Getty Realty Corp. 2012 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2012, filed March 18, 2013. Getty Realty is a REIT focused on owning, leasing and financing retail motor-fuel, convenience-store, automotive-service and petroleum-terminal properties. At year-end, it owned 946 properties and leased 135 properties across 21 states, with concentrations in the Northeast and Mid-Atlantic.
The central 2012 business event was the rejection of the Getty Petroleum Marketing, Inc. master lease in bankruptcy, effective April 30, 2012. More than 700 year-end properties had previously been subject to that lease, requiring significant repositioning, re-leasing, sales and direct operating expenditures.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenues | $102.2 million | $102.9 million | Down $0.8 million |
| Rental-property revenue | $99.3 million | $100.3 million | Down $1.0 million |
| Earnings from continuing operations | $13.8 million | $9.4 million | Up $4.4 million |
| Net earnings | $12.4 million | $12.5 million | Approximately flat |
| Diluted earnings per share | $0.37 | $0.37 | Flat |
| Funds from operations | $33.2 million | $42.1 million | Down $8.9 million |
| Adjusted funds from operations | $28.8 million | $62.7 million | Down $33.9 million |
| Cash flow from operating activities | $15.9 million | $60.8 million | Down $44.9 million |
| Cash and cash equivalents | $16.9 million | $7.7 million | Up $9.2 million |
| Total debt at year-end | $172.3 million | $170.5 million | Up $1.8 million |
| Shareholders’ equity | $372.7 million | $372.2 million | Approximately flat |
Based on reported figures, operating income was approximately 22.7% of revenue, earnings from continuing operations approximately 13.5%, and net earnings approximately 12.2%. These are calculated GAAP ratios and are affected by unusual items and discontinued operations.
Rental-property expenses increased to $30.2 million from $16.0 million, while general and administrative expenses increased to $29.1 million from $22.1 million. Interest expense increased to $9.9 million from $5.1 million. Non-cash impairment charges totaled $13.9 million, including $6.3 million in continuing operations. Environmental remediation obligations were $46.2 million at year-end, compared with $57.7 million in 2011.
Material Changes Versus the Prior Comparable Period
- Getty entered into ten long-term triple-net leases covering 443 properties previously leased to Marketing. The leases generally have 15-year initial terms, renewal options and rent escalations.
- Approximately 155 previously leased operating properties remained under month-to-month licenses and interim fuel-supply arrangements; approximately 60 properties were vacant or being marketed for sale.
- Getty sold 54 properties for aggregate proceeds of $15.4 million in 2012, compared with 10 property dispositions in 2011. Approximately 111 properties were classified as discontinued operations or held for sale.
- 2012 revenue from Marketing under the former master lease declined to approximately $20.1 million from $52.6 million in 2011, while revenue from other tenants rose to approximately $73.0 million from $45.5 million.
- Operating cash flow declined sharply because of increased direct property costs, bankruptcy-related expenses, accounts receivable activity and environmental expenditures.
- FFO declined because of lower earnings and the loss of the former master-lease economics. AFFO declined substantially, primarily because 2011 included a large non-cash deferred-rent allowance adjustment and 2012 included higher revenue-recognition and repositioning effects.
- The quarterly pattern remained volatile. Fourth-quarter 2012 net earnings were $5.8 million, compared with a fourth-quarter 2011 net loss of $19.5 million; fourth-quarter 2012 continuing-operations earnings were $4.4 million, compared with a $16.5 million loss in the prior-year quarter.
Debt, Liquidity and Capital Allocation
At December 31, 2012, debt consisted of $150.3 million under a revolving credit agreement and $22.0 million under a term loan. Both instruments were scheduled to mature in March 2013. On February 25, 2013, Getty repaid and terminated those facilities and entered into a $175 million senior secured credit agreement maturing in August 2015, with a one-year extension option, and a $100 million senior secured loan maturing in February 2021 at a fixed 6.00% rate.
Management stated that expected operating needs for the following twelve months could be met through operating cash flow, credit-facility availability and cash on hand. The new debt agreements contain leverage, loan-to-value, coverage and minimum-net-worth covenants, as well as restrictions on dividends and additional debt.
Property acquisitions and capital expenditures were $4.1 million in 2012, compared with $167.5 million in 2011. Getty committed to co-invest up to $14.1 million in capital improvements for certain newly leased properties. Cash dividends paid fell to $8.4 million from $63.4 million; the quarterly dividend was reduced to $0.125 per share in mid-2012 and increased to $0.20 per share in February 2013.
Outlook, Commentary, Risks and Unusual Items
- Management expected repositioning, legal and litigation costs to remain elevated in 2013 and expected net revenue from the former Marketing portfolio to remain below historical master-lease levels.
- Getty expected to continue leasing, selling or otherwise repositioning remaining properties, but provided no specific earnings, revenue or disposition guidance and could not predict the timing or terms of future transactions.
- Getty had an unpaid administrative claim against Marketing of approximately $7.4 million, subject to a $10.5 million cap, and had recorded a $3.0 million receivable related to funding litigation against Lukoil and reimbursable legal fees. Recovery of these amounts is uncertain.
- Getty advanced $1.7 million under the litigation funding agreement in the fourth quarter of 2012 and could be required to advance additional amounts.
- Marketing-related bad-debt reserves for unpaid rent and real estate taxes aggregated approximately $22.8 million at year-end. Collection from the Marketing bankruptcy estate is not assured.
- Environmental obligations remain a significant contingency. The company stated that actual future costs could substantially exceed accrued amounts. Key matters include underground storage tanks, remediation, MTBE litigation and potential liabilities related to the Lower Passaic River.
- Getty had accrued $3.6 million for certain litigation matters at year-end, but could not estimate losses above accrued amounts with certainty.
- Revenue concentration is material: CPD NY Energy Corp. and affiliates represented 18% of rental-property revenue in 2012, compared with 12% in 2011. Tenant performance is substantially dependent on the volatile petroleum-marketing industry.
- Getty remains subject to floating-rate debt exposure. Management estimated that a 0.50 percentage-point increase in market rates would reduce 2013 net income and cash flow by approximately $0.3 million based on projected floating-rate borrowings of approximately $72 million.
Important Facts for Investors to Verify
- Progress, occupancy and economics of the remaining Marketing-portfolio repositioning, including the approximately 155 licensed properties and vacant or held-for-sale locations.
- Actual cash costs for property expenditures, capital improvements, environmental remediation and eviction proceedings versus accrued or estimated amounts.
- Collections from Marketing’s administrative claim, other bankruptcy claims and the Lukoil litigation funding receivable.
- Compliance with the new credit and Prudential loan covenants, available borrowing capacity and refinancing requirements.
- Sustainability of the $0.20-per-share quarterly dividend in light of operating cash flow, REIT distribution requirements and debt restrictions.
- Tenant concentration and credit quality, particularly CPD and other petroleum-sector tenants.
- Reconciliation of GAAP earnings, FFO and AFFO, recognizing that FFO and AFFO are non-GAAP measures and do not represent operating cash flow or liquidity.