Good day, welcome to the Getty Realty Corp first 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 first-quarter earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ending March 31, 2019. The Form 8-K 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, that actual events or results could differ materially. I refer you to the company's annual report on Form 10-K for the year ending 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 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 first 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. I'll begin today's call by providing an overview of our first quarter 2019 performance, touch on our strategic objectives for the remainder of the year, then I will pass the call to Mark to discuss our portfolio in more detail, then Danion 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. 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 the organic growth embedded in our long-term leases, pursuing attractive acquisitions, and completing selected redevelopments. We continue to source and underwrite numerous opportunities in the convenience, gas, and auto-related sectors and are at various stages of the underwriting process for a number of potential transactions.
It can be difficult to predict the rate and timing for completing transactions, we are seeing numerous attractive opportunities, we remain confident that we will selectively add properties to our portfolio during 2019. 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 will drive additional long-term shareholder value. We also made ongoing progress with respect to our redevelopment strategy. During the quarter, we completed our tenth project, which was the ground lease of a new-to-industry convenience and gas location Mark will discuss in more detail. 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. I will turn the call over to Mark J. Olear to discuss our portfolio and investment activities.
Thank you, Chris. In terms of our investment activities, we had a relatively quiet first quarter. During the quarter, we invested approximately $0.6 million in both our completed redevelopment projects and sites which are in progress. As Chris mentioned, in the quarter, rent commenced on our tenth completed redevelopment project, which was a ground lease to Sheetz, a leading convenience and gas operator in the eastern half of the U.S. In this project, we invested $0.3 million and generated a net increase in annual rent of $0.2 million. In terms of redevelopment projects, we ended the quarter with 12 signed leases. Of these redevelopment projects, seven are on properties not currently included in our net lease portfolio, and five are on properties which are included in our net lease portfolio. All of these projects are continuing to advance through the redevelopment process.
We expect substantially all of these projects will be completed over the next one to three years. In total, to date, we have invested approximately $2.2 million 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 $7.9 million and will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today. For more detailed information on the redevelopment pipeline, please refer to page 14 of our investor presentation, which can be found on our website. We remain committed to 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 in gas and other automotive use sites remain strong. During the first quarter of 2019, we continued to source and underwrite a steady pipeline of potential transactions. While we did not close any acquisitions during the first quarter, 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 three vacant properties, generating net proceeds of $0.6 million. As a result of all of our activity, we ended the quarter with 913 net leased properties, seven 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 Danion.
Thank you, Mark. For the first quarter, our total revenues and rental income, which excludes tenant reimbursement and interest on notes and mortgages receivables, grew 6% to $34 million and 4.6% to $29.6 million, 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, so 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 first quarter, we experienced an increase in property costs associated with our redevelopment initiative, certain of which are non-recurring in nature. In addition, our G&A expenses increased primarily due to $0.3 million 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 $17.8 million, or $0.43 per share, as compared to $17.8 million or $0.44 per share for the prior year's quarter. Our AFFO for the quarter was $17.5 million or $0.42 per share, as compared to $16.8 million 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 million of borrowings, which includes $90 million under our credit agreement and $325 million of long-term fixed rate debt. Our weighted average borrowing cost is 5.2%.
The weighted average maturity of our debt is approximately five years, with 78% of our debt being fixed rate, and our earliest debt maturity remains 2021. Our debt-to-total capitalization currently stands at 25%, 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 at-the-market equity program. Our environmental liability ended the quarter at $59.3 million, down $0.6 million year to date. For the quarter ended March 31st, 2019, the company's net environmental remediation spending was approximately $1.5 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 acquisitional 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, one, our expectation that we will forgo rent when we re-capture properties for redevelopment. Two, our expectation that our cost of borrowings will increase in 2019. Three, the full year impact of the dilution associated with the company's 2018 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.
That concludes our prepared remarks. Let me ask the operator to open the call for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. 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 first quarter. Did the volatility in the fourth 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 the continued opportunity. The market continues to be competitive. 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. Some of that's due to the timing of industry M&A or just other dynamics within the transaction, and I think that's what we're seeing now is 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.
Oh, you don't have any OP.
It's not something that's in our playbook.
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, 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've been $0.43. I think you would see the uptick without that expense.
Got you. That was considered in guidance when you guys issued it, or was that-
No
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.
Morning.
On page 14 of your investor presentation, the redevelopment project, looks like the average yield you've been getting jumped up to 14% from 12% last quarter. How should we think about future yields? Was the last project sort of a higher yield than in the past?
Well, 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, think 10% plus yields. Specifically, as it relates to the project that was completed in the first quarter, there was a relatively modest investment on our part and a significant increase in rent. That's why you saw the jump from 12 to 14%.
Okay. Are there any large portfolios in the market or anything that you've maybe passed up on over the past few months that you didn't like because the pricing or maybe the deals weren't something you wanted? Kind of curious what's out there.
Sure. To answer the second part first, 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 first quarter. Overall, I would say that the trend of large consolidation perhaps has slowed down. I think that's just a 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. Appreciate it.
As a reminder, it is star one to ask a question. We'll take our next question from Anthony Paolone with J.P. Morgan. Please go ahead.
Yeah, thanks. Just following up on the pipeline questions. How much did you look at in the first quarter, just to get a sense as to what you all are seeing in terms of total volume?
How much new was added to the pipeline in the first quarter?
Yeah, how much did you underwrite or just order of magnitude, like was it hundreds of millions of dollars or tens or like what's the-
It's Mark Olear . I would say it's been steady as far as the opportunities that have been 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. As we've stated, we're confident that we'll find something that meets our criteria, but we'll remain disciplined in what we've seen so far to date in the year.
Okay. 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 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. It's definitely weighted towards gas convenience in our reviews. Yes.
Okay. 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? Is that just kind of the industry and deal flow? I guess what I'm getting toward is trying to understand 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?
Yeah, 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 oil-related industries, both in the tenant side and the brokerage side. We would hope that the overall pipeline will continue to grow as we expand the universe of criteria. Right now, as we make that transition, it's heavily weighted towards gas convenience because of our historical relationships in that sector.
All right. Just last question. You'd mentioned a few vacant properties sold after the quarter. As you look at the portfolio in its total, what's the order of magnitude of what you'd probably like to sell over time at this point?
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&A, has there been any shift in sentiment amongst acquirers with regards to using sale-leasebacks to fund M&A versus other types of financing? It just kind of seems like there's been a couple transactions here early in 2Q, but 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. 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 or equity. Our capital fits very well in consolidation amongst mid-size to larger companies that maybe are not public and do not have some of the access to the capital markets. I don't really see any change. What I do see happening in the first quarter or year to date is the buyers have been some of the largest participants in the industry, and that's the way that they choose to finance their own balance sheet.
Okay. 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 you might consider a little more rural in terms of a C-store property?
Yeah, 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 U.S., larger stores, larger footprint. It does tweak the model a little bit, but I think our strategy maintains or will be to continue to be in sort of that top 50, top 100 MSAs around the U.S. It'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.
Okay. One last kind of detail 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 the course of those properties being in the development pipeline, or was there just something one-time-ish this quarter specifically?
Yeah, no, there were a few projects that we elected to not pursue for various reasons. Those costs were then expensed through the income statement.
When you say not pursue, is it stuff that was going to be put into the?
Go ahead.
Yeah, I figured the active projects were just stuff moving from the pipeline into the active projects. Was there something that maybe kind of knocked out of the pipeline as well?
Yeah. This is projects that were in various stages that probably 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.
What's kind of the long-term plan for those properties? Do you just operate as is or?
Well, certain of them we continue to believe will be good redevelopments over the long term. Again, the accounting rules don't let you just keep the costs on the balance sheet, right? Then some of them will continue to be operating gas stations in our net lease portfolio, and some of them we'll go back to the drawing board on.
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 when we finish the second quarter end of June 30th.