Earnings Call: Q2 2019

Jul 25, 2019

everyone, and welcome to Getty's Realty's Earnings Conference Call for the Q2 of 2019. This call is being recorded. Prior to the start of the call, Joshua Dicker, Executive Vice President, General Counsel and Secretary of the company will read a Safe Harbor Please go ahead, Mr. Dicker. Thank you, operator. I would like to thank you all for joining us for Getty Realty's 2nd quarter conference call. Yesterday afternoon, the company released its financial results For the quarter ended June 30, 2019, the Form 8 ks and our earnings release are available on the Investor Relations section of our website atgeterealty.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 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 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 Q2 of 2019. With Josh and me on the call today an overview of our Q2 2019 performance, investment 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, Danion will discuss our financial results. Our results for the quarter were steady 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, dispose of non core sites and invest in properties in our redevelopment pipeline. Our rental income, which excludes GAAP revenue recognition adjustments and tenant reimbursements, grew by 3.5% to $29,400,000 for the quarter, primarily due to income received from properties acquired last year, our contractual rent increases and the completion of several of our redevelopment Projects. For the Q2, we reported net income of $13,200,000 FFO of $19,600,000 and AFFO of $18,100,000 which grew 4% over the prior year's quarter. The growth in AFFO can be attributed to both our rental income growth as well as our efforts to maintain an efficient Operating cost structure. On a per share basis, our AFFO was $0.43 per share, which was comparable to the prior year's quarter. I am pleased to announce an active quarter in terms of our growth strategy as we executed on both our acquisition and redevelopment platforms. During the quarter, we acquired 9 convenience and gas properties for approximately $30,000,000 In addition, after quarter end, we acquired 2 additional properties for $8,500,000 One site was a car wash and the other is a collision center, and both are newly constructed facilities subject to 15 year triple net leases. As Mark will discuss in more detail, these acquisitions mark an important milestone in Getty's evolution as we believe there are a number of attractive opportunities Further enhance our portfolio with closely related asset types. We believe all of our acquisition activity year to date supports our stated goals of acquiring high quality, Well located properties in the CNG sector as well as expanding our investment criteria to include various segments of what we call the other automotive sector. Turning to our redevelopment program. During the Q2, we added one signed lease to our pipeline of projects, bringing our pipeline to 13 redevelopments. During the quarter, we partially funded our growth 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 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. While the volume and timing of acquisition activity can vary quarter to quarter, we continue to source and underwrite transactions in the convenience gas and other automotive related sectors. Overall, the volume of opportunities available for these types of assets remains strong and we continue to see competition from both our REIT peers And other institutional real estate investors. 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 the portfolio, our well located properties will drive additional long term shareholder value. In addition, we are pursuing additional redevelopment projects and selectively disposing of properties where we have made the determination That the property is no longer competitive as a convenience and gas location and does not have redevelopment potential. As we move through the Q2 of 2019 and beyond, we continue to benefit from the stability of our cash flow from our core net lease portfolio and our conservative balance sheet. We remain focused on our 3 pronged growth platform consisting of: 1, stable growth supported by asset management activities in our core net lease portfolio 2, expanding our portfolio through acquisitions in the convenience, gas and auto related sectors and 3, selective redevelopment projects. We remain confident that we will be able to continue to successfully execute on our strategic objectives throughout the remainder of 2019. 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 9 properties for $29,700,000 6 of these properties we acquired for $24,700,000 were part of a sale leaseback transaction with a new Circle K franchisee who is an experienced owner and operator of convenience stores and car washes in the Southern California market. All the properties are located in the Los Angeles MSA and are subject to a 15 year unitary triple net lease. We expect to recognize initial full year rent of approximately $1,800,000 from this transaction. The properties are well positioned and the land and building size and design are competitive in the marketplace and a history of sales volume and profitability that meet our underwriting In addition, during the quarter, we acquired 3 properties in individual transactions for 5,000,000 In the aggregate, all of these properties are leased to Circle K and are located in Alabama, Georgia and North Carolina. The lot sizes for these three properties average more than 0.7 acres and the stores at each site are in excess of 2,200 square feet. Additionally, after the quarter ended, we closed on the acquisition of 2 additional properties for $8,500,000 One site, which was acquired $4,000,000 is a newly constructed car wash facility in Kentucky subject to a 15 year triple net lease with just Car Wash. The other site, which was acquired for $4,500,000 is a newly constructed collision center in the Minneapolis St. Paul MSA, subject to a 15 year lease with Caliber Collision. Turning to our redevelopment program. During the quarter, we Signed a new lease where our new tenant plans to update an existing convenience and gas site and transform it into a state of the art New to Industry Facility. The property is currently subject to a lease and we expect to recapture and commence work once the appropriate approvals have been received. In total, we ended the quarter with 13 signed leases, which includes 7 active projects and 6 projects On properties which are currently subject to triple net leases, which will be removed when we receive various approvals required to commence construction. Our pipeline includes a wide range of retail uses such as enhanced gas and convenience stores, specialty retail such as automotive parts and service And quick serve and fast casual restaurants. All of our projects are continuing to advance through the redevelopment process. We expect to substantially all these projects will be completed over the next 1 to 3 years with several additional projects moving to right commencement in 2019. To date, we have invested approximately $12,700,000 in both completed and in progress redevelopment projects With $600,000 occurring during the Q2 of 2019, and we estimate that the anticipated total investment through completion for the 13 projects Currently in progress by Getty will be approximately $8,600,000 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 over the next 5 years, possibly involving Finally, during the quarter, we disposed of 6 non core locations for $1,500,000 in proceeds and we exited 2 properties which we previously leased from 3rd party landlords. As a result of our portfolio activity, we ended the Quarter with 918 net leased properties, 7 active redevelopment sites and 8 vacant properties. Our weighted average lease term is approximately 10 years and our overall occupancy, not including our 7 active redevelopments, Increased to 99.1 percent. With that, I turn the call over to Danyan. Thank you, Mark. Turning to our financial results. For the Q2, our total revenues were $34,300,000 and rental income, which excludes tenant reimbursement and interest on notes and mortgages Receivables grew 2.1 percent to $29,600,000 Our growth in rental income continues to be driven by rent escalators in our leases, Plus incremental growth from completed acquisitions and redevelopment projects. During the Q2, the company also benefited from decreases in property costs on both environmental and general and administrative expenses. For more information on specific expense movements, please refer to yesterday afternoon's Earnings release. Our FFO for the quarter was $19,600,000 or $0.47 per share as compared to 17,600,000 or $0.43 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 $17,400,000 or $0.43 per share for the prior year's quarter. Turning to the balance sheet and our capital markets activities. We ended the quarter with $440,000,000 of borrowings, which includes $150,000,000 Under our credit agreement and $325,000,000 of long term fixed rate debt, our weighted average borrowing cost is 5.1%. The weighted average maturity of our debt is approximately 4.6 years with 74% of our debt being 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 36%, And our net debt to EBITDA is 4.3x. In addition, we used our ATM program during the quarter and issued $6,800,000 of capital at an average price of $31.92 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 $2,400,000 Finally, we reaffirm our 2019 Any acquisition or capital markets activities, although it does reflect 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 in 2019 3, the full year impact of the dilution associated with the company's 2018 capital raising activities and 4, Our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses, but deals ultimately not completed. With that, I will turn the call back to Chris. Thank you. That concludes our prepared remarks. So let me ask the operator to open the call for questions. We will We will take our first question from Anthony Paolone from JPMorgan. Please go ahead. Yes. Hi, thanks. Good morning. My first question is, can you talk about what all you have teed up for sale over the rest The year, just order of magnitude? Sure. I think we have sold We sold 6 properties in the quarter for $1,500,000 proceeds. I think that using that as sort of Our run rate for the rest of the year probably isn't is a good number to use. But again, all of our dispositions at this point are, Again, properties that we really don't think are long term holds for the company and don't have redevelopment potential. So I really do not Expect to generate significant net proceeds post sale. Okay, got it. And then 2, with regards to a couple of the auto related deals you did, it sounds like post 2Q. Are you are the dealers you're looking at on that front mostly one off like these look like a couple of $4,000,000 ish Transactions or is that a space where you're likely to see portfolios? Yes. So it's Mark. I think we'll see a mix of both in our underwriting and our sourcing efforts. I wouldn't say that the first two deals were Indicative that they're all one off deals, but we consider both. I think we're likely to or hopeful to find Some portfolio deals and continue to evaluate the individual acquisitions. And can you talk about the pipeline for these as well as just more broadly as we look into the second half? You mentioned that You have a good pipeline, but you're also comping up against other REITs and others as competitors. Can you talk about just what that looks like? Yes, sure. So through the first half of the year, our pipeline of opportunities in the Gas convenience sector is pretty much in line over the last couple of years. We're probably in excess of somewhere around $500,000,000 of opportunities that we've evaluated through First half of the year, which is pretty much on pace with what we saw last year annualized. We are growing our pipeline of Opportunities in other automotive, it's not quite at the pace of the volume that we've we have To date in the fuel and convenience, with that we continue to make inroads, develop relationships and we're seeing much more A better pace and a better volume of opportunities presented to us and again also sourcing direct So we're going to get some momentum in both categories. Okay. And it seemed like The just the math you provided or the numbers you provided, the Circle K sale leaseback was about a 7.3 Yield, it seems like a good yield. Just curious like In terms of having a $500,000,000 pipeline in the first half, like was that just connected well for you? Or Were the other deals just more aggressive? Like it just seems like at that price point, you should be able to make a lot of deals clear and hit the bid and Make it accretive to your cost of capital? Yes. I mean, I think that there's a host of factors, right? So, A, we referenced competition, right? Obviously, there's certainly a lot of activity in the sector, but we also have when opportunities come in, we put that through our underwriting criteria and Certain things don't fit either our real estate screen or maybe there's a credit issue on the tenant side. So not every transaction is going to be For us, but we certainly think that there are a lot of opportunities out there that work for our cost of capital and that we can move forward on and Add to the portfolio over the course of this year and beyond. Okay, great. Thank you. And our next question is from One moment please. And our next question is from Mitch Germain from JMP Securities. Please go ahead. Thank you. How much of your portfolio today currently is characterized as other auto? Very, very small percentage, Mitch, less 2% plus or minus. And then the shift into Kind of stretching kind of your acquisition criteria, is that due to competition in kind of more Yes. I think we still feel very comfortable about the core business, which remains convenience and gas. It's 98% of the portfolio. We've got deep relationships, and I think we've demonstrated that we can find opportunities and grow the portfolio there. As we looked at the broader net lease universe, obviously, other automotive It has a lot of similarities. There is a bit of overlap specifically with things such as car washes, right, which is a Has always been a piece to our portfolio. So I think we view it as additive. I think we view the real estate as very similar in terms of location and size, Both size lot size and building size. So again, I we view this as an add, not a shift or not anything No thought to moving away from convenience and gas on our side, but just adding to our opportunity set. And are you still seeing a significant consolidation trend in the convenience and gas sector? That sector continues to consolidate. It is M and A Driven, right. So there are certain opportunities commented that if you look at our transaction history over the last several years, it has been Largely driven by M and A and has been therefore variable. So yes, we continue to think that there will be more Was it $7,000,000 on the ATM in the quarter? Correct. Thank you. And our next question is from John Massocca from Ladenburg Thalmann. Please go ahead. Your line is open. Good morning. Hey, John. How are you? Not bad. So just for help with modeling, what was the timing on the Division Street deal from Some of the industry reports that were out there, it seems like it was pretty late in the quarter. Is that correct? Yes. Okay. I mean like is it like 2 days left in the quarter kind of or like mid June? They call it mid June. Okay, mid June. And then kind of following up on that transaction, was this your first transaction with Division Street and is there an opportunity potentially for more deals with the operator? Yes, it's Mark. This was our first transaction with this operator. He's an experienced operator from Southern California. He's been in the has been in the business for a while. He bought these from a larger operator and distributor in the LA market. Whether he if he can grow his business, it was a good relationship. Who knows if he's out there in the future and it lends More opportunities, but we certainly won't listen to them. But for right now, it's just these properties that we acquired. Okay. And then specifically with regards to kind of potential investments in kind of the pure car wash space, how do you maybe differentiate yourself from some of the other Net lease investors in the sector, just thinking because it's been a fairly popular investment, especially when you look at the 2 larger kind of PE backs Players in the space, there's a lot of net lease REITs that have invested in their real estate. So just is there something specific you're looking for in that sector? Or Is it just that it's attractive based on the kind of underlying fundamentals? I think it our goal with Specifically with the larger operators or other operators who are seeking to grow there is to form direct relationships, where we have And understanding as to what they're looking to do and also where we want to invest in terms of owning the real estate, We think that there's certainly an opportunity, specifically with Zips, who did our first deal within the quarter, We continue to find locations which work for both parties and have high quality real estate that fits well with our portfolio. And then, specifically with regards to maybe guidance, how much kind of assumptions are you making in terms of Stuff within that kind of 6 property pipeline that isn't yet being worked on from the development side. Are you assuming all of that Kind of works its way into the actual project side of the development list? Or is it When you contemplate your guidance, how much kind of rent is coming offline in order to redevelop it? So specifically as it relates to those 6 properties, those that which we call pipeline, they are Currently in net leases, we are currently collecting rent for this today. There will be downtime, right, when we take those properties back, Work on the properties and then obviously the properties will come back into service upon completion. That is factored into our guidance. We Try to minimize that downtime. I think on average on those particular properties, it would be somewhere between 6 12 months of downtime for the construction process. But specifically in the $171,000,000 to $175,000,000 is that just based on what you guys have Budgeted from what you can see or is that we're making some general assumption that, hey, all for conservatism, let's assume All of those stop paying rent as part of a net lease in, I don't know, September? Each project, John, has its own time line, right? So when we think about our numbers, specifically 2019 guidance, Each one has a different time line and roll on excuse me, roll off and then back on. It's hard to comment as to from your standpoint how do you model that. Again, it's individual in nature. At this time, we have no further questions. I would like to return back to Mr. Constance for any further or any closure remarks. Excellent. Thank you. Well, first off, thank you all for your continued And we look forward to getting back on the phone in October of this year when we report our Q3. This now concludes our conference call. You may now all disconnect.