Earnings Call: Q2 2018

Jul 26, 2018

Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the Q2 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 2nd quarter conference call. Yesterday afternoon, the company released its financial Results for the quarter ended June 30, 2018. Form 8 ks and earnings release are available in the Investor Relations section of our website atgetirealty.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 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, both its 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, 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 statements 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 Q2 of 2018. With Josh and me on the call today are Mark Olear, our Chief Operating Officer and Danyan Fielding, our Chief Financial Officer. Let me begin today's call by providing an overview of our Q2 2018 performance, investment activities and balance sheet initiatives. And then I will pass the call to Mark to discuss our portfolio in more detail. And finally, Daniel will discuss our financial results. The Q2 continued our trend of steady performance from our core net lease portfolio. As expected, our revenues and adjusted funds from operations both increased significantly Before our investment activities completed in the second half of twenty seventeen and in twenty eighteen year to date. For the Q2, we reported net income of $13,500,000 funds from operations of $17,600,000 and adjusted funds from operation of 17,400,000 which grew by more than $2,500,000 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 percent over the prior year's quarter. We executed on both our acquisition and redevelopment platforms during 2nd quarter. We acquired 32 convenience, gas and auto related properties for $55,000,000 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 GPN Investments, which is now our 6th largest tenant. Turning to our redevelopment program. Rent commenced on 2 projects during the quarter, bringing our total number of completed projects to 5, 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 as a convenience of gas location and does not have redevelopment potential. During the quarter, we also completed a $100,000,000 10 year private placement with Prudential, a long time capital partner of the company and NetLife, a new relationship for us. With the completion of this debt transaction, the company now has approximately 80% of this debt being fixed rate, the highest level in the history of the company, and we do not have any debt maturities until 2021. As we move through the second half of twenty eighteen 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 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 selected redevelopment projects. We remain confident that we will be able to continue to successfully execute on our With that, I will turn the call over to Mark O'Hare to discuss our portfolio investment activities. Thank you, Chris. I'll start by reviewing our investment activity then provide additional detail on our redevelopment projects and portfolio in general. During the quarter, we acquired 32 properties for $55,300,000 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 onethree of properties being in the Dallas Fort Worth MSA. The properties we acquired have an average lot size of 0 point 8 acres and average store size of 2,800 square feet, both of which enhance the quality and diversity of our portfolio. We expect to recognize initial full year rent of approximately $3,800,000 In addition, during the quarter, we There are 2 properties in individual transactions for $2,700,000 in the aggregate. The first property is a convenience and gas site in North Carolina. The other property is another car store in the Greater Chicago market. Turning to our redevelopment program. During the quarter, rent commenced on 2 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 to TrueMark 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 5 projects with an aggregate incremental return on an estimate of 18%. Turning to our redevelopment pipeline, we ended the quarter with 14 signed leases and LOIs, which include 9 active projects And 5 projects on properties which are currently included in triple net leases, but which will be removed when we receive various approvals Our pipeline includes a wide range of retail uses, such as enhanced convenience stores and gas station, Specialty retail such as automotive parts and service and quick serve and fast casual restaurants. All of our projects Continuing to advance through the redevelopment process. We expect substantially all these projects will be completed over the next 1 to 3 years with several additional projects moving to rent commencement in 2018. To date, we have invested $4,500,000 in both completed and in progress redevelopment projects with $1,000,000 occurring during the Q2 of 2018, And we estimate that the anticipated total investment through completion for the 14 projects currently in progress by Getty will be approximately $12,600,000 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 18 of our investor presentation, which can be found on our website. We remain committed to optimizing our portfolio and continue to anticipate Redevelopment opportunities over the next 5 years, possibly involving between 5% 10% of our current portfolio, With targeted unlevered redevelopment program yields of greater than 10%. Finally, during the quarter, we disposed 2 non core locations for $3,700,000 in proceeds. As a result of our portfolio activities, we ended the quarter with 9 18 net lease properties, 9 active redevelopment sites and 5 vacant properties. Our weighted average lease Term is approximately 11 years, and our overall occupancy, not including our 9 active redevelopments, increased to 99.5%. With that, I turn the call over to Daniel. Thank you, Mark. Turning to our financial results. For the Q2 2018, our total revenues And revenues from rental properties, which excludes tenant expense reimbursements and interest income, grew 18% to 34,200,000 and 19% to $29,000,000 respectively. The primary drivers of the increase over the prior year's quarter with the impact of rent received from our investment activity in the second half of twenty seventeen and twenty eighteen year to date. During the Q2 of 2018, our property costs increased by $1,200,000 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 $1,100,000 as compared to the Q2 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 17,600,000 or $0.43 per share as compared to $19,900,000 or $0.57 per share for the prior year's quarter. Our AFFO for the quarter was $17,400,000 or $0.43 per share as compared to 14,900,000 or $0.42 per share for the prior year's quarter. Turning to the balance sheet. As Chris mentioned, we issued the company's 1st ever 10 year note during the quarter. The $100,000,000 notes split evenly between potential net life, their interest at 5.47%. The proceeds from our note issuance were used to repay floating rate borrowings on our credit facility. 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 5.1% And the weighted average maturity of our debt is 5.7 years with approximately 80% of our debt being fixed rate. And post 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 4.6x. In addition, we used our ATM program during the quarter and issued $14,100,000 of capital at an average price of $26.20 per share. Our environmental liability ended the quarter at $61,800,000 down $1,700,000 so far this year. For the quarter, the company's mandatory remediation spending was approximately 3,000,000 Finally, we are reaffirming our 2018 AFFO per share guidance of $1.68 to $1.74 per share, which includes the impact of 2018 acquisition activities year to date and our $100,000,000 debt private placement. As a reminder, our guidance does not assume any future acquisitions or capital markets activities, although it does reflect our expectation that we will continue to 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 twenty seventeen and twenty eighteen 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 and 4, the full year impact of the dilution associated with the company's 2017 2018 capital raising activities. 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'll hear first from Mitch Germain with JMP Securities. Please go ahead. 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. It's primarily the volume of opportunities Primarily related to the consolidation that's going on in the convenience and gas sector, it continues to be strong. But in our opinion, it doesn't Some opportunities that are better for operators are not necessarily real estate that we want to purchase and hold long term. So 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. Got you. And then 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, I guess, quicker to take advantage of where pricing is? And then 2, any change in the competitive landscape in terms of Who you're bidding against for some of these deals? So the first question is, I think each situation in terms of who the seller is, is Unique or can be unique. So I'm not sure there's any central theme as to why there's really an acceleration of The M and A in the sector, other than there are large companies out there that have become serial acquirers that We are consolidating the industry and enhancing the overall store product and really growing their overall store The second question sorry, I forgot your second question. Let's go ahead. Competitive landscape. Can you repeat that? 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, and quite frankly, I only see that pace increasing. So Thanks. Thank you. We'll move next to Craig Mailman with KeyBanc. Hey, everyone. This is Laura Dixon here with Craig. So that you issued equity in the quarter. You're Trading at a premium to NAV on our estimates. So 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 $55,000,000 in acquisitions plus $1,000,000 in redevelopments in the quarter, and we've talked about kind of continuing to maintain a very strong conservative balance sheet. So 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, but and the ATM can certainly be part of that going forward. Okay. Thank you. And then just following up on the acquisition environment, are you able to Quantify what's in the acquisition pipeline currently? We don't Disclose that in any level of detail. I will say that we are, I'd say, on track to probably review the same In terms of volume opportunities this year that we underwrote last year, again, I'll just say that the Pipeline is strong. 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. We'll hear next from John Massocca with Ladenburg Thalmann. Please go ahead. Good morning, everyone. Good morning. So, kind of going on the acquisition front again, GPM has been pretty active. I mean, they recently did a deal with Champagne Let me just pronounce this. Champlain Oil, I mean is that type of transaction that you could be involved in? Or are those assets potentially too rural To really be attractive to you? So the Champlain Oil deal with Global, who's one of our other tenants, not GPM. It really we have ongoing dialogues with all of our tenants global who have the spare largest tenant, our GPN, who is now our 6th largest tenant. And there is there are wonderful operations such as the share planning transaction that we certainly have Taking a look at that, maybe don't necessarily fit some of the underwriting criteria from a real estate perspective that we would like to see. But Yes. 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 Yes, purchasing properties and entering into a new lease makes sense. Understood. And then It was kind of interesting that you completed 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 this redevelopment program. We happen to have a portfolio of properties, many of which are in the Northeast and Mid Atlantic, that are Very, very well located, primarily on corners and fairly dense markets. And those properties can fit a lot of Standalone retail uses. And 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 And when you have a property that fits kind of some of the attributes that a lot of The 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 Could you see acquisition opportunities in some of the kind of development 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 really I think that's The hit you 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 there. Understood. And then kind of lastly, a little detail question. The Middleton development project, what kind of happened to that? It came off the list this quarter, Look to New York? Yes. 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, and that project It's kind of off the table at this point. So we're reevaluating Millerton, and we'll find the best home for that property and keep adding new projects to the redevelopment portfolio in this quarter and future quarters. That makes sense. That's it for me. Thank you guys very much. We'll go now to Tony Pallone with JPMorgan. Thanks. Good morning. I think in your comments you mentioned, I think it was 5% to 10% of the portfolio over time Being up for redevelopment. I can't remember what the time line 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, it's really a lot of our properties are Subject to long term triple net leases where it's we may not have access to the property or we may We have to negotiate with our tenant to recapture the property. And those types of Negotiations on 15 year leases can be challenging. So I think what we've talked about is the 5% to 10% is Properties where they're either being currently held in development or currently held vacant while we're completing a redevelopment lease, And also the leases where we actually negotiated a contractual right to be able to recapture properties based on a formula. So 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% to 10% Of our overall portfolio. Okay. So hence why I guess it will 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. Is are those costs at this point still all related to legacy assets? Or Do other assets go into that mix over time? And wondering when if there's a point in time in the future where that just This is gone and no longer part of the story. Well, the vast, vast majority of Our environmental liability is associated with our legacy properties. And 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. And we do hope to get to a place At the end of the day, we're not on the touch of calls talking about environmental. And 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 have a direct 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. I mean is the number of properties associated with the liability that continue to shrink? Like is there progress being made there? Yes. Yes. We don't disclose the overall number of properties that are inside of our environmental liability. But Yes, that number of open incidents continues to come down quarter over quarter. Okay, great. Thank you. And 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. 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 Q3 In late October. This now concludes our conference call. You may disconnect at this time.