Getty Realty Corp. — 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a REIT specializing in owning, leasing and financing convenience-store and gasoline-station properties. As of September 30, 2016, it owned or leased 835 properties across 23 states and Washington, D.C.; 800 properties were leased under long-term triple-net leases and 35 were transitional properties being repositioned for sale, redevelopment or re-leasing. The filing covers the three and nine months ended September 30, 2016, with unaudited GAAP financial statements.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | Nine Months 2016 | Nine Months 2015 |
|---|---|---|---|---|
| Total revenues | $28.5 million | $30.0 million | $85.5 million | $80.9 million |
| Operating income | $12.7 million | $11.2 million | $36.4 million | $21.3 million |
| Net earnings | $8.8 million | $7.0 million | $30.1 million | $17.5 million |
| Net earnings per share | $0.26 | $0.21 | $0.88 | $0.52 |
| FFO | $16.2 million | $14.2 million | $46.3 million | $43.2 million |
| AFFO | $15.4 million | $12.8 million | $43.0 million | $42.4 million |
| AFFO per share | $0.45 | $0.38 | $1.26 | $1.25 |
| Cash flow from operations | Not separately provided | Not separately provided | $33.0 million | $34.4 million |
Approximate net margin was 30.9% in the quarter and 35.2% for the nine months. Approximate operating margin was 44.7% in the quarter and 42.5% for the nine months. These margins are affected by depreciation, impairments, gains on dispositions and other nonrecurring items.
- Cash and cash equivalents were $10.2 million at September 30, 2016, versus $3.9 million at December 31, 2015.
- Total assets were $871.1 million, compared with $896.9 million at year-end 2015. Real estate, net, was $661.4 million.
- Debt carrying values were $123.6 million under the credit agreement and $174.7 million of senior unsecured notes; the mortgage payable was eliminated. Gross stated debt was $300.0 million.
- Credit Agreement borrowings totaled $125.0 million, consisting of $75.0 million drawn on the revolving facility and a $50.0 million term loan. Approximately $100.0 million of revolving capacity remained before considering covenant or other borrowing limitations.
- Senior unsecured notes consisted of $100.0 million of Series A Notes due February 2021 at 6.0% and $75.0 million of Series B Notes due June 2023 at 5.35%.
- Shareholders’ equity increased to $419.8 million from $406.6 million at December 31, 2015.
- Dividends paid during the first nine months totaled $33.0 million, or $0.97 per share, including regular and special dividends.
Material Changes Versus the Prior Comparable Period
- Nine-month total revenue increased $4.6 million, or approximately 5.7%, primarily because of a full-period contribution from the 77-property United Oil acquisition completed in June 2015. Nine-month rental-property revenue increased $5.5 million to $72.9 million.
- Third-quarter revenue declined $1.5 million, primarily because of lower tenant reimbursements and lower noncash revenue-recognition adjustments. Contractual rent due or received was $23.5 million in both quarters.
- Operating income increased $15.1 million for the nine months, supported by higher rental revenue, lower property, environmental and general and administrative expenses, and lower impairments.
- Nine-month net earnings increased $12.6 million. The comparison benefited from a $3.9 million deferred gain recognized after repayment of the Ramoco seller-financing mortgage and from a $7.5 million reduction in other income in the prior-year period related largely to Marketing Estate distributions.
- Impairments declined to $6.8 million for the nine months from $15.3 million in the prior-year period; third-quarter impairments declined to $2.0 million from $4.5 million.
- FFO increased 7.3% for the nine months, while AFFO increased 1.6%. Third-quarter FFO and AFFO increased approximately 14.2% and 20.5%, respectively.
- Operating cash flow decreased modestly to $33.0 million from $34.4 million. Investing cash flow was positive $17.9 million versus negative $209.7 million in 2015, when the United Oil acquisition required substantial funding. Financing cash flow was negative $44.6 million versus positive $175.9 million in 2015, reflecting debt repayments and dividends.
- Credit Agreement borrowings declined by $19.0 million from December 31, 2015, while senior unsecured notes remained at $175.0 million.
Guidance, Outlook, Risks and Unusual Items
- The company stated that it expects operating cash needs for the next twelve months to be met through operating cash flow, available credit capacity and cash on hand. No formal earnings or revenue guidance was provided.
- Management continues to pursue acquisitions, redevelopment and alternative uses for selected properties. Third-quarter acquisitions totaled $1.9 million, comprising a leasehold interest and adjacent land. The company had up to $10.8 million of remaining commitments to fund certain tenant capital improvements.
- Environmental remediation remains a significant exposure. The environmental remediation liability was $78.5 million at September 30, 2016, including $44.8 million for future liabilities related to preexisting unknown contamination. Management states that actual future expenditures could be substantially higher than accrued amounts.
- Environmental obligations and estimates contributed to impairment charges and are subject to changes in contamination findings, regulatory requirements, remediation methods, recovery from state UST funds and tenant ability to perform.
- The company was defending New Jersey and Pennsylvania MTBE litigation and remained exposed to Lower Passaic River claims. The EPA selected a remedy for the lower eight miles of the river with an estimated cost of $1.38 billion, but Getty’s ultimate liability was described as uncertain. The filing states that New Jersey MTBE litigation will probably be resolved unfavorably, although the company could not estimate losses exceeding accrued amounts.
- Accrued litigation liabilities were $11.8 million at September 30, 2016. The company had also accrued $78.5 million for environmental remediation obligations.
- Substantially all tenants depend on petroleum marketing and convenience-store activity. Tenant concentration was material: Global Partners represented 21% of nine-month revenue, Chestnut Petroleum 14% and United Oil 15%.
- The company had 26 vacant transitional properties and six properties under month-to-month licenses, for which it remains responsible for certain operating, environmental and compliance costs until disposition or re-leasing.
- Interest-rate exposure is concentrated in the $125.0 million of floating-rate credit-agreement borrowings. Management estimated that a 0.50% increase in market rates would reduce 2016 net income and cash flow by approximately $0.2 million.
- The company established a $125.0 million ATM equity program and issued 145,000 shares for net proceeds of $2.9 million through September 30, 2016. Future issuance could dilute shareholders.
- The company reported compliance with material debt covenants and stated that no significant subsequent events occurred through the financial-statement issuance date.
Important Facts for Investors to Verify
- Reconcile AFFO growth with the relatively limited nine-month increase, including the effects of environmental credits, revenue-recognition adjustments and acquisition-related items.
- Assess the sustainability of rental income and tenant credit quality, particularly the concentration in Global Partners, Chestnut Petroleum and United Oil.
- Review debt maturities, floating-rate exposure, covenant headroom and the June 2018 revolving-facility maturity.
- Evaluate whether the $78.5 million environmental accrual adequately reflects potential remediation, UST retirement and litigation exposure.
- Monitor the Lower Passaic River and MTBE proceedings, insurance recoveries, indemnification claims and potential losses beyond recorded accruals.
- Track the ability to sell, re-lease or redevelop the 35 transitional properties without materially reducing cash flow or dividends.
- Confirm dividend coverage from recurring AFFO and operating cash flow, recognizing that debt agreements and future cash requirements may limit distributions.