Getty Realty Corp. — FY2018 Form 10-K Summary
Business context and reporting period
Getty Realty Corp. is a self-managed REIT specializing in owning, leasing and financing convenience store and gasoline station properties. This filing covers the fiscal year ended December 31, 2018; the source does not provide a separate quarterly filing summary for Q4. At year-end, the company owned 859 properties and leased 74 properties from third parties, for a total portfolio of 933 properties across 30 states and Washington, D.C. Substantially all properties are leased under triple-net arrangements.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $136.1 million | $120.2 million | +13.3% |
| Rental property revenue | $116.3 million | $101.3 million | +14.8% |
| Operating income | $68.0 million | $54.3 million | +25.3% |
| Earnings from continuing operations | $48.4 million | $45.0 million | +7.5% |
| Net earnings | $47.7 million | $47.2 million | +1.1% |
| Diluted earnings per share | $1.17 | $1.26 | Down $0.09 |
| FFO | $73.6 million | $74.6 million | -1.3% |
| AFFO | $69.7 million | $62.0 million | +12.3% |
| Diluted AFFO per share | $1.71 | $1.66 | +3.0% |
| Cash flow from operating activities | $63.3 million | $56.7 million | +11.6% |
| Total debt, net | $441.6 million | $379.2 million | +$62.5 million |
| Cash and cash equivalents | $46.9 million | $20.0 million | +$26.9 million |
Operating margin was approximately 50.0%, and net earnings margin was approximately 35.1%. Real estate assets before accumulated depreciation increased to $1.04 billion from $971.0 million. Stockholders’ equity increased to $581.2 million from $553.7 million. Cash dividends declared increased to $1.31 per share from $1.16 per share; cash dividends paid totaled $50.5 million.
Material changes versus the prior comparable period
- Rental revenue growth was primarily driven by $13.4 million of revenue from properties acquired in 2018 and the second half of 2017.
- The company acquired 41 properties for approximately $78.0 million, compared with 103 properties for $214.0 million in 2017. Major 2018 transactions included 30 properties from GPM Investments for $52.6 million and six properties from Applegreen for $17.4 million.
- Operating cash flow increased by $6.6 million, while investing cash use declined to $75.9 million from $206.2 million because acquisition spending decreased substantially.
- Interest expense rose to $22.3 million from $17.8 million because of higher average borrowings and higher average interest rates.
- Other income declined to $2.7 million from $8.5 million. The 2017 amount included $6.4 million of legal settlements and judgments; 2018 primarily reflected $2.6 million of insurance reimbursements.
- Net earnings were broadly stable, but diluted EPS declined because the weighted-average share count increased to 40.2 million from 36.9 million following equity issuance.
- FFO declined slightly, while AFFO increased because 2017 included substantially higher legal settlement income and other non-core items excluded from AFFO.
- The company completed six redevelopment projects that commenced rent in 2018, spent $2.7 million on construction in progress and reimbursed tenants $4.4 million for redevelopment-related capital expenditures.
Debt, liquidity and commitments
At December 31, 2018, total debt principal was $445.0 million, consisting of $120.0 million under the unsecured credit agreement and $325.0 million of senior unsecured notes. Net debt was $441.6 million. The credit agreement includes a $250.0 million revolving facility maturing in March 2022 and a $50.0 million term loan maturing in March 2023. Senior notes mature between 2021 and 2028, with $100.0 million due in 2021 and $125.0 million due in 2022-2023. The company issued $100.0 million of 5.47% notes in 2018.
Management stated that operating needs for the next 12 months could be met through operating cash flow, available credit, ATM equity proceeds and cash on hand. The company reported compliance with material debt covenants at year-end. A 1% increase in market interest rates on the $120.0 million of variable-rate borrowings would reduce estimated 2019 net income and cash flow by approximately $1.2 million.
Total contractual obligations were approximately $650.0 million, including debt principal, interest, leases, environmental remediation expenditures and capital improvement commitments. The company had up to $7.6 million remaining in commitments to fund certain tenant capital improvements.
Outlook, commentary, risks and unusual items
- Management expects to continue pursuing acquisitions, financing opportunities and redevelopment projects, but provided no quantitative earnings, acquisition or dividend guidance.
- Environmental remediation obligations totaled $59.8 million at year-end, including $45.3 million for future liabilities associated with preexisting unknown contamination. Management stated that actual future expenditures could be substantially higher than recorded amounts.
- Environmental and litigation matters include MTBE cases in New Jersey, Pennsylvania and Maryland, Lower Passaic River claims, a New York Uniondale case and other petroleum-contamination proceedings. Litigation accruals totaled $12.2 million, and the company cannot estimate potential losses above accrued amounts with certainty.
- The company believes the New Jersey MTBE litigation will probably be resolved unfavorably, although the timing and amount of any loss remain uncertain.
- Revenue is concentrated among petroleum and convenience-store tenants. Global Partners, United Oil and Chestnut represented 17%, 13% and 11% of 2018 total revenue, respectively.
- The portfolio is geographically concentrated: New York, Massachusetts and Connecticut represented 47.5% of properties. Tenant creditworthiness, petroleum industry volatility, lease renewals, vacancies, interest rates, environmental liabilities and access to capital remain significant risks.
- The company had nine vacant properties and six properties under redevelopment at year-end. It also reported nine properties sold during 2018, generating $3.9 million of gains.
- The company adopted revenue and nonfinancial-asset accounting updates in 2018 without a material impact. It expected adoption of the new lease standard in 2019 to add approximately $22 million to $32 million of operating lease liabilities and right-of-use assets.
- PricewaterhouseCoopers LLP issued an unqualified audit opinion, and management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2018.
Investor verification points
- Reconcile AFFO growth with the company’s non-GAAP adjustments and assess whether excluded environmental, insurance and legal items are recurring in economic substance.
- Review tenant-level credit quality, lease guarantees and exposure to Global, United Oil and Chestnut.
- Evaluate the adequacy and timing of the $59.8 million environmental remediation accrual, including potential recoveries from state funds and insurance.
- Monitor MTBE, Lower Passaic River and Uniondale litigation developments and any losses exceeding recorded accruals.
- Assess refinancing and liquidity requirements for the $100.0 million of notes due in 2021 and the $195.0 million of debt maturing in 2022-2023.
- Verify the effect of future equity issuance under the $125.0 million ATM program on per-share results and dividend coverage.
- Track lease renewals, vacancies, redevelopment costs and the performance of 2018 acquisitions.