Getty Realty Corp. — 2Q14 Form 10-Q Summary
Business context and reporting period
Getty Realty is a REIT focused on owning, leasing and financing retail motor-fuel and convenience-store properties. This unaudited report covers the three and six months ended June 30, 2014, with comparisons to the revised 2013 periods. At quarter-end, the company owned 796 properties and leased 114 properties from third-party landlords, totaling 910 properties across 20 states and Washington, D.C.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenues | $25.0 million | $24.3 million | $49.4 million | $47.2 million |
| Operating income | $9.2 million | $10.0 million | $19.3 million | $18.1 million |
| Earnings from continuing operations | $6.8 million | $7.0 million | $14.5 million | $12.3 million |
| Net earnings | $6.6 million | $12.7 million | $16.3 million | $23.1 million |
| Net earnings per share | $0.20 | $0.38 | $0.48 | $0.69 |
| FFO | $9.8 million | $11.4 million | $20.2 million | $20.0 million |
| AFFO | $9.1 million | $12.0 million | $18.2 million | $18.2 million |
Continuing-operations operating margins were approximately 36.7% in the quarter and 39.2% for the six-month period. Net earnings were materially affected by discontinued operations, property-sale gains and impairment charges.
- Rental-property revenue increased 3.7% year over year in the quarter to $24.2 million and 5.3% for the six months to $47.9 million.
- Six-month rental-property expenses declined to $11.9 million from $14.4 million, primarily because more properties were placed under triple-net leases and other properties were sold.
- Six-month operating cash flow was $13.8 million, compared with $10.0 million in 2013.
- Investing cash flow was $21.0 million provided, compared with $55.1 million used in 2013, reflecting substantially lower acquisitions and capital expenditures.
- Financing cash flow was $39.2 million used, including $24.0 million of net credit-line repayments and $15.2 million of dividends paid.
- Cash and cash equivalents were $7.7 million at June 30, 2014, versus $12.0 million at December 31, 2013.
- Total debt was $134.0 million: $34.0 million under the revolving credit facility and $100.0 million under the Prudential term loan.
- The revolving credit facility matures in August 2015, with a one-year extension option; the $100.0 million term loan matures in February 2021 and bears interest at 6.0%.
- The company paid $0.45 per share in dividends during the first six months, including a $0.05 per-share special dividend.
Material changes versus the prior comparable period
- Second-quarter net earnings fell $6.1 million, principally because discontinued-operations gains on property dispositions declined to $1.2 million from $4.2 million.
- Six-month net earnings fell $6.8 million because gains on dispositions declined to $4.4 million from $12.6 million, despite higher continuing-operations earnings.
- Continuing-operations earnings increased $2.2 million for the six months, supported by higher rental revenue, lower rental-property expenses and lower interest expense.
- Interest expense declined to $5.0 million for the six months from $5.9 million, reflecting lower average borrowings and interest rates.
- A $1.6 million non-cash allowance for deferred rent receivable was recorded for the NECG lease; the company fully reserved its $6.4 million deferred rent receivable balance at quarter-end.
- Non-cash impairment charges totaled $3.7 million for the six months, compared with $4.5 million in 2013. Total impairment charges, including discontinued operations, were $2.0 million in the second quarter.
- The company sold 49 transitional properties for $13.6 million during the six months and five additional properties for $5.0 million after quarter-end.
- Property acquisitions and capital expenditures were only $2.9 million in the first six months, versus $72.7 million in 2013, when the company acquired 36 properties for $72.5 million.
- Prior-period results were revised to reclassify certain rental-property expenses from discontinued to continuing operations. The revision did not affect net earnings, balance sheets or cash flows.
- A $420,000 out-of-period adjustment related to 2013 prepaid real-estate taxes reduced first-quarter 2014 net earnings; management concluded the adjustment was not material to current or prior periods.
Outlook, commentary, risks and unusual items
Management expects to continue repositioning transitional properties previously leased to Getty Petroleum Marketing, through sales, new leases and lease modifications. The company expects these properties to generate less net revenue than under the former master lease and expects related property, environmental and repositioning costs to pressure cash flow and potentially dividends. No quantitative earnings or revenue guidance was provided.
- There were 144 transitional properties at June 30, including 40 under month-to-month licenses, 83 associated with the NECG lease and 21 vacant. Transitional-property expenditures were $2.1 million for the first six months, compared with $4.6 million in 2013.
- NECG represented approximately 20% of rental revenue for the six months. Eviction proceedings remained pending at 10 Connecticut locations, and discussions regarding potential NECG lease modifications were ongoing.
- Capitol Petroleum affiliates represented approximately 17% of rental revenue for the six months. Their combined reported net loss was $3.0 million for the period, highlighting tenant-credit concentration risk.
- Environmental remediation obligations were accrued at $41.3 million at June 30, down from $43.5 million at year-end. Management expects potentially significant additional environmental obligations as underground storage tanks are replaced, but cannot predict their amount or timing.
- The company had $11.1 million accrued for certain legal matters. Material uncertainties remain regarding Lower Passaic River claims, New Jersey MTBE litigation and a Pennsylvania MTBE complaint filed in June 2014 and served in July 2014.
- New Jersey MTBE plaintiffs had indicated a settlement demand of approximately $24 million from Getty, although the company disputed the proposal and stated that losses could exceed accrued amounts.
- The company expects possible additional recoveries from the Marketing bankruptcy estate, but cannot estimate the amount or timing.
- The company’s ability to pay dividends is subject to operating cash flow, debt covenants, litigation and environmental costs, and continued REIT qualification.
- The company committed to co-invest up to $15.3 million in certain tenant capital improvements and had funded $0.4 million through June 30, 2014.
Important facts for investors to verify
- Near-term refinancing and covenant capacity for the $34.0 million revolving debt maturing in August 2015.
- Collection performance and ultimate recovery of NECG-related deferred rent and receivables.
- Progress and economics of repositioning the 144 transitional properties.
- Tenant concentration and financial condition of NECG, CPD NY, NECG affiliates and Capitol Petroleum affiliates.
- Actual environmental spending relative to the $41.3 million accrued obligation and the availability of UST-fund reimbursements and insurance coverage.
- Potential exposure from New Jersey and Pennsylvania MTBE claims and Lower Passaic River proceedings beyond recorded accruals.
- Sustainability of cash dividends relative to AFFO, operating cash flow, debt service and required REIT distributions.
- Whether future property-sale gains, impairment charges and discontinued-operations results continue to materially affect reported GAAP earnings.