Getty Realty Corp (GTY) 2009 Q1 法說會逐字稿

Good morning everyone and welcome to the Getty Realty's conference call for the first quarter ended March 31st, 2009. 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, Vice President, 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 effects 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 31st, 2008, as well as 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 and 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, everyone. For those listeners who have not received our press release, which went out after the close of business yesterday, May 5th, 2009 we reported the results of our first quarter ended March 31, 2009. 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 March 31, 2009 were $9.9 million, as compared to $11.4 million reported for the quarter last year. Net earnings for the quarter ended March 31, 2009 decreased by $1.5 million, as compared with the quarter ended March 31, 2008, and rent revenues decreased by $300,000 to $19.9 million for the period. The decrease to net earnings were primarily the result of higher operating expenses, particularly environmental expenses, which increased by $1.7 million to $2.5 million as compared to last year. The increase in environmental expenses was due to higher change in estimated remediation costs of $1.3 million, higher legal fees of $300,000, and higher litigation loss reserve adjustments of $300,000, as compared to last year. Environment expenses include legal fees of $700,000, attributable to trial evaded costs for several other active litigation matters, and adjustments in provisions for environmental litigation loss reserves of $300,000, principally related to a tentative settlement agreement for one litigation matter. The change in estimated ongoing remediation costs for this quarter was $1.3 million, and was in line with our expectations.

However, that compares to the relatively low $200,000 recorded last year. As a result, our adjusted funds from operations, the AFFO, for the quarter ended March 31, 2009, decreased $700,000, as compared with the quarter ended March 31, 2008. Environment management is not an exact science, as we have said before, and we have advised -- and as we have advised you in the past, results can be -- can significantly vary regardless of how good we are at managing our costs. We continue to expect quarter to quarter fluctuations in our included estimated costs to complete our remediation obligations as more information regarding each location becomes known, and as circumstances change. However, cash flow provided by our business remains in line with our expectations.

As we said in our press release in our 10-Q filed yesterday, a major tenant, Getty Petroleum Marketing has shown a continuing decline in its earnings performance. I assume that some of you may want to learn more from us about our opinion of Marketing's performance. However, we do not believe it is appropriate for us to comment beyond what we have already said in our public filings. At this time, I believe it is probable that Marketing will continue to receive financial support from its parent, Lukoil, through the term of the Master Lease, enabling it to meet its obligations as they come due in the ordinary course, including its lease obligation to us. I also believe that Lukoil appears to be committed to remain in the United States gasoline market.

As we have said, we remain open to negotiations with Marketing for removal of property from the unitary Master Lease, because we believe the take back of properties on mutually acceptable terms could be beneficial for both of us. For example, it is possible by reducing the number of properties held by Marketing, may benefit its financial position and at the same time, allow us to (inaudible) ourselves certain properties and reinvest the proceeds from these properties. We must note, there are many possibilities where modification of our unitary Master Lease with Marketing and many factors that may influence our positions regarding modification of the Master Lease.

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

Thank you, sir. (Operator Instructions) We'll take our first question from David Fick with Stifel Nicolaus.

Good morning, gentlemen.

Good morning David. First I want to congratulate you on beating the diabetes.

Thank you. It's a good feeling. I'll be thinking about you guys riding this weekend.

Great.

My first question is, I guess, hard for you to answer, but, I think it really would be helpful to investors to to have some understanding of the magnitude of the issues with Lukoil. Can you talk a little bit about how much of a deficit we're talking about in terms of cash flow contribution based on your view of their financial statements, or at least some idea of the EBITDA coverage percentages?

David, I think we've told you before, but let me repeat it. There's a confidentiality provision in the Master Lease, which prohibits us from discussing their numbers at all. As it is, we felt we have an obligation to our shareholders to disclose that this performance has gotten worse -- their financial performance -- but other than that, we really are prohibited, without taking a chance on violating the lease from saying anything more.

Okay. I understand that. I under stand that the SEC has taken the opposite view of that. It's obviously the single most important fact in terms of people's assessment of the quality of your [in common] and its frustrating I'm sure to you, and it's frustrating to us to be in this position.

On the other hand, David, we firmly believe that Lukoil and their financials are available, we'll continue to support them financially, so that we're not concerned.

Okay. And I guess that's -- without their guarantee at the parent level of the Master Lease, it's -- we're left relying on your judgment, and I presume the judgment of Mr. Driscoll, that in fact Lukoil will remain both interested in the US and willing to subsidize at some level.

Can you just follow on that with -- it's been more than a year now since this escalated to the public level, and has seen virtually no change in status over that time. In terms of public disclosure, almost the same. Any idea of timing? Have you been having regular conversations? Have there been offers, counteroffers, demands made?

There are periodic meetings and there are discussions, but it has not -- nothing has really happened that's worthy of answering.

Okay. Thank you. I did my best.

Next is on the environmental side -- if Kevin you could walk through the standard litany of environmental life cycle, but also there's a bit more discussion about litigation and settlements and there's additional legal fees this year. Could you just review the nature of what that entails?

Sure. I'll -- David, I'll return through our life cycle phases, and I'll turn it over to Josh Dicker to talk about the legal issues.

We currently have two sites with open incidents. Excuse me, 261 sites with open incidents. We have two of which are in predelineation, 15 in assessment. We have remediation action planned implementation -- we have nine in that category. We have 68 in operation maintenance, and 167 in closure activities.

We received two NFAs in the first quarter, and two more in the second quarter to date.

Thank you.

As far as the legal I'm going to turn it over to Josh Dicker to address that.

David, regarding the legal fees that seemed to be a little bit larger that showed up in the quarter, they relate primarily to two matters.

We've just completed a trial in state court in Elizabeth, New Jersey, which related to an abandoned tank and contamination events, and the trial can be an expensive process. So that was a significant expenditure, as well as --.

And the other matter is the MTBE multi-district litigation, which has been very active of late. There are -- were a number of focus cases that were pending for trial, and are pending for trial, and there's been a great deal of activity in preparation for those and trying to settle some of them, and we have been successful in doing so. So those are the areas where the legal fees jumped a little bit over the past quarter.

Will you refresh my memory, everything pre-Getty Marketing is your responsibility, everything post-Getty Marketing is their responsibility, or Lukoil's responsibility. Is this MTBE situation, isn't that a fairly recent phenomenon?

David, this is Kevin Shea speaking, let me just clarify that for you.

Our responsibilities with regard -- our environmental responsibilities with regards to the portfolio lease to Getty Petroleum Marketing are related to scheduled releases, scheduled spill numbers. Anything not on that schedule that was drawn up in 2000 and revised in 2001 -- if it's not on that schedule, it's Marketing's responsibility. So there could be instances where there was a release that was -- occurred prior to the commencement of that lease, but it's not on the schedule, not known, not on the schedule, and in those instances, it would be Marketing's liability. So just to clarify, that's not as black and white as -- if it occurred before the commencement of the lease, it's ours, and it occurred after the commencement of the lease it's theirs.

Actually it makes it better for you. That make me feel better.

Clearly.

And the number, by the way, David, that we are responsible for, has gone down dramatically.

Since 2001.

Was MTBE actually in use prior to 2001? I thought that was a recent phenomenon.

No, prior to 2001, yes, began being used, I believe, in the late 1970s, early 1980s.

Okay.

And we were named, along with tens of -- dozens of other companies in these multi-district litigation MTBE suits. And in a number of cases -- most of them -- Marketing was named also with us. So --

Is there any chance this escalates into a bigger deal? Obviously the auditors didn't make you accrue a substantial amount, but is there a large potential liability out there?

It's unknown. There are significant risks, but it is a very complicated matter, and despite the fact that this litigation has been going on for some time, there remain a number of issues that have not yet been resolved, that would help lead one to a better understanding as to what the potential liability is.

There are a lot of refiners and distributors, and operators on -- who are defendants, and there are a lot of legal theories that support the claims that have been made by the water authorities that brought the cases, so it's still very complicated, and very early, and it's hard to define where it's all going.

We've been -- our story is unique. We have some very good defenses, and we're actively defending the matters, and we have had some good success thus far in our defenses, and in trying to control costs, despite the fact that there's been some excessive legal fees, or extra legal fees over the last quarter.

And you're still being advised by Delta with respect to all of these issues, including the amount, the [dental] liability or accruals?

Yes, that's correct.

Okay. And just to refresh my memory one more time, there is any insurance? I know that the state reimbursement plans, but I assume they wouldn't cover any of this. Is there any -- any other coverage beyond that?

For the MTBE?

Yes.

No, we don't believe so.

Okay. Great. Thanks, guys.

Thanks.

Thank you.

(Operator Instructions) We'll take our next question from Brett Rice with Janney Montgomery Scott.

Good morning, gentlemen, thank you for taking my questions.

In the press release, the language that there's more stringent interpretations of existing standards by the New York state regulators for certain properties currently being remediated. Is that because there was a change of personnel at the agency that's interpreting this, or is it just because of the -- today government seems to be a little bit more frisky in looking into all sorts of things?

What -- what do -- what's the tone going to be going forward?

Brett, this is Kevin Shea. The answer to the questions are yes and yes. There's been some changes in personnel, and, in general the regulators are taking a more stringent approach in the -- some of the states where we have open releases.

In New York, specifically, certain parts of New York, regulators were allowing us to take a more passive remediation of open spills. In the past, which was warranted in as much as the majority of these spills are mature, legacy spills, not posing any imminent threats to human health or the environment. And as of the last six months, regulators have, in certain parts of New York, have mandated that we take a more aggressive approach.

We were getting closures previously, basically risk-based closures, that is it wasn't -- if a release didn't meet state cleanup standards, but was not posing a threat to human health, or the environment, we were get no further action letters. Lately, regulators, certain regulators -- have really been holding responsible parties' feet to the fire to meet state cleanup standards regardless of whether or not there was a threat to human health. It's an unwarranted approach in certain -- in our opinion -- the numbers of those locations, sort of overkill.

Right, right. If the unattended consequence of a lot of the things being done by government is a spike up in interest rates, is there a game plan in place to cap the floating rate debt to some fixed amount?

We have not, as of now, decided to fix any more than we already have.

Okay. And I guess I'm going to be revisiting a line of questioning by Mr. [Flick]. You do say that your belief is it's probable at this time that marketing will continue to receive financial report.

Can you give us anything -- why do you make that statement in the release. Can you give us any color on that?

Marketing has a substantial amount of debt, and we know that Lukoil has guaranteed that. It's substantially more than the rental obligations to us over the term of the lease, so that we believe that they will continue to stand behind them as they are with the debt.

Thank you for taking my questions.

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

Well, we thank you all for participating and joining us. Feel free to contact us anytime you have any other questions. Thank you.

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