Getty Realty Corp (GTY) 2008 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Getty Realty conference call for the second quarter and six months ended June 30, 2008. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Joshua Dicker, General Counsel and Secretary of the Company. Please go ahead, Mr. Dicker.

Thank you. I would like to thank you all for joining us for Getty Realty's quarterly conference call. Now, as we formally begin the conference call, I will read into the record the Safe Harbor statement. The statements made during the course of this conference call may include our hopes, intentions, beliefs, expectations, or projections of the future that, along with other statements that are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. An example of such forward-looking statements would be management's estimation as to the effect of a particular transaction.

It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking statements can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2007, our quarterly report on Form 10-Q for the quarterly period ended March 31, 2008, and in our other filings with the SEC.

You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly release revisions to these forward-looking statements to reflect future events or circumstances or reflect the occurrence of unanticipated events. Mr. Leo Liebowitz, Chairman and CEO, will comment on our press release that was issued yesterday after the close of business.

Now I would like to introduce the other officers of the Company who are present during this call and are prepared to answer your questions. Mr. Thomas Stirnweis, the Company's Vice President, Treasurer, and Chief Financial Officer, and Mr. Kevin Shea, Executive Vice President with principal responsibility for real estate acquisitions, asset management, and environmental matters. I will now turn the call over to Mr. Liebowitz.

Good morning. For those listeners who have not received the press release which went out after the close of business yesterday, July 29, we reported the results of our second quarter and our six months ended June 30, 2008. With regard to the press release, I will mention some of the highlights and afterwards we will be happy to answer your questions.

Net earnings for the quarter ended June 30, 2008 were $10.6 million, as compared to $10 million reported for the prior second quarter period. Net earnings for the six months ended June 30, 2008 were $22 million, as compared to $20.5 million reported for the six months ended June 30, 2007. Net earnings for the second quarter and the six months ended June 30, 2008 reflected an increase of $600,000 over the quarter ended June 30, 2007, and $1.5 million over the six months ended June 30, 2007.

Rent revenues increased by $2.5 million to $40.6 million for the six months ended June 30, 2008. The increase in net earnings in rent income reflects the full effect of the rental revenue attributable to properties acquired in 2007, which was offset by additional depreciation and amortization expense and the interest expense on the borrowing related to such acquisitions.

Our related--our adjusted funds from operations, AFFO, for the quarter ended June 30, 2008 increased $1.8 million to 11.7 million, and increased by $3 million to $24.7 million for the six months ended June 30, 2008.

Net environmental expense decreased $1.1 million and $1.2 million for the quarter and the six months ended June 30, 2008, as compared to the same 2007 year periods. You should not assume that future environmental expenses and changes in accrued estimated remediation expense will be the same magnitude as we experienced in the period ended June 30, 2008. Environmental management is not an exact science and results can vary regardless of how good we are at managing it. As we've previously reported, we continue to expect quarter-to-quarter fluctuations in accrued estimated remediation expense. However, cash flow provided by our business remains in line with our expectations.

As we've said in our press releases and our SEC filings, a major tenant, Getty Petroleum Marketing, has shown a continuing decline in its earnings performance and is exploring various avenues to resolve this problem, including their proposal to remove a large number of properties from our unitary master lease with them. We are conducting discussions with Marketing, and we are open to negotiating for the removal of properties from the unitary master lease, because we believe the removal of properties on mutually acceptable terms could be beneficial to both parties. For example, it is possible that reducing the number of properties held by Marketing may benefit their financial performance and at the same time allow us to relet, redevelop, or sell certain properties and reinvest the proceeds in new properties.

We must note that there are many possibilities for a modification of our unitary master lease with Marketing and many factors that may influence our respective positions regarding the modification of the master lease. In fact, we do not know whether a modification of the master lease on terms acceptable to us can be accomplished.

With that said, Tom Stirnweis, Kevin Shea, and I are ready to answer any of your questions. Please state your name and company before you ask a question,

Thank you. (OPERATOR INSTRUCTIONS.) And our first question comes from David Winnington.

Hey, guys. How are you doing?

Good morning.

Good morning, David.

Good morning.

So I just kind of wanted to follow-up with you, Leo, on your comments about the possibilities of the--with the properties that you could get back from Marketing. You said you could relet them, you could redevelop them, or you could sell them. I guess the first question I have associated with that is assuming that you relet them, what would be the--how long would you guys estimate it would take you to release the properties?

Well, these things don't happen overnight. Every potential lessee or potential buyer wants to do an environmental impact study, wants to really understand what he's committing to. And of course, we want to be comfortable that it's a tenant that we would want. So these don't happen quickly. Generally, they take a number of months. But we're working--we would work diligently on it. We'd like to get it done, if we can.

Okay. And so, with respect to selling the assets, does the new legislation for taxes on 1031 exchanges, does that affect your timeframe at all for--because I realize that some of the assets that you would sell might end up being 1031 exchanges for potential acquirors.

Well, generally, whenever we have a sale, we do a 1031 exchange and we try to acquire a service station, convenience store property in exchange. So we're using 1031 exchanges now, and we generally have not had any tax problems.

Okay. So--and correct me, if I'm wrong, but I was under the impression--or under--I had the understanding that there was going to be an increasing of the tax rate on 1031 exchanges. I think it was going to be going into effect by the end of the year or beginning of next year. Does that affect your strategy with respect to possibly disposing of the assets?

I don't believe so. I don't think the--the 1031 exchange is--[works well] for us. There are properties that we have been able to acquire to satisfy the exchange requirement within the time limits. The time limits are very short to identify the properties that we're going to acquire. But we've been able to do that without a problem.

Okay. And then, with respect to redeveloping, are we just redeveloping gas stations or are we converting them into something else?

In some cases they have higher and better uses. And if in fact there is an opportunity to maximize our income, we're going to do that.

Okay. Now, you guys mentioned that you're open to renegotiating the terms of the master lease agreement with Marketing. Let's assume that you reach an amicable agreement that is mutually beneficial to both sides. What--would you plan on collecting any type of lease termination income from that?

I can't--we're not far along really in our negotiation to respond to that. I don't think it would be appropriate at this time.

Okay. What--do you guys have any idea as to the timing of the negotiations at this point? I mean, do you have a meeting scheduled with them anytime soon, or is this just kind of taking it as it comes?

There's been ongoing discussions and we'll continue to do that. We obviously would like to get this behind us sooner rather than later. But we're only one party to it. There are two parties at least. So--.

--Okay. Well, if you had to ascribe a probability to I guess Marketing, it appears at this point that they're--they don't have any intention of stopping to pay rent, at least according to your filings. They've been current on rent I think through May or June.

Correct.

I--so what would be the probability of them planning for Chapter 11 bankruptcy or stopping--ceasing to pay rent under the lease agreement?

Obviously, that's an option that they have. We--management at least doesn't believe that they would go that far.

Why not?

Because they've indicated that they cannot live up to the terms of their agreement with us.

Okay. So do you think that they'll reach a point where operationally they are struggling so much that they're forced to do that or--?

--We hope that.

Okay. So I guess with that said then, how are your--I guess, how's your bad debt expense with respect to your other tenants that presumably are suffering from the same types of difficulties in their business?

We have zero in the way--I shouldn't say zero--virtually zero in the way of bad debt. All of our tenants pay their rent. They're in business and they know that they need to pay the rent. That's primary to their remaining in business. And right now things appear to be improving for the retail side from a margin point of view. So we're not anticipating any problems.

Okay. And I guess just do you--are they--I assume that they're encountering the same types of challenges that Marketing is as well, correct, as far as with respect to their margins and the way that their business is running right now?

Marketing is unique in the way they run their business as compared with others. And it's really not fair to compare what Marketing does and how they run their business with some other operator who has either a larger convenience store or auto repair business or other source of ancillary income in addition to the gasoline market. But gasoline margins, as I implied, at the moment appears to be pretty good on the retail side.

Okay. So how much--just how much do the ancillary services offset the fuel business?

It depends on the particular location. It depends on the type of facility. It depends upon how active they are in these other businesses.

Okay. Well, let's take for example a typical marketing location versus one of the other tenants that you just described that may have an auto repair or convenience store business that is I guess just average.

Well, Marketing does not directly operate the locations. Marketing has tenants in these locations who they pay a commission to sell gasoline for them, so that the income that goes to the operator in those cases--the ancillary income that goes to the operators in those cases goes directly to the operator and Marketing does not have the benefit of that.

Okay. So that to a large extent then is why they're probably struggling, because they don't have the other sources of revenue from the operations to help offset the poor margins at this point in time.

Well, that as well as other things, but--.

--Okay--.

--I can't get into at this point.

Okay. Well, those are all my questions. Thanks, guys.

Thank you. Do we have another question?

Next we will hear from David Fick.

Good morning. I'd just like to briefly respond to the alarmist question that was just asked on the 1031 exchange rules. There are no changes proposed in 1031 exchange rules. There is simply a modification in the IRS guideline regarding how interest on escrowed 1031 money is handled by the trustee. And it's a minor point and shouldn't raise any questions.

Thank you, David.

The primary question I have is can you comment on getting Marketing through June 30 in terms of the reports you're getting on sales and the trends compared to prior year?

Well, that is confidential. We're not allowed to disclose it. But as we've said in our release, we continue to see a downward trend in their earnings. We're not happy with it. They are obviously not happy with it.

Can you comment on rent coverage?

I don't think so.

David, this is Kevin Shea speaking. We've heard from other marketers across the country recently that motor fuel margins--retail motor fuel margins have improved dramatically in the last few weeks. Motor fuel margins are cyclical, they're volatile, but right now they're very, very strong. We're hopeful that they'll continue through the rest of the driving season in the fourth quarter, which has been typically--historically it's been a very strong margin, that part of the year, that fourth quarter. So we're hopeful that will also benefit Marketing and alleviate some of the stress that they're suffering right now. We don't know that it will be enough to turn them around and cure what ails them completely, but certainly they should reap some benefits from these improved margins.

Okay. Can you comment on the cap rates on your recent sales?

Yes, they've been in the high eights. And we've got a couple in the pipeline that will be in the low nines.

And what were the nature of those--?

--Excuse me, David. Those were on the 1031s where we picked up a property. Our cap rate on those acquisitions were in the high eights and nines.

And were these full state of the art C stores or were they more conventional--?

--No, no. They were convenience stores. [They are] convenience stores, quality assets.

Okay. And then, lastly, I hate to do this to you, but can you comment on the environmental life cycle, walk us through it?

Certainly.

Why do you hate to do it?

Well, it's repetitive every quarter, but we need to hear it.

Sure. We got six "no further action" letters in the second quarter. We have--we're now down to 274 sites with open releases. Two are in the pre-delineation stage; 14 are in the assessment stage; four in remediation action planned implementation stage; operations and maintenance, 81; and closure activities, 173.

Great. That covers me. Thank you.

Very good. Thank you.

Thank you.

Next we will hear from James Mitchell.

My questions relate to the trademark license of the Getty name on--for example, on properties taken back. If you should take back some properties, can you continue to use the Getty name on the stations that are no longer under the master lease with Getty Marketing?

Josh, would you respond?

It--the license is exclusive to GPMI as to the territory covered by that agreement. It's basically the 13 northeastern states from Maine to Virginia. Outside of that scope we control the use of the markets and the right to license it in the way we see fit.

Yes. But it's part of our negotiations. If we have a particular location that we'd like to continue to brand Getty, I'm sure that may be possible to negotiate with Marketing.

Within those 13 states, is Getty free to change the name on a station from Getty to Lukoil or must they continue to use the Getty name as long as they're leasing the property?

When you refer to Getty, you're referring to GPMI. Is that right?

Yes, correct.

Yes, they can brand it as they see fit.

That's all of my questions.

Thank you very much.

And next, we will hear from Joe First.

Good morning, gentlemen. I'm just curious on the properties that you have, if you have some idea overall what the market value is of all of those properties compared to what you have them on the books for, just in general.

The market value is substantially above what we have them on our books for. The question really is how does that compare with the market cap, I guess. And we think we're okay in that regard.

The values are in excess of the market--the values of the properties are in excess of the market cap.

Good. And then, let's say the worst happens and they default or cease to pay rent on the properties. Does that mean you basically can reclaim all the properties?

Yes. Of course, there'd be--I would imagine there'd be some litigation and I don't know how long it would take us to do so. But, yes, under the terms of the lease we'd have the right to reclaim the properties and relet them or do with them as we see fit.

Keep in mind--this is Josh Dicker--that it's a unitary lease, and obviously all the properties are dealt with as one premises.

A default on one is a default on all.

And if that were to happen, what would the process be to go on from there? How long do you think it would take and what would happen?

It would depend on the circumstances, and certainly we have considered that scenario. And we've given thought to how we would deal with it and that's not something that I'd like to go into in any great detail now.

Okay. Thank you. Good luck.

Thank you.

(OPERATOR INSTRUCTIONS.) Our next question comes from [Andrew Dakos].

Good morning. As I understand it, Marketing has some significant other assets within the Marketing sub of Lukoil that might appear - it would appear to me - to incentivize Lukoil to keep the lease current and not default or go into Chapter 11. Is that true?

They have a significant portfolio of service stations and convenience stores in this same area as the sites they lease from us. So that part of it's true. Whether--how that impacts how they deal with us only they know. We don't.

Okay. But do you think that--I mean, just looking at it, do you think it's less likely that they would default on the lease--on the master lease because of that fact alone?

We can only speculate, which we won't do. But I really can't comment on that.

They do--to respond specifically, they do have a significant amount of additional outlets and they have a significant amount of debt as well [against] those outlets. This is all public information. So--.

Has the parent--has Lukoil funded Marketing's losses at all to your knowledge to date?

We don't know their internal funding--what their relationship is with the parent.

We know that they've invested $150 million in GPMI.

That the parent--that Lukoil did?

Yes, correct.

Do you know if their bad debt is recoursed to the parent?

We believe that the parent guaranteed it.

But the parent has no guarantee on the master lease. Is that right?

That's correct.

Okay. Thank you.

Thank you.

And our next question comes from Brad Reece.

Good morning. In March, shortly after the disclosure that there were issues with the lease, Stifel Nicolaus came out with a report that indicated the liquidation value of the stations per share was $15 to $16 a share. With what has happened in the gas station world, would you say that valuations are higher, lower, or about the same from when that report was issued in March?

There's a number of people here from Stifel Nicolaus and we don't want to insult them. But we think that they were overly conservative in their statement, to put it mildly.

Okay. But in terms of whatever number they had, whether it should've been higher, have things--there have been--there was a New York Times July 7 article that stations are closing. A lot of the majors have stations for sale. What has happened to valuations that--to the extent you've observed them in the last three or four months since the report?

We haven't seen--Brad, we haven't seen a devaluation in quality assets, good properties that are throwing off a good cash flow. What's happened is the lower margins and the increased credit card fees, they really took its toll--their toll on the weaker sisters in the convenience--or in the retail petroleum universe. It's sort of a thinning of the herd, if you will. But as Leo had mentioned earlier, those sites with strong convenience store businesses, other ancillary businesses, they're more able to weather the storm here. The gasoline business has always been cyclical. It has been on the downside, in the trough, for the last six months. It appears to be coming out. And so, we have not seen values dropping in the better assets in the retail petroleum universe. Nothing like you read about the--what's going on in the residential markets.

Right. What macroeconomic scenario should I hope for to relieve the pressure that Getty Marketing is under?

Well, certainly--.

--Tough question.

Certainly, stronger retail margins will have a positive impact on them. There's some legislation going through--I think it's with the Senate now--on credit card bills. The--excuse me--on credit card fees, Fair Practices Act. Hopefully, that will get passed and that, too, will have a positive impact on GPMI and the rest of the petroleum universe.

Thank you.

Thank you.

We have a follow-up from David Fick.

Yes. It's amazing what happens when you let short sellers on your call. First, I'd like to say it's Stifel Nicolaus, not Stifel. And second, we had projected a low end estimate of 400,000 to 500,000 of value per unit as an absolute worst case scenario, not as our estimate of value. Just wanted to make that comment. Thank you.

David, as I said, I didn't mean to--.

--No problem, Leo. Thank you.

Thank you.

At this time we have no further questions. I would like to return back to Mr. Liebowitz for any closure or further remarks.

Okay. Well, since there are no further questions, I'd like to thank everyone for joining us and we look forward to speaking to you next quarter. Have a good day.

This now concludes our conference call. You may disconnect at this time.