Business Context and Reporting Period
Getty Realty Corp. is a U.S. REIT specializing in the ownership, leasing and financing of convenience store, gasoline station, car wash and automotive-related properties. The Form 10-Q covers the three and six months ended June 30, 2020. At quarter-end, Getty owned 887 properties and leased 59 properties from third-party landlords, totaling 946 properties across 35 states and Washington, D.C. Substantially all properties were leased under triple-net arrangements.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenues | $37.0 million | $34.3 million | $72.4 million | $68.3 million |
| Operating income | $17.6 million | $17.7 million | $36.5 million | $34.3 million |
| Net earnings | $11.0 million | $13.2 million | $23.7 million | $24.1 million |
| Diluted EPS | $0.26 | $0.32 | $0.56 | $0.58 |
| FFO | $18.6 million | $19.6 million | $38.6 million | $37.5 million |
| AFFO | $18.6 million | $18.1 million | $37.9 million | $35.7 million |
| AFFO per share | $0.44 | $0.43 | $0.90 | $0.86 |
| Net cash from operations | Not separately provided | Not separately provided | $32.8 million | $33.3 million |
Q2 2020 total revenue increased approximately 7.9% year over year, while net earnings declined approximately 16.9%. Operating margin was approximately 47.5%, compared with 51.6% in Q2 2019; net margin was approximately 29.7%, compared with 38.5%. For the six-month period, revenue increased approximately 5.9%, while net earnings declined approximately 1.9%. Six-month operating margin was approximately 50.4%, compared with 50.3% in the prior-year period.
- Rental property revenue increased to $36.3 million in Q2 and $71.0 million for the six months, primarily from acquired properties, contractual rent increases and higher tenant reimbursements.
- Q2 interest expense increased to $6.7 million from $6.0 million; six-month interest expense increased to $13.4 million from $11.9 million, reflecting higher average borrowings partly offset by lower average rates.
- Cash, cash equivalents and restricted cash totaled $27.1 million at June 30, 2020, compared with $23.7 million at December 31, 2019.
- Total assets were $1.265 billion and stockholders’ equity was $594.5 million at June 30, 2020.
- Total debt was $525.0 million before issuance costs, up from $470.0 million at December 31, 2019. Net debt was $522.6 million.
- Debt consisted of $75.0 million drawn on the revolving facility and $450.0 million of senior unsecured notes. The revolving facility had a $300.0 million borrowing capacity and matures in March 2022; the company may request an extension to March 2023, subject to the agreement.
- The company was in compliance with the material terms and financial covenants of its credit agreement and senior unsecured notes.
- Regular dividends paid during the first six months were $0.74 per share, or $31.2 million. Dividends declared for the period totaled $31.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by acquisitions and contractual rent escalations. Getty acquired 15 properties for $68.7 million in the first six months of 2020, compared with nine properties for $29.7 million in the prior-year period.
- Q2 net earnings declined because higher rental revenue was more than offset by higher depreciation and amortization, higher general and administrative expense, higher interest expense and the absence of a prior-year $1.4 million legal settlement included in other income.
- Q2 FFO declined to $18.6 million from $19.6 million, while AFFO increased to $18.6 million from $18.1 million. Six-month FFO increased to $38.6 million and AFFO increased to $37.9 million.
- Net cash used in investing activities increased to $65.0 million from $27.2 million, principally because property acquisitions increased by $39.0 million.
- Financing activities provided $35.6 million, compared with a $27.3 million use of cash in the prior-year period. The change primarily reflected $55.0 million of net additional credit-agreement borrowings and $11.9 million of ATM equity proceeds.
- Getty issued 404,000 common shares under its ATM program for net proceeds of $11.9 million, compared with 213,000 shares and $6.7 million in the prior-year period.
- The company adopted the expected-credit-loss standard on January 1, 2020, recording cumulative-effect reserves of $578,000 for direct financing leases and $309,000 for notes and mortgages receivable. No additional credit-loss allowance was recorded during the quarter or six-month period.
- Environmental remediation obligations declined to $49.3 million from $50.7 million at year-end 2019. Litigation accruals were approximately $17.8 million at both reporting dates.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
- Management reported that COVID-19 had not materially adversely affected reported first- or second-quarter results. Getty collected contractual base rent and mortgage payments from 96% of tenants or mortgagors during Q2 and 98% for July as of July 23, 2020. Management cautioned that July collections may not predict future periods.
- The company granted a small number of short-term rent or mortgage payment relief requests, primarily payment deferrals, with limited abatements. The full effect of COVID-19 on third-quarter and subsequent rental revenue and interest income could not be determined.
- Getty expected to resume its overall growth strategy during the third quarter but stated that COVID-19 could cause it to moderate or suspend acquisitions, redevelopment or other growth activities and rely more heavily on its revolving facility, ATM proceeds or other liquidity sources.
- Six redevelopment projects were active at June 30, 2020; four completed projects commenced rent during the first six months. Getty had completed 17 redevelopment projects since the program began in 2015.
- Environmental obligations and related litigation are significant contingencies. The company remains exposed to costs associated with underground storage tanks, preexisting contamination and tenant defaults on environmental responsibilities. Management stated that future actual net expenditures could be substantially higher than recorded amounts.
- Material environmental and MTBE-related matters include proceedings involving the Lower Passaic River, New Jersey, Pennsylvania and Maryland, and a former Uniondale, New York property. The company believes some matters could materially affect financial condition, liquidity, dividends or stock price, although the ultimate losses cannot be estimated reliably.
- The company’s tenant base is concentrated in petroleum marketing, convenience retail and related businesses. Tenant performance is therefore exposed to fuel demand, petroleum-industry volatility, tenant credit quality and COVID-19-related operating disruptions.
- A hypothetical 1% increase in market interest rates on the $75.0 million of variable-rate borrowings outstanding at June 30, 2020 would reduce 2020 net income and cash flow by approximately $0.4 million, before considering changes in future borrowings.
- Unusual items affecting comparability included a $1.4 million legal settlement in Q2 2019, a $0.4 million legal settlement in the first six months of 2020, insurance reimbursements, environmental estimate changes, impairment charges and non-cash revenue-recognition adjustments.
Important Facts for Investors to Verify
- Whether COVID-19 causes rent collections, tenant credit quality, rent concessions or property-level cash flow to deteriorate after July 2020.
- The refinancing or repayment plan for the $100.0 million Series A notes due in February 2021 and the $75.0 million revolving-facility balance due in March 2022.
- Whether acquisition-driven revenue growth can offset higher interest expense, depreciation, general and administrative costs and potential impairment charges.
- The sustainability of the $0.74 per-share dividend level and compliance with REIT distribution requirements and debt covenants.
- Changes in the $49.3 million environmental remediation obligation, the $17.8 million litigation accrual and the potential for liabilities exceeding recorded amounts.
- The comparability and calculation of FFO and AFFO, which are non-GAAP measures and may differ from measures used by other REITs.
- Future ATM equity issuance, dilution and the company’s reliance on external capital to fund acquisitions and liquidity needs.