Getty Realty Corp. 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014; unaudited interim GAAP results. Getty Realty is a REIT focused on owning, leasing and financing retail motor-fuel and convenience-store properties. At September 30, 2014, it owned 776 properties, leased 112 properties from third-party landlords, and operated a portfolio of 888 properties across 20 states and Washington, D.C.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenues | $24.8 million | $28.5 million | $74.2 million | $75.7 million |
| Revenues from rental properties | $24.0 million | $24.7 million | $71.9 million | $70.1 million |
| Operating income | $10.0 million | $16.7 million | $29.3 million | $35.2 million |
| Operating margin | 40.2% | 58.6% | 39.5% | 46.5% |
| Net earnings | $10.2 million | $41.9 million | $26.5 million | $65.0 million |
| EPS, basic and diluted | $0.30 | $1.25 | $0.79 | $1.94 |
| FFO | $12.4 million | $20.6 million | $32.6 million | $40.6 million |
| AFFO | $11.5 million | $18.5 million | $29.6 million | $36.7 million |
| AFFO per share | $0.34 | $0.55 | $0.88 | $1.09 |
Cash flow: Nine-month operating cash flow was $22.4 million, down from $38.8 million. Investing activities provided $26.9 million versus using $21.6 million in the prior-year period, primarily because 2014 had lower acquisition spending and more proceeds from dispositions and returned escrowed funds. Financing activities used $52.9 million, including $31.0 million of net credit-line repayments and $21.9 million of dividends. Ending cash was $8.4 million versus $12.0 million at December 31, 2013.
Balance sheet and debt: Total assets were $651.2 million versus $682.4 million at year-end 2013. Borrowings consisted of $27.0 million under the revolving credit facility, a $100.0 million term loan, and $0.3 million of mortgage debt. Total borrowings were approximately $127.3 million, down from approximately $158.0 million at year-end. Shareholders’ equity was $422.0 million.
The revolving credit agreement has a $175.0 million commitment, including a $150.0 million revolving facility and a $25.0 million term-loan allocation, and matures in August 2015, with a potential one-year extension. The company also has a $100.0 million senior secured Prudential term loan maturing in February 2021 at a fixed 6.00% rate. The revolver balance bore interest at approximately 2.7% at September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Q3 total revenue declined 13.0%, largely because Q3 2013 included $3.1 million of unusual revenue from the partial recovery of damages related to the former Getty Petroleum Marketing master lease.
- Nine-month rental-property revenue increased 2.5%, reflecting the 2013 Capitol acquisition and other leasing activity, despite lower non-cash revenue-recognition adjustments and lower reimbursable pass-through expenses.
- Operating expenses declined in both periods, particularly rental-property expenses, environmental expenses and general and administrative costs. However, operating income and margins declined because the prior-year periods benefited from unusual recoveries and other items.
- Net earnings, FFO and AFFO declined materially because 2013 included substantially larger gains on property dispositions and recoveries associated with the Marketing bankruptcy and Lukoil settlement.
- Allowance expense increased in 2014. The company recorded a $1.6 million allowance against deferred rent related to NECG and increased bad-debt reserves associated with the NECG lease.
- The company sold 71 properties during the first nine months for an aggregate $25.4 million and sold 12 additional transitional properties after quarter-end for $3.6 million. It acquired seven properties for approximately $6.8 million during the nine-month period.
Outlook, Commentary, Risks and Unusual Items
Outlook: Management stated that operating needs for the next 12 months are expected to be met through operating cash flow, available cash and borrowings under the Credit Agreement. No quantitative earnings, revenue or acquisition guidance was provided.
- The company continues to reposition 132 transitional properties, including vacant properties, month-to-month license properties and properties formerly leased to Getty Petroleum Marketing. Transitional-property expenditures exceeded licensing revenue by approximately $2.7 million in the first nine months of 2014.
- Getty expects to pursue acquisitions, dispositions, new leases and lease modifications, but the timing and terms of such transactions are uncertain.
- Chestnut-related tenants represented 20% of nine-month rental revenue, while Capitol-related tenants represented 17%. Tenant concentration and limited public credit information increase counterparty risk.
- NECG eviction proceedings remained active at eight locations. Management anticipated a favorable resolution in 2015, but the ultimate outcome and lease-modification discussions were uncertain.
- Environmental remediation obligations were accrued at $42.3 million at September 30, 2014. Management expects potentially significant additional remediation costs related to underground storage tanks, but the amount and timing could not be estimated and no additional amount was accrued.
- Pending environmental and MTBE litigation includes New Jersey proceedings for which plaintiffs had indicated an approximately $24 million settlement demand against Getty, as well as Pennsylvania litigation with uncertain exposure. The company stated that losses could exceed recorded accruals and materially affect liquidity, dividends and results.
- The company recorded $6.6 million of non-cash impairment charges for the first nine months, including amounts related to property values and increased environmental liabilities.
- Getty early adopted the new discontinued-operations guidance effective July 1, 2014, changing the classification of certain disposals and making comparisons with prior periods less comparable. It also corrected a prior-period classification error and recorded a $420,000 out-of-period adjustment in Q1 2014 related to prepaid real estate taxes.
- Dividends paid during the first nine months totaled $21.9 million, or $0.65 per share, including regular dividends of $0.60 and a special dividend of $0.05. Future dividends are not assured and are subject to cash flow, debt covenants, REIT requirements and market conditions.
Important Facts for Investors to Verify
- Upcoming refinancing or extension of the $27.0 million revolving-credit balance maturing in August 2015.
- Compliance with leverage, loan-to-value, coverage, tangible-net-worth and restricted-payment covenants under the credit agreements.
- Actual cash generation relative to the $21.9 million of dividends paid and the company’s ability to sustain distributions.
- NECG’s rent performance, eviction proceedings, deferred-rent recoverability and potential lease restructuring.
- Tenant concentration and credit quality, particularly Chestnut and Capitol affiliates.
- Future environmental remediation spending, recoveries from state underground-storage-tank funds and insurance coverage.
- Potential liability and settlement outcomes for New Jersey and Pennsylvania MTBE litigation and Lower Passaic River matters.
- The effect of property dispositions, transitional-property repositioning and discontinued-operations classification on recurring FFO and AFFO.