Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the second quarter of 2018. This call is being recorded. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel, and Secretary of the company will read a safe harbor statement and provide information about our non-GAAP financial measures. Mr. Dicker, please go ahead.
Thank you. I would like to thank you all for joining us for Getty Realty's second quarter conference call. Yesterday afternoon, the company released its financial results for the quarter ended June 30, 2018. 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 2018 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-K for the year ended December 31, 2017, 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 statement 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 revised definition of AFFO, which was revised at the end of 2017, 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 second quarter of 2018. With Josh and me on the call today are Mark Olear, our Chief Operating Officer, and Danion Fielding, our Chief Financial Officer. Let me begin today's call by providing an overview of our second quarter 2018 performance, investment activities, and balance sheet initiatives. I will pass the call to Mark to discuss our portfolio in more detail. Finally, Danion will discuss our financial results. The second quarter continued our trend of steady performance from our core net lease portfolio. As expected, our revenues and adjusted funds from operations both increased significantly due to our investment activities completed in the second half of 2017 and in 2018 year to date.
For the second quarter, we reported net income of $13.5 million, funds from operations of $17.6 million, and adjusted funds from operation of $17.4 million, which grew by more than $2.5 million or more than 17% over the prior year's quarter. Our quarterly AFFO per share of $0.43 increased by $0.01 per share or 2.4% over the prior year's quarter. We executed on both our acquisition and redevelopment platforms during the second quarter. We acquired 32 convenience gas and auto-related properties for $55 million in the quarter. As Mark will discuss in more detail, our previously announced portfolio transaction expanded our footprint in the Southern U.S. and our partnership with GPM Investments, which is now our sixth-largest tenant.
Turning to our redevelopment program, rent commenced on two projects during the quarter, bringing our total number of completed projects to five, in addition to our pipeline of 14 projects, which are detailed in our investor presentation. We continue to underwrite additional transactions in the convenience, gas, and auto-related sectors. Overall, the volume of opportunities available for these types of assets remains strong. We continue to see competition from both our REIT peers and other institutional real estate investors. With that said, we are staying true to our underwriting criteria. As such, we continue to be focused on acquiring high-quality real estate and partnering with tenants who share our commitment to the growth and evolution of the convenience and gas sector.
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. During the quarter, we also completed a $100 million 10-year private placement with Prudential, a longtime capital partner of the company, and MetLife, a new relationship for us. With the completion of this debt transaction, the company now has approximately 80% of its debt being fixed rate, the highest level in the history of the company. We do not have any debt maturities until 2021. As we move through the second half of 2018 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 three-pronged growth platform, consisting of a combination of stable growth supported by asset management activities in our core net lease portfolio, expanding our portfolio through acquisitions in the convenience, gas, and auto-related sectors, and selective redevelopment projects. We remain confident that we will be able to continue to successfully execute on our strategic objectives throughout the remainder of 2018. With that, I will turn the call over to Mark Olear to discuss our portfolio investment activities.
Thank you, Chris. I'll start by reviewing our investment activities, then provide additional detail on our redevelopment projects and portfolio in general.
During the quarter, we acquired 32 properties for $55.3 million. 30 of the properties we acquired were part of our transaction with GPM Investments that we discussed on our last call. As a reminder, the 30-property portfolio is located in Texas, Arkansas, Oklahoma, and Louisiana, with approximately one-third of the properties being in the Dallas-Fort Worth MSA. The properties we acquired have an average lot size of 0.8 acres and an average store size of 2,800 sq ft, both of which enhance the quality and diversity of our portfolio. We expect to recognize initial full-year rent of approximately $3.8 million. In addition, during the quarter, we acquired two properties in individual transactions for $2.7 million in the aggregate. The first property is a convenience and gas site in North Carolina. The other property is an auto parts store in the Greater Chicago market.
Turning to our redevelopment program, during the quarter, rent commenced on two projects. The first was a long-term triple net lease with AutoZone, a publicly traded parts retailer. In this project, our total investment is approximately $400,000, and we achieved an incremental return on our investment of 17%. Our second rent commencement this quarter was a long-term triple net lease through TruMark Financial, a regional credit union. In this project, we invested approximately $500,000 and achieved an incremental return on our investment of 27%. To date, we have completed five projects with an aggregate incremental return on investment of 18%. Turning to our redevelopment pipeline, we ended the quarter with 14 signed leases and LOIs, which include nine active projects and five projects on properties which are currently included in triple net leases, but 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 convenience stores and gas stations, 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 substantially all of these projects will be completed over the next one to three years, with several additional projects moving to rent commencement in 2018. To date, we have invested approximately $4.5 million in both completed and in-progress redevelopment projects, with $1 million occurring during the second quarter of 2018, and we estimate that the anticipated total investment through completion for the 14 projects currently in progress by Getty will be approximately $12.6 million. 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 18 of our investor presentation, which can be found on our website. We remain committed to optimizing our portfolio and continue to anticipate the redevelopment opportunities over the next five years, possibly involving between 5% and 10% of our current portfolio, with targeted unlevered redevelopment program yields of greater than 10%. Finally, during the quarter, we disposed of two non-core locations for $3.7 million in proceeds. As a result of our portfolio activities, we ended the quarter with 918 net leased properties, nine active redevelopment sites, and five vacant properties. Our weighted average lease term is approximately 11 years, and our overall occupancy, not including our nine active redevelopments, increased to 99.5%. With that, I turn the call to Danion.
Thank you, Mark. Turning to our financial results. For the second quarter of 2018, our total revenues and revenues from rental properties, which excludes tenant expense reimbursements and interest income, grew 18% to $34.2 million and 19% to $29 million respectively. The primary drivers of the increase over the prior year's quarter were the impact of rent received from our investment activity in the second half of 2017 and 2018 year to date. During the second quarter of 2018, our property costs increased by $1.2 million, primarily due to reimbursable real estate taxes, which are due from our tenants. In addition, our environmental expense, which can be variable at times, was up $1.1 million as compared to the second quarter of 2017, primarily due to increases in legal and professional fees associated with environmental litigation matters. For more information on specific expense movements, please refer to yesterday afternoon's earnings release.
Our FFO for the quarter was $17.6 million, or $0.43 per share, as compared to $19.9 million or $0.57 per share for the prior year's quarter. Our AFFO for the quarter was $17.4 million or $0.43 per share as compared to $14.9 million or $0.42 per share for the prior year's quarter. Turning to the balance sheet. As Chris mentioned, we issued the company's first-ever 10-year fixed rate note during the quarter. The $100 million note is split evenly between Prudential and MetLife, bear interest at 5.47%. The proceeds from our note issuance were used to repay floating rate borrowings from our credit facility. We ended the quarter with $450 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 5.1%, the weighted average maturity of our debt is 5.7 years, with approximately 80% of our debt being fixed rate. Post our credit facility refinancing, we do not have a debt maturity until 2021. Our debt to total capitalization currently stands at 27%. Our total debt to total asset value is 37%, and our net debt to EBITDA is 4.6 times. In addition, we used our ATM program during the quarter and issued $14.1 million of capital at an average price of $26.20 per share. Our environmental liability ended the quarter at $61.8 million, down $1.7 million so far this year. For the quarter, the company's environmental remediation spending was approximately $3 million.
Finally, we are reaffirming our 2018 AFFO per share guidance of $1.68-$1.74 per share, which includes the impact of 2018 acquisition activities year to date and our $100 million debt private placement. As a reminder, our guidance does not assume any future acquisitions or capital market 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, the full year impact of earnings from our second half of 2017 and 2018 year to date acquisitions. 2, our expectation that we will forego rent when we recapture properties from our net lease portfolio for redevelopment. 3, our expectation that our weighted average cost of borrowings will increase in 2018. 4, the full year impact of the dilution associated with the company's 2017 and 2018 capital raising activities.
With that, I will turn the call back to Chris.
Thank you. That concludes our prepared remarks, let me ask the operator to open the call for questions.
Certainly. If you would like to signal for a question at this time, please do so by pressing star one on your telephone keypad. If you are using a speakerphone, please ensure that your mute function has been turned off to allow your signal to reach our equipment. Again, that's star one for questions at this time, and we'll pause for just a moment to assemble our queue. We'll hear first from Mitch Germain with JMP Securities. Please go ahead.
Good morning.
Good morning.
Chris, you said you're sticking with your underwriting, and I'm curious, is that a comment that you're seeing any pricing changes within the market?
Not really. The volume of opportunities primarily related to the consolidation that's going on in the convenience and gas sector. It continues to be strong. In our opinion, some opportunities that are better for operators are not necessarily real estate that we want to purchase and hold long term. It really is a comment on being selective, in terms of how we think about acquiring real estate that we expect to own for a very long time.
Got you. With regards to how fragmented the industry is, maybe a couple of questions there. Number 1, is the current pricing environment making the decision to sell or estate planning decisions a little more quicker to take advantage of where pricing is? 2, any change in the competitive landscape in terms of who you're bidding against for some of these deals?
The first question is, I think each situation, in terms of who the seller is unique or can be unique. I'm not sure there's any central theme as to why there's really an acceleration of the M&A in the sector other than there are large companies out there that have become serial acquirers that really are consolidating the industry and enhancing the overall store product, and really growing their overall store base. The second question, sorry, I forgot your second question, Mitch.
Competitive landscape.
Can you repeat that?
The competitive landscape.
Look, I think if we think about convenience and gas and the other auto-related sectors, I think there is a significant amount of capital, both from our public REIT peers or many of our public REIT peers, but also other institutional real estate capital that has been active in the sector for the last several years. Quite frankly, I only see that pace increasing.
Many thanks.
Thank you. We'll move next to Craig Mailman with KeyBanc.
Hey, everyone, this is Laura Dixon, here with Craig. I saw that you issued equity in the quarter. You're trading at a premium to NAV in our estimates, just was wondering how that makes you think about using the ATM, like continuing to use the ATM at these levels, and does that help make some more deals pencil?
Well, we invested $55 million in acquisitions plus another $1 million in redevelopments in the quarter. We've talked about kind of continuing to maintain a very strong conservative balance sheet. With making additional investments, we thought we could use the ATM to continue to maintain the profiles from a leverage perspective that we're comfortable with. Really, we think we have the balance sheet that will afford us the opportunity to continue to grow, in the ATM can certainly be part of that going forward.
Okay. Thank you. Then just following up on the acquisition environment, are you able to quantify what's in the acquisition pipeline currently?
We won't disclose that in any level of detail. I will say that we are on track to probably review the same type of potential volume of opportunities this year that we underwrote last year. Again, I'll just say that the pipeline is strong, that there continues to be portfolio transactions and one-off transactions that are coming in that we're reviewing, and we're really sticking to our underwriting criteria and hoping that we can find deals that fit that model and that we can close.
Okay, great. Thank you.
As a reminder, that's star one to signal for a question at this time. We'll hear next from John Visotcky with Ladenburg Thalmann. Please go ahead.
Good morning, everyone.
Good morning.
Trying to go on the acquisition front again. GPM's been pretty active. They recently did a deal with Champlain Oil. Is that type of transaction that you could be involved in, or are those assets potentially too rural to really be attractive to you?
The Champlain Oil deal was Global, who's one of our other tenants, not GPM. We have ongoing dialogues with all of our tenants, Global, who happens to be our largest tenant, or GPM, who's now our sixth largest tenant. There are wonderful operations such as the Champlain transaction that we certainly have taken a look at, but maybe don't necessarily fit some of the underwriting criteria from a real estate perspective that we would like to see. Each situation, John, is unique, and we'll certainly take a look at it and work with our existing tenant base or new tenants to see if purchasing properties and entering into a new lease makes sense.
Understood. It was kind of interesting that you completed a development with a leading auto parts retailer, and you did one granular acquisition with the auto parts retailer. Is the development program a source and kind of a way for you to generate relationships in that space that could drive future acquisition activity?
Yes. I think that's certainly one of the benefits we're seeing from the redevelopment program. We happen to have a portfolio of properties, many of which are in the Northeast and Mid-Atlantic, that are very well located, primarily on corners in fairly dense markets. Those properties can fit a lot of standalone retail uses. I think Mark talked about some of the other auto sectors, some of the other sort of quick-serve fast casual restaurants or other specialty retail. When you have a property that fits kind of some of the attributes that a lot of the leading retailers are looking at, it certainly helps start a dialogue, and that leads to perhaps other redevelopment opportunities or further down the line, perhaps acquisition opportunities.
Could you see acquisition opportunities in some of the kind of assets that you're developing that maybe aren't really in that auto parts, gasoline kind of silo that you've primarily been in?
From a net lease acquisition standpoint, I think we're really trying to stay focused on our convenience and gas and other auto-related sectors. I think that's the history of the company. I think that's where our relationships are. I'm not sure it makes sense for us to really branch too far away from that.
Understood. Then kind of last little detail question. The Millerton development project, what kind of happened to that? It came off the list this quarter. Millerton, N.Y.
Yeah. Sure. This is part of development. We had a signed lease for that with a well-known retailer. We needed some land use approvals on the local level, which we didn't get. That project is kind of off the table at this point. We're reevaluating Millerton, and we'll find the best home for that property and keep adding new projects to the redevelopment portfolio this quarter and in future quarters.
Makes sense. That's it for me. Thank you guys very much.
As a final reminder to our phone audience, that is star one to signal for a question at this time. We'll go now to Anthony Paolone with J.P. Morgan.
Thanks. Good morning. I think in your comments you mentioned, I think it was 5%-10% of the portfolio over time being up for redevelopment.
Correct.
I can't remember what the timeline was, but I'm just curious what the gating factors are for that, given the returns are pretty high. I'm wondering why not accelerate that.
Tony, a lot of our properties are subject to long-term triple net leases, where we may not have access to the property, or we may have to negotiate with our tenant to recapture the property. Those types of negotiations on 15-year leases can be challenging. I think what we've talked about is the 5%-10% is properties where they're either being currently held in development or currently held vacant while we're completing a redevelopment lease, but also those leases where we've actually negotiated a contractual right to be able to recapture properties based on a formula. Not all of our leases have that same recapture feature to them, which is why I think you're seeing us kind of hold to that 5%-10% of our overall portfolio.
Okay. Hence why I guess it'll take a while to get there. Okay. Other item is on the environmental side, I know it's something that's kind of faded a bit over the last couple of years. Are those costs at this point still all related to legacy assets, or do other assets go into that mix over time? Wondering when, if there's a point in time in the future where that just is gone and no longer part of the story.
Well, the vast majority of our environmental liability is associated with our legacy properties. We continue to believe it is in our best interest to spend significant sums to reduce that liability. It's really pure construction and digging and monitoring over time. We do hope to get to a place, Tony, where at the end of the day, we're not on these types of calls talking about environmental. I think the nice feature from our side on environmental is, again, it's all related to legacy properties. It all dates back to when this company or the history of this company used to be an operator, and we had a direct responsibility. In our other properties which we've acquired, which were not part of our history, we've not had any significant experience where there's been environmental liability that comes back to our balance sheet.
All right. Is the number of properties associated with the liability continuing to shrink? Like, is there progress being made there?
Yes. We don't disclose the overall number of properties that are inside of our environmental liability. Yes, that number of open incidents continues to come down quarter-over-quarter.
Okay, great. Thank you.
You're welcome.
At this time, we have no further questions. I'd like to turn the call back to Mr. Constant for any closure or further remarks.
Great. Well, thank you everyone for being on the call today and for your interest in the company, and we look forward to speaking to everyone when we report our third quarter in late October.
This now concludes our conference call. You may disconnect at this time.