Getty Realty Corp. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Getty Realty Corp. is a publicly traded REIT focused on owning, leasing and financing convenience store and gasoline station properties. As of September 30, 2018, it owned 861 properties and leased 77 properties from third-party landlords, for a total portfolio of 938 properties across 30 states and Washington, D.C. The filing covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $34.7 million, versus $29.5 million in 2017 | $101.1 million, versus $86.2 million in 2017 |
| Operating income | $17.2 million, versus $12.7 million | $47.3 million, versus $39.1 million |
| Net earnings | $10.9 million, versus $9.3 million | $34.5 million, versus $34.2 million |
| Net earnings per share | $0.27, versus $0.24 | $0.85, versus $0.94 |
| Funds from operations | $17.9 million, versus $16.2 million | $53.3 million, versus $54.3 million |
| Adjusted funds from operations | $17.9 million, versus $15.7 million | $52.1 million, versus $44.7 million |
| Dividends declared per share | $0.32, versus $0.28 | $0.96, versus $0.84 |
Rental property revenue increased 18.7% for the quarter and 18.7% for the nine-month period, primarily from properties acquired in 2018 and the second half of 2017. Operating margins were approximately 49.5% for the quarter and 46.8% for the nine months, compared with approximately 43.2% and 45.4%, respectively, in the prior-year periods.
At September 30, 2018, total assets were $1.13 billion, including $891.4 million of net real estate. Cash and cash equivalents were $18.6 million, with restricted cash of $1.4 million. Stockholders’ equity was $572.2 million.
Net cash provided by operating activities was $46.5 million for the first nine months of 2018, compared with $40.2 million in 2017. Investing activities used $71.5 million, including $74.7 million for property acquisitions. Financing activities provided $24.2 million. Cash, cash equivalents and restricted cash declined by $0.8 million during the period to $20.0 million.
Debt and liquidity
Total debt was $425.0 million gross and $421.4 million net of issuance costs at September 30, 2018, compared with $380.0 million gross and $379.2 million net at December 31, 2017. Debt consisted of $100.0 million under the credit agreement and $325.0 million of senior unsecured notes.
- The revolving facility capacity was increased to $250.0 million and its maturity extended to March 2022; the $50.0 million term loan matures in March 2023.
- The company issued $100.0 million of 5.47% senior notes due 2028, consisting of $50.0 million Series D Notes and $50.0 million Series E Notes.
- Scheduled debt maturities include $100.0 million in 2021, $50.0 million in 2022 and $275.0 million thereafter.
- The company reported compliance with all material debt covenants at September 30, 2018.
- Management stated that the next twelve months’ operating needs are expected to be funded by operating cash flow, available credit, ATM equity proceeds and available cash.
Material changes versus the prior comparable period
- Revenue increased primarily because of acquisitions, while interest expense rose from $12.7 million to $16.4 million for the nine-month period due to higher average borrowings and interest rates.
- Net earnings were broadly stable for the nine months, but earnings per share declined because 2017 benefited from $2.4 million of discontinued-operation earnings, compared with a $0.5 million loss in 2018, and the weighted-average share count increased.
- Adjusted FFO increased 16.5% for the nine months, while FFO declined 2.0%, reflecting the effects of environmental estimates, insurance reimbursements, dispositions and other adjustments.
- Property acquisitions declined to $74.7 million for 39 properties from $143.9 million for 64 properties in 2017.
- The company issued 785,000 shares under its new ATM program for net proceeds of $20.7 million during the first nine months of 2018.
- Environmental expense increased to $3.9 million from $0.9 million, while impairment charges declined to $4.0 million from $6.5 million in continuing operations.
Guidance, outlook, risks and unusual items
No formal earnings guidance was provided. Management intends to continue pursuing acquisitions, redevelopment and alternative uses for selected properties. During the first nine months, the company acquired 39 properties, spent $2.1 million on construction-in-progress and had nine properties under active redevelopment. It also had four additional leased properties identified for possible future recapture and redevelopment.
Environmental remediation remains a significant contingency. The company accrued $60.9 million for prospective environmental remediation obligations at September 30, 2018, including $45.1 million for future liabilities related to preexisting unknown contamination. Management stated that actual future expenditures could be substantially higher than recorded amounts.
The company also accrued $12.3 million for certain legal matters. Material litigation and potential exposure include the Lower Passaic River matter, MTBE litigation in New Jersey, Pennsylvania and Maryland, and litigation concerning a former Uniondale, New York property. The filing states that losses exceeding recorded accruals could materially affect financial condition, liquidity, dividends or stock price; ranges of additional loss generally could not be estimated.
Tenant concentration and industry exposure are notable: Global Partners represented 18% of nine-month revenue, United Oil 13% and Chestnut Petroleum 11%. Tenant performance depends substantially on petroleum marketing and convenience-store activity. The company also remains contingently liable for certain environmental obligations if tenants or other counterparties do not perform.
The company plans to adopt the new lease standard on January 1, 2019. It expects limited impact as a lessor but expects to recognize lease liabilities and right-of-use assets for leases where it is a lessee. A 1% increase in market interest rates on the $100.0 million of variable-rate borrowings outstanding was estimated to reduce 2018 net income and cash flow by approximately $0.3 million.
Important facts for investors to verify
- Whether acquisition-driven revenue growth translates into sustained AFFO growth after higher interest expense and increased share issuance.
- The timing and refinancing plans for the $100.0 million 2021 maturity and $50.0 million 2022 revolving-facility maturity.
- Compliance with leverage, coverage, tangible-net-worth and dividend-related debt covenants.
- Actual environmental remediation spending and whether the $60.9 million accrual adequately reflects future costs.
- Potential liability and settlement developments in the Lower Passaic River, MTBE and Uniondale litigation matters.
- Credit quality and revenue concentration among Global Partners, United Oil and Chestnut Petroleum.
- The effect of the January 1, 2019 lease-accounting adoption, redevelopment spending and future ATM equity issuance.