Earnings Call: Q1 2018

May 9, 2018

Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the Q1 of 2018. This call is being recorded. Prior to starting the call, Joshua Dicker, our Executive Vice President, General Counsel and Secretary of the company, We'll read a Safe Harbor statement and provide information about 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 Q1 conference call. Yesterday afternoon, the 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 ks for the year ended December 31, 2017, as well as our other filings 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, Welcome to our call for the Q1 of 2018. With Josh and me on the call today are Mark O'Lear, our Chief Operating Officer and Daniel Fielding, our Chief Financial Officer. Let me begin today's call by providing an overview of our Q1 2018 performance and growth initiatives, and then I will pass the call to Mark to discuss our portfolio in more detail and then Daniel will discuss our financial results. We began 2018 with a solid quarter, which reflected both the steady performance of our core net lease portfolio and the additional income we generated from our team acquisition activity. For the Q1, we reported net income of $10,000,000 FFO of $17,800,000 and AFFO of 16,800,000 which grew by $2,600,000 or more than 18 percent over the prior year's quarter. Our quarterly AFFO per share of $0.42 increased by $0.02 Subsequent to quarter end, we acquired a portfolio of 30 properties and a $52,000,000 acquisition leaseback transaction with GPM Investments. This transaction further enhanced the company's presence in the Southern United States, and we continue to pursue additional attractive opportunities, which would further strengthen and diversify our portfolio. We remain diligent in our underwriting standards. As such, we continue to be focused on acquiring high quality real estate and Partnering with Tennant, we share our commitment to the growth and evolution of the convenience and gas sector as we believe these are critical components to drive additional shareholder value as we move through 2018 and beyond. During the quarter, we also completed several important steps to fortify our balance sheet. First, we refreshed our $125,000,000 ATM program. Secondly, we completed an upsized refinance of our existing credit facility, which pushed out our near term debt maturities and significantly improved the terms and pricing of our borrowings. And finally, in the Q2, we received the company's first investment grade debt rating from Fitch. I'm particularly pleased by the company's new debt rating as it reflects years of hard work by our staff and management team in The refinement and successful repositioning of our portfolio, adding to this effort was strong leasing and disposition activity over the last 5 years. Our approach has enabled us to maintain a low leverage and flexible unsecured balance sheet and in turn support our proven ability to accretively grow and diversify our portfolio. As we look ahead, we believe that the stability of cash flow from our core net lease portfolio and our conservative balance We will continue to afford us with the opportunity to focus our efforts on growing our business at a lower cost of capital. We remain focused on our 3 pronged growth platform With that, I will turn the call over to Mark Olear to discuss our portfolio investment activity. Thank you, Chris. I will start by reviewing our Q1 activity and then we'll turn to our portfolio acquisition which closed after quarter end. During the quarter, we disposed of 4 non core locations for $1,400,000 of proceeds. In terms of redevelopment projects added for the quarter, we executed 2 new leases with tenants who will operate 1 property as a new to industry convenience and gas use and the other property as a automotive parts store. This brings our total redevelopment projects We signed leases and LOIs to 16, which includes 10 active projects and 6 additional projects on properties, which are currently included in our net lease portfolio. All of these projects to continue to advance through the redevelopment process, We expect substantially all of these projects will be completed over the next 1 to 3 years with several projects moving to rent commencement 2018. In total, we have invested approximately $1,500,000 in these redevelopment projects with $300,000 occurring during Q1 of 2018. And we estimate that the total capital investment through completion by Getty of approximately $13,000,000 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%. As a result of our portfolio activities, We ended the quarter with 887 net leased properties, 10 active redevelopment sites and 5 vacant properties. Our weighted average lease term remained approximately 11 years and our overall occupancy, not including our 10 active redevelopments, increased by 30 basis points to 99.4% as compared to 99.1% at the end of 2017. Subsequent to quarter end, we completed the acquisition and leaseback of 30 properties as part of a larger transaction whereby our tenant GPM Investments acquired the business operations and real estate of EZ Mart, a privately held convenience and gas operator headquartered in Texas. The 30 property portfolio which we acquired includes 17 sites in Texas, 7 in Arkansas, 3 in Oklahoma and 3 in Louisiana. GPM Investments, our tenant in the transaction, is one of our largest convenience and gas operators in the United States and has been a tenant of ours and other portfolios since 2,004. The properties we acquired have an average lot size of 0.8 acres and an average store size of 2,800 square feet, which both enhance the quality and diversity of our portfolio. We funded $52,200,000 at closing and We recognize initial full year rent of approximately $3,800,000 While the acquisition market Continues to be competitive in the convenience and gas sector, our pipeline of actionable opportunities remains strong and we are in the process reviewing several additional acquisition opportunities for both single asset and portfolio transaction. That said, as we have in the past, we remain disciplined in our underwriting to ensure we are making accretive acquisitions. With that, I will turn the call over to Daniel. Thank you, Mark. Turning to our financial results. For the Q1 of 2018, our total revenues and revenues from rental properties, which excludes tenant expense reimbursements and interest income, grew 16% to $32,100,000 18 percent to $28,300,000 respectively. The primary drivers of the increase over the prior year's quarter with the impact of rent received from our 2017 acquisitions. During the Q1 of 2017, We experienced relatively flat recurring property costs and general and administrative expenses. In addition, our environmental expense, which can be variable at times, was up $1,200,000 as compared to a credit of $500,000 in the Q1 of 2017. For more information on specific expense movements, please refer to yesterday afternoon's earnings release. Our FFO for the quarter was $17,800,000 or $0.44 per share as compared to $18,200,000 or $0.52 per share for the prior year's quarter. Our AFFO for the quarter was $16,800,000 or $0.42 per share as compared to $14,200,000 or $0.40 per share for the prior year this quarter. Turning to the balance sheet. As Chris mentioned, We completed the refinance of our credit facility during the Q1, which reduced the company's weighted average cost of borrowings and extended our weighted average debt maturity. We ended the quarter with $375,000,000 of borrowings, which includes $150,000,000 under our credit agreement and $225,000,000 of long term fixed rate debt. Our weighted average borrowing cost is 4.6% And the weighted average maturity of our debt is 4.5 years with 60% of our debt being fixed rate and post our credit facility refinancing, We do not have any maturities until 2021. Our debt to total capitalization currently stands at 27%. Our total debt to total asset value is 34% and our net debt to EBITDA is 4.2x. During the quarter, we did not issue any shares under our ATM program. Our environmental liability ended the quarter at 60 $3,400,000 down $200,000 so far this year. For the quarter, the company's net environmental remediation spending was approximately $1,500,000 Finally, we are reaffirming our 2018 AFFO per share guidance of $1.68 to $1.74 per share, which now includes the impact of our recently announced acquisition. As a reminder, our guidance does not assume any future acquisition or capital markets activities, although it does reflect our expectation So 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 2017 acquisitions 2, our expectation that we will forego rent when we recapture properties 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 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. Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets. Please go ahead. Hey, everyone. This is Laura Dixon here with Craig. Just wanted to confirm on guidance, since you're reaffirming even though it includes the Impact of the acquisition, what are the other moving parts there? Well, I think we're still relatively early in the year. I think we expect to continue the rest of performance of the business and I think as the year progresses, we'll continue to evaluate what we think the appropriate guidance range is. Okay. So no offsets, it's just being conservative early in the year? That's correct. Okay. And then for the GPM deal, it sounds like Can you just discuss how deals marketed? And it sounds like that came in at a low 7% cap rate. Is that correct? So we expect to fund the recognized $3,800,000 on $52,200,000 of invested capital. So that's That's right. So cashier rent on the deal. The deal was priced kind of in the range that we've talked about for a long time, which is that 100 basis point range of 6.75 to 7.75. How the deal came to us? GPM has been a tenant of ours For over 10 years. We have 2 existing portfolios with them in other areas of the country. So we're certainly we know each other quite well And we were a part of that deal. We bought 30 properties and I think in total GPM acquired Over 250 locations as part of the operations side of the deal. So happy to do a deal with an existing tenant who we like and who we've had a successful relationship For a long time. Okay, great. I guess, pro form a the acquisition, what where would they stand on your top tenant list? They would be in our top 5. Top 5. And how comfortable would you be doing more deals with them given that exposure? Yes. Well, one of our goals that we've talked about is diversifying our revenue, right? We obviously have had some tenants that have been And the teens and as high as 20%. So what we're looking to do is continue to diversify revenue and to the extent we We continue to do deals with long term partners and keep them sort of sub-twenty percent or sub-fifteen percent, we would certainly look at that. Okay. Thank you. We will now take our next question from Anthony Paolone of JPMorgan. Please go ahead. Okay. Thanks. Good morning. Just to confirm on the last point on guidance, so the $55,000,000 you didn't change your guidance for the year, but the $55,000,000 that you've actually done Is in that number effectively already? Correct. Okay. And then Can you comment on the contractual bumps that you got on the $52,000,000 deal? Yes. There are annual contractual bumps at 1.5% a year. Okay. And Just think about like the last couple of years you guys have done a few portfolio trades and you've been really changing the complexion of the portfolio now. Can you talk to how many of your stores are full on C stores With gas versus some of the legacy properties that really just had comps and not much of a store element to it, just Just that is characteristics? Sure. Well, this morning, we published our new investment deck on slide 11, we've actually laid that detail out for the first time. So just to talk about what's on that slide is, as of Today, excluding the deal as of the end of Q1, excuse me, excluding the GPN deal, 74% of our properties have a In in store, and of that 74%, 23% have some sort of C store QSR combo, and when we say QSR combo, you're talking not only about either a nationally branded QSR such as a Dunkin' or a Subway inside the store, but also private label prepared or hot food that our tenants are Okay. Got it. And sorry, I didn't see the deck yet, so maybe answer this one. What and now what portion of the portfolio are you receiving financial statements or have a sense of EBITDAR cover, just tenant, credit financials and stuff. Yes. We received site level tenant level financials on about 60% of the portfolio Today, obviously, as we do more transactions, that's something that we were I've been increasing over time. All of our recent deals, we do get site level or tenant level financials on those. In addition to the 60% that we get today, There's another 25% of the portfolio where we get a corporate guarantee of a public company. So we don't necessarily see The site level, but we have an idea as to how the company is performing. Got it. Any brackets around the rough EBITDA coverage of the stores that you are getting financials on? No, it's in our deck as well. Where we get site level financials coverage. Okay. And then Last question. I think in your comments, you mentioned in the deal pipeline, auto related sectors. What does that encompass? Yes. That's the auto service, whether that's tire and battery, oil change, lube, Some of the publicly traded parts stores, we view that as sort of a natural extension of our kind of our underwriting. Okay, great. Thank you. We will now take our next question from Mitchell Germane of JMP Securities. Please go ahead. Good morning. If I could ask Tony's question in a different way, obviously some of the deals that you've done Recently have improved the credit profile of your tenant base. Is there anything that right now that's of concern to Whether it be a customer or a performance of a certain store that's concerning? We have a pretty active dialogue with all of our major portfolio tenants In a portfolio of 900 plus properties at this point in time, I'm sure there's always a handful that we're working through with them or We still have our 5 vacancies that we're still working through. So we definitely have a watch list that our asset management team works for Mark, Spent a lot of time kind of working on, but there's nothing of any significance that concerns us at this point. Great. What's the capital plan now that we've got the deal out there. How do you guys envision the balance sheet looking kind of post deal? Yes. I think that the big focus for us will be to continue to work on reducing our percentage of floating rate Got it at this point. Got you. And facilitated through the new Fitch rating? Is that the way we think about We certainly think that's going to be helpful as we look to raise debt capital, yes. And if you can just remind me of longer term targets on leverage? Well, we've said numerous times that we'd be comfortable running in the 4.5 to 5.5 Debt to EBITDA levels, I think for the quarter, we were 4.2%, post quarter With the acquisition, obviously, that's probably going to take up a little bit, but we're still at the low end of where we're comfortable at this point in time. Great. Last one for me. Obviously, we've been hearing about a little bit of a rise in some development type costs, labor, that sort of thing. Is the economics of your redevelopment changed at all? Or is it still kind of the same returns you've always been targeting? Yes. Nothing has really changed for us there, right? We're still targeting that kind of 300 basis point premium over the acquisition market for the entire program. And if you look at what's been completed to date, I think we've been I think our 3 completed projects to date Over 16% have averaged 16% incremental yield. So but now we're still targeting the same levels internal. You said on those you said 16%? So the 3 projects we completed, the average incremental yield has been 16%. But Target program wide, we're targeting north of 10%. Great. That's really good. Thank you. Thank you. We will now take our next question from Joshua Dennerlein of Bank of America Merrill Lynch. Please go ahead. Hey, good morning guys. Are there any large like these store portfolios out in the market that you might be looking at Well, there's definitely a host of activity. I don't think there's anything as large as say that the Kroger transaction was traded earlier in the year that's out there at this time, but there's Certainly a host of one offs and small portfolios and medium sized portfolios that we're in the process of reviewing and underwriting. Okay. And have you seen any move kind of in cap rates since the start of the year just given where interest rates are going? Yes. My view there is that they continue to be pretty sticky. There's certainly especially for the smaller deals, there's certainly a lot Money chasing them in the sector, which is keeping them keeping cap rates sort of compressed. Our view is that it's going to take a little bit of time for that The rise in the 10 year to filter through to the cap rate, the market for acquisitions and cap rates sort of towards the end of the year. Okay. And then how do you guys think about your cost of capital? Well, we have what we view as our long term cost of equity and our cost to long term fixed rate debt and look at what We think the appropriate split is for our business, which is where kind of our leverage metrics are. And I think it's It's been relatively consistent for us since the start of the year. And I think we can still invest Accretively in both the acquisition market and in the redevelopment market. Thank you. We will now take our next question from John Massocchi of Landenburg Salleman. Please go ahead. Good morning, everyone. Some of your larger competitors, it looks like they closed a sizable transaction With 711, was this something you looked at? And is this the type of transaction you would pursue given it's with kind of a brand name IG Tenen? Or does Pricing make or given pricing, does it make more sense to maybe pursue transactions with guys that are a little less brand name versus 711? Well, several of them is a tenant of ours. We certainly like them as a credit in our portfolio. And I'd say just broadly speaking, to the extent we can do transactions that make financial sense for us with investment grade tenants, we would certainly like to do that. But we also believe in our ability to underwrite tenants who maybe are not rated in the sector and underwrite Fair credit and the performance of the stores and the real estate itself. So we certainly look at both types of transaction. And those 711s in your portfolio, were those things you purchased as a 711 or were those things that maybe Became 711 either via the Sunoco purchase or other kind of purchases by 711? Both. Yes, the short answer is both. Certainly, 711 has been very acquisitive. So we've certainly benefited from that. But We've acquired 711s and then we've had sites where the operator has been acquired. And then kind of roughly speaking, how much potential do you think there is for Continued credit upgrades within the portfolio from operator M and A. Operator M and A provides opportunity for growth externally, but That's a great question. I really think that you're going to see the top 20 participants in the industry continue to consolidate The next tier down or several layers down. So I would expect to continue to see some consolidation within our tenant mix. Just given who the big acquirers are at this point in time, I think that we would get a credit upgrade in the portfolio for some of those transactions. All right. That's it for me. Thank you very much. We've got We've got another question from Craig Mailman from KeyBanc Capital Markets. Please go ahead. Hey, everyone. It's Laura again. Just a quick follow-up question about the Debt issuance potentially in the year, you've got about $150,000,000 outstanding on the line. I'm just wondering what you're modeling in terms of Potentially terming it out in terms of like size and like what rate you think you could issue at? Well, I think that the recent rating That certainly helps what we think where we think we can issue out. I don't want to comment specifically on what we think our cost is. But I think we're looking to term out a significant portion of our floating rate borrowings through the balance of the year. Okay. Do you have any sense of timing? Not that I want to comment on this call. Okay. Thank you. Thank you. At this time, we have no further questions. I'd like to turn back To Mr. Costant for any closure or further remarks. Great. Thank you all for joining us. We appreciate your interest in the company and we