Getty Realty Corp. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is an internally managed net-lease REIT focused on acquiring, financing and developing convenience, automotive and other single-tenant retail properties. For the quarter ended March 31, 2023, the portfolio comprised 1,047 properties across 39 states and Washington, D.C.; 1,007 were owned and 40 were leased from third-party landlords. Approximately 1,040 properties were leased under triple-net arrangements, with a weighted-average remaining lease term of 8.8 years excluding renewal options.
The interim financial statements are unaudited and prepared under U.S. GAAP. Getty operates as a single reporting segment and has elected REIT status.
Financial Highlights
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $43.0 million | $39.3 million | +9.4% |
| Rental-property revenues | $42.4 million | $39.0 million | +8.7% |
| Operating income | $21.4 million | $25.2 million | -15.3% |
| Net earnings | $14.1 million | $18.7 million | -24.9% |
| Basic EPS | $0.29 | $0.39 | -25.6% |
| Diluted EPS | $0.28 | $0.39 | -28.2% |
| FFO | $24.4 million | $23.3 million | +5.1% |
| AFFO | $27.2 million | $24.9 million | +9.3% |
| Basic AFFO per share | $0.56 | $0.52 | +7.7% |
Operating margin was approximately 49.6% in Q1 2023 versus 64.1% in Q1 2022. Net margin was approximately 32.7% versus 47.7%. The decline in GAAP profitability primarily reflected materially lower gains on real estate dispositions and higher interest and general and administrative expenses.
- Rental income increased $2.6 million, primarily from 2022 acquisitions, completed redevelopments and contractual rent increases, partly offset by dispositions.
- Interest income on notes and mortgages receivable increased to $0.7 million from $0.3 million.
- General and administrative expense increased $1.2 million, including higher employee-related costs, $0.8 million of non-recurring retirement costs and higher stock-based compensation.
- Interest expense increased $1.0 million to $7.5 million due to higher average borrowings and interest rates.
- Gain on real estate dispositions fell to $0.6 million from $6.2 million; Getty sold three properties in Q1 2023 versus 15 in Q1 2022.
Cash Flow, Liquidity and Capital Structure
| Cash flow or balance | Q1 2023 / March 31, 2023 | Q1 2022 / December 31, 2022 |
|---|---|---|
| Operating cash flow | $22.4 million | $20.8 million |
| Investing cash flow | $(49.9) million | $(7.9) million |
| Financing cash flow | $39.7 million | $19.3 million |
| Cash and cash equivalents | $22.1 million | $8.7 million |
| Total debt, gross | $675.0 million | $695.0 million |
| Total debt, net of issuance costs | $671.3 million | $691.5 million |
| Stockholders’ equity | $836.2 million | $759.9 million |
Investing outflows increased mainly because of $48.1 million of property acquisitions, $16.6 million of notes and mortgage receivable issuances, and additional construction-related investments. Getty invested $60.7 million across 26 properties, including nine acquired properties, four properties under construction accounted for as finance receivables and new construction loans for 13 properties.
As of March 31, 2023, the $300.0 million unsecured revolving facility was undrawn and fully available, subject to covenant compliance. The facility matures in October 2025 and may be extended for two six-month periods. Debt maturities include $50.0 million of senior unsecured notes in 2025 and $625.0 million thereafter. Getty stated that it was in compliance with its material debt covenants.
Getty paid $20.6 million of dividends, or $0.43 per share, during the quarter. It also settled 2.7 million shares under prior forward sale agreements for $83.0 million of net proceeds. Approximately 4.5 million shares remained subject to forward sale agreements, expected to generate approximately $146.9 million of gross proceeds upon settlement, including the February 2023 offering.
Material Changes Versus the Prior Comparable Period
- Revenue grew 9.4%, while net earnings declined 24.9% because the prior-year period benefited from substantially higher property-disposition gains.
- FFO and AFFO increased despite lower GAAP earnings, reflecting growth in recurring rental income and the exclusion of real estate depreciation and disposition gains from these non-GAAP measures.
- Acquisition and construction investment increased substantially, with $60.7 million invested versus $8.8 million in Q1 2022.
- Gross debt decreased $20.0 million. Getty issued $125.0 million of senior notes, including new 3.65% notes due 2033, and repaid $75.0 million of notes and $70.0 million of revolving borrowings during the quarter.
- Shares outstanding increased to 49.5 million from 46.7 million at year-end 2022, primarily due to settlement of forward equity agreements.
- Prospective environmental remediation obligations decreased modestly to $23.0 million from $23.2 million at December 31, 2022.
Outlook, Commentary, Risks and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Getty expects short-term liquidity needs to be funded through operating cash flow, available revolver capacity, cash, forward equity settlements and asset sales. Longer-term funding sources may include additional equity or debt issuance, operating cash flow and real estate dispositions.
- Tenant concentration remains material: ARKO represented 16.0% of revenue, Global Partners 15.0% and APRO/United Oil 10.0% for Q1 2023.
- Tenant performance is tied substantially to convenience retail, petroleum marketing and automotive services, which are competitive and variable industries.
- Environmental obligations are a significant contingency. The company accrued $23.0 million for prospective remediation liabilities but stated that actual future expenditures could be substantially higher. It remains contingently liable if tenants fail to satisfy environmental obligations.
- The Lower Passaic River proceedings involve a proposed $150.0 million collective settlement with the EPA. Getty’s contribution is confidential and was transferred to escrow based on established reserves. Court approval of the consent decree remained pending; if approval fails, ultimate liability remains uncertain.
- Getty continues to defend MTBE litigation brought by Pennsylvania and Maryland. The filing states that potential liability is uncertain and cannot currently be predicted.
- Q1 included $0.5 million of impairment charges, a $43,000 loss on extinguishment of debt and $0.8 million of non-recurring retirement-related employee costs.
- Interest-rate risk is concentrated in the revolver; no variable-rate borrowings were outstanding at March 31, 2023. The company remains exposed to refinancing, tenant credit, lease renewal, real estate valuation, inflation and capital-market risks.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the increase in recurring rental revenue and AFFO with the decline in GAAP net earnings and operating margin.
- Review the terms, settlement timing and dilution implications of the February 2023 forward equity offering and remaining forward sale agreements.
- Assess leverage, debt maturities, interest-rate exposure and compliance with financial covenants, particularly the $50.0 million 2025 maturity.
- Evaluate tenant concentration and the financial condition of ARKO, Global Partners and APRO/United Oil.
- Monitor approval and implementation of the Lower Passaic River consent decree and developments in the Pennsylvania and Maryland MTBE litigation.
- Compare future environmental remediation spending with the $23.0 million accrued liability and $25.0 million aggregate limit on the newer pollution liability insurance policy.
- Confirm that dividend coverage remains adequate under applicable REIT distribution requirements and debt agreements.