Earnings Call: Q4 2018

Feb 27, 2019

morning, everyone, and welcome to the Getty Realty's Earnings Conference Call for the 4th Quarter and Year End 2018. This call is being recorded. Submission of our non GAAP financial measures. Please go ahead, Mr. Dicker. Thank you. I would like to thank you all for joining us for Getty Realty's 4th quarter and year end earnings conference call. Yesterday afternoon, the company released its financial And may constitute forward looking statements. These statements are based on management's current expectations and beliefs and are subject to trends, Examples of forward looking statements include our 2019 guidance and may also include statements made by management in their remarks and in response 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, 2017, 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, 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 Q4 year ended 2018. With Josh and me on the call Today are Mark O'Neill, our Chief Operating Officer and Damian Fielding, our Chief Financial Officer. I will begin today's call by providing an overview of our 4th quarter Our Q4 2018 results Business activities concluded another strong year for Getty. During the quarter, our portfolio continued to display the strength and As we close out 2018 and look ahead to 2019, we continue to benefit from the overall health We are realizing internal growth from our operating assets, enhancing our portfolio through accretive acquisitions and unlocking embedded value 2018, our quarterly AFFO per share was $0.43 For the year ended 2018, we reported AFFO per share of $1.71 which was 3% higher than our results for the prior year and which fell within our revised guidance range. As I mentioned earlier, we continued to underwrite and acquire new properties during the quarter. For the year, our total investment was approximately 87,000,000 We acquired 41 high quality community gas and other automotive locations during the year. This demonstrates our proactive yet disciplined underwriting approach Over the past 2 years, we have acquired 144 properties for an investment for Parkway 300. Relationships such as these are one of the keys to our ongoing ability to source accretive growth opportunities. As an example, subsequent to our initial transaction This brings our total completed redevelopment to 9 since committing this program. We also maintain an attractive pipeline of both We were able to finance our growth in 2018 with a combination of debt and equity, including a 10 year unsecured debt private placement and measured use of our ATM program. We placed a premium on being conservatively leveraged and are committed to maintaining a well laddered flexible capital structure as we look at growth compensation. Looking ahead, we remain committed to an active approach to managing our portfolio of net leased assets, expanding our portfolio for acquisitions in the convenience, gas We will continue to be focused on acquiring high quality real estate and partnering with tenants We share our commitment to the growth and evolution of the Canadian Gas and other automotive related sectors. This approach and focus Thank you, Chris. In terms of our investment activities, we had a productive year As well as move redevelopment projects back into our net lease portfolio following rent commencement. During 2018, Getty's pipeline of potential The weighted average return exceeded 7.25 percent and the weighted average initial lease term was 14.1 years. To review a few highlights of our investment activities, for the Q4, we acquired 2 convenience and gas locations for 3,200,000 With an average initial return of more than 7.2%. For the year, we further advanced our goal of diversifying our revenue By expanding our relationships with 3 tenants, Applegreen, Circle K and GPM Investments, We display high quality operations and strong credit quality. We also expanded the company's presence in the Southern U. S, primarily through our portfolio transaction with GPM, which had 1 third of the sites The net result is that we are now represented in 30 states plus Washington, D. C. We are underwriting for convenience and gas and other automotive use sites remains robust. Moving to our redevelopment platform. For the year, we invested approximately $9,000,000 in both our completed projects and sites which are in progress. As Chris mentioned, in the Q4, we returned 3 redevelopment projects back to the net lease portfolio, Specifically in November, rent commenced for a build to suit urgent care location leased to ConvenientMD in Massachusetts. Our total investment The project was $2,100,000 and we expect to generate a return on investment of more than 10%. In December, we funded the raze and rebuild of a convenience and gas site with our global partners on Long Island, New York. In this project, our total investment was $3,100,000 and we expect to generate a return on our investment of 7.5%. Finally, in December, rent commenced on a project where we ground leased a site to a regional developer for a food service use. In this project, we invested $300,000 and we expect to generate a return on our investment of more than 20%. In terms of redevelopment projects, we ended the quarter with 13 signed leases. Of these redevelopment projects, 6 are on All of these projects are continuing to advance through the redevelopment process. We expect substantially all these projects will be completed over the next 1 to 3 years. In total, we have invested approximately $2,100,000 in these 13 redevelopment projects in our pipeline, We expect to have rent commencements at several sites during 2019. On the capital spending side, we estimate that These 13 projects will require a total investment by Getty of $8,200,000 and will generate incremental returns to the company Please refer to Page 14 of our investor presentation, which is found on our website. We remain committed to transforming selected Realizing proceeds of approximately $7,200,000 The properties sold were vacant or returned to us by our tenants for the terms of their lease agreements. We expect the net financial impact of these dispositions will be minimal. As we look ahead, we continue to selectively dispose of properties where we have made the determination that the property is no longer competitive as a gas convenience location As a result of all of our activity, we ended the year with 9 18 net lease excluding active redevelopments remains constant at 99%. With that, I turn the call over to Dan. Thank you, Mark. For the Q4, our total revenues and revenues from rental properties, which excludes tenant reimbursements and interest on notes and mortgages receivables, Property costs and environmental and G and A expenses collectively declined, primarily due to reductions in our environmental expense line item, Our FFO for the quarter was $20,300,000 or $0.49 per share as compared to $20,200,000 or $0.51 per share for the prior year's quarter. Our AFFO for the quarter was $17,600,000 or $0.43 per share as compared to 17 point $3,000,000 or $0.43 per share for the prior year's quarter. For the year ended 2018, our total revenues and revenues from rental stockholders grew by 13% to $136,100,000 and 15% to $116,300,000 respectively. Again, this growth stems from the escalators in our net leases and successful execution of both acquisitions and redevelopments. For the year ended 2018, our operating expenses increased. The primary driver for the increases was our environmental expense line item, In addition, during the year, we experienced an increase in profit costs due to pursuit costs for deals ultimately not completed. Our FFO for the year was $73,600,000 or $1.80 per share as compared to $74,600,000 or $2 Our AFFO for the year was $69,700,000 or $1.71 per share As compared to $62,000,000 or $1.66 per share for the prior year. Turning to the balance sheet and our capital markets activities, we ended 2018 with $445,000,000 of borrowings, Our weighted average borrowing cost is 5.1%. The weighted average maturity of our debt is 5 years with 73% of our debt being fixed rate, And our earliest debt maturity remains 2021. Our debt to total capitalization currently stands at 24%, Our debt to total asset value is 36% and our net debt to EBITDA is a conservative 4 times. In addition, we utilized our aftermarket equity program during the quarter and issued $9,700,000 of capital At an average price of $30.24 per share. For the year, we raised $31,000,000 $59,800,000 down $3,700,000 for the year. For the quarter year ended December 31, 2018, the company's net environmental Remediation spending was approximately $3,100,000 $9,900,000 respectively. Finally, we are introducing our 2019 AFFO per share guidance at a range of $1.71 to $1.75 Our guidance does not assume any acquisition or capital markets activities, although it does reflect our expectation that we will continue to Our expectation that we will forgo rent when we will catch up properties for redevelopment 2, our expectation that our cost of borrowings will increase 3, the full year impact of the dilution associated with the company's 2018 capital raising activities and 4, our 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 Craig Mailman with KeyBanc Capital Markets. Please go ahead, sir. Hey, guys. Good morning. Good morning. Daniel, anything else In guidance, any other big variances as we look year over year? Do you guys have any impact from the new lease accounting Craig, we're not expecting in our guidance a big impact on that at the moment. Okay. And then just bigger picture, I know acquisitions are a little bit more volatile for you guys. You guys are north of 200,000,000 2017 and about $80,000,000 in 2018, just as you guys look at what's in the pipeline, the competitiveness of the market, I mean, Do you think that 2019 could be more like 2018 or 2017 in terms of volume? Well, I think if you look at We think we've been successful in executing both portfolio and one off deals. Really, it's a matter of Two factors, which is a lot of our activity has been driven by industry M and A and consolidation, and we expect that trend to continue. And secondly, we have an underwriting criteria, which really places an emphasis on being in certain markets And where those sites are located within those markets and any transaction that we ultimately pursue has to It's in our underwriting model in order for us to move forward with it. So those are two things that I think will impact any deal that we look at sort of This year and beyond. Maybe another way to ask it. The investment pipeline today, how does that look relative to maybe the beginning of last year? Yes, I mean, I think it's consistent. Starting of last year. Yes, I mean, I think it's consistent. I mean, we disclosed a year ago at this time that we underwrote 1,000,000,000 3 last year and last year we underwrote $1,000,000,000 so slight difference, but the volume of opportunities that we continue to see which make it through our initial It's fairly consistent. And what are you guys seeing on the competitive side? And how is it Well, I think there's no doubt that there is Definitely competition from other REITs and from other institutional real estate investors for convenience and gas assets. The sector is quite healthy and it is consolidating. We are seeing a lot more activity there. In general, our view is that Pricing has been pretty disciplined across especially the public REIT market for our type of asset. So I don't really think it impacts Pricing on our side, I do think it does make the sector a little more crowded just from the number of people looking at every deal. Great. Thank you. We'll take our next question from Mitch Germain with Starz, JMP Securities. I just want to follow-up on Craig's question regarding The deal pipeline, I mean, or more or less what deals you saw 2017, I think you said 1.3 or so. Last year, one Close on a smaller amount in 2018. Did you guys make any sort of shift In terms of the way we value the real estate, the way we price transactions internally, I think really It is it's an acquisition, so certain transactions closed and certain transactions that we really liked Didn't close for various reasons, and that's really the only thing that I would point to in terms of the delta between 2017 2018. We think we've been pretty consistent in terms of generating new activity, in terms of our underwriting model and our internal process. We think we can continue to do that looking ahead. And we think the volume of opportunities And then any new players emerge? I mean, obviously, you've got some big start retail focused funds or I don't even know if we want to call non trader REITs again, but that sort of product is certainly reemerging again. Is that the competitive environment changed in any way, shape or form? Look, similar to my answer to Craig's question, the convenience Yes, sector has definitely become, I hate to say it, but more mainstream In terms of the retail real estate landscape, so the competition, I think, has been increasing over the last 3 to 5 years, And that is what it is, and we've been able to execute with more competition over the last several years. The tax reform made any shift to how some of the private owners are approaching Some of the generational issues in terms of estate planning and whatnot? Yes. I I think if you look at some of the industry data that's out there, I mean, there is an immense amount of real estate that's owned by these Companies or by families who have built up their businesses over time. And a lot of the M and A activity or what we generally refer to as industry M and A Small private business that's reached the end of their risk tolerance to continue to grow their business on their own balance sheet. And There are large acquirers out there, many of which we partnered with, who are seizing on that opportunity to grow their business and We'll take our next question from John Massocca with Ladenburg Thalmann Financial Services. Good morning. Hey, John. So what drove kind of the decline in properties leased from 3rd party landlord? It came down by about 3. I think if I look at the owned ones, it kind of makes sense based on what you bought and what you sold. But Was that movement maybe some landlords taking those properties back or maybe transfer of those into you guys having full ownership of them? Sure. Well, so I'll answer the question in a few different ways, right. So there are certain leased properties, right, that we have acquired over time, Where we want to eventually own the real estate and we were able to come to an agreement with our landlord. The flip side to that is there's a number of leases where we're coming to the end of our term and either We were not able to buy the property or we chose not to renew the lease for economic reasons and we let the lease expire. That's really those are the 2 moving pieces of the leased portfolio. And kind of how many of those leased properties are Yes. The schedule is in the 10 ks. Let me just pull it up here. We have 74 leases. There are 7, which we expect to which come up for exploration in 2019. It's a steady stream of properties that will either the initial term is coming due and we'll either look to buy the property. In certain cases, We'll look to extend the lease if we have a long term tenant that's there and in other cases we'll exit this. Okay. And then maybe switching to the acquisition front again. There's been a lot of talk of operator transaction activity up in Canada. Is that a place where you guys feel you can invest and will be willing to invest? We have looked at Canada a little bit over the years. I think our focus really And then one kind of clarifying point on guidance. Is it correct in kind of the way you were describing it that you're assuming So the reference that Daniel made to those costs, that's really cost that we expect to incur with respect to the development, Right. And certain costs that are expensed as part of our development projects and then certain deal related costs again for development. We have not traditionally included acquisitions as part of our guidance. Obviously, To the extent we are successful throughout the year, we'll update the guidance and that will reflect any additional costs that come in from those acquisitions. At this time, I'd like to turn the call back over to