Getty Realty Corp. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Getty Realty is a REIT specializing in owning, leasing and financing convenience-store and gasoline-station properties. As of June 30, 2016, it owned 745 properties and leased 92 properties from third-party landlords, totaling 837 properties across 23 states and Washington, D.C. The filing covers the three and six months ended June 30, 2016, with unaudited GAAP financial statements.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $28.6 million, versus $26.2 million | $57.0 million, versus $51.0 million |
| Operating income | $12.2 million, versus $7.5 million | $23.7 million, versus $10.0 million |
| Net earnings | $13.6 million, or $0.40 per share | $21.3 million, or $0.62 per share |
| Funds from operations | $16.0 million, or $0.47 per share | $30.1 million, or $0.88 per share |
| Adjusted funds from operations | $14.5 million, or $0.42 per share | $27.6 million, or $0.81 per share |
| Operating cash flow | Not separately provided for the quarter | $19.0 million, versus $23.6 million |
Operating margins were approximately 42.7% for the quarter and 41.5% for the six months, based on reported operating income and total revenues. Net margins were approximately 47.5% and 37.3%, respectively, but were affected by gains on dispositions and other unusual items.
At June 30, 2016, total assets were $873.7 million and shareholders’ equity was $416.1 million. Cash and cash equivalents were $6.8 million, compared with $3.9 million at December 31, 2015. Net cash provided by investing activities was $18.8 million, primarily reflecting $16.7 million of collections on notes and mortgages receivable and $1.6 million of disposition proceeds.
Total debt, net of issuance costs, was approximately $302.5 million, consisting of $127.5 million under the credit agreement, $174.7 million of senior unsecured notes and $0.3 million of mortgage debt. Credit-agreement borrowings were $129.0 million at face value, including $79.0 million under the revolving facility and $50.0 million under the term loan. The company reported compliance with material debt covenants.
Material changes versus the prior comparable period
- Revenue increased 9.0% for the quarter and 11.9% for the six months, primarily from the 77-property United Oil acquisition completed in June 2015. Management attributed approximately $3.0 million of quarterly and $7.5 million of six-month revenue to those properties.
- Net earnings increased 16.9% for the quarter and 103.0% for the six months. The comparison benefited from a $3.9 million deferred gain recognized after Ramoco affiliates repaid seller financing in April 2016.
- Other income declined to $0.8 million from $7.4 million in both comparable periods because the 2015 periods included distributions from the Marketing Estate. No further Marketing Estate distributions are expected.
- Interest expense increased to $4.2 million for the quarter and $8.4 million for the six months, reflecting higher average borrowings associated with the United Oil acquisition.
- Six-month operating cash flow declined $4.6 million to $19.0 million, while financing activities used $34.9 million, including $15.0 million of net credit-agreement repayments and $19.7 million of cash dividends.
- FFO increased to $30.1 million for the six months, but AFFO declined to $27.6 million from $29.6 million. Quarterly FFO and AFFO declined to $16.0 million and $14.5 million, respectively.
- Non-cash impairment charges declined to $4.8 million for the six months from $10.8 million. The company completed one redevelopment project and transferred $1.0 million of construction-in-progress to buildings and improvements.
Guidance, outlook, risks and unusual items
The filing does not provide specific earnings or revenue guidance. Management expects operating needs for the next twelve months to be met through operating cash flow, available borrowings under the credit agreement and cash on hand. The company continues to pursue acquisitions, redevelopment, alternative uses for transitional properties and the sale, re-leasing or redevelopment of 38 transitional properties.
The company paid $24.4 million of dividends during the first six months, or $0.72 per share, including regular dividends of $0.50 per share and a special cash and stock dividend of $0.22 per share. Future dividends are not assured and are subject to cash flow, market conditions, financial condition and debt-covenant compliance. In June 2016, the company established a $125 million at-the-market equity program and issued 23,000 shares for net proceeds of approximately $0.5 million during the quarter.
Environmental obligations were $81.1 million at June 30, 2016, including $46.0 million for future liabilities related to preexisting unknown contamination. The company states that actual costs could be substantially higher than recorded amounts. It also remains contingently liable for certain environmental obligations allocated contractually to tenants.
Material litigation and environmental risks include the Lower Passaic River matter and MTBE litigation in New Jersey and Pennsylvania. Litigation accruals were $11.8 million at June 30, 2016. The company believes the New Jersey MTBE litigation will probably be resolved unfavorably but cannot estimate losses above accrued amounts with certainty. The EPA selected an estimated $1.38 billion remedy for the lower eight miles of the Lower Passaic River, but the company’s ultimate responsibility remains uncertain.
Other risks include tenant concentration and creditworthiness, dependence on the petroleum marketing industry, interest-rate exposure, environmental remediation, transitional-property costs, refinancing needs, impairment estimates, litigation, and the ability to maintain REIT status and fund required distributions. A 0.50% increase in market rates was estimated to reduce 2016 net income and cash flow by approximately $0.3 million based on floating-rate borrowings outstanding at June 30.
Important facts for investors to verify
- Reconcile reported net earnings, FFO and AFFO to determine the recurring contribution from the United Oil portfolio and the impact of the Ramoco deferred gain.
- Assess tenant concentration: Global Partners, Chestnut Petroleum and United Oil represented 21%, 19% and 15%, respectively, of six-month 2016 revenue.
- Review the $81.1 million environmental liability, the $11.8 million litigation accrual and potential exposure beyond recorded amounts.
- Evaluate debt maturities and refinancing risk: $79.0 million revolving debt matures in June 2018, followed by the $50.0 million term loan in 2020 and senior notes maturing in 2021 and 2023.
- Monitor liquidity after dividends, environmental spending and the $11.3 million remaining commitment for tenant capital improvements.
- Review the valuation assumptions supporting real-estate impairments and transitional-property dispositions, which use largely unobservable Level 3 inputs.
- Confirm the sustainability of dividends and the potential dilution or funding implications of the $125 million ATM equity program.