Getty Realty Corp (GTY) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to Getty Realty's conference call for the quarter ended June 30, 2011. This call is being recorded. Prior to starting the call, Joshua Dicker, Vice President and 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 believe. In 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, Inc. 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 fiscal year ended December 31, 2010, our quarterly report on Form 10-Q for the quarter ended March 31, 2011, as well as in 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 provide some comments on our quarter and subsequent events.

Thank you, Josh. Prior to starting a formal statement, I want to introduce the other offices of the Company who are on the call with me today, including Josh Dicker, our General Counsel; Mr. Leo Liebowitz, our Co-Founder and Chairman; our Chief Financial Officer, Tom Stirnweis; and Kevin Shea, our Executive Vice President.

Last night's late night press release reported our results for the second quarter of 2011. It is available on our website, the SEC's EDGAR website, and various known financial websites around the Web.

Some of the highlights relative to the second quarter of 2010 include that our revenues from rental properties increased by 25%, or $5.4 million to approximately $27 million. Our net earnings increased by $1.2 million, 8.5%, to $15.2 million, or $0.46 per fully diluted share. Our earnings for continuing operations increased by $2.4 million, almost 20%, to $15 million, or $0.45 per fully diluted share.

Funds from operations grew by $2.2 million, 14, call it 15%, $17.2 million, $0.51 a share, and AFFO, which we consider our most valuable metric, improved by $3.1 million, some 21% to 17, call it $18 million, which is $0.54 per fully diluted share, which while flat year-over-year to the same calendar quarter 2010 I will note is up by $0.04 from the last quarter -- first quarter of 2011. So, our immediately prior quarter.

The main news about our operations this quarter is the steady improvement in our results which is coming from the growth in our investment program. As we anticipated, virtually all our performance metrics showed the improvement and we are happy with the progress that these results reflect. In a more granular level, rental revenues and proceeds from sales continue to beat expectations.

I mentioned proceeds from sales this quarter because one positive outcome of our discussions with GPMI, new management, is that we have commenced an effort to sell individual properties that are currently inside the master lease. We expect the proceeds of these sales to become a more meaningful, if lumpy, metric to measure the rationalization of the GPMI portfolio in the coming years.

The three main elements of our expenses -- environmental, G&A and interest costs also remains within our expectations. Net environmental expenses for this quarter were $1.3 million, which is slightly above the $1.1 million of the prior quarter, resulting from lower provisions for estimated costs offset by higher litigation and other reserves.

G&A costs also increased compared to last quarter. We anticipate continued modest increases in G&A cost in the coming quarters, reflecting our increasing depth of operations and other activities required to manage our business.

Interest costs were flat quarter-to-quarter, and I will add here that we are mindful about our interest rate exposure, but currently accept the guidance from the Fed that rates will stay low for an extended period of time.

As I mentioned earlier, progress is being made in working with the new owners of GPMI this quarter. A great deal of this work involves preparation for rationalizing a portfolio that was, dare I say badly neglected by its prior owners. This work is granular and mainly requires focus on a location-by-location basis. It will take time to see results and even more time before we will know what the long-term outcome will be. However, our experience thus far with the new GPMI has generally -- our experience has been that the new GPMI has generally acted in a rational and constructive manner, and we believe that we are moving in the right direction.

We are also still pursuing investments and still see numerous opportunities to drive growth in our core Gas Station/Convenience sector. Reflecting that strength, our acquisition pipeline remains robust and we are actively engaged in a number of prospective, accretive transactions that are in various stages of the acquisition process. We are hopeful to close some of these investments during 2011, but we cannot control the timing, the size and the returns from any prospective transaction and so therefore we cannot accurately predict when or even if they will happen.

Before I conclude, I want to acknowledge the subsequent event that we included in our press release last evening and just learned about ourselves in the last 48 hours. I think it's important to emphasize that this is a milestone in a dispute that has been going on for more than a year. We are not a party to this dispute, so we do not have all the facts, nor do we know all of the parties' plans, positions or expectations. We are monitoring events closely and we will provide additional disclosure when development dictates.

Beyond that, it's going to be difficult to say much more about the situation right now. In light of this complexity and the wide variety of the possible outcomes, I don't really want to speculate about what those prospective outcomes could be or their timing at this point. So, with that in mind, Operator, do you want to explain the procedure to the callers for asking questions?

Certainly. (Operator Instructions) We'll hear first from Anthony Paolone with JPMorgan. Please go ahead.

Hi, thanks. Good morning. Dave, it sounds like the conversations with the new owner of GPMI continue to progress, and so I was wondering if at this point you can give us a little more color on just the portfolio, things like what you're starting to see as you get information on profitability, how many assets are actually operational versus not. Just any other details as you get into things, to give us a better sense as to exactly what's going on there?

Tony, good morning. I think there isn't a lot new to add there above and beyond what we've given in our disclosure. I think that what we have been able to do, I think, as we're seeing much more progress with respect to dispositions of assets across-the-board, very long-term -- it takes a long time to get that process started with momentum, and it takes a long time to get transactions closed. But we don't really have -- I mean, certainly there hasn't been a lot of change with respect to properties that are being under-utilized or not utilized, as there has not been much additional disclosure that we can make with respect to their profitability.

I will say, though, that certainly the last 2.5 months, since sometime in May, have been a very positive time to be in their business. Margins are very good and pretty much everybody in their business at that time is making money.

Okay. But if you're going through this process of rationalizing the portfolio with them and it sounds like you've come to an agreement on selling some things, is it just that you can't disclose what some of the profitability and some of these other metrics might be in the portfolio, or you really just haven't gotten them at this point?

We haven't gotten them at this point.

Okay. And then can you talk a little bit more, then, about just the arrangement to potentially sell some assets out of that and how you're going about determining which assets to sell, maybe the number of assets that are in that pool potentially?

Well, I think what I ask you to focus on in our prior disclosures is the assets where you've seen -- I think we've disclosed assets where the tanks have been pulled and the assets that are being under-utilized at the present time. And I think we are out trying to turn those into cash and then we would reinvest that cash and hopefully reduce the master lease rental by the amount that we could reinvest that cash for.

Is it your sense, given what you have been able to kind of figure out knowing your portfolio and through what has been disclosed, that if you were to sell the nonoperating assets, would that business become profitable for GPMI?

From some of the pro formas that we have seen, Tony, I can tell you that this exercise of rationalizing these assets does have a meaningful impact on their profitability, improvement on their profitability.

Okay. And I understand the lumpiness of selling properties, but just out of curiosity, like, what kind of magnitude of sales are we thinking about here in, say, the next two, three quarters? Is it in the single-digit millions or tens of millions?

In the next two, three quarters it's single-digit millions. These transactions from initiation of sales, so from the time you put a sign up that says "For Sale" to closing is probably on the order of 8 to 14 months. It takes a long time to get them sold. Now, obviously, some will go in 60 days and some will go in 26 months, but I think you're going to see much more of the revenue impact moving through the snake in 2012, not 2011.

Okay. And then just last thing on GPMI related, given the [buy and all] disclosure, I mean, how have you thought about just what plays out if GPMI ends up, say, filing for bankruptcy because of the buy and all liability and how -- what do you think that does to the work you've been doing with the new owners thus far on your portfolio?

Well, I guess my basic statement is that we live and die on our portfolio, not on GPMI. And if GPMI ends up with a huge liability, that's a huge liability for GPMI. And if for some reason they stop paying us, then we take our portfolio back. So, for us it's about our portfolio. And certainly with respect to the things that we've commenced doing with GPMI, if you think about it, those are things, if we had to take the portfolio back, that we would be doing anyway. So, as far as we're concerned, we're just commencing a process that if something were to happen that we would be undertaking in any event.

Right. But it's safe to say that, though, in a snare where they were bankrupt and potentially kick back the lease and you guys took your portfolio back sooner, you would be doing the same things, but you would lose that rent support that they are currently providing right now because [of business] --

Yes, but there are other things we would pick up. I mean, if they can run that property, that portfolio profitably enough to pay us the rent, then we can run that portfolio profitably enough to pay us the rent.

Okay, understood. Just switching over to the deal side, a couple of things. Just, one, you talked about previously things like an Exxon/Mobil portfolio being out in the market, and it sounds like you still have a pretty good pipeline. Is that still the case, and can you put some parameters around the pipeline in terms of size and maybe number of portfolios and cap rates?

Yeah. The portfolios that we are looking at, and there are multiple ones, they range in size between, I would say some 5s and 10s, and some 90 and 110s, and everything in between. They are all at various different stages of the process, as I said. Some are in the evaluation stage, some have moved beyond the evaluation stage. It's competitive. There is no question the cap rates are continuing to compress, although I think I said this last quarter and I'll repeat it. It's an esoteric statement. The acceleration rate with which cap rates were compressing has slowed so that we are still seeing cap rates north of 8%, but I think they are south of 9% and probably south of 8.75% at this point. The better portfolios are very competitive.

Okay. And then how would you go about financing a deal right now, given where our line is?

I think if you look at us, run the comps, if you look at us on any kind of basis relative to other comps in terms of our leverage ratios, we are a very under-leveraged company right now.

Right. But you would have to go outside the line to get financing just -- so, I guess where are you seeing good financing sources right now to finance this sort of growth?

There is a lot of -- notwithstanding the congressional complaints that lenders are not lending for companies like ours, we are finding ample opportunity of borrowing funds, people who would like to lend us money.

Great. Thank you.

You're welcome.

We'll take our next question from Craig Schmidt with Bank of America Merrill Lynch.

Thank you. I guess sort of along the similar lines of the earlier question, I'm trying to understand, there are 165 properties where they have pulled the underground gasoline storage tanks? Is that --

I think -- yes, go ahead.

Okay. And that's within the 804 locations under the master lease?

Correct.

Okay. And so at this point, Getty Marketing is paying that one master lease including these 165 locations?

That's correct.

Okay. So, at this point they would be more interested in finding alternative uses, or is it something you're more interested doing in advance of, say, 2015?

David Driscoll We're both interested, Craig. They're interested for the obvious reason that you've identified, because it's costing them money. They want to generate as much revenue as they can or sell it and get a rent credit from us for whatever the reinvested proceeds are for. And we have an interest in doing it because we know it's a drag on their profitability, and like any landlord, we want our tenants to be profitable.

And what would be some of the alternative uses that you've done in the past where, like it would be underground tanks have been pulled?

I don't even have to do those in the past. I can tell you the people that are kicking the tires on the properties right now, and it ranges from the car dealer next-door who wants more parking all the way through people who want to erect -- there are a couple where somebody wants to erect a national brand convenience-only operation. There are existing owners who are running convenience stores or restaurants themselves who are interested -- they are currently the lessee and they are interested in buying their own property. There is a whole wide variety of drive down the street, look at the uses, and that's what we're seeing at this point.

Okay, thank you. That's helpful.

Great.

And, Mr. Driscoll, it appears we have no further questions in our queue at this time. Sir, I'll turn the conference back over to you.

Well, thank you. We appreciate everybody's continued interest in our Company, and we look forward to communicating with you in future quarters, and continuing to grow the Company and perform for you. Thanks for listening.

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