Earnings Call: Q1 2021

Apr 29, 2021

Good morning, and welcome to Getty Realty's Earnings Conference Call for the Q1 of 2021. This call is being recorded. After the presentation, there will be an opportunity to ask questions. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary Please go ahead, Mr. Dicker. Thank you, operator. I would like to thank you all for joining us for Getty Realty's Q1 earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ended March 31, 2021. Form 8 ks and earnings release are available in the Investor Relations section of our website at gettyrealty.com. Certain statements made in the course of this call are not based on historical information and may constitute forward looking statements. These statements are based on management's current expectations and beliefs and are subject to trends, events and uncertainties that could cause actual results to differ materially from those described in the forward looking statements. Examples of forward looking statements include our 2021 guidance and may also include Statements made by management in their remarks and in response to questions, including regarding the company's response to the COVID-nineteen pandemic, Future company operations and financial performance and the company's acquisition or redevelopment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual results could differ materially. I refer you to the company's annual report on Form 10 ks for the year ended December 31, 2020, and other filings made with the SEC For a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed Also, please refer to our earnings release for a discussion of our use of non GAAP financial measures, including our definition of adjusted funds from operation, or AFFO and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive Officer. Thank you, Josh. Good morning, everyone, and welcome to our Q1 of 2021 earnings call. With Josh and me on the call today are Mark Olear, our Chief Operating Officer and Brian Dickman, our Chief Financial Officer. I will begin today's call by providing an overview of our performance for the Q1 of 2021, Touch on our strategic objectives for the remainder of the year, and then we'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail. We delivered another quarter of solid results as our net lease portfolio and our tenants operating Businesses continue to display the strength and stability that we saw throughout the prior year. We had no issues with rent collections this quarter, including collecting small amounts of rent, which we agreed to defer in 2020. We view the strength of our collections as a The net result of our stable in place portfolio and the continued execution of our investment strategies was a 5.4% increase in total revenues, An 8.6% increase in our adjusted funds from operations and a 2.2% increase in our AFFO per share. We also continued to execute on our growth strategy during the Q1 as we invested a total of $30,300,000 in a combination of sales leasebacks and construction funding for new to industry locations. Our investment activity for the quarter was again focused on both the convenience store and car wash businesses. In addition, our team continues to source and underwrite numerous opportunities in the convenience and auto related sectors, and we are encouraged by the number of attractive opportunities we are reviewing in our investment pipelines. As we look ahead, we remain focused on 3 primary areas. The first is maintaining a healthy portfolio and high rent collections. We are pleased with the continued performance of our C store and auto related tenants, As evidenced by our steady and strong rent coverage ratios, the asset classes included in our portfolio have proven to be resilient and growing despite the impact of the pandemic. With that said, we will continue to monitor Tenet Health and the impact of the COVID-nineteen pandemic on our portfolio and the economy. Our second priority as we move through this year is executing on our initiatives to grow, evolve and enhance our portfolio by making accretive acquisitions of convenience stores and other automotive related retail assets, By unlocking embedded value through selective redevelopments and by maximizing the quality of our in place portfolio through continued active asset management. We are confident in our targeted investment asset classes and believe that acquiring high quality real estate in metropolitan markets Across the country, we'll continue to drive additional shareholder value. Finally, we remain committed to maintaining our stable and flexible balance sheet. We ended the quarter with significant availability on our revolving credit line. And during the quarter, we filed a new $250,000,000 ATM program, both of which we believe provide us with access to capital to grow our company while maintaining a well laddered and flexible capital structure. With that, I will turn the call over to Mark to discuss our portfolio and investment activities. Thank you, Chris. As of the end of the quarter, our portfolio includes 949 net leased properties, 6 active redevelopment sites and 5 vacant properties. Our weighted average lease term is approximately 9 and our overall occupancy, excluding active redevelopments, increased to 99.5%. Our portfolio remains spread over 35 states plus Washington, D. C. And our annualized base rents, 65% of which come from the top 50 MSAs in the U. S. Continue to be well covered as our trailing 12 month tenant rent coverage ratio increased 2.7 times. In terms of our investment activities, we had an active start to the year. During the quarter, we invested $30,300,000 in 9 properties. Our completed acquisitions during the Q1 stem from acquisition leaseback transactions with 3 separate tenants operating in ExpressTale Car Wash Business. We acquired one site with Zips Car Wash in the Louisville, Kentucky MSA for $4,800,000 1 site with Go Car Wash in San Antonio MSA for $3,100,000 In addition, we completed our 1st sale leaseback with Whitewater Express, We acquired 4 properties in Ohio and Kentucky for an aggregate purchase price of $13,900,000 All the acquired properties are subject to triple net leases with 15 year initial terms and our aggregate initial cash yield on the 6 sites acquired was slightly more than 7%. Getty also funded $8,400,000 construction loan For 3 new industry convenience stores with Refuel, a 90 unit C store operator with locations across the Southeastern U. S. As part of this transaction, we will accrue interest on our investment during the construction phase of the project. We expect to acquire The properties via sale leaseback transaction at the end of the construction period. We ended the quarter with a strong investment pipeline and remain Highly committed to continuing to grow our portfolio in terms of both the convenience store industry and other automotive related retail assets. We expect that we will pursue direct sale leasebacks, acquisitions of net leased properties and funding for new industry construction. Finally, we remain committed to our core underwriting principles of acquiring high quality real estate and partnering with strong tenants in our target asset Moving to our redevelopment platform. During the quarter, we invested approximately $100,000 in sites which are in our pipeline. At this time, we have 11 signed leases or letters of intent, which includes 6 active projects, 4 signed leases on properties which are currently subject to triple net leases, but which have not yet been recaptured from the current tenants And one signed letter of intent on a vacant property. We expect to have rent commencements at several sites during 2021. On the capital spending side, we have invested approximately $1,900,000 in the 11 redevelopment projects in our pipeline and estimate that these projects will require total investment by Getty of $7,500,000 We project these redevelopments will generate incremental returns to the company in excess where we can invest these funds in the acquisition market today. For more detailed information on the redevelopment pipeline, Please refer to Pages 14 and 15 of our investor presentation, which can be found on our website. Turning to dispositions. We sold 5 properties during the quarter, realizing proceeds of $8,400,000 3 of the properties sold, representing a vast majority of realized proceeds were previously leased to a local developer and the remaining two sites were vacant. We expect the net financial impact of these dispositions will be minimal. As we look ahead, we will continue to We have made the determination that the property is no longer competitive as a convenience store location and does not have redevelopment potential. With that, I will turn the call over to Brian to discuss our financial results. Thanks, Mark. Good morning, everyone. I'll start with a recap of earnings. Hopefully, you've all had a chance to see yesterday's release. AFFO, which we believe best reflects the company's core operating performance was $0.47 per share for the Q1, representing a year over year increase of 2.2%. In addition, FFO was $0.44 per share for the quarter. Our total revenues in the Q1 were $37,300,000 representing a year over year increase of 5.4%. Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables, grew 6.7% to 33,500,000 Acquisition activity, rent escalators in our leases and the completion of redevelopment projects all contributed to the growth in our rental income. On the expense side, property costs increased in the quarter, primarily due to increases in reimbursable real estate taxes. Environmental expenses also increased this quarter as a result of non cash changes in environmental remediation costs and estimates. The portion of environmental expenses, which flowed through to our AFFO, were down quarter over quarter as a result of lower professional fees and related expenses. As we note each quarter, environmental expenses are subject to a number of estimates and non cash adjustments and will continue to be highly variable. Finally, G and A expenses increased this quarter as well due to non recurring retirement costs as well as other employee related expenses and certain professional fees. As we turn to the balance sheet and our capital markets activities, we ended the quarter with $525,000,000 of debt outstanding comprised entirely of long term fixed Straight on secured notes. Our $300,000,000 revolver was completely undrawn at quarter end. Our Our total debt to total market capitalization was 29%, our total debt to total asset value was 38% and our net debt to EBITDA was 5 times. We have no maturity no debt maturities until June of 2023 other than our credit facility, which matures in March of next year, but has a 1 year expansion option With respect to our ATM program, we were selective with our issuance during the quarter, ultimately raising $20,800,000 an average price of $20.03 per share. As we look ahead and think about our capital needs, we remain committed to maintaining a conservative, well laddered and flexible capital With respect to our environmental liability, we ended the quarter at $48,700,000 which was an increase of $600,000 from the end of 2020. For the quarter, net environmental remediation spending was approximately $600,000 Finally, we reaffirmed our 2021 AFFO per For the remainder of 2021. Specific factors which may impact our guidance this year include the impact of our 20 20 Q1 2021 investment and capital raising activities, our expectation that operating costs will generally continue to increase, Our expectation that we will forego rent when we recapture properties for redevelopment and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses for deals ultimately not completed. With that, I will turn it back to Chris. Thank you, Brian. That concludes our prepared remarks. So let me ask the operator to open the call for questions. Thank you. At this time, we will be conducting a question and answer session. The first question is from Michael Gorman from BTIG. Please go ahead. Hey, thanks. Good morning. Chris, I was wondering if you could talk a little bit about what The environment is like right now on the tenant side in terms of consolidation. Are you seeing continued moves Towards consolidating the CSource space and how that plays into how your acquisition pipeline looks like or what your acquisition pipeline looks like over the balance of the year? Well, sure. Maybe I'll comment on that and then add something as well, which is, I think the medium store industry We'll continue to consolidate as it has been over the last several years. The reality is With the C store evolving and becoming more part merchandise, part quick serve restaurant, part coffee shop, The operations are incredibly sophisticated. And when you add loyalty programs and apps on top of that, There are small to midsize operators, right, that probably are not willing to or maybe cannot compete with some of the larger chain stores. So you're going to continue to see continued consolidation, whether it's a small player selling to a regional player or even some of the more National transactions that you've seen over the last couple of years. The other thing I would add, Mike, which is probably not related to your question, but what we're also seeing is that There are a number of, call it, medium to larger size chains that are also, quite frankly, building their own locations And growing organically in their target markets or in adjacent markets. And We think that's also a source of potential transactions for Gate as these operators are looking to source capital right to fund That's great. And actually, yes, it feeds right into my next question about the I'm curious if you could spend a little bit more time talking about kind of how you source those, how you underwrote those and maybe What kind of additional opportunities as you kind of just mentioned there are for either funding new development through construction loans or maybe even taking your redevelopment skill set into B. Lowe:] Construction loans are maybe even taking your redevelopment skill set into ground up development. Can you just kind of lay out the field of opportunity there? Yes. So I dovetailed to what I was just saying a moment ago. We've done this in a couple of transactions before, right, where we have been Effectively a development partner with a tenant where they have identified a site To do their prototype new build program. So in this case, Refuel is a large operator across the Southern U. S. They've got a new store program and they're looking for capital to help them fund along the way. And then the way our agreements are structured is we anticipate Buying the location upon completion. Again, it's important to get E right at the end of the day that we become the fee owner of the property. But if there's a way for us to partner with an operator and help fund their organic growth, we certainly think that's an opportunity for us In this case, but in others as well. Great. And then maybe just last one for me. In your conversations with your tenants, Any kind of updated thoughts on the relationship between what's been going on with convenience store sales, which seem to be pretty strong and then what's going on On the gas side of things and whether, I think historically it's been kind of that 50%, maybe 60% range of C store sales don't involve a gas transaction. Is that changing at all? It is gradually increasing, right? So there we have a stat in our investor materials that Approximately 50% of customer visits are non gas related visits. Anecdotally, in conversations with our tenants, we Seeing that 50% number growing, right, and it does vary by industry. Certainly, if you're in an area that's maybe more suburban or maybe We're spread out, right? You're seeing more visits and sometimes same customer visiting multiple times per day. And I think it's a trend that will continue as the convenience store becomes your morning destination to our afternoon destination, in certain cases, That was your evening test day shift for dinner. That's what our tenants are focused on, Driving customer visits for food and traditional merchandise when consumers do not need The next question is from Todd Thomas from KeyBanc. Please go ahead. Hi, thanks. Good morning. Just first question for Brian. In terms of the guidance, which does not include future investments, You closed $22,000,000 at a slightly more than 7% initial yield. You extended some construction financing. I was just curious what the offset was With the guidance range, the AFFO being affirmed, what the offset was Good morning, Todd. Fair question as we obviously did have some investment activity in the quarter. It was really the ATM issuance and I can't say that we were in the market during the quarter, but there were a couple of opportunities that were brought to us that we felt Made sense to transact on, as you weigh the different considerations of issuing equity, we thought that made sense for us, Particularly over the long term, acknowledging that it does put a little bit of short term pressure on the Earnings per share is number and AFFO per share, but the short answer to your question was the equity issuance and we felt that was the right thing to do notwithstanding The impact on the per share numbers. Okay. And then just back to investments. I was just curious if there's an update and if you can comment at all regarding the Couche Tops process, the Circle K portfolio and Getty's interest And those assets? Yes. There's not really any update or any thoughts that I can provide on at this time. Okay. And what about the disposition outlook? What's that look like? Should we expect More near term asset sales, I mean, how should we think about dispositions as we move forward throughout the year? Yes. If you look at our recent in the past 2 or 3 years, we've certainly been a seller of, call it, 10 to 15 properties a year, typically some of those properties have been some of our vacancies, some of those properties were Coming out of leases or lease terms expiring, I think that's a good run rate for Getty. We don't see significant The next question is from Nikita Veli of JPMorgan. Please go ahead. Hey, good morning, guys. Did you provide yields on these loans that you guys have advanced these construction loans? Just curious. Unfortunately, we can't disclose the exact yield on that, but what I'd say is that the interest rate During the construction period, it's certainly consistent with where Yigati has been investing over the last several years. Also, it's consistent to the cap rates. And then my second question was, what do you think the expected cap rate will be down the line when you Do you acquire those properties? Again, I can't really provide specific numbers, but I would I do too. The range of cap rates we've quoted in the past. Got it. Okay. And on The deal pipeline, I know you talked a little bit about that. In terms of just put some numbers and brackets around it, you have been a little bit more consistent in the recent quarters With the deal volume, do you think that $30,000,000 to $40,000,000 $50,000,000 of deals per quarter Is there a realistic number that you think you aspire to and over time can put forward that on a consistent basis? I'm not going to provide a specific number, but what I would say is, it's been one of our goals to become more of a Just to acquire, right into we've added a number of resources in Mark's group, right, to help with that. And I think our results have shown that we've certainly been acquiring at a steady pace over the last several years and we expect that to continue. Last question, if you don't mind. You did some car washes in the quarter. Can you just talk a little bit So how big of an opportunity that is as a percent of your total deal pipeline currently? Sure. This is Mark. I think it's growing to the point as we expand our relationships and develop New opportunities in the space, it's a highly fragmented industry, which is receiving a lot of attention for consolidation right now. And I think it's it will grow to be somewhat equal to or near the opportunity set for convenience stores. Right now it's not quite there, but we're working on it every day. And right now we're still probably heavily weighted slightly weighted towards convenience stores, but Not only in Car Wash, but in all the other automotive experience retail sectors, we're working to grow the pie as big as possible No. Thanks, guys. This concludes the question and answer session. I would like to turn the call back over to Chris Constant for closing remarks. Great. Thank you, operator. We appreciate everyone joining us this morning for our Q1 call. Thank you for your interest in Getty, and we look forward to getting back on with everybody at the end of the second quarter. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.