Earnings Call: Q3 2019

Oct 24, 2019

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. 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 3rd quarter conference call. Yesterday afternoon, the company released its financial results for the quarter ended September 30, 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 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 ks 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. 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 Q3 of 2019. With Josh and me on the call today are Mark Olear, our Chief Operating Officer and Danyan Fielding, our Chief Financial Officer. Let me begin today's call by providing an overview of our Q3 2019 performance, investments and balance sheet activities and our strategic objectives for the remainder of the year. And then I will pass the call to Mark to discuss our portfolio in more detail. And finally, Daniel 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 continue to selectively add properties to our portfolio and invest in properties in our redevelopment pipeline. Our total revenue for the Q3 was $36,400,000 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 percent to $30,200,000 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 Q3, we reported net income of $11,900,000 FFO of $19,100,000 and AFFO of 18,100,000 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 on both our acquisition and redevelopment platform. During the quarter, we acquired 5 properties for $13,600,000 and we have also had an active start to acquire new sites in the 4th quarter. As Mark will discuss in more detail, these acquisitions include both convenience and gas sites as well as other automotive properties and our 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 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 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 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 Q3, we completed 2 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 3 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 125,000,000 of 3.5 percent 10 year notes in a debt private placement with 3 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 6 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 completely fixed rate. We are also very pleased that we have $300,000,000 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 year to date with proceeds raised by 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 proved a 5.7% increase in our recurring quarterly cash dividend from $0.35 per share to 0.37 dollars 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 3 pronged strategy consisting of stable growth supported by asset management activities in our core net lease portfolio, expanding our portfolio and Convenience Gas and Auto related sectors and selective redevelopment projects. We are confident that we will be able to continue to successfully on strategic objectives throughout the remainder of 2019 and beyond. With that, I will turn the call over to Mark O'Lear to discuss our portfolio and investment activities. Thank you, Chris. I will start by reviewing our investment activities, then provide additional detail on our redevelopment projects and our portfolio in general. During the quarter, we acquired 5 properties for $13,600,000 As we mentioned on our last call, one of the properties which was acquired for $4,100,000 with a newly constructed car wash facility in Kentucky, subject to a 15 year triple net lease with Zips Car Wash. And one site, which was acquired for $4,600,000 is a newly constructed collision center in the Minneapolis St. Paul MSA, subject to a 15 year triple net lease with Caliber Collision. We also acquired 3 additional properties during the quarter for $4,900,000 in the aggregate. 2 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 Loo franchisee. In aggregate, we expect to generate full year rent of approximately $1,000,000 from the properties acquired during the quarter. Additionally, after the quarter ended, we closed on the acquisition of 2 additional properties for $6,200,000 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 2 projects. The first was a triple net ground lease for a new 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 commence this quarter was on a project where we ground leased a site to a regional developer for automotive use. In this project, we invested $384,000 and achieved an incremental return on investment of 28%. To date, our redevelopment program has completed 12 projects, representing a total investment by Getty of $10,400,000 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 3 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 6 active projects and 8 projects on properties which are either vacant or currently subject to triple net leases, 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 retails such as automotive parts and service, quick serve and fast casual restaurant. All of our projects are continuing to advance through the redevelopment process. We expect substantially all of these projects will be completed over the next 1 to 3 years with several additional projects moving to rent commencement before year end 2019. To date, we have invested approximately $13,300,000 in both completed and in progress redevelopment projects with 400,000 occurring during the Q3 of 2019, and we anticipate the total investment Through completion for the 14 projects currently in progress will be approximately 11,400,000 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 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 targeting unlevered redevelopment program yields of greater than 10%. Finally, 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, our portfolio activities, we ended the quarter with 922 net leased properties, 6th active redevelopment sites, 8 vacant properties. Our weighted average lease term is approximately 10 years, and our overall occupancy, not including our 6 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 3rd quarter, our total revenues were $36,400,000 an increase of 5% over the prior year's quarter and our rental income, which excludes tenant reimbursement and interest on notes and mortgages receivables grew 3.8% to 30,200,000 Our growth in rental income continues to be driven by rent escalated in our leases, plus incremental growth from completed acquisition and redevelopment projects. During the Q3, as expected, the company's results were impacted by increases in property costs, which stem 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 FFO for quarter was $19,100,000 or $0.46 per share as compared to $17,900,000 or $0.44 per share for the prior year's quarter. Our AFFO for the quarter was $18,100,000 or $0.43 per share as compared to 17,900,000 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 125,000,000 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 $450,000,000 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 $2,200,000 of capital at an average price of $0.3164 per share. Our environmental liability ended the quarter at $58,800,000 down $1,000,000 so far this year. For the quarter, the company's net environmental remediation spending was approximately 1,400,000 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 markets 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: 1, our expectation that we will forego rent when we recapture properties for redevelopment 2, our expectation that our cost of borrowings will increase due to long term debt financing announced in the Q3 of 2019. 3, the full year impact of the dilution associated with the company's 2018 2019 equity capital raising activities And 4, 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 A confirmation tone will indicate that your line is in the question for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star The first question is from Nikita Belli, JPMorgan. Please go ahead, ma'am. Good morning. Who do you guys see as the biggest Competitive for deals right now for you. I mean, you are competing against all the REITs, 1031 buyers, new private folks, kind of 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. But 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 months to 24 months. So On that point, what's kind of the range of sizes for the portfolio deals you're looking at? Like 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. But 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 5 or 6 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. And the cap rates, are they different to large deals than on a one offs? Yes. Again, the range of cap rates, I feel really hasn't moved for the types of properties we're looking for. So we've talked prior about a range that's high 6s, so say 6.75 to about 7.5% generally is where the range is that we're looking at. Got it. And 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 $13,000,000 that you closed this quarter and also on some information and maybe on the portfolio credit metrics such as the store level EBITDA coverage. This is Mark O'Lear. Through 3 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. So that sector is certainly larger in as we've looked at over prior years. We expect to continue to grow that as part of our underwriting exercises. So we're pretty much on pace through the 1st 3 quarters as we've been through the last few years in a similar 3 quarter period. I'm sorry, the second part of the question? Coverage. On the quarter. Yes. The coverage Nikita, it's Banyan here, is consistent this quarter with prior quarter at 2.2. Did we answer your question, sir? I'm sorry, I'm sure that 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? I mean, it seems like they We 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 5 or 10 year renewals. So there really hasn't been a big change in terms of the way we're structuring our long term net leases in either the CNG or the other automotive deals that we are originating. Great. And 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. I mean, 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 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 CNG sector for the year. I think the biggest difference for us is by opening sort of our underwriting to the other automotive, Right. We're adding several different asset classes that the company has not historically underwritten. So internally, we're far busier that we've been historically. And like Mark said, we remain confident that there's opportunities that we're going to be able to But 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? Yes, it's Mark. Yes, the answer Yes, on that. The car wash sector is actually very fragmented. The percent 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, Danyan, I apologize I missed your comments on the equity capital raising in the quarter. If I can Get back from your published remarks again. I apologize. Yes. It was $2,200,000 on the ATM in the quarter, Mitch. And 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. Lane has taking himself out of the question queue. The next question is from John Massocca, Ladenburg Thalmann. Please go ahead, sir. Good morning, everyone. Hey, John. So 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 percentage of your pipeline? Yes. The short answer is yes. When we started looking at different asset classes to invest in that had similar real estate characteristics to CNG. From a big picture standpoint. We're still going to invest in the MSAs in 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. So We feel it very closely aligns to the way we've underwritten historically and it's sort of a natural extension for us. Okay. And then 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% to 10%, but Is there any way to kind of potentially ramp that, those opportunities? Yes. It's Mark. So the pace of the redevelopment is somewhat governed by the if the property where the properties are embedded in existing leases, 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. And 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 us back into rent commencement. But in terms of maybe just getting projects to that starting point where you start the permitting and the entitlement process. I mean 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. But is there Anything kind of gating, getting that done quicker? Yes. There are certain issues around our take back rights in 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. So, as we would do as much as we can as fast as we can and we're pushing it as hard as we can. So, it's not a It's a pace we are pushing, I think, as hard as we think we can. Okay. And then 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. And the base terms of those leases generally run through late 20 27 beyond. As Mark was saying, one of the challenges in terms of accelerating to your point of that 5% to today The take back rights which obviously would generate additional redevelopment projects for us generally are staggered per year, right. So you can't We can't impact our tenant business to a significant amount in any given year, right, which also works to our benefit. We don't want to impact our tenants coverage, right, on the rest of the property for our benefit for redeveloping, say, one site or something like that. So it just staggered, John, which is what's kind of leading to the steady pace of delivering projects and adding projects. But I don't think to Mark's earlier point, you are going to see us all of a sudden have a pipeline in our investor deck of 25 projects We are exercising all of those rights in any one given year. Okay. And then 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 and separate leases. I don't want to comment on any other company's particular strategy, but CrossAmerica, right, is effectively outsourcing the operations to a highly skilled 2 star operator and I think it works to everyone's benefit. Okay. But Class America 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. Good 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 loop center versus the gas station leases that's been historically more in the wheelhouse of the company. Sure. Well, I think maybe I'll talk about the counterparties in a second. But in terms of underwriting, the real estate, right, 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. But the primary difference in terms of the underwriting of the individual locations themselves They are different businesses on the four walls, whereas the convenience and gas site has Gasoline Volumes and Margins and Inside C Store Sales. Car washes and loop centers right have Car Wash Sales and Oil Change and Tires and Batteries, etcetera. Yes. Both of those sectors, we believe, are continue to be Internet resistant, so which is one of the reasons that we've expanded into the other automotive. But the credit underwriting, which is also part of our process remains same. We're looking for strong counterparties, right, with a history of operating and success and we're looking to grow and continue to consolidate the industries. And 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 to talk before. What's underlying the high and low end of your 2019 guidance range. It seems like a wide variance with 1 quarter left. Yes. Good question. I think There are certain items in our P and L which do bounce around a little bit. We have certain costs related to our development program Within some of the timing there, it's hard to predict as to when we're going to get permits and approvals, etcetera. And then on the environmental side. Some of those costs which stay in AFFO right that are not backed out. Again, some of that spend It's a little hard for us to predict in our business. So those are generally the reasons that we keep a fairly wide range. Again, the core business, right, of leasing and collecting rent and pass through expenses from our tenants is fairly predictable, but Getty 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. Thanks you to everyone for being on our call for the Q3. We look forward to an active Q4 and to being back on the phone with everybody when we announce our 4th 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.