Getty Realty Corp. 2019 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a REIT specializing in the ownership, leasing and financing of convenience store and gasoline station properties. For the quarter ended June 30, 2019, the company owned 862 properties and leased 71 properties from third-party landlords, totaling 933 properties across 31 states and Washington, D.C. Substantially all properties are leased under triple-net arrangements.
The filing presents unaudited results for the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Getty adopted the new lease accounting standard, ASC 842, on January 1, 2019; comparative periods were not adjusted.
Key Financial Metrics
| Metric | Three Months 2019 | Three Months 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Total revenues | $34.3 million | $34.2 million | $68.3 million | $66.4 million |
| Net earnings | $13.2 million | $13.5 million | $24.1 million | $23.6 million |
| Basic and diluted EPS | $0.32 | $0.33 | $0.58 | $0.58 |
| FFO | $19.6 million | $17.6 million | $37.5 million | $35.4 million |
| AFFO | $18.1 million | $17.4 million | $35.7 million | $34.2 million |
| FFO per share | $0.47 | $0.43 | $0.90 | $0.88 |
| AFFO per share | $0.43 | $0.43 | $0.86 | $0.85 |
| Net cash from operating activities | Not separately provided | Not separately provided | $31.6 million | $30.8 million |
Quarterly operating income was $17.7 million versus $18.6 million, and the implied operating margin was approximately 51.6% versus 54.4%. Net margin was approximately 38.5% versus 39.5%. For the six-month period, operating income was $34.3 million versus $33.3 million, with an implied operating margin of approximately 50.3% in both periods; net margin was approximately 35.3% versus 35.5%.
- Rental property revenue increased to $33.6 million for the quarter and $66.8 million for the six months, primarily from 2018 acquisitions and contractual rent increases.
- Interest expense increased to $6.0 million for the quarter and $11.9 million for the six months, reflecting higher average borrowings and interest rates.
- Other income included a $1.4 million legal settlement in the quarter and six-month period.
- Impairment charges declined to $0.7 million for the quarter and $1.5 million for the six months, from $1.2 million and $4.0 million, respectively, in the prior-year periods.
Balance Sheet, Debt and Liquidity
- Total assets were $1.18 billion at June 30, 2019, compared with $1.16 billion at December 31, 2018. Net real estate was $908.6 million.
- Cash and cash equivalents were $25.6 million, and cash, cash equivalents and restricted cash totaled $27.5 million at quarter-end, down from $48.7 million at year-end.
- Total debt was $440.0 million before issuance costs and $437.1 million net, compared with $445.0 million and $441.6 million, respectively, at December 31, 2018.
- Debt consisted of $115.0 million outstanding under the revolving facility and term loan and $325.0 million of senior unsecured notes. The company reported compliance with material debt covenants.
- Debt maturities include $100.0 million of senior notes in 2021, $65.0 million on the revolving facility in 2022, $125.0 million in 2023, and $150.0 million thereafter.
- Six-month cash flow included $31.6 million from operations, $25.5 million used in investing activities, and $27.3 million used in financing activities. Property acquisitions used $29.7 million, while dividends paid totaled $28.3 million.
- Management stated that anticipated operating needs for the next twelve months can be met through operating cash flow, available credit, ATM proceeds and cash on hand.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 3.0%, while net earnings increased 2.3% and AFFO increased 4.1%.
- Quarterly net earnings declined 2.5%, despite higher FFO and AFFO, primarily because the prior-year quarter included a larger gain on real estate dispositions and 2019 included higher interest expense.
- Property acquisitions declined to nine properties totaling $29.7 million, compared with 32 properties totaling $55.3 million in the first six months of 2018.
- Property costs and environmental expenses declined, while general and administrative expense increased, partly due to $0.3 million of non-recurring employee retirement costs.
- The company issued 213,000 shares under its ATM program for net proceeds of $6.7 million, versus 537,000 shares and $13.7 million in the prior-year period.
- Regular dividends paid increased to $0.70 per share for the first six months, from $0.64 per share in 2018.
- ASC 842 added $24.0 million of lease-related right-of-use assets and $28.9 million of lease liabilities at June 30, 2019, with no reported impact on the income statement.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to continue pursuing acquisitions, redevelopment and alternative uses for selected properties. Seven properties were under active redevelopment at June 30, 2019, and eight properties were vacant.
- Tenant concentration is material: Global Partners represented 18% of six-month revenue, United Oil 13%, and Chestnut Petroleum 11%. Tenant performance is substantially tied to the competitive and volatile petroleum marketing industry.
- Environmental remediation obligations were $58.8 million at June 30, 2019, including $45.5 million for future liabilities associated with preexisting unknown contamination. Management warns that actual costs could be substantially higher than accrued amounts.
- The company had accrued $12.0 million for certain legal matters. Significant contingencies include Lower Passaic River claims, MTBE litigation in New Jersey, Pennsylvania and Maryland, and Uniondale, New York litigation.
- The company believes New Jersey MTBE litigation will probably be resolved unfavorably, but cannot estimate potential losses above accrued amounts with certainty.
- The company remains contingently liable for certain environmental obligations if tenants or other counterparties fail to perform. It also had a remaining commitment of up to $7.4 million for tenant capital improvements.
- A 1% increase in market interest rates on $115.0 million of variable-rate borrowings was estimated to reduce 2019 net income and cash flow by approximately $0.6 million.
- Unusual items affecting results included the $1.4 million legal settlement, environmental estimates and accretion, impairments, gains on property dispositions, and non-cash revenue recognition adjustments.
- Management reported effective disclosure controls as of June 30, 2019, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Reconcile AFFO growth and dividend coverage, including the treatment of the $1.4 million legal settlement and other adjustments.
- Review tenant concentration, lease guarantees, renewal terms and the financial condition of Global Partners, United Oil and Chestnut Petroleum.
- Assess the adequacy and sensitivity of the $58.8 million environmental liability accrual and the potential effect of pending environmental litigation.
- Review debt covenant headroom, variable-rate exposure and the 2021–2023 maturity schedule.
- Monitor acquisition volume, redevelopment spending, vacancies and the remaining $7.4 million tenant-improvement commitment.
- Confirm the sustainability of the $0.70-per-share semiannual dividend given operating cash flow, debt service, environmental costs and REIT distribution requirements.
- Consider the comparability effects of ASC 842 adoption and the company’s non-GAAP FFO and AFFO definitions.