Earnings Call: Q1 2020

May 6, 2020

Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the Q1 of 2020. This call is being recorded. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company will read a Safe Harbor statement and provide For information about our non GAAP financial measures, please go ahead, Mr. Picker. Thank you, operator. I would like to thank you all for joining us for Getty Realty's Q1 earnings conference call. This morning, the company released 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 20 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, subsequent quarterly reports filed on Form 10 Q 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 or implied in any forward looking statements made today. You should not place undue reliance on forward looking statements, which reflects 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, for AFFO and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Thank you, Josh. Good morning, everyone, and welcome to our call for the Q1 of 2020. With Josh and me on the call today are Mark O'Lear, our Chief Operating Officer and Dannion Fielding, our Chief Financial Officer. This morning's call is slightly modified from our typical prepared remarks. I will provide a general update on our business And Mark and Danyan will provide their standard quarterly review of our portfolio and financial matters. We will also spend a significant portion of the call discussing the impact of the COVID-nineteen pandemic on our business, our financial strength and our tenants' operational and financial health. Getty had a very successful start to 2020. We completed the acquisition of 12 properties for $57,000,000 in the Q1. When combined with our productive Q4 of 2019, we have invested more than $100,000,000 over the past 6 months in high quality, well located properties. In addition, we completed 2 redevelopment projects in the Q1, bringing our total of completed projects to 15 since the inception of our redevelopment effort. Additionally, during the quarter, our core net lease portfolio continued to display the strength and stability that we expect from our long term triple net Turning to our results. We grew our revenue, net earnings, FFO and AFFO for the quarter as compared the same period for the prior year. On a per share basis, our AFFO increased by 9.5%, which reflects the successful execution of all of our growth strategies. Let me now share some perspective on the impacts YETI has experienced from the In March, we began to implement plans for our business and employees to I am pleased to report that all of our employees and Board members are healthy and our team has been working efficiently and productively at home for the past 8 weeks. I am proud of the strength and resolve our employees have shown during this stressful period. Prior to the COVID-nineteen pandemic, our tenants businesses were performing well. The convenience and gas sector Instituted travel restrictions and stay at home orders. Fortunately, the vast majority of our properties are convenience stores and gasoline stations, Which are retail sectors that have been deemed essential under state and federal guidelines, meaning that more than 95% of our assets remain operational, while COVID related restrictions are in place. It should be noted that while our tenants are open for business, they are facing operational, health And safety challenges. Nationally, the COVID-nineteen pandemic has had a significant negative impact on motor vehicle use. And as a result, fuel volumes have declined significantly year over year, with the extent of the decline varying by region. Certain of our tenants are located in the most severely affected regions of the country and are experiencing fuel volume declines of as much as 70%. While it is impossible to replace the lost revenue from our lower fuel volumes, it is noteworthy that our tenants Have at the same time benefited from historically high retail fuel margins, meaning the gross profit made on a per gallon basis. This increase in retail fuel margins, which was driven by the considerable drop in oil prices, has partially offset The pressure on fuel related revenue caused by volume declines. In contrast to fuel related challenges, our tenants' convenience store businesses have Strong sales of grocery items and household products. I am pleased that to date the net result of the COVID-nineteen pandemic on Getty's business is that we have not experienced a meaningful negative financial impact to our business. Due to the timing of the rollout of stay at home directives, We did not experience any material rent collection issues in the Q1 of 2020. For the month of April, we received 97% contractual base rent and mortgage payments and granted deferrals for an additional 1.8% of expected base rent and mortgage payments. These deferrals were granted to select tenants and mortgage owners whose businesses have been deemed non essential or who, Due to COVID-nineteen related impacts, have experienced economic difficulty and requested relief. In most of these cases, the base rent or mortgage payment deferrals will continue for May June and then will be due over the course of the following 6 to 12 months depending on the particular arrangement. In general, the relief requests have come from our one off tenants and mortgage orders and from our smaller unitary tenants property is located on the East and West coasts. The remainder of uncollected payments due to the company for April, representing approximately 1.2% of Scheduled rent and mortgage payments have been abated or deemed to be uncollectible. This uncollectible portion of our rent and mortgage payments is and is being recorded. Impacted by the COVID-nineteen pandemic. With respect to requests related to May June, to the extent decisions have not already been made, company continues to evaluate these requests and has been seeking appropriate financial information to support its decision making process. As of this morning, we anticipate that for May, we will receive between 92% 95% of May contractual base rental and mortgage payments with rent and mortgage payment deferrals ranging from 2% to 5%. We will continue to work on a case by case basis with tenants during the COVID-nineteen pandemic who demonstrate a need for our systems. Our strategy over the last several years to diversify our tenant base with quality tenants has been productive with approximately 34% of our ABR now from public companies. As a result of our hard work, we believe that we are better positioned to weather the current public health storm. We think we can effectively navigate this uncertain environment due to the essential businesses of our tenants, the net lease structure of our leases and our stable balance However, it is important to recognize that the greater the duration and more restrictive the terms of the COVID-nineteen Shelter in place directives, the greater the risk that there will be economic impact on consumer and retail activity generally and therefore to our 20 20 financial performance in particular. Our conservative balance sheet continues to be a strength during these uncertain times. We place a premium on being lower leveraged. We are committed to maintaining a well laddered and flexible capital structure. We believe we have sufficient access to capital as we sit here today through cash on hand, funds available under our revolver and our ATM program. Looking ahead, we believe there will continue to be opportunities for Getty to grow its business. We are confident that our targeted investment strategy, which focuses on the largely essential and Internet resistant service oriented convenience and gas and other automotive sectors In metropolitan markets across the country, we'll continue to create value for our shareholders over the long term. We remain committed to an active approach to managing our portfolio of net leased assets, expanding our portfolio through Acquisitions in the convenience, gas and auto related sectors and selective redevelopment projects. We are confident in our ability to and should result in driving additional shareholder value as we move through 2020 beyond. With that, I will turn the call over to Mark Olear to discuss our portfolio and investment Thank you, Chris. In terms of our investment activity, we had a very busy first quarter in which we were able to invest $57,000,000 in 12 high quality other auto related assets. During the quarter, Getty acquired 10 properties The properties acquired are subject to unitary triple net lease with a 15 year base term and multiple renewal options. Properties are located in the Greater Kansas City MSA. Properties we acquired Have an average lot size of 1.4 acres and average tunnel length of 145 feet, both of which we believe enhance the quality and diversity of our portfolio. We invested $50,000,000 at closing and expect to generate a cash yield that is in line with our historical acquisition cap rate range. Additionally, we closed on the acquisition of 2 properties for $7,000,000 during the quarter. Both sites are car wash We remain highly committed to growing our portfolio in the community gas sector as well as our newer categories, including car washes at Automotive Service Centers. I note, however, that the COVID-nineteen pandemic is currently impacting the overall transaction market on various levels. And accordingly, we believe many of the acquisition opportunities in our pipeline will be delayed. Moving to our redevelopment platform. For the quarter, we invested approximately $500,000 in both completed projects and sites which are in progress. In the Q1, we returned 2 redevelopment projects back to our net lease portfolio. Specifically, in February, Brent commenced on a project in the Bronx, New York, where we leased a site to Wendy's for a quick service restaurant use. In this project, we invested $1,600,000 and we expect to generate a return on our investment of 11%. The second completed project was a lease to AutoZone in Philadelphia, Pennsylvania, our second completed project with this 10. In this project, we invested $300,000 and we expect to generate a return on investment of 39%. In terms of redevelopment leasing, we ended the quarter with 11 signed leases or letters of intent, which includes 4 active projects, 6 signed leases on properties which are currently subject to triple net leases, but which not have yet been recaptured from the current tenants And signed letters of intent on one vacant property. 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 are seeing some delays in certain of our projects as contractors, Suppliers and municipalities deal with the shutdown orders, social distancing requirements and other impediments to normal functioning. In total, we have invested approximately $1,200,000 in 11 redevelopment projects in our pipeline, and we expect to have rent commencement at several additional projects during 2020. On the capital spending side, we estimate that these 11 projects will require a total investment by Getty of $6,800,000 and will generate incremental returns to the company in excess of where we could invest 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 anticipate 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 4 properties during the Q1 of 2020, Realizing proceeds of approximately $1,700,000 The properties sold were vacant or We'll return to us by tenants per the terms of their lease agreements. We expect the net financial impact of these dispositions will be minimal. In addition, during the quarter, we exited 6 properties, which we previously leased from 3rd party landlords. As we look ahead, we will continue to selectively dispose of properties where we have made the determination that the property is no longer competitive at the CNG location and does not have redevelopment potential. As a result of all of our activity, we ended the quarter with 934 net leased properties, 4 active redevelopment sites and 9 vacant properties. Our weighted average lease term is approximately 10 years and our overall occupancy, Excluding active redevelopments remain constant at 99%. With that, I turn the call over to Daniel. Thank you, Mark. For the Q1, our total revenues were $35,400,000 an increase of 4% over the prior year's quarter And our rental income which excludes tenant reimbursement and interest on notes and mortgages receivables grew 6% to 31,300,000 Our growth in rental income continues to be driven by rent escalated in our leases plus additional rent from recently completed acquisition And redevelopment projects. During the Q1 of 2020, we benefited from reductions in both property costs and environmental expenses, while maintaining a steady level of general and administrative overhead. For more information on specific expense movements, Please refer to this morning's earnings release. Our FFO for the quarter was $20,000,000 or $0.47 per share as compared to $17,800,000 or $0.43 per share for the prior year's quarter. Our AFFO for the quarter was 19 point $3,000,000 or $0.46 per share as compared to $17,500,000 or $0.42 per share for the prior year's quarter. Turning to the balance sheet and our capital markets activity, we ended the Q1 of 2020 with $535,000,000 of total borrowings, Which includes 85,000,000 under our credit agreement and 450,000,000 of long term fixed rate debt. Our weighted average borrowing cost is 4.6%. Weighted average maturity of our debt is 5.1 years And 84% of our debt is in fixed rate and our earliest debt maturity remains our 100,000,000 Series A debt maturity in February of 2021. As of today, we As of today, we have 215,000,000 of undrawn capacity on our revolving credit facility, which we can use to fund operations or for growth over the near to medium term. At quarter end, our debt to total capitalization stood at 36%, Our debt to total asset value was 43% and our net debt to EBITDA was 5 times. Lastly for the quarter, we did not utilize our ATM. We have 80,000,000 available to us under our existing at the market equity program should we need to raise additional capital. Our environmental liability ended the quarter year at 50,400,000 Down 300,000 for the year. For the quarter, the company's net environmental remediation spending was approximately 1,300,000. Finally, we have withdrawn our 2020 AFFO per share guidance range given the uncertainty related to the COVID-nineteen pandemic And the unknown length and depth of impact to the U. S. Economy. With that, I will turn the call back to Chris. Thanks, Daniel. That concludes our prepared remarks. So let me ask the operator to open the call for questions. We will now begin the question and answer session. Our first question will come from Craig Mailman with KeyBanc Capital Markets, please go ahead. Hey, good morning guys. Just curious here, very good collections in April and then assuming some fall off here in May. Could you just talk about in May, Just give a little bit of color. Yes. So one thing we mentioned in our remarks, right, is the Q1 was very strong for our So April, we really didn't see too much of an impact as illustrated by the 97 Percent collection rate. When you start to look at May, it's really a combination of both, Craig. But we do have some non essential, non T and G properties in the portfolio. Interestingly enough, the car wash properties that we've acquired are All open and operating, so we're really not focusing on those in that category today. But there are certainly some CNG G sites that make up the amount that was not collected. So it's really a combination of both non essential closed properties as well as certain CNG sites that are struggling. Okay, that's helpful. Then on the write offs, Are you guys taking back those properties or are you just basically saying it's an abatement? Again, a combination of both, Right. So there are certain properties that are closed, right, that we've just elected to waive for a short amount of time. And then there are certain that I think will ultimately have to be re leased or that we may eventually sell over time. Okay. And then But again, I just want to I just Craig, one thing I would leave you with on that comment is that, that's a pretty small number at this point. So I wouldn't really So it's having a material impact on us sitting here today. No, no, that's helpful. Then just as we think about some of the remedies you guys have, I mean, Can you just remind us security deposits, letters of credit? I mean, are you guys drawing down on any of those as part of the deferral agreements? So from an perspective, you might be kind of whole or is this you guys are just not there? So from an accounting standpoint, right, we've elected to For deferrals, I'm speaking of at this point, right, we have elected to continue to treat that as payment good during the term of the lease, and therefore you really wouldn't see too much of an impact on an FFO, AFFO basis for properties that are in The abatement or uncollectible category, we're certainly evaluating our security deposits and LCs, right, but those properties have gone To a cash basis at this point. So, anything we do any action we do take there, right, you can see that in the Q2 or beyond. Okay. And then just moving on, just I know it's very early in this and just curious The acquisition market, kind of your thoughts here on when maybe that becomes open and functioning again and maybe what you are expecting to see On the opportunity set side and also just on the return side? Sure. This is Mark. We continue to do our best to underwrite the pipeline that we had been working on. There are certainly some physical challenges to Processing any new opportunities with regard to proper due diligence. Many of the parties involved with The transactions are properly focused on the operational side and the health and safety side of the business right now. So Any new opportunities are somewhat on a pause right now. That said, we continue to stay engaged with all the Sources that we receive marketing from are sale leaseback and acquisition leaseback partners that we've worked with over the years, And we continue to position ourselves to be ready to act when the market is able to reengage. And do you think there's going to be any material movement in returns or is it just too early to know? I think it's too early to know at this point. Great. Thanks guys. Thanks, Craig. Our next question will come from Anthony Paolone with JPMorgan. Please go ahead. Yes, thanks. Good morning. On some of the deferrals or abatements, Was that disproportionately at all in GPMI or was it fairly well spread across the portfolio? Well, probably fairly well spread across the portfolio, quite frankly. Again, some of those Where we abated rent or deferred rent in both cases were some non CNG properties, so those certainly wouldn't touch the The old legacy GPMI portfolio. But with that said, the GPMI portfolio is really Northeast, Mid Atlantic, right, and those are some of the areas that have been hit the hardest with the travel restrictions or I guess they were some of the earliest Areas to really kind of move to a shelter in place. So certainly some of those deferments are coming from the old My portfolio, but again, it's a combination of both. Okay. And then, you mentioned the gas margins Actually being pretty good. Like is that something that you think is sustainable if oil prices remain low for an extended period of time or is that Elevated margin is something that's more transitory? Yes. Typically, pre COVID, right, margins were strong. And obviously with the price of oil, the rapid decline in the price of oil, that's where Saw the margin expansion. I anticipate that, that will float down and maybe Eventually get back down towards a more of a normal level, but it's really hard to predict when and how fast that will ultimately happen. Okay. And then with regards to the EBITDA coverage, I think that was 2.1 times that you showed in the deck And would imagine that that drops down just naturally as the next few quarters flow through. But like where do you think that number needs to be You don't feel like the operator is getting enough profits to have skin in the game and to continue to operate or like Where should we think about that number, I guess, over time and where the comfort level should be? Well, again, you Should certainly expect to see that number tighten, right, given what's happening in their business. I think certainly when we underwrite portfolios, you're looking at a minimum of 1.5%, right? So I think anything tighter than really that 1.5 for a sustained period of time would be difficult For an operator to really feel good about being there and investing in those properties long term. But again, Tony, I think that's a long term view, right? Obviously, we'll see where it shakes out over the next couple of quarters. Yes. No, I understand the next Our next question will come from John Massocca with Ladenburg Thalmann. Please go ahead. Good morning. Hey, John. Just kind of touching on kind of acquisitions again. Just to kind of clarify, is your kind of view on the acquisition market that you would be aggressive or not aggressive necessarily, but You would be active if kind of transactions materialize. There's no kind of pause necessarily from your perspective Either due to kind of uncertainty in the market or your view of your cost of capital that you're kind of on the sidelines, it's really more just You need the deal volume to be out there in order to kind of reaccelerate acquisitions? I think for right now that the market is just Naturally on pause, as Mark mentioned, right, there's physical challenges. You have buyers and sellers who are Sellers who are struggling with their own operational issues and health and safety and kind of doing their day jobs. But from a long term perspective, I think our balance sheet is in great shape. I think We certainly continue to underwrite and continue to look at a number of opportunities. As Mark said, We had a pretty strong pipeline going into this. So again, I think once the natural pause kind of unwinds and Businesses normalized, right, of the fact of underwriting, whatever the Last couple of years performance look like and combining that with the stress of the COVID period and there will be Probably some issues around pricing and terms coming out of that, but I do expect the transaction market to reengage at some point, probably Yes, over the next couple of months. And is there any thought process on your end maybe to be more active in that market or even necessarily aggressive In that market, just given there's probably going to be high demand for the type of assets you target from other investors given The fact that they are kind of deemed essential in the new world we kind of live in where that's going to be an important factor? I think we're We at least believe we're always active and always being aggressive on our team that works under Mark, right, is still out there reviewing opportunities. But again, It's hard to comment on the activity level or what pricing will really be just given that, You don't know when that market is going to reopen and quite frankly it's kind of difficult to assess what the new normal will be. That's it for me. Thank you guys very much. Our next question will come from Joshua Federline with Bank of America. Please go ahead. Hey, good morning, everyone. Hope everyone's doing well. Just curious if you had any color on maybe the decline In the box sales at C Stores trended over April and if you think like kind of this new lower level maybe Yes, it's mundane kind of persist for a while and if that's how that might feed into coverage ratios going forward. It's really anecdotal feedback from our tenants and from the market in general, but I think we're hearing C store sales depending on where you are down anywhere from 5% to 20%. 5% to Okay. And then Josh, one thing I would add to that, right, is if you're a neighborhood convenience store, right, you're probably doing pretty well at this point. People are walking and shopping here and using it as for grocery type items. If you're a site that's On a natural commuting path where most of your traffic is driven by people driving to and from work, that's where you're seeing probably those larger declines. There's But I'll let people commuting by car to their offices. Okay. Okay. Yes, that makes a lot of sense. And then for the C stores with the QSRs attached, like is it similar declines or They're doing the same thing that the standalone QSRs are, right? They're doing takeout. Some people are experimenting with delivery. Their businesses are doing their best to or that portion of their business is doing their best At this time, I would like to turn the call back to Mr. Constant for any closure or further remarks. Thank you. Thanks again for joining us for the Q1 call. Hope everybody continues to be healthy and stay safe and we look forward to getting back