Getty Realty Corp. — Form 10-Q Summary
Business context and reporting period
Getty Realty is a REIT focused on owning, leasing and financing retail motor-fuel and convenience-store properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, with comparisons to the same periods in 2012. At June 30, 2013, the company owned 907 properties, leased 133 properties from third parties and operated across 21 states and Washington, D.C.
The portfolio remained in transition following the April 2012 rejection of the Getty Petroleum Marketing master lease. Approximately 750 properties were in long-term triple-net leases, while approximately 290 former Marketing properties remained transitional, held for sale, subject to month-to-month licenses, vacant, or involved in leasing and eviction activities.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenues | $25.1 million | $25.1 million | $48.8 million | $51.9 million |
| Operating income | $10.8 million | $5.2 million | $19.3 million | $12.0 million |
| Earnings from continuing operations | $7.8 million | $2.5 million | $13.4 million | $8.1 million |
| Net earnings | $12.7 million | $3.6 million | $23.1 million | $10.1 million |
| Diluted earnings per share | $0.38 | $0.11 | $0.69 | $0.30 |
| FFO | $11.4 million | $7.2 million | $20.0 million | $17.5 million |
| AFFO | $12.0 million | $6.3 million | $18.2 million | $16.0 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $10.0 million | $10.4 million |
Operating margins were approximately 43.1% for the second quarter and 39.5% for the first six months, compared with approximately 20.6% and 23.1%, respectively, in the prior-year periods. Continuing-operations net earnings margins were approximately 31.1% and 27.5%, compared with approximately 9.8% and 15.6%.
- Cash and cash equivalents were $6.8 million at June 30, 2013, compared with $16.9 million at December 31, 2012.
- Total assets were $704.3 million and shareholders’ equity was $382.9 million at June 30, 2013.
- Borrowings consisted of $121.0 million under the credit facility and $100.0 million under the Prudential term loan, for total reported borrowings of $221.0 million.
- The credit facility had an August 2015 maturity, with a potential one-year extension, and borrowings bore an average effective rate of 3.25% at June 30, 2013. The $100.0 million Prudential loan matures in February 2021 at a fixed 6.00% rate.
- Cash dividends paid during the first six months totaled $10.9 million, or $0.325 per share. Management stated that the quarterly $0.20 dividend was not assured.
Material changes versus the prior comparable periods
- Second-quarter net earnings increased $9.1 million, and six-month net earnings increased $13.0 million, primarily due to lower bad-debt expense, lower impairment charges, and higher gains on property dispositions.
- Rental-property revenue declined $0.3 million in the quarter and $3.5 million year to date. The prior-year periods included substantial contractual rent from Marketing under the rejected master lease, while current revenue reflects lower net revenue from repositioned properties.
- General and administrative expense declined to $2.4 million in the quarter and $5.9 million year to date, primarily because the company reversed previously recorded Marketing bad-debt reserves. The six-month reserve reduction was $8.8 million, including a $6.4 million reduction in general and administrative expense and a $2.4 million benefit in discontinued operations.
- Rental-property expenses increased $1.7 million year to date to $14.5 million, mainly because the company continued to bear taxes, maintenance and other costs for transitional properties.
- The company recorded a $1.5 million non-cash allowance for deferred rent related to the NECG lease and increased the NECG accounts-receivable bad-debt reserve by approximately $1.2 million during the quarter, bringing the aggregate NECG reserve to approximately $1.9 million.
- FFO increased to $11.4 million in the quarter and $20.0 million year to date; AFFO increased to $12.0 million and $18.2 million, respectively.
- In May 2013, the company acquired 36 gasoline-station and convenience-store properties from subsidiaries of Capitol Petroleum Group for $72.5 million. The acquisition was financed with $57.5 million of credit-facility borrowings, $11.5 million from 1031 exchanges and cash on hand.
- During the first six months, the company sold 77 properties for aggregate proceeds of approximately $26.7 million and recognized $12.6 million of gains on dispositions. At June 30, 2013, 144 properties with a net carrying value of $34.8 million were classified as held for sale.
Guidance, outlook, commentary, risks and unusual items
- Management expected operating cash needs for the following twelve months to be met through operating cash flow, available credit-facility borrowings and cash on hand. No formal earnings guidance was provided.
- The Marketing Estate’s Lukoil litigation settlement was approved after quarter-end on July 29, 2013. The $93.0 million settlement was expected to produce initial third-quarter proceeds of approximately $32.5 million for Getty, including approximately $25.9 million under its litigation funding agreement and approximately $6.6 million of remaining administrative-claim proceeds, plus possible additional distributions.
- The expected settlement proceeds were subject to collection, bankruptcy-estate distribution and potential federal tax considerations. The company had recorded an $8.1 million fair-value receivable related to the litigation funding agreement at June 30, 2013.
- On July 9, 2013, amendments temporarily increased interest rates to 3.75% on the credit facility and 6.50% on the Prudential loan, capped additional credit-facility borrowings at $2.0 million and restricted certain acquisitions after preliminary covenant calculations indicated a possible debt-to-EBITDA issue. Final calculations showed compliance, and the temporary restrictions were no longer in effect as of the filing date.
- Environmental remediation obligations totaled $45.2 million at June 30, 2013. Management warned that actual future costs could materially exceed recorded amounts. The company also had $4.0 million accrued for certain legal matters.
- The company remained involved in environmental litigation, including New Jersey MTBE proceedings and matters involving the Newark terminal and Lower Passaic River. Plaintiffs in the remaining MTBE case had preliminarily sought $88.0 million collectively from Getty, Marketing and Lukoil, although the company stated that the proposals were not realistic and that the ultimate loss could not be estimated beyond the amount accrued.
- Key operating risks include tenant credit deterioration, the uncertain restructuring of the NECG lease, vacancy and re-leasing costs, eviction proceedings, lower revenue from former Marketing properties, environmental liabilities, interest-rate exposure, debt covenants, and the company’s ability to maintain REIT status and dividends.
- Management estimated that a 0.50% increase in market interest rates on projected average floating-rate borrowings would reduce 2013 net income and cash flow by approximately $0.3 million.
Most important facts for investors to verify
- Whether the expected approximately $32.5 million of third-quarter Marketing Estate proceeds were received and the amount and tax treatment of subsequent distributions.
- Progress and final economics of the NECG lease restructuring, including the potential removal of 25 to 30 properties and recoverability of related receivables.
- Occupancy, rental income, operating costs and disposition proceeds for the approximately 290 transitional properties and the 144 properties held for sale.
- Compliance with credit-facility and Prudential loan covenants, available borrowing capacity, interest-rate exposure and refinancing requirements.
- Whether environmental remediation obligations and MTBE, Passaic River and other litigation liabilities remain adequately reserved.
- Sustainability of cash dividends in light of operating cash flow, transitional-property costs, environmental spending, debt restrictions and REIT distribution requirements.
- The comparability of GAAP earnings, FFO and AFFO, given the significant impact of property-sale gains, bad-debt reversals, non-cash allowances and other unusual items.