Getty Realty Corp. 2011 Q3 Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a REIT owning, leasing and financing retail motor-fuel, convenience-store and petroleum-terminal properties. The unaudited filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. The portfolio included 1,155 properties across 21 states, including 800 properties leased to Getty Petroleum Marketing Inc. under a unitary master lease.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenues | $28.1 million | $22.0 million | $81.3 million | $66.1 million |
| Operating income | $6.3 million | $14.6 million | $35.5 million | $41.4 million |
| Operating margin | 22.3% | 66.6% | 43.6% | 62.7% |
| Net earnings | $5.4 million | $13.4 million | $31.9 million | $39.2 million |
| Net margin | 19.1% | 60.7% | 39.3% | 59.3% |
| Diluted EPS | $0.16 | $0.45 | $0.96 | $1.44 |
| FFO | $7.9 million | $15.7 million | $38.7 million | $44.8 million |
| AFFO | $19.7 million | $15.4 million | $54.0 million | $43.8 million |
| Diluted AFFO per share | $0.59 | $0.52 | $1.62 | $1.61 |
For the nine months, operating cash flow was $52.7 million versus $42.9 million in 2010. Investing cash flow was negative $195.8 million, primarily from $167.5 million of property acquisitions and capital expenditures and $31.2 million of notes and mortgage receivable issuances. Financing cash flow was $151.0 million, including $92.0 million of net common-stock proceeds, borrowings and repayments under the credit facility, and $46.7 million of dividends.
At September 30, 2011, total assets were $623.4 million, cash and cash equivalents were $14.0 million, and shareholders’ equity was $399.9 million. Debt consisted of $147.7 million drawn under a $175.0 million revolving credit facility and $23.0 million under a term loan, for total debt of approximately $170.7 million. The credit facility had $27.3 million of stated undrawn capacity, although access could be restricted by tenant-related developments or covenant issues.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27.7% in Q3 and 23.0% for the nine months, primarily from the CPD NY and Nouria sale-leaseback acquisitions and related financing activity. Rent from tenants other than Marketing increased substantially, while Marketing rent was broadly stable.
- Net earnings declined 59.9% in Q3 and 18.6% for the nine months. Results were adversely affected by an $11.0 million non-cash allowance for deferred rent receivable related to Marketing, impairment charges, higher general and administrative expenses, and higher interest expense.
- Q3 operating expenses increased to $21.8 million from $7.3 million, largely because of the deferred-rent allowance, higher environmental costs, acquisitions-related expenses and increased general and administrative expenses.
- FFO declined, but AFFO increased because AFFO excludes the deferred-rent allowance, impairment charges and certain acquisition costs. AFFO per diluted share increased modestly despite a larger share count.
- The company issued 3.45 million common shares in the first quarter for net proceeds of approximately $92.0 million, used primarily to repay revolving-credit borrowings.
- Property acquisitions and capital expenditures increased to $167.5 million from $4.7 million in the prior-year period, primarily reflecting the CPD NY and Nouria transactions.
Outlook, Commentary, Risks and Unusual Items
- Marketing concentration and dispute: Approximately 52% of Q3 rental revenue was derived from the Master Lease. Marketing missed rent payment due dates in August and September but subsequently paid with interest. Litigation and disputes regarding alleged environmental defaults and rent offsets remain unresolved.
- Master Lease risk: Management stated that Marketing’s financial condition had deteriorated and that Marketing might seek to reduce the properties covered by the lease or file for bankruptcy. Any modification or termination could reduce rent and increase operating expenses.
- Deferred-rent reserve: The company recorded an additional $11.0 million non-cash allowance. Net deferred rent attributable to the Master Lease was $8.8 million at September 30, 2011, versus $21.2 million at December 31, 2010.
- Environmental exposure: Management estimated unaccrued Marketing-related environmental liabilities of $13 million to $20 million, net of expected recoveries. The company had $14.8 million of environmental remediation liabilities and $4.0 million of estimated recoveries recorded at September 30, 2011. The company does not maintain pollution legal liability insurance for potential Marketing environmental liabilities.
- Debt refinancing: The $175.0 million revolving credit facility was scheduled to mature in March 2012, and the $25.0 million term loan was scheduled to mature in September 2012. Management expected to refinance or amend the revolving facility but gave no assurance that financing would be available on favorable terms.
- Dividends: The company paid $46.7 million of dividends during the first nine months. The historical quarterly rate was $0.25 per share, but management stated that continuation was not assured because of Marketing, liquidity and covenant risks.
- Interest-rate exposure: The $45.0 million interest-rate swap expired June 30, 2011. Borrowings were therefore fully exposed to floating market rates; management estimated that a 0.50% rate increase would reduce 2011 net income and cash flow by approximately $0.2 million.
- Other contingencies: The filing discusses environmental litigation, including Lower Passaic River matters and a remaining MTBE case, as well as a reported $230 million arbitration award against Marketing that Marketing sought to vacate.
- No formal earnings or operating guidance was provided in the filing. Management stated that operating cash needs for the next 12 months were expected to be met by operating cash flow and available cash, subject to a favorable resolution of the revolving-credit refinancing.
Most Important Facts for Investors to Verify
- Whether the revolving credit facility was successfully refinanced or amended before its March 2012 maturity and on what terms.
- Whether Marketing continued paying rent and environmental obligations, and whether the Master Lease was modified, reduced, terminated or affected by bankruptcy proceedings.
- Whether additional deferred-rent reserves, property impairment charges or Marketing-related environmental liabilities were recorded after September 30, 2011.
- Whether the estimated $13 million to $20 million of unaccrued Marketing environmental liabilities materially understated eventual obligations.
- Whether the company maintained compliance with debt covenants and continued paying dividends at the historical rate.
- The sustainability and comparability of AFFO, given its exclusion of the $11.0 million deferred-rent allowance, impairment charges and acquisition costs.