Greetings, and welcome to the Getty Realty third quarter results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press the star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to your host, Mr. Joshua Dicker, Executive Vice President, General Counsel. Please go ahead, sir.
Thank you, operator. I would like to thank you all for joining us for Getty Realty's third quarter conference call. Yesterday afternoon, the company released its financial results for the quarter ended September 30, 2019. The Form 8-K and earnings release are available on 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 2019 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-K for the year ended December 31, 2018, as well as our periodic reports filed 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.
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 third quarter of 2019. With Josh and me on the call today are Mark Olear, our Chief Operating Officer, and Danion Fielding, our Chief Financial Officer. Let me begin today's call by providing an overview of our third quarter 2019 performance, investments and balance sheet activities, and our strategic objectives for the remainder of the year. Then I will pass the call to Mark to discuss our portfolio in more detail. Finally, Danion will discuss our financial results. Our results for the quarter were strong and once again in line with our expectations. During the quarter, our net lease portfolio displayed the ongoing strength and stability that we have consistently demonstrated from our long-term triple net leases, and we continued to selectively add properties to our portfolio and invest in properties in our redevelopment pipeline.
Our total revenue for the third quarter was $36.4 million, which represents 5% growth over the prior year's quarter, and our rental income, which excludes GAAP revenue recognition adjustments and tenant reimbursements, grew by 3.8% to $30.2 million for the quarter, primarily due to income received from properties acquired, our contractual rent increases, and the completion of several of our redevelopment projects. For the third quarter, we reported net income of $11.9 million, FFO of $19.1 million, and AFFO of $18.1 million, all of which represent growth over the prior year's quarter. The continued growth in AFFO, which we believe best demonstrates the performance of our core business, reflects not only the increases in revenue and rental income I mentioned a moment ago, but is also attributable to our ability to maintain an efficient operating cost structure.
On a per-share basis, our AFFO was $0.43, which was in line with our expectations for the quarter. We had another active quarter in terms of our growth strategy as we executed on both our acquisition and redevelopment platform. During the quarter, we acquired five properties for $13.6 million. We have also had an active start to acquire new sites in the fourth quarter. As Mark will discuss in more detail, these acquisitions include both convenience and gas sites, as well as other automotive properties, and are all strong assets which align with our stated goals of acquiring high-quality, well-located properties in the convenience and gas sector, as well as expanding our investment criteria to include the various segments of what we call the other automotive sector.
While the volume and timing of acquisition activity can vary from quarter to quarter, I am very pleased with the volumes we are currently sourcing and underwriting. We are seeing a number of portfolio and smaller transactions in the convenience gas and other automotive-related sectors. Overall, the types of opportunities and the quality of the assets we are underwriting within our sectors remain in line with the types of transactions we have completed over the past several years. We also continue to gain momentum in sourcing and underwriting high-quality opportunities within the other automotive sector. As we have continuously demonstrated, we will be disciplined when reviewing opportunities and are focused on acquiring high-quality real estate in either dense and established metropolitan areas or in high-growth markets, as we believe a portfolio of well-located properties will drive additional long-term shareholder value.
In addition to the external growth we pursue with acquisitions, we have distinct opportunities to unlock additional value within our existing portfolio as we execute on our redevelopment program. During the third quarter, we completed two redevelopment projects, bringing our total of completed redevelopments to 12 since the inception of this strategy. In addition, we signed leases or letters of intent on three new projects during the quarter, which brings our current pipeline of projects to 14. We also continue to take steps to strengthen our balance sheet. As we announced in September, the company issued $125 million of 3.5% 10-year notes in a debt private placement with three insurance companies. We used the proceeds of the note issuance to pay off all of our floating rate debt and extend our weighted average debt maturity to more than six years.
The issuance marks a significant milestone for Getty as this is the first time in the company's history that all of our indebtedness has been completely fixed rate. We are also very pleased that we have $300 million of debt capacity available to us through our revolving credit facility to draw upon to fund our future growth. In addition, we partially funded our growth during the quarter and year to date with proceeds raised via our at-the-market equity program. Looking ahead, capital market conditions remain favorable for our company, and we will look to continue to fund the company's growth with long-term and permanent capital. We plan to maintain our conservative balance sheet and are committed to having a well-laddered and flexible capital structure.
Turning to our dividend, as we announced yesterday, our board approved a 5.7% increase in our recurring quarterly cash dividend from $0.35 per share to $0.37 per share. Our board believes this annual increase is appropriate as it maintains a stable payout ratio and is tied to the company's growth over the prior year. Finally, we are excited about our accomplishments year to date and confident in our outlook for the remainder of the year. We continue to benefit from the health and the growth of the convenience store industry, stable cash flows received from our net lease portfolio, and our conservative balance sheet, which provides us both stability and flexibility.
We remain focused on our three-pronged strategy consisting of stable growth supported by asset management activities in our core net lease portfolio, expanding our portfolio through acquisitions in the convenience gas and auto-related sectors, and selective redevelopment projects. We are confident that we will be able to continue to successfully execute on our strategic objectives throughout the remainder of 2019 and beyond. With that, I will turn the call over to Mark Olear to discuss our portfolio and investment activities.
Thank you, Chris. I will start by reviewing our investment activities, provide additional detail on our redevelopment projects and our portfolio in general. During the quarter, we acquired five properties for $13.6 million. As we mentioned on our last call, one of the properties, which was acquired for $4.1 million, is a newly constructed car wash facility in Kentucky, subject to a 15-year triple net lease with Zips Car Wash. One site, which was acquired for $4.6 million, is a newly constructed collision center in the Minneapolis-Saint Paul MSA, subject to a 15-year triple net lease with Caliber Collision. We also acquired three additional properties during the quarter for $4.9 million in the aggregate. Two of these properties are convenience and gas locations located in Georgia and New York, which were leased to Circle K and Global Partners respectively.
The final site, which is in Georgia, is leased to Team Car Care, a Jiffy Lube franchisee. In aggregate, we expect to generate full year rent of approximately $1 million from the properties acquired during the quarter. Additionally, after the quarter ended, we closed on the acquisition of two additional properties for $6.2 million. Both sites are car wash facilities located in Arkansas and North Carolina and are subject to 15-year triple net leases with Zips Car Wash. Turning to our redevelopment program. During the quarter, rent commenced on two projects. The first was a triple net ground lease for a new-to-industry convenience and gas site with Big Y, one of the largest independently owned supermarket chains in New England. In this project, our total investment was approximately $100,000, and we achieved an incremental return on our investment of 29%.
Our second rent commenced this quarter was on a project where we ground leased a site to a regional developer for an automotive use. In this project, we invested $384,000 and achieved an incremental return on our investment of 28%. To date, our redevelopment program has completed 12 projects, representing a total investment by Getty of $10.4 million, which we have generated an aggregate incremental return on investment of 15%. In addition, during the quarter, we signed leases or letters of intent on three new projects where we plan to redevelop these properties for alternative retail or mixed uses.
In total, we ended the quarter with 14 signed leases or letters of intent, which includes six active projects and eight projects on properties which are either vacant or currently subject to triple net leases, but which will be recaptured from the current leases when we receive various approvals required to commence our construction. Our pipeline includes a wide range of retail uses, such as enhanced convenience stores and gas stations, specialty retail such as automotive parts and service, quick serve, and fast casual restaurants. All of our projects are continuing to advance through the redevelopment process. We expect substantially all these projects will be completed over the next one to three years, with several additional projects moving to rent commencement before year-end 2019. To date, we have invested approximately $13.3 million in both completed and in-progress redevelopment projects, with $400,000 occurring during the third quarter of 2019.
We anticipate the total investment through completion for the 14 projects currently in progress will be approximately $11.4 million. The investment in these redevelopment projects will generate incremental returns to the company in excess of what we could expect if we invested these funds in the acquisition market today. For more detailed information on Getty's redevelopment projects, please refer to page 14 of our investor presentation, which could be found on gettyrealty.com. We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next five years, possibly involving between 5% and 10% of our current portfolio, with targeting unlevered redevelopment program yields of greater than 10%. There were no property dispositions during the quarter, but we did exit one property, which we previously leased from a third-party landlord.
As a result of our portfolio activities, we ended the quarter with 922 net leased properties, six active redevelopment sites, eight vacant properties. Our weighted average lease term is approximately 10 years, our overall occupancy, not including our six active redevelopments, remains stable at 99.1%. With that, I turn the call over to Daniel.
Thank you, Mark. Turning to our financial results. For the third quarter, our total revenues were $36.4 million, an increase of 5% over the prior year's quarter, and our rental income, which excludes tenant reimbursement and interest on those and mortgages receivables, grew 3.8% to $30.2 million. Our growth in rental income continues to be driven by rent escalators in our leases, plus incremental growth from completed acquisition and redevelopment projects. During the third quarter, as expected, the company's results were impacted by increases in property costs, which stemmed primarily from additional professional fees associated with our redevelopment efforts and from additional environmental legal fees and expenses and environmental litigation accruals. For more information on specific expense movements, please refer to yesterday afternoon's earnings release.
Our EBITDA for the quarter was $19.1 million, or $0.46 per share, as compared to $17.9 million or $0.44 per share for the prior year's quarter. Our AFFO for the quarter was $18.1 million or $0.43 per share as compared to $17.9 million or $0.44 per share for the prior year's quarter. Turning to the balance sheet and our capital markets activities. As Chris mentioned, we issued $125 million, 10-year fixed rate note during the quarter. The notes which mature in 2029, bear interest at 3.52% and were split between Prudential, AIG and MassMutual. The proceeds from our note issuance were used to repay all of the company's floating rate borrowings on our credit facility. As a result, we ended the quarter with $450 million of long-term fixed rate debt. Our weighted average borrowing cost is 4.9%.
The weighted average maturity of our debt is approximately 6.2 years, with 100% of our debt being fixed rate, and our earliest debt maturity is 2021. Our debt to total capitalization currently stands at 27%. Our debt to total asset value is 39%, and our net debt to EBITDA is 4.5 times. In addition, we used our ATM program during the quarter and issued $2.2 million of capital at an average price of $0.3164 per share. Our environmental liability ended the quarter at $58.8 million, down $1 million so far this year. For the quarter, the company's net environmental remediation spending was approximately $1.4 million. Finally, we reaffirm our 2019 AFFO per share guidance at a range of $1.71 to $1.75 per share.
Our guidance does not assume any future acquisition or capital market activities, although it does reflect our activity yet to date, as well as our expectation that we will continue to execute on our redevelopment, leasing, and disposition activities. Specific factors which impact our guidance this year include, one, our expectation that we will forgo rent when we recapture the properties for redevelopment. two, our expectation that our cost of borrowings will increase due to long-term debt financing announced in the third quarter of 2019. three, the full-year impact of the dilution associated with the company's 2018 and 2019 equity capital raising activities. Four, 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 the call back to Chris.
Thank you, Daniel. With that, we will open the call up for questions. Thank you.
Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question is from Nikita Bely, JP Morgan. Please go ahead, ma'am.
Good morning. Who do you guys see as the biggest competitor for deals right now for you? You're competing against all the REITs, 1031 buyers, private folks. What's the landscape looking like right now?
Well, I think we certainly feel like we always compete with other net lease REITs who are active in the sectors that we are investing in. We also tend to compete, especially for larger portfolio transactions, with a number of strategic buyers or corporate buyers who have been fairly active over the last sort of 12-24 months.
On that point, what's kind of the range of sizes for the portfolio deals you're looking at? Overall, is it more smaller deals or you would prefer to do larger ones?
Well, traditionally we've done larger or chunkier sale-leaseback transactions. As we've talked about over the last several calls, in addition to looking at large portfolio transactions similar to those types of deals we've completed over the past five or six years, we're also looking at smaller portfolios, and we do acquire individual sites if we like the characteristics of the real estate and the locations themselves.
The cap rates, are they different on large deals than on one-offs?
Yeah. The range of cap rates, I feel really hasn't moved for the types of properties we're looking for. We've talked prior about a range that's high sixes, so say six and three-quarter to about seven and a half, generally is where the range is that we're looking at.
Got it. Maybe if I could squeeze one more in. Can you talk a little bit in general about the volume of the deals you had to look at for the $13.6 million that you closed this quarter, and also on some information and data maybe on the portfolio credit metrics such as the store level, EBITDA coverage?
This is Mark Olear. Through three quarters of the year, we've seen in the gas and convenience sector, a volume and pace of opportunities presented to us consistent with the last few years, and we've continued to grow, gain momentum in the other automotive. That sector is certainly larger in the opportunities we've looked at over prior years. We expect to continue to grow that as part of our underwriting exercises. We're pretty much on pace through the first three quarters as we've been through the last few years in a similar three-quarter period. I'm sorry, the second part of the question?
Coverage.
On the quarter.
Yeah. The coverage, Nikita Bely here, is consistent this quarter with prior quarter at 2.2.
Did we answer your question, sir?
I'm sorry, sir. The gentleman has left the line.
Okay.
The next question is from Mitch Germain, JMP Securities. Please go ahead, sir.
Good morning. Is the lease structure any different for the non-C-store transactions? It seems like they possibly have a little more term. Is that the way to think about it?
Well, typically we're looking at base terms on sale-leasebacks that we originate with either 15 or 20 years with multiple either five or 10-year renewals. There really hasn't been a big change in terms of the way we're structuring our long-term net leases in either the C&G or the other automotive deals that we're originating.
Great. Chris, is it safe to say that your level of constructiveness toward the deal pipeline seems to be a little more positive today than it's been? You talked about some smaller portfolios and seeing a lot of transactions. Has there been any change in the size of the pipeline or the opportunities that are being presented to you?
No. I think Mark summed it up that we think we're right on pace to see a similar amount of total volume underwritten by the company within the C&G sector for the year. I think the biggest difference for us is by opening sort of our underwriting to the other automotive, we're adding several different asset classes that the company had not historically underwritten. Internally, we're far busier than we've been historically, and like Mark said, we remain confident that there's opportunities that we're going to be able to execute on. I really think it's just a matter of being consistent within the convenience and gas sector, but also adding additional volume to underwrite through the other automotive asset classes.
Are those other automotive asset classes as fragmented from an ownership perspective as you see the traditional C-store?
Yeah. It's Mark. Yes, the answer is yes on that. The car wash sector is actually very fragmented. The % of large aggregators of portfolios versus the total number of units out there is relatively small. Similar to, we also feel, the tire and battery and the quick lube and other automotive uses is highly fragmented and is an opportunity for consolidation going forward.
Great. Last one for me. I think, Danion, I apologize I missed your comments on the equity capital raising in the quarter. If I can just get that from your previous remarks again. I apologize.
Yeah. It was $2.2 million on the ATM in the quarter, Mitch.
What was the average price?
The average price was $31.64.
Thank you.
Thanks, Mitch.
The next question is from Joshua Dennerlein, Bank of America Merrill Lynch. Please go ahead, sir. I'm sorry, Mr. Dennerlein has taken himself out of the question queue. The next question is from John Massocca, Ladenburg Thalmann. Please go ahead, sir.
Good morning, everyone.
Hey, John.
How's it going? I know within the C-store segment, your focus has largely been on kind of infill properties and kind of big MSAs. Does that same underwriting philosophy hold as you look at kind of investments in the other automotive segment, particularly that seems to be kind of growing as a % of your pipeline?
Yeah. The short answer is yes. When we started looking at different asset classes to invest in that had similar real estate characteristics, to C&G, from a big picture standpoint, we're still going to invest in the MSAs and the areas of the country that we believe in, but within the individual markets, right? These types of properties are located, in many cases, on the same corners or next door to convenience and gas properties, so that the traffic and the demand is driven by many of the same characteristics as you would see for convenience and gas. We feel it very closely aligns to the way we've underwritten historically, and it's sort of a natural extension for us.
Okay. Within the redevelopment kind of pipeline, what are maybe the gating factors to potentially accelerating the kind of execution on that pipeline? Obviously, the long-term goal is to do 5%-10%, but is there any way to kind of potentially ramp that, those opportunities?
It's Mark. The pace of the redevelopment is somewhat governed by where the properties are embedded in existing leases, the timing of the marketing of the properties, but also, the entitlement and permitting process. Most of these properties go through the entire municipal-level process or state-level process in order to gain the appropriate zoning, planning, and permitting. As much effort as we put into them, we can only control that and force that as much as possible, so that the timing horizon is quite long on taking these through that process, and that's probably the biggest governor of the pace of delivering those back into rent commencement.
In terms of maybe just getting projects to that starting point where you start the permitting and the entitlement process, is there anything that keeps you from moving that 5% in immediately or really trying to ramp? I know obviously you need counterparties to be kind of the other side of that deal and take over operating the redeveloped property.
Right
Is there anything kind of gating getting that done quicker?
Yeah, there are certain issues around our take-back rights and some of our leases, the timing and pace of that. Some are arm's-length negotiations, some are the timing of the exiting of the property by the existing tenant. We would do as much as we can, as fast as we can, and we're pushing it as hard as we can. It's a pace we're pushing, I think, as hard as we think we can.
Okay. As a reminder, the kind of give back and the take back rights, when do those largely expire?
They're all in the leases that were done with the former Getty Petroleum marketing properties. The base terms of those leases generally run through late 2027 and beyond. As Mark was saying, one of the challenges in terms of accelerating, to your point, that 5% to today is the take back rights, which obviously would generate additional redevelopment projects for us, generally are staggered per year. Right? We can't impact our tenant's business to a significant amount in any given year. Right? Which also works to our benefit. We don't want to impact our tenant's coverage on the rest of the property for our benefit for redeveloping, say, one site or something like that. It's just staggered, John, which is what's kind of leading to this steady pace of delivering projects and adding projects.
I don't think, to Mark's earlier point, you're going to see us all of a sudden have a pipeline in our investor deck of 25 projects because we're exercising all those rights any one given year.
Okay. One last very quick one. The agreement between kind of Applegreen and CrossAmerica with regards to managing certain properties that CrossAmerica was running previously. Does that impact you guys at all?
No. They're both tenants of ours in separate leases. I don't want to comment on any other company's particular strategy, but CrossAmerica is effectively outsourcing the operations to a highly skilled C-store operator, and I think it works to everyone's benefit.
Okay. CrossAmerica is the ultimate credit at the end of your lease, right? Still?
Correct. Yes.
Okay. All right. That's it for me. Thank you very much.
We have a question from Brett Reiss, Janney Montgomery Scott. Please go ahead, sir.
Morning, gentlemen.
Hi, Brett.
Hi. Could you just give us a little color on what the differences and similarities of the counterparty risk in leasing to a car wash and lube center versus the gas station leases that's been historically more in the wheelhouse of the company?
Sure. I think maybe I'll talk about the counterparties in a second, but in terms of underwriting the real estate. Again, we start with the markets we want to be in and within the individual markets, where the properties themselves are located and what's driving traffic and demand for those sites. The primary difference in terms of the underwriting of the individual locations themselves is they are different businesses on the four walls. Whereas a convenience and gas site has gasoline volumes and margins and inside C-store sales, car washes and lube centers have car wash sales and oil change and tires and batteries, et cetera. Both of those sectors, we believe, continue to be internet resistant, which is one of the reasons that we've expanded into the other automotive. The credit underwriting, which is also part of our process, remains the same.
We're looking for strong counterparties with a history of operating and success and who are looking to grow and continue to consolidate the industries. From a balance sheet and credit perspective, the tenants look fairly similar.
Okay, thank you.
We have a question from Joshua Dennerlein, Bank of America Merrill Lynch. Please go ahead.
Hey, guys. Sorry for getting on before.
Hey, Josh.
What's underlying the high and low end of your 2019 guidance range? Seems like a wide variance with one quarter left.
Yeah. Good question. I think there are certain items in our P&L which do bounce around a little bit. We have certain costs related to our development program, some of the timing there is hard to predict as to when we're going to get permits and approvals, et cetera. On the environmental side, some of those costs which stay in AFFO that are not backed out, again, some of that spend is a little hard for us to predict in our business. Those are generally the reasons that we keep a fairly wide range. Again, the core business of leasing and collecting rent and pass-through expenses from our tenants is fairly predictable, yet it does have a few nuances to it which require sort of a wider range.
Got it. Thank you. I'll leave it there. Thanks.
At this time, we have reached there are no further questions. I would like to turn the conference back over to Mr. Chris Constant for closing remarks. Please go ahead, sir.
Thank you to everyone for being on our call for the third quarter. We look forward to an active fourth quarter and to being back on the phone with everybody when we announce our fourth quarter and year-end 2019 results.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a good day.
Thank you.