10.3 million. The increase included $13.2 million of bad-debt reserves for unpaid Marketing rent and taxes and $2.9 million of Marketing-related legal and litigation costs.
- Total impairment charges increased to $7.4 million in Q3 from $0.6 million and to $10.6 million for nine months from $3.1 million, primarily reflecting lower estimated values for properties held for sale and higher environmental obligations.
- Discontinued operations shifted to a loss of $5.0 million in Q3 and $3.6 million for nine months, compared with income of $2.5 million and $5.8 million, respectively, in the prior-year periods.
- Interest expense increased to $2.9 million in Q3 from $1.4 million and to $7.1 million for nine months from $4.1 million because of higher average borrowings and interest rates.
- Operating cash flow fell to $12.3 million from $52.7 million, driven by lower earnings, increased accounts receivable, Marketing-related costs and working-capital uses.
- Getty sold 29 properties during the first nine months for aggregate proceeds of approximately $8.1 million and entered into six long-term triple-net leases covering 282 former Marketing properties. Approximately 330 properties remained under month-to-month licenses at September 30.
Guidance, outlook, risks and unusual items
- Management expects continued lower net revenue from former Master Lease properties than the contractual rent historically due from Marketing. It expects operating expenses to remain elevated for the foreseeable future because of repositioning, eviction proceedings, property expenditures, capital improvements and bankruptcy-related costs.
- Getty planned to pursue additional long-term leases covering approximately 150 properties in the fourth quarter of 2012. In October 2012, it entered into a 15-year triple-net lease covering 24 New York City properties with an affiliate of Capital Petroleum Group.
- Getty expects to evaluate approximately 160 remaining operating properties for sale, long-term leasing or capital investment, but cannot predict the timing or terms of future transactions.
- Marketing-related claims remain uncertain. Getty had reserved $24.5 million for unpaid Marketing rent and real estate taxes at September 30, 2012. It received approximately $0.7 million from the Marketing liquidation in October 2012 and advanced approximately $0.2 million under a litigation funding agreement. Recovery of further claims or advances is not assured.
- Environmental remediation liabilities were $52.3 million at September 30, 2012, compared with $57.7 million at December 31, 2011. Management states that actual costs could be materially higher. Getty also accrued $3.7 million for certain environmental litigation matters.
- Getty purchased a 10-year pollution legal liability policy in July 2012 for $3.1 million, with a $50.0 million aggregate limit subject to retentions and other conditions.
- The company is exposed to floating interest rates and cannot enter into another interest-rate swap under its Credit Agreement. A hypothetical 0.50% increase in market rates was estimated to reduce 2012 net income and cash flow by approximately $0.2 million.
- Superstorm Sandy affected portions of the company’s concentrated Northeast and Mid-Atlantic portfolio in October 2012. The filing states that the damage assessment was incomplete and that fourth-quarter results could be materially adversely affected.
- REIT status requires distribution of at least 90% of ordinary taxable income, but cash dividends depend on liquidity, debt covenants, operating results and other factors.
Most important facts for an investor to verify
- Whether Getty successfully refinanced or extended the Credit Agreement and Term Loan before their March 2013 maturities.
- Progress, occupancy, rent levels and required capital spending for the former Marketing portfolio, including properties under month-to-month licenses.
- Actual recoveries from the Marketing bankruptcy estate, the Lukoil litigation and the litigation funding agreement.
- Whether environmental remediation liabilities and related capital expenditures exceed the $52.3 million recorded liability.
- The financial effect of Superstorm Sandy on properties, tenants, insurance recoveries and fourth-quarter 2012 results.
- Compliance with debt covenants and the company’s ability to sustain cash dividends while funding repositioning and debt obligations.
- The comparability of reported earnings, FFO and AFFO given discontinued operations, impairments, bad-debt reserves and other unusual items.