GETTY REALTY CORP quarterly report, Q1 FY2019

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Getty Realty Corp. — Q1 2019 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 March 31, 2019, it owned 859 properties and leased 73 properties from third-party landlords across 30 states and Washington, D.C. The filing covers the unaudited three months ended March 31, 2019, compared with the same period in 2018.

Financial Performance and Position

  • Total revenue: $34.0 million, up from $32.1 million; rental-property revenue increased to $33.3 million from $31.4 million, primarily reflecting 2018 acquisitions and contractual rent increases.
  • Operating income: $16.7 million, compared with $14.7 million. Operating margin was approximately 49.0%, versus 45.8% in the prior-year quarter.
  • Net earnings: $10.9 million, compared with $10.0 million. Basic and diluted earnings per share were $0.26, compared with $0.25.
  • Funds from operations: $17.8 million in both periods. Adjusted funds from operations increased to $17.5 million from $16.8 million; AFFO per share remained $0.42.
  • Operating cash flow: $14.7 million, down from $17.3 million. Investing activities provided $2.3 million, while financing activities used $44.6 million.
  • Dividends: $0.35 per share was declared and approximately $14.5 million was paid during the quarter, compared with $0.32 per share and $12.8 million paid in the prior-year period.
  • Liquidity: Cash and cash equivalents were $19.1 million at March 31, 2019, compared with $46.9 million at December 31, 2018; cash, cash equivalents and restricted cash totaled $21.1 million at quarter-end.
  • Debt: Total debt was $415.0 million, or $411.9 million net of issuance costs, down from $445.0 million and $441.6 million, respectively, at December 31, 2018. The company repaid $35.0 million under its credit agreement and drew $5.0 million during the quarter.
  • Balance sheet: Total assets were $1.15 billion and stockholders’ equity was $578.2 million at March 31, 2019.

Material Changes Versus the Prior Comparable Period

  • Revenue increased 6.0%, while net earnings increased 8.9%.
  • Property costs increased to $5.5 million from $4.9 million, and general and administrative expense increased to $4.0 million from $3.6 million, including $0.3 million of non-recurring employee retirement costs.
  • Impairment charges declined to $0.8 million from $2.8 million. Approximately $0.7 million of the 2019 impairment charge resulted from increased asset retirement costs associated with revised environmental liability estimates.
  • Interest expense increased to $5.9 million from $5.1 million due to higher average borrowings and interest rates.
  • Operating cash flow declined by $2.6 million, principally because of changes in working capital and operating items.
  • No property acquisitions occurred during the quarter. One redevelopment project commenced rent, seven properties remained under active redevelopment, and redevelopment spending was approximately $0.2 million.
  • The company adopted ASC 842 lease accounting on January 1, 2019. The adoption added $25.8 million of lease-related assets and $29.8 million of lease liabilities at March 31, 2019, with no impact on the income statement.

Guidance, Outlook, Commentary, Risks and Unusual Items

  • No quantitative earnings, revenue or acquisition guidance was provided. Management stated that it expects next-twelve-month operating needs to be met through operating cash flow, available credit, potential ATM equity proceeds and cash on hand.
  • Management intends to continue pursuing acquisitions, financing opportunities and redevelopment of selected properties, but there were no acquisitions in the quarter.
  • Environmental remediation obligations totaled $59.3 million at March 31, 2019, including $45.3 million for future liabilities related to preexisting unknown contamination. Management noted that actual future expenditures could be substantially higher than accrued amounts.
  • Environmental and litigation matters include the Lower Passaic River proceedings, MTBE litigation in New Jersey, Pennsylvania and Maryland, and Uniondale, New York litigation. Accrued liabilities for certain legal matters totaled $12.2 million. The filing states that losses exceeding accrued amounts could materially affect financial condition, liquidity, dividends and stock price.
  • Tenant concentration is material: Global Partners represented 17% of quarterly revenue, United Oil represented 13%, and Chestnut Petroleum represented 11%.
  • The company has a remaining commitment of up to $7.5 million for certain tenant capital improvements and remains contingently liable for some environmental obligations assigned contractually to tenants.
  • All material debt covenants were reported as satisfied. Debt maturities include $100.0 million of senior notes in 2021, $40.0 million under the revolving facility in 2022, and $125.0 million in 2023.
  • A 1.0% increase in market interest rates applied to $90.0 million of variable-rate borrowings would reduce estimated 2019 net income and cash flow by approximately $0.7 million.

Important Facts for Investors to Verify

  • Whether tenant concentration and exposure to petroleum and convenience-store markets affect rent collections and lease renewals.
  • The ultimate cost and timing of environmental remediation and pending litigation, particularly the Lower Passaic River and MTBE matters.
  • Cash-flow coverage of the $0.35 quarterly dividend after debt service, environmental spending and redevelopment costs.
  • Refinancing plans for the $100.0 million 2021 maturity and subsequent 2022–2023 maturities.
  • Progress, costs, lease-up and returns from the seven active redevelopment projects.
  • Whether future acquisitions, equity issuance under the $125.0 million ATM program or additional borrowings will be required to fund growth and liquidity.