Earnings Call: Q1 2019

May 1, 2019

Good day, and welcome to the Getty Realty Corp. 1st Quarter 2019 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Joshua Dicker, SVP, General Counsel and Corporate Secretary. Please go ahead. Thank you. I would like to thank you all for joining us for Getty Realty's Q1 earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ended March 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 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 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 and 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 for the Q1 of 2019. With Josh and me on the call today are Mark O'Lear, our Chief Operating Officer and Daniel Fielding, our Chief Financial Officer. I'll begin today's call by providing an overview of our Q1 2019 performance, touch on 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 then Daniel will discuss our financial results. Our results for the quarter were steady and in line with our expectations. During the quarter, our net lease portfolio continued to display the strength and stability that we have consistently demonstrated from our long term triple net leases. Our total revenue grew by 6% in the quarter, primarily due to income received from properties acquired last year and the completion of several of our redevelopment projects. In addition, our adjusted funds from operations or AFFO grew by 4% as our strong top line results were partially offset by the impact of one time costs associated with certain of our redevelopment projects and non recurring retirement costs. On a per share basis, our AFFO was $0.42 which was comparable to the prior year's quarter. During the quarter, we continued to focus on our growth strategies, including realizing organic growth embedded in our long term leases, pursuing attractive acquisitions and completing selected redevelopments. We continue to source and underwrite numerous opportunities in Convenience, gas and auto related sectors and are at various stages of the underwriting process for a number of potential transactions. Although it can be difficult to predict the rate and timing for completing transactions, we are seeing numerous attractive opportunities and we remain confident and we will selectively add properties to our portfolio during 2019. With that said, we remain disciplined 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 We'll drive additional long term shareholder value. We also made ongoing progress with respect to our redevelopment strategy. During the quarter, we completed our 10th project, which was the ground lease of a new to industry convenience and gas location, which Mark will discuss in more detail. As we look ahead, we remain focused on creating shareholder value by executing on each of our stated growth initiatives. We also plan to maintain our Stable and flexible balance sheet. We place a premium on being conservatively leveraged and are committed to having a well laddered and flexible capital structure as we grow our company. With that, I will turn the call over to Mark O'Leary to discuss our portfolio and investment activities. Thank you, Chris. In terms of our investment activities, we had a relatively quiet Q1. During the quarter, we invested approximately $600,000 in both our As Chris mentioned, in the quarter, Brent commenced on our 10th completed redevelopment project, which was a ground lease to Sheetz, a leading convenience and gas operator in the Eastern half of the United States. In this project, we invested $300,000 and generated a net increase in annual rent of $200,000 In terms of redevelopment projects, we ended the quarter with 12 signed leases. Of these redevelopment projects, 7 are on properties not currently included in our net lease portfolio and 5 are on properties which are included in our net lease portfolio. All of these projects are continuing to advance through the redevelopment process. We substantially all of these projects will be completed over the next 1 to 3 years. In total to date, we have invested $2,200,000 in these 12 redevelopment projects, and we expect to have rent commencement at several sites during 2019. On the capital spending side, we estimate that these 12 projects will require a total investment by Getty of 7,900,000 and will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today. For a 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 transforming selective sites in our portfolio and look forward to updating everyone as we make progress. Turning to our acquisition program, the overall volume of opportunities we are underwriting for convenience and gas and other automotive use sites remain strong. During the Q1 of 2019, we continued to source and underwrite a steady pipeline of potential transactions. While we did not close any acquisitions during the Q1, as Chris discussed, we remain confident that we will close on opportunities in 2019 and look forward to updating everyone as we move throughout the year. Turning to dispositions, we did not sell any properties in the quarter, but we did exit one property which we had previously leased from a third party landlord. In addition, subsequent to the quarter end, we sold 3 vacant properties and is generating net proceeds of $600,000 As a result of all of our activity, we ended the quarter with 913 Net leased properties, 7 active redevelopment sites and 12 vacant properties. Our weighted average lease term remained approximately 10 years and our overall occupancy excluding active redevelopments was 98.7%. With that, I turn the call over to Danyard. Thank you, Mark. For the Q1, our total revenues and rental income, which excludes tenant reimbursement and interest on notes and mortgage receivables, Grew 6% to $34,000,000 and 4.6 percent to $29,600,000 respectively. Our top line growth continues to be driven by rent escalators in our leases plus incremental growth from completed 2018 acquisitions and redevelopment projects. At the beginning of the year, we adopted the new lease accounting standard. This change resulted in an immaterial impact on net earnings, FFO and AFFO. In addition, tenant reimbursements are now included in revenues from rental properties. Also note that we have not adjusted prior period results for certain line items are not directly comparable. For more information on changes in accounting due to the new leasing standard, please refer to yesterday's earnings release and our Form 10 Q, which has yet to be filed. During the Q1, we experienced an increase in property costs associated with our redevelopment initiative, certain of which are non recurring in nature. In addition, our G and A expenses increased primarily due to $300,000 of one time employee retirement costs. For more information on specific expense movements, please refer to yesterday's earnings release. Our FFO for the quarter was $17,800,000 or $0.43 per share as compared to 17,800,000 or $0.44 per share for the prior year's quarter. Our AFFO for the quarter was $17,500,000 or $0.42 per share as compared to $16,800,000 or $0.42 per share for the prior year's quarter. Turning to the balance sheet and our capital markets activities, We ended the quarter with $415,000,000 of borrowings, which includes $90,000,000 under our credit agreement and $325,000,000 of long term fixed rate debt. Our weighted average borrowing cost is 5.2%. The weighted average maturity of our debt is approximately 5 years with 78% of our debt being fixed rate and our earliest debt maturity remains 2021. Our debt to total capitalization currently stands at 0.25 dollars Our debt to total asset value is 36% and our net debt to EBITDA is 4.7 times. Lastly, for the quarter, we did not issue any equity under our absolute market equity program. Our environmental liability ended the quarter at $59,300,000 down $600,000 year to date. For the quarter ended March 31, 2019, the company's net environmental remediation spending was approximately 1,500,000 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 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 for deals ultimately not completed. With that, I will turn the call back to Chris. That concludes our prepared remarks, so let me ask the operator to open the call for questions. We'll take our first question from Mitch Germain with JMP Securities. Good morning. Chris, when thinking about the acquisition markets, obviously no activity in the Q1. Did the 4th quarter have any the volatility in the 4th quarter have anything to do with maybe the pipeline? Was it the lower rates causing a little more competition, was it just maybe a pricing dynamic where you guys are being disciplined? Any sort of trends that we should be considering From this quarter in terms of how we should think about acquisitions for the full year? No, I don't think there's any one trend that I would point to, Mitch. I think what we're seeing is continued opportunity. The market continues to be We remain confident that there are opportunities that we will be able to close on. The one thing that I would point out is that our large acquisitions have traditionally been lumpy. So that's due to the timing of industry M and A or just other dynamics within the transaction. And I think that's what We're seeing now some of the timing is difficult to predict. Does the OP unit currency offer some sort of Retirement planning currency for some of the private owners in the space or is that something that you guys haven't really considered much? We don't have an OP structure. So you don't have any OP? So you don't have any OP? Got you. Last one for me. Just trying to understand the Sequential decline in earnings, that was just the retirement benefit, is that the way we should think about it? Well, We had a long time employee retire, and obviously that's the cost that we incurred in the quarter that we highlighted, which are truly non recurring. If you back those costs out, our AFFO would have been $0.43 So I think you would see the uptick without that expense. Got you. And that was considered in guidance when you guys issued it? Or was that Kind of incremental. No. It wasn't. Okay. It was not. Thank you. We'll take our next Question from Joshua Dennerlein with Bank of America Merrill Lynch. Hey, good morning guys. Good morning. I saw on Page 14 of your investor presentation, the redevelopment project, looks like the yield jumped up. The average yield you've been getting jumped up to 14% from 12% last quarter. Is there any should we just How should we kind of think about future yields? Was the last project a higher yield in the past? Well, so Sure. I think in general what we've said about the program in total is that we expect Several hundred basis points premium over the acquisition market, so I think 10% plus yield. Specifically as it relates to the project that was completed in the Q1, there was a relatively modest investment on our part and a Yes. Again, increase in rent. So that's why you saw the jump from 12% to 14%. Okay. Okay. And Are there any large portfolios in the market or anything that you may have passed up on over the past like Few months that you didn't like the pricing or maybe the deals weren't something you wanted? Kind of curious about that there. I think Sure. So to answer the second part first, I mean, there's been nothing that we've really passed on specifically that comes to the top of mind That's been in the market in the Q1. The overall, I would say that the trend of large consolidation Perhaps it's slowed down, but I think that's just the timing thing and we expect the industry to continue To grow and consolidate, and I think it's just purely timing at this point. Okay. All right. Thank you. We'll take our next question from Anthony Paolone with JPMorgan. Please go ahead. Yes, thanks. Just following up on the pipeline questions, how much of or how much did you look at in the Q1 just to get a sense as to What you all are seeing in terms of total volume? How much new is added to the pipeline in the Q1? Yes. How much did you underwrite or just order of magnitude? Like was it 100 of 1,000,000 of dollars or tens or It's Mark Olear. So I think I would say it's been consistent as It's been steady as far as the opportunities that were presented coming out of last year or through last year. I don't know if we broke it down on a quarterly basis, but We've seen a steady pace of actionable opportunities that we've applied our underwriting criteria to. And And as we stated, we're confident that we'll find something that meets our criteria, but we remain disciplined in what we've seen so far to date In the year. Okay. And how much is or what does the split look like between Sort of the traditional gas station, C store stuff that you currently own versus some of the other automotive concepts that you'll consider at this point? I would say it's certainly heavily weighted towards our the more in profile gas and convenience portfolios and or one off deals. We continue to expand our search outside of that into the automotive related uses. But if you are Looking to it's definitely weighted towards gas convenience in our reviews, yes. And do you think that's just because of how you set the brackets around Your potential buy box and that it's still largely gas and convenience or is that just Kind of the industry and deal flow. And I guess what I'm getting toward is trying to understand like how big an opportunity set are you opening up For yourselves, by looking at some of these other areas, does that just lead to higher hit rate, just more deal volume in the future? Yes. I think the way towards gas convenience is based mostly on our historical relationships both with Our existing tenants that continue to grow new relationships in the gas convenience sector and the relationships in the investment and brokerage community. We are making Efforts to grow the opportunity set in other auto remade related industries, both in the tenant side and the brokerage side. So We hope that the overall pipeline will continue to grow as we expand the universe of criteria. But right now, as we make that transition, It's heavily weighted towards gas convenience because of our historical relationships in that sector. Okay. Then just last question, you had mentioned a few vacant properties sold after the quarter. As you look at the portfolio And it's total, what's the order of magnitude of what you'd probably like to sell over time at this point? It's not there's not a material portfolio of properties for disposition at this time. Okay. Thanks. We'll take our next question from John Massocca with Ladenburg Thalmann. Good morning. Hey, John. With regards to kind of operator M and A, has there been any shift in sentiment amongst acquirers With regards to using sale leasebacks to fund M and A versus other types of financing, it just kind of seems like there's been a couple of transactions here early in 2Q, you maybe with operators that haven't traditionally been as active on the sale leaseback front. Has there been a broader shift though in sentiment that you've seen? Not a broader shift. I mean there are certain large acquirers, which is probably what you're referring to, who have traditionally not used Sale leaseback financing, they have access to the broader credit market For equity, our capital fits very well in consolidation amongst Midsize to larger companies that maybe are not public and do not have some of the access to the capital markets. And so I don't really see any change. What I do see happening in the Q1 or year to date is the buyers Have been some of the largest participants in the industry and that's the way they choose to finance their own balance sheet. Okay. And then as you mentioned in your prepared remarks, you guys have been fairly focused on acquiring assets in, let's say, more infill locations. Is there anything from a kind of credit or lease perspective that would get you comfortable maybe widening your acquisition parameters To transact for something that might be you might consider a little more rural in terms of a C store property? Yes, it's a good question. Our strategy, the history of the company has always been more in the urban and suburban markets, particularly on the East Coast. We've certainly been acquiring more in the southern area of the Larger stores, larger footprint. So it does tweak the model a little bit, but I think our strategy maintains We'll be to continue to be in sort of that top 50, top 100 MSAs around the U. S. The way we think about real estate, the way we think about the industry, I don't think you can expect us to go into A very rural area and make a big splash there. And then one last kind of detailed question. Could you maybe provide a little more color on the uptick in operating costs? Just when you say there are one time costs associated with development, is that over Course of those properties being in development pipeline or was there just something one time ish this quarter specifically? Yes. No, there were a few projects that we elected to not pursue for various reasons, And those costs were then expensed through the income statement. When you say not pursue, is it stuff that I figured the active projects were just stuff moving from the pipeline into the active projects. I think it was just something that This may be kind of knocked out of pipeline as well? Yes. This is projects that were in various stages that probably don't weren't in the investor presentation, maybe a step below that Where for various reasons, whether it be on our side or on the counterparty side, we elected not to move forward and That means, you know. And what's kind of the long term plan for those properties? They just operate as is or? Well, certain of them we continue to believe will be good redevelopments over the long term. But again, the accounting rules don't let you just keep the cost on the balance But and then some of them will continue to be operating gas stations in our net lease portfolio and Some of them will go back to the drawing board. Makes sense. That's it for me. Thank you very much. Thanks, John. Thank you. At this time, I'd like to turn the call back over to our presenters for any additional or closing remarks. Excellent. Thank you very much for being on the call today and for your interest in the company and we look forward to updating you on our progress as the year goes on And then when we finish the Q2 ended June 30.