Earnings Call: Q3 2020

Oct 22, 2020

Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the Q3 of 2020. This call is being recorded. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company, We'll read a Safe Harbor statement and provide information about our non GAAP financial measures. Please go ahead, Mr. Dacre. Thank you, operator. I would like to thank you all for joining us for Gay Realty's 3rd quarter earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ended September 30, 2020. The 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 results to differ materially from those described in the forward looking statements. Examples of forward looking statements include our 2020 guidance and may also 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, future 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 events or results could differ materially. I refer you to the company's annual report on Form 10 ks for the year ended December 31, 2019, our subsequent quarterly reports filed on Form 10 ks and our 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 or implied in any forward looking statements that are made today, you should not place undue reliance on forward looking statements, which reflect our view only as of the date hereof. The company undertakes no duty to update any forward looking statements that may be made in the course of this call. 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 operations 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 call for the Q3 ended 2020. With Josh and me on the call today are Mark Olear, our Chief Operating Officer and Dannion Fielding, our Chief Financial Officer. Similar to prior quarters in 2020, we will provide an update on our business in the context of the ongoing COVID-nineteen pandemic and also provide our quarterly review of our portfolio and financial statements. Regarding COVID-nineteen, I am pleased to report That our Q3 results are further evidence of the stability of our triple net lease rents and growth platform. Our portfolio of convenience stores, gas stations and other automotive assets produced another strong quarter of rent collections, operating performance and growth at Getty. I'm especially proud of our company as we achieved our results during a difficult time for the overall U. S. Economy and related challenges to many aspects of the retail real estate sector. The entire Getty team is working hard to continue what has been a very strong year for our company. We are proud of our accomplishments year to date and expect to continue executing on all of our initiatives for the remainder of 2020. Turning to our results, we benefited from the stability of our triple net lease rents and our active and accretive acquisition program. As a result, our Q3 revenues for rental properties increased by more than 4% to 37,200,000 and our AFFO per share by more than 9% to $0.47 per share. The success of our acquisition strategy year to date has been a key contributor to our earnings growth, including transactions that closed just after the Q3 ended. Getty has acquired 32 properties for Approximately $140,000,000 so far this year. These high quality assets are located in numerous markets across the country and can include portfolios of convenience and gas assets as well as car washes. While the COVID-nineteen pandemic caused disruptions in transaction activity across the commercial real estate sector. Getty has been able to maintain momentum and close on several opportunities, which we had underwritten earlier in the year. In addition, as Mark will mention, we completed our redevelopment project with 711 and the Dallas Fort Worth MSA for a remodeled convenience and gas location, bringing our total number of completed projects to 18 since the inception of our redevelopment. Let me now share some additional details on Getty's performance during Pandemic. For the Q3, the performance of the convenience and gas and other automotive asset classes in general and our portfolio more specifically was strong. Our collections have continued to improve and in the quarter we collected 98% of our rent and mortgage payments and agreed to a small number of short term deferrals for rent and mortgage payments. Perhaps more importantly, we received substantially all of the deferred rent and mortgage payments, which were due to be repaid during the Q3. Looking ahead to the Q4, as of today, our collections rate currently remains at 98% for the month of October, and we are continuing to collect substantially all of the COVID related rent and mortgage deferrals that were due to be repaid this month. Although uncertainty remains regarding the forward impact of COVID-nineteen to the broader economy, we are encouraged by the strength exhibited by our tenants and assets since the beginning of the pandemic. We will continue to be vigilant in monitoring the health of our tenants as we believe the severity of the COVID-nineteen pandemic on the U. S. Economy will continue to impact consumer and retail activity generally and therefore could negatively affect Getty's rent collections and financial results. The operating environment for our tenants remains stressed as many tenants continue to adjust their operations to reflect ongoing health and safety challenges. Despite these challenges, most of our properties and tenants have performed well during this difficult time. Nationally, Fuel volumes continue to recover and are now down 17% year over year compared to the 50% decline we saw at the height of the pandemic's impact during the Q2. In addition, fuel margins remained elevated on a national basis from comparable periods in 2019, meaning that on an average, operators are making more money on a cents per gallon basis. The net impact to fuel gross profit remains highly regional, with certain of our tenants experiencing year over year declines and others reporting increases in annual fuel gross profit. The convenience store side of the business has generally performed well across the board during the pandemic, with the majority of our tenants reporting that results are slightly ahead of the prior year's performance. To touch on our balance sheet and liquidity position, we ended the quarter with $58,000,000 of cash on hand and $190,000,000 of availability on our revolving credit facility with some of the cash on hand being used to fund acquisitions we have already closed during the Q4. We believe we have sufficient access to capital at this point in time to execute on our business plan. Turning to our dividend. Given our performance, I am pleased to report that our Board approved an increase of 5.4% to $0.39 per share in our quarterly dividend. This represents the 7th straight year with a dividend increase. Our Board believes this annual increase is appropriate as it maintains a stable payout ratio It is tied to the company's growth over the past year. Looking ahead, while the situation remains fluid, we are continuing to effectively navigate uncertain environment, we believe that our execution of our strategic objectives over the last several years, the essential nature of our tenant businesses, The net lease structure of our leases and our stable balance sheet all position us well. Furthermore, we believe there will continue to be opportunities for YETI to grow its business. We are confident that our targeted investment strategy, which focuses on the largely Internet resistant, Service oriented convenience and gas and other automotive sectors across metropolitan markets in this country will continue to create value for our shareholders over the long term. We remain committed to an active approach in managing our portfolio of net leased assets, expanding our portfolio through acquisitions and selective redevelopment projects. We are confident in our ability to continue to successfully execute on our strategic objectives over the long term. This approach and focus on these Croco components should result in driving additional shareholder value as we move through the remainder of 2020 beyond. Before turning the call to Mark, let me just address our recently announced executive transition. Danyan Fielding, our CFO, is going to be leaving the Getty team for for personal reasons. I'd like to thank Danyan for his dedication to Getty over the last 4 plus years. Danyan led his team and company's finances and was a key part of Getty's success. We expect that Daniel will leave Getty before year end and wish his family and him well in his future endeavors. The search is underway and we anticipate a smooth transition of the CFO role. With that, I will turn the call over to Mark Olear to discuss our portfolio and investment activities. Thank you, Chris. In terms of our investment activities, for the Q3 and 1st 2 weeks of October, we were very active in the transaction market. During the quarter, we invested $36,100,000 for the acquisition of 9 properties. Subsequent to the end of the quarter, we invested an additional $36,600,000 for the acquisition of 8 properties. The The majority of our completed acquisitions during the Q3 stem from an acquisition leaseback transaction with a subsidiary of Go Car Wash. The properties acquired are subject to a unitary triple net lease with a 15 year base term and multiple renewal options. These properties are located within San Antonio MSA. Properties we acquired have an average lot size of 2 acres and an average Tunnel length of more than 160 feet, both of which we believe enhance the quality and diversity of our portfolio. We invested $28,000,000 at closing and expect to generate a cash yield that is in line with our historic acquisition cap rate range. Additionally, we closed on the acquisition of 2 newly constructed car wash locations in North Carolina and Ohio. The site is subject to a 15 year triple net lease with Zips Car Wash. Getty's aggregate initial cash yield on our 2nd quarter Acquisitions was 7.2%. Subsequent to the quarter end, we completed a sale leaseback with Fikes Wholesale, one of the leading independent community store operators in the Southern United States. In the transaction, Getty acquired 6 properties for 28,600,000 The properties acquired are subject to a unitary triple net lease with a 15 year base term and multiple renewal options. The properties are located throughout the state of Texas. The properties we acquired have an average lot size of 2.7 acres And an average store size in excess of 5,300 square feet, which reflect that the assets we acquired have all the attributes of today's modern full service convenience stores. Our initial cash yield is in line with our historical acquisition cap rate range. We also closed on the acquisition of 2 Car Wash locations in the Kansas The sites were added to our 15 year triple net lease with Go Car Wash. We remain highly committed to growing our portfolio in the convenience and gas sector as well as our other oil related categories, including car washes and automotive service centers. While the COVID-nineteen pandemic continues to impact the overall transaction market, Business conditions for our target asset classes have stabilized and we are seeing an increase in these transaction activity in the marketplace. As a result, we expect that we will remain active in the underwriting and acquiring and acquiring assets. Getty will remain committed to its core principles of acquiring high quality real estate and partnering with strong tenants in our target asset classes. Moving to our redevelopment platform. For the quarter, we invested approximately $600,000 in both completed projects and sites which are in progress. In the Q3, we returned 1 redevelopment project back to our net lease portfolio. Specifically in July, a project was Turn to the portfolio in the Dallas Fort Worth MSA, where we leased a site to 711 for the state of the art convenience and gas location. Our total investment in this project was $800,000 and we expect to generate a return on our investment of 18%. In terms of redevelopment leasing, we ended the quarter with 12 signed leases, which includes 7 active projects and 5 signed leases on properties, which are currently subject to triple net leases, but which have not yet been recaptured from the current tenants. All these projects are continuing to advance through the redevelopment process. Again, I note that due to the impact of the COVID-nineteen pandemic, we continue to experience delays in certain of our projects as contractors, In total, we have invested approximately $1,500,000 in the 12 redevelopment projects in our pipeline. We expect to have one additional rent commencement in Q4 2020. From a capital investment perspective, we expect that these 12 projects will require Total investment by Getty of $7,900,000 and will generate incremental returns to the company in excess of where we could have invested these funds in the acquisition market today. For more detailed information on the redevelopment pipeline, please refer to Page 15 of our investor presentation, which can be found on our website. We remain committed to optimizing our portfolio and continue to redevelopment opportunities over the next 5 years, possibly involving between 5% 10% of our current portfolio with targeted unlevered redevelopment program yields of greater than 10%. Turning to dispositions. We sold 1 non core property during 3rd quarter realizing proceeds of approximately $200,000 We also exited 1 property, which we previously leased from of 3rd party landlord. As we look ahead, we continue to selectively dispose of properties where we have made the determination The property is no longer competitive as a CNG location and does not have redevelopment potential. As a result of our activity, we ended the quarter with 939 net leased properties, 7 active redevelopment sites and 8 vacant properties. Our weighted average lease term is approximately 10 years and our overall occupancy, excluding active redevelopments, increased to 99.2%. With that, I turn the call over to Daniel. Thank you, Mark. For the 3rd quarter, our total revenues were $37,900,000,000 an increase of 4% over the prior year's quarter. And our rental income, which excludes tenant reimbursements And interest on notes and mortgages for Seaport also grew 5.3% to 31,900,000 Our growth in rental income continues to be driven by rent escalators in our leases plus additional rent from recently completed acquisitions and redevelopment projects. During the Q3 of 2020, we benefited from a reduction in both property costs and environmental expenses, offset by an increase in general and administrative expenses due to increases in employee related expenses and legal and other professional fees. For more information on specific expense movements, please refer to the S. A. Afternoon's earnings release. Our FFO for the quarter was $20,800,000 or $0.48 per share as compared to $19,100,000 or $0.46 per share for the prior year's quarter. Our AFFO for the quarter was $20,200,000 as compared to $18,100,000 In the prior year's quarter, on a per share basis, our AFFO was $0.47 up 9% from $0.43 in the prior year. Turning to the balance sheet and capital markets activities. We ended the Q3 2020 with $560,000,000 of total borrowings, which includes $110,000,000 under our credit agreement and $450,000,000 of long term fixed rate debt. Our weighted average borrowing cost is 4.3%. The weighted average maturity of our debt is 4.5 years with 80% of our debt being fixed rate. And our earliest debt maturity remains on $100,000,000 Series A, which matures in February 2021. We are in the process of refinancing this upcoming debt maturity We'll provide an update at the appropriate time. As of today, we have $190,000,000 of undrawn capacity on our revolving credit facility, which can be used to fund operations or for growth over the near to medium term. At quarter end, our debt to total capitalization stood at 34%, Our debt to total asset value was 41% and our net debt to EBITDA ratio was 4.9x. Additionally, we utilized our ATM program in the quarter and efficiently raised permanent capital. For the quarter, we raised 27,000,000 at an average price of $29.41 per share, which helped to fund our growth and maintain our low leverage profile. We still have $40,000,000 available to us under our existing at the market program. As we look ahead and think about our capital needs, We remain committed to maintaining a well laddered and flexible capital structure. Our environmental liability ended the quarter at $49,000,000 down $1,700,000 for the year. For the quarter, the company's net environmental remediation spending was approximately 1 $4,000,000 While our tenants at Engedi have fared well so far through the COVID-nineteen pandemic uncertainly persists with the risk of possible reimplementation of shelter in place restrictions and the length and depth We withdrew our 2020 AFFO per share guidance range In conjunction with our Q1 2020 results and given the continued uncertainty related to the COVID-nineteen pandemic, We are not reinstating guidance at this time. With that, I will turn the call back over to Chris. Thank you, Daniel. With that, I'll ask the operator to open the call for questions. And at this time, we will be conducting a question and answer session. Our first question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question. Hi, thanks. Good morning. Good morning, Doug. Good morning. In terms of acquisition, so it sounded like some of the deal flow in Q3 and then October was attributable to deals that you're pursuing sort of pre COVID. Were there any changes in the prices paid today compared to the pre COVID pricing that you were negotiating? And then can you just talk about pricing for new investments more broadly and how that's trending? Yes. I'll answer both those with one statement, which is our view With both what's been closed and what we're underwriting is that there really hasn't been too much of a change In the range of the cap rates that we're offering, tenant expectations, etcetera. If anything, the sector has performed quite well, right? Results are very strong. Balance sheets in our sector remain fairly strong. So We don't see a whole lot of change around the cap rate environment for our types of assets. Okay. And can you describe what the acquisition pipeline looks like today? And Maybe can you discuss whether you expect to have any additional closings by year end and sort of how big the pipeline is really heading into 20 Yes. We really don't typically provide that level of Forward expectation, what I could say is the team is continuing to underwrite. We have a series of Opportunities, both one off and multi property in the pipeline. And as I said in my remarks, I think we We feel very confident that we're going to continue to execute on all of our strategies, and one of those is I'd say to acquire attractive assets both in the C and G sector and in another automotive asset classes. Okay. And just lastly, in terms of the balance sheet, can you just provide an update on sort of the timing and any pricing Expectations that you have today on the February, the Series A notes? Yes. I mean, we're as Daniel mentioned In his remarks, we are in the middle of working through refinancing of the upcoming February 21 debt maturity. And again, we certainly expect that to be a Very positive event for the company, but not prepared to offer sort of any level of pricing or coupon today. And our next question is from John Massocca with Ladenburg Thalmann. Please proceed with your question. Good morning. Hey, John. So maybe touching on acquisitions again. I mean, as we Think about that other automotive bucket, which is kind of in a lot of car washes in recent quarters versus kind of more of the traditional C store investments. How big is the cap rate spread between those, if at all? I mean, I'm just thinking, are cap rates on CSource kind of trading significantly inside Car washes or is it kind of right on top of each other? Yes. It's one of the reasons we like the Other automotive extension is pricing is fairly consistent between C&G and some of the other automotive buckets. So while I think there are Small variations, it's not a significant gap. Okay. And then with the deal that was closed subsequent to quarter end, I'm sorry, I missed the tenant. And maybe kind of how did that deal come to the team? So the tenant is Bikes Wholesale. They operate their C stores under the brand CeFCO, CEFCO, and they're probably at 200 locations across the Southern United States. We have an existing relationship With the management team there, they've certainly been an operator who has been growing organically, right, and who has from From time to time, used sale leaseback to kind of right size their balance sheet. And they've really they've been Really developing on their own balance sheet and then kind of reloading for the next tranche. Okay. Understood. And then maybe shifting gears a little bit, with the kind of August announcement about the settlement around MTBE Yi with State of New Jersey. How could potential future settlements potentially impact The kind of environmental obligation that's on the balance sheet, I'm just thinking because of the dynamic between what's kind of this uncertain obligation and kind of certain obligation, Can some of that excess uncertain obligation go away as more kind of losses related to environmental contamination are settled? Well, so the remediation obligations, which are the which is the $49,000,000 on our balance sheet, that is separate from our environmental litigation So I'll answer your question about litigation, right. Getty wants to get out of the environmental litigation business. These litigation matters that are on in our filings and in our disclosure, all stem from The time when Getty was an operator, pre becoming a REIT, and we have been working hard to settle and resolve all the litigations that are out there. And we expect to ultimately Get there, the company. And this settlement is from a case that's been out there for a very long time and it's fully reserved on our balance sheet and Part of our strategy to move on from some of the legacy issues that we deal with as a company here. Okay. And then, so I guess broadly speaking, how much is kind of reserved for any other outstanding kind of Legacy litigation. And maybe where is that flowing through? Well, it's a the crude is a liability on our balance Right. And as we take additional accruals, it flows through the P and L. And I think at quarter end, Daniel may have the exact number, but I think it's 17.8% was on what was on our balance sheet. Yes, it's 17.9%, Chris. Okay. That's it for me. Thank you all very much. Thanks, John. And our next question is from Nikitavelli with JPMorgan. Please proceed with your question. Good morning, guys. Can you talk a little bit about what's happening with the rent coverage at the store level, the economics there? Obviously, Your collections have been very good, but do you see at all profits being squeezed by turns? I know you mentioned, Chris, that The gas stations are coming back, but still not fully back to pre COVID levels. Can you talk a little bit about that? Yes. So our coverage We published our investor presentation this morning. Our coverage on trailing 12 months It was 2.7. That is a very strong number for Getty. It's actually an increase from what was published last quarter. The primary driver behind that was the rolling off of a relatively challenged quarter In the middle of 2019. But what you see there is, as I mentioned in my remarks, the C store part of the business is actually up Year over year and depending on where our tenants operate, The effect of the higher fuel margin has offset most, if not all, The reduction in volume, and so the gas side of the business, again, highly regional. In certain markets, it's Certainly off a little bit, but in other markets, it's actually higher than where it was going into 2020. Really, it's a very strong, almost historically strong and stable margin environment for many of our tenants today, which is driving That increase in coverage for Getty. Got you. What about the deal flow? This has been very good for you 3Q Q and post 4Q. Is there anything behind that deal flow? Is it something we're working on for a while? Is it just the timing happened so? Or do you You'll see more activity on that side and also who are the competitors? Have they changed between the last 6 to 9 months? Yes. So, 2 questions in there. The first question was what's been driving the kind of recurring I think 2 things there. If you go all the way back to the end of last year, right, we had a really busy Q4 of 2019, a really busy Q1 of 2020, kind of pre COVID, and we had a number of opportunities, which we were working on. Many of those opportunities were just put on hold as operators and transactions normally were kind of assessing the damage In the context of COVID, those opportunities all came back and that's what you see closing in this quarter and so far in the Q4. But one of our goals as a team is to be more Be a constant acquirer out in the markets, both in the C and G market and other automotive market. And I think you're Seeing some of those efforts start to pay off at Getty. And then your second question is competition. I think We're certainly seeing a lot of competition from our repeaters, other institutional real estate investors. The ten thirty one market is still very strong given the interest rate environment. So I don't think there's been any decrease in competition Either pre or post COVID. What about the sell offs today? Are those any different Today and pre COVID, and have you also on that front, have you seen any distressed market? I wouldn't use the word distress. I think what I would say is having access to capital is Certainly at the forefront of many of our tenants' minds. If you're a public or a larger operator, you certainly have more access to capital than if you're A small regional operator. Some of our opportunities that we've closed this year are Tenants are operators that have a lot of real estate on their balance sheet and we're able to monetize that, right, to free up capital for other areas of their business. And that's a trend that we have been saying for a while that we think will continue and I think COVID probably accelerated that. Got you. And maybe one last question for Danyan. Danyan, you've managed the balance sheet very well over time and the company has been very In conservative position, do you think on a longer term basis, there's opportunity for getting to maybe Take up the leverage a bit to do a little bit more deals. How do you see the balance sheet from now on? Good question, Akita. We've been very consistent in articulating that we view our leverage in a conservative manner and And we have indicated that our net debt will be within a range of 4.5 times to 5.5 times. As you know, today we're timing at 4.9 times. The way we view that is that it provides us capacity To do acquisitions, as we pursue our growth, we don't really see it as mechanism to increase leverage for financial engineering purposes. So we will continue to manage the balance sheet In that conservative way to maintain that strength and flexibility on a go forward basis. And at this time, we have no further questions. I would like to return to Mr. Konstant for any closure for further remarks. Thank you, operator. Thank you, everyone, for your interest in Getty. We look forward to getting back in front of everybody when we report our year end numbers in February. I appreciate your interest in the company. Thank you. Bye.