Getty Realty Corp (GTY) 2011 Q1 法說會逐字稿

Good morning, everyone, and welcome to Getty Realty's conference call for the quarter ended March 31, 2011. This call is being recorded. Prior to starting the call, Joshua Dicker, Vice President, General Counsel, and Secretary of the Company will read a Safe Harbor statement. 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. Forward-looking statements are usually identified by words such as will, should, could, expect and belief, and other words with forward-looking connotations. Examples of such forward-looking statements would include management's statements about the nature of the Company's acquisition pipeline or acquisition prospects, or statements about expected developments with respect to Getty Petroleum Marketing.

It is important to note that the Company's actual results could differ materially from those anticipated 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, 2010, 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 or circumstances or reflect the occurrence of unanticipated events. David Driscoll, our Chief Executive Officer, will now comment on our press release issued after the close of business yesterday.

Thank you, Josh. Prior to starting my formal statement, I want to introduce the other officers of the Company who are on the call with Josh Dicker and me today, Leo Liebowitz, our Chairman and Co-Founder, Chief Financial Officer, Tom Stirnweis, and Executive Vice President, Kevin Shea. We released our earnings last night for the first quarter of 2011. The earnings, the 8-K, the earnings release is available on the SEC's EDGAR website, and many other news and financial web sites as well as our own.

As an introduction to the quarter, I want to highlight that our quarter was very complicated and busy. It featured two significant portfolio acquisitions, an equity offering, the extension of our line of credit, and changes in the ownership of our largest tenant, Getty Petroleum Marketing, who we refer to as GPMI. Full effects of all these events were not realized during our first quarter, so I think it's useful to interpret our results from a longer term run rate perspective, rather than focusing on a snapshot of specific quarterly results.

Our revenues from rental properties increased by approximately $2.5 million to $2.5 million this quarter, compared to approximately $22.5 million during the first quarter of 2010. The increase was primarily due to rental income from the 59 Mobile properties acquired from CPD, Chestnut Petroleum Distributors in January of 2011. However, net earnings decreased by approximately $500,000 to approximately $11.4 million versus $11.9 million for the first quarter of 2010.

Earnings from continuing operations likewise decreased by approximately $300,000 to approximately $11.3 million, as compares to approximately $11.6 million for the first quarter of 2010. The decreases in net earnings and earnings from continuing operations for the quarter, as compared to the respective prior year periods should be understood with the context, that we incurred a one-time non-cash charge of approximately $2 million for certain costs that were incurred in connection with the two portfolio acquisitions that we closed in the quarter.

We consider adjusted funds from operations, AFFO, to potentially be a better metric to compare our performance, because it eliminates these types of non-cash one-time charges, including certain acquisitions expenses, the effects of straight line rent and other items we refer to as recognition adjustments in our filings. Our AFFO was approximately $16.3 million for the quarter, which represented an increase of approximately $2.7 million over Q1 2010, and an increase of approximately $1.9 million during the immediately prior quarter ending December 31, 2010.

Diluted AFFO per share for the quarter was $0.50, compared to $0.55 for the quarter ended March 31, 2010, and $0.48 for the immediately prior quarter ending December 31, 2010. The reductions in AFFO per share resulted-- for this quarter -- resulted primarily from increased share count, resulting from our two equity offerings in May of 2010 and January of 2011. Performance comparisons should be considered also within the context of the fact that we are a less leveraged Company today than we were during the first quarter of 2010. Indeed, we were even less leveraged during the first quarter of this year than our period-end balance sheet indicates, because that balance sheet reflects all of the borrowings incurred to fund the Nouria acquisition, but none of the revenues from that acquisition, because it occurred on the last day of the quarter.

Environmental expenses continues to decline -- the decline we have witnessed in recent quarters -- to $1.1 million this quarter. However, as you know environmental expenses vary from quarter-to-quarter. Accordingly, undue reliance should not be placed on the magnitude or direction of such short-term changes. On the acquisition front, we refer to the 59 property Mobile-branded property portfolio we purchased in a sale lease back transaction with Chestnut Petroleum Distributors in January, and a 66 property Shell-branded portfolio in a sale lease back transaction with Nouria Energy Group on the last day of the quarter. The beneficial effects of the Nouria acquisition will be realized, starting in the second quarter of 2011.

Of course, the other significant news in the quarter was the March 1 announcement by LUKOIL regarding the sale of their entire interest in our largest tenant GPMI to Cambridge Holdings or Cambridge Petroleum Holdings Corp. We refer to them as Cambridge. Since that announcement, we have been meeting with the new principals of GPMI, and have commenced dialogue with them on a wide number of issues effecting our relationship in the portfolio that GPMI leases from us. We believe we are still in the discovery stage with GPMI, but even so, we have already jointly commenced pursuit of some mutually beneficial portfolio rationalization projects.

In the meantime under Cambridge, GPMI appears to be undergoing certain changes in the way they previously operated. These changes include, termination or prospective termination of their large portfolio subleases, and changes in the way they obtain fuel that they supply to their dealers. As a result of all these actions, we believe we are at the beginning of a process that may result in considerable changes in our master lease with GPMI.

This is an early stage of an evolutionary process. Any additional impact of these changes is not estimable at the present time. However, we're hopeful we can achieve the best possible outcome for Getty, as we now believe we have both the opportunity, and what appears to be a cooperative organization that is willing to engage in rational discussions with us. We are also acutely aware that our investors want more information from us around GPMI, and guidance regarding the long-term impact on our relationship, and how that will affect our revenues in the future years. We understand this concern, and we are working to achieve greater clarity. We believe we are making progress towards that goal.

Finally, we are still seeking acquisitions, and activity in our core gas station and convenience store sector remains quite strong. Reflecting that strength, our acquisition pipeline remains robust. We are actively engaged in a number of prospective transactions that are at various stages in the acquisition process, and appear to offer accretive opportunities. Nevertheless, while we are seeking additional investments to close during 2011, the timing, size and returns from any prospective transactions are, simply at this point prospective. So we cannot accurately predict when, or if they will happen.

All in all, I'm pleased with the results for the quarter, the progress we're making with GPMI, and we remain focused on our priorities, and will continue to report progress to you as it occurs. With that all, all of us are happy to entertain any questions you might have. Operator, do you want to explain the procedure to callers? I am sure everybody knows it by now, but we can try.

Thank you, sir. (Operator Instructions).We'll take our first question from Lindsay Schroll with Bank of America Merrill Lynch.

Hi, good morning.

Good morning.

Just a quick question. Is Cambridge Petroleum, are they current with their rent payments?

Yes, they are current with us, and they have been current from the first month that they were -- from the first month that they arrived.

Okay. And what percentage of your revenue is GPMI currently?

Just under 60%.

60%. Okay. And then turning to the pipeline, have you seen any compression of cap rates, like what's the competitive environment out there?

Well, it's still competitive, there's a lot of capital from all different sectors chasing transactions. But we -- and I guess the best way to answer that, is that we saw a significant compression of cap rates in the 2009, 2010 time frame. It's clear that as we've gone into 2011, while some measure of compression continues, it's not as significant as it was in the past. So they appear to be -- they're not compressing as fast as they were. I won't say they're bottoming out, but they're not compressing as fast as they were.

And where is most of the competition coming from?

Oh, mezzanine, sub debt, private equity, other REITS.

Okay. Thank you.

You're welcome.

(Operator Instructions). Our next question comes from Tony Paolone with JPMorgan.

Thank you. Good morning.

Good morning.

Dave, what's your opinion of Cambridge's intentions here, and what they're doing with GPMI, and how GTY fits into that equation?

Well, their stated intention, Tony, is that they want to rationalize the portfolio, work with us to create a Company that is strong and viable, go into the capital markets, raise capital, reinvest in the brand, and significantly grow the Company. And I think if you called him on the phone and asked him that question, that's exactly how he would answer it.

And what -- but can you give us a little clarity on like what you think rationalize the portfolio means? Like what's --to me it suggests there's some impediment or something in the way from them being a lot more profitable. And just wondering is that the leases, is it the way the business has been done there? I mean how do you think about that, and again how does GTY fit into that?

The easiest way to understand that, Tony, is there are assets inside GPMI, that are at the present time producing little or no revenue for them. And yet they are paying rent to us because it's all one property, it's a master lease. So they're paying rent to us on the entire thing, even though they're generating no revenue on a portion of the assets. So certainly to the extent that those assets could be redeployed, i.e., sold, the capital redeployed, and their rent obligations reduced, that has the triple benefit, if you will, of creating rent reductions for them, other expenses, maintenance, real estate taxes, that they get relieved of for properties that are producing little or no revenue. And finally whatever other drag those non-productive assets had for them are eliminated. That has a pretty big swing for their operating performance. From our standpoint, being able to raise capital from the sale of assets, and then redeploy them into our acquisitions program, not only diversifies us away from our concentration with GPMI, but also lets us continue our diversify geographically and into more robust growth areas of the country.

How many stores are empty? Have you guys gotten an update on that count, since the discussions began here?

We have approximate numbers, and it's less than 15%.

15% of the eight -- is it 800 and some odd stores?

Right now, today I think it stands at around 815 --

813

813, I think is the number.

And those stores have no tanks, or are they leased for other uses, or are they just completely dark?

Those stores generally have no tanks and no tenants.

Okay. And do you have a sense as to -- have you received enough information at this point, to get a sense as to the profitability of the remaining stores, if you had to go and set rents at those, at the ones that are up and running?

If we did, you wouldn't have gotten that whole, probably not very elegantly written statement from us about we understand that you want guidance, but we're not in a position to provide it to you at this time.

Okay. I mean, have you all received more information at this point, though, or have a better sense, of whether [de-gallonage] or whatnot?

Yes. We've received a lot more information. We're I think significantly more knowledgeable than we were two months ago. But it remains a moving target, and there are a lot of different units and a lot of moving parts.

Can you characterize given the information you've received about, say, the operating assets, whether you're surprised, in line, disappointed, in terms of how that could play out?

No, I would say generally speaking, it's in line with what we expected to find. I don't think we're surprised on the downside. I don't think we're surprised on the upside.

Okay. If you get the stores back, how would the environmental liability work? Can you walk us through, if like, does the liability revert back to GTY if there is an issue, or would Cambridge remain on the hook for that? Like how does that work?

First, it's not Cambridge, it's GPMI that is on the hook for the environmental. GPMI is on the hook for all the environmental in the locations, except for that which was specifically identified as known in 1997. And we retain liability for roughly 240 sites at this point, that we're working our way through towards completion. They have liability for the rest of that. And notwithstanding the release of a property from the master lease and it's ultimate sale, they would retain that liability going forward.

And in the instance that, say, Cambridge decided that, the best way to rationalize the business here is to do a reorg and file bankruptcy, what would then happen, if they kicked back some stores to you -- would you then, just the environmental liability becomes GTY's, and there would be nothing to go after in that instance? Or is there some sort of insurance back stop?

Well first, the plain fact is that the -- if they weren't there, we do retain the environmental liability of those properties, since we own them. But -- and at the present time, there is no insurance on those properties, but there's an awful lot that's between -- between today's operating situation, and we suddenly have their liability, environmental liability on their properties. I mean, there's a tremendous amount that has to be pierced through, in terms of operating profitability.

Okay. One last question on GPMI, and then I have a couple other items. The -- in terms of booking revenues there at this point, it sounds like things can change, and you might have some straight line to write off and different things like that. Why not just go to cash accounting, and just book things on a cash basis, I guess?

It's not up to us. The High Lords of GAAP require that there's actually reasons for doing that. And you have to be able to show that there are specific triggers and justification, and memos have to be written and everything else. And unfortunately, and frankly, in a perfect world, I would have done that a long time ago. But I don't believe in straight line rents, and which probably makes me a heretic, because it means I don't believe in GAAP.

(Laughter). Okay. Fair enough. Just a couple other -- just items outside of that. What's the G&A run rate now, ex those transaction costs? Because I think it was up a little bit in the quarter, even when you stripped the deal costs out.

It's about $10 million a year, at the present time.

Okay. Do you foresee much higher in the near term, just regarding maybe legal costs or anything surrounding GPMI, that you have to take on?

Well, the prudent man would say, yes, to that question. I think you'll see a continued general drift upward, but I would describe it as a drift upward. I don't think you're going to suddenly see us at the end of the year running at a $15 million a year G&A run rate.

Okay. And then, OpEx was also a little bit higher in the quarter. Is there anything there, maybe in the way some of the deals you brought on are just accounted for, where you get a little more reimbursement accounting? Or is there anything in OpEx we need to watch?

I don't think so. I'll go back, and re-look at that. There's some -- there is some -- there's some qualities in the way that some of the leaseholds are accounted for in the new acquisitions, with some pass through rents to landlords. But I think on a percentage basis that shouldn't be -- percentage of costs to revenues, that shouldn't be a major item.

Okay.

But it isn't like we've suddenly write -- started writing gross leases, and we have expenses. Our CFO, Tom Stirnweis wants to say something.

The other thing that we have is, we have some above and below market leases. So there's going to be some non-cash amortization of rent expense, that's going to be hitting operating expenses, and likewise revenue.

This is all about GAAP.

It's all about -- (Multiple speakers).

Right.

Making life clearer for everybody.

And the offset of the revenue -- will be inflating the revenue in the expense line. And there's going to be very little impact on the bottom line from that accounting treatment.

Okay. Got it. Thank you.

(Operator Instructions).And our next question comes from Brett Reiss with Janney Montgomery Scott. Please go ahead.

Good morning, gentlemen.

Morning.

Do you know whether Cambridge Petroleum Holdings laid out consideration to step into the shoes of GPMI? Or did they just -- were they just handed it for no consideration, or were they even maybe paid money to take this off the hands of LUKOIL?

The answer is, we don't know, Brett. It wouldn't be -- it's not a matter of public record. It's not the sort of thing we would ordinarily, knowledge ably would come into.

Okay. And could you just either tell us a little bit about who Cambridge Petroleum Holdings are? Or is there some website or information you can point me towards?

There is a website. I can't be any more specific than to say that if you were to put Cambridge Petroleum Holdings into a Google search site, that their website does comes up. I found it. It's a relatively sparse website. Our experience -- I would tell you generally is, that they strike us as being knowledgeable, sophisticated and savvy people in the retail petroleum sector, who are also clearly knowledgeable private equity players. They know how to structure and communicate to the financial community, in terms of raising capital, and certainly the leveraged community, in terms of raising leveraged capital.

Right, right. And just the flexibility and tone of dialogue, how have you found it different with them, as to the prior party?

Well, it's easy. They appear to be interested in doing rational things. As we were talking about with Tony, they have properties that are not generating a lot of revenue, but have a lot of rental costs associated with them. They're interested in redeploying those assets. The prior regime, dare I use that word, was pretty much sort of a not interested. They'd listened, they talk, and then they'd never get back to us.

All right. And you feel Cambridge will be more motivated to get something done?

Yes. It seems that way.

Okay. All right. Thank you for taking my questions.

You're welcome.

At this time, we have no further questions. I'd like to return back to Mr. Driscoll for any additional or closing remarks, sir.

Well, I want to thank everybody for remaining interested, tell you that we do understand the need for additional information. And we look forward to providing that to you in the coming quarters.

This now concludes --

Go ahead. I'm done.

This now concludes our conference call. Thank you for your participation.