Earnings Call: Q4 2019

Feb 27, 2020

Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the 4th Quarter and Year End 2019. 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. Dicker. Thank you, operator. I would like to thank you all for joining us for Getty Realty's 4th quarter and year end earnings conference call. Yesterday afternoon, the company released its financial results For the quarter year ended December 31, 2019, 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 actual results to differ materially from those described in the forward looking statements. Examples of forward looking statements include our 2020 guidance and may also include statements made by management in their remarks And in response to questions, including regarding 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, 2018, 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 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 a 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, Welcome to our call for the Q4 year ended 2019. With Josh and me on the call today are Mark O'Lear, our Chief Operating and Daniel Fielding, our Chief Financial Officer. I will begin today's call by providing an overview of our 4th quarter year end 2019 performance, touch on our 2020 strategic objectives, and then we'll pass the call to Mark to discuss our portfolio in more detail and then Dania will discuss our financial results. Getty had a very active 4th quarter, punctuated by the acquisition of 13 properties for $43,800,000 in a combination of individual and portfolio transactions in both the convenience and gas and other automotive sectors. In addition, during the quarter, our core net lease portfolio continued to display the strength and As we close out 2019 and look ahead to 2020, our team is more focused than ever on executing on each of our growth initiatives, including realizing internal growth from our operating assets, enhancing our portfolio through accretive acquisitions and unlocking embedded value through selective redevelopments. We are confident that our targeted investment strategy, which includes focusing on the largely Internet resistant Service oriented convenience and gas and other automotive sectors in metropolitan markets across the country will continue to create value for our shareholders over the long term. Furthermore, we will do so while maintaining a conservative and flexible balance sheet position. Turning to our results for the quarter. We grew our revenue, net earnings, FFO and AFFO for the quarter year as compared to the same periods for the prior year. On a per share basis, our AFFO was in line with our expectations and increased slightly year over year, which also reflects our successful capital raising activities during 2019. In addition, we made the decision to incur certain expenses in our redevelopment program and for our environmental litigation matters, which weighed on our profitability during the year. Finally, the timing of our acquisitions in 2019 was such that much of the financial benefit will be felt beginning in 2020 beyond. As I mentioned earlier, we continue to underwrite and acquire new properties. For the year, our total investment was nearly $90,000,000 We acquired 27 high quality convenience and gas and other automotive locations during the year. This activity demonstrates our proactive yet disciplined underwriting approach to growing our portfolio. Over the past 3 years, we have acquired For an investment of approximately $380,000,000 I am particularly proud of the fact that we continue to grow our relationships with established convenience and gas operators. We have been in the convenience and gas business for a very long time and our success proves that maintaining and growing relationships such as these are one of the keys to our ongoing ability to source accretive growth opportunities. The convenience and gas sector continues to evolve. Chain store operators are taking market share at the expense of individual sites. And as the industry consolidates, we are afforded regular opportunities to review new investment We expect to continue to partner with chain store operators who share our growth oriented vision for the sector in the coming years. In addition, 2019 was a year for Getty in which we established and grew relationships with several other automotive operators and made progress and expanding our investments to include related sectors such as car washes and automotive parts and services businesses. As an example, we completed our first transactions with both Zips and Go Car Wash during the year and continue to expand with 1 of the largest Jiffy Lube franchisees in the U. S. As well. These types of assets are highly complementary to our existing portfolio as they are generally located in similar retail areas, occupy similar locations and size and have similar economic profiles. Over the long term, our goal remains to focus on acquiring high quality real estate and to partner with tenants who share our commitment to the growth and evolution of the Conventional Gas and Other Automotive Businesses. Turning to our redevelopment program, rent commenced on 4 projects during 2019. These projects included new to industry convenience and gas as well as other retail uses. This brings our total completed redevelopments to 13 since commencing this program. As this platform matures, we expect to have a steady stream of completed projects on an annual basis, while also maintaining a pipeline of additional opportunities which will move through the development progress over time. Utilizing the financial flexibility that we've worked hard to create, We were able to finance our growth in 2019 with a combination of debt and selective equity, including our September $125,000,000 10 year unsecured debt private placement and measured use of our ATM program. We placed a premium on being conservatively leveraged and are committed to maintaining a well laddered and flexible capital structure as we look to grow the company. Looking ahead, we remain committed to an active approach to managing our portfolio of net leased assets, expanding our portfolio through acquisitions as well as selective redevelopment program projects. We are confident that we will be able to continue to successfully execute on our strategic objectives throughout 2020. This approach and focus on these critical components should result in driving Thank you, Chris. In terms of our investment activities, we had a productive 4th quarter in which we were able to invest $33,800,000 in 13 high quality convenience and gas and other auto related assets. When combined with our acquisition activity from earlier in the year, In total, we acquired 27 properties for $87,200,000 Staying on acquisitions, during To 2019, Getty's underwriting of potential transactions grew as we added resources to focus on convenience and gas opportunities and made additional inroads in other automotive categories. For the year, we reviewed approximately $1,500,000,000 of opportunities, which met our initial screening process. Convenience and gas opportunities represented 63% and other automotive represented 37% of the total. As we have mentioned in prior calls, we remain highly committed to growing our portfolio in the convenience and gas sector. With that said, we view the categories of car wash and automotive services as highly complementary to our portfolio as these property types share many similar attributes. Going forward, we anticipate growing both areas underwriting platform and added resource to support our expanded efforts. To review a few highlights of our investment activities. For the Q4, we acquired 5 convenience and gas locations in individual transactions for $15,700,000 and 8 Car Wash properties for $28,100,000 In aggregate, the return for the sites acquired during the Q4 was in line with the remainder of our 2019 activity and broader historical pricing, having a weighted average initial return of 7.2%. Finally, the weighted average initial lease term for the properties acquired in this quarter was 13.6 years. For the year, we further advanced our goal of diversifying our revenue by expanding our relationships with Circle K, Irving Oil and Kum and Go and entering into new relationships with 2 of the fastest growing express car wash operators in the U. S, Zipps and Go Car Wash. Our transaction activity in the quarter year further expand our geographic reach and remain centered around major metropolitan markets, including the Los Angeles and Las Vegas MSAs. The net result is that we are Now represented in 33 states plus Washington, D. C. And 50% of 57% of our annualized base rent comes from the top 25 National MSAs. Additionally, after the quarter ended, we closed on the acquisition of 11 properties for 53,400,000 All these sites are car wash facilities and are subject to 15 year triple net leases with Zips and Go Car Wash. Overall, our team remains busy sourcing and underwriting potential investments and we continue to feel strongly that the volume of opportunities we are underwriting will produce additional growth as we progress throughout the year. Moving to our redevelopment platform. For the year, we invested approximately $2,400,000 in both our completed projects and sites which are in progress. In the Q4, we returned 1 redevelopment project back into the triple net lease portfolio, bringing our total 4 completed rent commenced projects 4 in 2019, and 13 since the inception of this initiative. Specifically in December, rent commenced on a project where we ground generate a return on our investment of more than 30%. In terms of redevelopment projects, we ended the quarter with 14 signed leases or letters of intent, which include 5 active projects and 7 signed leases on properties which are currently subject to triple net leases, but which have not yet been recaptured from the current tenants and signed letters of intent on 2 vacant properties. All of these projects are continuing to advance through the redevelopment process. We expect substantially all these projects will be completed over the next 1 to 3 years. In total, we have invested approximately $2,800,000 in the 14 redevelopment projects in our pipeline, and we expect to have rent commencement at Several sites during 2020. On the capital spending side, we estimate that these 14 projects will require total investment by Getty of $10,300,000 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 14 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 9 properties during 2019, realizing proceeds of approximately 2,700,000 The properties sold were vacant or returned to us by tenants for the terms of their lease agreements. We expect the net financial impact of these dispositions will be minimal. In addition, during the year, we exited 5 properties which we previously leased from 3rd party landlords. As we look ahead, we 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 year with 931 net leased properties, 5 active redevelopment sites and 9 vacant properties. Our weighted average lease term is approximately 10 years and our overall occupancy excluding active redevelopments remains consistent at 99%. With that, I turn the call over to Danyan. Thank you, Mark. For the Q4, our total revenues were $35,900,000 an increase of 2.4% over the prior year's quarter And our rental income, which excludes tenant reimbursement and interest on notes of mortgage receivables, grew 4.3% to CHF 30,700,000. Our growth in rental income continues to be driven by our rent escalators and our leases plus incremental growth from completed acquisitions and redevelopment projects. It should be noted that due to the timing of our acquisition activity in 2019 being weighted towards the end of the year, During the Q4 of 2019, we incurred one time costs related to our decision to proactively terminate a redevelopment project and higher than projected legal fees related to certain of our environmental litigation where we are nearing settlement. For more information on specific expense movements, please refer to yesterday's earnings release. Our FFO for the quarter was 21,200,000 or $0.51 per share as compared to $20,300,000 or $0.49 per share for the prior year's quarter. Our AFFO for the quarter was $18,000,000 or $0.43 per share as compared to 17,600,000 or $0.43 per share for the prior year's quarter. For the year ended 2019, our total revenues and our rental income, which includes tenant reimbursement and interest on notes and mortgage receivables, grew by 3.3% to $140,700,000 3.4 percent to $120,300,000 respectively. Again, this growth stems from the escalators in our net leases and successful execution of both acquisitions and redevelopments. For the year ended 2019, our operating expenses increased. The primary driver for the increases was professional fees and other redevelopment costs included in property costs and increases in our environmental expense line items, which continue to be highly variable. Our FFO for the year was $77,800,000 or $1.86 per share as compared to 73,600,000 or $1.80 per share for the prior year. Our AFFO for the year was 71,800,000 or $1.72 per share as compared to $69,700,000 or $1.71 per share for the prior year. Turning to the balance sheet and our capital markets activities. We ended 2019 with $470,000,000 of borrowings, which includes $20,000,000 under our credit agreement and $450,000,000 of long term fixed rate debt. Our weighted average borrowing cost is 4.9%. The weighted average maturity of our debt is 5.8 years and 96% of our debt is fixed rate and our earliest debt maturity remains 2021. Our debt to total capitalization currently stands at 27%. Our debt to total asset value is 41% And our net debt to EBITDA is a conservative 4.4 times. In addition, we utilized our at the market equity program during the quarter and issued $5,500,000 of capital at an average price of $33.04 per share. For the year, we raised 14,500,000 Our ATM program at an average price of $32.29 per share. Our environmental liability ended the quarter and year at $50,700,000 down $9,100,000 for the year. For the quarter year ended December 31, 2018, The company's net environmental remediation spending was approximately $2,300,000 $7,500,000 respectively. Finally, we are introducing our 2020 AFFO per share guidance at a range of $1.75 to $1.80 per share. Our guidance includes all transaction activity as of this date, but does not assume any potential future acquisitions All capital markets activities for the remainder of 2020, although it does reflect our expectations that we will continue to execute on our redevelopment, leasing and disposition activity. Specific factors which impact our guidance this year include our expectation that we will When we recapture properties for redevelopment, our expectation that our cost of borrowings will increase in 2020, The full year impact of the dilution associated with the company's 2019 capital raising activities and our expectation that we will remain active in pursuing acquisition Thank you. That concludes our prepared remarks. So let me ask the operator to open the call for questions. Thank you. One moment please while we poll for questions. Thank you. Our first question comes from Nikita Zelle with JPMorgan. Please proceed with your question. Good morning, guys. What's embedded in your 2020 guidance Well, our overall AFFO guidance is $1.75 to $1.80 We typically don't provide any sort of additional breakdown Other than I would say that we don't expect anything to materially change year over year from 2019. And on the pipeline that you guys looking at right now, so you mentioned in 2019 the split between the C stores and Auto was kind of sixty-forty. Do you plan to maintain that split? Or it sounds like maybe you will be doing a little bit more of auto in terms of just the Percentage split of your total deal flow? Yes. I think, our view is we're continuing to underwrite Kaminsky Gas opportunities as well as the other automotive opportunities and where we feel That's the right opportunity for us. We're planning on acting on that. So we're not targeting any specific split at any given year. But Really what we think we have is we have 2 areas that we're comfortable underwriting and comfortable investing in and growing both aspects of our portfolio. But there's really no shift or target specific number that we have for either asset class. And just curious if the acquisition volume obviously has picked up since the recent past through some quarters in 4Q and year to date. Can you give us a little bit of understanding of why that is? I mean, is it because of the pricing? Is it just the timing factor? Or is it the type of deals that You were looking at that came through all? This is Mark Olear. Yes, it's more a factor of just the timing of the transactions as they progress through 2019. So basically what you're saying is, we shouldn't extrapolate the deal flow from your 4Q and 1Q into If we were to make an assumption. Yes. I mean, our transaction activity historically has been lumpier. We are Underwriting a significant amount every year and we hope to be more consistent over time, but I think it's We're not going to make any comment on a recurring level on any given quarter. Right. Last question on Tenant Credit Watch So, Alistair, any comments on that? We maintain a process here to monitor our Not only at the health of our tenants, but also to review the coverages of our individual assets. We do have a property specific watch list, which We've spoken to people about in the past and there's really nothing of note that that's worthy to bring up on the call. Thank you very much. Thank you. Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed with your question. Good morning. Hi, John. So I was wondering if maybe you could provide a little color on How you kind of source the transactions during the quarter and subsequent quarter end, both the Car Wash deals and the C store transactions? Sure. Well, first off, each every transaction is a little different. So some have a velocity that's moves along much faster and Some takes more time and I'll let Mark answer maybe more specifically. But within the CNG sector, And because of the history, we're routinely afforded the opportunity to look at deals. We're very active in sourcing in And I think as we get more experience and have more of a presence in the other automotive sectors, we're starting See that same trend accelerate, but I'm just going to comment specifically. Just regarding sourcing, it's just a continued commitment to what we've been doing in We've grown some internal resources dedicated to business development. It's direct outreach to tenants that we have researched that are growing in the various sectors. It's Following up with our existing growing relationships with our existing tenant base, widely marketed Brokered deals or sponsored deals, trade shows, the standard just commitment to sourcing new opportunities that we've been doing for 2 years and just staying on top of that. Okay. And then with just 4Q and 1Q, I mean how many transactions Was kind of implied in that acquisition activity? Well, In the Q4, it was 1 portfolio sale leaseback and 9 individual transactions. And in the beginning of This year, it's 1 portfolio sale leaseback and 1 individual transaction. Okay. That makes sense. And then you guys mentioned on your In your prepared remarks that one development deal was kind of removed from the pipeline. Can you maybe provide a little more color on that? Yes. As the development program the entire portfolio of the development program Proceeds through the development entitlement process, there are deals that will not achieve the required entitlements or permits To put it into development and we make a strategic decision to terminate those efforts and Focus on the rest of the pipeline. So it's there are deals at risk that we make decisions to just terminate the activity on. And when That progress is kind of terminated. I mean, does that go back to being kind of an original C store asset? Or do you need to kind of find An alternative solution for the property? It's different in each property. If it's in a net lease portfolio, it's likely to stay there. It's a vacant property. We continue to work on the best and highest strategic plan on a property level. So it really depends on where It currently is where it comes from in the various buckets of our of the portfolio. So It's not a one size fits all answer there. It's kind of the right decision for each property. Okay. And then on the balance sheet, And it's still decently far out, but is there any potential to maybe prepay the $100,000,000 private John, it's Danyan here. On those notes, there are make whole provisions in there. So we have to do the analysis to look at Where issuance costs are relative to that, obviously, that is something that is top of our mind As we progressed during the year, and so you'll probably hear from us later this year on that. Okay. That's it for me. Thank you very much. Thanks, Joe. Thank you. Our next question comes from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question. Hey, guys. I know we talked a bit last year car washes were something you guys were more interested in, But pricing was a little bit tougher. Could you just talk about what has made you guys a little bit more competitive to kind of get the deals in 4Q and And 1Q here so far? Well, I think the market continues to be competitive. I think some of it's relationship driven. I think some of it is where we're targeting in terms of Various MSAs, but I don't think anything has really changed in the overall competitive dynamic. And I think both of the parties we mentioned, I'm sure have multiple relationships across institutional real estate Companies and we'll be competing in the future. What was the yield that you guys got on the 2020 acquisitions? Yes. The yields are very similar to where we've been talking about, Craig. So we've always said it's a market where we're looking at is really kind of High 6% to mid-seven percent, so think 6.75% to 7.5%, and nothing has really deviated from that overall. And then pro form a the 1Q deals, kind of how much capital do you guys think you can deploy and remain within Your leverage targets? Well, some of that depends on our ability to issue on the ATM if we could choose to use that product, but We certainly have ample capacity remaining under the line. And if you look at kind of our Activity pace over the last couple of years, takes maybe an average of that. I think we feel we've got ample capacity to continue to grow at that same rate. And obviously, the ability to issue under the ATM and Yes, given where the stock price may be is, but only add to that. Great. Thank you. But just to be clear, I mean, there There's no plan for us to materially deviate from where our leverage has been over the last several years when we maintain a historical leverage profile and there There's no real plan to deviate from that. Right. No, I was just trying to get at how much you could deploy before you would need to do a bigger equity raise Sure. If a portfolio came about, like what is it $100,000,000 $150,000,000 that you guys feel comfortable putting out the door before you would need I think we've got well north of $200,000,000 available under the revolver. And obviously, we do have the ATM program, which would Somewhat mitigate our need to go do a larger equity deal if there were a large portfolio. So, but again, we look at We've done larger equity deals. We look at all of our sources of capital as we kind of look to grow the business. So, I think there's In our minds, it's the right tool for each type of transaction that's out there. Great. Thanks. Thank you. At this time, we have no further questions. So I'd like to return back to Mr. Constant for any closure or further remarks. Well, first off, thanks everybody for being on the call today. We look forward to getting back on the phone with everybody at the end of the Q1 of 2020 at the end of April. Again, I appreciate your interest in Get Realty. Thank you. This now concludes our conference call. You may disconnect at this time.