GETTY REALTY CORP annual report, FY2021

Getty Realty Corp. 2021 Form 10-K Summary

Business context and reporting period

Getty Realty Corp. is an internally managed net-lease REIT focused on acquiring, financing, developing and leasing convenience stores, car washes, automotive service centers, automotive parts retailers, drive-thru restaurants and other freestanding retail properties. The filing covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020.

Portfolio at year-end: 1,028 properties in 38 states and Washington, D.C., including 981 owned properties and 47 properties leased from third-party landlords.
Substantially all properties are leased under triple-net arrangements, under which tenants generally pay taxes, maintenance, insurance and other operating expenses.
Contractual rent weighted-average lease term, excluding renewal options: 8.8 years.
Five properties were vacant and four were under active redevelopment at year-end.

Financial performance and key metrics

Metric	2021	2020	Change
Total revenues	$155.4 million	$147.3 million	Up $8.1 million
Rental property revenues	$153.9 million	$144.6 million	Up $9.3 million
Operating income	$86.5 million	$75.6 million	Up $10.9 million
Net earnings	$62.9 million	$69.4 million	Down $6.5 million
Diluted earnings per share	$1.37	$1.62	Down $0.25
Funds from operations	$86.1 million	$99.3 million	Down $13.2 million
AFFO	$90.0 million	$79.1 million	Up $10.8 million
AFFO excluding stock compensation and debt-cost amortization	$95.0 million	$83.3 million	Up $11.7 million
Net cash from operating activities	$86.8 million	$82.8 million	Up $4.0 million

Rental revenue growth was primarily attributable to acquired properties, rent commencements from completed redevelopments and contractual rent increases. Interest income on notes and mortgages receivable declined to $1.5 million from $2.7 million.

Operating expenses increased to $85.7 million from $76.3 million, including higher depreciation and amortization, general and administrative expense and environmental expense.
Environmental expense increased to $3.5 million from $1.1 million, principally due to higher litigation accruals and remediation costs and estimates.
Impairment charges were $4.4 million, compared with $4.3 million.
Gains on real estate dispositions rose to $16.7 million from $4.5 million; the company sold 16 properties in 2021 versus 11 in 2020.
Other income declined sharply to $1.1 million from $21.1 million because 2020 included $21.3 million of legal settlement proceeds.
Interest expense declined to $24.7 million from $26.1 million, primarily because of lower average interest rates.

Balance sheet, cash flow, debt and liquidity

Total assets were $1.47 billion at December 31, 2021, compared with $1.35 billion at year-end 2020.
Net real estate was $1.27 billion, up from $1.14 billion.
Cash and cash equivalents were $24.7 million, with total cash, cash equivalents and restricted cash of $26.5 million.
Total debt was $585.0 million, compared with $550.0 million; total debt net of issuance costs was $581.1 million.
Debt consisted of $60.0 million drawn under the revolving facility and $525.0 million of senior unsecured notes.
Debt maturities include $75.0 million of senior notes due in 2023, $50.0 million of notes and $60.0 million drawn on the revolver due in 2025, and $400.0 million of notes due after 2025.
The $300.0 million revolving facility was amended in October 2021, extending maturity from March 2022 to October 2025, reducing borrowing costs and modifying covenants. Two six-month extensions are available subject to conditions.
The company raised $92.3 million of net proceeds through its ATM equity program and issued approximately 3.0 million shares during 2021. The ATM authorization permits aggregate sales of up to $250.0 million; no forward sale agreements had been entered into at year-end.
Cash flow from investing activities was a use of $169.7 million, principally reflecting property acquisitions. Financing activities provided $52.3 million, including ATM proceeds, partially offset by dividends and debt activity.
Regular quarterly dividends paid totaled $70.8 million, or $1.56 per share, compared with $62.6 million, or $1.48 per share, in 2020.

Material changes versus the prior comparable period

Investment activity expanded materially: $200.0 million was invested across 100 properties in 2021, including 97 property acquisitions for $194.3 million, compared with 34 properties acquired for $150.0 million in 2020.
The 2021 acquisitions added convenience stores, car washes and automotive service centers, eight new tenants and four new states, with increased exposure to the Southeast and Midwest.
Construction loans of $13.5 million were advanced for five new-to-industry developments; $5.7 million remained outstanding at year-end.
Rental revenues and operating income increased, but GAAP net earnings and FFO declined because 2020 benefited from substantial legal settlement proceeds and lower depreciation and other expenses.
AFFO increased despite the lower GAAP earnings comparison, reflecting the company’s adjustments for non-cash, environmental and unusual items.
Environmental remediation obligations declined modestly to $47.6 million from $48.1 million, while environmental litigation accruals declined to approximately $1.9 million from $4.3 million.
The company updated its AFFO definition to include stock-based compensation and amortization of debt issuance costs as adjustments beginning with the quarter and year ended December 31, 2021. It stated that the updated definition would be used beginning in the first quarter of 2022.

Guidance, outlook, commentary and risks

Management expects to continue its growth strategy in 2022 and believes operating cash flow, cash balances, revolver capacity, ATM proceeds and other financing sources will be sufficient for operating needs, dividends, debt service, acquisitions and redevelopment expenditures. The filing does not provide quantitative earnings or acquisition guidance.

Management intends to continue pursuing acquisitions, sale-leasebacks, construction loans and redevelopment opportunities that diversify property types, tenants and geographies.
COVID-19 had not caused significant disruption to 2021 financial results, but management continued to identify material uncertainty regarding tenant performance, rent collections, capital markets, covenant compliance and future acquisition activity.
Tenant concentration is material: Global Partners represented 16% of 2021 revenue, ARKO 14%, United Oil 11% and Chestnut 9%. Tenant defaults, bankruptcies or weaker operating performance could reduce rental cash flow.
The portfolio remains geographically concentrated; 38.7% of properties were in New York, Massachusetts and Connecticut at year-end.
Substantial tenant exposure to petroleum marketing, convenience retail and automotive industries creates sensitivity to fuel demand, wholesale fuel prices, alternative vehicles, regulation and industry competition.
Environmental obligations are significant and difficult to estimate. The company may become responsible if tenants or other counterparties fail to perform. Accrued prospective remediation obligations were $47.6 million, including $36.2 million for preexisting unknown contamination.
Pending matters include MTBE litigation in Pennsylvania and Maryland and proceedings relating to the former Newark terminal and Lower Passaic River. The company believes the Lower Passaic River matter is not reasonably likely to have a material impact based on currently known facts, but states that ultimate liability remains uncertain and losses could exceed accrued amounts.
Variable-rate borrowings create interest-rate risk. A 1% increase in market rates, based on $60.0 million of outstanding variable-rate debt, was estimated to reduce 2022 net income and cash flow by approximately $0.6 million.
Debt agreements contain leverage, coverage, net worth, restricted payment and other covenants. Noncompliance could limit borrowing or dividends and potentially accelerate debt.
The company was exposed to the transition from LIBOR; $60.0 million of borrowings were LIBOR-based at year-end.
The company’s independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2021.

Subsequent financing event

On February 22, 2022, the company issued $100.0 million of new senior unsecured notes, consisting of $55.0 million of 3.45% notes due 2032, $20.0 million of 3.45% notes due 2032 and $25.0 million of 3.45% notes due 2032. It also committed to issue $125.0 million of 3.65% notes due 2033 in January 2023. Proceeds from the notes issued at closing were used to repay all amounts outstanding under the revolving facility and for general corporate purposes. The delayed-funding notes are intended to prepay the $75.0 million of 5.35% notes due June 2023 and support general corporate purposes.

Most important facts for investors to verify

Reconcile AFFO and FFO definitions with those used by peer net-lease REITs; these are non-GAAP measures and are not directly comparable without reviewing the reconciliations.
Assess tenant concentration, tenant credit quality and lease guarantees, particularly for Global, ARKO, United Oil and Chestnut.
Review debt maturities, covenant headroom, the February 2022 refinancing and the timing of the January 2023 delayed-funding notes.
Evaluate the sustainability of dividends relative to AFFO, operating cash flow, debt covenants and required REIT distributions.
Review environmental accrual assumptions, expected state fund recoveries, insurance coverage and potential exposure beyond the $47.6 million recorded remediation liability.
Track the Pennsylvania and Maryland MTBE cases and Lower Passaic River proceedings for changes in probable loss estimates or settlement obligations.
Evaluate acquisition yields, integration, redevelopment execution and the effect of equity issuance on per-share results.
Monitor interest-rate exposure, LIBOR replacement provisions, inflation and construction costs.