Getty Realty Corp. — Form 10-Q Summary
Business Context and Reporting Period
Getty Realty Corp. is a publicly traded REIT specializing in the ownership, leasing and financing of convenience store, gasoline station, car wash and automotive-related properties. The filing covers the three months ended March 31, 2020, and was filed May 6, 2020. At quarter-end, the company owned 885 properties and leased 62 properties from third-party landlords, comprising 947 properties across 35 states and Washington, D.C. Substantially all properties are leased under triple-net arrangements.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $35.4 million | $34.0 million | +$1.3 million |
| Rental property revenue | $34.7 million | $33.3 million | +$1.4 million |
| Operating income | $18.9 million | $16.7 million | +$2.2 million |
| Net earnings | $12.7 million | $10.9 million | +$1.8 million |
| Basic and diluted EPS | $0.30 | $0.26 | +$0.04 |
| Operating cash flow | $17.9 million | $15.5 million | +$2.4 million |
| FFO | $20.0 million | $17.8 million | +$2.2 million |
| AFFO | $19.3 million | $17.5 million | +$1.8 million |
| AFFO per share | $0.46 | $0.42 | +$0.04 |
Operating margin was approximately 53.4% in Q1 2020 versus 49.0% in Q1 2019. Net margin was approximately 35.9% versus 32.1%. The company declared dividends of $0.37 per share, compared with $0.35 per share in the prior-year quarter.
Cash, cash equivalents and restricted cash totaled $37.9 million at March 31, 2020, compared with $21.1 million at March 31, 2019. Cash and cash equivalents alone were $35.9 million at quarter-end, compared with $21.8 million at December 31, 2019.
Total debt was $535.0 million, or $532.3 million net of issuance costs, at March 31, 2020, compared with $470.0 million, or $467.1 million net, at December 31, 2019. Debt consisted of $85.0 million outstanding under the revolving facility and $450.0 million of senior unsecured notes. The company reported compliance with its material debt covenants.
Material Changes Versus the Prior Comparable Period
- Rental revenue increased primarily from $2.0 million of revenue from newly acquired properties and contractual rent increases, partly offset by lower revenue-recognition adjustments.
- Property costs declined to $4.9 million from $5.5 million, primarily because of lower rent expense, reimbursable property taxes and redevelopment-related professional fees.
- Depreciation and amortization rose to $7.1 million from $6.1 million, primarily because of acquired properties.
- Interest expense increased to $6.7 million from $5.9 million because of higher average borrowings.
- The company acquired 12 car wash properties for $57.3 million. There were no property acquisitions in Q1 2019.
- Investing cash flow changed to a use of $53.1 million from a source of $1.5 million, principally because of acquisitions.
- Financing cash flow was a source of $49.5 million versus a use of $44.6 million, reflecting $65.0 million of new revolving-facility borrowings and no repayments during the quarter.
- Impairment charges increased to $1.0 million from $0.8 million, while environmental expense declined to $0.2 million from $0.9 million.
Outlook, Commentary, Risks and Unusual Items
Management stated that COVID-19 did not materially disrupt the first quarter, but the pandemic created substantial uncertainty for subsequent periods. As of May 6, 2020, the company had received April contractual base rent and mortgage payments from approximately 97% of tenants or mortgagors. It had also received requests for short-term deferrals or other relief; future collections and the effect on second-quarter and later revenue could not be determined.
Management expects near-term operating needs to be funded by operating cash flow, available cash, revolving-facility borrowings and potential ATM equity issuance. The company may moderate or suspend acquisitions, redevelopment and other growth activities and may rely more heavily on debt or equity liquidity if COVID-19 conditions worsen. No quantitative earnings or revenue guidance was provided.
- Environmental remediation obligations were $50.4 million at March 31, 2020, including $37.9 million for future liabilities related to preexisting unknown contamination. Management cautioned that actual costs could substantially exceed recorded amounts.
- Accrued legal and environmental litigation matters totaled $17.8 million. The filing identifies material uncertainty involving Lower Passaic River claims, MTBE litigation in New Jersey, Pennsylvania and Maryland, and Uniondale, New York litigation.
- The company had a remaining commitment of up to $7.0 million for certain tenant capital improvements.
- Three tenants represented significant revenue concentrations: Global Partners subsidiaries, 15%; United Oil, 13%; and Chestnut Petroleum subsidiaries, 11%, for Q1 2020.
- A 1% increase in market interest rates, based on $85.0 million of variable-rate borrowings outstanding at quarter-end, was estimated to reduce 2020 net income and cash flow by approximately $0.6 million.
- The company adopted the current expected credit loss standard on January 1, 2020, recording an $886,000 cumulative retained-earnings adjustment, consisting of $578,000 for direct financing leases and $309,000 for notes and mortgages receivable.
Important Facts for Investors to Verify
- Actual tenant rent collections, deferrals, bankruptcies and lease modifications after April 2020, particularly among petroleum, convenience-store and automotive tenants.
- Compliance with leverage, coverage and other debt covenants, including the $100.0 million senior-note maturity in 2021 and the revolving facility maturity in March 2022.
- Changes in environmental remediation estimates, litigation accruals and potential liabilities exceeding recorded reserves.
- The sustainability of the $0.37-per-share dividend in light of COVID-19, debt service, covenant restrictions and REIT distribution requirements.
- Whether the $57.3 million car wash acquisition program and redevelopment activities generate expected rent and cash flow.
- Future impairment charges resulting from lower tenant cash flows, property values or changes in environmental estimates.