Getty Realty Corp (GTY) 2009 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 end June 30th, 2009. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. 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 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 31, 2008, as well as in our other filings for 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 close of business. Now, I would like to introduce the other officers of the Company who are present during this call, and 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 acquisition, asset management, and environmental matters, along with Mr. Liebowitz and myself, will be happy to answer your questions.

I will now turn the call over to Mr. Liebowitz.

Good morning, everyone. For those listeners who have not received the press release which went out after the close of business yesterday, August 4th, we reported the results of our second quarter and six months ended June 30th, 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 increased by $3 million to $13.6 million for the quarter ended June 30th, 2009, and by $1.5 million to $23.5 million for the six months ended June 30th, 2009. This compares to $10.6 million and $22 million for the respective prior year periods.

The increase in net earnings for the quarter and the six months ended June 30th, 2009, were principally due to increased gains on dispositions of real estate, lower interest expense, and reductions in various operating expenses as compared to the respective prior year periods. These positive changes in our results were partially offset by $1.1 million of impairment charges included in the quarter and the six months which ended June 30th, 2009.

Adjusted funds from operations, or AFFO, increased by $2.1 million to $13.8 million for the quarter ended June 30th, 2009, and increased by $1.4 million to $26.1 million for the six months ended June 30th, 2009, as compared to $11.7 million and $24.7 million for the respective prior year periods.

Environmental expenses, net of estimated recoveries from underground storage tanks for the quarter ended June 30th, decreased by $900,000, but increased by $900,000 in the six month period as compared to the prior year periods. Environmental management is not an exact science, as we've said before, and the results can significantly vary regardless of how good we are at managing our costs. We continue to expect quarter-to-quarter fluctuations in our accrued estimated costs to complete our remediation obligations, as more information regarding these locations becomes known or as circumstances change.

G&A expenses decreased by $0.6 million for the quarter ended June 30th, and by $0.4 million to $3.4 million for the six months ended June 30th, 2009.

Depreciation and amortization expense decreased for the quarter ended June 30th due to the effect of certain assets becoming fully depreciated, lease terminations, and property dispositions. The $1.1 million of impairment charges recorded in the quarter and the six months was attributable to general reductions in real estate valuations, and in certain cases by the removal or scheduled removal of underground storage tanks by Marketing.

Gains on dispositions in real estate resulting from the sale of four properties was $3.3 million for the six months which ended June 30th, 2009.

Interest expense decreased due to a reduction in interest rates on the Company's floating rate borrowings. And as we said in our press releases and 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've had discussions with Marketing and are open to negotiations 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 re-let, re-develop, 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, Joshua Dicker, Tom Stirnweis, and Kevin Shea are ready to answer any of your questions. Please state your name and company before you ask a question.

(Operator Instructions). And our first question comes from David Fick from Stifel Nicolaus.

Good morning.

Good morning, David.

You have been taking some assets back out of the master lease, it sounds like. Were the sales this quarter part of that? Were they originally Marketing leases?

That's true. That's primarily true, yes.

Now, can you help us with the mechanics of how you do that? Is there a release mechanism in the lease whereby you're able to do this without a whole lot of negotiation on the big picture, and reduce rent by a certain amount associated with a given asset? Just sort of mechanically, how does that work in terms of your relationship with Marketing?

Unfortunately, it's not simple. We have to-- Marketing has identified the properties that they would like to get out of. And we've analyzed them and we are on a very discreet basis -- because we're not allowed to under the terms of our agreement to publicize the fact that they are available. So, we then-- if we're approached by someone who has an interest, as distinguished from our going out and beating the bushes, we would negotiate a transaction with them and then go to Marketing, and they would have to agree to sign the letter releasing that particular property and eliminating it from the master lease.

We then have a formula by which we reduce the master lease rent amount -- and I'm disclosing more than we've ever disclosed of course. Josh Dicker is looking at me. But, in any event, it's not simple. There is always discussions of environmental and other issues which we have to resolve and do to our satisfaction, otherwise we're not going to do the transaction.

And that's where the $1.5 million --

Kevin, do you want to add to that?

A little bit, yes. We have a standard agreement, a letter agreement that we use when we have a buyer that's interested in a property and we can agree upon a price. And we remove the properties from the lease via this letter agreement that we've negotiated over the years with GPMI. And while it's rather time-consuming, we've sort of got it down to a formula.

Now, that was where the $1.5 million charge came in this quarter? It was related to that? And you ended up taking certain liability associated with environment issues on some of those assets? Is that correct?

No. You're talking about the accretion, now?

Maybe I'm confusing the two.

The impairment?

Yes, the impairment, yes.

Yes, we'll let Tom respond to that, if you don't mind.

Without getting too much into the mechanics of the accounting, the impairment charge is really a subjective analysis that we prepared assuming the holding life of each of our assets and the revenue received during that holding period, plus some amount of assumed proceeds at a disposition date somewhere in the future. Again, a lot of assumptions, a lot of moving parts, not exactly a perfect science here.

And based on certain assumptions of when we would remove properties or sell properties, we look at the total cash received versus the carrying value and record impairment for the difference. Again, very subjective analysis on a property-by-property basis, and varying degrees of detailed information for each property.

Is it fair to say that you have a few of these transactions each quarter, and that over time you may work out your relationship with marketing, sort of incrementally dealing with the individual assets? Is that a possible outcome here? Or, do you think there will be a point at which it all comes to a head and you'll negotiate a final settlement?

David, this is Kevin speaking. Firstly, let me say that the relationship with Marketing is a good, solid, working relationship. We've been unable to this point to come to a global agreement with them to remove properties on a wholesale basis. We have, however, as I mentioned, come to an agreement with them which enables us to remove properties on a one-off basis. We are continuing to negotiate with them from time to time in hopes that we can reach a mutually beneficial agreement wherein we'll be able to remove large numbers of properties at a given time. But thus far, we have not been able to reach that global agreement, so we're working with them to accomplish our mutual goal to take back certain properties that they've identified as non-core and redeploy the proceeds from those assets and new properties.

Okay. And then lastly, as usual, our estimate of environmental expenses was baseless and worthless this quarter.

Not (inaudible) baseless, David.

Well, you know, we try to get enough information to have some sort of an estimate but we're never close. It's the one thing that obviously moves around a lot and is highly volatile. So, why don't you go ahead and walk us through our standard environment review?

It doesn't move around a lot because we make that happen.

I know. Nobody's blaming anybody. It's just one of those things. We'll never win the award for accuracy of earnings estimates with you guys.

And, David, that's a function of just what information becomes available that particular quarter.

Right, I understand. All right, so, what was the cycle this quarter? Where are we in it?

Yes, sure, David, this is Kevin speaking. We got three No Further Actions in the second quarter. The life cycle breakdown is as follows. We've got two in Pre-Delineation, 14 in Assessment, we've got nine in Remedial Action Plan Implementation, 68 in Operation Maintenance, and 165 in Closure Activities, for a total of 258 properties with open releases.

Okay. Anything of significance happen from a regulatory perspective this quarter?

No. It's been a pleasantly quiet quarter.

And what are you hearing--

Emphasize, "Pleasantly."

What are you hearing from your environmental consultants at this stage, in terms of forward closure activity?

Well, we're hoping to get another dozen-plus this year, but we're at the mercy of the regulators. We've got a number of sites that we believe meet closure criteria, and it's just getting the regulators to sign off on these No Further Action Letters. They just don't move as fast as we'd like them to, unfortunately.

Okay, well, thank you.

Thank you very much.

Thank you.

(Operator Instructions.) Our next question comes from Brett Rice from Janney Montgomery Scott.

Good morning, gentlemen.

Good morning.

My question has to do with the language in the release, about Mr. Liebowitz's belief that it's probable that Marketing will continue to receive financial support from LUKOIL. Is that based on just your assessment that LUKOIL is rational and there's less economic pain with the status quo, versus them breaching the agreement? Or have you or agents of yours spoken to LUKOIL? What enables you to make that statement?

I will have to tell you it's really based upon the way they've behaved.

Right.

More than anything else. They have not said anything that we've not disclosed in our SEC filings or in our annual report that's new. But, we continue to promptly receive the rent by wire transfer on the first of the month, and we see no reason why that wouldn't continue.

Right. The gains in the dispositions of real estate that was $3.1 million for the quarter, could you tell us how many properties were involved with that?

There were four properties, I believe.

Okay, and are you at liberty to say how much the total proceeds were?

Hold on.

It should be on the cash flow statement, Brett, for the six months. $4.3 million.

And it was four properties?

Four properties. That $4.3 million probably includes some proceeds from small partial takings of properties, but yes, four properties.

All right. Would you say that these were good performing properties or these were marginal properties in the portfolio?

These were properties that GPMI had identified as non-core properties, and they had a higher and better use. So, we sold them to others who took them out of the industry and developed them for other uses.

Right, right.

We did use the proceeds, though, to buy other locations (inaudible) to replace them.

Right. Now, other REITs that I follow, there's a big gap between the cap rates that buyers and sellers-- in office and shopping center properties things are just not moving. Could you just -- and maybe it's for Mr. Shea -- give me a sense of how cap rates on gasoline station-type properties are in this environment?

Sure. They've increased significantly over the past six to nine months. They're up around in the 10 to 12 range right now. There's not a lot of capital out there for any sector, but certainly not for the convenience and gas sector, which has always been underserved by the financial institutions. Cap rates are, as I said, up in the double digits now for C&G properties.

Right. Thank you for answering my questions.

Certainly.

Thank you.

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

All right, thank you all very much for joining us. We'll look forward to speaking with you next quarter or sooner. Have a good day. This concludes our conference call.

And this concludes our conference call. You may disconnect at this time.