Getty Realty Corp. — FY2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, with quarterly data for the fourth quarter. Getty Realty is a self-managed REIT focused on owning, leasing and financing convenience store and gasoline station properties. At year-end, it owned 740 properties and leased 89 properties from third-party landlords, for a total portfolio of 829 properties across 23 states and Washington, D.C. Approximately 808 properties were subject to triple-net leases, with a contractual weighted-average lease term of approximately 11 years excluding renewal options.
For the fourth quarter of 2016, rental-property revenue was $25.1 million, net earnings were $8.3 million and diluted earnings per share were $0.24.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $115.3 million | $110.7 million | +4.1% |
| Revenue from rental properties | $97.9 million | $92.9 million | +$5.0 million |
| Operating income | $50.2 million | $34.3 million | +$15.9 million |
| Earnings from continuing operations | $42.1 million | $40.4 million | +4.2% |
| Net earnings | $38.4 million | $37.4 million | +2.7% |
| Diluted EPS | $1.12 | $1.11 | +0.9% |
| Funds from operations | $64.2 million | $69.1 million | -7.2% |
| Adjusted FFO | $58.0 million | $65.2 million | -11.1% |
| Cash flow from operations | $36.9 million | $49.7 million | -25.8% |
Operating margin was approximately 43.5%, and net earnings margin was approximately 33.3%. The filing does not present a consolidated EBITDA margin. Interest expense increased to $16.6 million from $14.5 million, primarily because of higher average borrowings associated with the 2015 United Oil acquisition. Impairment charges declined to $12.8 million from $17.4 million, while environmental expense declined to $2.6 million from $6.2 million.
At December 31, 2016, total assets were $877.3 million, shareholders’ equity was $430.9 million and total debt was approximately $298.5 million net of debt issuance costs. Cash and cash equivalents were $12.5 million. Debt consisted of $125.0 million outstanding under the Credit Agreement and $175.0 million of senior unsecured notes. The company reported compliance with its material debt covenants.
The company paid $36.2 million of cash dividends during 2016 and also paid $4.4 million in stock dividends as part of a special dividend. Dividends declared were $1.03 per share for the year, while total dividends paid were $1.22 per share including the special dividend.
Material changes versus the prior comparable period
- Rental-property revenue benefited from a full year of contributions from the 77-property United Oil portfolio acquired in June 2015; United Oil generated $17.6 million of revenue in 2016 versus $10.2 million in 2015.
- 2015 included $18.2 million of distributions from the Marketing Estate. No further distributions are expected. This unusual item contributed materially to the 2015 FFO and AFFO comparisons.
- Operating income improved because of higher rental revenue, lower property costs, reduced impairments, lower environmental expense and lower general and administrative expense.
- FFO and AFFO declined despite higher earnings, primarily because of the absence of the 2015 Marketing Estate distribution and changes in non-cash adjustments.
- Operating cash flow decreased by $12.8 million, largely because of the 2015 Marketing Estate receipt, partially offset by the full-year contribution from United Oil.
- Getty acquired three convenience store and gasoline station properties and an adjacent redevelopment parcel for an aggregate $7.7 million, compared with $219.2 million spent on 80 properties in 2015.
- The company sold 12 properties in continuing operations during 2016 and recorded $6.4 million of gains on dispositions, including recognition of a $3.9 million deferred gain after repayment of seller financing by Ramoco affiliates.
- At year-end, 15 properties were vacant and six properties were under active redevelopment for alternative single-tenant retail uses.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects operating cash needs for the next twelve months to be met through operating cash flow, borrowings under the Credit Agreement and available cash and cash equivalents. The company continues to pursue acquisitions, redevelopment and alternative-use opportunities, but states that suitable investments and favorable financing may not be available.
Debt maturities included $75.0 million under the revolving facility in June 2018, $50.0 million under the term loan in June 2020, $100.0 million of Series A Notes in February 2021 and $75.0 million of Series B Notes in June 2023. Subsequent to year-end, on February 21, 2017, Getty issued $50.0 million of 4.75% Series C Notes due 2025 and used the proceeds to repay revolver borrowings.
- Tenant concentration: Global Partners, United Oil and Chestnut Petroleum represented 21%, 15% and 15% of total 2016 revenue, respectively. Tenant defaults, bankruptcies or deteriorating petroleum-market conditions could materially reduce rent collections.
- Environmental exposure: The company accrued $74.5 million for prospective environmental remediation obligations, including $45.0 million for preexisting unknown contamination. Actual costs could exceed recorded amounts.
- Litigation: Environmental and MTBE-related proceedings in New Jersey and Pennsylvania, as well as Lower Passaic River matters, remain uncertain. The company stated that an unfavorable resolution of the New Jersey MTBE litigation is probable but could not estimate losses above recorded accruals.
- Interest-rate risk: A hypothetical 1% increase in market rates was estimated to reduce 2017 net income and cash flow by approximately $1.3 million based on $125.0 million of floating-rate borrowings.
- Geographic concentration: 56.5% of properties were concentrated in New York, Massachusetts and Connecticut, increasing exposure to regional economic and real estate conditions.
- REIT and dividend requirements: Getty must generally distribute at least 90% of taxable income to maintain REIT status. Debt agreements may restrict dividends during events of default.
- Accounting estimates: Property impairments, environmental liabilities, deferred rent collectability and litigation accruals rely on estimates that may change materially.
Most important facts for investors to verify
- Reconciliation of reported FFO and AFFO to recurring cash generation, excluding the nonrecurring 2015 Marketing Estate distribution.
- Tenant credit quality, lease guarantees, renewal prospects and exposure to Global Partners, United Oil and Chestnut Petroleum.
- Current availability under the revolving facility, covenant headroom and the effect of the 2017 Series C refinancing on near-term maturities.
- Changes in the $74.5 million environmental liability and the potential magnitude of unaccrued MTBE, Lower Passaic River and other environmental claims.
- Occupancy, leasing progress and expected returns for the 15 vacant properties, six active redevelopment projects and seven properties planned for recapture.
- Sustainability of dividends relative to AFFO, capital-improvement commitments of up to $10.2 million and required REIT distributions.